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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
Commission file number 0-20734
e.DIGITAL CORPORATION
(Name of small business issuer in its charter)
Delaware 33-0591385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13114 Evening Creek Drive South
San Diego, California 92128
(858) 679-1504
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $426,350
The aggregate market value of the issue's Common Stock held by non-affiliates of
the registrant on June 1, 1999 was approximately $271,297,000 based on the
average of the closing bid and ask price of $2.505 as reported on the NASD's OTC
electronic Bulletin Board system.
As of June 1, 1999 there were 109,174,552 shares of e.Digital Corporation Common
Stock, par value $.001, outstanding and 12,500 shares of Series A Preferred
Stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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PART I
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ITEM 1. Description of Business 2
ITEM 2. Description of Property 12
ITEM 3. Legal Proceedings 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters 12
ITEM 6. Management's Discussion and Analysis or Plan of Operation 13
ITEM 7. Financial Statements 22
ITEM 8. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure 22
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act 22
ITEM 10. Executive Compensation 24
ITEM 11. Security Ownership of Certain Beneficial Owners
and Management 25
ITEM 12. Certain Relationships and Related Transactions 26
ITEM 13. Exhibits and Reports on Form 8-K 27
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SIGNATURES
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE
"SAFE HARBOR" PROVISIONS THEREOF. THEREFORE, THE COMPANY IS INCLUDING THIS
STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH
SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE WORDS
"ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED TO
CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY
ARISE AFTER THE DATE HEREOF.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY
e.Digital Corporation, a Delaware corporation ("e.Digital" or the "Company") is
a holding company which operates through its wholly owned California subsidiary,
e.Digital Corporation. ("Subsidiary"). e.Digital provides innovative product
designs and technologies for the rapidly growing market for electronic devices
using portable storage media (flash memory and microdrive technologies).
e.Digital employs its patented MicroOS file management system as the
intelligence targeted for portable digital voice, music, audio, image, video and
data recording and storage devices that interface with computers and the
Internet.
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e.Digital earns revenues from performing contract design and development
services for OEM (Original Equipment Manufacturer) customers in a broad range of
targeted digital processing markets. These markets include dictation equipment,
digital music, consumer electronics, digital image and video and other portable
product markets. The Company also seeks to license its patented MicroOS file
management system and offers manufacturing services for its customers with
actual production contracted to third parties.
Currently the Company is developing and manufacturing digital dictation products
for Lanier Worldwide, Inc. ("Lanier"), an advanced digital recorder reference
design for Intel Corporation ("Intel") and strategically working with Lucent
Technologies, Inc. ("Lucent") in the digital music field. e.Digital has provided
initial portable digital music player prototypes to Lucent. These prototypes are
being used in demonstrating the downloading of secure high-quality music from
the Internet to the computer and then to e.Digital's hand-held music player. The
Company is also developing portable solutions for the emerging mobile enterprise
industry that is implementing voice and voice processing in mobile
corporate-wide environments.
The Company was incorporated in the Province of British Columbia, Canada on
February 11, 1988 and on November 22, 1994 changed its domicile to the Yukon
Territory, Canada. On August 30, 1996, the Company continued its jurisdiction to
the State of Wyoming, then on September 4, 1996, to the State of Delaware. On
January 13, 1999, the shareholders approved a name change to e.Digital
Corporation. 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.edig.com.
INDUSTRY BACKGROUND
The Company designs products employing portable storage media with the major
categories being digital recorders and related mobile devices and the rapidly
emerging digital music market.
Portable Storage Market
The Company's MicroOS technology serves as the intelligence for portable storage
media (flash memory and microdrive technology are the most common types). The
traditional data storage market includes dynamic random access memory ("DRAM")
as the main system memory, static random access memory ("SRAM") as specialized
and high speed memory, hard disk drives for high capacity data storage and
floppy disk drives for low capacity removable data storage.
In recent years, digital processing has expanded beyond the boundaries of
desktop computer systems to include an array of electronic systems. These new
devices include hand-held data collection terminals, medical monitors, mobile
communication systems, highly portable computers, digital cameras, cellular
telephones, communications switches, wireless base stations, network computers,
pay telephones, digital audio and music recorders and other electronic systems.
These emerging applications have storage requirements that are not well
addressed by traditional storage solutions. Important requirements include small
form factor, high reliability, low power consumption and the capability to
withstand high levels of shock and vibration and extreme temperature
fluctuations. In the late 1980s, a new memory technology, known as flash memory,
was developed for these applications.
Flash memory-based products are solid-state devices. They are non-volatile,
meaning that no on-going source of power is required in order for the products
to retain data, images or audio indefinitely. Flash is noiseless, considerably
lighter, more rugged and consumes less power than older disk drive technology. A
variety of form factors have been developed using flash memory including PC
cards, CompactFlash(TM) cards, miniature cards, multimedia cards, smart media
cards and others. Flash products are produced by a large number of firms
including Intel Corp., SanDisk Corporation, AMD, M-Systems, Samsung, TDK,
Toshiba and others. Industry estimates indicate Flash cartridge shipments
exceeded 4.4 million units in 1998 and are projected to exceed 30.1 million
units in 2002 according to Peripheral Research Corp.
A newer technology consistent with the CompactFlash form factor is IBM's new
microdrive technology designed to provide higher storage capacity for portable
devices. Microdrives are high capacity miniature one-inch hard disk drives. IBM
has announced the availability of 170 MB and 340 MB microdrives in mid-1999.
The Company believes these portable storage formats are complicated to use and
generally require a sophisticated file system. A file system is a software
driver which is used to make portable memory components more closely emulate a
disk drive and allow an understood mechanism for rapidly storing and retrieving
data with the minimal overhead allowed in a portable device.
Current product applications by the Company have focused on CompactFlash cards.
CompactFlash is available in capacities ranging from 2 megabyte to 96 megabytes.
The Company's technology also supports SanDisk's multimedia card format, the IBM
microdrive format, Intel Miniature Card format and others thereby offering
customers design flexibility and choices among portable storage memory. Intel,
SanDisk and other large manufacturers are aggressively promoting high volume use
of portable storage media in a variety of new product concepts.
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As a developer of advanced electronic products and technologies employing
portable storage media, the Company's success is in part dependent upon the
continued growth and use of various forms of portable storage media. New product
applications are also premised, in part, on continued reductions in the
per-megabyte cost of such memory.
Digital Recording, Related Mobile Devices and Mobile Enterprise Markets
The consumer electronics market is undergoing a major technology convergence in
ever smaller products which combine multiple functions. Palm-type computers are
tiny PCs that allow users to access their e-mail from remote locations. Cellular
phones are incorporating PC features and pagers are combining with cellular
phones and voice-mail systems. Consumer electronic manufacturers are integrating
functions and devices at an extremely fast pace, and technology consumers are
eager to take advantage of "convergence" products.
The older analog dictation products market is evolving to fully digital
dictation systems interfacing with computers and the text-to-voice and emerging
voice-to-text technology markets. The mobile enterprise industry is focused on
integrating voice and voice processing into mobile devices and corporate
enterprise solution software. The Company believes these movements will impact
all types of portable and mobile products and technologies.
The Internet is impacting business and technology in unparalleled ways. Voice
and text mail is burgeoning. Music, data and audio can be downloaded through the
Internet to the personal computer creating a market for portable devices that
can interface digitally. Portable storage media prices are dropping improving
the outlook for portable devices that employ such memory. These moves along with
lower voltage storage media and improved battery technology are expected to
expand the market for portable and mobile devices.
The worldwide electronics industry is quickly evolving to provide more
electronic content to consumer items, including portable devices. The fast-paced
electronics industry presents challenges for developers of electronic products,
where time-to-market, cost, performance, quality, reliability, size and the need
for product diversity become the focus in a volatile industry.
The recently formed Voice Technology Initiative for Mobile Enterprise Solutions
(VoiceTIMES) alliance plans to establish standards for mobile speech technology
in corporate environments. Its membership is engaged in targeted research
studies to identify enterprise solutions where mobile devices can change the way
companies do business by providing plug and play compatible mobile devices. The
initial areas of research include the medical industry, law enforcement,
insurance, services, field sales and ERP systems. The Company believes, as an
inaugural member of VoiceTIMES, that it will benefit from this research which
will provide a range of marketing and sales opportunities. The Company is
focusing research and development activities towards these product markets.
Digital Music and the Internet
Music is one of the most popular forms of entertainment in the world. Music is
also big business. According to the Recording Industry Association of America,
or RIAA, worldwide sales of recorded music were $38.7 billion in 1998. Five
major global record companies--BMG Entertainment, EMI Music, Sony Corporation,
Universal Music Group and Warner Communications Inc.--and their numerous
affiliated labels account for more than 80% of all recorded music sales
worldwide. The recorded music industry has operated under the same basic
business model for many years. Typically, record companies sign artists to
exclusive contracts under which the record companies develop and promote their
music. The companies then sell this recorded music through wholesale and retail
distribution channels to consumers. In addition, there are millions of amateur
musicians who do not have access to distribution through traditional channels.
The Internet presents a significant opportunity for the rapid and cost-effective
distribution, promotion and sale of recorded music. Music is one of the most
popular topics on the Internet as reflected by the increasing number of
music-related websites and the growth of online sales of compact discs. To date,
online recorded music sales have occurred primarily through the purchase of
compact discs through online retailers. The popularity of online buying is
forcing traditional retailers to sell recorded music using the Internet, either
through their own websites, Internet portals and other sites or in the future
through in-store kiosks.
In recent years, consumers have increasingly used their computers to play music.
Dataquest estimates that in 1998, 30% of U.S. households had multimedia PCs with
a sound card, speakers and either a CD-ROM or DVD-ROM drive. Consumers can now
play CDs on their computers with the ease and fidelity formerly associated only
with stereo systems. However, music files can be very large. For example, a
three minute song can occupy more than thirty megabytes of storage. Storing and
transferring audio files can be expensive and slow. To address this problem
compression formats have been developed and consumers are employing faster
Internet connections. Many consumers have upgraded from a 28.8 Kbps modem to a
cable, xDSL or ISDN modem. According to Jupiter Communications, the number of
subscribers using cable, xDSL or ISDN modems is projected to increase from one
million in 1998 to 10.5 million in 2002. Music consumers increasingly want to
hear
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recorded music in real time on their computers and store these recordings for
later playback on portable devices as well as computers.
Advances in digital compression technologies now allow the transmission of
near-compact disc quality audio over the Internet. Several compression formats
are currently used, including Lucent's EPAC (Enhanced Perceptual Audio Coder),
Dolby Laboratories AC3, Microsoft's Windows Media 4.0 (MSA4.0) format and mp3
(an open digitally encoded audio standard arising from the Motion Picture
Experts Group). Companies offering audio compression formats include Lucent
Technologies Inc., AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft
Corporation and RealNetworks, Inc. among others. To date, recorded music sales
delivered through digital transmission have been minimal, but are expected to
reach 7% of all United States recorded music sales by 2003, according to
Forrester Research.
As downloading music from the Internet has become increasingly popular, music
content copyright owners, including the major record companies, have expressed
concerns about unauthorized copying or "pirating" of copyrighted sound
recordings. For example, many compression technologies, including the basic mp3
standard specification, lack copyright protection. This can result in the
unauthorized downloading and replication of digital music. The major recording
industry association, the Recording Industry Association of America (RIAA), has
formed a committee, the Secure Digital Music Initiative (SDMI), to propose a
standard for the secure digital distribution and use of recorded music. SDMI
compliant devices are expected to be on the market by the end of 1999 and in the
future will limit the transmission of "pirated" music.
The e-commerce market for downloadable recorded music is just emerging and there
is limited availability of digital music on the Internet. The major record
companies to date have engaged in limited efforts to sell recorded music through
digital transmission. But the explosive growth of the Internet, emergence of
compression technologies, copy protection systems and the SDMI standard setting
process is causing rapid changes in the music industry. Recently there have been
rapid developments in the digital music field with a large number of
announcements by artists, global record companies, compression and security
firms, consumer product companies and others announcing various alliances and
ventures to provide music over the Internet. e.Digital believes these industry
forces will drive demand for portable devices capable of playing various music
compression and security formats.
e.DIGITAL'S STRATEGY
The Company offers OEM customers core technology and experienced design and
development services to rapidly implement digital solutions in the portable
device marketplace. The Company believes it was selected by Lanier, Intel and
Lucent for state-of-the-art projects due to the combination of this technology
and its experience in implementing solutions For simple memory interfaces many
OEMs develop simple file management code, however in more complex memory
management requirements the Company believes it offers a superior solution. As
portable devices become more robust and provide multiple functions, the Company
believes there will be expanded market opportunities for its file management
system. The Company's objective is to have MicroOS become a leading file
management system in a growing digital market for portable devices.
e.Digital's MicroOS provides a flexible software solution for portable digital
music players. The Company also has substantial experience in adapting MicroOS
to leverage the strengths of various Digital Signal Processors (DSPs). DSP
processors are a key electronic component employed in portable digital devices
to manipulate digitized signals. The Company is also experienced in adapting
compression algorithms to DSP processors. This experience and the Company's
abilities position it as a leader in providing hardware and software solutions
to developers of portable digital devices.
The Company's strategy in the digital music field is to leverage its
relationship with Lucent and others in focusing its development efforts on the
EPAC compression scheme being promoted by Lucent. EPAC stands for Enhanced
Perceptual Audio Coder and is the core technology being promoted by Lucent's New
Venture Group as a secure high-quality solution for Internet music delivery. At
128 kilobits per second, EPAC offers CD-transparent stereo sound. EPAC is fully
compliant with RealNetworks G2 player, the industry's most recognized system for
streaming media. RealNetwork's recent introduction of the RealJukeBox music
management software further demonstrated the capabilities of digital music. EPAC
is 30-50% faster to download than mp3 and uses 30-50% less storage space. Unlike
mp3, EPAC can be downloaded with a selected song rather than in a separate
technical step. EPAC uses psychoacoustic modeling to compress music in a way
that is not noticeable to the ear. Music compressed at a rate of 11 to 1 retains
its fidelity. EPAC's variable bit rates and high audio quality allow it to be
used in multiple bandwidth applications.
e.Digital is also retaining flexibility in its designs to provide portable
digital music player designs that will also use other audio compression formats
or respond to multiple compression, digital watermarking and encryption schemes.
e.Digital's strategy is to build upon its proprietary technology to develop
long-term strategic relationships with key manufacturers in various industries.
The Company believes it has the expertise and experience to offer a turnkey
solution to
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major OEMs seeking to implement portable digital sound processing. The Company
offers a total solution from product design through development and
manufacturing.
The Company actively seeks licensing, private label, and OEM opportunities in
the digital sound processing market. The Company's efforts include:
1. Expanding its business by developing custom products for additional
OEM customers The Company seeks to expand its business through sales and
marketing targeted at obtaining additional product development
opportunities with existing customers and new OEM customers.
2. Developing brand name recognition with OEM customers - The Company
has limited brand name recognition but seeks to position e.Digital's
MicroOS as a market leader in the portable file management software
field. This strategy is being pursued through participation in industry
alliances, professional articles and attaching its names along with OEM
products to the extent possible.
3. Expanding the technology base through continued enhancements of the
MicroOS technology and new inventions - The Company develops in-house
proprietary designs, products, features or technologies that may be
private labeled or licensed to one or more OEMs. The Company's
engineering team continues to enhance and update the MicroOS software
and related technology. The Company also devotes resources to expanding
the technology to new applications. In addition to improved music and
voice processing, management believes the Company's technology may have
applications in a wide range of products including voice pagers,
answering machines, cellular phones, computers and for the storage of
pictures and video images.
4. Leverage strategic and industry relationships - e.Digital has
established important strategic or industry relationships with a number
of partners including Lucent, Intel, IBM, SanDisk and other music
oriented companies. The Company seeks to leverage these relationships to
achieve the strategies outlined above by expanding its business and
solidifying its position as a technology leader in the field of voice,
music and data processing.
ACCOMPLISHMENTS TO DATE
e.Digital innovated the use of flash memory in a handheld digital voice
recording device, using removable digital recording media in a handheld device,
interfacing a portable digital voice recorder with a personal computer and the
Internet and employing CompactFlash in the recording and playback of
near-compact disc (CD) quality music in a portable device. These innovations
have positioned the Company with industry leaders in providing digital recording
and digital music solutions to consumers. Management believes the following
accomplishments have aided the Company's industry positioning:
o The Company recently commenced shipments of a highly advanced
mobile digital recorder and docking station to Lanier against $3
million of initial production orders.
o The Company is designing and developing an advanced digital
voice recorder under contract to Intel. Intel is paying
non-recurring engineering fees for design and development of
prototypes.
o e.Digital has completed a second-generation digital music player
in cooperation with Lucent and both parties are demonstrating
the technology to prospective customers.
o The Company has established strategic or industry relationships
with major companies in the digital music and portable device
market.
o e.Digital was selected by IBM to be an inaugural member of the
VoiceTIMES alliance to develop standards for voice technologies
and handheld mobile devices.
o The Company was selected by Lucent to be its technical advisor
at SDMI meetings to help establish standards for digital music.
o e.Digital has been granted U.S. patents on its core technology,
the MicroOS file management system.
STRATEGIC AND INDUSTRY RELATIONSHIPS
The Company has established strategic and industry relationships primarily in
the fields of digital music and advanced digital recorders.
Digital Music Relationships - e.Digital plans to continue to develop and build
strategic relationships with key third parties in the digital music field that
are engaged in the compression, component, copy protection and product
development segments of digital music distribution. e.Digital believes these
relationships enhance its ability to participate in this explosive new field of
business.
Lucent Technologies Inc. - e.Digital is collaborating with Lucent to
jointly offer OEMs a reference design and a new handheld solid-state
music player. The new SDMI compliant music player features the MicroOS
file management system and plays music stored in Lucent's EPAC audio
compression format which offers high security and excellent sound
quality. Initial designs incorporate a 32 megabyte CompactFlash card
produced by SanDisk. Lucent and
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e.Digital are collaborating on the marketing of this product design to a
wide range of participants in the digital music industry. Lucent
designs, builds and delivers a wide range of network, communications and
technology solutions.
Texas Instruments - e.Digital's EPAC music player uses a new class of
Digital Signal Processor manufactured by Texas Instruments. e.Digital is
serving as the DSP engineering specialist to port (configure software to
operate on a new processor) EPAC software to a new class of Texas
Instrument DSPs. Texas Instruments is a global semiconductor company and
a leading designer and supplier of digital signal processing solutions.
SanDisk Corporation - e.Digital is working with SanDisk to incorporate
CompactFlash into the e.Digital EPAC music player. SanDisk specializes
in designing, manufacturing and marketing flash memory data storage
products.
Cognicity, Inc. - The Company is working with Cognicity and Lucent to
use Cognicity's AudioKey as a security feature to watermark digital
music content providing a means for copyright protection. A watermark is
an embedded digital tag on a CD or digital music file providing a means
of tracking its source and use. Cognicity is a provider of content
management tools to help customers protect, extend and manage their
digital assets.
Celestial Technologies, Inc. - The current demonstrations of the EPAC
player use Celestial's Audio Library software to manage digital music on
the PC, function as a personal music server (jukebox) and manage the
transfer of digital music to the portable EPAC player.
Through SDMI members and others the Company is also developing relationships
with additional digital music industry participants including other compression
and protection technology providers.
Advanced Digital Recorders and Mobile Devices - e.Digital's experience and
expertise in developing advanced digital recorders with computer and Internet
interface has positioned the Company as a technology leader in this field. The
Company believes the introduction of the Lanier recorder with its highly
advanced features further positions the Company as a technical leader in this
field. e.Digital believes that this reputation was the reason it was selected as
one of seven inaugural members of the VoiceTIMES alliance targeted to provide
standards for the integration of mobile devices in corporate environments. The
Company is working with the following companies in these fields:
Intel Corporation - e.Digital is working with Intel to design and
develop an advanced digital voice recorder with text-to-speech and
speech-to-text technologies that interfaces with the computer and
Internet. Intel is also an inaugural member of the VoiceTIMES alliance.
Intel is a world leader in designing, manufacturing and marketing
microcomputer components and related products.
IBM - IBM is leading the VoiceTIMES alliance and e.Digital is working to
expand its relationship with IBM through this and other activities. IBM
is a worldwide provider of advanced information technology.
The Company believes its experience in producing the Lanier recorder, its
contract with Intel and its participation in the VoiceTIMES alliance will expand
its opportunities to develop additional advanced digital recorders and related
mobile devices.
CUSTOMERS
The Company has revenue producing contracts or arrangements with the following
customers:
Lanier Agreement
The Company recently announced $3 million of initial production orders from
Lanier resulting from a January 1997 development and supply agreement (the
"Lanier Agreement"). The Company has designed, developed and produced a new
digital voice recorder and computer docking station for the medical industry.
The contract provides that e.Digital will supply product under the agreement
through December 2001. In May 1999 the Company commenced production, through a
subcontract manufacturer, and in June commenced initial customer shipments
pursuant to purchase orders. The supply agreement provides for rolling six month
requirement forecasts and three month advance orders.
Lanier is one of the world's largest providers of document management solutions,
services and support with over $1.6 billion in annual revenues. Lanier markets,
sells and services a wide array of tailored solutions. Lanier was the first to
market centralized digital dictation systems and the new recorder and docking
station is Lanier's first portable digital dictation system with advanced
features to interface with computerized digital dictation systems.
e.Digital is shipping a handheld recorder and docking station to Lanier
Healthcare, a Lanier business unit. These products represent the Cquence Mobile
portion of Lanier's Cquence line of products for the medical industry. The
Cquence line is an integrated medical document management solution that manages
medical documents from creation, completion, distribution
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and retention. Cquence Mobile offers healthcare providers a mobile digital
dictation unit and computer interface with a number of new advanced features.
Intel Agreement
In August 1998, e.Digital signed an agreement to design and develop a digital
voice recorder for Intel. Intel is financing the design and prototypes which use
MicroOS and utilize advanced text-to-speech and speech-to-text technologies.
e.Digital will receive license fees and royalties from any future production
products, and in derivatives of the development effort. The prototype is
expected during 1999.
Intel is the market leader in microprocessors. Advanced digital recorders
require advanced processors to process speech-to-text and text-to-speech
applications.
Lucent Projects
e.Digital has produced certain prototype equipment based on purchase orders from
Lucent. The use of e.Digital technology allowed Lucent to present its audio
compression technology and Cognicity's watermarking technologies at a
demonstration in Beverly Hills and Manhattan in late October 1998. e.Digital's
technology was used to playback digital audio via the Internet from Manhattan to
the Beverly Hills demonstration. In January 1999, Lucent demonstrated
e.Digital's first-generation digital music player at the Midem International
Music Market trade show in Cannes, France. e.Digital has recently completed a
second-generation device which was demonstrated in May 1999 at PC Magazine
Editor's day. e.Digital's latest EPAC Internet music player offers high
security, copyright protection and CD-transparent sound quality.
Lucent and e.Digital are actively demonstrating and marketing their digital
music solution to participants in the digital music arena including (a)
providers of infrastructure technology, products and services, (b) providers of
online music services, (c) Internet retrieval and portal companies, and (d)
online music retailers.
The Company is also porting Lucent's EPAC compression algorithm software to the
new class of Texas Instrument DSPs pursuant to a purchase order from Lucent.
This effort is an example of e.Digital's digital signal processing consulting
services.
Other Projects
The Company has performed development services for other customers from time to
time. e.Digital has received several follow-on orders to supply daughterboards
to ADAMLAB for their SuperHawk Voice Output Communication Aid (VOCA). ADAMLAB is
a Regional Educational Service Agency (RESA) project in Michigan dedicated to
providing low-cost voice technology to speech-challenged individuals and
students. The orders stem from a July 1997 development agreement between the two
companies, where e.Digital developed voice recording components for ADAMLAB
employing MicroOS software.
STANDARDS
The Company believes that a successful solution for mobile business commerce and
digital music commerce must incorporate technical and industry standards.
e.Digital is participating in the standard-setting initiatives.
Voice Technology Initiative for Mobile Enterprise Solutions (VoiceTIMES)
e.Digital along with IBM, Intel and four other leaders in speech recognition and
mobile technologies announced in April 1999 the formation of VoiceTIMES.
VoiceTIMES goal is to coordinate the technical requirements needed for companies
to build and deploy solutions using voice technologies and handheld mobile
devices. With the growth of mobile devices and increasing demand for network
access, the VoiceTIMES initiative was formed to define specifications for how
voice commands and information are transmitted and received by existing and
future mobile devices. The VoiceTIMES alliance aims to eliminate the
complexities for the consumer and solutions integrator and provide future
generations standard compliant speech-enabled mobile products.
As a charter member, the Company believes the VoiceTIMES alliance will expand
opportunities for e.Digital to develop speech-based mobile information gathering
devices and leverage existing product designs and technology into additional
industry solutions and products.
Secure Digital Music Initiative (SDMI)
The SDMI was officially announced in December 1998 and is sponsored by the
Recording Industry of America (RIAA) to develop an open standard for the secure
digital delivery of recorded music. Over 200 companies are participating in this
effort. To date, this effort has focused on requirements for consumer portable
music devices, such as the e.Digital hand-held music player. Through e.Digital's
association with Lucent, e.Digital has been attending SDMI meetings as Lucent's
technical representative and participating in these efforts.
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The worldwide recording industry recognized that many companies are developing
approaches to provide security for music that is digitally distributed via CD,
high-density disc, the Internet and other means. The SDMI goal is to encourage a
marketplace of interoperable products that will benefit consumers and spur
innovation. SDMI compliant devices expected by the end of calendar 1999 are
expected to accept any content in any format the manufacturer allows. Phase 2
SDMI compliant devices are expected to accept open formats and only reject
pirated copies of new content released after Phase 2 compliant music creation
and playback technology becomes available in the future.
e.Digital believes the SDMI standards will allow the rapid development and
growth of the digital distribution of music on the Internet and the demand for
portable players and related devices.
TECHNOLOGY AND SERVICES
The Company's technology and services are focused on providing digital solutions
for the portable device marketplace.
MicroOS Core Technology
The Company's core MicroOS technology is an efficient, portable storage memory
file management system. The patented software architecture takes a unique
approach to file management that is robust, high-speed and efficient. This
approach is suited for the high-speed portable product market because it
requires minimal micro-controller support while providing broad product
functionality. This architecture offers OEMs the ability to reduce new product
development time and time to market, as well as produce a product featuring a
reduced chip count and correspondingly lower cost and power requirements.
The Company's design caters to ultra-miniature applications by reducing the need
for a high power micro-controller by paring down code to fit and run efficiently
on low-cost micro-controllers while preserving memory for other functions. The
software stores and manipulates compressed voice, data, image or video files. It
supports various flash memory formats including CompactFlash, Intel Miniature
Card and IDE hard disks as well as the new IBM microdrive technology. Unlike
less robust systems, MicroOS can support an unlimited number of files,
directories, and subdirectories and is fully MS-DOS compatible. It is also
easily adaptable to function with Microsoft Windows CE platforms. The system is
written in the programming language "C" to facilitate porting to other
environments.
For developers of voice and data recording devices, digital cameras and other
multimedia products, the intricacies of incorporating full-featured Flash memory
can add costly obstacles to a successful product release. These products require
a software system that will deliver Flash-based features and functionality to
users managing digital data for reliability in operations such as play, record,
edit, delete, insert, and rewind.
MicroOS Audio Technology
The Company has employed MicroOS in portable digital recorders and extended the
technology for implementation into various product concepts. One extension is
the Company's MicroOS Audio technology, which utilizes Lucent's EPAC compression
technology. MicroOS Audio provides the means for CD-quality, stereo music and
high-bandwidth speech and music playback from a CompactFlash cartridge, other
removable flash memory or embedded memory. Record, edit and playback functions
are encoded and a PC interface links the portable unit to the computer. Inherent
in the combined technology, is a storage algorithm providing the ability to
watermark information, providing protection against piracy. The MicroOS Audio
technology is easily adaptable to other compression technologies, such as mp3,
AC3 and MSA4.0 and others.
MicroOS Audio's features include instant access to recorded material,
computer/Internet compatible files, a computer standard interface and
adaptability to various industry standard removable flash memory devices. The
advantages of the MicroOS Audio stereo technology over portable CD players
include its small size, low power consumption, use of re-recordable media,
inexpensive computer interface/compatibility and no moving parts. In addition to
being a stand-alone, ultra compact, portable stereo, the MicroOS Audio
technology can be integrated into a variety of products, such as laptop or
hand-held PC's, pagers, cellular phones, PDAs and other portable devices.
Services
e.Digital offers developers of electronic products a portfolio of services
within the broad categories of design services, development services and
manufacturing services.
e.Digital offers services to perform design projects for electronic components
and portable products. When developers of electronic products lack the
experience or resources to work with portable storage media to do their own
design work, or they want to keep internal engineers and designers on other
work, e.Digital's design services help perform component and product design.
e.Digital offers design services in areas such as integrated circuit design, the
design and incorporation of custom digital signal processing solutions, wireless
communication, computer and Internet connectivity and physical product design.
e.Digital has expertise in embedded systems, digital and analog integrated
circuit design, wireless, multimedia, Internet and computer connectivity, DSP
customization, flash memory interface and related fields. Generally, the Company
contracts actual physical product design to independent firms.
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In addition to design, the Company's engineers can perform development services
aimed to convert designs into functional reference designs, prototypes and/or
end products. The Company also is experienced in arranging for manufacturing
services including factory hand-off and development of test procedures.
MARKETING AND SALES
e.Digital uses its internal sales and marketing, primarily two executives of the
Company, to target electronic product developers and manufacturers. Targeted OEM
customers include dictation equipment manufacturers, Internet music
participants, digital camera developers and developers of other portable
products. The Company anticipates that it will hire at least one technical sales
representative during fiscal 2000 to expand its marketing and sales activities.
In December 1997, the Company established a business development agreement on a
commission basis with TEKSEL Co. Ltd. of Tokyo, Japan wherein TEKSEL represents
e.Digital's MicroOS to the Japanese market. TEKSEL is a distributor of advanced
U.S. technology products by major technology companies. To date, the Company has
not expended any significant effort to pursue the Japanese market through
supporting TEKSEL but intends to do so during fiscal 2000.
The Company primarily markets its services through its strategic and industry
relationships and technical articles in trade and business journals. The Company
may in the future employ limited and selected advertising in targeted
publications.
MANUFACTURING AND DISTRIBUTION
The Company has established what it believes is the beginning of a strategic
manufacturing relationship with Eltech Electronics, Inc. and its Malaysian
affiliate Eltech Electronics Technology ("Eltech") to provide the Company's OEM
customers with leading edge turnkey electronic product tooling and manufacturing
capacity. The first project with Eltech has been the Lanier digital recorder and
docking station on which initial production commenced in late May 1999 with June
1999 shipments. In December 1998 the Company entered into a one year
manufacturing agreement with Eltech to produce the Lanier products.
The Company believes this relationship may be used for future products under
development but neither party is so bound. The Company's strategy is to arrange
for the production of products for its OEM customers on a turn-key basis,
wherein the Company limits its need for working capital to finance inventory,
production and receivable financing. In other instances the Company may enter
into licensing and royalty agreements with OEM customers who have existing
manufacturing abilities or arrangements.
The Company believes, but there is no assurance, that it will be able to
continue to offer manufacturing services for its customers for future developed
products through contract manufacturing relationships on terms that will not
require substantial financial risk or the provision of significant working
capital by the Company.
INTELLECTUAL PROPERTY
The Company has five issued U.S. patents covering its MicroOS file management
software and certain technology related to portable digital devices. The
Company's software is also subject to copyrights. The Company relies primarily
on a combination of its patents, copyright and trade secret protection together
with licensing arrangements and nondisclosure and confidentiality agreements to
establish and protect its proprietary rights.
The patent position of any item for which the Company has filed a patent
application is uncertain and may involve complex legal and factual issues.
Although the Company is currently prosecuting trademark applications with the
U.S. Patent and Trademark Office and also has filed certain international patent
applications corresponding to its U.S. patents or applications, the Company does
not know whether any of these applications will result in the issuance of
patents or trademarks, or, for any patents already issued or issued in the
future, whether they will provide significant proprietary protection or will be
circumvented or invalidated. Additionally, since an issued patent does not
guarantee the right to practice the claimed invention, there can be no assurance
others will not obtain patents that the Company would need to license or design
around in order to practice its patented technologies, or that licenses that
might be required would be available on reasonable terms. Further there can be
no assurance that any unpatented manufacture, use, or sale of the Company's
technology or products will not infringe on patents or proprietary rights of
others. The Company, however, has made reasonable efforts in the design and
development of its products not to infringe on other known patents.
The Company also relies on trade secret laws for protection of its intellectual
property, but there can be no assurance others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can protect its rights to unpatented trade secrets.
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The Company also has filed a number of trademark applications with the U.S.
Patent and Trademark Office including E.DIGITAL. The Company has received
notification of allowance from the United States Patent Office for use of
FlashBack(R), Hold That Thought(R), Fumble Free(R) and SoundClip(R) as a
registered trade names.
The Company intends to make every reasonable effort to protect its proprietary
rights to make it difficult for competitors to market equivalent competing
products without being required to conduct the same lengthy testing and
development conducted by the Company and not use any of the Company's innovative
and novel solutions to the many technical obstacles involved in portable
recording using Flash memory.
RESEARCH AND DEVELOPMENT COSTS
For the years ended March 31, 1999 and 1998, the Company spent $508,237 and
$261,619, respectively, on research and development. The Company anticipates it
will continue to devote substantial resources to research and development
activities. During fiscal 1999 and 1998, $849,997 and $581,577, respectively, of
research and development was borne by Lanier, a contract development customer
and such related costs were included in cost of services. Also in fiscal 1999
approximately $39,000 of research and development revenue was recognized from an
Intel development contract and related costs were included in cost of services.
COMPETITION
The Company believes it has a leading comprehensive file management system
capable of customization for individual customer requirements. Other companies
offering file management systems include M-Systems Flash Disk Pioneers Ltd.,
Intel and Datalight Inc. In addition to licensing file management systems, some
customers develop their own file management systems for a particular product,
either in total or by adapting from one of the competitive vendors. While this
self-development is common in simple memory management devices, the Company
offers a system attractive for more complex applications. Although, the Company
was successful in competing against other systems in its selection by Lanier and
Intel and in working with Lucent, there is no assurance the Company can continue
to compete against other providers of digital recording solutions, many of which
have substantially greater resources than that of the Company.
The Company's technology focuses on digital applications. Accordingly,
competition for the Company's technology include other analog tape solutions and
traditional dictation equipment. The Company and its OEM customers, therefore,
compete with a wide range of consumer and business product suppliers producing a
wide variety of products and solutions. The electronics product market is highly
competitive with many large international companies competing for the consumer
and business market.
The Company believes its existing know-how, contracts, patents, copyrights,
trade secrets and potential future patents and copyrights, will be significant
in enabling it to compete successfully in the field of digital sound processing
for portable storage media.
The competition is anticipated to be fierce in the field of portable digital
music players. Diamond Multimedia Systems, Inc. introduced the Rio, the first
commercially available mp3 portable player, in November 1998. Over 250,000 units
were reported as sold through April 1999. Other manufacturers, including
Creative Labs, Thompson Multimedia's RCA division, LG Electronics, Samsung and
others, have recently released or announced plans to sell portable digital music
players, most using the mp3 compression. Other manufacturers are expected to
announce products in the future and companies not normally associated with
consumer electronics may enter the market to use portable music players to seed
the market for digital music. The Company's technology will compete with other
solutions, however the Company will focus on markets requiring advanced features
and a robust file management system.
Barriers to entry by new competitors are not significant and new competitors in
consumer electronics are continually commencing operations. The technology of
electronics and electronic components, features and capabilities is also rapidly
changing, in many cases causing rapid obsolescence of existing products and
technologies.
EMPLOYEES
As of June 1, 1999, the Company employed approximately 17 employees of which
three were production, eight were research, development and engineering, three
were accounting/administrative and three were executive officers. None of the
Company's employees are represented by a labor union, and the Company is not
aware of any current efforts to unionize the employees. Management of the
Company considers the relationship between the Company and its employees to be
good.
The Company also engages consultants or leases engineering personnel on a
temporary basis from time to time and uses other outside consultants for various
services.
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REGULATION
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters and there can be no assurance that material costs and liabilities
will not be incurred or that past or future operations will not result in
exposure or injury or claims of injury by employees or the public. Some risk of
costs and liabilities related to these matters are inherent in the Company's
business, as with many similar businesses. Management believes its business is
operated in substantial compliance with applicable environmental, waste
management, health and safety regulations, the violation of which could have a
material adverse effect on the Company. In the event of violation, these
requirements provide for civil and criminal fines, injunctions and other
sanctions and, in certain instances, allow third parties to sue to enforce
compliance. In addition, new, modified or more stringent requirements or
enforcement policies could be adopted which could adversely affect the Company.
ITEM 2. DESCRIPTION OF PROPERTY
Commencing July 11, 1997, the Company jointly entered into a three year lease
with American Technology Corporation ("ATC"), an affiliated company (see "Item
12 - Certain Relationships and Related Transactions"), for an aggregate of
12,925 square feet of office and engineering office space at 13114 Evening Creek
Drive South, San Diego, California with an unaffiliated landlord. The Company
occupies approximately 5,500 square feet of the jointly leased space at a cost
of $6,900 per month for the Company's share. The Company could become obligated
for the entire lease should ATC default on its share of payments thereon.
The Company believes that the terms of the above arrangement are no less
favorable than could be obtained from an independent and unaffiliated party.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to the conduct of its
business. There are currently no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades in the over-the-counter market on the OTC
Bulletin Board. The following table sets forth, for the periods indicated, the
high and low closing bid prices for the Common Stock, as reported by the
National Quotation Bureau, for the quarters presented. Bid prices represent
inter-dealer quotations without adjustment for markups, markdowns, and
commissions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal year ended March 31, 1998
First quarter $0.40625 $0.125
Second quarter $0.25 $0.10
Third quarter $0.18 $0.07
Fourth quarter $0.09 $0.05
Fiscal year ended March 31, 1999
First quarter $0.146 $0.061
Second quarter $0.115 $0.0525
Third quarter $0.066 $0.0525
Fourth quarter $0.247 $0.06
</TABLE>
At June 1, 1999, there were 109,174,552 shares of Common Stock outstanding,
which were held by approximately 660 shareholders of record.
The Company has never paid any dividends to its Common Stock shareholders.
Future cash dividends or special payments of cash, stock or other distributions,
if any, will be dependent upon the Company's earnings, financial condition and
other relevant factors. The Board of Directors does not intend to pay or declare
any dividends on its Common Stock in the foreseeable future, but instead intends
to have the Company retain all earnings, if any, for use in the Company's
business.
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RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of equity securities sold by the Company during
the fourth fiscal quarter ended March 31, 1999 that were not registered under
the Securities Act:
In January 1999, the Company sold for cash $400,000 of 15% Promissory Notes
("Notes") due December 31, 1999 to one accredited investor. The Note is not
convertible. In connection with the sale the Company issued the Noteholder
warrants exercisable into 4,000,000 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
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.
During the three months ended March 31, 1999 the Company issued (a) warrants
exercisable into 500,000 shares of Common Stock at $0.10 per share until June
30, 2000 to one corporation for services rendered, (b) warrants exercisable into
100,000 shares of Common Stock at $0.10 per share until January 2002 to one
corporation for debt restructuring, (c) and warrants exercisable into an
aggregate of 1,117,857 shares of Common Stock until March 2002 to three
corporations and one individual in connection with the exercise of outstanding
warrants. These securities were offered and sold without registration under the
Act, in reliance upon the exemption provided by Section 4(2) of the Act and an
appropriate legend was placed on the warrant agreements. The securities were
issued by the Company without an underwriter and no commission was paid.
SUBSEQUENT SALE OF PREFERRED STOCK
Subsequent to year end, on June 25, 1999, the Company issued 300 shares of
Series B Convertible Preferred Stock, par value $.001 ("Series B stock") for
cash at $10,000 per share to one institutional investor for gross proceeds of
$3,000,000. Dividends of 7% per annum are payable, with certain exceptions,
either in cash or in shares of Common Stock, at the election of the Company. The
stated dollar amount of Series B stock is convertible into fully paid and
nonassessable shares of Common Stock of the Company at a conversion price which
is the lower of (i) $2.00 per share or (ii) a per share amount computed on each
of two adjustment dates (30 and 60 days after registration of the underlying
shares), but not less than $1.50 per share except as may be subsequently
modified as a consequence of certain possible penalties and other adjustments
related to the Company's failure to file a registration statement on a timely
basis or have the registration statement declared effective within 180 days. The
conversion price on the two adjustment dates is computed at a premium to the
average of the three lowest of the ten day closing bid market prices prior to
and including each adjustment date. The Series B stock shall be subject to
automatic conversion on June 24, 2002, subject to certain conditions.
The Series B Preferred Stock is redeemable in certain instances at the Company's
option and at the holder's election upon the occurrence of certain triggering
events including, without limitations, failure to register the underlying shares
within 180 days or a lapse of a registration statement for ten non-consecutive
trading days and certain other events. The redemption price upon such election
following a triggering event shall be the greater of (a) 110% of the stated
value or (b) the product of the number of preferred shares multiplied by the
closing market price, multiplied by the stated value per share, divided by the
then conversion price per share. In addition, certain recently converted of
Common Stock are subject to repurchase upon a triggering redemption.
The Company also issued to the purchaser of Series B stock warrants to purchase
195,000 shares of Common Stock at $2.40 per share until June 24, 2004. In
connection with the financing the Company incurred placement agent fees and
legal and related costs of approximately $250,000 and issued a warrant to
purchase 137,615 common shares at $3.27 per share until June 24, 2004 as a
placement agent fee to Jesup & Lamont Securities Corporation in connection with
the offering. The Company intends to use the net proceeds of approximately
$2,750,000 for general corporate purposes.
The securities were offered and sold without registration under the Act in
reliance upon the exemption provided by Regulation D thereunder and an
appropriate legend was placed on the Series B Preferred Stock and the warrants
and will be placed on the shares issuable upon conversion or exercise unless
registered under the Act prior to issuance. The Company has agreed to file a
registration statement on the stock obtained upon conversion of the Series B
Preferred Stock or exercise of the warrants and also granted other registration
rights to the holder.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE NOTES THERETO AND 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
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FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING, "CERTAIN
FACTORS THAT MAY AFFECT E.DIGITAL'S BUSINESS, FUTURE RESULTS AND FINANCIAL
CONDITION."
GENERAL
e.Digital Corporation provides innovative product designs and technologies for
the rapidly growing market for electronic devices using portable storage media.
The Company employs its patented MicroOS(TM) file management system as the
intelligence targeted for portable digital voice, music, audio, image, video and
data recording devices that interface with computers and the Internet. The
Company 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 technology and from contract development services for and
sales to OEMs of custom digital products.
The Company recently announced initial shipments against approximately $3
million of production orders from Lanier Worldwide, Inc. ("Lanier") resulting
from a January 1997 development and supply agreement (the "Lanier Agreement").
These initial orders represent the first five months of orders for digital
recording products targeted for the medical market. These products are intended
to be sold worldwide by Lanier's sales force. The contract provides for rolling
six month forecasts of requirements and three month rolling orders for future
products.
The Company has also entered into a development agreement with Intel Corporation
("Intel") and is designing and developing a digital voice recorder reference
design and prototypes. Under the agreement, Intel is paying non-recurring
engineering fees for design and development of prototypes.
The Company is also supplying digital music player prototypes to Lucent and
performing other work to port Lucent's EPAC compression technology to a new
Texas Instrument DSP.
The Company is actively developing licensing, private label, and OEM
opportunities seeking to penetrate the digital recording and playback market.
Under the Lanier Agreement, the Company incurred approximately $1.5 million of
non-recurring engineering fees and costs from inception through March 31, 1999.
Approximately $92,000 of additional revenues are anticipated in fiscal 2000 to
complete this contract.
Through March 31, 1999 the Company recognized approximately $39,000 of revenues
pursuant to the Intel contract.
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
$2.7 million in fiscal 1998 (including an inventory write-off of $1.3 million)
and $1.8 million in fiscal 1999. The Company's current level of monthly cash
operating costs is approximately $120,000 per month. However, the Company may
increase expenditure levels in future periods to support its digital music
business and to support OEM customers. Accordingly, the Company's losses are
expected to continue until such time as the Company is able to realize 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 digital music applications, dictation systems, and
computer peripherals and telecommunication equipment. Revenue from licensing,
royalties and development services, and additional 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 or the
lack of market success of the recently introduced digital recorder products by
Lanier would have a material adverse effect on operations. The markets for
consumer electronic products are subject to rapidly changing customer tastes and
a high level of competition. Demand for the Company's products is expected to be
influenced by OEM market success, technological developments and general
economic conditions. Because these factors can change rapidly, customer demand
for the Company's technology can also shift quickly. The Company may not be able
to respond to technical developments by competitors because of the time required
and risks involved in the development or introduction of new or improved
technology and due to limited financial resources.
RESULTS OF OPERATIONS
For the fiscal year 1999, the Company reported revenues of $426,350, a 60%
decrease over revenues of $1,079,645 for fiscal 1998. Three customers accounted
for 78% of fiscal 1999's revenues and the loss of a customer could have a
material adverse impact on the Company.
Revenue for fiscal 1999 included $154,428 of product sales to OEMs versus
$454,473 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
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been discontinued. The Company does not anticipate any significant product sales
in future periods until the second fiscal quarter, since shipments under the
Lanier Agreement only commenced in June 1999. There can be no assurance of the
level or continuation of shipments to Lanier.
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 $271,922 for the fiscal year ended March 31, 1999 and are
less than the $625,172 for the prior year 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.
For the year ended March 31, 1999, the Company reported a gross loss of $561,963
as compared to a gross loss of $1,265,981 for fiscal 1998. Cost of sales
consisted of $138,316 of product costs and $849,997 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 year gross loss. There can be no assurance the Company
can attain positive gross margins in the future.
Total operating expenses (consisting of research and related expenditures,
selling and administrative expenses and non-cash compensation costs) for the
year ended March 31, 1999, were $1,262,578, as compared to $1,394,504 for the
year ended March 31, 1998. Selling and administrative costs aggregated $703,441
in fiscal 1999 compared to $1,132,885 in the prior period. The $429,444
reduction was comprised primarily of a $108,000 decrease in compensation and
related cost, a $62,000 decrease in depreciation, amortization and business
property tax, a $110,000 reduction in occupancy related costs and a $140,000
reduction in legal and related costs.
Research and related expenditures for the year ended March 31, 1999 were
$508,237, as compared to $261,619, for the prior year. An aggregate of $849,997
of development costs were incurred for contract development work during the year
ended March 31, 1999 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.
During fiscal 1999, the Company incurred $50,900 of non-cash compensation from
the issuance of options and warrants versus nil for the prior comparable period.
The Company from time to time uses options, warrants and shares in lieu of cash
to pay for services.
The Company reported an operating loss of $1,824,541 for the year ended March
31, 1999, as compared to an operating loss of $2,660,485 for the year ended
March 31, 1998. The decrease in operating losses in the current fiscal year is
due to the decreased gross loss from product sales and development services.
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.
The Company's cash interest expense for the year ended March 31, 1999 was
$81,086, an increase from the $59,953 for the prior period resulting from the
interest bearing debt outstanding during fiscal 1999. The Company also incurred
during fiscal 1999 a total of $673,197 as non-cash interest expense from the
issuance of convertible promissory notes convertible at a discount and warrants
issued with debt and amortization of note discounts.
The Company reported a net loss for the current fiscal year of $2,595,476
comparable to the net loss of $2,563,597 for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had a working capital deficit of $1,378,155
compared to a working capital deficit of $911,041 at March 31, 1998. The Company
had $46,907 of working capital invested in inventories at March 31, 1999. The
decrease in working capital was a result of the Company's continuing losses that
consumed working capital during the year.
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 and
January 1999 sold $500,000 of 15% Promissory Notes. Also in fiscal 1999 the
Company obtained $245,625 from the exercise of previously outstanding warrants.
The proceeds were applied for continued operating capital.
For the year ended March 31, 1999, net cash increased by $104,596. Cash used in
operating activities was $1,637,023. Major components using cash were a net loss
of $2,595,476 reduced by $48,600 of aggregate depreciation and amortization,
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$11,233 of loss on disposal of property and equipment, $50,900 for services paid
by issuance of options and warrants and $673,197 of non-cash interest, or a net
loss use of cash of $1,811,545. The major change in assets and liabilities
providing cash from operating activities was a reduction in inventory of
$133,844, a reduction in accounts receivable on research and development
contract of $75,256 and an increase in other accounts payable and accrued
liabilities of $55,252. The major changes in assets and liabilities using
operating cash was a reduction in accounts payable trade of $84,974.
From April to June 1999, the Company obtained $1,161,963 of cash from the
exercise of options and warrants significantly improving the Company's financial
position. At May 31, 1999 the Company had cash on hand of approximately
$910,000. In June 1999 the Company obtained net proceeds of approximately
$2,750,000 from the sale of Series B Preferred Stock. Other than cash on hand
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) product sales against existing orders; the Company
believes it has sufficient capital resources for the next twelve months. 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 shipments, orders and reorders are subject to
many factors and risks, many outside the control of the Company.
Should additional funds be required and not be available, the Company may be
required to curtail or scale back staffing or operations. There can be no
assurance that additional funding in the future 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 recorded an obligation with Comdisco, Inc. providing for future
payments of approximately $515,000 from time to time based on agreed upon
percentages of future equity raised.
The Company had in 1997 been notified by the Internal Revenue Service of a
potential tax liability of approximately $450,000 plus interest relating to the
imposition of withholding taxes on imputed interest from purported loans from
the Company's former Canadian parent company to operating subsidiaries. The
Company contested this proposed tax liability and on June 15, 1999 was notified
by the Internal Revenue Service that no changes would be assessed for the tax
returns for tax years March 31, 1995 and 1996. The Company believes this matter,
which was previously reported as a contingent liability in its financial
statements, has now been resolved.
The Company has only recently commenced production on the Lanier products.
Management believes its third party contract manufacturing arrangement minimizes
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.
INFLATION
Inflation has not had any significant impact on the Company's business.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" (SFAS 133) which establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized
currently in earnings unless
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<PAGE> 17
specific hedge accounting criteria are met. SFAS 133 is effective for fiscal
years beginning after June 15, 2000. The Company does not expect the adoption of
SFAS 133 to have a material effect on the Company's consolidated financial
statements.
YEAR 2000 READINESS DISCLOSURE
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 which could
lead to business disruptions in the U.S. and internationally.
The Company has identified the following areas, which could be impacted by the
Year 2000 issue. They are: Company designed and produced products; internally
used systems and software; products or services provided by key third parties;
and the inability of OEM customers and prospective customers to process business
transactions relating to revenue and product sales.
During the first calendar quarter ended March 31, 1999 the Company completed an
initial review its internal systems. The review consisted of an evaluation of
significant internal hardware systems and major software application programs,
which are primarily, packaged third party "off-the-shelf" software programs. As
a result of this review the Company has identified certain systems which require
further review and probable upgrades to be Year 2000 ready, the costs of which
are included in management's estimates outlined below. The Company is currently
evaluating new business software applications and one major selection and
evaluation criterion will be full compliance with Year 2000. The Company's
MicroOS technology does not have any material Year 2000 problems.
The Company is in the process of assessing the compliance of its major
customers, suppliers and vendors. Management believes that third-party
relationships upon which the Company relies represent the greatest risk with
respect to the Year 2000 issue, because the Company cannot guarantee that third
parties will be able to adequately assess and address their Year 2000 compliance
issues in a timely manner. The Company has tested the Lanier products being
produced and believe they are Year 2000 compliant. The Company's manufacturing
supplier has assured the Company in writing that it has no material Year 2000
issues and will be able to continue to produce product in their factory. However
production is dependent upon outside part and component suppliers and there can
be no assurance that supply of critical components would not impede production
of products pursuant to Lanier orders. Failures of component suppliers to the
factory or failure at the factory would have a material adverse effect on
Company operations.
As a consequence, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on future results of operations or
financial condition.
Total costs relating to the Company's compliance efforts, based on management's
best estimates range from $10,000 to $20,000 consisting primarily of obtaining,
installing and testing new computers and upgrades of third party "off-the-shelf"
software programs. To date there have been no material direct out-of-pocket
costs. Maintenance or modification costs will be expensed as incurred, while the
costs of new computers or software will be capitalized and amortized over the
respective useful life.
Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the likely worst case scenario could be a system
failure causing disruptions of operations, including, among other things, a
temporary inability to distribute products under the Lanier contract or to
process transactions, develop products, send invoices or engage in similar
normal business activities at the Company or its vendors and suppliers. If the
Company determines certain suppliers are not Year 2000 compliant, it may have to
arrange for alternative sources of supply and the stockpiling of inventory in
the fall of 1999 in preparation for the Year 2000. The Company cannot estimate
at this time the cost or effect on the Company's financial condition of any
stockpiling of inventory. The Company currently does not have any other
contingency plans with respect to potential Year 2000 failures of its suppliers
or customers and at the present time, after an initial evaluation, does not
intend to develop one other than continuing to work with Eltech to mitigate the
Lanier product Year 2000 exposure. If the above failures would occur, depending
upon their duration and severity, they could have a material adverse effect on
the Company's business, results of operations and financial condition.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to the Company's efforts to address the Year 2000 concerns
regarding the Company's (a) operations, (b) products and technologies licensed
or sold to third parties and (c) major suppliers and customers. Such statements
are intended as Year 2000 Statements and Year 2000 Readiness Disclosures and are
subject to the "Year 2000 Information Readiness Act."
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<PAGE> 18
CERTAIN FACTORS THAT MAY AFFECT E.DIGITAL'S BUSINESS, FUTURE RESULTS AND
FINANCIAL CONDITION
In addition to the other information in this Annual Report on Form 10-KSB, the
factors listed below should be considered in evaluating our business and
prospects. This Annual Report contains a number of forward-looking statements
which reflect our current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below and elsewhere herein, that could
cause actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify forward-looking statements.
Readers are cautioned to consider the specific factors described below and not
to place undue reliance on the forward-looking statements contained herein,
which speak only as of the date hereof. We undertake no obligation to publicly
revise these forward-looking statements, to reflect events or circumstances that
may arise after the date hereof.
FINANCIAL RISKS
We Have a History of Losses and May Incur Future Losses - We have incurred
significant operating losses in prior fiscal years and at March 31, 1999 had an
accumulated deficit of $38,833,648 We had a net loss of approximately $2.6
million in fiscal 1999. To date, we have not achieved profitability and given
the level of operating expenditures and the uncertainty of revenues and margins,
we may continue to incur losses and negative cash flows in future periods. The
failure to obtain sufficient revenues and margins to support operating expenses
could harm our business.
We Expect Our Operating Results May Fluctuate Significantly - Our quarterly and
annual operating results have fluctuated significantly in the past and we expect
that they will continue to fluctuate in the future. This fluctuation is a result
of a variety of factors, including the following:
o Unpredictable demand and pricing for our contract development
services
o Market acceptance of OEM products by end users
o Uncertainties with respect to future OEM customer product
orders, their timing and the margins to be received, if any
o Fluctuations in operating costs
o Changes in research and development costs
o Changes in general economic conditions
Our Business is Changing and Developing and We Depend on New Products and
Services - The scale and scope of our business is changing. Historically, a
majority of our revenues were derived from our contract manufacturing business.
Our future growth is greatly dependent upon our OEM relationship with Lanier and
Intel and new relationships yet to be established. Our performance will be
dependent upon the risks that are inherent in any business venture that is
undergoing a major change in the scope of its operations, future events and
developments, and changes in our policies and methods of operations in the
future.
We May Experience Product Delays, Cost Overruns and Errors - We have experienced
development delays and cost overruns associated with contract development
services in the past. We may experience additional delays and cost overruns on
current projects or future projects. We have experienced delays in bringing the
Lanier products to production through our outside manufacturing arrangement.
Future delays and cost overruns could adversely affect our financial results and
could affect our ability to respond to technological changes, evolving industry
standards, competitive developments or customer requirements. Our technology,
the results of our contract services and the products produced for OEM customers
could contain errors that could cause delays, order cancellations, contract
terminations, adverse publicity, reduced market acceptance of products, or
lawsuits by customers or their customers.
We May Need to Obtain Additional Financing - We believe that with cash on hand
and proceeds from existing development and production contracts that we have
sufficient proceeds to meet cash requirements for the next twelve months.
However, we may need to raise additional funds to:
o Finance unanticipated working capital requirements
o Pay for increased operating expenses or shortfalls in
anticipated revenues
o Fund increases in research and development costs
o Develop new technology, products or services
o Respond to competitive pressures
o Support strategic and industry relationships
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available to us then we
may not be able to continue operations or take advantage of opportunities. If we
raise additional equity funds, the percentage ownership of our stockholders will
be reduced.
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<PAGE> 19
RISKS RELATED TO SALES, MARKETING AND COMPETITION
The Electronic Products Market in Which We Compete is Highly Competitive - We
compete in the market for electronics products which is intensely competitive
and subject to rapid technological change. The market is also impacted by
evolving industry standards, rapid price changes and rapid product obsolescence.
Our competitors include 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. Our current competitors or
new market entrants could introduce new or enhanced technologies or products
with features which render the Company's technology or products obsolete or less
marketable, or could develop means of producing competitive products at a lower
cost. Our ability to compete successfully will depend in large measure on our
ability to maintain our capabilities in connection with upgrading products and
quality control procedures and to adapt to technological changes and advances in
the industry. Competition could result in price reductions, reduced margins, and
loss of contracts, any of which could harm our business. There can be no
assurance that we will be able to keep pace with the technological demands of
the marketplace or successfully enhance our products or develop new products
which are compatible with the products of the electronics industry.
We Rely on a Limited Number of Customers - A substantial portion of our revenues
have been derived primarily from a limited number of customers. For the year
ended March 31, 1999, the provision of contract development services to Lanier
accounted for approximately 57% of our revenues. We expect that the production
of Lanier products will account for a significant portion of fiscal 2000
revenues. The loss of the Lanier relationship, failure to produce products under
our contract or a decline in the economic prospects of Lanier or the products we
produce would have a material adverse effect on our operations.
We Cannot Predict Product Acceptance in the Market - Our sales and marketing
strategy contemplates sales of developed products to the electronics and
computer software markets, by our OEM customers. The failure of our OEM
customers to penetrate their projected markets would have a material adverse
effect upon our operations and prospects. Market acceptance of our customer's
products will depend in part upon our ability to demonstrate and maintain the
advantages of our technology over competing products.
We Have Limited Marketing Capability - We have limited marketing capabilities
and resources and are primarily dependent upon in-house executives for the
marketing of our 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 our technology. We cannot assure that our marketing
efforts will be successful or result in future development contracts or other
revenues.
We Depend on the Development of the Digital Music Market to Create a Market for
Consumer Devices - We believe the market for portable consumer devices to play
digital music will not develop significantly until consumers are able to
download popular digital recordings from the Internet. We believe the
availability of popular recordings will depend on the adoption of one or more
formats to limit the unauthorized reproduction and distribution of music, called
"pirated" copies. Piracy is a significant concern of record companies and
artists. The failure of the industry to adopt a standard format or formats for
protecting from piracy will delay or have an adverse impact on the growth of
this market. This failure could harm our business.
We have designed our digital music prototype to include piracy protection and to
be adaptable to different music industry and technology standards. Numerous
standards in the marketplace, however, could cause confusion as to whether our
designs and services are compatible. If a competitor were to establish products
for OEM customers with a dominant industry standard unavailable to us, our
business would be harmed.
Our Business Depends on Emerging Markets and New Products - In order for demand
for our technology, services and products to grow, the markets for portable
digital devices, such as digital recorders and digital music players and other
portable consumer devices, must develop and grow. If sales for these products do
not grow, our revenues could decline. To remain competitive, we intend to
develop new applications for our technology and develop new technology and
products. If new applications or target markets fail to develop, or if our
technology, services and products are not accepted by the market, our business,
financial condition and results of operations could suffer.
Our Technology May Become Obsolete - 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 our technology and developed products obsolete or less competitive. We
will be required to devote substantial efforts and financial resources to
enhance our existing products and methods of manufacture and to develop new
products and methods. There can be no assurance we will succeed with these
efforts. Moreover, there can be no assurance that other products will not be
developed which would render our technology and products obsolete.
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<PAGE> 20
RISKS RELATED TO OPERATIONS
We Depend On a Single Contract Manufacturer and a Limited Number of Suppliers -
We rely on Eltech Electronics for the manufacture and assembly of products
pursuant to our contract with Lanier. We depend on Eltech to (1) allocate
sufficient capacity to our manufacturing needs, (2) produce acceptable quality
at agreed pricing and (3) deliver on a timely basis. If Eltech is unable to
satisfy these requirements, our business, financial condition and operating
results could be materially and adversely affected.
Under our supply agreement with Eltech, we are obligated to provide six month
rolling forecasts for anticipated purchases and 90 days of purchase orders. The
requirements of the contract could result in shortages or excess product and
adversely harm our business. Any failure in performance by this manufacturer for
any reason could have a material adverse affect on our business.
Production and pricing by Eltech is subject to the risk of price fluctuations
and periodic shortages of components. We have no supply agreements with
component suppliers and, accordingly, we are dependent on the future ability of
Eltech to purchase components. Failure or delay by suppliers in supplying
necessary components could adversely affect our ability to deliver products on a
timely and competitive basis in the future.
Our Future Success Depends on Our Key Personnel - Our future success depends to
a significant extent on the continued service of our key technical, sales and
senior management personnel and their ability to execute our strategy. The loss
of the services of any of our senior level management, or certain other key
employees, could harm our business.
Our future success also depends on our ability to attract, retain and motivate
highly skilled employees. Competition for employees in our industry is intense.
We may be unable to retain our key employees or to attract, assimilate and
retain other highly qualified employees in the future. We have from time to time
in the past experienced, and we expect to continue to experience in the future,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications.
Some of Our Management are Part-Time and Have Certain Conflicts of Interest -
Our Chairman, Elwood G. Norris, is also a director of ATC and Chairman and
Director of Patriot Scientific Corporation ("Patriot"). He is the owner of
approximately 26% of the shares of ATC and 10% of Patriot. Our Secretary, Robert
Putnam, is also a Vice President, Investor Relations of ATC and Secretary of
Patriot. Mr. Putnam is the owner of approximately 4% of the issued and
outstanding shares of ATC. Our controller is also Chief Accounting Officer ,
Treasurer and Assistant Secretary of ATC.
As a result of their ownership and involvement with ATC and Patriot, Mr. Norris,
Mr. Putnam and Ms. Warden have in the past, and are expected in the future to
devote a substantial portion of their time to their other endeavors and only
part-time services to e.Digital. Certain conflicts of interest now exist and
will continue to exist between the Company and certain of its officers and
directors due to the fact that they have other employment or business interests
to which they devote some attention and they are expected to continue to do so.
It is conceivable that the respective areas of interest of the Company, Patriot
and ATC could overlap or conflict.
Mr. Norris is a professional inventor and is only obligated to assign inventions
made at the direction of the Company or which relate to digital voice technology
products. The Company has no rights to any other inventions, designs,
improvements or discoveries made by Mr. Norris.
It is possible that these factors could harm the Company which does not have the
benefit of a full-time executive team devoted to executing the Company's
strategies.
We Face Year 2000 Risks - Many existing computer programs cannot distinguish
between a year beginning with "20" and a year beginning with "19" because they
use only the last two digits to refer to a year. For example, these programs
cannot tell the difference between the year 2000 and the year 1900. As a result,
these programs may malfunction or fail completely. If we or any third parties
with whom we have a material relationship fail to achieve year 2000 readiness,
our business may be seriously harmed. In particular, year 2000 problems could
temporarily prevent us from offering our goods and services. See "Management's
Discussion and Analysis or Plan of Operations -- Year 2000 Readiness
Disclosure."
RISKS RELATED TO INTELLECTUAL PROPERTY AND GOVERNMENT REGULATION
We Depend on Proprietary Rights to Develop and Protect Our Technology - Our
success and ability to compete substantially depends on our internally developed
software, technologies and trademarks, which we protect through a combination of
patent, copyright, trade secret and trademark laws. Patent applications or
trademark registrations may not be approved. Even when they are approved, our
patents or trademarks may be successfully challenged by others or invalidated.
If our trademark registrations are not approved because third parties own such
trademarks, our use of these trademarks would be restricted
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<PAGE> 21
unless we enter into arrangements with the third-party owners, which may not be
possible on commercially reasonable terms or at all.
We generally enter into confidentiality or license agreements with our
employees, consultants and strategic and industry partners, and generally
control access to and distribution of our software, technologies, documentation
and other proprietary information. Despite our efforts to protect our
proprietary rights from unauthorized use or disclosure, parties may attempt to
disclose, obtain or use our solutions or technologies. The steps we have taken
may not prevent misappropriation of our solutions or technologies, particularly
in foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.
We have licensed, and we may license in the future, certain proprietary rights
to third parties. While we attempt to ensure that the quality of our brand is
maintained by our business partners, they may take actions that could impair the
value of our proprietary rights or our reputation. In addition, these business
partners may not take the same steps we have taken to prevent misappropriation
of our solutions or technologies.
We May Face Intellectual Property Infringement Claims That May Be Costly To
Resolve - Although we do not believe we infringe the proprietary rights of any
third parties, we cannot assure you that third parties will not assert such
claims against us in the future or that such claims will not be successful. We
could incur substantial costs and diversion of management resources to defend
any claims relating to proprietary rights, which could harm our business. In
addition, we are obligated under certain agreements to indemnify the other party
for claims that we infringe on the proprietary rights of third parties. If we
are required to indemnify parties under these agreements, our business could be
harmed. If someone asserts a claim relating to proprietary technology or
information against us, we may seek licenses to this intellectual property. We
may not be able to obtain licenses on commercially reasonable terms, or at all.
The failure to obtain the necessary licenses or other rights may harm our
business.
Risks Related To Government Regulation, Content And Intellectual Property
Government Regulation May Require Us To Change The Way We Do Business - Our
business is subject to rapidly changing laws and regulations. Although our
operations are currently based in California, the United States government and
the governments of other states and foreign countries have attempted to regulate
activities on the Internet. Evolving areas of law that are relevant to our
business include privacy law, proposed encryption laws, content regulation and
import/export regulations. Because of this rapidly evolving and uncertain
regulatory environment, we cannot predict how these laws and regulations might
affect our business. In addition, these uncertainties make it difficult to
ensure compliance with the laws and regulations governing the Internet. These
laws and regulations could harm us by subjecting us to liability or forcing us
to change how we do business.
RISKS RELATED TO TRADING IN OUR COMMON STOCK
Our Stock Price May Continue to be Volatile - The trading price of our Common
Stock has been subject to significant fluctuations to date, and will likely be
subject to wide fluctuations in the future due to:
o quarter-to-quarter variations in operating results
o announcements of technological innovations by us, our customers
or competitors
o new products or significant OEM design wins by e.Digital or its
competitors
o general conditions in the markets for the Company's products or
in the electronics industry
o the price and availability of products and components
o changes in operating factors including delays of shipments,
orders or cancellations
o general financial market conditions
o market conditions for technology stocks
o litigation or changes in operating results or estimates by
analysts or others
o or other events or factors
We do not endorse and accept no responsibility for the estimates or
recommendations issued by stock research analysts or others from time to time or
comments on any electronic chat boards. The public stock markets in general, and
technology stocks in particular, have experienced extreme price and trading
volume volatility. This volatility has significantly affected the market prices
of securities of many high technology companies for reasons frequently unrelated
to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the our Common Stock in
the future.
Stocks Traded on the OTC Bulletin Board are Subject to Special Regulations - Our
shares of Common Stock are traded on the OTC Bulletin Board, an electronic,
screen-based trading system operated by the National Association of Securities
Dealers, Inc. ("NASD"). Securities traded on the OTC Bulletin Board are, for the
most part, thinly traded and are subject to special regulations not imposed on
securities listed or traded on the NASDAQ system or on a national securities
exchange. As a result, an investor may find it difficult to dispose of, or to
obtain accurate quotations as to the price of, our Common Stock. Sales of
substantial amounts of our outstanding Common Stock in the public market could
materially adversely affect the
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<PAGE> 22
market price of our Common Stock. To date, the price of our Common Stock has
been extremely volatile with the sale price fluctuating from a low of $0.05 to a
high of $3.735 in the last twelve months.
Our Number of Common Shares has Increased Dramatically and May Affect Future
Stock Prices - Our outstanding shares of common stock have increased from
57,171,119 shares at March 31, 1998 to 97,321,297 shares at March 31, 1999 and
to 109,174,552 shares at June 1, 1999. This dramatic increase of shares has
resulted primarily from the conversion of notes, preferred shares and warrants
at low prices in comparison to recent trading prices. Accordingly, there may be
significant shares in the public float acquired by holders at significantly
lower prices. Additional shares may also be issued in the future from existing
dilutive securities outstanding or from the issuance of new equity securities in
the future. These factors could increase the volatility of our stock price in
the future.
FORWARD LOOKING STATEMENTS
Important Factors Related to Forward-Looking Statements and Associated Risks -
This annual report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act") and we intend that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include our plans and objectives of management for
future operations, including plans and objectives relating to the products and
our future economic performance.
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 we will design,
manufacture, market and ship new products on a timely basis, that competitive
conditions within the computer and electronic markets will not change materially
or adversely, that the computer and electronic markets will continue to
experience growth, that demand for the our products will increase, that we will
obtain and/or retain existing development partners and key management personnel,
that future inventory risks due to shifts in market demand will be minimized,
that our forecasts will accurately anticipate market demand and that there will
be no material adverse change in our 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 our control. Although we believe 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, our business and operations are subject to
substantial risks which increase the uncertainty inherent in such
forward-looking statements. Any of the other factors disclosed above could cause
our net sales or net income (or loss), or our 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 us to alter our marketing, capital
expenditure or other budgets, which may in turn affect our 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 us or any other person that our
objectives or plans will be achieved.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company required to be included in
this Item 7 are set forth in a separate section of this report and commence on
Page F-1 immediately following page 31.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and significant employees of the Company,
their ages and positions held are as follows:
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<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Elwood G. Norris 60 Chairman of the Board and Director
Alfred H. Falk 44 President, Chief Executive Officer and Director
Robert Putnam 40 Vice President, Secretary and Director
Renee Warden 35 Controller
Norbert Daberko 42 Vice President Engineering(1)
</TABLE>
(1) A significant employee of the Company.
The terms of all directors will expire at the next annual meeting of the
Company's shareholders, or when their successors are elected and qualified.
Directors are elected each year, and all directors serve one-year terms.
Officers serve at the pleasure of the Board of Directors. There are no
arrangements or understandings between the Company and any other person pursuant
to which he was or is to be selected as a director, executive officer or nominee
therefor. There are no other persons whose activities are material or are
expected to be material to the Company's affairs.
BIOGRAPHICAL INFORMATION
ELWOOD G. NORRIS - Mr. Norris has been Chairman of the Board of
Directors of the Company since 1988. From 1988 to October 1995, he was President
and Chief Executive Officer. From January 1997 to July 1998 he served again as
Chief Executive Officer. Since 1980, Mr. Norris has also been a Director of ATC
and served as its President and Chief Executive Officer until February 1994. He
is currently Chief Technology Officer of ATC. ATC is a publicly held consumer
electronic products company. Since August 1989, he has served as director of
Patriot and served as Chairman and Chief Executive Officer until June 1994. From
June 1995 until June 1996, when he was re-appointed Chairman, Mr. Norris served
as temporary President and Chief Executive Officer of Patriot. Patriot is a
public company engaged in the development of microprocessor technology, digital
modem products and radar and antenna engineering. He is the primary inventor of
the Company's digital recording technology. Mr. Norris devotes only part-time
services to the Company, approximately twenty hours per week.
ALFRED H. FALK - Mr. Falk was appointed President and a Director of the
Company in January 1997 and on July 1, 1998 he was also appointed as Chief
Executive Officer. From March, 1995, prior to his appointment as President, he
served as Vice President, Business Development and Vice President of OEM and
International Sales of the Company. Before joining the Company, Mr. Falk was
with Resources Internationale where he served as Director of U.S. Sales from
1993 to 1995. From 1988 to 1993, Mr. Falk was the Manager of OEM Sales and
Technology Licensing for Personal Computer Products, Inc. in San Diego. From
1978 to 1988 Mr. Falk held several management positions at DH Technology and was
instrumental in its successful start up. Mr. Falk attended Palomar College in
San Marcos and Foothill College in Los Altos, California.
ROBERT PUTNAM - Mr. Putnam was appointed Secretary of the Company in
March 1988, and Vice President in April 1993. He was appointed a Director of the
Company in 1995. He served as a Director of ATC from 1984 to September 1997 and
served as Secretary/Treasurer until February 1994, President and Chief Executive
Officer from February 1994 to September 1997 and currently serves as Vice
President, Investor Relations of ATC. He has also served as Secretary/Treasurer
of Patriot since 1989 and from 1989 to March 1998 was a director of Patriot. Mr.
Putnam obtained a B.A. degree in mass communications/advertising from Brigham
Young University in 1983. Mr. Putnam devotes only part-time services to the
Company, approximately twenty hours per week.
RENEE WARDEN - Ms. Warden was appointed Controller of the Company in
June 1997. From November 1991 to June 1997 she was Accounting Manager for the
Company. Since 1993, she has attended Palomar College and most recently the
accounting program at the University of Phoenix, San Diego. In March 1999 she
was also appointed Chief Accounting Officer, Treasurer and Assistant Secretary
of ATC. Ms. Warden devotes only part-time service to the Company, approximately
thirty hours per week.
NORBERT DABERKO - Mr. Daberko was appointed Vice President of
Engineering in 1994. Prior to his work with the Company, Mr. Daberko served as
Project Manager for new product development, engineering testing, and product
maintenance for Personal Computer Products, Inc. He has also served as Project
Manager for a proprietary hardware development program, the system integration
of a military proposal, as well as several other capacities at Electronic Data
Systems, Inc. in Richardson, Texas. Mr. Daberko obtained his AA from Fullerton
College and a BSEE from California Polytechnic University.
CONFLICTS OF INTEREST
Certain conflicts of interest now exist and will continue to exist between the
Company and certain of its officers and directors due to the fact that they have
other employment or business interests to which they devote some attention and
they are expected to continue to do so. The Company has not established policies
or procedures for the resolution of current or potential conflicts of interest
between the Company and its management or management-affiliated entities. There
can be no
23
<PAGE> 24
assurance that members of management will resolve all conflicts of interest in
the Company's favor. The officers and directors are accountable to the Company
as fiduciaries, which means that they are legally obligated to exercise good
faith and integrity in handling the Company's affairs. Failure by them to
conduct the Company's business in its best interests may result in liability to
them.
It is conceivable that the respective areas of interest of the Company, Patriot
and ATC could overlap or conflict. The Company believes that although each of
the three corporations are involved in the electronics industry, the respective
areas of focus, products and technology directions of the three companies are
sufficiently distinct such that no conflict in business lines or executive
loyalties will result. Because of this unlikelihood, no steps have been taken to
resolve possible conflicts, and any such conflicts, should they arise, will be
addressed at the appropriate time.
Mr. Norris, Mr. Putnam and Ms. Warden are officers and directors of multiple
public companies as outlined above and Mr. Putnam and Ms. Warden are subordinate
to Mr. Norris in these relationships. The Company has not provided a method of
resolving any potential conflicts arising from these relationships and probably
will not do so, partly due to inevitable extra expense and delay any such
measures would occasion. Mr. Norris, Mr. Putnam and Ms. Warden are obligated to
perform their duties in good faith and to act in the best interest of the
Company and its shareholders, and any failure on their part to do so may
constitute a breach of their fiduciary duties and expose them to damages and
other liability under applicable law. While the directors and officers are
excluded from liability for certain actions, there is no assurance that Mr.
Norris, Mr. Putnam or Ms. Warden would be excluded from liability or indemnified
if they breached their loyalty to the Company.
Mr. Norris is a professional inventor and is only obligated to assign inventions
made at the direction of the Company or which relate to digital voice technology
products. The Company has no rights to any other inventions, designs,
improvements or discoveries made by Mr. Norris.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Act") requires the
Company's officers, directors and persons who own more than 10% of a class of
the Company's securities registered under Section 12(g) of the Act to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on a review of copies of such reports furnished to the Company and
written representations that no other reports were required during the fiscal
year ended March 31, 1999, the Company believes that all persons subject to the
reporting requirements pursuant to Section 16(a) filed the required reports on a
timely basis with the SEC.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for the years ended March 31, 1999, 1998
and 1997, the cash compensation of Mr. Norris and Mr. Falk, who both functioned
as Chief Executive Officer during the year ended March 31, 1999. No other person
who served as an Executive Officer of the Company during the fiscal year ended
March 31, 1999 received total salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term
--------------------------- Compensation
Name and Fiscal Other Options All Other
Principal Position Year Salary Bonus Annual (# of Shares) Compensation
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alfred H. Falk, President, 1999 $101,885 -0- -0- 882,000 -0-
Chief Executive Officer 1998 $ 84,307 -0- -0- 648,316(1) -0-
and Director 1997 $ 80,936 -0- -0- -0- -0-
Elwood G. Norris, Chairman 1999 $ 60,607 -0- -0- 592,500 -0-
and former Chief 1998 $ 68,666 -0- -0- 1,457,500(2) -0-
Executive Officer 1997 $105,788 -0- -0- -0- $ 5,940(3)
</TABLE>
- --------------
(1) A total of 148,316 of these options were voluntarily canceled during
fiscal 1998 to allow warrant exercise by prepaid warrant holders.
(2) A total of 250,000 of these options were voluntarily canceled during
fiscal 1998 to allow warrant exercise by prepaid warrant holders.
(3) Represents bonus paid by issuance of 10,000 shares of Common Stock
valued at $5,940.
OPTION GRANTS
Shown below is further information on grants of stock options to the Named
Executive Officers reflected in the Summary Compensation Table shown above.
24
<PAGE> 25
OPTION GRANTS FOR FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
- ---- ---------------- --------------------------- -------- ----------
<S> <C> <C> <C> <C>
Alfred H. Falk 482,000 12.8% $0.0875 4/22/2003
400,000(1) 10.5% $0.10 1/15/2004
Elwood G. Norris 192,500 5.1% $0.0875 4/22/2003
400,000(1) 10.5% $0.10 1/15/2004
</TABLE>
- --------------
(1) These options vested 50% at issue and 50% after one year from issue.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no options exercised by the Named Executive Officers during the
fiscal year ended March 31, 1999. The following table provides information on
unexercised options at March 31, 1999:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options At In-the-Money Options At
March 31, 1999 March 31, 1999(1)
----------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alfred H. Falk 1,015,158 384,842 $76,175 $17,325
Elwood G. Norris 1,375,000 425,000 $104,062 $30,438
</TABLE>
- --------------
(1) The last sale price at March 31, 1999 was $0.165 per share.
The Company has not awarded stock appreciation rights to any employee of the
Company and has no long-term incentive plans, as that term is defined in
Securities and Exchange Commission regulations. The Company has no defined
benefit or actuarial plans covering any person.
EMPLOYMENT AGREEMENTS
In September 1995, the Company entered into an employment agreement with Elwood
G. Norris, the Company's Chairman. The employment agreement, as amended,
provides for payment of a base salary of $68,000 per year. The employment
agreement, which terminates on September 30, 1999, further provides that Mr.
Norris (or his estate) shall continue to receive his base salary for a period of
not longer than twelve months in the event Mr. Norris is unable to fulfill his
duties due to mental or physical disabilities or death. Under terms of the
employment agreement, Mr. Norris also is entitled to participate in the
Company's bonus pool and health insurance plan. From time to time, Mr. Norris
has waived certain compensation due him under this employment agreement and
subsequent to March 31, 1999 agreed to a base salary of $68,000 per annum for
the term of the agreement and waived any past amounts that may have been due
under the terms of the agreement. There are no deferred amounts payable to Mr.
Norris.
In October 1997, the Company entered into an employment agreement with Alfred H.
Falk, the Company's President and Chief Executive Officer. The employment
agreement, as amended by Board of Director approved increases, currently
provides for a base salary of $105,000 per year. The agreement has no
termination date. In the event of non-voluntary termination other than for
cause, the employee is entitled to six months severance payment. In the event of
a change of control (a new owner controls more than 50% of the Company's common
stock) and employee is terminated within 12 months of the change, other than
cause, then the employee shall receive a termination payment equal to one year's
then annual compensation.
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by the Company to
the directors in their capacity as directors. It is anticipated that during the
next twelve months that the Company will not pay any direct or indirect
remuneration to any directors of the Company in their capacity as directors
other than in the form of reimbursement of expenses of attending directors' or
committee meetings. However, directors have received in the past, and may
receive in the future, stock options.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following table sets forth, as of June 1, 1999, information regarding
ownership of the Common Stock, by each person known by the Company to be the
beneficial owner of more than 5% of the Company's outstanding Common Stock, by
each
25
<PAGE> 26
director and by all executive officers and directors of the Company as a group.
All persons named have sole voting and investment power over their shares except
as otherwise noted.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME SHARES OWNED OF CLASS
---- ------------ --------
<S> <C> <C>
Elwood G. Norris 3,859,838(1) 3.4%
Robert Putnam 1,165,000(2) 1.0%
Alfred H. Falk 1,200,000(3) 1.1%
All officers and directors
as a group (4 persons) 6,336,838(4) 5.5%
</TABLE>
- --------------
(1) Includes 225,300 shares owned by ATC as a result of Mr. Norris' 26%
ownership, options exercisable within 60 days to purchase 1,600,000
shares and warrants to purchase 1,500,000 shares. Excludes unvested
options to purchase 200,000 shares.
(2) Includes options exercisable within 60 days to purchase 625,000 shares
and warrants to purchase 500,000 shares. Excludes unvested options to
purchase 125,000 shares.
(3) Consists entirely of options exercisable within 60 days. Excludes
unvested options to purchase 200,000 shares.
(4) Includes options exercisable within 60 days to purchase 3,464,500
shares, warrants on 2,000,000 shares and the 225,300 shares owned by ATC
and attributable to Mr. Norris.
PREFERRED STOCK
The following security ownership information is set forth as of June 1, 1999,
with respect to certain persons or groups known to the Company to be beneficial
owners of more than 5% of the Company's outstanding Series A Stock, the only
class of preferred stock outstanding. Other than as set forth below, the Company
is not aware of any other person who may be deemed to be a beneficial owner of
more than 5% of the Company's preferred stock.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name and address of Beneficial Owner Ownership(1)(3) Class
- ------------------------------------ --------------- ----------
<S> <C> <C>
Canusa Trading Ltd. 5,000 40%
W.A. Manuel, Director(2)
37 Reid Street, 2nd Flr., Armoury Bldg.
Hamilton, Bermuda
Neo Optics Ltd. 5,000 40%
Douglas Tufts, Director(2)
1600-555 Burrard Street
Vancouver, B.C. V7X1S6 Canada
R. Kirk Avery 2,500 20%
6121 Vista de la Mesa
La Jolla, California 92037
</TABLE>
- --------------
(1) Represents number of shares of Series A Stock, held as of June 1, 1999.
At such date an aggregate of 12,500 shares of preferred stock were
issued and outstanding convertible into an aggregate of 1,622,023 shares
of Common Stock.
(2) The Company believes that the representative named has the authority to
vote the shares on behalf of the preferred stockholder.
(3) The Company has no additional information regarding beneficial ownership
of Common Stock by the holders of preferred stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Elwood Norris, Chairman and Chief Executive Officer of the Company, is also a
Director of ATC. He is the owner of 2,934,634 shares of ATC (representing
approximately 26% of its issued and outstanding capital) and Robert Putnam, the
Vice President/Secretary and a Director of the Company is also Vice President,
Treasurer and Assistant Secretary of ATC. He is the beneficial owner of 420,000
shares of ATC (representing approximately 4% of its issued and outstanding
shares).
Commencing July 11, 1997 the Company jointly leased with ATC an aggregate of
12,925 square feet of engineering office space at 13114 Evening Creek Drive
South, San Diego, California of which the Company occupies approximately 5,500
square feet at a cost of $6,500 per month. The Company believes that the terms
of these arrangements are no less favorable than could be obtained from an
independent and unaffiliated party.
Certain conflicts of interest now exist and will continue to exist between the
Company and its officers and directors due to the fact that they have other
employment or business interests to which they devote some attention and they
are expected to continue to do so. The Company has not established policies or
procedures for the resolution of current or potential conflicts of interest
between the Company and its management or management-affiliated entities. There
can be no assurance that
26
<PAGE> 27
members of management will resolve all conflicts of interest in the Company's
favor. The officers and directors are accountable to the Company as fiduciaries,
which means that they are legally obligated to exercise good faith and integrity
in handling the Company's affairs. Failure by them to conduct the Company's
business in its best interests may result in liability to them.
Officer and Director Robert Putnam also acts as Treasurer and Secretary of
Patriot where he ultimately reports to the Board of Directors of which Mr.
Norris is Chairman. Mr. Putnam is also Vice President, Investor Relations of
ATC, a company effectively controlled by Mr. Norris. Ms. Warden is Chief
Accounting Officer, Treasurer and Assistant Secretary of ATC. The possibility
exists that these other relationships could affect Mr. Putnam's independence as
a director of the Company and Ms. Warden as an officer. The Company has not
provided a method of resolving this conflict and probably will not do so, partly
due to inevitable extra expenses and delay any measures would occasion. Mr.
Norris, Mr. Putnam and Ms. Warden are obligated to perform their duties in good
faith and to act in the best interest of the Company and its stockholders, and
any failure on their part to do so may constitute a breach of their fiduciary
duties and expose them to damages and other liability under applicable law.
While the directors and officers are excluded from liability for certain
actions, there is no assurance that Mr. Norris, Mr. Putnam or Ms. Warden would
be excluded from liability or indemnified if they breached their loyalty to the
Company.
On June 12, 1998, the Company granted Mr. Norris a stock purchase warrant to
purchase 1,500,000 shares of Common Stock at $0.10 per share until June 12, 2003
in consideration of Mr. Norris providing a limited personal guarantee
(consisting of up to 200,000 shares of ATC stock owned by Mr. Norris) to
facilitate the offering and sale by the Company of the Notes. The guarantee
terminated when the notes were converted to common stock in February 1999. The
Company also granted to Mr. Putnam a stock purchase warrant to purchase 500,000
shares at $0.10 per share until June 12, 2003 in consideration of Mr. Putnam
providing purchasers of the Notes an option to purchase up to 25,000 shares of
ATC stock owned by him. The Company believes the Company would have been unable
to obtain the Note financing without the inducement provided by Mr.
Norris and Mr. Putnam.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Each exhibit marked with an asterisk is filed with this Annual Report on Form
10-KSB. Each exhibit not marked with an asterisk is incorporated by reference to
the exhibit of the same number (unless otherwise indicated) previously filed by
the Company as indicated below.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
2.6 Plan of Reorganization and Agreement of Merger, dated July 1996 and
filed as Exhibit A to the Company's July 3, 1996 Proxy Statement.
3.1 Certificate of Incorporation of Norris Communications, Inc. (as amended
through May 28, 1996) and filed as Exhibit B to the Company's July 3,
1996 Proxy Statement.
3.1.1 Certificate of Amendment of Certificate of Incorporation of Norris
Communications, Inc. filed with the State of Delaware on January 14,
1998 and filed as Exhibit 3.1.1 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1997.
3.1.2 Certificate of Amendment of Certificate of Incorporation of Norris
Communications Inc. filed with the State of Delaware on January 13, 1999
and filed as Exhibit 3.1.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 1998.
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.
*3.4 Certificate of Designation of Preferences, Rights and Limitations of
Series B Redeemable Convertible Preferred Stock filed with the State of
Delaware on June 24, 1999.
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.
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
4.3.1 Form of Amendment No. 1 to Common Stock Warrant between the Company and
three Warrant Holders holding an aggregate of $1,154,409 face value of
warrants granted in July and August 1996 (Each Amendment is identical
except for the dates and the name of the Warrant Holder), filed as
Exhibit 4.11.1 to the Company's Form 8-K, dated September 10, 1997.
4.4 Warrant Agreement for 401,924 shares of Common Stock between the Company
and Klein Investment Group, L.P. (formerly known as Iacocca Capital
Partners, L.P.) dated August 7, 1996 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 (increasing warrants to
801,924), 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.
4.6 Form of Series 98A 12% Convertible Promissory Note with Limited Guaranty
("Notes") due May 15, 1999 between the Company and 6 investors for an
aggregate of $1,000,000 (individual notes vary as to date, amount and
payee) and filed previously 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 Common Shares
between the Company and Renwick Corporate Finance, Inc. and filed
previously as Exhibit 4.6 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) and filed previously as Exhibit 4.6 to the Company's
Annual Report on Form 10-KSB dated March 31, 1998.
4.9 Form of 15% Promissory Note due December 31, 1999 for an aggregate of
$500,000 issued to three investors and filed previously as Exhibit 4.9
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1998.
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 issued to three
investors and filed previously as Exhibit 4.10 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.
4.11 Stock Purchase Warrant for 33,750 Common Shares between the Company and
Cruttenden & Co., Inc. dated July 15,1994 and filed as Exhibit 4.3 to
the Company's 1995 Form 10-KSB.
4.12 Stock Purchase Warrant for 300,000 Common Shares between the Company and
CVD Financial Corporation dated July 15, 1994 and filed as Exhibit 4.4
to the Company's 1995 Form 10-KSB.
4.12.1 First Amendment to Stock Purchase Warrant for 300,000 Common Shares
between the Company and CVD Financial Corporation dated November 14,
1994 and filed as Exhibit 4.4.1 to the Company's 1995 Form 10-KSB.
4.12.2 Second Amendment to Stock Purchase Warrant (for 300,000 shares) between
the Company and CVD Financial Corporation dated August 1, 1995 and filed
as Exhibit 10.5.5 to the Company's Form 8-K dated October 27, 1995.
4.13 Stock Purchase Warrant for 150,000 Common Shares between the Company and
CVD Financial Corporation dated July 15, 1994 and filed as Exhibit 4.5
to the Company's 1995 Form 10-KSB.
4.13.1 First Amendment to Stock Purchase Warrant for 150,000 Common Shares
between the Company and CVD Financial Corporation dated November 14,
1994 and filed as Exhibit 4.5.1 to the Company's 1995 Form 10-KSB.
4.13.2 Second Amendment to Stock Purchase Warrant (for 150,000 shares) between
the Company and CVD Financial Corporation dated August 1, 1995 and filed
as Exhibit 10.5.4 to the Company's Form 8-K dated October 27, 1995.
4.14 Warrant Agreement for 82,100 Common Shares between the Company and
Comdisco, Inc. dated as of August 15, 1994 and filed as Exhibit 4.6 to
the Company's 1995 Form 10-KSB.
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
4.15 Warrant Agreement No. 1 for 106,986 Common Shares between the Company
and Pennsylvania Merchant Group Ltd. dated March 1, 1995 and filed as
Exhibit 4.7 to the Company's 1995 Form 10-KSB.
4.15.1 Warrant Agreement No. 2 for 87,300 Common Shares between the Company and
Pennsylvania Merchant Group Ltd. dated March 17, 1995 and filed as
Exhibit 4.7.1 to the Company's 1995 Form 10-KSB.
4.15.2 Warrant Agreement No. 3 for 714 Common Shares between the Company and
Pennsylvania Merchant Group Ltd. dated March 20, 1995 and filed as
Exhibit 4.7.2 to the Company's 1995 Form 10-KSB.
4.15.3 First Amendments to Warrant Agreements No. 1, 2 and 3 between the
Company and Pennsylvania Merchant Group Ltd. dated as of September 29,
1997 (amended to 45,570 shares), filed as Exhibit 4.7.3 to the Company's
Form 10-QSB for the quarter ended September 30, 1997.
4.16 First Amendment to Warrant Agreement between the Company and First
Bermuda Securities Ltd. dated as of September 30, 1997 (27,500 shares),
filed as Exhibit 4.10.1 to the Company's Form 10-QSB for the quarter
ended September 30, 1997.
4.17 Placement Agent's Warrant Agreement between Auerbach, Pollack &
Richardson, Inc. and the Company, filed as Exhibit 10.17 to the
Company's Form 8-K dated November 13, 1995.
4.17.1 Warrant Certificate Issued to Auerbach, Pollak & Richardson, Inc. and
filed as Exhibit 10.18 to the Company's Form 8-K dated November 13, 1995
and filed previously as an Exhibit to the Company's Current Report on
Form 8-K, dated November 13, 1995.
4.17.2 Release and Termination of Right of First Refusal and Amendment to
Warrant between the Company and Auerbach, Pollak & Richardson, Inc.
dated May 13, 1996 and filed previously as an Exhibit to the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996.
4.17.3 Form of Amendment to Warrant Certificate and Warrant Agreement between
the Company and Auerbach, Pollack & Richardson, Inc. and six individual
assignees (identical amendments except as to the number of shares (total
of 128,067 shares) and the name of holder) dated as of September 30,
1997, filed as Exhibit 10.18.2 to the Company's Form 10-QSB for the
quarter ended September 30, 1997.
4.18 Warrant Agreement for 150,000 Common Shares between the Company and
Higham, McConnell & Dunning dated October 10, 1996 and filed previously
as an Exhibit to Registration Statement No. 333-13779.
4.18.1 Amendment No. 1 to Stock Purchase Warrant Agreement between the Company
and Higham, McConnell & Dunning dated September 30, 1997, filed as
Exhibit 4.13.1 to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
*4.18.2 Amendment No. 2 to Stock Purchase Warrant Agreement between the Company
and Higham, McConnell & Dunning dated May 27, 1999.
*4.19 Warrant Agreement for 500,000 shares dated January 15, 1999 between the
Company and Sunrise Capital, Inc.
*4.20 Form of Warrant Agreement for an aggregate of 2,907,142 shares (as of
March 31, 1999) issued at various dates between the Company and six
investors.
*4.21 Form of Warrant Agreement for an aggregate of 1,117,857 shares (as of
March 31, 1999) dated March 1999 between the Company and four investors.
*4.22 Warrant Agreement for 125,000 shares dated October 15, 1998 between the
Company and Renwick Corporate Finance, Inc.
*4.23 Warrant Agreement for 100,000 shares dated January 15, 1999 between the
Company and Pomerado Properties.
*4.24 Warrant Agreement for 195,000 shares dated June 24, 1999 between the
Company and JNC Opportunity Fund Limited.
*4.25 Warrant Agreement for 137,615 shares dated June 24, 1999 between the
Company and Jesup & Lamont Securities Corporation.
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
*4.26 Convertible Preferred Stock Purchase Agreement between the Company and
JNC Opportunity Fund Limited dated June 24, 1999.
*4.27 Registration Rights Agreement between the Company and JNC Opportunity
Fund Limited dated June 24, 1999.
10.1 Stock Option Plan adopted by the Company on August 21, 1992 ("1992
Plan"), filed as Exhibit 10.10 to the Company's Registration Statement
on Form 10, as amended.
10.2 Stock Option Plan adopted by the Company on September 29, 1994 ("1994
Plan"), filed as Exhibit 10.10 to the Company's 1995 Form 10-KSB.
10.2.1 First Amendment to Stock Option Plan adopted by the Company on January
26, 1996 and filed previously as Exhibit 10.14.1 to the Company's Annual
Report on Form 10-KSB dated March 31, 1998.
10.2.2 Second Amendment to Stock Option Plan adopted by the Company on
September 3, 1997 and filed previously as Exhibit 10.14.2 to the
Company's Annual Report on Form 10-KSB dated March 31, 1998.
10.3 Employment Agreement dated September 12, 1995 between the Company and
Elwood G. Norris, filed as an Exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996.
*10.3.1 First Amendment to Employment Agreement between the Company and Elwood
G. Norris dated May 20, 1999.
10.4 Employment Agreement dated September 8, 1995 between the Company and
Robert Putnam, filed as Exhibit 10.21 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996.
*10.5 Employment Agreement dated October 3, 1997 between the Company and
Alfred H. Falk.
10.6 Agreement dated January 6, 1997 between the Company and Lanier
Worldwide, Inc., filed as an Exhibit to Registration Statement No.
333-7709 [Portions of this Exhibit have been omitted (based upon a
request for confidential treatment) and have been filed separately with
the Securities & Exchange Commission pursuant to Rule 406].
*10.6.1 First Amendment to Lanier Agreement between the Company and Lanier
Worldwide, Inc. dated May 19, 1998.
10.7 Lease Settlement Agreement and Promissory Note dated as of September 30,
1997 between the Company and Pomerado Properties, filed as Exhibit
10.13.1 to the Company's Form 10-QSB for the quarter ended September 30,
1997.
10.8 Purchase Agreement - Services between Company and Intel Corporation,
dated August 4, 1998 [Portions of this Exhibit have been omitted (based
upon a request for confidential treatment) and have been filed
separately with the Securities and Exchange Commission pursuant to Rule
24b-2] and filed previously as Exhibit 10.28 to the Company's Form
10-QSB/A dated October 21, 1998.
10.9 Sublease Agreement between Global Associates, Ltd. and American
Technology Corporation and the Company dated July 11, 1997 and filed as
Exhibit 10.34 to the Company's Form 10-QSB for the quarter ended June
30, 1997
*10.10 Manufacturing Agreement between the Company and Eltech Electronics, Inc.
dated December 3, 1998.
*21.1 List of subsidiaries.
*23.2 Consent of Ernst & Young.
*27.1 Financial Data Schedule.
</TABLE>
- ----------
* Filed concurrently herewith.
(b) REPORTS ON FORM 8-K.
The Company filed the following report on Form 8-K during the last fiscal
quarter ended March 31, 1999: NONE
30
<PAGE> 31
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
E.DIGITAL CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
Report of Independent Auditors F-1
Consolidated Balance Sheets as at March 31, 1999 F-2
and 1998
Consolidated Statements of Operations for the years F-3
ended March 31, 1999 and 1998
Consolidated Statements of Common Stockholders' Equity (Deficiency) for F-4
the years ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years F-5
ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements F-6
</TABLE>
31
<PAGE> 32
CONSOLIDATED FINANCIAL STATEMENTS
E.DIGITAL CORPORATION
AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
MARCH 31, 1999 AND 1998
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
We have audited the accompanying consolidated balance sheets of E.DIGITAL
CORPORATION AND SUBSIDIARY (FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
as of March 31, 1999 and 1998 and the related consolidated statements of
operations, common stockholders' equity (deficiency) and cash flows for the
years then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
e.Digital Corporation and subsidiary at March 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the company has suffered recurring losses
from operations and has an accumulated deficit. These conditions raise
substantial doubt about the company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Vancouver, Canada,
June 18, 1999 (except as to
Note 18[f] which is as of /s/ ERNST & YOUNG LLP
June 25, 1999). Chartered Accountants
F-1
<PAGE> 34
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
(See Note 1 - Nature of Operations and Basis of Presentation)
As at March 31
<TABLE>
<CAPTION>
1999 1998
$ $
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 166,966 62,370
Accounts receivable, less allowance for doubtful
accounts of $953 and $953, respectively 60,793 54,659
Amounts receivable on research and development contracts [note 11] 92,725 167,981
Inventory [note 6] 46,907 180,751
Prepaid expenses and other 8,961 10,240
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 376,352 476,001
- -----------------------------------------------------------------------------------------------------------------------
Property and equipment [note 7] 72,675 137,890
Intangible assets, net of accumulated amortization
of $12,611 and $9,764, respectively 11,798 14,645
- -----------------------------------------------------------------------------------------------------------------------
460,825 628,536
=======================================================================================================================
LIABILITIES, PREFERRED STOCKHOLDERS' EQUITY
AND COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable, trade 597,953 682,927
Other accounts payable and accrued liabilities [note 11] 711,033 655,781
15% promissory notes payable, net of unamortized discount of $82,499[note 10] 417,501 --
Current portion of term note payable [note 9] 28,020 48,334
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,754,507 1,387,042
- -----------------------------------------------------------------------------------------------------------------------
Term note payable [note 9] 98,163 90,084
Secured notes payable [note 10] -- 500,000
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,852,670 1,977,126
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 1 and 14]
PREFERRED STOCKHOLDERS' EQUITY [note 18]
Series A, convertible voting preferred stock, $.001 par value, redeemable at $10
plus accrued and unpaid dividends at 8% cumulative, 100,000 shares
authorized, 32,500 and 99,500
outstanding, respectively [note 13] 33 100
Additional paid-in capital 364,172 1,002,562
- -----------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKHOLDERS' EQUITY 364,205 1,002,662
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) [note 18] Common stock, $.001 par
value, authorized 200,000,000
[1998 - 120,000,000], 97,321,297 and 57,171,119 shares
outstanding, respectively [note 13] 97,321 57,171
Additional paid-in capital [note 13] 35,126,914 31,333,437
Prepaid warrants [notes 13 and 15] 261,047 903,996
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (38,833,648) (36,238,172)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (1,756,050) (2,351,252)
- -----------------------------------------------------------------------------------------------------------------------
460,825 628,536
=======================================================================================================================
</TABLE>
See accompanying notes
F-2
<PAGE> 35
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31
<TABLE>
<CAPTION>
1999 1998
$ $
- -----------------------------------------------------------------------------
<S> <C> <C>
Revenues - products 154,428 454,473
- services [note 11] 271,922 625,172
- -----------------------------------------------------------------------------
426,350 1,079,645
- -----------------------------------------------------------------------------
Cost of sales - products 138,316 1,764,049
- services [note 11] 849,997 581,577
- -----------------------------------------------------------------------------
988,313 2,345,626
- -----------------------------------------------------------------------------
GROSS LOSS (561,963) (1,265,981)
- -----------------------------------------------------------------------------
OPERATING EXPENSE
Selling and administrative 754,341 1,132,885
Research and related expenditures 508,237 261,619
- -----------------------------------------------------------------------------
1,262,578 1,394,504
- -----------------------------------------------------------------------------
OPERATING LOSS (1,824,541) (2,660,485)
- -----------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense [note 9] (81,086) (59,953)
Non-cash interest expense [note 10] (673,197) --
Interest income 6,026 11,731
Other (22,678) 145,110
- -----------------------------------------------------------------------------
(770,935) 96,888
- -----------------------------------------------------------------------------
Loss before provision for income taxes (2,595,476) (2,563,597)
Provision for income taxes [note 12] -- --
- -----------------------------------------------------------------------------
LOSS AND COMPREHENSIVE LOSS FOR THE YEAR (2,595,476) (2,563,597)
=============================================================================
LOSS PER SHARE (.04) (.06)
=============================================================================
</TABLE>
See accompanying notes
F-3
<PAGE> 36
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
Year ended March 31
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN
SHARES AMOUNT CAPITAL
# $ $
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, MARCH 31, 1997 23,370,008 23,370 28,459,269
Stock issued on legal settlement 400,000 400 87,100
Stock issued as compensation 387,175 387 124,149
Stock issued on exercise of prepaid warrants 30,587,851 30,588 2,341,921
Stock issued pursuant to private placement fees 457,484 457 (457)
Stock issued as payment for professional
services rendered 1,968,601 1,969 361,617
Loss for the year -- -- --
Dividends on Series A preferred stock [note 13] -- -- (40,162)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 57,171,119 57,171 31,333,437
Stock issued on exercise of prepaid warrants 10,783,128 10,782 632,167
Stock issued on conversion of secured notes payable 5,714,284 5,715 494,285
Stock issued on conversion of Series A preferred stock 8,466,565 8,467 732,357
Dividends on Series A preferred stock [note 13] -- -- (102,368)
Stock issued on conversion of 12% convertible
promissory notes payable 12,379,059 12,379 1,527,818
Stock issued on exercise of warrants 2,807,142 2,807 242,818
Value assigned to 2,000,000 warrants
granted in connection with issuance
of 12% convertible promissory notes payable -- -- 100,000
Value assigned to 5,000,000 warrants
granted in connection with issuance
of 15% promissory notes payable -- -- 110,000
Value assigned to the 1,171,429 warrants
issued for services -- -- 46,500
Compensatory stock options [note 13] -- -- 9,900
Loss for the year -- -- --
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 97,321,297 97,321 35,126,914
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PREPAID CONTRIBUTED ACCUMULATED
WARRANTS SURPLUS DEFICIT
$ $ $
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, MARCH 31, 1997 3,276,505 1,592,316 (33,674,575)
Stock issued on legal settlement -- -- --
Stock issued as compensation -- -- --
Stock issued on exercise of prepaid warrants (2,372,509) -- --
Stock issued pursuant to private placement fees -- -- --
Stock issued as payment for professional
services rendered -- -- --
Loss for the year -- -- (2,563,597)
Dividends on Series A preferred stock [note 13] -- -- --
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 903,996 1,592,316 (36,238,172)
Stock issued on exercise of prepaid warrants (642,949) -- --
Stock issued on conversion of secured notes payable -- -- --
Stock issued on conversion of Series A preferred stock -- -- --
Dividends on Series A preferred stock [note 13] -- -- --
Stock issued on conversion of 12% convertible
promissory notes payable -- -- --
Stock issued on exercise of warrants -- -- --
Value assigned to 2,000,000 warrants
granted in connection with issuance
of 12% convertible promissory notes payable -- -- --
Value assigned to 5,000,000 warrants
granted in connection with issuance
of 15% promissory notes payable -- -- --
Value assigned to the 1,171,429 warrants
issued for services -- -- --
Compensatory stock options [note 13] -- -- --
Loss for the year -- -- (2,595,476)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 261,047 1,592,316 (38,833,648)
=====================================================================================================================
</TABLE>
See accompanying notes
F-4
<PAGE> 37
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31
<TABLE>
<CAPTION>
1999 1998
$ $
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the year (2,595,476) (2,563,597)
Adjustments to reconcile loss to net cash used by
operating activities:
Depreciation and amortization 48,600 77,801
Loss (gain) on disposal of property and equipment 11,233 (4,798)
Professional services paid by issuance of common stock -- 363,586
Compensation paid by issuance of common stock -- 124,536
Legal settlement paid by issuance of common stock -- 87,500
Non-cash compensation 50,900 --
Non-cash interest expense 673,197 --
Write-down of intangible assets -- 19,978
Changes in assets and liabilities:
Accounts receivable (6,134) (24,562)
Amounts receivable on research and development contract 75,256 (167,981)
Inventory 133,844 1,468,112
Prepaid expenses and other 1,279 (10,240)
Accounts payable, trade (84,974) (581,223)
Other accounts payable and accrued liabilities 55,252 (205,498)
Advances on research and development contract -- (174,341)
- -------------------------------------------------------------------------------------------
CASH (USED IN) OPERATING ACTIVITIES (1,637,023) (1,590,727)
- -------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (3,880) (9,628)
Proceeds on disposal of property and equipment 12,109 74,067
- -------------------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ACTIVITIES 8,229 64,439
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of term note payable (12,235) (50,000)
Proceeds from issuance of secured notes payable -- 500,000
Proceeds from sale of redeemable Series A preferred stock -- 962,500
Proceeds from 12% convertible promissory notes payable 1,000,000 --
Proceeds from exercise of warrants 245,625 --
Proceeds from 15% promissory notes payable 500,000 --
- -------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,733,390 1,412,500
- -------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH DURING THE YEAR 104,596 (113,788)
Cash and cash equivalents, beginning of year 62,370 176,158
- -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 166,966 62,370
===========================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE> 38
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
e.Digital Corporation, formerly Norris Communications, Inc., (the "Company")
operates in one major line of business, the development, manufacture and
marketing of electronic products.
The Company was incorporated in the Province of British Columbia, Canada on
February 11, 1988 and on November 22, 1994 changed its domicile to the Yukon
Territory, Canada. On August 30, 1996, the Company continued its jurisdiction to
the State of Wyoming, then on September 4, 1996, to the State of Delaware. On
January 13, 1999, the shareholders approved the name change to e.Digital
Corporation.
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States on
a going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future.
The Company has incurred significant losses and negative cash flow from
operations in each of the last three years and has an accumulated deficit of
$38,833,648 at March 31, 1999 [1998 - $36,238,172]. The Company's ability to
continue as a going concern is in substantial doubt and is dependent upon
achieving a profitable level of operations and, if necessary, obtaining
additional financing.
Management of the Company has undertaken steps as part of a plan to improve
operations with the goal of sustaining Company operations for the next twelve
months and beyond. These steps include (i) focusing sales and marketing on the
OEM markets; (ii) focusing on the completion of a research and development
contract and supply of the resulting product; and (iii) controlling overhead and
expenses. There can be no assurance the Company can attain profitable operations
in the future.
These consolidated financial statements do not give effect to any adjustments
which would be necessary should the Company be unable to continue as a going
concern and therefore be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts different
from those reflected in the accompanying consolidated financial statements.
F-6
<PAGE> 39
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, e.Digital Corporation ("Subsidiary") (a company
incorporated in the State of California). All significant intercompany accounts
and transactions have been eliminated.
RECLASSIFICATIONS
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the 1999 presentation.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, amounts receivable on
research and development contract, accounts payable, trade, other accounts
payable and accrued liabilities, term note payable, secured notes payable and
15% promissory notes payable approximate their fair values.
CASH EQUIVALENTS
Cash equivalents, consisting of commercial paper with maturities of less than 90
days, certificates of deposit and money market funds, are recorded at cost,
which approximates market value.
TRANSLATION OF FOREIGN CURRENCIES
Monetary assets and liabilities are translated into U.S. dollars at the rate in
effect at the balance sheet date. Other balance sheet items and revenues and
expenses are translated into U.S. dollars at the rates prevailing on the
respective transaction dates. Gains and losses on foreign currency transactions,
which have not been material, are reflected in the consolidated statements of
operations.
F-7
<PAGE> 40
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
LOSS PER SHARE
Basic earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common stockholders, after deduction for cumulative
unpaid dividends, by the weighted average number of common shares outstanding
for the period. The weighted average number of common shares outstanding during
1999 was 66,492,289 [1998 - 47,419,643]. Diluted earnings (loss) per share
reflects the potential dilution of securities that could share in the earnings
(loss) of an entity. The Company's losses for the years presented cause the
inclusion of potential common stock instruments outstanding to be antidilutive
and, therefore, in accordance with Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" ("SFAS No. 128"), the Company is not required to
present a diluted earnings (loss) per share. Stock options, warrants, secured
notes payable, redeemable convertible preferred stock and prepaid warrants
exercisable into 29,011,591 shares of common stock were outstanding as at March
31, 1999 and stock options, warrants and prepaid warrants exercisable into
41,084,409 shares of common stock were outstanding as at March 31, 1998. These
securities were not included in the computation of diluted earnings (loss) per
share because of the losses, but could potentially dilute earnings (loss) per
share in future years.
INVESTMENT
The Company's 58,600 shares or approximately 2.5% investment in JABRA
Corporation ("JABRA"), a private corporation, is accounted for using the cost
method [see Note 8].
REVENUE RECOGNITION
Revenue is recognized on the basis of shipment of products or delivery of
services. Research and development contract revenue is recognized in the period
the related research and development expenditures are incurred. Funds received
in advance of meeting the criteria for revenue recognition are deferred and are
recorded as revenue as they are earned.
RESEARCH AND RELATED EXPENDITURES
Research and related expenditures are charged to operations as incurred.
INVENTORY
Inventory of raw materials and finished goods is recorded at the lower of cost
and net realizable value. Cost is determined on a first-in, first-out basis.
F-8
<PAGE> 41
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
related assets, ranging from 3 to 7 years or, in the case of leasehold
improvements, over the lesser of the useful life of the related asset or the
lease term. When assets are sold or retired, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss on
the disposition is credited or charged to income. Maintenance and repair costs
are charged to operations when incurred.
INTANGIBLE ASSETS
Intangible assets include costs relating to obtaining patents, which are
deferred when management is reasonably certain the patent will be granted. Upon
granting of the patent, such costs will be amortized to operations over the life
of the patent. If management determines that development of products to which
patent costs relate is not reasonably certain, or that deferred patent costs
exceed net recoverable value, such costs are charged to operations.
LEASES
Leases entered into are classified as either capital or operating leases.
Leases, which substantially transfer all benefits and risks of ownership of
property to the Company, are accounted for as capital leases. At the time a
capital lease is entered into, an asset is recorded together with its related
long-term obligation to reflect the purchase and financing.
Rental payments under operating leases are expensed as incurred.
F-9
<PAGE> 42
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and Financial
Accounting Standards Board Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN No.
28"), and complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") [see Note 13]. Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price. The Company accounts for stock issued to
non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force No. 96-18 "Accounting for Equity Instruments with Variable
Terms That Are Issued for Consideration Other Than Employee Services Under FASB
Statement No. 123." [see Note 13].
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130") effective March 31, 1999. SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. For the
years ended March 31, 1999 and 1998, there were no material differences between
comprehensive income and net income.
SEGMENT INFORMATION
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 requires public companies to report
financial and descriptive information about their reportable operating segments.
The Company identifies its operating segments based on how management internally
evaluates separate financial information (if available), business activities and
management responsibility. The Company believes it operates in a single business
segment and adoption of this standard did not have a material impact on the
Company's consolidated financial statements. Through March 31, 1999, there have
been no material foreign operations [see Note 4].
F-10
<PAGE> 43
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133") which establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
The Company does not expect the adoption of SFAS No. 133 to have a material
effect on the Company's consolidated financial statements.
3. CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents, trade
receivables and amounts receivable on research and development contracts. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses which, when realized, have been within
the range of management's expectations.
Amounts owing from three major customer's comprises 46%, 28% and 15%,
respectively of accounts receivable at March 31, 1999. An amount owing from one
major customer comprises 80% of accounts receivable at March 31, 1998.
4. MAJOR CUSTOMERS AND EXPORT SALES
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to three major customers comprise
57%, 20% and 11%, respectively, of revenues in 1999. Sales to two major
customers comprise 58% and 32%, respectively, of revenues in 1998. During 1999,
the Company had export sales of approximately $24,000 [1998 - $359,000].
F-11
<PAGE> 44
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
5. STATEMENT OF CASH FLOWS
The Company had non-cash operating and financing activities and made cash
payments as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Non-cash financing activities:
Professional services paid by issuance of common stock -- 363,586
Compensation paid by issuance of common stock -- 124,536
Compensatory stock options 9,900 --
Legal settlement paid by issuance of common stock -- 87,500
Common stock issued on conversion of 12% convertible
promissory notes payable 1,000,000 --
Common stock issued on conversion of secured notes payable 500,000 --
Common stock issued on conversion of Series A preferred stock 740,824 --
Non-cash financing charges 673,197 --
Unamortized non-cash financing charges included in 15%
promissory notes payable 82,499 --
Warrants issued for services 46,500 --
Common stock issued on exercise of prepaid warrants 642,949 2,372,509
Cash payments for interest and income taxes were as follows:
Interest 81,086 58,800
Taxes -- --
==============================================================================================
</TABLE>
F-12
<PAGE> 45
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
6. INVENTORY
<TABLE>
<CAPTION>
1999 1998
$ $
- ----------------------------------------------------
<S> <C> <C>
Raw materials 46,907 109,960
Finished goods -- 70,791
- ----------------------------------------------------
46,907 180,751
====================================================
</TABLE>
During 1999, the Company wrote-off all remaining finished goods, consisting of
electronic products which the Company no longer manufactures. At March 31, 1999,
raw materials are comprised of the components to be utilized primarily for the
initial production of a contract product.
Management of the Company has established, in the normal course of business,
provisions for sales returns, warranty and obsolescence in respect of sales to
March 31, 1999 and inventory as at March 31, 1999. No estimate can be made of
the range of amounts of loss that are reasonably possible should actual
experience exceed estimates for sales returns or warranty costs.
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Computer hardware and software 195,988 135,055 60,933
Furniture and equipment 48,258 47,474 784
Machinery and equipment 37,108 29,221 7,887
- ----------------------------------------------------------------------------------
Leasehold improvements 4,664 1,593 3,071
286,018 213,343 72,675
- ----------------------------------------------------------------------------------
1998
Computer hardware and software 192,109 102,421 89,688
Furniture and equipment 48,258 46,265 1,993
Machinery and equipment 177,883 135,678 42,205
- ----------------------------------------------------------------------------------
Leasehold improvements 4,664 660 4,004
422,914 285,024 137,890
==================================================================================
</TABLE>
F-13
<PAGE> 46
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
8. INVESTMENT IN JABRA
The Company owns 58,600 common shares of JABRA or approximately 2.5% of JABRA's
common shares with a carrying value of $Nil on the Company's consolidated
balance sheets.
9. TERM NOTE PAYABLE
<TABLE>
<CAPTION>
1999 1998
$ $
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Term note payable, unsecured, interest at 10% per annum, with monthly
payments of principal and interest of $5,000, maturing February 2002. 126,183 138,418
Less current portion 28,020 48,334
- -------------------------------------------------------------------------------------------------------
98,163 90,094
=======================================================================================================
</TABLE>
Principal repayments under the term note are:
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------------------------------------------------
<S> <C>
2000 28,020
2001 51,984
2002 46,179
- -------------------------------------------------------------------------------------------------------
126,183
=======================================================================================================
</TABLE>
In January 1999, the Company granted the term note payable holder warrants to
purchase 100,000 shares of common stock at an exercise price of $0.10 per share
through January 2002 in consideration of amending certain terms on the above
term note.
F-14
<PAGE> 47
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
10. NOTES PAYABLE
[A] SECURED NOTES PAYABLE
In June 1997, the Company issued $500,000 of secured convertible 12% notes
payable ("Secured Notes") for cash. Interest is payable quarterly in cash and
the Secured Notes were due on September 30, 1999. The Secured Notes were
collateralized by the Company's issued and pending patents and Flashback
technology. The Secured Notes were convertible at the lowest conversion price of
the prepaid warrants [see Note 15], which is currently fixed at $0.0875 per
share. Upon a distribution in shares, subdivision, split-up, combination,
reclassification or other change in the common stock, the conversion price of
the Secured Notes is the lesser of $0.0875 (or lower amount effective at the
time) or 70% of the average closing bid price of the common stock for the 20
trading days after each such event. Pursuant to the terms of the Secured Notes,
during 1999 the Company issued 5,714,284 shares of common stock upon the
conversion of the Secured Notes, and warrants to purchase an additional
5,714,284 shares of common stock exercisable for three years at $0.0875 per
share. Through March 31, 1999, 2,807,142 shares of common stock were issued upon
exercise of these warrants for cash of $245,625. In addition, during the year
the Company issued warrants to purchase 1,117,857 shares of common stock through
March 2002 at $0.15 per share as an inducement to exercise the existing
warrants.
[B] 12% CONVERTIBLE NOTES PAYABLE
In June 1998, the Company completed the sale of $1,000,000 of 12% convertible
promissory notes payable with limited guaranty ("12% Convertible Notes") due May
15, 1999. Pursuant to a conversion feature exercised by the Company in February
1999, the 12% Convertible Notes were converted into 12,379,059 shares of common
stock. The 12% Convertible Notes were convertible at a discount at the time of
issuance and accordingly, the Company recorded $540,197 as non-cash interest
expense.
In connection with the sale of the 12% Convertible Notes, the Company issued
warrants to purchase 571,429 common shares at $0.0875 per share and granted
warrants to two officers and shareholders of the Company, to purchase an
aggregate of 2,000,000 common shares at $0.10 per share, for certain guarantees
and inducements granted to purchasers of the 12% Convertible Notes. The
estimated fair value of the warrants at issuance was $100,000 and was recorded
as non-cash interest expense.
F-15
<PAGE> 48
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
10. NOTES PAYABLE (CONT'D.)
[C] 15% PROMISSORY NOTES PAYABLE
In December 1998 and January 1999, the Company issued $500,000 of 15% unsecured,
subordinated, promissory notes payable ("15% Promissory Notes") for cash to
assist in the completion of its research and development projects.
Interest is payable quarterly in cash and the notes are due December 31, 1999.
In connection with the sale of the 15% Promissory Notes, the Company issued
warrants to purchase 5,000,000 common shares at $0.10 per share. The estimated
fair value of the warrants at issuance was $110,000 and is being amortized as
non-cash interest expense over the term of the 15% Promissory Notes.
11. RESEARCH AND DEVELOPMENT CONTRACTS
In January 1997, the Company entered into a long-term contract with an
independent company to provide research and development services with respect to
a digital recorder. The Company expects to receive aggregate cash payments of up
to $860,000 for engineering services. Costs not specified in the contract are
the responsibility of the independent company, which also pays certain costs
directly to outside vendors. The contract also provides that the Company will
arrange for production and delivery of finished product to certain
specifications through December 26, 2001.
To date, the Company has incurred $1,462,687 [1998 - $650,110] in direct costs
of development work and has recorded $857,000 [1998 - $665,081] of revenue
related to the contract. Total payments received to date on the contract in the
aggregate are $764,275 [1998 - $497,100]. At March 31, 1999, amounts receivable
on research and development contracts consist of unbilled amounts of $92,725
[1998 - $44,174 billed and $123,807 unbilled].
In August 1998, the Company entered into a development contract with an
independent company to develop a reference design and initial prototypes of an
advanced digital recorder. The Company expects to receive aggregate cash
payments of approximately $270,000 for its engineering services and prototypes.
To date, the Company has incurred $39,096 in direct costs of development and has
recorded $39,096 of revenue related to the contract. Total payments received to
date on the contract aggregate $81,000. At March 31, 1999, the amount received
in excess of earnings on the contract is $41,904 which is included in other
accounts payable and accrued liabilities on the consolidated balance sheets.
F-16
<PAGE> 49
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
11. RESEARCH AND DEVELOPMENT CONTRACTS (CONT'D.)
The Company provides other contract development pursuant to purchase orders or
agreements with third parties from time to time in the normal course of its
business.
12. INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. For financial
statement purposes, a change in valuation allowance of $1,095,000 has been
recognized to offset certain deferred tax assets for which realization is
uncertain. Significant components of the Company's deferred tax liabilities and
assets as of March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
- --------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Tax over book depreciation 339,000 440,000
- --------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 339,000 440,000
- --------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Net operating loss carryforwards 11,331,000 10,274,000
Other 307,000 370,000
- --------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 11,638,000 10,644,000
Valuation allowance for deferred tax assets (11,299,000) (10,204,000)
- --------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 339,000 440,000
- --------------------------------------------------------------------------------------
NET DEFERRED TAX -- --
======================================================================================
</TABLE>
F-17
<PAGE> 50
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
12. INCOME TAXES (CONT'D.)
The net provision for income taxes in 1999 and 1998 is $Nil as the Company
incurred losses in those years.
A reconciliation between federal statutory income tax rates and the effective
tax rate of the Company at March 31 is as follows:
<TABLE>
<CAPTION>
LIABILITY METHOD
--------------------
1999 1998
% %
- ------------------------------------------------------------------
<S> <C> <C>
U.S. federal statutory rate 35.0 35.0
U.S. federal net operating loss rate (35.0) (35.0)
U.S. state tax rate -- --
- ------------------------------------------------------------------
Effective rate on operating loss -- --
==================================================================
</TABLE>
The Company has U.S. net operating loss carryforwards available at March 31,
1999 of approximately $29,945,000 [1998 - $27,386,000] and $14,787,000 [1998 -
$11,980,000] for federal and state tax purposes, respectively, to offset income
in future years. These carryforwards will begin to expire in the years 2006 and
2000, respectively, unless previously utilized.
The tax losses of the Company identified above may be subject to limitation
arising from changes of ownership over the three year statutory testing period.
13. CAPITAL STOCK [see also Note 18]
AUTHORIZED CAPITAL
The authorized capital of the Company consists of 200,000,000 common shares
[1998 - 120,000,000 common shares] with a par value of $.001 per share and
5,000,000 preferred shares with a par value of $.001 per share.
F-18
<PAGE> 51
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
13. CAPITAL STOCK (CONT'D.)
COMMON STOCK
The issued common stock of the Company consisted of 97,321,297 and 57,171,119
common shares as of March 31, 1999 and 1998, respectively.
REDEEMABLE PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of $.001 par value preferred
stock in one or more series from time to time by action of the Board of
Directors. During September 1997, the first series, consisting of up to 100,000
shares, was designated by the Board of Directors as Series A (the "Series A
stock"). During September and October 1997, the Company sold 99,500 shares of
Series A stock at $10 per share for gross proceeds of $995,000 and net proceeds
of $962,500. The Series A stock has voting rights equal to the number of shares
of common stock into which the Series A stock is convertible. Dividends of 8%
($0.4036 per share) per annum are cumulative and may be payable in cash or
shares of common stock, at the Company's election. The Series A stock has a
liquidation preference of $10 per share, plus accrued and unpaid dividends, with
no participation after the preference is paid.
During 1999, a total of $740,824 of Series A stock and dividends were converted
into 8,466,565 shares of common stock. The cumulative amount of unpaid dividends
at March 31, 1999 is $39,205, [1998 - $40,162] which has been recorded as an
increase in the carrying value of the Series A stock.
Each share of Series A stock is currently convertible into 118.90 shares of
common stock computed by dividing $10 plus accrued and unpaid dividends by the
lesser of (i) $0.0875 or (ii) 80% of the average closing bid price for the
common stock for the ten trading days immediately following any and each
distribution in shares, subdivision, split-up, combination, reclassification or
other change in common stock. At March 31, 1999, the Series A stock would have
been convertible into approximately 4.2 million shares of common stock [1998 -
11.8 million]. The Company is required to redeem the Series A stock on September
1, 2000 and upon the occurrence of certain other events. The Company may redeem
the Series A stock earlier only if there are sufficient shares available for
conversion of the Series A stock. The redemption price is $10 per share plus
accrued and unpaid dividends if there are sufficient shares available for the
conversion of the Series A stock, otherwise the redemption price is equal to the
greater of (i) $10 per share plus accrued interest and unpaid dividends or (ii)
an amount equal to a five day market price multiplied by the number of common
shares into which the Series A stock would be convertible if shares were
authorized, plus a 10% premium.
F-19
<PAGE> 52
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
13. CAPITAL STOCK (CONT'D.)
STOCK OPTIONS
The Company maintains two stock option plans. The 1992 Stock Option Plan is a
non-qualified stock option plan, which entitles certain directors and key
employees to purchase common shares of the Company. A maximum of 10% of
outstanding common shares are authorized for grant under the Plan. Options are
granted at a price not less than fair market value at the date of grant, and are
subject to approval of the Board of Directors. The 1994 Stock Option Plan
entitles certain directors, key employees and consultants of the Company to
purchase common shares of the Company. The 1994 Plan covers a maximum aggregate
of 10,000,000 shares, as amended and approved by shareholders on July 25, 1996
and January 5, 1998. The 1994 Plan provides for the granting of options which
either qualify for treatment as incentive stock options or non-statutory stock
options.
During 1999, 3,777,660 [1998 - 2,987,656] options were granted at an exercise
prices ranging from $0.0875 to $0.10 per share [1998 - at an adjusted exercise
price of $0.0875 per share]. Options granted during 1999 and 1998 were under the
1994 Stock Option Plan.
The following table summarizes stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
# $
- ---------------------------------------------------------------
<S> <C> <C>
BALANCE, MARCH 31, 1997 1,170,658 2.89
Granted 2,987,656 0.0875
Exercised -- --
Expired (347,818) 2.22
Cancelled (1,075,156) 1.57
- ---------------------------------------------------------------
BALANCE, MARCH 31, 1998 2,735,340 0.222
Granted 3,777,660 0.094
Exercised -- --
Expired (44,000) 2.84
Cancelled (135,000) 0.0875
- ---------------------------------------------------------------
BALANCE, MARCH 31, 1999 6,334,000 0.1362
===============================================================
</TABLE>
F-20
<PAGE> 53
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
13. CAPITAL STOCK (CONT'D.)
The following table summarizes the number of options exercisable at March 31,
1999 and the weighted average exercise prices and remaining contractual lives of
the options.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED EXERCISE PRICE
RANGE OF NUMBER NUMBER WEIGHTED AVERAGE OF OPTIONS
EXERCISE OUTSTANDING AT EXERCISABLE AT AVERAGE REMAINING EXERCISABLE AT
PRICES MARCH 31, 1999 MARCH 31, 1999 EXERCISE PRICE CONTRACTUAL MARCH 31, 1999
$ # # $ LIFE $
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0.0875 to 0.10 6,250,000 4,547,658 0.0914 4.04 years 0.0901
3.375 to 3.65 84,000 84,000 3.473 .77 years 3.473
- ------------------------------------------------------------------------------------------------------------------
6,334,000 4,631,658
==================================================================================================================
</TABLE>
The non-exercisable options vest over a period of two years.
During 1999, the Company recorded non-cash compensation expense of $9,900 under
its stock option plans to non-employees through the granting of 300,000 options
which vest over two years.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123") for stock options granted to employees. Accordingly, no compensation cost
has been recognized for the granting of options to employees. Had compensation
cost for the stock option plans been determined based on the fair market value
at the grant date for awards in 1999 and 1998, consistent with the provisions of
SFAS No. 123, the Company's loss and loss per share for the years ended March
31, 1999 and 1998 would have been increased as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
- --------------------------------------------------------------
<S> <C> <C>
Loss for the year 2,595,476 2,563,597
Compensation expense 262,157 171,953
- --------------------------------------------------------------
Pro forma loss 2,857,633 2,735,550
- --------------------------------------------------------------
Pro forma loss per share 0.04 0.06
==============================================================
</TABLE>
The effects on pro forma loss per share of expensing the estimated fair value of
stock options and warrants are not necessarily representative of the effects on
reported net income (loss) for future years due to such things as the potential
for issuance of additional stock options and warrants in future years.
F-21
<PAGE> 54
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
13. CAPITAL STOCK (CONT'D.)
The fair value of options, used as a basis for the above pro forma disclosures,
was estimated at the date of grant using the Black-Scholes option pricing model.
The option and warrant pricing assumptions include a dividend yield of 0% [1998
- - 0%]; and expected volatility of 1.20 [1998 - 1.460]; a risk free interest rate
of 6.00% [1998 - 5.80%]; and an expected life of half the period from grant to
expiration.
SHARE WARRANTS
The Company has outstanding share warrants as of March 31, 1999, in connection
with private placements, convertible notes payable, equipment leasing and
establishing and amending previous loans, entitling the holders to purchase one
common share for each warrant held as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
WARRANTS $ EXPIRATION DATE
- -------------------------------------------------------------------------------
<S> <C> <C>
33,750 4.00 June 1999
450,000 1.75 July 1999
82,100 4.00 August 1999
20,570 0.25 February 2000
25,000 0.25 March 2000
5,000,000 0.10 June 2000
27,500 0.25 March 2001
571,429 0.0875 June 2001
801,924 0.25 July 2001
125,000 0.0875 October 2001
150,000 0.15625 October 2001
100,000 0.10 January 2002
285,714 0.0875 February 2002
2,621,428 0.0875 March 2002
1,117,857 0.15 March 2002
2,000,000 0.10 June 2003
500,000 0.10 January 2004
128,067 0.25 October 2005
- -------------------------------------------------------------------------------
14,040,339
- -------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE> 55
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
14. COMMITMENTS
The Company and American Technology Corporation ("ATC"), a company related
through common management and ownership, have a joint lease for office space in
San Diego, California. The lease expires on July 31, 2000. Office rent expense
recorded by the Company for the years ended March 31, 1999 and 1998 was $76,447
and $148,950, respectively.
The total commitments under the joint lease for office space are $239,371 of
which the Company's share of minimum commitments under the operating lease are
as follows:
<TABLE>
<CAPTION>
$
- -----------------------------------------------------
<S> <C>
2000 80,175
2001 27,111
- -----------------------------------------------------
107,286
=====================================================
</TABLE>
The Company could become obligated for the entire lease obligation should ATC
default on its share of payments thereon.
15. PREPAID WARRANTS [see also Note 18]
During 1999, the holders of prepaid warrants (issued in 1997 for cash) converted
$642,949 [1998 - $2,372,509] of prepaid warrants into 10,783,128 common shares
[1998 - 30,587,851] of the Company at a conversion price of $0.0875 [1998 -
conversion price ranging from $0.0875 to $0.254].
The fixed conversion price of $0.0875 per share may be adjusted down (i) to 80%
of the market price following certain changes in the Company's common stock
including a reverse stock split, and (ii) to the price at which new securities
are issued if at a price below $0.0875 per share.
In determining the number of shares of common stock to be issued upon exercise,
the Company adjusts the face value of the prepaid warrants upward to reflect
penalties and the 7% annual discount. The adjusted value of the prepaid warrants
was $292,509 at March 31, 1999 [1998 - $1,287,000] and conversion at that date
would have required the issuance of 4,474,897 [1998 - 14,710,859] common shares.
The prepaid warrants expire in January 2000 at which time they convert to common
shares if not previously converted. Assuming the prepaid warrant holders at
March 31, 1999 were to hold to term, the Company would be required to issue
4,660,360 common shares at that time [1998 - 15,329,463].
F-23
<PAGE> 56
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
16. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering eligible employees. Matching
contributions are made on behalf of all participants at the discretion of the
Board of Directors. During the years ended March 31, 1999 and 1998, the Company
made no matching contributions.
17. YEAR 2000 ISSUE (UNAUDITED)
The Company has assessed its exposure with respect to Year 2000 technology
compliance as limited, although it is not possible to quantify the effects Year
2000 compliance issues will have on customers or suppliers, and does not expect
any interruption in its normal business activities.
The Company has identified and evaluated the changes to its computer systems
necessary to achieve a Year 2000 date conversion, and any required conversion
efforts are underway. The Company is also communicating with suppliers,
financial institutions, and others with which it does business to understand the
impact of Year 2000 issues on the Company. The Company does not believe the cost
of achieving Year 2000 compliance to be material. Additionally, the Company
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial prospects.
18. SUBSEQUENT EVENTS
Subsequent to March 31, 1999, the Company had the following equity transactions:
[a] The Company received cash of $1,091,875 in connection with the exercise
of warrants into 4,739,047 shares of common stock and the Company issued
warrants to purchase 2,571,427 shares of common stock through March 2002
at $0.15 per share to certain holders as an inducement to exercise.
[b] The Company received cash of $70,088 from the exercise of employee stock
options into 791,000 shares of common stock.
[c] The Company issued 82,517 shares of common stock to consultants and
attorneys for services rendered valued at $46,482.
[d] The balance of prepaid warrants with a carrying value of $261,047 was
converted into 4,493,335 shares of common stock.
F-24
<PAGE> 57
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
18. SUBSEQUENT EVENTS (CONT'D.)
[e] A total of 20,000 shares of Series A stock with a carrying value of
$222,305 was converted into 2,572,709 shares of common stock.
[f] On June 25, 1999 the Company issued 300 shares of Series B Convertible
Preferred Stock, par value $.001 ("Series B stock") for cash of $10,000
per share and gross proceeds of $3,000,000. Dividends of 7% per annum
are payable, with certain exceptions, either in cash or in shares of
common stock at the election of the Company. The dollar amount of Series
B stock, is convertible into fully paid and nonassessable shares of
Common Stock of the Company at a conversion price which is the lower of
(i) $2.00 per share or (ii) a per share amount computed on each of two
adjustment dates (30 and 60 days after registration of the underlying
shares), but not less than $1.50 per share except as may be subsequently
modified as a consequence of certain possible penalties and other
adjustments. The conversion price on the two adjustment dates is
computed at a premium to the average of the three lowest of the ten day
closing bid market prices prior to and including each adjustment date.
The Series B stock shall be subject to automatic conversion on June 24,
2002, subject to certain conditions.
The Series B stock is redeemable in certain instances at the Company's
option and at the holder's election upon the occurrence of certain
triggering events including without limitations, failure to register the
underlying shares within 180 days or a lapse of a registration statement
for ten non-consecutive trading days and certain other events. The
redemption price upon such election following a triggering event shall
be the greater of (a) 110% of the stated value or (b) the product of the
number of preferred shares multiplied by the closing market price
multiplied by the stated value per share divided by the then conversion
price per share. In addition, certain recently converted common shares
are subject to repurchase upon a triggering redemption. Because the
redemption provisions are not entirely within the control of the
Company, the Series B stock is presented as preferred stockholders'
equity on the consolidated balance sheet.
The Company also issued to the purchaser of the Series B stock warrants
to purchase 195,000 shares of common stock at $2.40 per share until June
24, 2004.
In connection with the financing the Company incurred placement agent
fees and legal and related costs of approximately $250,000 and issued a
warrant to purchase 137,615 common shares at $3.27 per share until June
24, 2004 as a placement agent fee. The value assigned to the 137,615
warrants issued as a placement fee is $275,000. The Company intends to
use the net cash proceeds of approximately $2,750,000 for general
corporate purposes.
F-25
<PAGE> 58
E.DIGITAL CORPORATION AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999 and 1998
18. SUBSEQUENT EVENTS (CONT'D.)
The following pro forma condensed consolidated balance sheet assumes the
above equity transactions and the sale of the aggregate of 300 shares of
Series B stock and the estimated valuation of the warrants granted as if
the transaction was completed as of March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, PRO FORMA MARCH 31,
1999 ADJUSTMENTS 1999 AS ADJUSTED
$ $ $
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets 376,352 3,911,963 4,288,315
Long-term assets 84,473 -- 84,473
--------------------------------------------------------------------------------------
460,825 3,911,963 4,372,788
======================================================================================
Current liabilities 1,754,507 (46,482) 1,708,025
Long-term liabilities 98,163 -- 98,163
Preferred stock
Series A 364,205 (222,292) 141,913
Series B -- 2,475,000 2,475,000
Common stock 97,321 12,679 110,000
Additional paid-in capital 35,126,914 1,954,105 37,081,019
Prepaid warrants 261,047 (261,047) --
Contributed surplus 1,592,316 -- 1,592,316
Accumulated deficit (38,833,648) -- (38,833,648)
--------------------------------------------------------------------------------------
Total common stockholders'
(deficiency) (1,756,050) 1,705,737 (50,313)
--------------------------------------------------------------------------------------
460,825 3,911,963 4,372,788
======================================================================================
</TABLE>
F-26
<PAGE> 59
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
e.Digital Corporation
By: /s/ ALFRED H. FALK
-------------------------------------
Alfred H. Falk
Chief Executive Officer and President
Date: June 28, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Position Date
---- -------- ----
<S> <C> <C>
/s/ Alfred H. Falk Chief Executive Officer, President June 28, 1999
- ---------------------------------- and Director
Alfred H. Falk (principal executive officer)
/s/ Renee Warden Controller June 28, 1999
- ---------------------------------- (principal financial officer)
Renee Warden
/s/ Elwood G. Norris Chairman of the Board and Director June 28, 1999
- ----------------------------------
Elwood G. Norris
/s/ Robert Putnam Vice President, Secretary and Director June 28, 1999
- ----------------------------------
Robert Putnam
</TABLE>
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF DESIGNATION
OF PREFERENCES, RIGHTS AND LIMITATIONS
OF
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK OF
E.DIGITAL CORPORATION
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
The undersigned, ELWOOD G. NORRIS and ROBERT PUTNAM, do hereby certify
that:
1. They are the Chairman of the Board and Secretary,
respectively, of E.DIGITAL CORPORATION, a Delaware corporation (the
"Corporation").
2. The Corporation is authorized to issue five million
(5,000,000) shares of preferred stock, 100,000 of which have been issued.
3. The following resolutions were duly adopted by the Board
of Directors:
WHEREAS, the Certificate of Incorporation of the Corporation provides
for a class of its authorized stock known as preferred stock, comprised of five
million (5,000,000) shares, $.001 par value, issuable from time to time in one
or more series;
WHEREAS, the Board of Directors of the Corporation is authorized to fix
the dividend rights, dividend rate, voting rights, conversion rights, rights and
terms of redemption and liquidation preferences of any wholly unissued series of
preferred stock and the number of shares constituting any series and the
designation thereof, of any of them; and
WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to fix the rights, preferences,
restrictions and other matters relating to an additional series of the preferred
stock, which shall consist of up to three hundred (300) shares of the 5,000,000
shares of preferred stock which the corporation has the authority to issue, as
follows:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
provide for the issuance of an additional series of preferred stock for cash or
exchange of other securities, rights or property and does hereby fix and
determine the rights, preferences, restrictions and other matters relating to
such additional series of preferred stock as follows:
<PAGE> 2
Section 1. Designation, Amount, Par Value and Rank. The series
of preferred stock shall be designated as 7% Series B Convertible Preferred
Stock (the "Preferred Stock") and the number of shares so designated shall be
300 (which shall not be subject to increase without the consent of the holders
of the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $.001 and a stated value
equal to the sum of $10,000 plus all accrued dividends to the date of
determination to the extent not previously paid in cash in accordance with the
terms hereof (the "Stated Value"). Notwithstanding anything herein to the
contrary, the shares of Preferred Stock shall be junior in rank to the Series A
Redeemable Convertible Preferred Stock issued pursuant to a Certificate of
Designation dated September 19, 1997, as to dividends and upon liquidation or
redemption.
Section 2. Dividends.
(a) Holders shall be entitled to receive, out of funds
legally available therefor, and the Company shall pay, cumulative dividends at
the rate per share (as a percentage of the Stated Value per share) of 7% per
annum, payable on each Conversion Date (as defined herein) for such share and on
each January 1, April 1, July 1 and October 1 for so long as such Preferred
Stock shall be outstanding, commencing June 30, 1999 (each of a Conversion Date
and such quarter dates are referred to herein as a "Dividend Payment Date"), in
cash or shares of Common Stock (as defined in Section 8). Subject to the terms
and conditions herein, the decision whether to pay dividends hereunder in Common
Stock or cash shall be at the discretion of the Company. Dividends on the
Preferred Stock shall be calculated on the basis of a 360-day year, shall accrue
daily commencing on the Original Issue Date (as defined in Section 8), and shall
be deemed to accrue from such date whether or not earned or declared and whether
or not there are profits, surplus or other funds of the Company legally
available for the payment of dividends. Except as otherwise provided herein, if
at any time the Company pays less than the total amount of dividends then
accrued on account of the Preferred Stock, such payment shall be distributed
ratably among the Holders based upon the number of shares of Preferred Stock
held by each Holder. Any dividends to be paid in cash hereunder that are not
paid within three (3) Trading Days (as defined in Section 8) following a
Dividend Payment Date shall continue to accrue and shall entail a late fee,
which must be paid in cash, at the rate of 18% per annum or the lesser rate
permitted by applicable law (such fees to accrue daily, from the date such
dividend is due hereunder through and including the date of payment). The
Company shall provide the Holders written notice of its intention to pay
dividends in cash not less than ten (10) days prior to January 1, April 1, July
1 and October 1 of each year for so long as shares of Preferred Stock are
outstanding (the Company may indicate in such notice the maximum amount of cash
dividends that it intends to pay during such period). Failure to timely provide
such notice shall be deemed an election by the Company to pay dividends for such
period in shares of Common Stock pursuant to the terms hereof.
(b) Notwithstanding anything to the contrary contained
herein, the Company must pay dividends in cash if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes is insufficient to pay such
dividends in shares of Common Stock;
-2-
<PAGE> 3
(ii) after the Dividend Effectiveness Date (as
defined in Section 8), Underlying Shares (as defined in Section 8) are not
registered for resale pursuant to an effective Underlying Shares Registration
Statement (as defined in Section 8) (if the Company is permitted and elects to
pay dividends in shares of Common Stock under this clause (ii) prior to the
Dividend Effectiveness Date and thereafter an Underlying Shares Registration
Statement shall be declared effective by the Commission (as defined in Section
8), the Company shall, within three (3) Trading Days after the date of such
declaration of effectiveness, exchange such Underlying Shares for shares of
Common Stock that are free of restrictive legends of any kind);
(iii) the Common Stock is not then listed or quoted on
the OTC Bulletin Board ("OTC"), or on the New York Stock Exchange, American
Stock Exchange, Nasdaq National Market, or Nasdaq SmallCap Market (each, a
"Subsequent Market");
(iv) the Company has failed to timely satisfy its
conversion obligations hereunder; or
(v) the issuance of the Underlying Shares issuable
as payment of such dividend would result in a violation of Section 5(a)(iii) or
the rules of the OTC or any other rules and regulations governing any Subsequent
Market on which the Common Stock is then listed or quoted for trading.
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined in
Section 8), nor shall the Company directly or indirectly pay or declare any
dividend or make any distribution (other than a dividend or distribution
described in Section 5 or dividends due and paid in the ordinary course on
preferred stock of the Company at such times when the Company is in compliance
with its payment and other obligations hereunder) upon, nor shall any
distribution be made in respect of, any Junior Securities, nor shall any monies
be set aside for or applied to the purchase or redemption (through a sinking
fund or otherwise) of any Junior Securities or shares pari passu with the
Preferred Stock.
Section 3. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, the
Company shall not, without the affirmative vote of the Holders of a majority of
the shares of the Preferred Stock then outstanding, (a) alter or change
adversely the powers, preferences or rights given to the Preferred Stock or
alter or amend this Certificate of Designation, (b) authorize or create any
class of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 4) senior to or otherwise pari passu with the
Preferred Stock, (c) amend its certificate of incorporation or other charter
documents so as to affect adversely any rights of the Holders, (d) increase the
authorized number of shares of Preferred Stock, or (e) enter into any agreement
with respect to the foregoing.
-3-
<PAGE> 4
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value per share before any distribution or payment
shall be made to the holders of any Junior Securities, and if the assets of the
Company shall be insufficient to pay in full such amounts, then the entire
assets to be distributed to the Holders shall be distributed among the Holders
ratably in accordance with the respective amounts that would be payable on such
shares if all amounts payable thereon were paid in full. A sale, conveyance or
disposition of all or substantially all of the assets of the Company or EDC (as
defined in Section 8) or the effectuation by the Company or EDC of a transaction
or series of related transactions in which more than 40% of the voting power of
the Company or EDC is disposed of, or a consolidation or merger of the Company
with or into any other company or companies or of EDC into one or more companies
not wholly-owned by the Company shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall mail
written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record Holder.
Section 5. Conversion.
(a)(i) Conversions at Option of Holder. Each share of Preferred
Stock shall be convertible into shares of Common Stock (subject to the
limitations set forth in Section 5(a)(iii)), at the Conversion Ratio (as defined
in Section 8), at the option of the Holder at any time and from time to time
from and after the Original Issue Date. Holders shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice attached hereto as Exhibit A (a "Conversion Notice"). Each
Conversion Notice shall specify the number of shares of Preferred Stock to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date the Holder delivers such Conversion Notice by
facsimile (the "Conversion Date"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered hereunder. If the Holder is converting less than all
shares of Preferred Stock represented by the certificate or certificates
tendered by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a
certificate representing the number of shares of Preferred Stock as have not
been converted.
(ii) Automatic Conversion. Subject to the provisions
of this paragraph, all outstanding shares of Preferred Stock for which
conversion notices have not previously been received or for which redemption has
not been made or required hereunder shall be automatically converted on the
third anniversary of the Original Issue Date for such shares. The conversion
contemplated by this paragraph shall not occur at such time as (a) (1) an
Underlying Shares Registration Statement is not then effective or (2) the Holder
is not permitted to resell Underlying Shares pursuant to Rule 144(k) promulgated
under the Securities Act (as defined in Section 8), without volume restrictions,
as evidenced by an opinion letter of counsel acceptable to the Holder and the
transfer agent for the Common Stock; (b) there are not sufficient shares of
Common Stock
-4-
<PAGE> 5
authorized and reserved for issuance upon such conversion; or (c) the Company
shall have defaulted on its covenants and obligations hereunder or under the
Purchase Agreement or Registration Rights Agreement. Notwithstanding the
foregoing, the three-year period for conversion under this Section shall be
extended (on a day-for-day basis) for any Trading Days after the Effectiveness
Date that a Holder is unable to resell Underlying Shares under an Underlying
Shares Registration Statement due to (a) the Common Stock not being quoted or
listed for trading on the OTC or any Subsequent Market, (b) the failure of such
Underlying Shares Registration Statement to be declared, or if declared, to
remain effective during the Effectiveness Period (as defined in the Registration
Rights Agreement) as to all Underlying Shares, or (c) the suspension of the
Holder's right to resell Underlying Shares thereunder. The provisions of Section
5(a)(iii) shall not apply to any automatic conversion pursuant to this Section
5(a)(ii).
(iii) Certain Conversion Restrictions.
(A) A Holder may not convert shares of Preferred Stock
to the extent such conversion would result in the Holder, together with any
affiliate thereof, beneficially owning (as determined in accordance with Section
13(d) of the Exchange Act (as defined in Section 8) and the rules thereunder) in
excess of 4.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of the shares of Preferred Stock held
by such Holder after application of this Section. The Holder shall have the sole
authority and obligation to determine whether the restriction contained in this
Section applies and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which shares of
Preferred Stock are convertible shall be in the sole discretion of the Holder.
The provisions of this Section may be waived by a Holder (but only as to itself
and not to any other Holder) upon not less than 61 days prior notice to the
Company. Other Holders shall be unaffected by any such waiver.
(B) A Holder may not convert shares of Preferred Stock
to the extent such conversion would result in the Holder, together with any
affiliate thereof, beneficially owning (as determined in accordance with Section
13(d) of the Exchange Act and the rules thereunder) in excess of 9.999% of the
then issued and outstanding shares of Common Stock, including shares issuable
upon conversion of the shares of Preferred Stock held by such Holder after
application of this Section. The Holder shall have the sole authority and
obligation to determine whether the restriction contained in this Section
applies and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which shares of
Preferred Stock are convertible shall be in the sole discretion of the Holder.
The provisions of this Section may be waived by a Holder (but only as to itself
and not to any other Holder) upon not less than 61 days prior notice to the
Company. Other Holders shall be unaffected by any such waiver.
(b)(i) Not later than three (3) Trading Days after each
Conversion Date, the Company will deliver to the Holder (A) a certificate or
certificates which shall be free of restrictive legends and trading restrictions
(other than those required by Section 3.1(b) of the Purchase Agreement)
representing the number of shares of Common Stock being acquired upon the
conversion of shares of Preferred Stock (subject to the limitations set forth in
Section 5(a)(iii) hereof), (B) one or more certificates representing the number
of shares of Preferred Stock not converted and (C) a bank check
-5-
<PAGE> 6
in the amount of accrued and unpaid dividends (if the Company has elected or is
required to pay accrued dividends in cash). Notwithstanding the foregoing or
anything to the contrary contained herein, the Company shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon
conversion of any shares of Preferred Stock until one Trading Day after
certificates evidencing such shares of Preferred Stock are delivered for
conversion to the Company, or the Holder of such Preferred Stock notifies the
Company that such certificates have been lost, stolen or destroyed and provides
a bond (or other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith. The
Company shall, upon request of the Holder, if available, use its best efforts to
deliver any certificate or certificates required to be delivered by the Company
under this Section electronically through the Depository Trust Corporation or
another established clearing corporation performing similar functions. If in the
case of any Conversion Notice such certificate or certificates are not delivered
to or as directed by the applicable Holder by the third (3rd) Trading Day after
the Conversion Date, the Holder shall be entitled to elect by written notice to
the Company at any time on or before its receipt of such certificate or
certificates thereafter, to rescind such conversion, in which event the Company
shall immediately return the certificates representing the shares of Preferred
Stock tendered for conversion.
(ii) If the Company fails to deliver to the Holder
such certificate or certificates pursuant to Section 5(b)(i), by the third (3rd)
Trading Day after the Conversion Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, $3,000 for each Trading Day
after such third (3rd) Trading Day until such certificates are delivered.
Nothing herein shall limit a Holder's right to pursue actual damages for the
Company's failure to deliver certificates representing shares of Common Stock
upon conversion within the period specified herein and such Holder shall have
the right to pursue all remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.
(iii) In addition to any other rights available to the
Holder, if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), by the third (3rd) Trading Day after
the Conversion Date, and if after such third (3rd) Trading Day the Holder
purchases (in an open market transaction or otherwise) Common Stock to deliver
in satisfaction of a sale by such Holder of the Underlying Shares which the
Holder was entitled to receive upon such conversion (a "Buy-In"), then the
Company shall (A) pay in cash to the Holder the amount by which (x) the Holder's
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder was entitled to receive from the conversion at
issue multiplied by (2) the market price of the Common Stock at the time of the
sale giving rise to such purchase obligation and (B) at the option of the
Holder, either return the shares of Preferred Stock for which such conversion
was not honored or deliver to such Holder the number of shares of Common Stock
that would have been issued had the Company timely complied with its conversion
and delivery obligations under Section 5(b)(i). For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of shares of Preferred Stock with
respect to which the market price of the Underlying Shares on the date of
conversion totaled $10,000, under clause (A) of the immediately preceding
sentence the Company shall be required to
-6-
<PAGE> 7
pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In. Nothing
herein shall limit a Holder's right to pursue actual damages for the Company's
failure to deliver certificates representing shares of Common Stock upon
conversion within the period specified herein and such Holder shall have the
right to pursue all remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.
(c)(i)(A) The conversion price for each share of Preferred Stock
(the "Conversion Price") in effect on any Conversion Date shall be the lesser of
(a) $2.00 and (b) the Adjusted Conversion Price as calculated in accordance with
Section 5(c)(i)(B), each as adjusted in accordance with this Section 5(c).
Notwithstanding anything to the contrary contained herein, except as a result of
the operation of Section 5(c)(i)(C) and Sections 5(c)(ii) - (v), the Conversion
Price shall not be less than $1.50 per share.
(B) The Conversion Price shall be adjusted on (1) the 30th
Trading Day following the date that an Underlying Shares Registration Statement
relating to the Preferred Stock is first declared effective by the Commission
(the "First Adjustment Date") and on (2) the 30th Trading Day following the
First Adjustment Date (the "Second Adjustment Date"). Each of the First
Adjustment Date and Second Adjustment Date are an "Adjustment Date." On each
Adjustment Date, the Conversion Price applicable to all then outstanding shares
of Preferred Stock for which no Conversion Notice has been provided shall be
adjusted in accordance with the following formula, provided that in no event
shall the Conversion Price as so adjusted be increased above the Conversion
Price in effect prior to such time (the resulting Conversion Price is referred
to herein as the "Adjusted Conversion Price"):
Adjusted Conversion Price = $2.00 - [113% * ($2.00 - RP)/RP)]
Where RP for an Adjustment Date of calculation means the average
of the three (3) lowest Per Share Market Values during the ten
(10) Trading Days immediately preceding and including such
Adjustment Date; provided, that at the Holder's option such ten
(10) Trading Day period shall be extended for the number of
Trading Days, if any, during such period in which (A) trading in
the Common Stock is not quoted on or listed for trading on (as
applicable), or is suspended from trading on, the OTC or a
Subsequent Market on which it is listed for trading prior to
such suspension (unless, in the case of a suspension or
delisting from a Subsequent Market, the Common Stock is
immediately available for quotation on the OTC), or (B) after
the date declared effective by the Commission, the Underlying
Shares Registration Statement is not effective, or (C) after the
date declared effective by the Commission, the Prospectus
included in the Underlying Shares Registration Statement may not
be used by the Holder for the resale of Underlying Shares.
-7-
<PAGE> 8
(C) If (1) the Underlying Shares Registration Statement is
not filed on or prior to the Filing Date (if the Company files such Underlying
Shares Registration Statement without affording the Holder the opportunity to
review and comment on the same as required by Section 3(a) of the Registration
Rights Agreement, the Company shall not be deemed to have satisfied this clause
(a)), or (2) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the Exchange Act
within five (5) days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the Commission that an Underlying Shares
Registration Statement will not be "reviewed," or not subject to further review
or comment, or (3) the Underlying Shares Registration Statement is not declared
effective by the Commission on or prior to the Effectiveness Date, or (4) such
Underlying Shares Registration Statement is filed with and declared effective by
the Commission but thereafter ceases to be effective as to all Registrable
Securities (as defined in the Registration Rights Agreement) at any time prior
to the expiration of the Effectiveness Period without being succeeded within ten
(10) days by a subsequent Underlying Shares Registration Statement filed with
and declared effective by the Commission, or (5) trading in the Common Stock
shall be suspended from a Subsequent Market or quotations of the Common Stock
shall not be available on the OTC due to the failure of the Company to meet the
requirements for trading on the OTC, in either case for more than three (3)
Business Days (which need not be consecutive days), (6) the conversion rights of
the Holders are suspended for any reason or (7) an amendment to the Underlying
Shares Registration Statement is not filed by the Company with the Commission
within twenty (20) days of the Commission's notifying the Company that such
amendment is required in order for the Underlying Shares Registration Statement
to be declared effective (if the Company files such amendment without affording
the Holder the opportunity to review and comment on the same as required by
Section 3(a) of the Registration Rights Agreement, the Company shall not be
deemed to have satisfied this clause (7)) (any such failure or breach being
referred to as an "Event," and for purposes of clauses (1), (3), (6) the date on
which such Event occurs, or for purposes of clause (2) the date on which such
five (5) day period is exceeded, or for purposes of clauses (4) and (7) the date
which such 10 day-period is exceeded, or for purposes of clause (5) the date on
which such three (3) Business Day-period is exceeded, being referred to as
"Event Date"), then, on the Event Date and each monthly anniversary thereof
until the earlier to occur of the second month anniversary after the Event Date
and such time as the applicable Event is cured, the then applicable Conversion
Price shall be decreased by 2%. Commencing on the second month anniversary after
the Event Date and on each monthly anniversary thereof, until such time as the
applicable Event is cured, the Holder shall have the option to either (x)
require further cumulative 2% discounts to continue or (y) require the Company
to pay to the Holder 2% of the aggregate Stated Values of the shares of
Preferred Stock then held by such Holder (which, for purposes hereof shall
include all shares of Preferred Stock tendered for conversion by such Holder but
for which Underlying Shares due in respect thereof shall not have been received
by such Holder), in cash, as liquidated damages and not as a penalty. Any
decrease in the Conversion Price pursuant to this Section shall remain in effect
notwithstanding the fact that the Event causing such decrease has been
subsequently cured and further monthly decreases have ceased. The provisions of
this Section are not exclusive and shall in no way limit the Company's
obligations under the Registration Rights Agreement.
-8-
<PAGE> 9
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities or pari
passu securities payable in shares of Common Stock, (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine outstanding
shares of Common Stock into a smaller number of shares, or (d) issue by
reclassification and exchange of the Common Stock any shares of capital stock of
the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(ii) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights, warrants or options to all
holders of Common Stock entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Conversion Price shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, warrants or
options, plus the number of shares of Common Stock which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Value, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of Common Stock offered for subscription or purchase. Such
adjustment shall be made whenever such rights or warrants are issued, and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants. However, upon the
expiration of any right, warrant or option to purchase shares of Common Stock
the issuance of which resulted in an adjustment in the Conversion Price pursuant
to this Section 5(c)(iii), if any such right, warrant or option shall expire and
shall not have been exercised, the Conversion Price shall immediately upon such
expiration shall be recomputed and effective immediately upon such expiration
shall be increased to the price which it would have been (but reflecting any
other adjustments in the Conversion Price made pursuant to the provisions of
this Section 5 upon the issuance of other rights or warrants) had the adjustment
of the Conversion Price made upon the issuance of such rights, warrants, or
options been made on the basis of offering for subscription or purchase only
that number of shares of Common Stock actually purchased upon the exercise of
such rights, warrants or options actually exercised.
(iv) If prior to the 180th day from the date that the
Commission declares effective an Underlying Shares Registration Statement (which
180 day period shall be increased on a day to day basis for each day after the
date the Commission declares effective such Underlying Shares Registration
Statement that a Holder is unable to resell Underlying Shares thereunder due to
(a) the Common Stock not being quoted or listed for trading on the OTC or any
Subsequent Market (as the case may be), (b) the failure of such Underlying
Shares Registration Statement to remain effective during the entire 180 day
period as to all Underlying Shares or (c) the suspension of a Holder's right to
resell Underlying Shares under such Underlying Shares Registration Statement)
the
-9-
<PAGE> 10
Company or any subsidiary thereof, as applicable with respect to Common Stock
Equivalents (as defined below), at any time while any shares of Preferred Stock
are outstanding, shall issue shares of Common Stock or rights, warrants, options
or other securities or debt that is convertible into or exchangeable for shares
of Common Stock ("Common Stock Equivalents"), entitling any Person to acquire
shares of Common Stock at a price per share less than the Conversion Price (if
the holder of the Common Stock or Common Stock Equivalent so issued shall at any
time receive or have the right to receive, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or exchange
prices or otherwise, or due to warrants, options or rights issued in connection
with such issuance, shares of Common Stock at a price less than the prevailing
Conversion Price, such issuance shall be deemed to have occurred for less than
the Conversion Price), then the Conversion Price shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such Common Stock or such
Common Stock Equivalents plus the number of shares of Common Stock which the
offering price for such shares of Common Stock or Common Stock Equivalents would
purchase at the Conversion Price, and the denominator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock so issued or issuable,
provided, that for purposes hereof, all shares of Common Stock that are issuable
upon conversion, exercise or exchange of Common Stock Equivalents shall be
deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such Common Stock or Common
Stock Equivalents are issued. However, upon the expiration of any Common Stock
Equivalents the issuance of which resulted in an adjustment in the Conversion
Price pursuant to this Section, if any such Common Stock Equivalents shall
expire and shall not have been exercised, the Conversion Price shall immediately
upon such expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been (but reflecting
any other adjustments in the Conversion Price made pursuant to the provisions of
this Section after the issuance of such Common Stock Equivalents) had the
adjustment of the Conversion Price made upon the issuance of such Common Stock
Equivalents been made on the basis of offering for subscription or purchase only
that number of shares of the Common Stock actually purchased upon the exercise
of such Common Stock Equivalents actually exercised.
(v) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common Stock
(and not to Holders) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 5(c)(ii)-(iv) above), then in each such case the Conversion Price at
which each share of Preferred Stock shall thereafter be convertible shall be
determined by multiplying the Conversion Price in effect immediately prior to
the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to one outstanding shares of Common
Stock as determined by the Board of Directors in good faith; provided, however,
that in the event of a distribution exceeding ten percent (10%) of the net
assets of the Company, if the Holders of a majority in interest of the Preferred
Stock dispute such valuation,
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<PAGE> 11
such fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the Holders of a majority in interest of the shares of Preferred
Stock then outstanding; and provided, further, that the Company, after receipt
of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to the Holders
of the portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(vi) All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted
pursuant to Section 5(c)(ii),(iii),(iv), or (v) the Company shall promptly mail
to each Holder, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(viii) In case of any reclassification of the Common
Stock, or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property (other than compulsory share
exchanges which constitute Change of Control Transactions), the Holders of the
Preferred Stock then outstanding shall have the right thereafter to convert such
shares only into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
reclassification or share exchange, and the Holders of the Preferred Stock shall
be entitled upon such event to receive such amount of securities, cash or
property as a holder of the number of shares of Common Stock of the Company into
which such shares of Preferred Stock could have been converted immediately prior
to such reclassification or share exchange would have been entitled. This
provision shall similarly apply to successive reclassifications or share
exchanges.
(ix) In case of any (1) merger or consolidation of
the Company with or into another Person that would constitute a Change of
Control Transaction, or (2) sale by the Company of more than one-half of the
assets of the Company (on an as valued basis) in one or a series of related
transactions, or (3) tender or other offer or exchange (whether by the Company
or another Person) pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, stock, cash or property of
the Company or another Person, a Holder shall have the right thereafter to (A)
convert its shares of Preferred Stock into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and such Holder shall
be entitled upon such event or series of related events to receive such amount
of securities, cash and property as the shares of Common Stock into which such
shares of Preferred Stock could have been converted immediately prior to such
merger, consolidation or sales would have been entitled, (B) in the case of a
merger or
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<PAGE> 12
consolidation, (x) require the surviving entity to issue shares of convertible
preferred stock or convertible debentures with such aggregate stated value or in
such face amount, as the case may be, equal to the Stated Value of the shares of
Preferred Stock then held by such Holder, plus all accrued and unpaid dividends
and other amounts owing thereon, which newly issued shares of preferred stock or
debentures shall have terms identical (including with respect to conversion) to
the terms of the Preferred Stock (except, in the case of debentures, as may be
required to reflect the differences between debt and equity) and shall be
entitled to all of the rights and privileges of a Holder of Preferred Stock set
forth herein and the agreements pursuant to which the Preferred Stock was issued
(including, without limitation, as such rights relate to the acquisition,
transferability, registration and listing of such shares of stock other
securities issuable upon conversion thereof), and (y) simultaneously with the
issuance of such convertible preferred stock or convertible debentures, shall
have the right to convert such instrument only into shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger or consolidation, or (C) in the event of an
exchange or tender offer or other transaction contemplated by clause (3) of this
Section, tender or exchange its shares of Preferred Stock for such securities,
stock, cash and other property receivable upon or deemed to be held by holders
of Common Stock that have tendered or exchanged their shares of Common Stock
following such tender or exchange, and such Holder shall be entitled upon such
exchange or tender to receive such amount of securities, cash and property as
the shares of Common Stock into which such shares of Preferred Stock could have
been converted (taking into account all then accrued and unpaid dividends)
immediately prior to such tender or exchange would have been entitled as would
have been issued. In the case of clause (B), the conversion price applicable for
the newly issued shares of convertible preferred stock or convertible debentures
shall be based upon the amount of securities, cash and property that each share
of Common Stock would receive in such transaction, the Conversion Ratio
immediately prior to the effectiveness or closing date for such transaction and
the Conversion Price stated herein. The terms of any such merger, sale,
consolidation, tender or exchange shall include such terms so as continue to
give the Holders of Preferred Stock the right to receive the securities, cash
and property set forth in this Section upon any conversion or redemption
following such event. This provision shall similarly apply to successive such
events. The rights set forth in this Section 5(c)(ix) shall not alter the rights
of a Holder set forth in Section 7, provided, that, a Holder may only exercise
the rights set forth in this Section 5(c)(ix) or the rights set forth in Section
7 with respect to a single event giving rise to such rights.
(x) If (a) the Company shall declare a dividend (or
any other distribution) on the Common Stock, (b) the Company shall declare a
special nonrecurring cash dividend on or a redemption of the Common Stock, (c)
the Company shall authorize the granting to all holders of Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights, (d) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into other
securities, cash or property, or (e) the Company shall authorize the voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company; then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Preferred Stock, and shall cause
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<PAGE> 13
to be mailed to the Holders at their last addresses as they shall appear upon
the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange. Holders are entitled to convert shares of
Preferred Stock during the 20-day period commencing the date of such notice to
the effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common Stock
solely for the purpose of issuance upon conversion of Preferred Stock and
payment of dividends on Preferred Stock, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of shares of Common Stock as
shall be issuable (taking into account the provisions of Section 5(a) and
Section 5(c)) upon the conversion of all outstanding shares of Preferred Stock.
The Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the Holder of
a share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for Common Stock on
conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted.
(g) Shares of Preferred Stock converted into Common Stock or
redeemed in accordance with the terms hereof shall be canceled and may not be
reissued.
(h) Any and all notices or other communications or
deliveries to be provided by the Holders of the Preferred Stock hereunder,
including, without limitation, any Conversion Notice, shall be in writing and
delivered personally, by facsimile or sent by a nationally recognized overnight
courier service, addressed to the attention of the Chief Executive Officer of
the Company addressed to 13114 Evening Creek Drive South, San Diego, California
92128 or to facsimile number (619)
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<PAGE> 14
486-3922, or to such other address or facsimile number as shall be specified in
writing by the Company for such purpose. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
6:30 p.m. (New York City time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 6:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) upon receipt, if sent by a nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
Section 6. Optional Redemption.
(a) Subject to the provisions of this Section 6, the Company
shall have the right, upon twenty (20) Trading Days' notice (an "Optional
Redemption Notice") to the Holders of the Preferred Stock, to redeem all or any
portion of the shares of Preferred Stock which have not previously been redeemed
or for which Conversion Notices shall not have been delivered, at a price equal
to the Optional Redemption Price (as defined below). The Company may only
deliver an Optional Redemption Notice after the Effectiveness Date if: (i) the
number of shares of Common Stock at the time authorized, unissued and unreserved
for all purposes is sufficient to satisfy the Company's conversion obligations
of all shares of Preferred Stock then outstanding, (ii) the Underlying Shares
then outstanding are registered for resale pursuant to an effective Underlying
Shares Registration Statement pursuant to which the Holders are permitted to
utilize to sell Underlying Shares, and (iii) the Common Stock is eligible for
quotation on the OTC or listed for trading on a Subsequent Market. Each of
clauses (i) - (iii) of the immediately preceding sentence must be true during
the entire twenty (20) Trading Days between the date of delivery of an Optional
Redemption Notice and the date of payment of the Optional Redemption Price. The
entire Optional Redemption Price shall be paid in cash. A Holder may convert
(and the Company shall honor such conversions in accordance with the terms
hereof) any or all of the shares of Preferred Stock subject to an Optional
Redemption Notice, provided that the Conversion Notice for such shares is
delivered prior to the 19th Trading Day following the receipt by such Holder of
such an Optional Redemption Notice.
(b) Failure by the Company to pay any portion of the
Optional Redemption Price by the 20th Trading Day following the date of an
Optional Redemption Notice shall result in the invalidation ab initio of the
unpaid portion of such optional redemption, and, notwithstanding anything herein
to the contrary, the Company shall thereafter have no further rights to
optionally redeem any shares of Preferred Stock. In such event, the Company
shall, at the option of the Holder, either, (i) not later than three (3) Trading
Days from receipt of Holder's request for such election, return to the Holder
all of the shares of Preferred Stock for which such Optional Redemption Price
has not been paid in full (the "Unpaid Redemption Shares") or (ii) convert of
all or any portion of
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<PAGE> 15
the Unpaid Redemption Shares in which event the Per Share Market Value for such
shares shall be the lower of the Per Share Market Value calculated on the date
the Optional Redemption Price was originally due and the Per Share Market Value
as of the Holder's written demand for conversion. If the Holder elects option
(ii) above, the Company shall within three (3) Trading Days of its receipt of
such election deliver to the Holder the shares of Common Stock issuable upon
conversion of the Unpaid Redemption Shares subject to such Holder conversion
demand and otherwise perform its obligations hereunder with respect thereto.
(c) The "Optional Redemption Price" shall equal the sum of
the sum of (i) the greater of (A) 110% of the Stated Value of the shares of
Preferred Stock to be redeemed and (B) the product of (x) the number of shares
of Preferred Stock to be redeemed and (y) the product of (1) the closing sales
price on (x) the date of the Optional Redemption Notice or (y) the date of
payment in full by the Company of the Optional Redemption Price, whichever is
greater, and (2) the Conversion Ratio calculated on the date of the Optional
Redemption Notice, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect of such shares of Preferred Stock.
Section 7. Redemption Upon Triggering Events.
(a) Upon the occurrence of a Triggering Event, each Holder
shall (in addition to all other rights it may have hereunder or under applicable
law), have the right, exercisable at the sole option of such Holder, to require
the Company to redeem all or a portion of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory
Redemption Amount plus (ii) the product of (A) the number of Underlying Shares
delivered to the Holder not more than 30 Trading Days preceding such Holder's
delivery of a notice to the Company exercising its right of redemption as a
result of a Triggering Event hereunder and then held by the Holder and (B) the
closing sales price on the date such redemption is demanded or the date the
redemption price hereunder is paid in full, whichever is greater (such sum, the
"Redemption Price"). The Redemption Price shall be due and payable within five
Trading Days of the date on which the notice for the payment therefor is
provided by a Holder. If the Company fails to pay the Redemption Price hereunder
in full pursuant to this Section on the date such amount is due in accordance
with this Section, the Company will pay interest thereon at a rate of 18% per
annum (or the lesser amount permitted by applicable law), accruing daily from
such date until the Redemption Price, plus all such interest thereon, is paid in
full. For purposes of this Section, a share of Preferred Stock is outstanding
until such date as the Holder shall have received Underlying Shares upon a
conversion (or attempted conversion) thereof that meets the requirements hereof.
A "Triggering Event" means any one or more of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or order of
any court, or any order, rule or regulation of any administrative or
governmental body):
(i) the failure of an Underlying Shares Registration
Statement to be declared effective by the Commission on or prior to the 180th
day after the Original Issue Date;
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<PAGE> 16
(ii) if, during the Effectiveness Period, the
effectiveness of the Underlying Shares Registration Statement lapses for any
reason for more than an aggregate of ten calendar days, or the Holder shall not
be permitted to resell Registrable Securities (as defined in the Registration
Rights Agreement) under the Underlying Shares Registration Statement for more
than an aggregate of ten calendar days (which need not be consecutive days);
(iii) the failure of the Common Stock to be eligible
for quotation on the OTC or listed for trading on a Subsequent Market or the
suspension of the Common Stock from quotation on the OTC or trading on a
Subsequent Market, in either case, for more than ten calendar days (which need
not be consecutive days) without, in the case of a suspension or delisting from
a Subsequent Market, being immediately available for quotation on the OTC;
(iv) the Company shall fail for any reason to deliver
certificates representing Underlying Shares issuable upon a conversion hereunder
that comply with the provisions hereof prior to the 10th day after the
Conversion Date or the Company shall provide notice to any Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversion of any Preferred Stock in accordance with the terms
hereof;
(v) the Company or EDC shall be a party to any
Change of Control Transaction, shall agree to sell (in one or a series of
related transactions) all or substantially all of its assets (whether or not
such sale would constitute a Change of Control Transaction) or shall redeem more
than a de minimis number of Common Stock or other Junior Securities (other than
redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the
satisfaction of the Holders prior to the expiration of sixty (60) days from the
Event Date relating thereto;
(vii) the Company shall fail for any reason to pay in
full the amount of cash due pursuant to a Buy-In within seven (7) days after
notice therefor is delivered hereunder; or
(viii) the Company shall fail to have available a
sufficient number of authorized and unreserved shares of Common Stock to issue
to such Holder upon a conversion hereunder.
Section 8. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Change of Control Transaction" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 40% of the
voting securities of the Company or EDC, (ii) a replacement at one time or over
time of more than one-half of the members of the Company's or EDC's board of
directors which is not approved by a majority of those individuals who are
members of the board of directors on the date hereof (or by those individuals
who are serving as members of the board of directors on any date whose
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<PAGE> 17
nomination to the board of directors was approved by a majority of the members
of the board of directors who are members on the date hereof), (iii) the merger
of the Company with or into another entity or the merger of EDC with or into
another entity that is not wholly-owned by the Company, consolidation or sale of
all or substantially all of the assets of the Company or EDC in one or a series
of related transactions, or (iv) the execution by the Company or EDC of an
agreement to which the Company or EDC is a party or by which it is bound,
providing for any of the events set forth above in (i), (ii) or (iii).
"closing sales price" means on any particular date (a) the
closing sales price per share of Common Stock on such date on the Subsequent
Market on which the Common Stock is then listed or quoted, or if there is no
such price on such date, then the closing sales price on the Subsequent Market
on the date nearest preceding such date, or (b) if the Common Stock is not then
listed or quoted on a Subsequent Market, the closing sales price for a shares of
Common Stock in the OTC, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or if there is no such
price on such date, then the closing sales price on the OTC on the date nearest
preceding such date, or (c) if the Common Stock is not then reported by the
National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the Holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a shares of Common Stock as determined by an Appraiser selected
in good faith by the Holders of a majority of the shares of the Preferred Stock.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.001
per share, and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, the numerator
of which is Stated Value and the denominator of which is the Conversion Price at
such time.
"Dividend Effectiveness Date" means the earlier to occur of (x)
the Effectiveness Date (as defined in the Registration Rights Agreement) for the
Preferred Stock and (y) the date that an Underlying Shares Registration
Statement relating to the Preferred Stock is declared effective by the
Commission.
"EDC" means e.Digital Corporation, a wholly-owned subsidiary of
the Company organized as of the Original Issue Date in the State of California.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Junior Securities" means the Common Stock and all other equity
securities of the Company other than those securities that are outstanding on
the Original Issue Date and which are explicitly senior in rights or liquidation
preference to the Preferred Stock.
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<PAGE> 18
"Mandatory Redemption Amount" for each share of Preferred Stock
means the sum of (i) the greater of (A) 110% of the Stated Value and (B) the
product of (a) the closing sales price on the Trading Day immediately preceding
(x) the date of the Triggering Event or the Conversion Date, as the case may be,
or (y) the date of payment in full by the Company of the applicable redemption
price, whichever is greater, and (b) the Conversion Ratio calculated on the date
of the Triggering Event, or the Conversion Date, as the case may be, and (ii)
all other amounts, costs, expenses and liquidated damages due in respect of such
share of Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance
of any shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of Common Stock on such date on the Subsequent
Market on which the Common Stock is then listed or quoted, or if there is no
such price on such date, then the closing bid price on the Subsequent Market on
the date nearest preceding such date, or (b) if the Common Stock is not then
listed or quoted on a Subsequent Market, the closing bid price for a shares of
Common Stock in the OTC, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in good faith by the Holder, or (d) if the Common Stock are not
then publicly traded the fair market value of a share of Common Stock as
determined by an Appraiser selected in good faith by the Holders of a majority
of the shares of the Preferred Stock.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated the Original Issue Date, between the Company and the
original Holder.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the Original Issue Date, between the Company and the original
Holder.
"Securities Act" means the Securities Act of 1933, as amended.
"Trading Day" means (a) a day on which the Common Stock is
traded on a Subsequent Market on which the Common Stock is then listed or
quoted, as the case may be, or (b) if the Common Stock is not listed on a
Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC, or (c) if the Common Stock is
not quoted on the OTC, a day on which the Common Stock is quoted in the
over-the-counter market as
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<PAGE> 19
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices); provided,
however, that in the event that the Common Stock is not listed or quoted as set
forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except
Saturday, Sunday and any day which shall be a legal holiday or a day on which
banking institutions in the State of New York are authorized or required by law
or other government action to close.
"Underlying Shares" means, collectively, the shares of Common
Stock into which the Shares are convertible and the shares of Common Stock
issuable upon payment of dividends thereon in accordance with the terms hereof.
"Underlying Shares Registration Statement" means a registration
statement that meets the requirements of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the Holder, who shall be named
as a "selling stockholder" thereunder.
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<PAGE> 20
RESOLVED, FURTHER, that the Chairman, the president or any
vice-president, and the secretary or any assistant secretary, of the Corporation
be and they hereby are authorized and directed to prepare and file a Certificate
of Designation of Preferences, Rights and Limitations in accordance with the
foregoing resolution and the provisions of Delaware law.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
21st day of June, 1999.
/s/ ELWOOD G. NORRIS
----------------------------------------
ELWOOD G. NORRIS, Chairman
/s/ ROBERT PUTNAM
----------------------------------------
ROBERT PUTNAM, Secretary
<PAGE> 1
EXHIBIT 4.18.2
[LETTERHEAD]
May 27, 1999
VIA U.S. MAIL
Mr. Fred Falk
President & CEO
e.Digital Corporation
13114 Evening Creek Drive South
San Diego, CA 92128
Re: Fees and Services
Dear Fred:
This letter will memorialize our agreement regarding fees of $61,938.99
due and owing to Higham, McConnell & Dunning, LLP ("HM&D") as of February 28,
1999 for various legal services performed by HM&D prior thereto (the "Fees and
Services"). The Company has requested, due to the increase in the fair market
value of shares of e.Digial Corporation (the "Company") common stock previously
issued to HM&D on or about March 24, 1998 in payment of other legal services,
that HM&D release the Company from its current payment obligations and, in
connection therewith, waive any and all future claims with respect to the Fees
and Services. HM&D has agreed to the Company's request based upon the terms and
conditions set forth herein. In connection therewith, the parties hereto agree
as follows:
1. The Company shall enter into Amendment No. 2 to Stock Purchase
Warrant (the "Amended Warrants"), in the form attached hereto as
Exhibit A. The Amended Warrant shall provide that the exercise
price shall be reduced from $0.15625 per share to $0.01 per
share.
2. The Company shall immediately pay HM&D's March and April 1999
invoices and will utilize its best efforts to pay all future
invoices with thirty (30) days of presentation. HM&D agrees to
accept 3,071 shares of common stock as payment in full for the
March and April invoices, with the number of shares of common
stock issuable to the firm determined by dividing the amount of
the invoice by $2.589.
3. The Company shall execute a Consent Agreement, in the form
attached hereto as Exhibit B acknowledging that securities
received by HM&D may result in monetary consideration which may
be grossly disproportionate to the value of the services
performed.
4. The parties hereby fully and forever waive, release, extinguish,
and discharge one another of and from any and all claims,
payments, actions, causes of actions, suits, agreements debts,
expenses, costs, complaints, demands, liabilities, duties,
losses or damages of whatever kind or nature, in law, equity or
otherwise, whether known or unknown, suspected or unsuspected,
which they may have the respect to the Fees and Services.
5. In connection with the foregoing, each of the parties hereto
acknowledges that it is aware of the provisions of Section 1542
of the California Civil Code and does hereby expressly waive and
relinquish all rights and benefits which it has or may have had
under such Section, which reads as follows:
<PAGE> 2
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
6. You have been advised and encouraged to seek the advice of
independent counsel, and in fact have done so, before agreeing
to the terms of this letter and/or the fees and transactions
described herein.
Best regards,
HIGHAM, McCONNELL & DUNNING LLP
/s/ CURT BARWICK
----------------------------------------
Curt C. Barwick
Agreed to and accepted this 28th day of May 1999.
E.DIGITAL CORPORATION
By: /s/ ALFRED H. FALK
-------------------------------------
Alfred H. Falk, President & CEO
CCB:
Enclosures
<PAGE> 1
EXHIBIT 4.19
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 500,000 SHARES OF COMMON STOCK
THIS CERTIFIES THAT SUNRISE CAPITAL, INC. and all registered and permitted
assigns ("Holder") is entitled to purchase, on or before January 15, 2004, FIVE
HUNDRED THOUSAND (500,000) shares of the common stock, par value $0.001 ("Common
Stock" or "Shares") of e.DIGITAL CORPORATION (the "Corporation") upon exercise
of this Warrant along with presentation of the full purchase price as provided
herein. The purchase price of the common stock upon exercise (the "Warrant
Shares") is equal to Ten Cents ($0.10) per share (the "Exercise Price"). This
Warrant is granted for valuable consideration received.
1. Exercise.
(a) This Warrant may be exercised one time, in whole or minimum increments of
100,000 shares, on any business day on or before the expiration date listed
above by presentation and surrender hereof to the Corporation at its principal
office of a written exercise request and the Exercise Price in lawful money of
the United States of America in the form of a wire transfer or check, subject to
collection, for the Warrant Shares specified in the exercise request. If this
Warrant should be exercised in part only, the Company shall, upon surrender of
this Warrant, execute and deliver a new Warrant evidencing the rights of the
Holder hereof to purchase the balance of the Warrant Shares purchasable
hereunder. Upon receipt by the Corporation of an exercise request and
representations, together with proper payment of the Exercise Price, at such
office, the Holder shall be deemed to be the holder of record of the Warrant
Shares, notwithstanding that the stock transfer books of the Corporation shall
then be closed or that certificates representing such Warrant Shares shall not
then be actually delivered to the Holder. The Corporation shall pay any and all
transfer agent fees, documentary stamp or similar issue or transfer taxes
payable in respect of the issue or delivery of the Warrant Shares.
(b) At any time during the period from issuance to expiration (the "Exercise
Period"), the Holder may, at its option, exchange this Warrant, in whole or
minimum increments of 100,000 shares (a "Warrant Exchange"), into the number of
Warrant Shares determined in accordance with this Section (1)(b), by
surrendering this Warrant at the principal office of the Company, accompanied by
a written notice stating such Holder's intent to effect such exchange, the
number of Warrant Shares to be exchanged and the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date the Notice of Exchange is received
by the Company or such later date as may be specified in the Notice of Exchange
(the "Exchange Date"). Certificates for the shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant of like tenor evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within ten (10) days following the
Exchange Date. In connection with any Warrant Exchange, this Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price by (B) the current
market value of a share of Common Stock. Current market value shall be the
average closing trading price for the 5 trading day period prior to the Exchange
Date.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this
Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares of its Common Stock with respect to its
outstanding Common Stock;
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<PAGE> 2
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of
its shares of Common Stock;
the Exercise Price in effect at the time of the record date of such dividend,
subdivision, combination, or reclassification shall be proportionately adjusted
so that Holder shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised prior to such event, Holder
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Corporation shall fix a record date for the issuance of rights,
options, or warrants or make a distribution of shares of Common Stock to all
(but not less than all) holders of its outstanding Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into shares of Common Stock) at a price per share (or having a conversion price
per share, if a security convertible into Common Stock) less than the market
price of the shares (based on the closing price on the record date on NASDAQ or
a listed securities exchange of the Corporation's Common Stock, or if no such
quote is available, the shareholders equity on the date of the last financial
statement divided by the total number of shares outstanding) (the "Market
Price"), the Exercise Price to be in effect after such record date shall be
determined by multiplying the then current Exercise Price in effect immediately
prior to such record date by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such record date plus the number
of shares of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
Market Price and of which the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible securities so to be offered are initially convertible). Such
adjustment shall be made successively whenever such a record date is fixed; and
in the event that such rights or warrants are not so issued, the Exercise Price
shall again be adjusted to be the Exercise Price which would then be in effect
if such record date had not been fixed.
(c) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplemental Warrant") which will make
lawful and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive reorganizations, reclassifications, and changes of
Common Stock and to successive consolidations, mergers, sales, or conveyances.
3. Restrictions on Transfer.
Holder has been advised and understands that the Warrants and the Warrant Shares
purchasable thereby are characterized as "restricted securities" under the
federal securities laws because they are being acquired from Corporation in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances. Holder further understands that
the certificates evidencing the Warrant Shares will bear the following or
comparable legend: "These securities have not been registered under the
Securities Act of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to Rule
144 under such Act."
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<PAGE> 3
The Holder understands that the Company may place, and may instruct any transfer
agent or depository for the Warrant Shares to place, a stop transfer notation in
the securities records in respect of the Warrant Shares.
4. Registration Rights.
Holder shall have the right, at any time and from time to time until January 15,
2004, to include all of the shares purchased or purchasable upon the exercise of
this Warrant ( the "Registrable Shares") within any Registration Statement of
the Corporation filed by the Corporation covering shares of its Common Stock
other than a Registration Statement filed solely with respect to any employee
benefit plan of the Corporation or an offering solely related to an acquisition
or for which such Registrable Shares cannot, in the sole judgment of the
Company, be appropriately registered. The Corporation shall promptly give
written notice to Holder of any intended registration of its Common Stock not
less than forty-five (45) days prior to the anticipated effective date of the
Registration Statement, and Holder shall, within fifteen (15) days of receipt
thereof, notify the Corporation of the number of Registrable Shares it desires
to include in the Registration Statement. The number of Registrable Shares which
may be included by the Holder in any such Registration Statement may be
restricted by the Corporation if, in the opinion of the Corporation's managing
underwriter, the number of shares proposed to be sold by the Holder and by the
Corporation in such offering exceeds the number of securities which can be sold
in such offering. In such event, the Registrable Shares of Holder to be included
within such Registration Statement shall not exceed the number approved for
inclusion therein by the Corporation and its managing underwriter. All costs or
expenses, incident to the registration, qualification or listing of such
securities shall be paid by the Corporation, and the Corporation shall comply
with all reasonable requests of Holder made in connection with the registration,
qualification, listing or sale of Registrable Shares.
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 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).
5. 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 underwritten 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 such
underwriter(s), as the case may be, for a period of time not to exceed one
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.
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<PAGE> 4
6. Assignment or Loss of Warrant.
(a) The Holder of this Warrant shall be entitled, without obtaining the consent
of the Corporation, to assign its interest in this Warrant, or any of the
Warrant Shares, in whole or in part to any person, provided, however, that the
transferee, prior to any such transfer, provides the Corporation with a legal
opinion, in form and substance satisfactory to the Company, that such transfer
will not violate the Act or any applicable state securities or blue sky laws.
Otherwise without obtaining the prior written consent of the Company, Holder
shall not transfer or assign its interest in this Warrant, or any of the Warrant
Shares prior to exercise, in whole or in part to any transferee.
(b) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
7. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
The 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.
8. Arbitration. In the event that a dispute arises between the Corporation and
the holder of this Warrant as to any matter relating to this Warrant, the matter
shall be settled by arbitration in San Diego County, California in accordance
with the Rules of the American Arbitration Association and the award rendered by
such arbitrator(s) shall not be subject to appeal and may be entered in any
federal or state court located in San Diego County having jurisdiction thereof,
and actions or proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers as of this 15th day of January, 1999.
e.DIGITAL CORPORATION
/s/ ALFRED H. FALK /s/ ROBERT PUTNAM
Alfred H. Falk, President and CEO Robert Putnam, Secretary
4
<PAGE> 1
EXHIBIT 4.20
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT.
SERIES 97W
WARRANT NO. 97W ___
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE _________ SHARES OF COMMON STOCK
THIS CERTIFIES THAT: ____________________
____________________
____________________
and all registered and permitted assigns (collectively, "Holder") is entitled to
purchase, on or before ________________________________________________________,
_____________________________ shares of the common stock ("Common Stock") of
e.Digital Corporation, (the "Corporation" or "Company") upon exercise of this
Warrant along with presentation of the full purchase price as provided herein.
The purchase price of the common stock upon exercise of this Warrant ("Warrant
Shares") is equal to eight and three-quarter cents ($0.0875) per share (the
"Exercise Price"). This Warrant is issued for full and valuable consideration
and is issued in connection with the conversion of certain Notes issued by the
Company dated June 13, 1997 for an aggregate of $500,000.
1. Exercise of Warrant.
(a) This Warrant may be exercised in whole or in part (a part must equal to at
least 100,000 shares or the balance of the warrant) on any business day on or
before the expiration date listed above by presentation and surrender hereof to
the Company at its principal office of an exercise request and the Exercise
Price in lawful money of the United States of America in the form of a wire
transfer or check, subject to collection, for the number of Warrant Shares
specified in the exercise request. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and an exercise request and representations, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all transfer agent fees, documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
(b) At any time during the Exercise Period, the Holder may, at its option,
exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this Section (1)(b), by
surrendering this Warrant at the principal office of the Company, accompanied by
a written notice stating such Holder's intent to effect such exchange, the
number of Warrant Shares to be exchanged and the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date the Notice of Exchange is received
by the Company or such later date as may be specified in the Notice of Exchange
(the "Exchange Date"). Certificates for the shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant of like tenor evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date.
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<PAGE> 2
In connection with any Warrant Exchange, this Warrant shall represent the right
to subscribe for and acquire the number of Warrant Shares (rounded to the next
highest integer) equal to (i) the number of Warrant Shares specified by the
Holder in its Notice of Exchange (the "Total Number") less (ii) the number of
Warrant Shares equal to the quotient obtained by dividing (A) the product of the
Total Number and the existing Exercise Price by (B) the current market value of
a share of Common Stock. Current market value shall be the average closing price
for the 5-day period prior to the Exchange Date.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares, or rights or warrants to purchase shares of its Common
Stock with respect to its outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of
its shares of Common Stock
the Exercise Price in effect and the number of Warrant Shares purchasable at the
time of the record date of such dividend, subdivision, combination, or
reclassification shall be proportionately adjusted so that Holder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised prior to such event, Holder would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value. or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplement Warrant") which will make lawful
and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive consolidations, mergers, sales, or conveyances.
3. Registration Rights.
The Company shall advise the Holder of this Warrant or any then holder of
Warrants (such persons being collectively referred to herein as "holders") by
written notice at least two weeks prior to the filing of any new registration
statement ("Registration Statement") under the Securities Act of 1933 (the
"Act") covering securities of the Company, other than a Registration Statement
filed with respect to any employee benefit plan or an offering
2
<PAGE> 3
solely related to an acquisition for which such Warrant Shares cannot be
appropriately registered or which does not permit registration of the Warrants
or Warrant Shares, and will for a period of three years, from the date of this
Warrant upon the request of any such holder, include in any such registration
statement the number of Warrant Shares holder desires to include in the
Registration Statement. In the event the managing underwriter for any said
registration advises the Company that the inclusion of the Warrant Shares would
be detrimental to the offering, then such Warrant Shares shall be included in
the Registration Statement only if the Holder agrees in writing, for a period of
up to 120 days following such offering, not to sell or otherwise dispose of the
Warrant Shares. The Company shall supply prospectuses and other documents as the
Holder may request in order to facilitate the public sale or other disposition
of the Warrant Shares for sale in such states where the Company qualifies its
other securities pursuant to the Registration Statement for sale and do any and
all other acts and things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of the Warrant or
Warrant Shares. The Holder need not exercise the Warrant to have the Warrant
Shares included in a registration statement. Nothing in this Section shall be
construed to extend the expiration date of this Warrant.
The Company shall bear the entire cost and expense of any registration of
securities initiated by it notwithstanding that Warrants Shares subject to this
Warrant may be included in any such registration. Any holder whose Warrant
Shares are included in any such registration statement shall, however, bear the
fees of his own counsel, transfer taxes or underwriting discounts or commissions
applicable to the Warrant Shares sold by him pursuant thereto.
Neither the giving of any notice by any holder nor making of any request for
prospectus shall impose upon such holder or owner making such request any
obligation to sell any Warrant Shares, or exercise any Warrants.
4. Assignment or Loss of Warrant.
(a) Any sale, transfer, assignment, hypothecation or other disposition of this
Warrant or of the Warrant Shares shall only be made if any such transfer,
assignment or other disposition will comply with the rules and statutes
administered by the Securities and Exchange Commission and (i) a Registration
Statement under the Act including such Shares is currently in effect, or (ii) in
the opinion of counsel, which counsel and which opinion shall be reasonably
satisfactory to the Company, a current Registration Statement is not required
for such disposition of the shares. Each stock certificate representing Warrant
Shares issued upon exercise or exchange of this Warrant shall bear the following
legend (unless, in the opinion of counsel, which counsel and which opinion shall
be reasonably satisfactory to the Company, such legend is not required):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION
OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH
TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) The Holder understands that the Company may place, and may instruct any
transfer agent or depository for the Shares to place, a stop transfer notation
in the securities records in respect of the Shares.
(c) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
5. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued,
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<PAGE> 4
fully paid and nonassessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale (other than as provided
in the Company's articles of incorporation and any restrictions on sale set
forth herein or pursuant to applicable federal and state securities laws) and
free and clear of all preemptive rights.
6. Notices to Warrant Holders. No Shareholder Rights.
So long as this Warrant shall be outstanding, (i) if the Company shall pay any
dividend or make any distribution upon the Common Stock or (ii) if the Company
shall offer to the holders of Common Stock for subscription or purchase by them
any share of any class or any other rights or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Company to another corporation, or voluntary or involuntary
dissolution, liquidation or winding up of the Company shall be effected, then in
any such case, the Company shall cause to be mailed by certified mail to the
Holder, at least fifteen days prior the date, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which such action is to take place and the date, if any is to be fixed, as of
which the holders of Common Stock or other securities shall receive cash or
other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
Nothing in this Warrant shall be construed as conferring upon the Holder or its
transferees any rights as a stockholder in the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
to any meeting of stockholders.
7. Arbitration.
In the event that a dispute arises between the Corporation and the Holder of
this Warrant as to any matte relating to this Warrant, the matter shall be
settled by arbitration in San Diego, California in accordance with the Rules of
the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in California having jurisdiction thereof, and actions or
proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers effective this ____ day of _______________.
e.DIGITAL CORPORATION
BY /s/ FRED FALK
Fred Falk, President
BY /s/ ROBERT PUTNAM
Robert Putnam, Secretary
ACKNOWLEDGMENT OF REPRESENTATION:
- -----------------------------------
Warrant Holder
4
<PAGE> 1
EXHIBIT 4.21
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT.
SERIES 99W
WARRANT NO. 99W-___
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE _________ SHARES OF COMMON STOCK
THIS CERTIFIES THAT: _______________________
_______________________
_______________________
and all registered and permitted assigns (collectively, "Holder") is entitled to
purchase, on or before March 31, 2002,__________________________________________
_______________________________ shares of the common stock ("Common Stock") of
e.Digital Corporation, (the "Corporation" or "Company") upon exercise of this
Warrant along with presentation of the full purchase price as provided herein.
The purchase price of the common stock upon exercise of this Warrant ("Warrant
Shares") is equal to fifteen cents ($0.15) per share (the "Exercise Price").
This Warrant is issued for full and valuable consideration and is issued in
connection with the conversion of certain Warrants issued by the Company.
1. Exercise of Warrant.
This Warrant may be exercised in whole or in part (a part must equal to at least
100,000 shares or the balance of the warrant) on any business day on or before
the expiration date listed above by presentation and surrender hereof to the
Company at its principal office of an exercise request and the Exercise Price in
lawful money of the United States of America in the form of a wire transfer or
check, subject to collection, for the number of Warrant Shares specified in the
exercise request. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant, execute and deliver a new Warrant
evidencing the rights of the Holder thereof to purchase the balance of the
Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and an exercise request and representations, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all transfer agent fees, documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares, or rights or warrants to purchase shares of its Common
Stock with respect to its outstanding Common Stock;
1
<PAGE> 2
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of its
shares of Common Stock;
the Exercise Price in effect and the number of Warrant Shares purchasable at the
time of the record date of such dividend, subdivision, combination, or
reclassification shall be proportionately adjusted so that Holder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised prior to such event, Holder would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value. or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplement Warrant") which will make lawful
and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive consolidations, mergers, sales, or conveyances.
3. Registration Rights.
The Company shall advise the Holder of this Warrant or any then holder of
Warrants (such persons being collectively referred to herein as "holders") by
written notice at least two weeks prior to the filing of any new registration
statement ("Registration Statement") under the Securities Act of 1933 (the
"Act") covering securities of the Company, other than a Registration Statement
filed with respect to any employee benefit plan or an offering solely related to
an acquisition for which such Warrant Shares cannot be appropriately registered
or which does not permit registration of the Warrants or Warrant Shares, and
will for a period of three years, from the date of this Warrant upon the request
of any such holder, include in any such registration statement the number of
Warrant Shares holder desires to include in the Registration Statement. In the
event the managing underwriter for any said registration advises the Company
that the inclusion of the Warrant Shares would be detrimental to the offering,
then such Warrant Shares shall be included in the Registration Statement only if
the Holder agrees in writing, for a period of up to 120 days following such
offering, not to sell or otherwise dispose of the Warrant Shares. The Company
shall supply prospectuses and other documents as the Holder may request in order
to facilitate the public sale or other disposition of the Warrant Shares for
sale in such states where the Company qualifies its other securities pursuant to
the Registration Statement for sale and do any and all other acts and things
which may be necessary or desirable to enable such Holders to consummate the
public sale or other disposition of the Warrant or Warrant Shares. The Holder
need not exercise the Warrant to have the Warrant Shares included in a
registration statement. Nothing in this Section shall be construed to extend the
expiration date of this Warrant.
The Company shall bear the entire cost and expense of any registration of
securities initiated by it notwithstanding that Warrants Shares subject to this
Warrant may be included in any such registration. Any holder whose Warrant
2
<PAGE> 3
Shares are included in any such registration statement shall, however, bear the
fees of his own counsel, transfer taxes or underwriting discounts or commissions
applicable to the Warrant Shares sold by him pursuant thereto.
Neither the giving of any notice by any holder nor making of any request for
prospectus shall impose upon such holder or owner making such request any
obligation to sell any Warrant Shares, or exercise any Warrants.
4. Assignment or Loss of Warrant.
(a) Any sale, transfer, assignment, hypothecation or other disposition of this
Warrant or of the Warrant Shares shall only be made if any such transfer,
assignment or other disposition will comply with the rules and statutes
administered by the Securities and Exchange Commission and (i) a Registration
Statement under the Act including such Shares is currently in effect, or (ii) in
the opinion of counsel, which counsel and which opinion shall be reasonably
satisfactory to the Company, a current Registration Statement is not required
for such disposition of the shares. Each stock certificate representing Warrant
Shares issued upon exercise or exchange of this Warrant shall bear the following
legend (unless, in the opinion of counsel, which counsel and which opinion shall
be reasonably satisfactory to the Company, such legend is not required):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION
OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH
TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) The Holder understands that the Company may place, and may instruct any
transfer agent or depository for the Shares to place, a stop transfer notation
in the securities records in respect of the Shares.
(c) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
5. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
6. Notices to Warrant Holders. No Shareholder Rights.
So long as this Warrant shall be outstanding, (i) if the Company shall pay any
dividend or make any distribution upon the Common Stock or (ii) if the Company
shall offer to the holders of Common Stock for subscription or purchase by them
any share of any class or any other rights or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Company to another corporation, or voluntary or involuntary
dissolution, liquidation or winding up of the Company shall be effected, then in
any such case, the Company shall cause to be mailed by certified mail to the
Holder, at least fifteen days prior the date, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which such action is to take place and the date, if any is to be fixed, as of
which the holders of Common Stock or
3
<PAGE> 4
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
Nothing in this Warrant shall be construed as conferring upon the Holder or its
transferees any rights as a stockholder in the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
to any meeting of stockholders.
7. Arbitration.
In the event that a dispute arises between the Corporation and the Holder of
this Warrant as to any matte relating to this Warrant, the matter shall be
settled by arbitration in San Diego, California in accordance with the Rules of
the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in California having jurisdiction thereof, and actions or
proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers effective this ___st day of __________ 1999.
e.DIGITAL CORPORATION
BY /s/ FRED FALK
Fred Falk, President
BY /s/ ROBERT PUTNAM
Robert Putnam, Secretary
ACKNOWLEDGMENT OF REPRESENTATION:
- -----------------------------------
Warrant Holder
4
<PAGE> 1
EXHIBIT 4.22
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 125,000 SHARES OF COMMON STOCK
THIS CERTIFIES THAT Renwick Corporate Finance, Inc. and all registered and
permitted assigns (collectively, "Holder") is entitled to purchase, on or before
October 15, 2001, one hundred twenty-five thousand (125,000) shares of the
common stock ("Common Stock") of Norris Communications, Inc. (the "Corporation"
or "Company") upon exercise of this Warrant along with presentation of the full
purchase price as provided herein. The purchase price of the common stock upon
exercise of this Warrant ("Warrant Shares") is equal to eight and three-quarter
cents ($0.0875) per share (the "Exercise Price"). The purchase price of this
Warrant is $100.00. This Warrant is cancelable (to the extent necessary) by the
Company in the event the Company has in place an agreement to sell the shares
underlying this Warrant (or otherwise needs to issue such shares as penalty or
interest on currently outstanding securities) by March 31, 1999 and shareholders
have not approved authorization of additional shares by the Company.
1. Exercise of Warrant.
(a) This Warrant may be exercised in whole or in part on any business day on or
before the expiration date listed above by presentation and surrender hereof to
the Company at its principal office of an exercise request and the Exercise
Price in lawful money of the United States of America in the form of a wire
transfer or check, subject to collection, for the number of Warrant Shares
specified in the exercise request. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and an exercise request and representations, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all transfer agent fees, documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
(b) At any time during the Exercise Period, the Holder may, at its option,
exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this Section (1)(b), by
surrendering this Warrant at the principal office of the Company, accompanied by
a written notice stating such Holder's intent to effect such exchange, the
number of Warrant Shares to be exchanged and the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date the Notice of Exchange is received
by the Company or such later date as may be specified in the Notice of Exchange
(the "Exchange Date"). Certificates for the shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant of like tenor evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date. In connection with any Warrant Exchange, this Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price by (B) the current
1
<PAGE> 2
market value of a share of Common Stock. Current market value shall be the
average closing price for the 5-day period prior to the Exchange Date.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares, or rights or warrants to purchase shares of its Common
Stock with respect to its outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of its
shares of Common Stock;
the Exercise Price in effect and the number of Warrant Shares purchasable at the
time of the record date of such dividend, subdivision, combination, or
reclassification shall be proportionately adjusted so that Holder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised prior to such event, Holder would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplement Warrant") which will make lawful
and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive consolidations, mergers, sales, or conveyances.
3. Registration Rights.
The Company will use its best efforts to ensure that shares underlying this
Warrant be registered in the next registration statement filed by the Company.
Otherwise;
(1) The Company shall advise the Holder of this Warrant or of the Warrant Shares
or any then holder of Warrants or Warrant Shares (such persons being
collectively referred to herein as "holders") by written notice at least two
weeks prior to the filing of any new registration statement ("Registration
Statement") under the Securities Act of 1933 (the "Act") covering securities of
the Company, other than a Registration Statement filed with respect to
2
<PAGE> 3
any employee benefit plan or an offering solely related to an acquisition for
which such Warrant Shares cannot be appropriately registered or which does not
permit registration of the Warrants or Warrant Shares, and will for a period of
five years, from the date of this Warrant upon the request of any such holder,
include in any such registration statement the number of Warrant Shares holder
desires to include in the Registration Statement. In the event the managing
underwriter for any said registration advises the Company that the inclusion of
the Warrant Shares would be detrimental to the offering, then such Warrant
Shares shall be included in the Registration Statement only if the Holder agrees
in writing, for a period of up to 120 days following such offering, not to sell
or otherwise dispose of the Warrant Shares. The Company shall supply
prospectuses and other documents as the Holder may request in order to
facilitate the public sale or other disposition of the Warrant Shares for sale
in such states where the Company qualifies its other securities pursuant to the
Registration Statement for sale and do any and all other acts and things which
may be necessary or desirable to enable such Holders to consummate the public
sale or other disposition of the Warrant or Warrant Shares. The Holder need not
exercise the Warrant to have the Warrant Shares included in a registration
statement. Nothing in this Section shall be construed to extend the expiration
date of this Warrant.
(2) The following provision of this Section shall also be applicable:
(A) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants Shares
subject to this Warrant may be included in any such registration. Any holder
whose Warrant Shares are included in any such registration statement shall,
however, bear the fees of his own counsel, transfer taxes or underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(B) Neither the giving of any notice by any holder nor making of any
request for prospectus shall impose upon such holder or owner making such
request any obligation to sell any Warrant Shares, or exercise any Warrants.
The Company's agreements with respect to Warrant Shares in this Section
shall continue in effect regardless of the exercise and surrender of this
Warrant.
4. Assignment or Loss of Warrant.
(a) Any sale, transfer, assignment, hypothecation or other disposition of this
Warrant or of the Warrant Shares shall only be made if any such transfer,
assignment or other disposition will comply with the rules and statutes
administered by the Securities and Exchange Commission and (i) a Registration
Statement under the Act including such Shares is currently in effect, or (ii) in
the opinion of counsel, which counsel and which opinion shall be reasonably
satisfactory to the Company, a current Registration Statement is not required
for such disposition of the shares. Each stock certificate representing Warrant
Shares issued upon exercise or exchange of this Warrant shall bear the following
legend (unless, in the opinion of counsel, which counsel and which opinion shall
be reasonably satisfactory to the Company, such legend is not required):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION
OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH
TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) The Holder understands that the Company may place, and may instruct any
transfer agent or depository for the Shares to place, a stop transfer notation
in the securities records in respect of the Shares.
(c) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
3
<PAGE> 4
5. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
6. Notices to Warrant Holders. No Shareholder Rights.
So long as this Warrant shall be outstanding, (i) if the Company shall pay any
dividend or make any distribution upon the Common Stock or (ii) if the Company
shall offer to the holders of Common Stock for subscription or purchase by them
any share of any class or any other rights or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Company to another corporation, or voluntary or involuntary
dissolution, liquidation or winding up of the Company shall be effected, then in
any such case, the Company shall cause to be mailed by certified mail to the
Holder, at least fifteen days prior the date, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which such action is to take place and the date, if any is to be fixed, as of
which the holders of Common Stock or other securities shall receive cash or
other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
Nothing in this Warrant shall be construed as conferring upon the Holder or its
transferees any rights as a stockholder in the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
to any meeting of stockholders.
7. Arbitration.
In the event that a dispute arises between the Corporation and the Holder of
this Warrant as to any matte relating to this Warrant, the matter shall be
settled by arbitration in San Diego, CA in accordance with the Rules of the
American Arbitration Association and the award rendered by such arbitrator(s)
shall not be subject to appeal and may be entered in any federal or state court
located in California having jurisdiction thereof, and actions or proceedings
shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers effective this 15th day of October, 1998.
NORRIS COMMUNICATIONS, INC.
BY /s/ FRED FALK
Fred Falk, President
BY /s/ ROBERT PUTNAM
Robert Putnam, Secretary
ACKNOWLEDGMENT OF REPRESENTATION:
- ----------------------------------
Warrant Holder
4
<PAGE> 1
EXHIBIT 4.23
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 100,000 SHARES OF COMMON STOCK
THIS CERTIFIES THAT: POMERADO PROPERTIES L.P.
3575 KENYON STREET
SAN DIEGO, CA 92110
and all registered and permitted assigns (collectively, "Holder") is entitled to
purchase, on or before January 15, 2002, One Hundred Thousand (100,000) shares
of the common stock ("Common Stock") of e.Digital Corporation (the "Corporation"
or "Company") upon exercise of this Warrant along with presentation of the full
purchase price as provided herein. The purchase price of the common stock upon
exercise of this Warrant ("Warrant Shares") is equal to ten cents ($0.10) per
share (the "Exercise Price"). This Warrant is issued for full and valuable
consideration and is issued in connection with the extension of a certain Lease
Settlement Agreement and Promissory Note issued by the Company dated September
30, 1997 for an aggregate of $182,128.74.
1. Exercise of Warrant.
This Warrant may be exercised in whole or in part (a part must equal to at least
50,000 shares or the balance of the warrant) on any business day on or before
the expiration date listed above by presentation and surrender hereof to the
Company at its principal office of an exercise request and the Exercise Price in
lawful money of the United States of America in the form of a wire transfer or
check, subject to collection, for the number of Warrant Shares specified in the
exercise request. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant, execute and deliver a new Warrant
evidencing the rights of the Holder thereof to purchase the balance of the
Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and an exercise request and representations, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all transfer agent fees, documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares, or rights or warrants to purchase shares of its Common
Stock with respect to its outstanding Common Stock;
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(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of its
shares of Common Stock;
the Exercise Price in effect and the number of Warrant Shares purchasable at the
time of the record date of such dividend, subdivision, combination, or
reclassification shall be proportionately adjusted so that Holder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised prior to such event, Holder would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value. or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplement Warrant") which will make lawful
and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive consolidations, mergers, sales, or conveyances.
3. Registration Rights.
The Company shall advise the Holder of this Warrant or any then holder of
Warrants (such persons being collectively referred to herein as "holders") by
written notice at least two weeks prior to the filing of any new registration
statement ("Registration Statement") under the Securities Act of 1933 (the
"Act") covering securities of the Company, other than a Registration Statement
filed with respect to any employee benefit plan or an offering solely related to
an acquisition for which such Warrant Shares cannot be appropriately registered
or which does not permit registration of the Warrants or Warrant Shares, and
will for a period of three years, from the date of this Warrant upon the request
of any such holder, include in any such registration statement the number of
Warrant Shares holder desires to include in the Registration Statement. In the
event the managing underwriter for any said registration advises the Company
that the inclusion of the Warrant Shares would be detrimental to the offering,
then such Warrant Shares shall be included in the Registration Statement only if
the Holder agrees in writing, for a period of up to 120 days following such
offering, not to sell or otherwise dispose of the Warrant Shares. The Company
shall supply prospectuses and other documents as the Holder may request in order
to facilitate the public sale or other disposition of the Warrant Shares for
sale in such states where the Company qualifies its other securities pursuant to
the Registration Statement for sale and do any and all other acts and things
which may be necessary or desirable to enable such Holders to consummate the
public sale or other disposition of the Warrant or Warrant Shares. The Holder
need not exercise the Warrant to have the Warrant Shares included in a
registration statement. Nothing in this Section shall be construed to extend the
expiration date of this Warrant.
The Company shall bear the entire cost and expense of any registration of
securities initiated by it notwithstanding that Warrants Shares subject to this
Warrant may be included in any such registration. Any holder whose Warrant
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<PAGE> 3
Shares are included in any such registration statement shall, however, bear the
fees of his own counsel, transfer taxes or underwriting discounts or commissions
applicable to the Warrant Shares sold by him pursuant thereto.
Neither the giving of any notice by any holder nor making of any request for
prospectus shall impose upon such holder or owner making such request any
obligation to sell any Warrant Shares, or exercise any Warrants.
4. Assignment or Loss of Warrant.
(a) Any sale, transfer, assignment, hypothecation or other disposition of this
Warrant or of the Warrant Shares shall only be made if any such transfer,
assignment or other disposition will comply with the rules and statutes
administered by the Securities and Exchange Commission and (i) a Registration
Statement under the Act including such Shares is currently in effect, or (ii) in
the opinion of counsel, which counsel and which opinion shall be reasonably
satisfactory to the Company, a current Registration Statement is not required
for such disposition of the shares. Each stock certificate representing Warrant
Shares issued upon exercise or exchange of this Warrant shall bear the following
legend (unless, in the opinion of counsel, which counsel and which opinion shall
be reasonably satisfactory to the Company, such legend is not required):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION
OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH
TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) The Holder understands that the Company may place, and may instruct any
transfer agent or depository for the Shares to place, a stop transfer notation
in the securities records in respect of the Shares.
(c) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
5. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
6. Notices to Warrant Holders. No Shareholder Rights.
So long as this Warrant shall be outstanding, (i) if the Company shall pay any
dividend or make any distribution upon the Common Stock or (ii) if the Company
shall offer to the holders of Common Stock for subscription or purchase by them
any share of any class or any other rights or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Company to another corporation, or voluntary or involuntary
dissolution, liquidation or winding up of the Company shall be effected, then in
any such case, the Company shall cause to be mailed by certified mail to the
Holder, at least fifteen days prior the date, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which such action is to take place and the date, if any is to be fixed, as of
which the holders of Common Stock or
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<PAGE> 4
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
Nothing in this Warrant shall be construed as conferring upon the Holder or its
transferees any rights as a stockholder in the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
to any meeting of stockholders.
7. Arbitration.
In the event that a dispute arises between the Corporation and the Holder of
this Warrant as to any matte relating to this Warrant, the matter shall be
settled by arbitration in San Diego, California in accordance with the Rules of
the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in California having jurisdiction thereof, and actions or
proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers effective this 15th day of January 1999.
e.DIGITAL CORPORATION
BY /s/ FRED FALK
Fred Falk, President
BY /s/ ROBERT PUTNAM
Robert Putnam, Secretary
ACKNOWLEDGMENT OF REPRESENTATION:
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Warrant Holder
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<PAGE> 1
EXHIBIT 4.24
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
E.DIGITAL CORPORATION
WARRANT
Dated: June 24, 1999
e.Digital Corporation, a Delaware corporation (the "Company"), hereby
certifies that, for value received, JNC Opportunity Fund Ltd. or its registered
assigns ("Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company195,000 shares of common stock, $.001 par value per
share (the "Common Stock"), of the Company (each such share, a "Warrant Share"
and all such shares, the "Warrant Shares") at an exercise price equal to $2.40
per share (as adjusted from time to time as provided in Section 9, the "Exercise
Price"), at any time and from time to time from and after the date hereof and
through and including June 24, 2004 (the "Expiration Date"), and subject to the
following terms and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
<PAGE> 2
(a) The Company shall register the transfer of any
portion of this Warrant in the Warrant Register, upon surrender of this Warrant,
with the Form of Assignment attached hereto duly completed and signed, to the
Company at the office specified in or pursuant to Section 12. Upon any such
registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New Warrant"),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so transferred, if any, shall be issued to the transferring Holder. The
acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant. No assignment or transfer of this Warrant shall be deemed
effective until the Form of Assignment is submitted to the Company at the
address specified in Section 12.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder to the office of the Company specified in or pursuant to
Section 3(b) for one or more New Warrants, evidencing in the aggregate the right
to purchase the number of Warrant Shares which may then be purchased hereunder.
Any such New Warrant will be dated the date of the original issuance of this
Warrant and not the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the
registered Holder on any business day before 6:30 P.M., New York City time, at
any time and from time to time on or after the date hereof to and including the
Expiration Date. At 6:30 P.M., New York City time on the Expiration Date, the
portion of this Warrant not exercised prior thereto shall be and become void and
of no value. Prior to the Expiration Date, the Company may not call or otherwise
redeem this Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 10, upon
surrender of this Warrant, with the Form of Election to Purchase attached hereto
duly completed and signed, to the Company at its address for notice set forth in
Section 12 and upon payment of the Exercise Price multiplied by the number of
Warrant Shares that the Holder intends to purchase hereunder, in the manner
provided hereunder, all as specified by the Holder in the Form of Election to
Purchase, the Company shall promptly (but in no event later than 3 business days
after the Date of Exercise (as defined herein)) issue or cause to be issued and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends except as required
under Section 3.1(b) of the Purchase Agreement. Any person so designated by the
Holder to receive Warrant Shares shall be deemed to have become holder of record
of such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable), with
the Form of Election to Purchase attached hereto (or attached to such New
Warrant) appropriately completed and duly signed, and (ii)
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<PAGE> 3
payment of the Exercise Price for the number of Warrant Shares so indicated by
the holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant Shares.
However, if after the date that a registration statement covering the resale of
the Warrant Shares by the Holder (an "Underlying Shares Registration Statement")
is declared effective by the Commission, the closing sales price of the Common
Stock on the primary market or exchange for the Common Stock, as reported by
Bloomberg Information Services, Inc. or the successor to its function of
reporting share prices, equals or exceeds $4.20 for ten (10) consecutive trading
days, then the Company, by two (2) trading days' written notice to the Holder
may require the Holder to exercise this Warrant for the then remaining number of
Warrant Shares to which this Warrant would then entitle the Holder; provided,
that, in order for the Company to exercise this right of forced conversion, at
all times during the ten (10) trading day period from the date of delivery to
the exercising Holder of the Warrant Shares due on the exercise at issue and for
the ten (10) trading days thereafter, (i) an Underlying Shares Registration
Statement shall be effective and the prospectus thereunder shall be available to
the Holder to resell Warrant Shares and (ii) the Warrant Shares shall be listed
for trading on or eligible for quotation on (as the case may be), and not
subject to suspension by, the OTC Bulletin Board or any subsequent national
securities market or trading facility on which the Common Stock is then listed
or quoted for trading. If less than all of the Warrant Shares which may be
purchased under this Warrant are exercised at any time, the Company shall issue
or cause to be issued, at its expense, a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares for which no exercise has been
evidenced by this Warrant.
4. Piggyback Registration Rights. During the Effectiveness
Period (as defined in the Registration Rights Agreement, of even date herewith,
between the Company and the original Holder), the Company may not file any
registration statement with the Securities and Exchange Commission (other than
registration statements of the Company filed on Form S-8 or Form S-4, each as
promulgated under the Securities Act, pursuant to which the Company is
registering securities pursuant to a Company employee benefit plan or pursuant
to a merger, acquisition or similar transaction including supplements thereto,
but not additionally filed registration statements in respect of such
securities) at any time when there is not an effective Underlying Shares
Registration Statement, unless the Company provides the Holder with not less
than 20 days notice of its intention to file such registration statement and
provides the Holder the option to include any or all of the applicable Warrant
Shares therein. The piggyback registration rights granted to the Holder pursuant
to this Section shall continue until all of the Holder's Warrant Shares have
been sold in accordance with an effective registration statement or upon the
Expiration Date. The Company will pay all registration expenses in connection
therewith.
5. Certain Exercise Restrictions.
(a) The Holder may not exercise this Warrant to the
extent such exercise would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined
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<PAGE> 4
in accordance with Section 13(d) of the Exchange Act and the rules thereunder)
in excess of 4.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon exercise of this Warrant after application of
this Section. The Holder shall have the sole authority and obligation to
determine whether and to what Warrant Shares the restriction contained in this
Section applies. The provisions of this Section may be waived by the Holder upon
not less than 61 days prior notice to the Company.
(b) The Holder may not to exercise this Warrant to
the extent such exercise would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules thereunder) in excess of 9.999% of the then
issued and outstanding Common Stock, including shares issuable upon exercise of
this Warrant after application of this Section. The Holder shall have the sole
authority and obligation to determine whether and to what Warrant Shares the
restriction contained in this Section applies. The provisions of this Section
may be waived by the Holder upon not less than 61 days prior notice to the
Company.
6. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the exercise of
this Warrant; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the
registration of any certificates for Warrant Shares or Warrants in a name other
than that of the Holder. The Holder shall be responsible for all other tax
liability that may arise as a result of holding or transferring this Warrant or
receiving Warrant Shares upon exercise hereof.
7. Replacement of Warrant. If this Warrant is mutilated,
lost, stolen or destroyed, the Company shall issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
8. Reservation of Warrant Shares. The Company covenants
that it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and restrictions of Section 9). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and nonassessable.
9. Certain Adjustments. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to adjustment
from time to time as set forth in this
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<PAGE> 5
Section 9. Upon each such adjustment of the Exercise Price pursuant to this
Section 9, the Holder shall thereafter prior to the Expiration Date be entitled
to purchase, at the Exercise Price resulting from such adjustment, the number of
Warrant Shares obtained by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Shares issuable upon exercise
of this Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
(a) If the Company, at any time while this Warrant
is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid
on outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock or on any other class of capital stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.
(b) In case of any reclassification of the Common
Stock, any consolidation or merger of the Company with or into another person,
the sale or transfer of all or substantially all of the assets of the Company or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right to receive the securities or property set forth in this
Section 9(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant
is outstanding, shall distribute to all holders of Common Stock (and not to
holders of this Warrant) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 9(a), (b) and (d)), then in each such case the Exercise Price shall
be determined by multiplying the Exercise Price in effect immediately prior to
the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of
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<PAGE> 6
which the numerator shall be such Exercise Price on such record date less the
then fair market value at such record date of the portion of such assets or
evidence of indebtedness so distributed applicable to one outstanding share of
Common Stock as determined by the Company's independent certified public
accountants that regularly examines the financial statements of the Company (an
"Appraiser").
(d) If at any time prior to the 180th day after the
date that the Commission declares effective an Underlying Shares Registration
Statement (which 180 day period shall be increased on a day to day basis for
each day after the date the Commission declares effective such Underlying Shares
Registration Statement that a Holder is unable to resell Warrant Shares
thereunder due to (a) the Common Stock not being quoted or listed for trading on
the OTC or any Subsequent Market (as the case may be), (b) the failure of such
Underlying Shares Registration Statement to remain effective during the entire
180 day period as to all Warrant Shares or (c) the suspension of a Holder's
right to resell Warrant Shares under such Underlying Shares Registration
Statement) the Company or any subsidiary thereof, as applicable with respect to
Common Stock Equivalents (as defined below), shall issue shares of Common Stock
or rights, warrants, options or other securities or debt that is convertible
into or exchangeable for shares of Common Stock ("Common Stock Equivalents"),
entitling any person or entity to acquire shares of Common Stock at a price per
share less than both the market price of the Common Stock at the time of
issuance and the Exercise Price then in effect (if the holder of the Common
Stock or Common Stock Equivalent so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights
issued in connection with such issuance, receive or have the right to acquire
Common Stock at a price less than the Exercise Price or market price of the
Common Stock at the time of the issuance of the originally issued Common Stock
or Common Stock Equivalent, then such issuance shall be deemed to have occurred
for less than such Exercise Price or market price), then, forthwith upon such
issue or sale, the Exercise Price shall be reduced to the price (calculated to
the nearest cent) determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of (i) the number of shares of Common Stock outstanding immediately prior to
such issuance, and (ii) the number of shares of Common Stock which the aggregate
consideration received (or to be received, assuming exercise or conversion in
full of such Common Stock Equivalents) for the issuance of such additional
shares of Common Stock would purchase at the Exercise Price, and the denominator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately after the issuance of such additional shares. For purposes hereof,
all shares of Common Stock that are issuable upon conversion, exercise or
exchange of Common Stock Equivalents shall be deemed outstanding immediately
after the issuance of such Common Stock Equivalents. Such adjustment shall be
made whenever such Common Stock or Common Stock Equivalents are issued. However,
upon the expiration of any Common Stock Equivalents the issuance of which
resulted in an adjustment in the Exercise Price pursuant to this Section, if any
such Common Stock Equivalents shall expire and shall not have been exercised,
the Exercise Price shall immediately upon such expiration be recomputed and
effective immediately upon such expiration be increased to the price which it
would have been (but reflecting any other adjustments in the Exercise Price made
pursuant to the provisions of this Section after the issuance of such Common
Stock Equivalents) had the adjustment of the Exercise Price made upon the
issuance of such
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<PAGE> 7
Common Stock Equivalents been made on the basis of offering for subscription or
purchase only that number of shares of the Common Stock actually purchased upon
the exercise of such Common Stock Equivalents actually exercised.
(e) For the purposes of this Section 9, the
following clauses shall also be applicable:
(i) Record Date. In case the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them (A) to receive a dividend or other distribution payable in Common Stock or
in securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 9 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant
to Section 9(c) above, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall
be a nationally recognized accounting firm), in which case the adjustment shall
be equal to the average of the adjustments recommended by each of the Appraiser
and such appraiser. The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. Such
adjustment shall become effective immediately after the record date mentioned
above.
(h) If (i) the Company shall declare a dividend (or
any other distribution) on its Common Stock; (ii) the Company shall declare a
special nonrecurring cash dividend on or a redemption of its Common Stock; (iii)
the Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; (iv) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock of
the Company, any consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of the Company, or
any compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or (v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the affairs of the Company; then the
Company shall cause to be mailed
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<PAGE> 8
to each Holder at their last addresses as they shall appear upon the Warrant
Register, at least 30 calendar days prior to the applicable record or effective
date hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution, redemption, rights
or warrants, or if a record is not to be taken, the date as of which the holders
of Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer, share
exchange, dissolution, liquidation or winding up; provided, however, that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.
10. Payment of Exercise Price. The Holder may pay the
Exercise Price in one of the following manners:
(a) Cash Exercise. The Holder may deliver
immediately available funds; or
(b) Cashless Exercise. At the option of the Company,
the Holder may surrender this Warrant to the Company together with a notice of
cashless exercise, in which event the Company shall issue to the Holder the
number of Warrant Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued
to the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the average of the closing sale prices of
the Common Stock for the five (5) trading days
immediately prior to (but not including) the
Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the original issue date of this Warrant.
11. Fractional Shares. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of this
Warrant. The number of full Warrant Shares
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<PAGE> 9
which shall be issuable upon the exercise of this Warrant shall be computed on
the basis of the aggregate number of Warrant Shares purchasable on exercise of
this Warrant so presented. If any fraction of a Warrant Share would, except for
the provisions of this Section 11, be issuable on the exercise of this Warrant,
the Company shall pay an amount in cash equal to the Exercise Price multiplied
by such fraction.
12. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6:30 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 6:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
13114 Evening Creek Drive South, San Diego, California 92128, Attention: Chief
Executive Officer, or to Facsimile No. (619) 486-3922, or (ii) if to the Holder,
to the Holder at the address or facsimile number appearing on the Warrant
Register or such other address or facsimile number as the Holder may provide to
the Company in accordance with this Section 12.
13. Warrant Agent. The Company shall serve as warrant agent
under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent. Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Company or any new warrant agent shall be a party or any
corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business shall
be a successor warrant agent under this Warrant without any further act. Any
such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder
at the Holder's last address as shown on the Warrant Register.
14. Miscellaneous.
(a) This Warrant shall be binding on and inure to
the benefit of the parties hereto and their respective successors and assigns.
This Warrant may be amended only in writing signed by the Company and the Holder
and their successors and assigns.
(b) Subject to Section 14(a), nothing in this
Warrant shall be construed to give to any person or corporation other than the
Company and the Holder any legal or equitable right, remedy or cause under this
Warrant. This Warrant shall inure to the sole and exclusive benefit of the
Company and the Holder.
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<PAGE> 10
(c) This Warrant shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof. The Company and
the Holder hereby irrevocably submit to the exclusive jurisdiction of the state
and federal courts sitting in the City of New York, borough of Manhattan, for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each of the Company and the Holder
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by receiving a copy thereof
sent to the Company at the address in effect for notices to it under this
instrument and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
(d) The headings herein are for convenience only, do
not constitute a part of this Warrant and shall not be deemed to limit or affect
any of the provisions hereof.
(e) In case any one or more of the provisions of
this Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
E.DIGITAL CORPORATION
By:________________________________________________
Name:______________________________________________
Title:_____________________________________________
<PAGE> 1
EXHIBIT 4.25
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
E.DIGITAL CORPORATION
WARRANT
Dated: June 24, 1999
e.Digital Corporation, a Delaware corporation (the "Company"), hereby
certifies that, for value received, Jesup & Lamont Securities Corporation or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company 137,615 shares of common stock, $.001 par
value per share (the "Common Stock"), of the Company (each such share, a
"Warrant Share" and all such shares, the "Warrant Shares") at an exercise price
equal to $3.27 per share (as adjusted from time to time as provided in Section
9, the "Exercise Price"), at any time and from time to time from and after the
date hereof and through and including June 24, 2004 (the "Expiration Date"), and
subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
<PAGE> 2
(a) The Company shall register the transfer of any
portion of this Warrant in the Warrant Register, upon surrender of this Warrant,
with the Form of Assignment attached hereto duly completed and signed, to the
Company at the office specified in or pursuant to Section 12. Upon any such
registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New Warrant"),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so transferred, if any, shall be issued to the transferring Holder. The
acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant. No assignment or transfer of this Warrant shall be deemed
effective until the Form of Assignment is submitted to the Company at the
address specified in Section 12.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder to the office of the Company specified in or pursuant to
Section 3(b) for one or more New Warrants, evidencing in the aggregate the right
to purchase the number of Warrant Shares which may then be purchased hereunder.
Any such New Warrant will be dated the date of the original issuance of this
Warrant and not the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the
registered Holder on any business day before 6:30 P.M., New York City time, at
any time and from time to time on or after the date hereof to and including the
Expiration Date. At 6:30 P.M., New York City time on the Expiration Date, the
portion of this Warrant not exercised prior thereto shall be and become void and
of no value. Prior to the Expiration Date, the Company may not call or otherwise
redeem this Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 10, upon
surrender of this Warrant, with the Form of Election to Purchase attached hereto
duly completed and signed, to the Company at its address for notice set forth in
Section 12 and upon payment of the Exercise Price multiplied by the number of
Warrant Shares that the Holder intends to purchase hereunder, in the manner
provided hereunder, all as specified by the Holder in the Form of Election to
Purchase, the Company shall promptly (but in no event later than 3 business days
after the Date of Exercise (as defined herein)) issue or cause to be issued and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends except as required by
applicable federal securities laws. Any person so designated by the Holder to
receive Warrant Shares shall be deemed to have become holder of record of such
Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable), with
the Form of Election to Purchase attached hereto (or attached to such New
Warrant) appropriately completed and duly signed, and (ii) payment of the
Exercise Price for the number of Warrant Shares so indicated by the holder
hereof to be purchased.
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<PAGE> 3
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant Shares.
If less than all of the Warrant Shares which may be purchased under this Warrant
are exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the Effectiveness
Period (as defined in the Registration Rights Agreement, of even date herewith,
between the Company and the original Holder), the Company may not file any
registration statement with the Securities and Exchange Commission (other than
registration statements of the Company filed on Form S-8 or Form S-4, each as
promulgated under the Securities Act, pursuant to which the Company is
registering securities pursuant to a Company employee benefit plan or pursuant
to a merger, acquisition or similar transaction including supplements thereto,
but not additionally filed registration statements in respect of such
securities) at any time when there is not an effective registration statement
covering the resaleof the Warrant Shares by the Holder, unless the Company
provides the Holder with not less than 20 days notice of its intention to file
such registration statement and provides the Holder the option to include any or
all of the applicable Warrant Shares therein. The piggyback registration rights
granted to the Holder pursuant to this Section shall continue until all of the
Holder's Warrant Shares have been sold in accordance with an effective
registration statement or upon the Expiration Date. The Company will pay all
registration expenses in connection therewith.
5. Certain Exercise Restrictions.
(a) The Holder may not exercise this Warrant to the
extent such exercise would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules thereunder) in excess of 4.999% of the then
issued and outstanding shares of Common Stock, including shares issuable upon
exercise of this Warrant after application of this Section. The Holder shall
have the sole authority and obligation to determine whether and to what Warrant
Shares the restriction contained in this Section applies. The provisions of this
Section may be waived by the Holder upon not less than 61 days prior notice to
the Company.
(b) The Holder may not to exercise this Warrant to
the extent such exercise would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules thereunder) in excess of 9.999% of the then
issued and outstanding Common Stock, including shares issuable upon exercise of
this Warrant after application of this Section. The Holder shall have the sole
authority and obligation to determine whether and to what Warrant Shares the
restriction contained in this Section applies. The provisions of this Section
may be waived by the Holder upon not less than 61 days prior notice to the
Company.
6. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the exercise of
this Warrant; provided, however,
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<PAGE> 4
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the registration of any certificates for
Warrant Shares or Warrants in a name other than that of the Holder. The Holder
shall be responsible for all other tax liability that may arise as a result of
holding or transferring this Warrant or receiving Warrant Shares upon exercise
hereof.
7. Replacement of Warrant. If this Warrant is mutilated,
lost, stolen or destroyed, the Company shall issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
8. Reservation of Warrant Shares. The Company covenants
that it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and restrictions of Section 9). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and nonassessable.
9. Certain Adjustments. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to adjustment
from time to time as set forth in this Section 9. Upon each such adjustment of
the Exercise Price pursuant to this Section 9, the Holder shall thereafter prior
to the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant
is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid
on outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock or on any other class of capital stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
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<PAGE> 5
and shall become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.
(b) In case of any reclassification of the Common
Stock, any consolidation or merger of the Company with or into another person,
the sale or transfer of all or substantially all of the assets of the Company or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right to receive the securities or property set forth in this
Section 9(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant
is outstanding, shall distribute to all holders of Common Stock (and not the
Holder) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
9(a) and (b), then in each such case the Exercise Price shall be determined by
multiplying the Exercise Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Exercise Price determined as of
the record date mentioned above, and of which the numerator shall be such
Exercise Price on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
(d) For the purposes of this Section 9, the
following clauses shall also be applicable:
(i) Record Date. In case the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them (A) to receive a dividend or other distribution payable in Common Stock or
in securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the
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<PAGE> 6
Company, and the disposition of any such shares shall be considered an issue or
sale of Common Stock.
(e) All calculations under this Section 9 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(f) Whenever the Exercise Price is adjusted pursuant
to Section 9(c) above, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall
be a nationally recognized accounting firm), in which case the adjustment shall
be equal to the average of the adjustments recommended by each of the Appraiser
and such appraiser. The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. Such
adjustment shall become effective immediately after the record date mentioned
above.
(g) If (i) the Company shall declare a dividend (or
any other distribution) on its Common Stock; (ii) the Company shall declare a
special nonrecurring cash dividend on or a redemption of its Common Stock; (iii)
the Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; (iv) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock of
the Company, any consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of the Company, or
any compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or (v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the affairs of the Company; then the
Company shall cause to be mailed to each Holder at their last addresses as they
shall appear upon the Warrant Register, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
10. Payment of Exercise Price. The Holder may pay the
Exercise Price in one of the following manners:
(a) Cash Exercise. The Holder may deliver
immediately available funds; or
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<PAGE> 7
(b) Cashless Exercise. At the option of the Company,
the Holder may surrender this Warrant to the Company together with a notice of
cashless exercise, in which event the Company shall issue to the Holder the
number of Warrant Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued
to the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the average of the closing sale prices of
the Common Stock for the five (5) trading days
immediately prior to (but not including) the
Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the original issue date of this Warrant.
11. Fractional Shares. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of this
Warrant. The number of full Warrant Shares which shall be issuable upon the
exercise of this Warrant shall be computed on the basis of the aggregate number
of Warrant Shares purchasable on exercise of this Warrant so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 11,
be issuable on the exercise of this Warrant, the Company shall pay an amount in
cash equal to the Exercise Price multiplied by such fraction.
12. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6:30 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 6:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
13114 Evening Creek Drive South, San Diego, California 92128, Attention: Chief
Executive Officer, or to Facsimile No. (619) 486-3922, or (ii) if to the Holder,
to the Holder at the address or facsimile number appearing on the Warrant
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<PAGE> 8
Register or such other address or facsimile number as the Holder may provide to
the Company in accordance with this Section 12.
13. Warrant Agent. The Company shall serve as warrant agent
under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent. Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Company or any new warrant agent shall be a party or any
corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business shall
be a successor warrant agent under this Warrant without any further act. Any
such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder
at the Holder's last address as shown on the Warrant Register.
14. Miscellaneous.
(a) This Warrant shall be binding on and inure to
the benefit of the parties hereto and their respective successors and assigns.
This Warrant may be amended only in writing signed by the Company and the Holder
and their successors and assigns.
(b) Subject to Section 14(a), nothing in this
Warrant shall be construed to give to any person or corporation other than the
Company and the Holder any legal or equitable right, remedy or cause under this
Warrant. This Warrant shall inure to the sole and exclusive benefit of the
Company and the Holder.
(c) This Warrant shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof. The Company and
the Holder hereby irrevocably submit to the exclusive jurisdiction of the state
and federal courts sitting in the City of New York, borough of Manhattan, for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each of the Company and the Holder
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by receiving a copy thereof
sent to the Company at the address in effect for notices to it under this
instrument and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
(d) The headings herein are for convenience only, do
not constitute a part of this Warrant and shall not be deemed to limit or affect
any of the provisions hereof.
(e) In case any one or more of the provisions of
this Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially
-8-
<PAGE> 9
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Warrant.
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SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated above.
E.DIGITAL CORPORATION
By:________________________________________________
Name:______________________________________________
Title:_____________________________________________
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EXHIBIT 4.26
================================================================================
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Between
e.DIGITAL CORPORATION
and
THE INVESTORS SIGNATORY HERETO
June 24, 1999
================================================================================
<PAGE> 2
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement"), dated
as of June 24, 1999, between e.Digital Corporation, a Delaware corporation (the
"Company"), and the investors signatory hereto on the date of this Agreement
(each such investor is a "Purchaser" and all such investors are, collectively,
the "Purchasers").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchasers and the
Purchasers, severally and not jointly, desire to purchase from the Company,
shares of the Company's 7% Series B Convertible Preferred Stock, par value $.001
per share (the "Preferred Stock"), which are convertible into shares of the
Company's common stock, par value $.001 per share (the "Common Stock").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy are
hereby acknowledged, the Company and the Purchasers agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 The Closing.
(a) The Closing. (i) Subject to the terms and conditions set
forth in this Agreement, the Company shall issue and sell to the Purchasers and
the Purchasers shall, severally and not jointly, purchase 300 shares of
Preferred Stock (the "Shares") for an aggregate purchase price of $3,000,000.
The closing of the purchase and sale of the Shares (the "Closing") shall take
place at the offices of Robinson Silverman Pearce Aronsohn & Berman LLP
("Robinson Silverman"), 1290 Avenue of the Americas, New York, New York 10104,
immediately following the execution hereof or such later date as the parties
shall agree. The date of the Closing is hereinafter referred to as the "Closing
Date."
(ii) Prior to the Closing Date, the parties shall
deliver or shall cause to be delivered the following: (A) the Company shall
deliver to each Purchaser (1) stock certificates representing a number of Shares
equal to the quotient obtained by dividing the purchase price indicated below
such Purchaser's name on the signature page to this Agreement by 10,000,
registered in the name of such Purchaser, (2) a Common Stock purchase warrant,
in the form of Exhibit D, pursuant to which such Purchaser shall have the right
to purchase the number of shares of Common Stock indicated below such
Purchaser's name on the signature page to this Agreement, registered in the name
of such Purchaser (collectively, the "Warrants"), (3) the legal opinion of
Higham, McConnell & Dunning LLP, outside counsel to the Company, substantially
in the form of Exhibit C, and (4) all other documents, instruments and writings
required to have been delivered at or prior to the Closing Date by the Company
pursuant to this Agreement, including an executed Registration Rights Agreement,
dated the date hereof, among the Company and the Purchasers, in the form of
Exhibit B (the "Registration Rights Agreement"), and the Transfer Agent
Instructions, in the form of Exhibit E, delivered to and acknowledged by the
Company's transfer agent (the "Transfer Agent Instructions"); and (B) each
Purchaser shall deliver (1) the purchase price indicated below such
<PAGE> 3
Purchaser's name on the signature page to this Agreement in United States
dollars in immediately available funds by wire transfer to an account designated
in writing by the Company for such purpose, and (2) all documents, instruments
and writings required to have been delivered at or prior to the Closing Date by
such Purchaser pursuant to this Agreement, including, without limitation, an
executed Registration Rights Agreement.
1.2 Terms of Preferred Stock. The Preferred Stock shall have the
rights preferences and privileges set forth in Exhibit A, and shall be
incorporated into a Certificate of Designation (the "Certificate of
Designation") which shall be filed on or prior to the Closing Date by the
Company with the Secretary of State of the State of Delaware, in form and
substance mutually agreed to by the parties.
For purposes of this Agreement, "Conversion Price," "Original
Issue Date" and "Trading Day" shall have the meanings set forth in Exhibit A;
"Business Day" shall mean any day except Saturday, Sunday and any day which
shall be a federal legal holiday or a day on which banking institutions in the
State of New York or the State of California are authorized or required by law
or other governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The
Company hereby makes the following representations and warranties to the
Purchasers:
(a) Organization and Qualification. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, with the requisite corporate power and authority
to (i) own and use its properties and assets, (ii) carry on its business as
currently conducted, and (iii) enter into and perform the transactions
contemplated by this Agreement, the Certificate of Designation, the Registration
Rights Agreement, the Warrants and the Transfer Agent Instructions
(collectively, the "Transaction Documents"). The Company has no subsidiaries
other than as set forth in Schedule 2.1(a) (collectively the "Subsidiaries").
Each of the Subsidiaries is an entity, duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the full power and authority
to own and use its properties and assets and to carry on its business as
currently conducted. Each of the Company and the Subsidiaries is duly qualified
to do business and is in good standing as a foreign corporation in each
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary, except where the failure to be so
qualified or in good standing, as the case may be, could not, individually or in
the aggregate, (x) adversely affect the legality, validity or enforceability of
the Securities (as defined below) or any of the Transaction Documents, (y) have
or result in a material adverse effect on the results of operations, assets,
prospects, or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to
perform fully on a
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timely basis its obligations under any of the Transaction Documents (any of (x),
(y) or (z), a "Material Adverse Effect").
(b) Authorization; Enforcement. The execution and delivery
of each of the Transaction Documents by the Company and the consummation by it
of the transactions contemplated thereby have been duly authorized by all
necessary action on the part of the Company. Each of the Transaction Documents
has been duly executed by the Company and, when delivered (or filed, as the case
may be) in accordance with the terms hereof, will constitute the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms. Neither the Company nor any Subsidiary is in violation of any of
the provisions of its respective certificate of incorporation, by-laws or other
charter documents.
(c) Capitalization. The number of authorized, issued and
outstanding capital stock of the Company is set forth in Schedule 2.1(c). No
shares of Common Stock are entitled to preemptive or similar rights, nor is any
holder of the Common Stock entitled to preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as a result of the purchase and sale of the Shares
and the Warrant and except as disclosed in Schedule 2.1(c), there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person any right
to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common Stock. To
the actual knowledge of the Company, except as specifically disclosed in the SEC
Documents (as defined below) or Schedule 2.1(c), no Person or group of related
Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), or
has the right to acquire by agreement with or by obligation binding upon the
Company, in excess of 5% of the Common Stock. A "Person" means an individual or
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.
(d) Issuance of the Shares and the Warrants. The Shares and
the Warrants are duly authorized and, when issued and paid for in accordance
with the terms hereof, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens, encumbrances and rights of first
refusal of any kind (collectively, "Liens"). The Company has an adequate reserve
of duly authorized shares of Common Stock, reserved for issuance to the holders
of the Shares and the Warrants, to enable it to perform its conversion, exercise
and other obligations under this Agreement, the Certificate of Designation and
the Warrants. Such number of reserved and available shares of Common Stock is
not less than the sum of (i) the number of shares of Common Stock which would be
issuable upon conversion in full of the Shares, assuming such conversion
occurred on the Original Issue Date at a Conversion Price of $1.50 per share,
(ii) the number of shares of Common Stock issuable upon exercise of the
Warrants, and (iii) the number of shares Common Stock which would be issuable
upon payment of dividends on the Shares, assuming each Share is outstanding for
three years and all dividends are paid in shares of Common Stock (such number of
shares of Common Stock, the "Initial Minimum"). All such authorized shares of
Common Stock shall be duly reserved
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<PAGE> 5
for issuance to the holders of the Shares and the Warrants. The shares of Common
Stock issuable upon conversion of the Shares as payment of dividends thereon and
upon exercise of the Warrant are collectively referred to herein as the
"Underlying Shares." The Shares, the Warrants and the Underlying Shares are
collectively referred to herein as, the "Securities." When issued in accordance
with the Certificate of Designation and the Warrants, the Underlying Shares will
be duly authorized, validly issued, fully paid and nonassessable, free and clear
of all Liens.
(e) No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation, bylaws or other
charter documents (each as amended through the date hereof), or (ii) subject to
obtaining the Required Approvals (as defined below), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, indenture or instrument (evidencing
a Company debt or otherwise) to which the Company or any Subsidiary is a party
or by which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company is subject (including Federal and state
securities laws and regulations), or by which any property or asset of the
Company is bound or affected, except in the case of each of clauses (ii) and
(iii), as could not, individually or in the aggregate, have or result in a
Material Adverse Effect. The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental authority,
except for violations which, individually or in the aggregate, could not have or
result in a Material Adverse Effect.
(f) Filings, Consents and Approvals. Neither the Company nor
any Subsidiary is required to obtain any consent, waiver, authorization or order
of, give any notice to, or make any filing or registration with, any court or
other Federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filing of the Certificate of
Designation with the Secretary of State of Delaware, (ii) the filings required
pursuant to Section 3.10, (iii) the filing of the Underlying Shares Registration
Statement with the Securities and Exchange Commission (the "Commission") meeting
the requirements set forth in the Registration Rights Agreement and covering the
resale of the Underlying Shares by the Purchaser and (iv) in all other cases
where the failure to obtain such consent, waiver, authorization or order, or to
give such notice or make such filing or registration could not have or result
in, individually or in the aggregate, a Material Adverse Effect (collectively,
the "Required Approvals").
(g) Litigation; Proceedings. Except as specified in Schedule
2.1(g) or in the SEC Documents, there is no action, suit, notice of violation,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries or any of
their respective properties before or by any court, governmental or
administrative agency or regulatory authority (Federal, state, county, local or
foreign) which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction
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<PAGE> 6
Documents or the Securities or (ii) could, individually or in the aggregate,
have or result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under or in violation of (and no event has occurred
which has not been waived which, with notice or lapse of time or both, would
result in a default by the Company or any Subsidiary under), nor has the Company
or any Subsidiary received notice of a claim that it is in default under or that
it is in violation of, any indenture, loan or credit agreement or any other
agreement or instrument to which it is a party or by which it or any of its
properties is bound, (ii) is in violation of any order of any court, arbitrator
or governmental body, or (iii) is in violation of any statute, rule or
regulation of any governmental authority, in each case of clauses (i), (ii) or
(iii) above, except as could not individually or in the aggregate, have or
result in a Material Adverse Effect.
(i) Private Offering. Assuming the accuracy of the
representations and warranties of the Purchaser set forth in Sections
2.2(b)-(g), the offer, issuance and sale of the Securities to the Purchaser as
contemplated hereby are exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). Neither the Company
nor any Person acting on its behalf has taken any action that could subject the
offering, issuance or sale of the Securities to the registration requirements of
the Securities Act.
(j) SEC Documents; Financial Statements. Except as specified
in Schedule 2.1(j), the Company has filed all reports required to be filed by it
under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
for the three years preceding the date hereof (or such shorter period as the
Company was required by law to file such material) (the foregoing materials
being collectively referred to herein as the "SEC Documents" and, together with
the Schedules to this Agreement the "Disclosure Materials") on a timely basis or
has received a valid extension of such time of filing and has filed any such SEC
Documents prior to the expiration of any such extension. As of their respective
dates, the SEC Documents complied in all material respects with the requirements
of the Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. All material agreements to which the Company is a party or to which
the property or assets of the Company are subject have been filed as exhibits to
the SEC Documents as required. The financial statements of the Company included
in the SEC Documents comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing. Such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved ("GAAP"), except as may be
otherwise specified in such financial statements or the notes thereto, and
fairly present in all material respects the financial position of the Company
and its consolidated subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended, subject, in the
case of unaudited statements, to normal, immaterial, year-end audit adjustments.
Since March 31, 1998, except as specifically disclosed in the SEC Documents or
Schedule 2.1(j), (a) there has been no event, occurrence or development that has
or that could result in a Material Adverse Effect, (b) the Company has not
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<PAGE> 7
incurred any liabilities (contingent or otherwise) other than (x) liabilities
incurred in the ordinary course of business consistent with past practice and
(y) liabilities not required to be reflected in the Company's financial
statements pursuant to GAAP or required to be disclosed in filings made with the
Commission, (c) the Company has not altered its method of accounting or the
identity of its auditors and (d) the Company has not declared or made any
payment or distribution of cash or other property to its stockholders or
officers or directors (other than in compliance with existing Company stock
option plans) with respect to its capital stock, or purchased, redeemed (or made
any agreements to purchase or redeem) any shares of its capital stock. The
Company last filed audited financial statements with the Commission on June 26,
1998, and has not received any comments from the Commission in respect thereof.
(k) Investment Company. The Company is not, and is not an
Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(l) Certain Fees. Except for certain fees payable by the
Company to Jesup & Lamont Securities Corp., no fees or commissions will be
payable by the Company to any broker, financial advisor or consultant, finder,
placement agent, investment banker, or bank with respect to the transactions
contemplated by this Agreement. The Purchasers shall have no obligation with
respect to any fees or with respect to any claims made by or on behalf of other
Persons for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by this Agreement. The Company
shall indemnify and hold harmless each Purchaser, its employees, officers,
directors, agents, and partners, and their respective Affiliates, from and
against all claims, losses, damages, costs (including the costs of preparation
and attorney's fees) and expenses suffered in respect of any such claimed or
existing fees, as such fees and expenses are incurred.
(m) Solicitation Materials. Neither the Company nor any
Person acting on the Company's behalf has solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) Form S-3 Eligibility. The Company is eligible to
register securities for resale with the Commission under Form S-3 promulgated
under the Securities Act.
(o) Seniority. Except for the Company's Series A Preferred
Stock, no class of equity securities of the Company is senior to the Shares in
right of payment, whether upon liquidation or dissolution, or otherwise.
(p) Patents and Trademarks. The Company has, or has rights
to use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses and rights which are necessary
or material for use in connection with its business, and which the failure to so
have would have a Material Adverse Effect (collectively, the "Intellectual
Property Rights"). To the best knowledge of the Company, except as specified in
Schedule 2.1(p), all such Intellectual Property Rights are enforceable and there
is no existing infringement by another Person of any of the Intellectual
Property Rights.
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(q) Registration Rights; Rights of Participation. Except as
set forth on Schedule 6(b) to the Registration Rights Agreement, the Company has
not granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(r) Regulatory Permits. The Company and its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
Federal, state or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Documents, except where the
failure to possess such permits could not, individually or in the aggregate,
have or result in a Material Adverse Effect ("Material Permits"), and neither
the Company nor any such Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.
(s) Title. Neither the Company nor any of the Subsidiaries
own any real property. Except as specified in Schedule 2.1(s), the Company and
the Subsidiaries have good and marketable title to all personal property owned
by them which is material to the business of the Company and its Subsidiaries,
in each case free and clear of all Liens, except for Liens as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its Subsidiaries. Any
real property and facilities held under lease by the Company and its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries.
(t) Disclosure. The Company confirms that it has not
provided any Purchaser or its agents or counsel with any information that
constitutes or might constitute material non-public information. The Company
understands and confirms that the Purchasers shall be relying on the foregoing
representations in effecting transactions in securities of the Company. All
disclosure provided to the Purchasers regarding the Company, its business and
the transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company are true and correct and do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
2.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants to the
Company as follows:
(a) Organization; Authority. Such Purchaser is a corporation
or limited partnership validly existing and in good standing under the laws of
the jurisdiction of its organization with the requisite power and authority, to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations thereunder. The purchase by
such Purchaser of the Securities hereunder has been duly authorized by all
necessary corporate or partnership action on the part of such Purchaser. Each of
this Agreement and the Registration Rights Agreement has been duly executed and
delivered by such Purchaser and
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<PAGE> 9
constitutes the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms.
(b) Investment Intent. Such Purchaser is acquiring the
Securities offered and sold to it hereunder as principal for its own account for
investment purposes only and not with a view to or for distributing or reselling
such Securities or any part thereof or interest therein, without prejudice,
however, to such Purchaser's right, subject to the provisions of this Agreement
and the Registration Rights Agreement, at all times to sell or otherwise dispose
of all or any part of such Securities pursuant to an effective registration
statement under the Securities Act and in compliance with applicable state
securities laws or under an exemption from such registration. By making this
representation, such Purchaser does not represent that it will hold such
Securities for any period of time.
(c) Purchaser Status. Such Purchaser was offered the
Securities is, and at the date of each exercise under its respective Warrant, it
will be, an "accredited investor" as defined in Rule 501(a) under the Securities
Act. Such Purchaser has not been formed solely for the purpose of acquiring the
Securities.
(d) Experience of Purchaser. Such Purchaser either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. Such
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) Access to Information. Such Purchaser acknowledges
receipt of the Disclosure Materials and further acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or on
behalf of such Purchaser or its representatives or counsel shall modify, amend
or affect such Purchaser's right to rely on the truth, accuracy and completeness
of the Disclosure Materials and the Company's representations and warranties
contained in the Transaction Documents.
(g) General Solicitation. To the best of such Purchaser's
knowledge, such Purchaser is not purchasing the Securities as a result of or
subsequent to any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or
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<PAGE> 10
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.
(h) Reliance. Such Purchaser understands and acknowledges
that (i) the Securities are being offered and sold to it without registration
under the Securities Act in a private placement that is exempt from the
registration provisions of the Securities Act and (ii) the availability of such
exemption, depends in part on, and the Company will rely upon the accuracy and
truthfulness of, the foregoing representations and such Purchaser hereby
consents to such reliance.
The Company acknowledges and agrees that no Purchaser makes or
has made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred securities under the
Securities Act. Notwithstanding the foregoing, the Company hereby consents to
and agrees to register on the books of the Company and with any transfer agent
for the securities of the Company any transfer of Securities by a Purchaser to
an Affiliate of such Purchaser or to one or more funds under common management
with such Purchaser, and any transfer among any such Affiliates or one or more
funds, provided that the transferee certifies to the Company that it is an
"accredited investor" as defined in Rule 501(a) under the Securities Act and
that it is acquiring the Securities solely for investment purposes. Any such
transferee shall agree in writing to be bound by the terms of this Agreement and
shall have the rights of the Purchaser under this Agreement and the Registration
Rights Agreement.
(b) The Purchasers agrees to the imprinting, so long as is
required by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR
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IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above
nor any other legend if the conversion of Shares, the payment of dividends
thereon, and exercise of the Warrant or other issuances of Underlying Shares as
contemplated hereby, by the Certificate of Designation or the Warrants occurs at
any time while an Underlying Shares Registration Statement is effective under
the Securities Act or, in the event there is not an effective Underlying Shares
Registration Statement, at such time, in the opinion of counsel to the Company,
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission). The Company shall cause its counsel to issue the reliance
letter included in the Transfer Agent Instructions to the Company's transfer
agent on the day that the Underlying Shares Registration Statement is declared
effective by the Commission. The Company agrees that, in the event any
Underlying Shares are issued with a legend in accordance with this Section
3.1(b), it will, within three (3) Trading Days after request therefor by a
Purchaser, provide such Purchaser with a certificate or certificates
representing such Underlying Shares, free from such legend at such time as such
legend would not have been required under this Section 3.1(b) had such issuance
occurred on the date of such request. The Company may not make any notation on
its records or give instructions to any transfer agent of the Company which
enlarge the restrictions of transfer set forth in this Section.
3.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Underlying Shares upon (i) conversion of the Shares in
accordance with the terms of the Certificate of Designation, and (ii) exercise
of the Warrants in accordance with their terms, will result in dilution of the
outstanding shares of Common Stock, which dilution may be substantial under
certain market conditions. The Company further acknowledges that its obligation
to issue Underlying Shares upon (x) conversion of the Shares in accordance with
the terms of the Certificate of Designation, and (y) exercise of the Warrants in
accordance with its terms, is unconditional and absolute, subject to the
limitations set forth herein in the Certificate of Designation or pursuant to
the Warrants, regardless of the effect of any such dilution.
3.3 Furnishing of Information. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. As long as any Purchaser owns Securities, if
the Company is not required to file reports pursuant to such sections, it will
prepare and furnish to such Purchasers and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act such information as is
required for such Purchasers to sell the Securities under Rule 144 promulgated
under the Securities Act. The Company further covenants that it will take such
further action as any holder of Securities may reasonably request, all to the
extent required from time to time to enable such Person to sell Underlying
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144 promulgated under the Securities Act,
including the legal opinion referenced above in this Section. Upon the request
of any such Person, the Company shall deliver to such Person a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
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<PAGE> 12
3.4 Integration. The Company shall not, and shall use its best
efforts to ensure that, no Affiliate shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers.
3.5 Increase in Authorized Shares. If on any date the Company would
be, if a notice of conversion or exercise (as the case may be) were to be
delivered on such date, precluded from (a) issuing the number of Underlying
Shares as would then be issuable upon a conversion in full of the Shares, or (b)
issuing the number of Underlying Shares upon exercise in full of the Warrants,
subject to the limitations on the Company's obligation to issue shares of Common
Stock pursuant to Sections 5(a)(iii) of the Certificate of Designation (the
"Current Required Minimum"), in either case, due to the unavailability of a
sufficient number of authorized but unissued or reserved shares of Common Stock,
then the Board of Directors of the Company shall promptly (and in any case,
within 45 Business Days from such date) prepare and mail to the stockholders of
the Company proxy materials requesting authorization to amend the Company's
Certificate of Incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue to at least such number of shares as
reasonably requested by the Purchaser in order to provide for such number of
authorized and unissued shares of Common Stock to enable the Company to comply
with its issuance, conversion exercise and reservation of shares obligations as
set forth in this Agreement, the Certificate of Designation and the Warrants
(the sum of (x) the number of shares of Common Stock then outstanding plus all
shares of Common Stock issuable upon exercise of all outstanding options,
warrants and convertible instruments, and (y) the Current Required Minimum,
shall be a reasonable number). In connection therewith, the Board of Directors
shall (a) adopt proper resolutions authorizing such increase, (b) recommend to
and otherwise use its best efforts to promptly and duly obtain stockholder
approval to carry out such resolutions (and hold a special meeting of the
stockholders no later than the 60th day after delivery of the proxy materials
relating to such meeting) and (c) within five (5) Business Days of obtaining
such stockholder authorization, file an appropriate amendment to the Company's
Certificate of Incorporation to evidence such increase.
3.6 Listing of Underlying Shares. If, after the date hereof, the
Company shall list the Common Stock on any of the New York Stock Exchange,
American Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market (each,
a "Subsequent Market"), then the Company shall include in such listing for the
benefit of the Purchasers for issuance upon exercise of the Warrants and
conversion of the Shares a number of shares of Common Stock equal to not less
than the then Current Required Minimum. If the number of Underlying Shares
issuable upon conversion in full of the then outstanding Shares, as payment of
dividends thereon, and upon exercise of the then unexercised portion of the
Warrants exceed the number of Underlying Shares previously listed on account
thereof with a Subsequent Market, then the Company shall take the necessary
actions to immediately list a number of Underlying Shares as equals no less than
the then Current Required Minimum.
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<PAGE> 13
3.7 Conversion and Exercise Procedures. The Transfer Agent
Instructions, Conversion Notice (as defined in Exhibit A) and Notice of Exercise
under the Warrants set forth the totality of the procedures with respect to the
conversion of the Shares and exercise of the Warrants, including the form of
reliance letter, if necessary, that shall be rendered to the Company's transfer
agent and such other information and instructions as may be reasonably necessary
to enable the Purchasers to convert Shares and exercise Warrants as contemplated
in the Certificate of Designation and the Warrants. The Company shall honor
conversions of the Shares and exercises of the Warrants and shall deliver
Underlying Shares in accordance with the respective terms, conditions and time
periods set forth in the Certificate of Designation and the Warrants.
3.8 Notice of Breaches. Each of the Company and the Purchasers shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained therein to be
incorrect or breached as of the Closing Date. However, no disclosure by a party
pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in any Transaction
Document.
3.9 Right of First Refusal; Subsequent Registrations. (a) The
Company shall not, directly or indirectly, without the prior written consent of
the Purchasers, offer, sell, grant any option to purchase, or otherwise dispose
of (or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity, debt or equity-equivalent
securities or a transaction intended to be exempt or not subject to registration
under the Securities Act (a "Subsequent Placement") for a period of 180 days
after the Closing Date, except (i) the granting of options or warrants to
employees, officers and directors, and the issuance of shares upon exercise of
options granted, under any stock option plan heretofore or hereinafter duly
adopted by the Company, (ii) shares of Common Stock issuable upon exercise of
any currently outstanding warrants and upon conversion of any currently
outstanding convertible securities of the Company, in each case disclosed in
Schedule 2.1(c), and (iii) shares of Common Stock issuable upon conversion of
Preferred Stock and upon exercise of the Warrants in accordance with the
Certificate of Designation or the Warrants, respectively, unless (A) the Company
delivers to the Purchasers a written notice (the "Subsequent Placement Notice")
of its intention to effect such Subsequent Placement, which Subsequent Placement
Notice shall describe in reasonable detail the proposed terms of such Subsequent
Placement, the amount of proceeds intended to be raised thereunder, the Person
with whom such Subsequent Placement shall be effected, and attached to which
shall be a term sheet or similar document relating thereto and (B) the
Purchasers shall not have notified the Company by 6:30 p.m. (New York City time)
on the fifth (5th) Trading Day after their receipt of the Subsequent Placement
Notice of their willingness to provide (or to cause its sole designee to
provide), subject to completion of mutually acceptable documentation, financing
to the Company on conversion, reset and pricing terms (including original issue
discount, if any) and substantially on such other terms set forth in the
Subsequent Placement Notice. If the Purchasers shall fail to notify the Company
of their intention to enter into such negotiations within such time period, the
Company may effect the Subsequent Placement substantially upon the terms and to
the Persons (or Affiliates of such Persons) set forth in the Subsequent
Placement Notice; provided, that the Company shall provide the Purchasers with a
second Subsequent Placement Notice, and the Purchasers shall again have the
right
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<PAGE> 14
of first refusal set forth above in this Section, if the Subsequent Placement
subject to the initial Subsequent Placement Notice shall not have been
consummated for any reason on conversion, reset and pricing terms (including
original issue discount, if any) and substantially on such other terms set forth
in such Subsequent Placement Notice within thirty (30) Trading Days after the
date of the initial Subsequent Placement Notice with the Person (or an Affiliate
of such Person) identified in the Subsequent Placement Notice. If the Purchasers
shall indicate a willingness to provide financing in excess of the amount set
forth in the Subsequent Placement Notice, then each Purchaser shall be entitled
to provide financing pursuant to such Subsequent Placement Notice up to an
amount equal to such Purchaser's pro rata portion of the aggregate number of
Shares purchased by such Purchaser under this Agreement, but the Company shall
not be required to accept financing from the Purchasers in an amount less than
or in excess of the amount set forth in the Subsequent Placement Notice.
(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered, and securities of the Company permitted pursuant to Schedule 6(b) of
the Registration's Rights Agreement to be registered, in the Underlying Shares
Registration Statement in accordance with the Registration Rights Agreement, and
(z) Common Stock permitted to be issued pursuant to paragraph (a)(i) - (iii) of
Section 3.9(a), the Company shall not, without the prior written consent of the
Purchaser (i) issue or sell any of its or any of its Affiliates' equity or
equity-equivalent securities pursuant to Regulation S promulgated under the
Securities Act, or (ii) register for resale any securities of the Company for a
period of not less than 90 Trading Days after the date that the Underlying
Shares Registration Statement is declared effective by the Commission. Any days
that a Purchaser is unable to sell Underlying Shares under the Underlying Shares
Registration Statement shall be added to such 90 Trading Day period for the
purposes of (i) and (ii) above.
3.10 Certain Securities Laws Disclosures; Publicity. The Company
shall: (i) issue a press release acceptable to the Purchasers disclosing the
transactions contemplated hereby on the Closing Date, (ii) file with the
Commission a Report on an appropriate disclosure form under the Exchange Act
disclosing the transactions contemplated hereby within fifteen (15) Business
Days after the Closing Date, and (iii) timely file with the Commission a Form D
promulgated under the Securities Act as required under Regulation D promulgated
under the Securities Act and provide a copy thereof to the Purchasers promptly
after the filing thereof. The Company shall, no less than two (2) Business Days
prior to the filing of any disclosure required by clauses (ii) and (iii) above,
provide a copy thereof to the Purchasers. No such filing or disclosure may be
made that mentions a Purchaser by name without the prior consent of such
Purchaser. Such filings shall be subject to Section 4.11 hereof.
3.11 Transfer of Intellectual Property Rights. Except in connection
with the sale of all or substantially all of the assets of the Company, the
Company other than in connection with licensing agreements in the ordinary
course of the Company's business, shall not transfer, sell or otherwise dispose
of any Intellectual Property Rights, or allow any of the Intellectual Property
Rights to become subject to any Liens, or fail to renew such Intellectual
Property Rights (if renewable and it would otherwise lapse if not renewed),
without the prior written consent of the Purchasers.
3.12 Use of Proceeds. The Company shall use the net proceeds from the
sale of the
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<PAGE> 15
Securities hereunder for working capital purposes and not for the satisfaction
of any portion of Company debt other than trade payables in the ordinary course
of the Company's business or to redeem any Company equity or equity-equivalent
securities. Pending application of the proceeds of this placement in the manner
permitted hereby, the Company will invest such proceeds in interest bearing
accounts and/or short-term, investment grade interest bearing securities.
3.13 Reimbursement. If any Purchaser, other than by reason of its
gross negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought against the Company by any Person,
including stockholders of the Company, or is impleaded by the Company in such an
action, proceeding or investigation in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation) not to exceed
$200,000 incurred in connection therewith, as such expenses are incurred. In
addition, other than with respect to any matter in which a Purchaser is a named
party, the Company will pay such Purchaser the charges, as reasonably determined
by such Purchaser, for the time of any officers or employees of such Purchaser
devoted to appearing and preparing to appear as witnesses, assisting in
preparation for hearings, trials or pretrial matters, or otherwise with respect
to inquiries, hearings, trials, and other proceedings relating to the subject
matter of this Agreement. The reimbursement obligations of the Company under
this paragraph shall be in addition to any liability which the Company may
otherwise have, shall extend upon the same terms and conditions to any
Affiliates of the Purchasers who are actually named in such action, proceeding
or investigation, and partners, directors, agents, employees and controlling
persons (if any), as the case may be, of the Purchasers and any such Affiliate,
and shall be binding upon and inure to the benefit of any successors, assigns,
heirs and personal representatives of the Company, the Purchasers and any such
Affiliate and any such Person. The Company also agrees that neither the
Purchasers nor any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company in connection with or
as a result of the consummation of the Transaction Documents except to the
extent that any losses, claims, damages, liabilities or expenses incurred by the
Company result from the gross negligence or willful misconduct of the Purchasers
or entity in connection with the transactions contemplated by this Agreement.
Notwithstanding the foregoing, the Company shall not be obligated to indemnify
or reimburse the Purchasers or their Affiliates in connection with any action,
proceeding or investigation brought against such Person by the Commission or any
stock exchange if such action, proceeding or investigation is limited to the
actions or misconduct of such Purchaser or Affiliate and does not involve an
investigation, action or proceeding directly against the Company or its
directors or officers.
3.14 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of the other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to
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<PAGE> 16
protect and enforce its rights, including without limitation the rights arising
out of this Agreement or out of the Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.
ARTICLE IV
MISCELLANEOUS
4.1 Fees and Expenses. At the Closing the Company shall reimburse
the Purchasers for $15,000 of their expenses incurred in connection with the
preparation of the Transaction Documents and for $15,000 of their due diligence
expenses incurred in connection with the transactions contemplated hereby. Each
of the amounts contemplated by the immediately preceding sentence shall be
retained by the Purchasers, and shall not be delivered to the Company at the
Closing. Other than the amount contemplated in the immediately preceding
sentence, and except as otherwise set forth in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all U.S. stamp and other
taxes and duties levied in connection with the issuance of the Securities.
4.2 Entire Agreement; Amendments. The Transaction Documents,
together with the Exhibits and Schedules thereto, and the Transfer Agent
Instructions contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters, which the parties acknowledge
have been merged into such documents, exhibits and schedules.
4.3 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Agreement later than 6:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
If to the Company: e.Digital Corporation
13114 Evening Creek Drive S.
San Diego, CA 92128
Facsimile No.: (619) 486-3922
Attn: Chief Executive Officer
With copies to: Higham, McConnell & Dunning LLP
28202 Cabot Road, Suite 450
Laguna Niguel, CA 92677-1250
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<PAGE> 17
Facsimile No.: (949) 365-5522
Attn: Curt C. Barwick, Esq.
If to a Purchaser: To the address set forth under such
Purchaser's name on the signature pages
hereto.
4.4 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and the Purchasers or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought. No waiver of
any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
4.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Except as set forth in
Section 3.1(a), a Purchaser may not assign this Agreement or any of the rights
or obligations hereunder without the consent of the Company.
4.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
4.8 Governing Law. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
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<PAGE> 18
4.9 Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery and
conversion or exercise (as the case may be) of the Shares and the Warrants.
4.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 Publicity. The Company and the Purchasers shall consult with
each other in issuing any press releases or otherwise making public statements
or filings and other communications with the Commission or any regulatory agency
or stock market or trading facility with respect to the transactions
contemplated hereby and neither party shall issue any such press release or
otherwise make any such public statement, filings or other communications
without the prior written consent of the other, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law or stock market rule or regulation, in
which such case the disclosing party shall provide the other party with prior
notice of such public statement, filing or other communication. Notwithstanding
the foregoing, the Company shall not publicly disclose the name of a Purchaser,
or include the name of the Purchaser in any filing with the Commission, or any
regulatory agency, trading facility or stock market (other than one or more
Underlying Shares Registration Statements, or other reports or applications
required by the terms hereof without the prior written consent of the Purchaser,
except to the extent such disclosure (but not any disclosure as to the
controlling Persons thereof) is required by law or stock market rule or
regulation, in which case the Company shall provide the Purchaser with prior
notice of such disclosure.
4.12 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
4.13 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchasers
will be entitled to specific performance of the obligations of the Company under
the Transaction Documents. Each of the Company and the Purchasers agree that
monetary damages may not be adequate compensation for any loss incurred by
reason of any breach of its obligations described in the foregoing sentence and
hereby agrees to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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<PAGE> 19
SIGNATURE PAGE FOLLOWS]
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<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this
Convertible Preferred Stock Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated above.
E.DIGITAL CORPORATION
By: /s/ ROBERT PUTNAM
------------------------------------
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By: Encore Capital Management, L.L.C.
Its Investment Adviser
By: /s/ NEIL T. CHAU
--------------------------------
Neil T. Chau
Managing Member
Purchase Price for Preferred Stock
to be acquired at Closing: $3,000,000
Warrants to be acquired
at Closing: 195,000
Address for Notice:
JNC Opportunity Fund Ltd.
c/o Olympia Capital (Cayman) Ltd.
Williams House, 20 Reid Street
Facsimile No.: (441) 295-2305
Attn: Director
With copies to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
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<PAGE> 21
and
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen. Esq.
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<PAGE> 1
EXHIBIT 4.27
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of June 24, 1999, among e.Digital Corporation, a Delaware
corporation (the "Company"), and the investors signatory hereto on the date of
this Agreement (each such investor is a "Purchaser" and all such investors are,
collectively, the "Purchasers").
This Agreement is made pursuant to the Convertible Preferred
Stock Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have meaning set forth in Section 6(f).
"Affiliate" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common control
with such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of New York or the state of California generally are authorized or
required by law or other government actions to close.
"Closing Date" means June 24, 1999.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.001
per share, or such securities that such stock shall hereafter be reclassified
into.
"Effectiveness Date" means the 90th day following the Closing
Date.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
<PAGE> 2
"Filing Date" means the 30th day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Preferred Stock" means the Company's Series B Convertible
Preferred Stock issued to the Purchasers in accordance with the Purchase
Agreement.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable (i) upon conversion in full of the Preferred Stock, and (ii) upon
exercise of the Warrants.
"Registration Statement" means the registration statement and
any additional registration statements contemplated by Section 2(a), including
(in each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
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<PAGE> 3
"Rule 158" means Rule 158 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means one special counsel to the Holders, for
which the Holders will be reimbursed by the Company pursuant to Section 4.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" means (i) the Common Stock purchase warrants issued
to the Purchasers pursuant to the Purchase Agreement and (ii) the Common Stock
purchase warrant issued to Jesup & Lamont Securities Corporation as compensation
in connection with the transactions contemplated by the Purchase Agreement.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall
prepare and file with the Commission a shelf Registration Statement covering the
number of Registrable Securities contemplated by Section 2(b) for an offering to
be made on a continuous basis pursuant to Rule 415. The Registration Statement
shall be on Form S-3 (or on another appropriate form in the event that the
Company is not eligible to file a Registration Statement on Form S-3 for the
resale of the Registrable Securities). The Company shall use its best efforts to
cause the Registration Statement to be declared effective under the Securities
Act as promptly as possible after the filing thereof, but in any event prior to
the Effectiveness Date, and shall use its best efforts to keep such Registration
Statement continuously effective under the Securities Act until the date which
is three years after the date that such Registration Statement is declared
effective by the Commission or such earlier date when all Registrable Securities
covered by such Registration Statement have been sold or may be sold without
volume restrictions pursuant to Rule 144(k) as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company's transfer agent and the affected Holders (the
"Effectiveness Period"), provided, however, that the Company shall not be deemed
to have used its best efforts to keep the Registration Statement effective
during the Effectiveness Period if it voluntarily takes any action that would
result in the Holders not being able to sell the Registrable Securities covered
by such Registration Statement during the Effectiveness Period, unless such
action is required under applicable law or the Company has filed a
post-effective amendment to the Registration Statement and the Commission has
not declared it effective.
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(b) The initial Registration Statement required to be filed
hereunder shall include (but not be limited to), 2,752,615 shares of Common
Stock registered for the benefit of the Holders.
(c) If the Holders of a majority of the Registrable
Securities so elect, an offering of Registrable Securities pursuant to the
Registration Statement may be effected in the form of an Underwritten Offering.
In such event, and, if the managing underwriters advise the Company and such
Holders in writing that in their opinion the amount of Registrable Securities
proposed to be sold in such Underwritten Offering exceeds the amount of
Registrable Securities which can be sold in such Underwritten Offering, there
shall be included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be sold, and
such amount shall be allocated pro-rata among the Holders proposing to sell
Registrable Securities in such Underwritten Offering.
(d) If any of the Registrable Securities are to be sold in
an Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such Holder
(i) agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement on the form contemplated by Section 2(a)
which Registration Statement shall contain (except if otherwise directed by the
Holders) the "Plan of Distribution" attached hereto as Annex A, and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than three (3) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (other than any supplement required to be filed
in accordance with Section 3(c)(ii), which need only be furnished for review two
(2) Business Days prior to filing), the Company shall, (i) furnish to the
Holders, their Special Counsel and any managing underwriters, copies of all such
documents proposed to be filed, which documents (other than those incorporated
or deemed to be incorporated by reference) will be subject to the review of such
Holders, their Special Counsel and such managing underwriters, and (ii) cause
its officers and directors, counsel and independent certified public accountants
to respond to such inquiries as shall be necessary, in the reasonable opinion of
respective counsel to such Holders and such underwriters, to conduct a
reasonable investigation within the meaning of the Securities Act. The Holders
shall provide any comments or objections to any proposed filings by the
expiration of the third Business Day after actual receipt of the materials
provided for their review. For each Business Day after such third Business Day
during which a failure to provide such comments (which may be provided orally or
in writing) exists one day shall be added to each of the Filing Date and
Effectiveness Date for all purposes hereof. The Company
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shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object.
(b) (i) Prepare and file with the Commission such
amendments, including post-effective amendments, to the Registration Statement
and the Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or any
similar provisions then in force) promulgated under the Securities Act; (iii)
respond as promptly as reasonably possible, and in any event within twenty (20)
days, to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto and as promptly as reasonably
possible provide the Holders true and complete copies of all correspondence from
and to the Commission relating to the Registration Statement; and (iv) comply in
all material respects with the provisions of the Securities Act and the Exchange
Act with respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
(c)(i) File additional Registration Statements if the number of
Registrable Securities at any time exceeds 85% of the number of shares of Common
Stock then registered in a Registration Statement, provided that such
requirements shall be subject to any floor applicable to the conversion price of
the Preferred Stock. The Company shall have 30 days to file such additional
Registration Statements after such requirement notice of which may be given by
the Holders). In such event, the Registration Statement required to be filed by
the Company shall include a number of shares of Common Stock equal to no less
than the number of shares of Common Stock into which all then outstanding shares
of Preferred Stock are convertible (assuming such conversion occurred on the
Filing Date for such Registration Statement or the date of the filing of the
final acceleration request therefor, whichever date yields a lower Conversion
Price) less the shares covered by the prior Registration Statement and any other
Registrable Securities not then registered in a Registration Statement.
(ii) File such supplements or "stickers" to the
Registration Statement or Prospectus as and when required by the Commission to
evidence a material amount of resales by a Holder pursuant to a Prospectus. In
connection therewith, if such supplements or "stickers" are periodically
required by the Commission, the Company shall, within four (4) Business Days,
file such supplements or "stickers" whenever a Holder has sold 50% of the
Registrable Securities covered by the then outstanding Prospectus (as last
supplemented or "stickered") in order to cover 100% of the number of the
outstanding Registrable Securities.
(d) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than five (5) Business Days
(or, in the case of a supplement or "sticker" required to be filed
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<PAGE> 6
pursuant to Section 3(c)(ii), within one Business Day) prior to such filing) and
(if requested by any such Person) confirm such notice in writing no later than
one (1) Business Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration Statement
is proposed to be filed; (B) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement (the Company shall
provide true and complete copies thereof and all written responses thereto to
each of the Holders, which the Holders shall keep confidential); and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (v) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement ineligible for
inclusion therein or any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case of
the Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any 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.
(e) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(f) If requested by any managing underwriter or the Holders
of a majority in interest of the Registrable Securities to be sold in connection
with an Underwritten Offering, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement such
information as such managing underwriters and such Holders reasonably agree
should be included therein, and (ii) make all required filings of such
Prospectus supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be incorporated in
such Prospectus supplement or post-effective amendment; provided, however, that
the Company shall not be required to take any action pursuant to this Section
3(f) that would, in the opinion of counsel for the Company, violate applicable
law or be detrimental to the business prospects of the Company.
(g) Upon request, furnish to each Holder, their Special
Counsel and any managing underwriters, without charge, at least one conformed
copy of each Registration Statement and each amendment thereto, including, if
requested, financial statements and schedules, all documents incorporated or
deemed to be incorporated therein by reference, and all exhibits to the extent
requested by such Person (including those previously furnished or incorporated
by reference) promptly after the filing of such documents with the Commission.
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<PAGE> 7
(h) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(i) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable the
disposition in such reasonble number of jurisdictions of the Registrable
Securities covered by a Registration Statement; provided, however, that the
Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(j) Cooperate with the Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall comply with the requirements of
the Certificate of Designation and Warrants, and to enable such Registrable
Securities to be in such denominations and registered in such names as any such
managing underwriters or Holders may request.
(k) Upon the occurrence of any event contemplated by Section
6(e), as promptly as reasonably possible, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
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.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance as
is customary in Underwritten Offerings) and take all such other actions in
connection therewith (including those reasonably requested by any managing
underwriters and the Holders of a majority of the Registrable Securities being
sold) in order to expedite or facilitate the disposition of such Registrable
Securities, and whether or not an underwriting agreement is entered into, (i)
make such representations and warranties to such Holders and such underwriters
as are customarily made by issuers to underwriters in underwritten public
offerings (subject to the scheduling of appropriate exceptions to insure such
representations and warranties are accurate), and confirm the same if and when
requested; (ii) obtain and deliver copies thereof to each Holder and the
managing underwriters, if any, of opinions of counsel to the Company
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<PAGE> 8
and updates thereof addressed to each Holder and each such underwriter, in form,
scope and substance reasonably satisfactory to any such managing underwriters
and Special Counsel to the selling Holders covering the matters customarily
covered in opinions requested in Underwritten Offerings and such other matters
as may be reasonably requested by such Special Counsel and underwriters; (iii)
immediately prior to the effectiveness of the Registration Statement, at the
time of delivery of any Registrable Securities sold pursuant thereto, use its
best reasonable efforts to obtain and deliver copies to the Holders and the
managing underwriters, if any, of "cold comfort" letters and updates thereof
from the independent certified public accountants of the Company (and, if
necessary, any other independent certified public accountants of any subsidiary
of the Company or of any business acquired by the Company for which financial
statements and financial data is, or is required to be, included in the
Registration Statement), addressed to the Company in form and substance as are
customary in connection with Underwritten Offerings; (iv) if an underwriting
agreement is entered into, the same shall contain indemnification provisions and
procedures no less favorable to the selling Holders and the underwriters, if
any, than those set forth in Section 5 (or such other provisions and procedures
acceptable to the managing underwriters, if any, and holders of a majority of
Registrable Securities participating in such Underwritten Offering); and (v)
deliver such documents and certificates as may be reasonably requested by the
Holders of a majority of the Registrable Securities being sold, their Special
Counsel and any managing underwriters to evidence the continued validity of the
representations and warranties made pursuant to Section 3(l)(i) above and to
evidence compliance with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company.
(m) In connection with an Underwritten Offering, make
available for inspection by the selling Holders, any representative of such
Holders, any underwriter participating in any disposition of Registrable
Securities, and any attorney or accountant retained by such selling Holders or
underwriters, at the offices where normally kept, during reasonable business
hours, all financial and other records, pertinent corporate documents and
properties of the Company and its subsidiaries, and cause the officers,
directors, agents and employees of the Company and its subsidiaries to supply
all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission.
(o) The Company may require each selling Holder to furnish
to the Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such Holder as
is required by law to be disclosed in the Registration Statement, and the
Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
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<PAGE> 9
(p) If the Registration Statement refers to any Holder by
name or otherwise as the holder of any securities of the Company, then such
Holder shall have the right to require (if such reference to such Holder by name
or otherwise is not required by the Securities Act or any similar Federal
statute then in force) by written notice to the Company the deletion of the
reference to such Holder in any amendment or supplement to the Registration
Statement filed or prepared subsequent to the time that such reference ceases to
be required.
(q) Each Holder covenants and agrees that (i) it will not
sell any Registrable Securities under the Registration Statement until it has
received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(h) and notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(d) and (ii) it and its officers, directors or
Affiliates, if any, will comply with the prospectus delivery requirements of the
Securities Act as applicable to it in connection with sales of Registrable
Securities pursuant to the Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an Underwritten Offering and whether or not the Registration Statement is
filed or becomes effective and whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses referred to
in the foregoing sentence shall include, without limitation, (i) all
registration and filing fees (including, without limitation, fees and expenses
(A) with respect to filings required to be made with the OTC Bulletin Board and
any Subsequent Market on which the Common Stock is then listed for trading, and
(B) in compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of counsel for the Holders in connection with
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as the managing underwriters, if any, or
the Holders of a majority of Registrable Securities may designate)), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses if the
printing of prospectuses is requested by the managing underwriters, if any, or
by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders (in the case of such Special Counsel, not to exceed $7,500), (v)
Securities Act liability insurance, if the Company so desires such insurance,
and (vi) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this
Agreement. In addition, the Company shall be responsible for all of its internal
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit, the fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities exchange as
required hereunder.
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(b) If the Holders require an Underwritten Offering pursuant
to the terms hereof and there shall be at such time an effective Registration
Statement covering all of the Registrable Securities pursuant to which the
Holders are both named Selling Securityholders thereunder and permitted to
utilize the Prospectus thereunder to resell such Registrable Securities held by
them, then the Company shall be responsible for all costs, fees and expenses in
connection therewith, except for the fees and disbursements of the Underwriters
(including any underwriting commissions and discounts) and their legal counsel
and accountants. By way of illustration which is not intended to diminish from
the provisions of Section 4(a), the Holders shall not be responsible for, and
the Company shall be required to pay the fees or disbursements incurred by the
Company (including by its legal counsel and accountants) in connection with, the
preparation and filing of a Registration Statement and related Prospectus for
such offering, the maintenance of such Registration Statement in accordance with
the terms hereof, the listing of the Registrable Securities in accordance with
the requirements hereof, and printing expenses incurred to comply with the
requirements hereof. If the Holders require an Underwritten Offering at a time
when all of the circumstances specified in the opening clause to the first
sentence of this Section 4(b) are present, then such Holders shall bear all
costs associated with such Underwritten Offering, including those costs
specified in Section 4(c) above.
5. Indemnification
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(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising
out of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (2) in the case of an occurrence of an event
of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an
outdated or defective Prospectus after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt by
such Holder of the Advice contemplated in Section 6(f) or (3) such Holder fails
to comply with its prospectus delivery requirements in connection with the sale
giving rise to such Loss and such delivery would have avoided such Loss. The
Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
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<PAGE> 12
Prospectus, or in any amendment or supplement thereto or to the extent such Loss
was directly caused by the Holder's failure to comply with its prospectus
delivery requirements in connection with the sale giving rise to such Loss and
such Loss would have been avoided by such delivery. In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any
Proceeding shall be brought or asserted against any Person entitled to indemnity
hereunder (an "Indemnified Party"), such Indemnified Party shall promptly notify
the Person from whom indemnity is sought (the "Indemnifying Party") in writing,
and the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party. An Indemnified Party
shall have the right to employ separate counsel in any such Proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party or Parties unless: (1) the
Indemnifying Party has agreed in writing to pay such fees and expenses; or (2)
the Indemnifying Party shall have failed promptly to assume the defense of such
Proceeding and to employ counsel reasonably satisfactory to such Indemnified
Party in any such Proceeding; or (3) the named parties to any such Proceeding
(including any impleaded parties) include both such Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall have been advised by
counsel that a conflict of interest is likely to exist if the same counsel were
to represent such Indemnified Party and the Indemnifying Party (in which case,
if such Indemnified Party notifies the Indemnifying Party in writing that it
elects to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten (10) Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
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(d) Contribution. If a claim for indemnification under
Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public
policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms. The parties hereto agree that it would
not be just and equitable if contribution pursuant to this Section 5(d) were
determined by pro rata allocation or by any other method of allocation that does
not take into account the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this Section
5(d), no Holder shall be required to contribute, in the aggregate, any amount in
excess of the amount by which the proceeds actually received by such Holder from
the sale of the Registrable Securities subject to the Proceeding exceeds the
amount of any damages that such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by
a Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any
of its subsidiaries has, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
-13-
<PAGE> 14
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specified in Schedule 6(b)
hereto, neither the Company nor any of its subsidiaries has previously entered
into any agreement granting any registration rights with respect to any of its
securities to any Person.
(c) No Piggyback on Registrations. Except as and to the
extent specified in Schedule 6(b) hereto, neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.
(d) Piggy-Back Registrations. If at any time when there is
not an effective Registration Statement covering all of the Registrable
Securities and the Underlying Shares, the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each holder of Registrable
Securities written notice of such determination and, if within twenty (20) days
after receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered; provided, however,
that the Company shall not be required to register any Registrable Securities
pursuant to this Section 6(d) that are eligible for sale pursuant to Rule 144(k)
of the Commission.
(e) Prospectus Delivery Requirements. Each Holder covenants
and agrees that (i) it will not sell any Registrable Securities under the
Registration Statement until it has received copies of the Prospectus as then
amended or supplemented as contemplated in Section 3(h) and notice from the
Company that such Registration Statement and any post-effective amendments
thereto have become effective as contemplated by Section 3(d) and (ii) it and
its officers, directors or Affiliates, if any, will comply with the prospectus
delivery requirements of the Securities Act as applicable to any of them in
connection with sales of Registrable Securities pursuant to the Registration
Statement.
(f) Discontinued Disposition. Each Holder agrees by its
acquisition of such Registrable Securities that, upon receipt of a notice from
the Company of the occurrence of any event of the kind described in Sections
3(d)(ii), 3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith
discontinue disposition of such Registrable Securities under the Registration
Statement until such Holder's receipt of the copies of the supplemented
Prospectus and/or amended Registration Statement contemplated by Section 3(k),
or until it is advised in writing (the "Advice") by the Company that the use of
the applicable Prospectus may be resumed, and, in either case, has received
copies of any additional or supplemental filings that are incorporated or deemed
to be incorporated by reference in such Prospectus or Registration Statement.
The Company may provide appropriate stop orders to enforce the provisions of
this paragraph.
-14-
<PAGE> 15
(g) Amendments and Waivers. The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the same shall be in writing and
signed by the Company and the Holders of at least two-thirds of the then
outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders and that does not directly or
indirectly affect the rights of other Holders may be given by Holders of at
least a majority of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this sentence may not be
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.
(h) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 6:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: e.Digital Corporation
13114 Evening Creek Drive S.
San Diego, CA 92128
Facsimile No.: (619) 486-3922
Attn: Chief Executive Officer
With copies to: Higham, McConnell & Dunning LLP
28202 Cabot Road, Suite 450
Laguna Niguel, CA 92677-1250
Facsimile No.: (949) 365-5522
Attn: Curt Barwick, Esq.
If to a Purchaser: To the address set forth under such Purchaser's
name on the signature pages hereto.
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in
the stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(i) Successors and Assigns. This Agreement shall inure to
the benefit of and be binding upon the successors and permitted assigns of each
of the parties and shall inure to the benefit
-15-
<PAGE> 16
of each Holder. The Company may not assign its rights or obligations hereunder
without the prior written consent of each Holder. Each Holder may assign their
respective rights hereunder in the manner and to the Persons as permitted under
the Purchase Agreement.
(j) Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(k) Governing Law. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by and construed and enforced in accordance with the internal laws
of the State of New York, without regard to the principles of conflicts of law
thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in the City of New York, borough of
Manhattan, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is improper. Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof to
such party at the address in effect for notices to it under this Agreement and
agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law.
(l) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(m) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(n) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(o) Shares Held by The Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
-16-
<PAGE> 17
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
-17-
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
E.DIGITAL CORPORATION
By: /s/ ROBERT PUTNAM
-------------------------------------------
Name: Robert Putnam
Title: Corporate Secretary
JNC OPPORTUNITY FUND LTD.
By: Encore Capital Management, L.L.C.
Its Investment Adviser
By: /s/ NEIL T. CHAU
--------------------------------------
Neil T. Chau
Managing Member
Address for Notice:
JNC Opportunity Fund Ltd.
c/o Olympia Capital (Cayman) Ltd.
Williams House, 20 Reid Street
Facsimile No.: (441) 295-2305
Attn: Director
With copies to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
and
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen. Esq.
-18-
<PAGE> 19
Annex A
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
- - ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- - block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal
to facilitate the transaction;
- - purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- - an exchange distribution in accordance with the rules of the applicable
exchange;
- - privately negotiated transactions;
- - short sales;
- - broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
- - a combination of any such methods of sale; and
- - any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
-19-
<PAGE> 20
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
-20-
<PAGE> 1
EXHIBIT 10.3.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
Executed on September 12, 1995 between Norris Communications Corp., Norris
Communications, Inc. and Elwood G. Norris
This first amendment is entered into this 20th day of May, 1999 and is executed
between e.Digital Corporation (a Delaware corporation, formerly Norris
Communications Corp.), e.Digital Corporation (a California corporation, formerly
Norris Communications, Inc.) and Elwood G. Norris.
Whereas there have been oral modifications to the above referenced agreement
from time to time, the parties wish to acknowledge prior modifications and
waivers as follows:
From the date hereof the compensation (Base Salary) provided by Section 3 of the
agreement shall be fixed at $68,000 per annum for the term of the agreement and
any automatic extensions thereof or until otherwise agreed in writing.
The Employee hereby waives, forfeits and releases the Company from any
obligation for past unpaid or deferred amounts that may be construed by the
terms of the Employment Agreement versus amounts actually paid thereunder.
Other than the modifications above, the terms of the Employment Agreement, as
hereby amended, shall be effective and any prior agreements or understandings
shall terminate.
/s/ ALFRED H. FALK
e.Digital Corporation
Delaware
/s/ ROBERT PUTNAM
e.Digital Corporation
California
/s/ ELWOOD G. NORRIS
Elwood G. Norris
Employee
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into on this 3rd day of October, 1997 by
and between Norris Communications, Inc. ("Employer") ("Company") and Alfred H.
Falk ("Employee").
1. Position and Title:
Employee's position and title shall be President.
Employee shall report to the Chief Executive Officer/Chairman of the Board
(Elwood Norris).
Employee shall be responsible for all day-to-day activities of the business and
shall assume management responsibility for all functions and individuals who are
part of the Company's operations.
Employee shall be a member of the Board of Directors for the Company and shall
participate in all board related activities.
2. Compensation:
Employee's base compensation shall be $96,000 per year. Future increases and
bonuses shall be at the determination of the Board of Directors, based on
performance.
3. Stock Options:
As soon as Employer is legally and contractually permitted, it shall issue
Employee a stock option of 400,000 shares. Pricing shall be based on the terms
and conditions of the existing plan.
This stock option shall vest one-third immediately with the balance over a two-
year period in equal amounts on the first and second annual anniversary dates of
the execution of the stock option agreement.
In the event of any corporate occurrence affecting stock options, the options of
Employee will be treated equivalently with those of any senior officers of the
Company.
4. Termination and Change of Control:
In the event termination occurs for reasons other than: (1) cause or (2)
Employee's voluntary termination, six months severance shall be provided:
including base compensation; health and medical benefits; and outplacement
services.
For purposes of this agreement, "cause" shall be defined as contemplated by
Section 2924 of the California Labor Code.
In the event there is a change of control during Employee's employment, a new
owner controls more than 50 percent of the company's common stock and Employee
is terminated within 12 months of that event (for reasons other than cause)
Employee shall receive a termination payment equal to the then current annual
compensation. All stock options shall become immediately vested.
5. Other Benefits:
Employee shall receive insurance, medical, disability insurance, and health
benefits currently available to other senior executives as per existing
policies.
Employee shall be entitled to take four weeks of vacation annually.
<PAGE> 2
To the extent currently available, Employee shall receive other such benefits
equal to those of other senior executives within the Company, specifically
including directors and officers insurance.
6. Arbitration Agreement:
Any claim or controversy arising out of or related to this agreement, the
employment relationship or the subject matter hereof shall be settled by
binding arbitration before one arbitrator in Los Angeles, California in
accordance with the commercial arbitration rules of the American Arbitration
Association; and judgment upon any award rendered by the arbitrator(s) may be
entered as a judgment in any court having competent jurisdiction. The party
shall have rights to discover as provided in Section 1283.05 of the California
Code of Civil Procedure. The prevailing party in any such dispute shall recover
all of its costs and expenses, including reasonable attorney fees.
This agreement supersedes any previous agreements between Employer and Employee.
INTENDING TO BE LEGALLY BOUND, the parties have executed this Employment
Agreement as of the date first above written.
NORRIS COMMUNICATIONS, INC.
By: /s/ ELWOOD G. NORRIS
Elwood G. Norris, Chief Executive Officer
/s/ ALFRED FALK
Alfred Falk, Employee
<PAGE> 1
Exhibit 10.6.1
AMENDMENT
This Amendment to the Agreement dated December 26, 1996 between Norris
Communications, Inc. ("Norris") and Lanier Worldwide, Inc. ("Lanier") is made
and entered into this 19th day of May, 1998.
WITNESSETH
WHEREAS, Lanier and Norris executed an Agreement dated December 26,
1996, pursuant to which Norris manufactures and sells to Lanier certain products
for resale under Lanier's name and trademarks; and
WHEREAS, the Agreement provides that it shall continue in full force and
effect through and including December 26, 2000; and
WHEREAS, Lanier and Norris mutually desire that the term of Agreement be
extended for one year and continue in full force and effect through and
including December 26, 2001; and
WHEREAS, Lanier and Norris mutually desire that all other terms and
conditions of the Agreement remain unchanged.
NOW, THEREFORE, in consideration of the premises, and mutual promises
and agreements contained herein, Lanier and Norris, intending to be legally
bound, hereby agree as follows:
1. Article 14 of the Agreement is hereby amended to state the following:
Article 14. DURATION OF THE AGREEMENT
This Agreement shall be deemed to come into force on the 26th day of
December, 1996, and unless earlier terminated in accordance with the provisions
of this Agreement, shall continue in full force and effect until and including
the 26th day of December, 2001. This Agreement shall be
<PAGE> 2
automatically renewed for 1 (one) year and thereafter from year to year, unless
either of the parties hereto gives the other party at least 6 (six) months prior
written notice to terminate this Agreement before the expiration of the initial
or any renewed term of this Agreement. If such prior written notice is sent by
either party, then this Agreement shall terminate on the initial or, as the case
may be, duly renewed expiration date hereof.
2. All other terms and conditions in the Agreement remain unchanged and
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
LANIER WORLDWIDE, INC. NORRIS COMMUNICATIONS, INC.
By: \s\ BRIAN R. BERGIN By: \s\ ALFRED H. FALK
--------------------------------- -------------------------------------
Name: Brian R. Bergin Name: Alfred H. Falk
------------------------------- -----------------------------------
Title: Vice President, Product Mktg. Title: President
------------------------------ ----------------------------------
<PAGE> 1
EXHIBIT 10.10
MANUFACTURING AGREEMENT
BY AND BETWEEN
NORRIS COMMUNICATIONS, INC.
AND
ELTECH ELECTRONICS, INC.
This Agreement is entered into this 3rd day of December, 1998, by and between
NORRIS COMMUNICATIONS, INC., a corporation having a place of business at 13114
Evening Creek Dr. South, San Diego,CA 92128, ("Buyer") and ELTECH ELECTRONICS,
INC., a California corporation, having a place of business at 790 Chelmsford
Street, Lowell, MA 01851 acting in party with ELTECH ELECTRONICS TECHNOLOGY,
having a place of business at Plo 34, Fasa 11, Kawasan Perindustrian Senai,
81400 Senai, Johor, Malaysia("Seller").
1.0 TERM OF AGREEMENT
1.1 The term of this Agreement ("Term") shall commence on December 03, 1998
and expire on December 03, 1999 (twelve months after the commencement).
In the event that neither party to this Agreement gives written notice
to the other within three (3) months prior to an expiration date, this
Agreement shall automatically be renewed for successive twelve-month
periods, unless terminated in accordance with Section 13 or Section 17
hereof. All existing terms and conditions shall remain the same, unless
specifically modified by the parties in a written amendment to this
Agreement.
2.0 STATEMENT OF WORK
2.1 Buyer agrees that Seller shall be a manufacturer of certain Products for
the Term, as long as schedule, delivery and pricing requirements of this
Agreement are met.
2.2 Seller agrees to assemble, test, inspect, package for delivery and sell
the Products only to Buyer as described in this Agreement, and Buyer
agrees to purchase the Products in accordance with the terms and subject
to the conditions of this Agreement.
2.3 Buyer shall consign to Seller all applicable Product documentation,
including bills of material, for use in the manufacture of each Product.
Seller shall make available to Buyer all necessary manufacturing,
testing, inspection and other information required in the qualification
of the manufacturing process, as mutually agreed by the parties, as well
as a costed bill of materials for each Product, excluding certain
components which, by contractual obligation with suppliers, Seller
cannot divulge. Cost information provided will include material, labor
and overhead on a per product basis.
2.4 Seller shall purchase parts and material for Products only from Buyer's
Approved Vendor List ("AVL") as amended from time to time upon mutual
agreement of the parties hereto and approved in writing by Buyer.
3.0 ORDERS
3.1 Upon execution of this Agreement, and on a monthly basis thereafter,
Buyer shall supply Seller with a six-month rolling forecast of orders
for each Product.
3.2 Pursuant to this Section 3, Buyer shall issue written purchase orders
("Purchase Orders") signed by an authorized representative of Buyer.
Such Purchase Orders shall, at a minimum, indicate the quantity,
description, revision level(s), price, ship-to address, and delivery
schedule for each Product ordered. Buyer shall ensure that the delivery
schedule contained in each Purchase Order will allow for the appropriate
product lead time as specified on the quotation received from Seller.
3.3 Starting with the execution of this Agreement, and in accordance with
Sections 4 and 5 below, Buyer shall issue firm Purchase Orders for
Products to be delivered during the first 90-day period of each rolling
forecast.
3.4 Each Purchase Order shall become effective only upon the earlier to
occur of (i) written acceptance of the Seller, or (ii) the passage of
ten (10) days after Seller's receipt. The parties hereby agree that
where any term or provision in
1
<PAGE> 2
any Purchase Order conflicts with or could be construed to alter a term
or provision of this Agreement, the term or provision herein shall
govern.
4.0 RESCHEDULES AND CANCELLATIONS
4.1 Seller shall use commercially reasonable efforts to accommodate any
reschedule request, subject in each case to material availability,
available capacity and other factors impacting the manufacturing
process, and subject to the following guidelines:
(a) Orders scheduled for delivery within ninety (90) days are not
cancelable.
(b) Orders scheduled for delivery within 90 days are reschedulable using
the following time frames as a guideline:
o The first two months of the quarter are fixed with the
third month of the quarter Open to reschedules at 100%
into the next month, which upon the new quarter, the
buyer will receive said rescheduled quantity.
(c) Orders scheduled for delivery beyond ninety (90) days may be
rescheduled two times. Orders scheduled within 60-90 days may be
rescheduled once.
(d) Buyer will be responsible for all non-cancelable, non-returnable or
custom parts pursuant to Section 3.1.
4.2 Reschedules must be in the form of written changes to existing Purchase
Orders and shall be effective only upon written acceptance by Seller.
4.3 Either party may at any time request delivery of a Product on an earlier
date. Both parties shall use commercially reasonable efforts to
accommodate such requests. Acceptance of Products delivered in advance
in accordance with Buyer's request constitute Buyer's agreement to pay
the corresponding invoice as well as any incremental overtime or
material expediting charges incurred by Seller. Such incremental
charges, if any, must be approved in advance by Buyer.
4.4 Any excess material, components and products that were purchased based
upon Buyer purchase order and/or based upon Buyer's forecast and held by
the Seller due to, and not limited to, reschedules, cancellations,
engineering change orders (ECOs), or mix changes and not used or
dispositioned as directed by Buyer, within three (3) months of expected
shipment or usage date ("Excess Material"), will be returned to Buyer.
Excess Material shall also include all other components and materials
purchased by Seller for the manufacture of Products pursuant to a
Purchase Order accepted by the Seller which Products have not been
completed at the time of a termination of this Agreement. Excess
material shall be billed at cost plus a 15% handling charge. In
addition, Buyer will be responsible for all excess material due to
minimum order quantities.
4.5 Buyer will be assessed a 2% per month carrying charge for all excess
material as defined in Paragraph 4.4 above and reschedules subject to
the provisions of Paragraph 4.1.
5.0 INVENTORY PLANNING EXPOSURE
5.1 The Seller agrees to maintain a minimum finished goods inventory of one
(1) month based on the rolling forecasts provided by the Buyer. Buyer
agrees to provide seller with monthly consumption information to aid in
the development of the stocking position.
5.2 In the event of an order cancellation and/or change in Buyer's forecast,
Buyer's maximum liability will be limited to one (1) month of finished
goods, 100% of work-in-process, 100% of raw stock, and 100% of Excess
Material. Seller agrees to use all reasonable efforts to return
components to it's manufacturer.
5.3 Sudden significant changes in the rolling forecast due to errors or
omissions on the part of the Buyer versus real demand changes by the
Buyer shall not be cause for issuance of late delivery notices affecting
Seller's delivery PPM.
2
<PAGE> 3
6.0 PRICING
6.1 Buyer may incorporate engineering changes or other modifications to the
Products being manufactured. All such engineering changes shall be set
forth in written ECOs furnished by Buyer to Seller. Buyer shall be
advised of all price and schedule impacts incurred by Seller in
connection with such changes. Seller shall not commence implementation
of engineering changes until written approval has been received by Buyer
authorizing all price impacts. Buyer will advise Seller of date that ECO
will be implemented. Seller will set forth best efforts that the ECO
process will be implemented within one week of approval. Seller will
ensure that products impacted by ECO will be updated and marked
according to the specified ECO. ECOs are not to exceed two weeks
providing Eltech has received a full ECO documentation package. In the
event the ECO would take longer than two weeks, Buyer will be notified.
6.2 Seller shall charge a one-time, nonrecurring engineering ("NRE") fee for
each surface mount and thru-hole project to cover programming,
verification and debugging of surface mount equipment.
6.3 In addition to the selling price Buyer shall be responsible for all
freight, insurance, duty, tax and other handling costs incurred by
Seller in connection with the shipping of Products to Buyer or Buyer's
customers.
6.4 In the event Buyer obtains a lower price from sources other than from
Seller, Buyer will allow Seller the right of first refusal. Buyer will
provide Seller all necessary cost information to allow Seller to meet
Buyer's lowest price.
7.0 DELIVERY
7.1 The risk of loss and title to products shall pass to Buyer at point of
manufacture.
7.2 Seller shall package each product according to written specifications
supplied by the Buyer. Seller shall take reasonable steps needed to
insure maximum protection from damage due to handling and other hazards
which might occur during transit.
7.3 A packing list will accompany each shipment and include, at a minimum,
the purchase order number, Buyer's part number, quantity, quantity
back-ordered, date of shipment and country of origin.
7.4 Buyer shall designate method of all shipments.
8.0 PAYMENT TERMS
8.1 Payments shall be made in US dollars within thirty (30) days of
shipment.
8.2 All payments to be received from Buyer's customer(s) that relate to
product(s) produced by Seller shall be directly remitted from Buyer's
customer(s) to the following address:
Norris Communications, Inc.
P. O. Box 414433
Boston, MA 02241-4433
8.3 BankBoston will be facilitating the lockbox account outlined in section
8.2. It will be solely used with transactions specifically associated
between Buyer and Seller. All checks received at the lockbox will be
photocopied by BankBoston and sent to Buyer. In addition, BankBoston
will forward by fax a summary of all checks received into the lockbox to
both Buyer and Seller. Said funds will be identified by BankBoston prior
to check(s) clearing the US Banking System.
8.4 All funds received at the lockbox stated within section 8.2 shall be
temporarily in the custody of Seller.
8.5 Seller will apply funds obtained in connection with section 8.2 to
Buyers outstanding payables due to Seller on or about the date funds
clear the US Banking System.(in most cases 1 to 3 days after receipt of
fax summary from bank). Upon application of said funds, the remaining
funds will be wired transferred to Buyer.
3
<PAGE> 4
8.6 The Seller may from time to time demand different terms of payment from
those specified herein whenever it reasonably appears that the Buyer's
financial condition requires such change, and may demand assurance of
the Buyer's ability to pay whenever it reasonably appears that such
ability is in doubt. Such demand shall be in writing.
8.7 If Buyer disputes the amount due pursuant to any invoice, the Buyer may
only withhold payment of the amount in dispute if the Seller is notified
in writing of the dispute in question within fifteen (15) days of
receipt of the subject invoice. Otherwise, payment shall be made in full
as required by this Section 8. Each party shall refund any disputed
amount already paid to the other party after receipt of satisfactory
supporting evidence. In no case shall any adjustment, refund, or credit
be issued for any items after six (6) months following the original date
of the subject invoice, unless such items are called to the attention of
the Seller in writing within six (6) months following the original date
of the subject invoice.
8.8 All invoices will be in writing and contain, at a minimum, the following
information: Buyer invoice and ship-to address, Buyer purchase order
number, product or service description, quantity of goods shipped, unit
and extended price, and method of shipment.
9.0 PRODUCT QUALITY STANDARDS; BUYER'S REMEDY FOR NON-CONFORMANCE
9.1 Buyer and Seller hereby agree to mutually establish the standards of
Product quality. Seller shall adopt commercially acceptable processes
and procedures for quality control, and Buyer shall adopt commercially
acceptable processes and procedures for incoming inspection of Products.
9.2 Prior to each shipment of Products to the Buyer or Buyer's customers, ,
Seller shall perform Quality Control Tests as specified by the Buyer.
Buyer may inspect Seller's manufacturing and quality control facilities
at any reasonable time upon advance notice. Upon request, Seller will
make reasonable efforts to provide Buyer with access to Seller's quality
control documentation applicable to Products in process and previously
shipped to Buyer. Buyer's personnel shall comply with Seller's security
and safety regulations while on Seller's premises.
9.3 All Products ordered by Buyer pursuant to this Agreement shall be
subject to an Incoming Inspection by Buyer at the Products' destination
or at the source of manufacture at the agreement of Buyer and Seller.
The Buyer shall accept all Products which pass such Incoming Inspection.
All Products not explicitly rejected within thirty (30) days pursuant to
this Section 9.3 shall be deemed to be accepted.
9.4 Upon receipt of notice of rejection, Seller shall, within two (2) days
of such notice of rejection, either (i) provide Buyer with a "Return
Product Authorization" authorizing the Buyer to return such rejected
products to Seller at Seller's expense and pursuant to which Seller may
designate a carrier and method of shipment, or (ii) replace such
rejected Products. In the event that Seller elects to provide Buyer with
a Return Product Authorization, Buyer, in order to obtain replacement or
repair of the rejected Products, shall arrange for shipment of the
rejected Products to the Seller, F.O.B. Buyer's dock, within five (5)
days of receipt of the Return Product Authorization. In the event that
Seller receives the rejected Products from Buyer and determines, by
means of performance of additional Quality Control Tests on the rejected
Products and/or other evidence, that the alleged defects in the Products
are not the result of failure to meet the applicable Quality Standards
on the part of the Seller, Seller shall present the Buyer with a
quotation for repair services outlining the price and delivery. Buyer
shall issue a purchase order to Seller prior to the commencement of
work.
9.5 In the event the Seller has tested and performed troubleshooting on
nonfunctional boards, and they have been determined not to have a
manufacturability problem that should have been identified according to
Seller's quality system, the boards will be identified, shipped, and
invoiced to the Buyer.
9.6 Buyer's remedies as set forth in Sections 9, 10, 11 and 13 shall be
Buyer's sole remedies with respect to the non-conformance of Products
with any requirements, terms or conditions of or pursuant to this
Agreement.
9.7 Buyer agrees to list and track serial numbers and date codes on a
product-by-product basis.
10.0 WARRANTY
10.1 Warranty by Seller
4
<PAGE> 5
THE FOLLOWING WARRANTY FOR PRODUCTS IS IN LIEU OF ALL CONDITIONS OR WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED CONDITIONS OR
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE ON THE PART OF
THE SELLER.
Seller warrants that upon delivery and for a period of twelve (12) months
following receipt of a product by Buyer or Buyer's customer(s), such Product
will be free from material and workmanship defects according to Sellers quality
system. If products delivered fail to meet the warranties contained herein, then
Seller, at Buyer's option, shall correct such failure by repair, replacement or
cancellation of the order, as determined in Buyer's sole discretion.
10.2 Warranty by Buyer
Buyer warrants that, at the time of delivery of consigned materials and tools
(as defined in Section 12 hereof), Buyer has free and clear title to the
consigned materials and tools. Buyer warrants the consigned materials and tools
against faulty workmanship and materials, that they meet applicable
specifications and that the tools perform the functions on which the Seller will
rely to manufacture the Products. Buyer warrants and represents that it is the
owner of any and all proprietary rights in the information provided to Seller in
order to manufacture the Products, and that the Buyer has the unqualified right
to make available to the Seller the consigned materials, tools, and other
information, including drawings, designs and specifications, for use by the
Seller hereunder, and to grant licenses, if required, under the terms of this
Agreement. Buyer shall indemnify Seller, its employees, agents, shareholders,
licensees, sublicensees, successors and assigns from any and all damages, costs
and liabilities incurred by any of them arising out of the breach of the
foregoing warranty by Buyer.
10.3 Seller agrees that any rights it may have against any supplier of
components or other materials used in products manufactured hereunder,
which rights arise out of a breach of any warranty of supplier with
respect to such materials or components be subrogated to Buyer.
11.0 LIMITATION OF LIABILITY
11.1 EXCEPT AS SET FORTH IN THIS AGREEMENT, IN NO EVENT SHALL SELLER BE
LIABLE IN CONNECTION WITH THE PERFORMANCE OR NONPERFORMANCE OF THIS
AGREEMENT FOR INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOSS OF
PROFITS, LOSS OF USE OF DATA OR INTERRUPTION OF BUSINESS, WHETHER SUCH
ALLEGED DAMAGES ARE LABELED IN TORT, CONTRACT, WARRANTY OR INDEMNITY,
EVEN IF SELLER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; AND
IN NO EVENT SHALL SELLER'S LIABILITY ARISING OUT OF THE PERFORMANCE OR
NONPERFORMANCE OF THIS AGREEMENT, WHETHER ARISING OUT OF CONTRACT, TORT
(INCLUDING NEGLIGENCE AND STRICT LIABILITY) UNDER ANY WARRANTY,
INDEMNITY OR ANY OTHER LEGAL OR EQUITABLE FORM OF ACTION, EXCEED THE
GREATER OF (A) THE AGGREGATE PURCHASE PRICE PAID BY THE BUYER FOR SUCH
PRODUCTS AND/OR SERVICES UNDER THE AGREEMENT, OR (B) BUYER S ACTUAL
DAMAGES INCLUDING REASONABLE ATTORNEYS FEES AND OTHER COSTS INCURRED BY
BUYER. IN NO EVENT SHALL THESE COSTS EXCEED 120% OF PURCHASE PRICE PAID
BY THE BUYER.
11.2 SELLER IS PERFORMING WORK PURSUANT TO SPECIFICATIONS PROVIDED BY BUYER;
THEREFORE, SELLER SHALL NOT BE LIABLE FOR THE TECHNICAL ADEQUACY OR
DESIGN OF THE PRODUCTS, NOR SHALL SELLER BE LIABLE FOR THE SAFETY OR
REGULATORY COMPLIANCE OF THE PRODUCTS (UNLESS CAUSED BY SELLER'S
NEGLIGENCE), INCLUDING, BUT NOT LIMITED TO, ENSURING THE PRODUCT MEETS
APPLICABLE GOVERNMENT OR RESPONSIBLE AGENCY REGULATIONS. BUYER AGREES TO
INDEMNIFY AND SAVE SELLER HARMLESS FROM AND AGAINST ALL LOSSES, EXPENSES
OR DAMAGES ARISING OUT OF ANY CLAIM RESULTING FROM SELLER'S COMPLIANCE
WITH BUYER'S SPECIFICATIONS, AND SELLER AGREES TO INDEMNIFY AND SAVE
BUYER HARMLESS FROM AND AGAINST ALL LOSSES, EXPENSES OR DAMAGES ARISING
OUT OF ANY CLAIM RESULTING FROM SELLER'S NEGLIGENCE IN FAILING TO COMPLY
WITH BUYER'S SPECIFICATIONS.
12.0 TOOLING AND TEST EQUIPMENT
5
<PAGE> 6
The tooling and test equipment supplied by the Buyer will remain the property of
Buyer. The parties agree to the following provisions with respect to the Tools:
12.1 Seller expressly agrees that all Tools are the property and assets of
Buyer. Seller shall not assign, lease, license, pledge, loan, mortgage
or otherwise part with possession or the right to possess the tools.
Seller shall allow no claims, encumbrances or liens with respect to the
Tools and shall not state or imply to any third party that Seller is the
owner of the Tools.
12.2 Seller agrees that all Tools will be used only to manufacture Buyer's
Products, unless otherwise approved by the Buyer.
12.3 The Seller agrees that it will follow normal industrial practice in the
identification and maintenance of the property control records on all
such tooling, and will make such records available for inspection by the
Buyer at all reasonable times. After the termination or completion of
such order(s) and upon the request of the Buyer, the Seller shall
furnish a list of such tooling in the form requested and shall make such
tooling available for disposition by the Buyer.
13.0 DEFAULT - DUE ON DEMAND
13.1 Should either party become insolvent or be a party to any bankruptcy or
receivership proceedings, either party may, with or without previous
written notification to the other, declare this Agreement terminated.
13.2 If either party shall be in default with respect to any of its
obligations herein, the other party may notify the defaulting party in
writing specifying the nature of the default; and if such default is not
cured within thirty (30) days after the receipt of such notice, the
notifying party may terminate this Agreement as of the effective date of
notice of termination provided to the defaulting party.
13.3 In the event that Seller terminates this Agreement pursuant to this
Section 13, Buyer shall forthwith pay to Seller (i) all outstanding
invoices, (ii) the per unit price for all completed but unshipped
Products as of the termination, plus freight and other charges
hereunder, and (iii) the cost of all Excess Materials, plus a 15%
handling charge. Seller's rights pursuant to this Section 13 are its
sole and exclusive remedy at law or equity.
14.0 TERMINATION
This Agreement may be terminated by either party upon 120 days prior written
notice. In the event of such termination, Seller shall continue shipment of all
orders accepted prior to the date of such notice, and Buyer shall remain
obligated to accept and pay for such deliveries at the agreed-upon price, and to
be liable for payment for all Excess Material pursuant to Section 4 & 5 hereof,
but in any event no later than the date of termination of this Agreement.
15.0 GENERAL PROVISIONS
15.1 Entire Agreement; Amendment
This document and its Exhibits contain the entire Agreement between the parties
relating to the subject matter hereof. All prior or contemporaneous agreements,
written or oral, between the parties regarding the Products and services are
superseded by this Agreement. This Agreement may not be modified except by
written document signed by an authorized representative of each party. Buyer and
Seller are to adhere to the Mutual Confidentiality Agreement entered on July
24th, 1997.
15.2 Force Majeure
Neither party shall be liable for delay or defaults due to fire, weather, riot,
strikes, acts of God, acts of the public enemy, or other similar unforeseeable
events or causes beyond the reasonable control and without the fault or
negligence of the party incurring such delay.
15.3 Waiver
6
<PAGE> 7
No term of this Agreement shall be considered waived and no breach excused by
either party unless made in writing by the other party. No consent, waiver, or
excuse by either party, express or implied, shall constitute a subsequent
consent, waiver or excuse.
15.4 Nonassignment
Neither party shall assign this Agreement without the consent of the other party
provided, however, that either party may assign this Agreement and its rights
hereunder, without the consent of the other, to its parent corporation or any
subsidiary or corporate affiliate of it.
15.5 Controlling Law
This Agreement and all transactions under it shall be governed by the laws
(excluding choice of law rules) of and within the state of New York.
15.6 Arbitration
Any controversy or claim arising out of or relating to this contract, or the
breach thereof, shall be resolved by arbitration in Boston, Massachusetts, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator(s) may be
enforced in any court having jurisdiction thereof.
15.7 Severability
If any provision of this Agreement is held invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired.
15.8 Headings
All headings and captions included in this Agreement are for convenience of
reference only and are not intended to affect the interpretation of any
provision hereof.
16.0 CONTINGENCY PLANNING
In case of an act of God or unplanned events impacting Buyer's supply line of
product, Eltech Malaysia will supply Eltech East (Lowell, Massachusetts) with a
complete documentation packages of all boards being built for Buyer and required
technical support to build product. Eltech will make best efforts to commence
production of boards in a thirty (30) day period.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, in one
or more counterparts, on the dates set forth below:
ELTECH ELECTRONICS, INC.
(Seller)
By /s/ John Vallone
John Vallone
(Typed Name)
Title: President, Eltech Electronics, Inc.
Date: 12/7/98
(Buyer)
/s/ FRED FALK
Fred Falk
(Typed Name)
Title: President and CEO
Date: 12-8-98
7
<PAGE> 1
EXHIBIT 21.1
E.DIGITAL CORPORATION
LIST OF SUBSIDIARIES
e.Digital Corporation
13114 Evening Creek Drive South
San Diego, California 92128
619.679.1504
(A California Corporation)
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-46619, Form S-3, No. 33-81212, Form S-3 No. 33-92032, Form
S-3 No. 33-92978, Form S-3 No. 333-4880, Form S-3 No. 333-62387, Form S-8 No.
333-13779, Form S-8 No. 333-17959, Form S-8 No. 333-24405, Form S-8 No.
333-26561, Form S-8 No. 333-76959 and Form S-8 No. 333-76961) of e.Digital
Corporation and in the related Prospectuses of our Report of Independent
Auditors dated June 18, 1999 (except as to Note 18[f] which is as of June 25,
1999), with respect to the consolidated financial statements of e.Digital
Corporation and subsidiary (formerly Norris Communications, Inc. and
subsidiary) included in the Annual Report (Form 10-KSB) for the year ended March
31, 1999.
Vancouver, Canada,
June 18, 1999 (except as to /s/ ERNST & YOUNG LLP
Note 18[f] which is as of Chartered Accountants
June 25, 1999).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED MARCH 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 166,966
<SECURITIES> 0
<RECEIVABLES> 61,746
<ALLOWANCES> 953
<INVENTORY> 46,907
<CURRENT-ASSETS> 376,352
<PP&E> 286,017
<DEPRECIATION> 213,342
<TOTAL-ASSETS> 460,825
<CURRENT-LIABILITIES> 1,754,507
<BONDS> 98,163
364,205
0
<COMMON> 97,321
<OTHER-SE> (1,853,371)
<TOTAL-LIABILITY-AND-EQUITY> 460,825
<SALES> 154,428
<TOTAL-REVENUES> 426,350
<CGS> 138,316
<TOTAL-COSTS> 988,313
<OTHER-EXPENSES> 1,262,578
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 673,197
<INCOME-PRETAX> (2,595,476)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,595,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,595,476)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
