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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1 TO 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, 1996
Commission file number 0-20734
NORRIS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Delaware None
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12725 Stowe Drive
Poway, California 92064
(619) 679-1504
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(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 No X
---- ----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $1,328,502
The aggregate market value of the issue's Common Stock held by non-affiliates as
of June 19, 1996 (assuming for this purpose that only directors and officers of
registrant are affiliates of registrant), based on the average of the closing
bid and asked prices on that date, was approximately $24,972,800.
As of June 19, 1996 there were 22,023,013 shares of Norris Communications Corp.
Common Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1996 Annual Meeting of
Shareholders are incorporated by reference into Part III (Items 9-12) of this
Form 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Norris Communications Inc., a Delaware corporation (the "Company") is a holding
company which, through its wholly owned California domiciled subsidiary Norris
Communications, Inc. ("NCI"), is engaged in a single industry segment: the
development, manufacture and marketing of electronic products. The Company was
incorporated under the Company Act (British Columbia), Canada on February 11,
1988 under the name 340520 B.C. Ltd. The Company changed its name to Norris
Communications Corp. on April 7, 1988 and on November 22, 1994 the Company
continued its jurisdiction of incorporation from British Columbia to the Yukon
Territory, Canada. The Company further continued its jurisdiction of
incorporation to Wyoming on August 30, 1996 and on September 4, 1996,
reincorporated into Delaware as Norris Communications, Inc.
Through NCI the Company is involved in (1) marketing its FLASHBACK(TM)
technology, a proprietary method for information storage and retrieval and (2)
using its state-of-the-art electronic manufacturing facility to manufacture its
proprietary products and provide contract manufacturing services for others. The
Company also holds as an investment 1,800,000 common shares (approximately
23.1%) of JABRA Corporation ("JABRA"). JABRA is a developer and manufacturer of
communication products for desktop, mobile and wireless applications.
The address of the Company's principal executive office is 12725 Stowe Drive,
Poway, California 92064 and its telephone number is (619) 679-1504. NCI's
primary operating facilities are located at that address. The Company presents
its consolidated financial statements in United States dollars.
HISTORY
The Company, through a predecessor corporation, was started in 1988 based on a
new technology that its founder Elwood Norris had developed while researching
and developing headset/microphone alternatives for NASA. The successful
combination of a speaker and microphone was developed into the EarPHONE(TM)
product line, now owned by JABRA.
In August 1989, the Company acquired American Surface Mounted Devices ("ASMD"),
subsequently merged into NCI. This acquisition enabled the Company to become a
regional full-service independent supplier of turnkey manufacturing of circuit
board assemblies, systems and subsystems, to original equipment manufacturers
("OEMs") in the computer, defense, telecommunications and medical industries.
Since acquiring ASMD, the Company has invested over $2.5 million in equipping a
new 31,000 square foot manufacturing and administrative facility. Prior to the
late fiscal 1995 launch of the first FLASHBACK technology product, a personal
digital recorder, ASMD's contract manufacturing services accounted for
substantially all of the Company's revenues. During the 1996 fiscal year, due to
the startup of the manufacturing of the FLASHBACK recorder, the Company scaled
back certain contract manufacturing services. As the Company develops and
expands its FLASHBACK technology product line and develops or acquires new
technologies, it is management's strategy to utilize its strong printed circuit
board assembly capability to produce components by combining added-value
technology with added-value manufacturing. The Company intends to aggressively
refocus on the outside contract manufacturing business.
On January 15, 1993, the Company sold 300,000 common shares of JABRA stock for
$750,000, and JABRA sold 500,000 newly issued common shares with warrants for
$1.25 million. The Company retained 2,300,000 common shares or 74.2% of JABRA
stock and the Company agreed to surrender operating control of JABRA pursuant to
the stock sale agreement. On July 15, 1993, the Company sold an additional
500,000 common shares for $1.625 million and JABRA sold 1,000,000 newly issued
common shares for $3.25 million. The Company's 1,800,000 common shares
represented 42.8% of the outstanding shares of JABRA and as a result of the lack
of operating control, the Company ceased consolidating JABRA's operations and
recorded its investment on the cost basis because it no longer had significant
influence over the operations of JABRA. At March 31, 1996, the Company had a
zero cost basis in its 1,800,000 JABRA common shares. During fiscal 1995 and
1996, JABRA reported to the Company the sale of 1,154,671 newly issued common
shares for proceeds of $4.0 million. As a result of these transactions, the
Company's ownership in JABRA at March 31, 1996, represented by 1,800,000
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common shares, is 23.1% (or 20.1% on a fully diluted basis). The Company has
granted an option to purchase 300,000 of the JABRA common shares to CVD
Financial Corporation ("CVD").
THE COMPANY'S FLASHBACK TECHNOLOGY
During 1993, the Company invented and commenced development of advanced digital
recording technology that does not involve mechanical moving parts. Although
various digital techniques have been adapted to sound recording and
reproduction, such as compact disc players and digital tape recorders, these
devices still utilize mechanical techniques for moving the storage media as well
as positioning the read/write head in the case of compact discs. The Company's
technology is designed to substitute all solid state electronic control for
traditional mechanical functions and magnetic media. The technology developed
integrates a sophisticated micro-processor based control system, digital signal
processing (DSP), sophisticated digital/analog and analog/digital conversion
along with advanced data compression and non-volatile storage media (Flash
memory) to produce a no-moving-parts recording scheme with advanced features and
capabilities.
Management believes the newly developed proprietary technology for information
storage lends itself to a broad array of product applications. Through a
technique of combining digital signal processing with state of the art
compression algorithms and a non-volatile storage array all managed by a
microcontroller, it is possible to store data without the need for magnetic
media such as is presently used in audio/video tape recording equipment as well
as computer hard drives and diskettes. Since there are no moving parts, there
are correspondingly no motors, belts, or other control devices required. All
functions associated with devices designed around this new technology can be
operated by existing microprocessor control devices. The prices of various forms
of storage arrays, and specifically Flash memory chips, continue to decline
making more applications utilizing the Company's proprietary technology cost
effective.
In addition to improved voice recorders, the Company believes the technology may
have applications in a wide range of products including pagers, answering
machines, telephones, compact disc quality sound recordings and for the storage
of pictures and video images.
CURRENT PRODUCT
The Company's first digital recording technology product is the FLASHBACK
portable digital voice recorder. The FLASHBACK is a self contained miniature
hand held voice recording device with features unavailable in conventional tape
recorders. In addition to standard features such as playback, recording, fast
forward and reversing functions, the FLASHBACK recorder provides the ability to
electronically insert, delete, or edit the content of messages/recordings, to
randomly access recordings instantly and play back at high or low speed without
changing voice pitch.
The FLASHBACK personal digital recorder is approximately the size of a half deck
of playing cards, weighs less than 3 ounces and is ergonomically designed to fit
in the palm of a user's hand. FLASHBACK has two controls (from which all major
functions are controlled) plus a volume control and two LED's (Light Emitting
Diode) one serving as a power indicator and the other as a record indicator. The
FLASHBACK runs on two AAA batteries.
All the sound information on a FLASHBACK is stored on a removable,
interchangeable, playback/recording media (SOUNDCLIP(TM)) that functions similar
to a tape cassette in a conventional cassette recorder. SOUNDCLIPs are
solid-state non-volatile storage devices developed by the Company. SOUNDCLIPs
utilize state-of-the-art Flash memory chips as the storage medium and they
retain recorded information, even in the absence of applied power. This is a
major distinguishing feature of Flash memory versus traditional random access
memory (RAM) chips which require constant power to retain information. Flash
memory has been commercialized by Intel Corporation, from whom the Company is
purchasing Flash memory chips, although other suppliers are available. Unlike
recordings on tape media, information stored on a SOUNDCLIP is unaffected in the
presence of magnets and magnetic fields. SOUNDCLIPs are presently available in
18 and 36 minute capacities but longer capacity SOUNDCLIPs are both feasible and
planned for longer recording applications.
SOUNDCLIPs have been designed to be compatible with type II PCMCIA (Personal
Computer Memory Card International Association) card slots, common to portable
personal computers and Personal Digital Assistant (PDA) devices allowing the
future connection between voice recordings and computers.
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ADDITIONAL FLASHBACK PRODUCTS SCHEDULED FOR MARKETING IN FISCAL 1997
VOICELINK - In October 1996 the Company completed testing and commenced initial
commercial shipments of its VOICELINK (formerly named SOUNDLINK) product.
VOICELINK is an accessory to the FLASHBACK product, a computer peripheral which
plugs into the PC Card slot common to personal computers and Personal Digital
Assistant (PDA) devices, incorporating a port for the VOICELINK. VOICELINK
allows up to 36 minutes of recorded information to be downloaded to the hard
drive in under two seconds. This introduces the concept of the voice memo, which
can be transmitted to other PCs over existing networks including the Internet.
Recipients hear the original recording, including voice quality and inflection,
through their computer's sound card, and by sending voice memos, users save nine
tenths of the time it would take to type the same information. Management
anticipates, in the future, as standards are established, automatic 'voice to
text' transcription and automatic language translation is expected to be
possible which will enhance the value of voice memos.
MOBILE OFFICE PACKAGE: In October 1996 the Company also completed testing and
commenced initial commercial shipments of its MOBILE OFFICE PACKAGE, a bundled
package consisting of FLASHBACK, SOUNDCLIP, VOICELINK and PC (IBM compatible)
computer driver software on a floppy disk. The Company is developing a Macintosh
compatible version although no availability date has yet been determined by
management.
NORRIS FLASH FILE SYSTEM(TM) ("NFFS"): A developmental tool that lends itself to
licensing for a broad range of technological applications. The system stores and
manipulates data using a file manager API (Application Program Interface), and
supports compressed voice, image or video as well as conventional file data.
Norris' proprietary methods compress sound or video into digital form and
structure the data specifically for Flash memory. Although Flash memory can be
difficult to integrate, it is preferred to other types of solid state memory
because of its large capacity, low power requirements, and internal stability.
The feature-rich system was created to painlessly overcome the intricacies of
dealing with Flash memory. Unlike other Flash File Systems, the Norris system
can support an unlimited number of files, directories, and / or subdirectories,
requiring no ATA (a hard disk standard) or portable computer (PC) Card support
hardware or software. The use of Flash memory is seen by the Company as the most
practical solution for storing data on removable and interchangeable modules,
given that other memory technologies either require battery back-up, draw too
much power, are physically too large, or are mechanically or magnetically
sensitive. The NFFS is particularly well suited for use with multimedia data in
a Flash memory environment, but can be adapted for use with other types of
memory if desired.
MULTI-CHIP MODULE ("MCM"): As part of the development of FLASHBACK, the Company
has developed a MCM which is expected to be marketed as a resource to system
developers. The MCM contains a microprocessor, digital signal processor,
firmware and software. The MCM recently became available and is offered
sub-assembled in a very compact format. The MCM integrates all the basic core
processing functions needed to implement a digital recording device. As of
October 1996, the Company estimated that the product development was 70%
complete, with prototypes planned to be completed by early December 1996.
PVP-2000(TM): The next generation of FLASHBACK recorder is currently under
development. Management anticipates, but there can be no assurance, that the
product will be ready to enter the market the first quarter of calendar 1997. In
addition to the digital recording features showcased in the FLASHBACK, the
PVP-2000 will incorporate a liquid crystal display (LCD) screen to display the
number and length of messages, a calendar/clock function to set alarms and
reminders, longer recording capacity, and a built-in pager. The PVP-2000 is also
expected to link with PCs and allow downloading of recorded and received
material.
MARKETS FOR THE COMPANY'S PRODUCTS AND TECHNOLOGY
BIS Strategic Decisions estimates the United States retail market for the
Company's consumer products (FLASHBACK, SOUNDCLIP, VOICELINK, and PVP-2000)
includes approximately 32 million mobile professionals, owners, managers and
entrepreneurs. Of those, an estimated 71% are computer literate, 45% use
electronic mail (e-mail), 27% use cellular phones, and 28% use pagers. In
general, these professionals spend at least 20% of their time away from the
office. They see portable technology as critical to their success. They drive
the usage, purchase, and acceptance of mobile information technology among their
colleagues, peers and others.
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The mobile professional, along with telecommuters and professionals conducting
business out of a small office or home office, are the main markets for Norris'
FLASHBACK recorder and the MOBILE OFFICE PACKAGE comprising a FLASHBACK,
SOUNDCLIP, and VOICELINK.
The OEM and Licensing market for the Company's products includes companies and
individuals preparing to use Flash memory in their systems and/or products.
These potential customers and partners span a number of industries including
mobile telecommunications, mobile computing, office products, consumer
electronics, etc. The MCM and the NFFS can be incorporated into numerous
products and systems including two-way voice pagers, digital recorders, cellular
in-phone answering machines or voice mail systems, set top boxes, flight data
recorders, conference phone recorders, surveillance devices, and digital
dictation systems,. The common factor in many of these products will be the need
to store data in compressed format, while keeping it accessible and safe.
Another common factor will be a standard form factor such as CompactFlash, being
promoted by a number of major corporations, including Norris, SanDisk, Polaroid,
Eastman Kodak, Apple, Canon, Seagate, Hewlett Packard, NEC Motorola, Matsushita
and Sony, who are members of the CompactFlash Association.
The Company intends to private label its consumer products and proprietary
technology to selected name-brand companies in the dictation, personal computer,
consumer electronics, telecommunications, paging, and other industries.
THE MARKET AND DISTRIBUTION CHANNELS
The Company's current and planned consumer products, FLASHBACK, SOUNDCLIP,
VOICELINK, the MOBILE OFFICE PACKAGE and PVP-2000 are sold by the Company's
internal sales and marketing staff through VARs, resellers and external
distributors specializing in serving the mobile computing and computer
peripheral markets. While existing VARs, resellers and distributors are
presently primarily in the United States, the Company has signed contracts for
Asian Pacific distribution, and is seeking international distribution partners.
The Company's core technology, embodied in the NFFS and MCM, is being sold
through OEM, partnership, private label and Licensing agreements prospected
internally by the Company's OEM sales division. The Company's contract
manufacturing services are sold by the Company's management and sales staff.
MANUFACTURING
The Company also provides contract manufacturing including component
procurement, ICT (In Circuit Testing) and ASIC (Application Specific Integrated
Circuit) testing, printed circuit board assembly using surface mount, custom
wire-bonding, pin-through-hole technology assembly, post assembly testing, and
final product packaging.
In fiscal 1995, the contract manufacturing services accounted for over 90% of
the Company's consolidated revenues. However in fiscal 1996, the Company
reconfigured its operations in light of the FLASHBACK developed products and
significantly downsized its contract manufacturing business which contributed
18% of total consolidated revenues for fiscal 1996. Maintaining its charter as a
revenue center for fiscal 1997, management is refocusing on additional outside
contract manufacturing business.
During fiscal 1996, the Company utilized its contract manufacturing experience
to manufacture the FLASHBACK for its own account, from parts and electronic
components purchased from regular distribution channels. The Company is reliant
on several sole source suppliers for several key electronic components, with
only one of them produced to the Company's specifications. Reliance on sole
source suppliers is not considered unusual in the electronic components
industry, but the unavailability of such components could have an adverse effect
on the Company's business. Although other suppliers of general components
exists, additional time would be required to modify components to meet the
Company's specifications. Any delays could have an adverse impact on the
Company's results of operations. Delays could also result from component
shortages, which are common to the electronic industry. The occurrence of any
such events could have a material adverse impact on the Company's operations.
The Company plans on completing a make versus buy analysis prior to the
production of each new proprietary developed product. The Company will review
alternatives for contracting with other manufacturing facilities to produce its
products
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and will select, when warranted, organizations who will provide a lower unit
product cost than internal manufacturing, a secondary source of supply, and/or
additional capacity.
MAJOR CUSTOMERS
During the fiscal year ended March 31, 1995, IVAC Corporation accounted for 31%
of total revenues. No other customer accounted for more than 10% of revenues in
fiscal 1995. For the fiscal year ended March 31, 1996, two customers The Sharper
Image and The Good Guys accounted for 10% each of total revenues. The Company
has not had enough FLASHBACK marketing history and experience to determine if it
will be reliant on a small number of customers.
COMPETITION
There is no known competition with regard to a handheld digital voice recorder
that offers the ability to download recorded sound and data information to a
computer in compressed format. However, without the SoundLink device, the
FLASHBACK is frequently compared to the `note taker' type of products which
offer limited recording capabilities and feature sets. The Mobile Office Package
will be competing with companies that sell traditional dictation/transcription
devices. The success of the products will depend greatly on how the end user
plans to utilize the product or technology. The Company maintains a clear
advantage in its solid state removable recording technology. If the product is
to be utilized for sending voice messages across the Internet, there is no
currently competitive product.
The Company further believes its existing know-how, issued contracts, present
pending patent applications, customized components, existing copyrights, trade
secrets and potential future patents and copyrights, will be significant in
enabling it to compete successfully.
Barriers to entry by new competitors are not significant and new competitors in
consumer electronics are continually commencing operations. The technology of
electronics and electronic components, features and capabilities is also rapidly
changing, in many cases causing rapid obsolescence of existing products and
technologies. Although the Company believes it has a technological advantage at
the present time, there can be no assurance that it can successfully exploit or
maintain this technological advantage in the future.
PATENTS, TRADENAMES AND COPYRIGHTS
The Company owns one patent protecting its products. The Company has applied for
additional multiple pending patent applications with multiple claims on
innovations in audio and other forms of recording. The Company's software is
subject to copyrights and pending patent applications. The patent position of
any item for which the Company has filed a patent application is uncertain and
may involve complex legal and factual issues. Although the Company is currently
prosecuting multiple patent and trademark applications with the U.S. Patent and
Trademark Office and also has filed certain international patent applications
corresponding to its U.S. patent applications, the Company does not know whether
any of its applications will result in the issuance of patents, or, for any
patents issued, whether they will provide significant proprietary protection or
will be circumvented or invalidated. Additionally, since an issued patent does
not guarantee the right to practice the claimed invention, there can be no
assurance others will not obtain patents that the Company would need to license
or design around in order to practice its patented technologies, or that
licenses that might be required would be available on reasonable terms. Further
there can be no assurance that any unpatented manufacture, use, or sale of the
Company's technology or products will not infringe on patents or proprietary
rights of others. The Company however has made reasonable efforts in the design
and development of its products not to infringe on other patents.
The Company also relies on trade secret laws for protection of its intellectual
property, but there can be no assurance others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can protect its rights to unpatented trade secrets.
The Company also has filed a number of trademark applications with the U.S.
Patent and Trademark Office. The Company has received notification of allowance
from the United States Patent Office for use of FLASHBACK as a registered
tradename. The Company believes the trademark on FLASHBACK to be significant to
its operations and the loss or infringement of the name could have an adverse
impact on operations.
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The Company intends to make every reasonable effort to protect its proprietary
rights to make it difficult for competitors to market equivalent competing
products without being required to conduct the same lengthy testing and
development conducted by the Company and not use any of the Company's innovative
and novel solutions to the many technical obstacles involved in portable
recording using Flash memory.
EMPLOYEES
As of June 19, 1996, the Company, through its wholly owned subsidiary NCI,
employed approximately 49 full-time employees of which 26 were production, 10
were sales/customer service, 5 were research and development, 5 were
accounting/MIS and 3 were administrative officers. None of the Company's
employees are represented by a labor union, and the Company is not aware of any
current efforts to unionize the employees. Management of the Company considers
the relationship between the Company and its employees to be good.
GOVERNMENT REGULATION
The Company's manufacturing operations are subject to certain federal, state and
local regulatory requirements relating to environmental, waste management,
health and safety matters and there can be no assurance that material costs and
liabilities will not be incurred or that past or future operations will not
result in exposure or injury or claims of injury by employees or the public.
Some risk of costs and liabilities related to these matters are inherent in the
Company's business, as with many similar businesses. Management believes its
business is operated in substantial compliance with applicable environmental,
waste management, health and safety regulations, the violation of which could
have a material adverse effect on the Company. In the event of violation, these
requirements provide for civil and criminal fines, injunctions and other
sanctions and, in certain instances, allow third parties to sue to enforce
compliance. In addition, new, modified or more stringent requirements or
enforcement policies could be adopted which could adversely affect the Company.
RESEARCH AND DEVELOPMENT COSTS
For the years ended March 31, 1996 and 1995, the Company spent $1,048,500 and
$1,897,000, respectively, on research and development. The Company anticipates
it will continue to devote substantial resources to research and development
activities.
INVESTMENT IN JABRA
The Company owns 1,800,000 common shares of JABRA representing 23.1% ownership
(20.1% on a fully diluted basis). The Company exercises no significant influence
over the operations of JABRA. The Company has granted an option to purchase
300,000 of the JABRA common shares to CVD Financial Corporation ("CVD").
JABRA is a private company engaged in developing, manufacturing and marketing
cellular, desktop, mobile and wireless communications products. JABRA's
principal technology is the patented "all-in-the-ear" EarPHONE technology
originally conceived and developed by the Company when JABRA was a wholly owned
subsidiary.
As a minority shareholder in JABRA, which has reported operating losses since
its inception, there can be no assurance as to when or if the Company's
remaining shares can produce any financial return to the Company. The Company's
investment in JABRA shares is carried on its balance sheet at a cost of nil.
MISCELLANEOUS
No material portion of the Company's business is subject, at the election of the
United States government, to renegotiation or termination of contracts or
subcontracts.
Compliance with federal, state and local provisions enacted or adopted
regulating the discharge of materials into the environment, or otherwise related
to the protection of the environment, has not had and is not expected to have
material effect on the Company's capital expenditures, earnings and competitive
position.
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The Company does not have, and has not had in any of its last three fiscal
years, any significant export sales or operations outside the United States.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Prior to the introduction of the FLASHBACK recorder in December 1994, the
revenues of the Company were generated by contract manufacturing. Contract
manufacturing accounted for over 90% of total revenues in fiscal 1995 compared
to 18% of total revenues in fiscal 1996. As a result of the reduction of outside
contract manufacturing services, the reconfiguration of manufacturing to
accommodate the production of FLASHBACK proprietary products, i.e. FLASHBACK and
accessories, the sale of FLASHBACK products accounted for the majority of
revenues for the fiscal year ended March 31, 1996. As a result of the
significant change in the source of revenue, comparisons to prior results is
less meaningful and prior results are not necessarily indicative of future
results.
The Company has incurred operating losses in seven of its past eight years and
these losses have been material. The Company incurred an operating loss of $8.3
million in fiscal 1996. This resulted from the development and launch of the
FLASHBACK and losses incurred in reducing contract manufacturing operations in
preparation of FLASHBACK production. Since future results are primarily
dependent on proprietary product (FLASHBACK and new products scheduled for
introduction) results, the Company's losses are expected to continue until such
time as the Company is able to manufacture and sell quantities of proprietary
products at sufficient margins to cover fixed costs of operations. Should the
Company be unable to accomplish the foregoing and operate profitably, the
Company may be forced to reduce or curtail operations. The Company continues to
be subject to the risks normally associated with any new business activity,
including unforeseeable expenses, delays and complications. Accordingly, there
is no assurance the Company can or will report operating profits in the future.
Since the Company utilizes its own facility and equipment for the manufacture of
proprietary products, gross margins are especially dependent upon sales volumes
as a result of a substantial fixed manufacturing overhead. The Company estimates
that its monthly fixed cash operating costs approximate $450,000 per month. At
low sales volumes it is unlikely that positive gross margins from proprietary
products can be achieved, however at higher volumes the allocation of fixed
costs over more sales can result in increasing gross margins. Accordingly, the
Company anticipates variances in gross margins from quarter to quarter in future
quarters as production is still in the early stages and product sales volumes
can vary as the various distribution channels are launched and as a result of
seasonal and other factors associated with the sale of consumer electronic
products.
Sales of and demand for the Company's FLASHBACK recorder have not met
management's expectations due to a variety of factors including competitive
pressure in the portable recording industry and insufficient financial resources
to differentiate the product from competitors. The Company has responded by
changing distribution channel emphasis to the high end business markets, by less
reliance on outside sales representatives (through the hiring of a director of
sales and marketing) and by educating retailers and customers on the differences
between FLASHBACK and less expensive memo recorders. The scheduled introduction
of the Company's VOICELINK computer peripheral in the second fiscal 1997 quarter
is expected to open new channels of distribution and further differentiate the
Company's product offerings. Sales are expected to be subject to significant
month to month variability resulting from the limited market penetration
achieved to date, the impact of new product introductions and the seasonal
nature of demand for consumer electronic products. The markets for consumer
electronic products are subject to rapidly changing customer tastes and a high
level of competition. Demand for the Company's products is expected to be
influenced by marketing and advertising expenditures, product positioning in
retail outlets, technological developments and general economic conditions.
Because these factors can change rapidly, customer demand can also shift
quickly. The Company may not be able to respond to changes in customer demand
because of the time required to change or introduce products, production
limitations and limited financial resources.
On November 10, 1995, the Company announced an original equipment manufacturer
(OEM) sales division had been created to meet the demand for the FLASHBACK
technology. The three goals are to (1) license the microprocessor and
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software, (2) design and manufacture custom products, and (3) offer private
label branding of current Company products. Also, the Company announced the
availability of the NFFS as a development tool for individuals and companies
preparing to use Flash memory in their systems and/or products. The Company
anticipates, but there can be no assurance, that OEM revenues will become a
significant component of future revenues of the Company.
RESULTS OF OPERATIONS
For the fiscal year ended March 31, 1996, the Company reported revenues of $1.3
million, 76% less than revenues of $5.6 million for fiscal 1995. The decrease in
revenues is due to FLASHBACK sales not meeting expectations and not achieving
sales levels comparable to prior contract manufacturing revenues. Fiscal 1996
revenues are primarily from sales of FLASHBACK. Fiscal 1995 revenues were
primarily from the operations of the contract manufacturing business. A
substantial portion of the Company's FLASHBACK revenues have been derived from a
limited number of customers. The loss of certain large customers or a decline in
the economic prospects of such customers would have a further adverse effect on
the Company.
For fiscal 1996, the Company reported a gross loss of $3.1 million or 232% of
revenues, as compared to a gross loss of $1.1 million or 20% for fiscal 1995.
The decrease in gross profit in fiscal 1996 was due to the Company's reduction
of contract manufacturing and minimal sales of the FLASHBACK while fixed
manufacturing overhead related to cost of sales plus the cost of product
exceeded the revenues generated by sales of FLASHBACK. Also in the first quarter
of fiscal 1996 cost of sales included $980,000 representing the cost of 7,000
discontinued FLASHBACK units sold to Active Media Services, Inc., an independent
media trading firm. These units were sold in exchange for $1,172,500 of media
trade credits and 50% of the cash proceeds realized on the ultimate sale of the
units. The Company recognized no prepaid asset nor any revenue in connection
with the trade credits since their use requires certain matching cash payments
and the Company's ability to continue as a going concern is in substantial
doubt. In addition, the amount of cash to be received on the ultimate sale of
the units can not be reasonable estimated. Accordingly, the Company intends to
recognize future revenue from the trade credits only when ascertainable economic
value is realized from their use or cash proceeds are received from the ultimate
sale of the units.
During fiscal 1995, the contract manufacturing operation experienced high
manufacturing costs due to FLASHBACK startup costs, low margin turnkey and
consignment orders and an increased mix of through-hole printed circuit boards
which required more hand placement of components (which increased labor costs
with no corresponding increase in revenues). In fiscal 1996, the Company
reconfigured its operations in light of the FLASHBACK developed products and
significantly downsized its contract manufacturing business. The Company expects
to report gross losses until product sales and/or margins improve sufficiently
to cover manufacturing overhead. The Company's strategies to produce positive
margins includes increasing volume of existing products and adding new products,
improving pricing, reducing manufacturing costs, obtaining additional contract
manufacturing business, and obtaining new revenues from the OEM division. There
can be no assurance the Company can achieve positive gross margins.
Total operating expenses (including research and related expenditures, selling
and administrative and interest expense less interest income) were $4.9 million
for the fiscal year ended March 31, 1996 as compared to $5.9 million for fiscal
1995. Operating expenses for the fiscal year 1996 decreased by $1.0 million
primarily due to a concerted effort to reduce expenses, while manufacturing and
selling the FLASHBACK. The material changes and reasons for the changes from
fiscal 1996 compared to fiscal 1995 were: a decrease in legal fees and
settlements of $263,000 (the decrease was due to a reduction of settlements and
legal fees being paid in the current fiscal year), a decrease in salaries of
$100,000 (the Company reduced staffing due to financial constraints), a decrease
in finders fees of $130,000 (a large line of credit was established in the prior
year where a finders fee was paid), a decrease in public relations of $60,000
(the Company has reduced outside public relations internally assuming many of
these duties), and a reduction of other advertising, promotions and trade show
expenses of $80,000 (associated with the prior year new product launch), offset
by an increase associated with a $120,000 refinancing fee on the convertible
note. Research and development costs (associated with new product development)
were $1 million for fiscal 1996, as compared to $1.9 million for fiscal 1995
which included intensive FLASHBACK development costs. The research and
development associated with new products, although subject to quarterly
variations, are expected to continue at current levels.
In August 1989, the Company acquired ASMD which provided the contract
manufacturing operations. In light of the Company's decision to significantly
downsize manufacturing operations during fiscal 1996, the impairment of the
<PAGE> 10
remaining goodwill associated with the purchase of ASMD was determined by the
Company to be in question and the Company subsequently wrote off the unamortized
balance of $0.2 million in March 1996.
The Company reported an operating loss of $8.3 million for fiscal 1996, as
compared to an operating loss of $7.1 million for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had working capital of $1.1 million, compared to
working capital of $1.7 million at March 31, 1995. The Company had approximately
$3.2 million of working capital invested in inventories at March 31, 1996,
compared to approximately $2.7 million at March 31, 1995 with the increase due
to FLASHBACK components. The decrease in working capital is a result of the
Company's continuing losses which consumed working capital during the period.
The Company exhausted its available credit under its credit line which was
converted to a fixed note, as discussed below. Approximately $6 million in cash
was used in operating activities by the Company for the year ended March 31,
1996.
On October 17, 1995, the Company executed a Loan Modification Agreement with CVD
Financial Corporation ("CVD"), regarding a line of credit. The Loan Modification
Agreement, which had an effective date of August 1, 1995, provided for (i) the
extension of the maturity date of the loan (the "Loan") to January 31, 1996,
(ii) a reduction in the interest rate charged by CVD from prime rate plus seven
percent (7%) to prime rate plus two percent (2%), (iii) the waiver by CVD of
certain events of default which had occurred, (iv) the issuance of 75,000 shares
of the Company's common stock, to CVD, (v) the issuance of a new warrant to CVD
to purchase 200,000 shares of Common Stock at $2.00 per share, (vi) the
repricing of existing warrants to purchase 450,000 shares of Common Stock to
$1.75 per share, (vii) the issuance of an option to acquire up to 300,000 shares
of JABRA Corporation ("JABRA") common stock at a price of $1.50 per share,
(viii) the grant of certain conversion rights to CVD to enable CVD to convert at
anytime prior to repayment all or any portion of the outstanding principal
balance of the Loan (including accrued but unpaid interest) into shares of
Common Stock at the lesser of (a) $1.50 per share or (b) following the
occurrence of an event of default, the higher of $1.00 per share and the average
closing price for the 20 days preceding the date of notice of an event of
default, and (ix) in the event CVD becomes the holder of not less than 1,000,000
shares of Common Stock, to nominate and appoint one director to the Company's
board of directors. Substantially all of the assets of the Company and its
subsidiary (including JABRA shares) were pledged to CVD as collateral for the
amounts loaned and the Company was prohibited from incurring additional
indebtedness without CVD's prior consent. In addition, as a result of the Loan
Modification Agreement, the loan became non-revolving (i.e. no additional funds
may be borrowed prior to maturity) and 50% of the net proceeds from any equity
financing had to be used to pre-pay the loan.
On October 17, 1995, the Company paid CVD $429,000, reducing the outstanding
principal balance of the note to $2,703,646. On January 8, 1996, the Company
made an additional $518,100 principal payment on the note. On February 1, 1996
the Company obtained an extension of the convertible note to April 30, 1996 in
consideration of an extension fee of $33,155 which was added to the principal
balance of the note. On April 10, 1996 the Company made another principal
payment of $766,667 on the note reducing the balance to $1,418,879 and obtained
an additional extension of the convertible note to October 31, 1996.
In March 1996, the Company obtained $3 million from a convertible debt financing
(by June 30, 1996 all the debt had been converted to common stock), and used the
proceeds to make the April principal payment on the CVD convertible note as well
as to provide short-term working capital. In June 1996, the Company obtained
$2.4 million in funds from a private placement of securities and used the
proceeds for a $1.1 million principal payment on the CVD convertible note
(reducing the outstanding balance to approximately $0.3 million) with the
balance allocated for working capital. In July and August 1996, the Company
obtained additional equity from the private placement of securities for cash of
approximately $3.1 million. On July 31, 1996 the Company retired the remaining
$307,416 obligation related to the demand loan payable to CVD. As a result of
these transactions, as of September 30, 1996, the Company had no long-term debt
nor any bank lines of credit or related financing facilities.
<PAGE> 11
On June 7, 1996, the Company closed a private placement of common stock and
warrants convertible into common stock and received gross proceeds of
$2,500,000. The purchase price for the 2,420,143 shares of common stock was
$.70. The five warrants (sold at a face value of $805,000) are convertible into
common stock (without additional consideration) in an amount equal to the face
value of the warrant divided by the lessor (i) $.70 per share or (ii) a 30%
discount to the average closing bid price for the shares for the five days prior
to (but not including) the conversion date. The purchases were granted certain
demand and piggyback registration rights under certain conditions. The private
placement was effected through Iaccoca Capital Partners, L.P. acting as a
placement agent who was paid a fee of 7% in cash and granted a warrant to
purchase 401,924 common shares at an exercise price of $.9875 per share through
July 31, 2001.
On July 31, 1996 and August 7, 1996, the Company closed an additional private
placement and received gross proceeds of $3,170,000. The purchase price for the
245,931 shares of common stock sold was .69125. The seven warrants (sold at a
face value of $3,000,000) are convertible into common stock (without additional
consideration) in an amount equal to the face value of the warrant divided by
the lessor of (i) $.69125 per share or (ii) a 30% discount to the average
closing bid price for the shares for the five days prior (but not including) the
conversion date. The purchasers were granted certain demand and piggyback
registration rights under certain conditions. The private placement was effected
through Greystone Capital, Ltd. ,with fees (including a finders fee) of 10%
being paid in cash.
The Company will require additional capital within the next twelve months to
meet its debts as they become due and to continue as a going concern. The
Company will also require additional working capital to finance production and
sales of its proprietary products. Successful commercialization of proprietary
products and the introduction of the PVP-2000 will require additional working
capital. The Company estimates that at current expenditure levels and projected
working capital requirements, after reflecting the private placements described
above, it will require a minimum of an additional $3 million to continue
operating for the next twelve months without any contribution from operations.
The existing business may be able to generate some of the additional funding
required depending on proprietary product results, success in obtaining contract
manufacturing business and the ability of the OEM division to generate revenues,
however there can be no assurance thereof. The Company is currently pursuing
various alternatives to meet its needs for additional capital. There can be no
assurance the Company will be successful and any such financing may be dilutive
to current shareholders. The failure to refinance existing debt or raise
additional funds could have a material adverse effect on the Company and could
force the Company to reduce or curtail operations.
The Company may, from time to time, seek additional funds through additional
lines of credit, public or private debt or equity financing. The Company might
require additional capital to finance future developments, new products,
production, marketing, acquisitions or extraordinary expansion of facilities in
accordance with its business strategy. There can be no assurances that
additional capital will be available when needed.
CHANGES IN CASH
For the fiscal year ended March 31, 1996, net cash decreased $0.4 million. Cash
used in operating activities was $6.0 million. Major components using cash were
a net loss of $8.3 million, and an increase in inventory of $0.6 million. The
increase in inventory resulted from a build-up of finished goods and raw
materials. Major components providing cash were an increase in accounts payable
of $1.3 million, depreciation and amortization (including the write-off the
unamortized balance of goodwill) of $0.8 million and the reduction of trade
payables, other liabilities and loans of $0.4 million through issuance of stock.
The major components of cash provided by financing activities were proceeds from
issuance of shares of $3.5 million and proceeds of $3.0 million from issuance of
convertible notes payable.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company's future commitments are related to its capital and operating leases
(see footnote 12 to the consolidated financial statements). These commitments
are included in the cash requirements discussed above. The Company is currently
in arrears and in breach of payment obligations totaling $.5 million for a
capital lease. The Company, however, has not received notice of default from the
lessor and is discussing with the lessor various financing alternatives.
The Company is committed to purchase orders providing for the future delivery of
components in accordance with production schedules. Generally, these orders may
be canceled or extended should production schedules change, however, purchase
orders for customized components often involve vendors less willing to cancel
purchase orders although generally
<PAGE> 12
open to extensions or modifications which are common to the industry. Since the
Company's production schedules have been extended, should production be further
curtailed or cease, then the Company could become liable for outstanding
purchase orders and the liability could be material.
If in the future, operations of the Company increase significantly, the Company
may require additional funds. The Company might also require additional capital
to finance future developments, acquisitions or extraordinary expansion of
facilities. The Company currently has no plans, arrangements or understanding
regarding any acquisitions.
MANAGEMENT'S PLANS FOR IMPROVING OPERATIONS
Management has undertaken steps as part of a plan to improve operations with the
goal of sustaining Company operations for the next twelve months and beyond.
These steps include (i) re-focusing the Company on a family of products,
technology components and software and not having the Company be reliant on a
single recorder product; (ii) expanding the retail product offering by
introducing a computer interface VOICELINK which allows the FLASHBACK recorder
to interact with a personal computer, and communicate with other computers via
the internet; (iii) repositioning the core retail product, the FLASHBACK
recorder, at the computer peripheral and telephony markets; (iv) building a
sales and marketing infrastructure to focus on the computer retail and OEM
markets; and (v) upgrading and expanding the management team. The Company's next
generation retail product, the Mobile Office began shipping in October 1996. The
Mobile Office includes the Company's FLASHBACK recorder, 36 minute SOUNDCLIPS,
VOICELINK (which links the FLASHBACK to a personal computer) and the related
software.
The Company is actively developing a number of distributors, licensing and OEM
opportunities and has signed agreements, as of October 1996, with Mobile Planet,
a US based distributor; Pocket Power, an Italian distributor, OEM agreements
with Thin Spin Holdings LLC and with Sanyo Information Systems UK Ltd. The
Company continues to progress with additional licensing and OEM opportunities,
which management believes could have a positive impact on future operations. Due
to the Company's high manufacturing overhead, the Company expects to report
gross losses until product sales and/or margins improve sufficiently to cover
the overhead. The Company's strategies to produce positive margins includes
increasing the volume of existing products and adding new products, such as
Mobile Office, reducing manufacturing cost, obtaining additional contract
manufacturing business and obtaining new revenues from OEM and licensing
agreements with companies like Sanyo. The Company believes the successful
implementation of these steps will bring the Company to profitability within the
next twelve months, however, there can be no assurances that the Company can
successfully implement its plan to improve operations and/or achieve positive
gross margins in the future.
POSSIBLE INABILITY TO CONTINUE AS A GOING CONCERN
The Company has suffered recurring losses from operations. This factor, in
combination with (i) the Company's reliance upon debt and new equity financing
to fund the continuing, increasing losses from operations and cash flow
deficits, (ii) substantial inventory buildup during fiscal 1995 and fiscal 1996
consisting of raw materials, components and finished product to be utilized in
the manufacture and sale of its FLASHBACK product and material decline in
inventory turnover, (iii) materially increased net losses and cash flow deficits
from operations during fiscal 1995 and fiscal 1996 and (iv) the likelihood that
the Company may be unable to meet its debts as they come due, raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern is dependent upon its ability to obtain
adequate financing and achieve a level of revenues adequate to support the
Company's capital requirements, as to which no assurance can be given. In the
event the Company is unable to continue as a going concern, it may elect or be
required to seek protection from its creditors by filing a voluntary petition in
bankruptcy or may be subject to an involuntary petition in bankruptcy. To date,
management has not considered this alternative, nor does management view it as a
likely occurrence. See Management's Plans For Improving Operations in the
preceding paragraph.
INFLATION
Inflation has not had any significant impact on the Company's business.
ITEM 7. FINANCIAL STATEMENTS
<PAGE> 13
The consolidated financial statements of the Company required to be included in
this Item 7 are set forth in a separate section of this amendment and commence
on Page F-1 immediately following page 15.
<PAGE> 14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated herein by reference from
the definitive proxy statement was filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, on October 30, 1996.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from
the definitive proxy statement was filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, on October 30, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from
the definitive proxy statement was filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, on October 30, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from
the definitive proxy statement was filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, on October 30, 1996.
<PAGE> 15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this amendment to be signed on its behalf by the undersigned, thereunto
duly authorized.
NORRIS COMMUNICATIONS CORP.
Date: November 12, 1996 By : /s/ KATHLEEN E. TERRY
---------------------
Kathleen E. Terry
Chief Financial Officer
<PAGE> 16
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF THE COMPANY PAGE
Auditors' Report F-1
Comments by Auditors for U.S. Readers on Canada-U.S.
Reporting Conflict F-3
Consolidated Balance Sheets as of March 31, 1996
and 1995 F-4
Consolidated Statements of Operations for the years
ended March 31, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity (Deficiency
for the years ended March 31, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years
ended March 31, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
<PAGE> 17
CONSOLIDATED FINANCIAL STATEMENTS
NORRIS COMMUNICATIONS CORP.
MARCH 31, 1996
2
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
NORRIS COMMUNICATIONS CORP.
We have audited the consolidated balance sheets of NORRIS COMMUNICATIONS CORP.
as at March 31, 1996 and 1995 and the consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at March 31, 1996
and 1995 and the results of its operations and the changes in its financial
position for the years then ended in accordance with accounting principles
generally accepted in the United States.
VANCOUVER, CANADA,
May 24, 1996 (except as to Note 16[b] /s/ Ernst & Young
which is as of June 7, 1996). CHARTERED ACCOUNTANTS
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA - U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by a significant uncertainty such as that referred to in
the attached consolidated balance sheets as at March 31, 1996 and 1995 and as
described in Note 1 to the consolidated financial statements. Our report to the
shareholders dated May 24, 1996 (except as to Note 16[b] which is as of June 7,
1996) is expressed in accordance with Canadian reporting standards which do not
permit a reference to such an uncertainty in the auditors' report when the
uncertainty is adequately disclosed in the consolidated financial statements.
VANCOUVER, CANADA,
May 24, 1996 (except as to Note 16[b] /s/ Ernst & Young
which is as of June 7, 1996). CHARTERED ACCOUNTANTS
3
<PAGE> 19
NORRIS COMMUNICATIONS CORP.
CONTINUED UNDER THE LAWS OF THE YUKON TERRITORY, CANADA
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
AS AT MARCH 31
1996 1995
$ $
- -
<S> <C> <C>
ASSETS [note 9]
CURRENT
Cash and temporary cash investments 2,843,540 3,291,203
Accounts receivable, less allowance for doubtful
accounts of $11,647 and $210,000, respectively 94,619 152,673
Inventory [note 6] 3,243,245 2,663,403
Prepaid expenses and other 226,436 396,644
----------- -----------
TOTAL CURRENT ASSETS 6,407,840 6,503,923
----------- -----------
Property and equipment [note 7] 1,359,791 1,742,796
Purchased goodwill, net of accumulated amortization of
$427,965 and $309,646, respectively -- 354,955
Other intangible assets, net of accumulated amortization
of $24,896 and $17,451, respectively 49,513 56,958
----------- -----------
7,817,144 8,658,632
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable [note 9] 2,185,546 3,000,000
Accounts payable, trade 2,554,209 1,234,574
Other accounts payable and accrued liabilities 443,225 410,539
Current portion of capital lease obligations [note 12] 168,831 193,229
----------- -----------
TOTAL CURRENT LIABILITIES 5,351,811 4,838,342
----------- -----------
Convertible notes payable [note 13] 3,000,000 --
----------- -----------
TOTAL LIABILITIES 8,351,811 4,838,342
----------- -----------
Commitments and contingencies [notes 1 and 12]
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, no par value, authorized 30,000,000 and
20,000,000 shares, respectively; 15,103,703 and 11,616,814
shares outstanding, respectively [notes 11, 13 and 16] 21,762,337 17,849,751
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (23,889,320) (15,621,777)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (534,667) 3,820,290
----------- -----------
7,817,144 8,658,632
=========== ===========
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
4
<PAGE> 20
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
YEAR ENDED MARCH 31
<TABLE>
<CAPTION>
1996 1995
$ $
- -
<S> <C> <C>
REVENUES [note 14] 1,328,502 5,593,081
Cost of sales [note 14] 4,413,814 6,729,320
---------- ----------
Gross profit (loss) (3,085,312) (1,136,239)
---------- ----------
OPERATING EXPENSE (INCOME)
Selling and administrative 3,574,597 3,737,704
Research and related expenditures 1,048,540 1,896,809
Interest expense 356,429 320,257
Interest income (33,971) (17,203)
Write-down of purchased goodwill 236,636 --
Write-down of intangible assets [note 15] -- 68,550
---------- ----------
5,182,231 6,006,117
---------- ----------
Operating loss (8,267,543) (7,142,356)
Provision for income taxes [note 10] -- --
---------- ----------
LOSS FOR THE YEAR (8,267,543) (7,142,356)
========== ==========
LOSS PER SHARE (.63) (.88)
========== ==========
</TABLE>
See accompanying notes
5
<PAGE> 21
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIENCY)
(EXPRESSED IN U.S. DOLLARS)
YEAR ENDED MARCH 31
<TABLE>
<CAPTION>
COMMON STOCK
------------ CONTRIBUTED ACCUMULATED
SHARES AMOUNT SURPLUS DEFICIT
# $ $ $
- - - -
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 7,696,814 10,781,155 1,592,316 (8,479,421)
Stock issued under stock
option plan 20,000 40,900 -- --
Issuance of common stock 3,900,000 7,027,696 -- --
Loss for the year -- -- -- (7,142,356)
----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1995 11,616,814 17,849,751 1,592,316 (15,621,777)
Stock issued as compensation
expense 13,333 20,000 -- --
Stock issued under stock
option plan 15,000 30,303 -- --
Stock issued as payment for
refinancing fee [note 9] 75,000 101,250 -- --
Stock issued as payment for
professional services rendered 215,842 319,498 -- --
Issuance of common stock 3,167,714 3,441,535 -- --
Loss for the year -- -- -- (8,267,543)
----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1996 15,103,703 21,762,337 1,592,316 (23,889,320)
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes
6
<PAGE> 22
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
YEAR ENDED MARCH 31
<TABLE>
<CAPTION>
1996 1995
$ $
- -
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the year (8,267,543) (7,142,356)
Adjustments to reconcile loss to net cash used by
operating activities:
Depreciation and amortization 524,399 596,327
Loss on disposal of property and equipment 38,550 126,032
Write-down of intangible assets -- 68,550
Write-down of purchased goodwill 236,636 --
Professional services paid by issuance of common stock 319,498 --
Refinancing fee paid by issuance of common stock 101,250 --
Compensation paid by issuance of common stock 20,000 --
Changes in assets and liabilities:
Accounts receivable 58,054 431,895
Inventory (579,842) (2,077,320)
Prepaid expenses and other 170,208 (328,579)
Accounts payable, trade 1,319,635 338,931
Other accounts payable and accrued liabilities 32,686 194,038
---------- ----------
CASH (USED IN) OPERATING ACTIVITIES (6,026,469) (7,792,482)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (84,932) (247,888)
Proceeds on disposal of property and equipment 30,752 180,645
---------- ----------
CASH (USED IN) INVESTING ACTIVITIES (54,180) (67,243)
---------- ----------
FINANCING ACTIVITIES
Advances (repayments) under demand loan payable (814,454) 2,720,000
Principal payments on capital lease obligations (24,398) (65,944)
Issuance of convertible notes payable 3,000,000 --
Repayment of note payable -- (31,250)
Proceeds from issuance of shares 3,471,838 7,068,596
---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 5,632,986 9,691,402
---------- ----------
INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS DURING THE YEAR (447,663) 1,831,677
Cash and temporary cash investments, beginning of year 3,291,203 1,459,526
---------- ----------
CASH AND TEMPORARY CASH INVESTMENTS, END OF YEAR 2,843,540 3,291,203
========== ==========
</TABLE>
See accompanying notes
7
<PAGE> 23
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, 1996 AND 1995
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Norris Communications Corp. (the "Company") was incorporated in the Province of
British Columbia, Canada on February 11, 1988 and is engaged, through its
wholly-owned U.S. subsidiary, in the development, manufacture and marketing of
electronic products. On November 22, 1994, the Company continued its
jurisdiction to the Yukon Territory, Canada.
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States on
a going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future.
The Company has incurred significant losses and negative cash flow from
operations in each of the last three years and has an accumulated deficit of
$23,889,320 at March 31, 1996 [1995 - $15,621,777]. The Company's operational
plan for fiscal year 1997 contemplates developing markets for its proprietary
products and continued investment in research and related expenditures. The
Company's ability to continue as a going concern is in substantial doubt and is
dependent upon achieving a profitable level of operations and, if necessary,
obtaining additional financing.
Management of the Company has undertaken steps as part of a plan to improve the
financial position and operations with the goal of sustaining Company operations
for the next twelve months and beyond. These steps include (i) seeking
additional equity through private placements and attempting to arrange lines of
credit; (ii) re-focusing the Company on a family of products, technology
components and software and not having the Company be reliant on a single
recorder product; (iii) expanding the retail product offering by introducing a
computer interface VoiceLink which allows the FLASHBACK recorder to interact
with a personal computer, and communicate with other computers via the Internet;
(iv) repositioning the core retail product, the FLASHBACK recorder, at the
computer peripheral and telephony markets; (v) building a sales and marketing
infrastructure to focus on the computer retail and Original Equipment
Manufacturer markets; and (vi) upgrading and expanding the management team.
These consolidated financial statements do not give effect to any adjustments
which would be necessary should the Company be unable to continue as a going
concern and therefore be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts different
from those reflected in the accompanying consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Differences between accounting principles generally accepted in the United
States and Canada are summarized below.
8
<PAGE> 24
Under accounting principles generally accepted in Canada, costs relating to debt
financing are deferred and amortized over the term of the related debt.
Accounting principles generally accepted in the United States provide that costs
relating to debt financing may be treated as a charge to operations in the
period incurred.
Under accounting principles generally accepted in Canada, the release of escrow
shares by the Vancouver Stock Exchange is not considered compensatory. To
conform to accounting principles generally accepted in the United States,
compensation expense of $3,445,750 related to the release of escrow shares was
recorded in 1993. Compensation expense was determined based on the difference
between the fair value of the shares at the time they were placed in escrow and
their fair value, determined to be the average share price in the year the
criteria were met, at the time the criteria triggering the release were met. The
final release of 1,350,000 shares on December 8, 1992 was valued at $3,445,750
as a non-cash compensation expense transaction.
Under accounting principles generally accepted in Canada, the sale of shares of
a subsidiary, and the issuance of shares by the subsidiary, to parties outside
the consolidated group, results in a credit (charge) to operations equal to the
difference between proceeds and the change in the parent company's interest in
the underlying equity of the shares of the subsidiary. Accounting principles
generally accepted in the United States require such amounts to be treated as
contributed surplus where there is not reasonable assurance of realization of
the gain.
Under accounting principles generally accepted in Canada, common share issue
costs are presented as a charge to accumulated deficit. Accounting principles
generally accepted in the United States require that common share issue costs be
deducted from the proceeds of issue.
Loss for the year and basic loss per share under accounting principles generally
accepted in Canada would be:
<TABLE>
<CAPTION>
1996 1995
$ $
- -
<S> <C> <C>
Loss for the year, as reported (8,267,543) (7,142,356)
Adjustments:
Costs of debt financing 321,629 61,110
----------- -----------
Loss for the year, as adjusted (7,945,914) (7,081,246)
=========== ===========
Weighted average number of common shares outstanding 13,065,095 8,097,624
=========== ===========
Basic loss per share .61 .87
=========== ===========
</TABLE>
Consolidated balance sheet items under accounting principles generally accepted
in Canada would be:
<TABLE>
<CAPTION>
1996 1995
$ $
- -
<S> <C> <C>
Common stock 19,005,688 14,905,737
Contributed surplus -- --
----------- -----------
Accumulated deficit (19,157,616) (11,024,337)
=========== ===========
</TABLE>
Other differences between accounting principles generally accepted in the United
States and Canada relate to presentation of certain financial information. In
addition, for all years presented, non-cash investing and financing activities
would be presented in the consolidated statements of cash flows [see Note 5].
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned U.S. subsidiaries, Norris Communications, Inc. in 1996 and
American Surface Mounted Devices, Inc. ("ASMD") and Comp General Corporation
("CGC") in 1995, all based in San Diego County, California. On April 1, 1995,
ASMD was merged into CGC, which changed its
9
<PAGE> 25
name to Norris Communications, Inc., under the laws of the State of California.
All significant intercompany accounts and transactions have been eliminated.
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
TEMPORARY CASH INVESTMENTS
Temporary cash investments, consisting of commercial paper with maturities of
less than 90 days, certificates of deposit and money market funds, are recorded
at cost, which approximates market value.
TRANSLATION OF FOREIGN CURRENCIES
These consolidated financial statements are presented in United States dollars.
The Canadian parent is considered to have the United States dollar as the
functional currency. Monetary assets and liabilities are translated at the rate
in effect at the balance sheet date. Other balance sheet items and revenues and
expenses are translated at the rates prevailing on the respective transaction
dates. Gains and losses on foreign currency transactions, which have not been
material, are reflected in the consolidated statements of operations.
EARNINGS PER SHARE
Primary and fully diluted earnings per share amounts are based on the weighted
average number of common shares and common stock equivalents outstanding for
each year.
INVESTMENT
The Company's 1,800,000 shares or 23.1% investment in JABRA Corporation
("JABRA") is accounted for using the cost method [see Note 8].
REVENUE RECOGNITION
Revenue is recognized on the basis of shipment of products or delivery of
services.
RESEARCH AND RELATED EXPENDITURES
Research and related expenditures are charged to operations as incurred.
INVENTORY
Inventory of raw materials is recorded at the lower of cost and replacement
cost. Inventory of work in process and finished goods is recorded at the lower
of cost and net realizable value. Cost is determined on a first-in, first-out
basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
related assets, ranging from 3 to 7 years or, in the case of leasehold
improvements, over the lesser of the useful life of the related asset or the
lease term. When assets are sold or retired, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss on
the disposition is credited or charged to income. Maintenance and repair costs
are charged to operations when incurred.
10
<PAGE> 26
GOODWILL
Purchased goodwill was created upon acquisition of subsidiaries. The goodwill
pursuant to the acquisition of subsidiaries is amortized over a four year
period. Goodwill is written down to fair value when declines in value are
considered to be other than temporary based upon undiscounted cash flows of the
respective subsidiary.
OTHER INTANGIBLE ASSETS
Other intangible assets include government bidding rights and rights to
technology, which are amortized over a 10 year period, and costs relating to
obtaining patents, which are deferred when management is reasonably certain the
patent will be granted. Upon granting of the patent, such costs will be
amortized to operations over the life of the patent. If management determines
that development of products to which patent costs relate is not reasonably
certain, or that deferred patent costs exceed net recoverable value, such costs
are charged to operations.
LEASES
Leases entered into are classified as either capital or operating leases. Leases
which substantially transfer all benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the purchase and financing.
Rental payments under operating leases are expensed as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of their carrying amount or
their estimated recoverable amount. The adoption of this statement by the
Company is not expected to have an impact on the financial statements. SFAS No.
123 encourages the accounting for stock-based employee compensation programs to
be reported within the financial statements on a fair value based method. If the
fair value based method is not adopted, then the statement requires pro-forma
disclosure of net income and earnings per share as if the fair value based
method had been adopted. It is not expected that the Company will adopt the fair
value based method of accounting for stock options, which is encouraged by SFAS
No. 123, but rather will continue to account for such stock options utilizing
the intrinsic value based method as is allowed by the statement.
Both statements are effective for fiscal years beginning after December 15,
1995.
3. CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables. The Company has
$2.2 million in a money market fund at Merrill Lynch, Pierce, Fenner & Smith
Inc.
Concentration of credit risk with respect to trade receivables exists at year
end as approximately $27,000 or 26% of the outstanding accounts receivable
related to three customers. The Company performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses which, when
realized, have been within the range of management's expectations.
4. MAJOR CUSTOMERS
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to three major customers comprise
10%, 10% and 9%, respectively, of revenues in 1996. Sales to two major customers
comprise 31% and 9%, respectively, of revenues in 1995.
11
<PAGE> 27
5. STATEMENT OF CASH FLOWS
The Company had non-cash operating and financing activities and made cash
payments as follows:
<TABLE>
<CAPTION>
1996 1995
$ $
- -
<S> <C> <C>
Non-cash financing activities
Professional services paid by issuance of common stock 319,498 --
Refinancing fee paid by issuance of common stock 101,250 --
Compensation paid by issuance of common stock 20,000 --
Cash payments for interest and income taxes were as follows:
Interest 356,429 320,257
Income taxes -- --
======= =======
</TABLE>
6. INVENTORY
<TABLE>
<CAPTION>
1996 1995
$ $
- -
<S> <C> <C>
Raw materials 1,569,812 1,312,935
Work in process 194,437 462,602
Finished goods 1,478,996 887,866
--------- ---------
3,243,245 2,663,403
========= =========
</TABLE>
During 1995, the Company introduced a new electronic product for sale in the
retail market. The amount of revenues to date from the sale of the electronic
product have not been significant. In addition, the Company's experience with
sales returns and warranty provisions has been limited. At March 31, 1996,
inventory of the Company is substantially all comprised of four successive
models of the electronic product.
Management of the Company has established, in the normal course of business,
provisions for sales returns, warranty and obsolescence in respect of sales to
March 31, 1996 and inventory as at March 31, 1996. In addition, management of
the Company has developed programs for the sale of earlier models of the
electronic product which are expected to result in the sale of this inventory in
the near term. No estimate can be made of the range of amounts of loss that are
reasonably possible should actual experience exceed estimates for sales returns
or warranty or should the programs to sell inventory not be successful.
12
<PAGE> 28
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
- - -
1996
<S> <C> <C> <C>
Computer hardware and software 402,794 231,196 171,598
Furniture and equipment 131,755 93,643 38,112
Leasehold improvements 589,979 203,203 386,776
Machinery and equipment 1,308,116 675,904 632,212
Machinery and equipment under capital
leases 452,960 321,867 131,093
--------- --------- ---------
2,885,604 1,525,813 1,359,791
========= ========= =========
1995
Computer hardware and software 362,986 157,539 205,447
Furniture and equipment 130,902 71,800 59,102
Leasehold improvements 584,550 141,374 443,176
Machinery and equipment 1,277,378 501,303 776,075
Machinery and equipment under capital
leases 636,008 377,012 258,996
--------- --------- ---------
2,991,824 1,249,028 1,742,796
========= ========= =========
</TABLE>
8. INVESTMENT IN JABRA
The Company owns 1,800,000 common shares of JABRA or 23.1% of JABRA's common
shares with a carrying value of $Nil on the Company's consolidated balance
sheet. The Company has granted an option to the lender, expiring July 31, 1997,
to purchase 300,000 of JABRA's common shares at a price of $1.50 per share
pursuant to the Company's demand loan payable [see Note 9]. Due to the fact that
the Company has no direct involvement in the operations of JABRA, is not active
at the Board of Directors level and owns, on a fully diluted basis,
approximately 20.1% of JABRA with additional dilution possible and beyond its
control, management is of the opinion that the Company does not exert
significant influence over the operations of JABRA, and therefore accounts for
its investment in JABRA under the cost method effective July 15, 1993.
9. DEMAND LOAN PAYABLE
During 1995, the Company negotiated a demand loan payable, as amended, of $3.5
million, bearing interest at prime plus 2%, repayable on demand and expiring on
July 31, 1995. In connection with the demand loan payable, as amended, share
warrants providing the right to acquire 450,000 common shares of the Company on
or before June 20, 1999 at a price of $4.00 per share were issued. During 1996
and in the period subsequent thereto, the demand loan payable was amended on
August 1, 1995, February 1, 1996 and April 1, 1996. Pursuant to the various
amendments: the expiry date was extended to October 31, 1996; the Company
granted an additional share warrant providing the right to acquire 200,000
common shares of the Company on or before September 1, 1998 at a price of $2.00
per share; the existing share warrants providing the right to acquire 450,000
common shares of the Company on or before June 20, 1999 were repriced to $1.75
per share from $4.00 per share; 75,000 common shares of the Company were issued
at an agreed price of $1.35 per share; the Company granted an option to acquire
up to 300,000 common shares of JABRA on or before July 31, 1997 at a price of
$1.50 per share; 33% of the net proceeds from any equity financing prior to
April 1, 1996 and 50% of the net proceeds from any equity financing thereafter
must be used to pre-pay the demand loan payable; and the lender may convert at
any time prior to repayment all or any portion of the outstanding principal
balance of the demand loan payable, including accrued interest thereon, into
common shares of the Company at the lesser of $1.50 per share or following the
occurrence of an event of default, the higher of $1.00 per share and the average
closing price for the 20 days preceding the date of notice of an event of
default.
13
<PAGE> 29
The demand loan payable is collateralized by a first security interest covering
accounts recoverable, inventory, property and equipment, and other assets, and a
specific pledge of the Company's shares in NCI and JABRA.
10. INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement No. 109, "Accounting for Income Taxes". Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. For financial statement purposes, a change
in valuation allowance of $2,632,000 has been recognized to offset certain
deferred tax assets for which realization is uncertain. Significant components
of the Company's deferred tax liabilities and assets as of March 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
$ $
- -
<S> <C> <C>
DEFERRED TAX LIABILITIES
Tax over book depreciation 85,000 39,000
---------- ----------
TOTAL DEFERRED TAX LIABILITIES 85,000 39,000
---------- ----------
DEFERRED TAX ASSETS
Bad debt reserve 5,000 86,000
Inventory capitalization 108,000 92,000
Inventory reserve 20,000 103,000
Net operating loss carryforwards 5,912,000 3,047,000
Warranty reserve 8,000 78,000
Other 83,000 52,000
---------- ----------
TOTAL DEFERRED TAX ASSETS 6,136,000 3,458,000
Valuation allowance for deferred tax assets (6,051,000) (3,419,000)
---------- ----------
NET DEFERRED TAX ASSETS 85,000 39,000
---------- ----------
NET DEFERRED TAX -- --
========== ==========
</TABLE>
The net provision for income taxes in 1996 and 1995 is $Nil as the Company
incurred losses in those years. Pre-tax income (loss) from Canadian operations
was approximately $1,035,000 in 1996 and $1,424,000 in 1995.
A reconciliation between federal statutory income tax rates and the effective
tax rate of the Company at March 31 is as follows:
<TABLE>
<CAPTION>
LIABILITY METHOD
----------------
1996 1995
% %
- -
<S> <C> <C>
U.S. federal statutory rate 35.0 35.0
U.S. federal net operating loss rate (35.0) (35.0)
U.S. state tax rate -.- -.-
Canadian statutory rate 44.1 45.1
Canadian non-capital loss rate (44.1) (45.1)
---- ----
Effective rate on operating loss -.- -.-
==== ====
</TABLE>
The Company has U.S. net operating loss carryforwards available at March 31,
1996 of approximately $9,462,000 and $4,991,000 for federal and state tax
purposes, respectively, to offset income in future years. These carryforwards
will begin to expire in the years 2005 and 1998, respectively, unless previously
utilized.
The tax attributes of the Company identified above may be subject to limitation
arising from changes of ownership over the three year statutory testing period.
The Company has non-capital losses available for Canadian income tax purposes
aggregating approximately $2,081,500. The non-capital losses expire as follows:
14
<PAGE> 30
$
-
1998 9,300
2002 1,102,900
2003 969,300
---------
2,081,500
=========
No provision has been made in the accounts for the future tax benefits that may
result from the utilization of these losses as their realization is not certain.
11. SHARE CAPITAL
STOCK OPTIONS
The Company maintains two stock option plans. The 1992 Stock Option Plan is a
non-qualified stock option plan which entitles certain directors and key
employees to purchase common shares of the Company. A maximum of 10% of
outstanding common shares are authorized for grant under the Plan. Options are
granted at a price not less than fair market value at the date of grant, and are
subject to approval of the Board of Directors. The 1994 Stock Option Plan was
approved by the shareholders on September 29, 1994 and entitles certain
directors, key employees and consultants of the Company to purchase common
shares of the Company. The 1994 Plan covers a maximum aggregate of 500,000
shares. The 1994 Plan provides for the granting of options which either qualify
for treatment as incentive stock options or non-statutory stock options.
Options granted during 1996 were under the 1994 and 1992 Stock Option Plan.
Options granted during 1995 were under the 1992 Stock Option Plan.
The following table summarizes stock option transactions:
1996 1995
---- ----
Outstanding, beginning of year 694,658 564,318
Granted 843,000 185,840
Exercised (15,000) (20,000)
Expired (23,000) --
Cancelled (6,000) (35,500)
---------- ----------
Outstanding, end of year 1,493,658 694,658
========== ==========
Options covering 843,000 common shares were granted in 1996 at a per share price
ranging from US $1.50 to US $3.375. Options covering 185,840 common shares were
granted in 1995 at a per share price of US $3.65.
All outstanding options were exercisable at March 31, 1996, except for 292,000
options which vest over varying periods of up to two years. The options are
exercisable at prices ranging from US $2.09 to US $3.65 and expire over the
period to April 2000.
Options covering 15,000 common shares were exercised in 1996 at a per share
price of $2.02 ($2.84 Cdn.). Options covering 20,000 common shares were
exercised in 1995 at a per share price of $2.05 ($2.84 Cdn.).
15
<PAGE> 31
SHARE WARRANTS
The Company has outstanding share warrants as of March 31, 1996, in connection
with private placements, convertible debentures, equipment leasing and
establishing and amending the demand loan payable, entitling the holders to
purchase one common share for each warrant held as follows:
NUMBER OF EXERCISE PRICE
WARRANTS $ EXPIRATION DATE
--------- - ---------------
200,000 2.00 September 1998
33,750 4.00 June 1999
450,000 1.75* July 1999
82,100 4.00 August 1999
106,986 2.01** February 2000
88,014 2.01** March 2000
128,067 1.25** October 2005
1,088,917
* Repriced to $1.75 per share from $4.00 per share pursuant to amendments
to demand loan payable [see Note 9].
** These warrants contain provisions for adjustment for dilutive events.
The exercise prices and where applicable, the number of warrants, have
been adjusted to reflect any such events or agreements through March
31, 1996.
All warrants are denominated in U.S. dollars.
12. COMMITMENTS
The Company has two leases for office space in Poway, California which are
subject to annual increases based on the CPI index. The leases expire in 1998
and 2002. The minimum operating lease commitments include future rent payments
for the office lease which expires in 1998, a portion of which has been sublet
on a month-to-month basis to a related company at cost. Office rent expense for
the years ended March 31, 1996 and 1995 was $271,620 and $307,735, respectively.
In addition, the Company leases certain equipment under capital leases. The cost
of the assets under capital lease is recorded with machinery and equipment. All
assets under capital lease are subject to lien by the lessor. The capital lease
bears interest at 18% per annum.
Subsequent to the transfer of one of its lease obligations to the Federal
Deposit Insurance Corporation, the Company has had difficulty in making payments
to the appropriate party. As such, the Company is not current on its lease
payments and, in accordance with the terms of the lease, has classified the
entire remaining obligation as a current liability.
16
<PAGE> 32
Minimum commitments are as follows:
OPERATING CAPITAL
LEASES LEASES
$ $
Year Ending March 31
1997 809,000 166,621
1998 593,000 2,954
1999 318,000 1,231
2000 221,000 --
2001 221,000 --
Thereafter 166,000 --
--------- -------
Total minimum lease payments 2,328,000 170,806
---------
Less amounts representing interest 1,975
-------
Obligations under capital leases 168,831
Less current portion 168,831
-------
--
=======
13. CONVERTIBLE NOTES PAYABLE
1996 1995
$ $
- -
7% convertible notes payable, due March 1999 3,000,000 --
The convertible notes payable are convertible at the option of the holder into
common shares of the Company at any time after May 4, 1996. The convertible
notes payable are convertible at the lesser of: $1.765 for each common share; or
a 30% discount to the 5 day moving average price of the common shares on the day
prior to conversion.
During the period May 13, 1996 to May 24, 1996, the holders of the convertible
notes payable exercised their options and converted all of the convertible notes
payable, together with accrued interest thereon, into 4,336,167 common shares of
the Company at conversion prices per share ranging from US $0.981 to US $1.269.
Proforma convertible notes payable, total liabilities, common stock and total
stockholders' equity (deficiency) as at March 31, 1996 after giving effect to
the above conversion would be:
1996 1995
$ $
(PROFORMA) (AUDITED)
Convertible notes payable -- 3,000,000
Total liabilities 5,351,811 8,351,811
Common stock 24,762,337 21,762,337
Total stockholders' equity (deficiency) 2,465,333 (534,667)
=========== ===========
14. BARTER TRANSACTION
During 1996, the Company sold 7,000 units of product to an independent media
trading firm in exchange for $1,172,500 of media trade credits and 50% of the
cash proceeds realized on the ultimate sale of the units. The costs of the 7,000
units, amounting to $980,000, has been charged to cost of sales. The Company
recognized no prepaid asset or any revenue in connection with the trade credits
since their use requires matching cash payments and the Company's ability to
continue as a going concern is in substantial doubt. In addition, the amount of
cash to be received on the ultimate sale of the units cannot be reasonably
estimated. Accordingly, the Company intends to recognize future revenue from the
trade credits only when ascertainable economic value is realized from their use
or cash proceeds are received from the ultimate sale of the units.
During 1996, the Company recorded revenue on the utilization of approximately
$37,000 of trade credits.
17
<PAGE> 33
15. WRITE-DOWN OF INTANGIBLE ASSETS
During 1994, the Company acquired certain proprietary electronic data
compression technology for an aggregate purchase price of $101,743, consisting
of $30,000 and 27,000 shares of common stock of the Company with an assigned
value of $71,743. Although the acquisition contemplated payment of consideration
for additional technology, none has been delivered by the inventor and
accordingly the Company is not obligated to make any purchases or pay any
additional consideration. The acquired technology is unproven and is not used in
the Company's proprietary products and the Company has no present plans to
attempt to develop this technology. Accordingly, during 1995, the unamortized
balance of the acquired technology was written down to a nominal value.
16. SUBSEQUENT EVENTS
[a] On April 23, 1996, the Company issued 85,000 common shares at an
assigned value of $1.50 per share in settlement of accounts payable and
accrued liabilities of $127,500 and 48,000 common shares at an assigned
value of $1.50 per share for marketing services of $72,000.
[b] On June 7, 1996, the Company completed a private placement of
$2,500,000, consisting of 2,420,143 common shares of the Company issued
at a price of $0.70 per share and warrants with a face value of
$805,900. The warrants are exercisable into common shares of the
Company at the lesser of: $0.70 per common share or a 30% discount to
the 5 day moving average price of the common shares on the day prior to
exercise. The exercise price of the warrants will be further discounted
by 7% per year until the warrants are exercised. The Company is
committed to filing a Registration Statement with the Securities and
Exchange Commission by July 7, 1996 in connection with the private
placement. In the event the Company is unable to file a Registration
Statement prior to July 7, 1996 and/or the Registration Statement is
not declared effective before September 5, 1996, the Company agrees to
issue 3% more common shares and warrants for each successive 30 day
period for the first four months and 1% more common shares and warrants
for each successive 30 day period thereafter, until the Registration
Statement is filed and/or declared effective.
18
<PAGE> 1
EXHIBIT 23.1
CONSENT OF
INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-81212, Form S-3 No. 33-92032, Form S-3 No. 33-92978 and Form
S-3 No. 333-4880) of Norris Communications Corp. and in the related
Prospectuses of our Report of Independent Auditors and Comments by Auditors for
U.S. Readers on Canada-U.S. Reporting Conflict dated May 24, 1996 (except as to
Note 16[b] which is as of June 7,1996), with respect to the consolidated
financial statements of Norris Communications Corp. included in the Annual
Report (Form 10-KSB(Amended)) for the year ended March 31, 1996.
Vancouver, Canada /s/ Ernst & Young
November 12, 1996 Chartered Accountants
