<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 2
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1996
Commission File Number 0-20734
NORRIS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware None
-------- ----
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
12725 Stowe Drive, Poway, California 92064
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(619) 679-1504
(Registrant's telephone number, including area code)
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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, without par value 22,268,828
- ------------------------------- ----------
(Class) (Outstanding at November 8, 1996)
<PAGE> 2
NORRIS COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1996 and
March 31, 1996 (unaudited) 3
Consolidated Statements of Operations for the three and six
months ended September 30, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended September 30, 1996 and 1995 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
</TABLE>
* No information provided due to inapplicability of the item.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORRIS COMMUNICATIONS, INC
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30,1996 MARCH 31, 1996
$ $
-----------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash 991,109 2,843,540
Accounts receivable, less allowance for doubtful
accounts of $11,647 and $11,647, respectively 113,235 94,619
Inventory (note 3) 3,246,086 3,243,245
Prepaid expenses and other 164,799 226,436
-----------------------------------------
TOTAL CURRENT ASSETS 4,515,229 6,407,840
Property and equipment, net 1,309,318 1,359,791
Other intangible assets, net of accumulated amortization of
$28,618 and $24,896 respectively 45,791 49,513
-----------------------------------------
TOTAL ASSETS 5,870,338 7,817,144
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable (note 4 ) -- 2,185,546
Accounts payable, trade 1,338,730 2,554,209
Other accounts payable and accrued liabilities 227,069 443,225
Current portion of capital lease obligations 167,836 168,831
-----------------------------------------
TOTAL CURRENT LIABILITIES 1,733,635 5,351,811
-----------------------------------------
Convertible notes payables -- 3,000,000
-----------------------------------------
TOTAL LIABILITIES 1,733,635 8,351,811
-----------------------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $.001 par value, 5,000,000 shares authorized;
none issued. -- --
Common stock, no par value, authorized 60,000,000 and 30,000,000
respectively; 22,268,828 and 15,103,703 shares
outstanding, respectively (note 5) 26,695,054 21,762,337
Pre-paid Warrants (note 6) 3,396,505 --
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (27,547,172) (23,889,320)
------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 4,136,703 (534,667)
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 5,870,338 7,817,144
==========================================
</TABLE>
See notes to interim consolidated financial statements
3
<PAGE> 4
NORRIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
$ $ $ $
---------------------------- --------------------------------
<S> <C> <C> <C> <C>
REVENUES 147,817 327,871 301,543 806,603
Cost of sales 790,061 725,440 1,049,318 2,192,405
---------------------------- --------------------------------
Gross profit (loss) (642,244) (397,569) (747,775) (1,385,802)
---------------------------- ---------------------------------
OPERATING EXPENSE (INCOME)
Selling and administration 1,376,352 912,264 2,449,651 1,695,733
Research and related expenditures 196,101 126,365 407,685 604,090
Interest expense 1,042 57,406 77,522 181,940
Interest income (13,589) (4,224) (24,781) (20,409)
---------------------------- ---------------------------------
1,559,906 1,091,811 2,910,077 2,461,354
---------------------------- --------------------------------
Operating loss (2,202,150) (1,489,380) (3,657,852) (3,847,156)
Provision for income taxes (note 8) -- -- -- --
---------------------------- --------------------------------
NET LOSS (2,202,150) (1,489,380) (3,657,852) (3,847,156)
============================ ================================
Net loss per share (note 9) (0.10) (0.13) (0.19) (0.33)
============================ ================================
Weighted average shares 22,287,418 11,710,529 19,641,347 11,697,517
============================ ================================
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE> 5
NORRIS COMMUNICATIONS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30
1996 1995
OPERATING ACTIVITIES $ $
---------- ----------
<S> <C> <C>
Net loss (3,657,852) (3,847,156)
Adjustments to reconcile net loss to net cash
used by operating activites:
Depreciation and amortization 202,998 255,229
Gain from sale of asset - 38,550
Interest paid by issuance of common stock 33,773 -
Professional services paid by issuance of common stock 72,000 -
Legal settlement paid by issuance of common stock 127,500 -
Changes in assets and liabilities:
Accounts receivable (18,616) 12,807
Inventory (2,841) (1,349,753)
Prepaid expenses and other 61,637 88,950
Accounts payable, trade (1,215,479) 1,476,168
Other accounts payable and accrued liabilities (216,156) (390,686)
---------- ----------
Cash used in operating activities (4,613,036) (3,715,891)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (148,803) (35,263)
Proceeds on sale of assets - 28,300
Investment in patents and intangibles - (3,965)
---------- ----------
Cash used in investing activities (148,803) (10,928)
---------- ----------
FINANCING ACTIVITIES
Repayments under demand loan payable (2,185,546) 132,646
Principal payments on capital lease obligations (995) (27,333)
Convertible note payable - -
Proceeds from issuance of shares and warrants 5,095,949 330,303
---------- ----------
Cash provided by financing activities 2,909,408 435,616
---------- ----------
Net decrease in cash (1,852,431) (3,291,203)
Cash, beginning of period 2,843,540 3,291,203
---------- ----------
Cash, end of period 991,109 0
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 77,521 181,940
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
A note holder converted a long-term convertible
note plus accrued interest into common stock 3,033,773 -
</TABLE>
See notes to interim consolidated financial statements
5
<PAGE> 6
NORRIS COMMUNICATIONS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
1. OPERATIONS
Norris Communications Inc. (the "Company") was incorporated in the Province of
British Columbia, Canada on February 11, 1988 and on November 22, 1994, changed
its domicile from British Columbia to the Yukon Territory, Canada. The Company
further changed its domicile to Wyoming on August 30, 1996 and on September 4,
1996 reincorporated into Delaware. The Company is engaged through its
wholly-owned U.S. subsidiary in the development, manufacture and marketing of
electronic products and exploiting proprietary technology.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Norris Communications, Inc.
("NCI"), a California corporation, based in San Diego County, California.
The interim consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future. The
Company has incurred significant losses and negative cash flow from operations
in each of the last three fiscal years and for the three and six month periods
ended September 30, 1996 and has an accumulated deficit of $27,547,172 at
September 30, 1996. The Company's operational plan for fiscal 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 obtaining additional
financing and achieving a profitable level of operations.
These interim consolidated financial statements do not give effect to any
adjustments which would be necessary should the Company be unable to continue as
a going concern and therefore be required to realize its assets and discharge
its liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying interim consolidated
financial statements.
These interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and the instructions to Form 10-QSB. They do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The interim consolidated financial
statements and notes thereto should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
March 31, 1996.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. Operating results for the three
and six month periods ended September 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending March 31, 1997. The interim
consolidated financial statements and notes thereto are stated in U.S. dollars.
3. INVENTORY
Inventory of raw material is recorded at the lower of cost and replacement cost,
which is less than net realizable value. 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. Inventories consist of the
following:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
<S> <C> <C>
Raw materials $1,398,656 $1,569,812
Work in process 171,179 194,437
Finished goods 1,676,251 1,478,996
- -----------------------------------------------------------------------
$3,246,086 $3,243,245
</TABLE>
6
<PAGE> 7
NORRIS COMMUNICATIONS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
4. DEMAND LOAN PAYABLE
The demand loan payable to CVD Financial Corporation plus accrued interest was
retired on July 31, 1996.
5. COMMON STOCK
The following table summarizes shares issued during the period ended September
30, 1996:
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
Balance, March 31, 1996 15,103,703 $21,762.337
Convertible notes and accrued interest
at prices ranging from $0.981 to $1.269 per share 4,366,051 3,033,773
Stock issued for accounts payable at $1.50 per share 85,000 127,500
Stock issued for services at $1.50 per share 48,000 72,000
Stock issued for cash at $0.70 per share net of
offering costs of $159,283 2,420,143 1,534,817
Stock issued for cash at $0.69125 per share net of
offering costs of $5,373 245,931 164,627
- -----------------------------------------------------------------------------------------------
Balance, September 30, 1996 22,268,828 $26,695,054
===============================================================================================
</TABLE>
6. PRE-PAID WARRANTS
Represents proceeds from warrants pre-paid for cash net of offering costs of
$884,227. The face amount of the warrants or $3,805,900 is exercisable, without
further cash payment, into common shares of the Company at the lessor of: $0.70
per common share (with respect to $805,900 of warrants) and $0.69125 per common
share (with respect to $3,000,000 of warrants) or a 30% discount to the 5 day
moving average bid price of the common shares on the day prior to exercise. The
exercise price of the warrants will be further discounted by 7% per year and for
other events until the warrants are exercised. At September 30, 1996 these
warrants were exercisable into approximately 5.5 million common shares.
7. OPTIONS AND WARRANTS
At September 30, 1996 warrants were outstanding/exercisable into the following
listed shares:
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Expiration Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Warrants 200,000 2.00 September 1998
Warrants 450,000 1.75 June 1999
Warrants 33,750 4.00 June 1999
Warrants (a) 128,067 1.25 October 2005
Warrants 82,100 4.00 August 1999
Warrants (a) 106,986 2.01 February 2000
Warrants (a) 88,014 2.01 March 2000
Warrants 129,230 1.625 March 2001
Warrants 401,924 0.9875 July 2001
- ----------------------------------------------------------------------------
Total 1,620,071
============================================================================
</TABLE>
(a) These warrants, amongst other provisions, contain a provision for
adjustment for dilutive events. The exercise prices and where
applicable, the number of warrants, have been adjusted to reflect any
such events through March 31, 1996.
7
<PAGE> 8
NORRIS COMMUNICATIONS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
7. OPTIONS AND WARRANTS (Continued)
The following table summarizes stock option activity for the period:
<TABLE>
<S> <C>
Outstanding at March 31, 1996 1,493,658
Granted -
Exercised -
Expired (66,000)
Canceled (5,000)
---------
Outstanding at September 30, 1996 1,422,658
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.90 to $6.01 and
expire over a period from 1996 to 2000.
8. INCOME TAXES
The Company has not provided a tax provision for the current period, due to
current losses. The Company has U.S. net operating loss carryforwards of
approximately $9,462,000 and $4,991,000 for federal and state tax purposes,
respectively, subject to certain limitations.
9. NET LOSS PER SHARE
The net loss per share is calculated using a weighted average number of common
shares and common stock equivalents outstanding for the period. Common
equivalent shares consisting of outstanding pre-paid warrants, stock options and
stock purchase warrants have been excluded because their effect would be
antidilutive.
10. CONTINGENT LIABILITY
The Company may have a liability to certain security holders due to the
possible violation of federal and state securities laws prohibiting an issuer
from selling securities in a private placement by any form of general
solicitation or advertising. Section 5 of the Securities Act of 1933 prohibits
the sale of securities pursuant to a prospectus that does not satisfy the
requirements of the Securities Act. Such violation, if deemed to have occurred,
could give rise to a private right of action by the affected security holders
for rescission of recently issued securities in the amount of $5.67 million and
for damages. Management of the Company has provided notice to each of the
affected security holders of the possible violation and has obtained from
affected security holders, representing $5.42 million of the above issued
shares, written release and waivers with respect thereto. It is possible that
the release and waiver agreements could be challenged at some later date by an
affected security holder on grounds of enforceability. Although Management of
the Company has no present reason to believe that the release and waiver
agreements are not enforceable, a contrary finding by a federal or state court
may result in a continuing risk of potential liability. Management of the
Company believes the likelihood of a future event occurring to confirm the
contingent liability is remote.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Prior to the introduction of the FLASHBACK proprietary product in December 1994,
the revenues of the Company were generated by contract manufacturing. In fiscal
1996 contract manufacturing accounted for 18% of total revenues and 51% for the
six months ended September 30, 1996. The sale of FLASHBACK products accounted
for approximately 31% of revenues for the six months ended September 30, 1996.
The Company has incurred operating losses in each of the past three fiscal years
and these losses have been material. The Company incurred an operating loss of
$8.3 million in fiscal 1996. This resulted primarily from FLASHBACK operations.
Since future results are dependent on proprietary product (FLASHBACK recorders
and new products) 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.
8
<PAGE> 9
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 and by education efforts aimed at
retailers and customers on the differences between FLASHBACK and less expensive
memo recorders. The introduction of the Company's VOICELINK computer peripheral
in the second fiscal 1997 quarter opened new channels of distribution and
further differentiates 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.
The Company is also engaged in OEM and licensing activities in connection with
its FLASHBACK technology. The Company anticipates, but there can be no
assurance, that OEM and licensing revenues will become a significant component
of future revenues of the Company.
RESULTS OF OPERATIONS
For the first six months of fiscal 1997, the Company reported revenues of
$301,543, 63% less than revenues of $806,603 for the first six months of fiscal
1996. For the three months ended September 30, 1996 revenues were $147,817
compared to $327,871 for the same quarter of the prior year. The decrease in
revenues is due primarily to reduced FLASHBACK sales comparable to the prior
year. Sales for the prior period included some initial stocking orders by
retailers. 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 the first six months of fiscal 1997, the Company reported a gross loss of
$747,775 as compared to a gross loss of $1,385,802 for the first six months of
fiscal 1996. The gross loss for the second fiscal 1997 quarter was $642,244
compared to a gross loss of $397,569 for the second fiscal 1996 quarter. Gross
losses are due to the minimal sales of the FLASHBACK product while significant
fixed manufacturing overhead related to cost of sales (primarily facility and
equipment costs) plus the cost of product continue to exceed the revenues
generated by sales. The first quarter of fiscal 1996 cost of sales included
$980,000 representing the cost of 7,000 discontinued FLASHBACK units sold in
exchange for $1,172,500 of media trade credits. The Company recognized no
prepaid asset nor any revenue in connection with the trade credits. The second
quarter of fiscal 1997 included the write-down of approximately $178,850 of
inventory no longer useable due to technical changes in FLASHBACK models.
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
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 and licensing
division. There can be no assurance the Company can achieve positive gross
margins in the future.
9
<PAGE> 10
Total operating expenses (including research and related expenditures, selling
and administrative and interest expense less interest income) were $2.9 million
for the six months ended September 30, 1996 as compared to $2.5 million for the
first six months of fiscal 1996. Total operating expenses for the second fiscal
quarter of 1997 were $1.6 million compared to $1.1 million for the second fiscal
quarter of 1996. Selling and administrative expenses increased in the first six
months of fiscal 1997 to $2.4 million compared to $1.7 million for the
comparable period of the prior year. The increase of $0.7 million in the current
six month period included an increase in personnel and consulting of $250,000
due to primarily to additional sales and marketing expense associated with the
advertising launch of the Mobile Office, $65,000 costs of a recently established
office in the U.K., a $111,000 increase in legal and related costs primarily
associated with financing, registration and regulatory activities and general
increases in other administrative expenses as compared to the prior period.
Research and development costs were $408,000 for the first six months of fiscal
1997, as compared to $604,000 for the first six months of fiscal 1996 which
included $370,000 of FLASHBACK pre-production development costs. The research
and development associated with new products, although subject to quarterly
variations, are expected to continue at recent levels comparable, to recent
quarter levels.
The Company's interest expense for the six months ended September 30, 1996 was
$77,522 a reduction from $181,940 for the prior period resulting from the
retirement of demand loans and other interest bearing debt outstanding during
fiscal 1996.
The Company reported an operating loss of $2.2 million for the second quarter of
fiscal 1997, as compared to an operating loss of $1.5 million for the second
quarter of fiscal 1996 with the increase due primarily to the larger gross loss
and increased selling and administrative expenses. For the six months ended
September 30, 1996 the operating loss was $3.7 million compared to $3.8 million
for the prior period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $2.8 million, compared
to working capital of $1.1 million at March 31, 1996. The Company had
approximately $3.2 million of working capital invested in inventories at
September 30, 1996, comparable to the balance at March 31, 1996. The increase in
working capital is a result of the Company's financing activities offset by
continuing losses which consumed working capital during the period.
Approximately $4.6 million in cash was used in operating activities by the
Company in the six months ended September 30, 1996 which included a $1.4 million
reduction in accounts payable and accrued liabilities.
During the first six months the Company retired the $2,185,546 obligation
related to the demand loan payable, to CVD Financial Corporation ("CVD"). During
the first fiscal quarter, $3 million of long-term convertible notes, plus
accrued interest, were converted into common stock. The Company has no long-term
debt nor any bank lines of credit or related financing facilities. During the
first six months of fiscal 1997, the Company obtained equity from the sale of
common stock and pre-paid warrants for net cash proceeds of $5.1 million.
Given the Company's cash position and assuming the current rate of revenues and
expenditures and level of operations, the Company will require additional
capital within the next 3 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 recent introduction of the
VOICELINK will require additional working capital. The Company estimates that at
current expenditure levels and projected working capital requirements 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 additional contract
manufacturing business and the ability of the OEM and licensing 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 raise
additional funds could have a material adverse effect on the Company and could
force the Company to reduce or curtail operations.
10
<PAGE> 11
The Company may, from time to time, seek additional funds through lines of
credit, public or private debt or equity financing. The Company estimates that
it will require additional capital to finance future developments, 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 six months ended June 30, 1996, net cash decreased by $1.9 million. Cash
used in operating activities was $4.6 million. Major components using cash were
a net loss of $3.6 million after depreciation and a decrease in other accounts
payable and accruals of $1.4 million. The major component of cash provided by
financing activities was proceeds from issuance of common shares and pre-paid
warrants of $5.1 million less $2.2 million used to retire the obligation on the
demand loan payable.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company's future commitments are related to its capital and operating leases
(see audited financial statements for the fiscal year ended March 31, 1996,
footnote 12). These commitments are included in the cash requirements discussed
above. The Company is currently in arrears and in breach of payment obligations
totaling $0.5 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 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 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 new
generation retail product, the Mobile Office, began initial shipping in October
1996. The Mobile Office includes the FLASHBACK recorder, 36 minute SOUNDCLIPS,
VOICELINK (which links the recorder to a personal computer) and related
software.
The Company is actively developing a number of distributors, licensing and OEM
opportunities and has signed agreements, as of November 13, 1996, with Mobile
Planet, a U.S. based distributor, and 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 the recently introduced Mobile Office, reducing manufacturing
11
<PAGE> 12
overhead and costs, obtaining additional contract manufacturing business and
obtaining new revenues from OEM and licensing agreements with companies like
recently signed, Sanyo. The Company believes the successful implementation of
these steps will bring the Company to profitability with 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 AND MANAGEMENT'S PLANS FOR
IMPROVING OPERATIONS
The Company has suffered recurring losses from operations. This factor, in
combination with (i) the Company's reliance upon debt and new equity 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) material net losses and cash flow deficits from operations during fiscal
1996 and to date in fiscal 1997 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 section.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards having relevant applicability to the
Company consist primarily of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), which establishes standards for accounting for stock-based
compensation. SFAS No. 123 is effective for financial statements for fiscal
years beginning after December 15, 1995. 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,
utilizing the "intrinsic value based method" as is allowed by that statement.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to the conduct of its
business. There are currently no material, pending legal proceedings to which
the Company is a party or to which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES
The Company continued its jurisdiction of incorporation from the Yukon
Territory, Canada to the state of Wyoming on August 30, 1996 and further on
September 4, 1996 reincorporated into Delaware as Norris Communications, Inc.
The change in jurisdiction and governing law affected the rights of common
shareholders as more fully described in the Company's definitive proxy statement
dated July 3, 1996 (meeting date of July 25, 1996).
At the July 25, 1996 special meeting the shareholders authorized 5,000,000
shares of $.001 par value preferred stock for issuance from time to time for
such purposes and for such consideration as the Board of Directors may approve
without need to obtain approval of shareholders. The Board of Directors may
establish the terms of the preferred stock including, without limitation,
preferences and terms relating to dividends, conversion prices, voting rights,
liquidation and redemption prices. The Company has not issued any preferred
stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
12
<PAGE> 13
On July 25, 1996 the Company had a special shareholder meeting. All matters
except for Item 2 were approved by the shareholders at the July 25, 1996 meeting
which was then adjourned until August 23, 1996 for further consideration of Item
2 which was passed on that date.
1. Authorization to change domicile from Yukon Territory, Canada to
Wyoming, U.S.A., by way of a continuation under the Yukon Business
Corporations Act.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
6,220,271 26,888 16,225
2. Authorization to subsequently change its domicile from Wyoming to
Delaware to be accomplished by the merger of the Corporation with and
into a wholly-owned Delaware corporation formed solely for the purpose
of completing the merger.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
6,199,271 45,188 18,925
3. Authorization to increase in the number of shares of common stock
that the Corporation is authorized to issue from 30,000,000 to
60,000,000.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
5,773,185 440,674 49,525
4. Authorization to issue 5,000,000 shares of $.001 par value preferred
stock.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
5,670,992 528,494 63,898
5. Authorization to alter the procedure to change the number of members
of the Corporation's Board of Directors.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
6,033,924 183,845 45,615
6. Authorization to change the Corporation's name from "Norris
Communications Corp." to "Norris Communications, Inc."
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
6,194,756 27,700 40,928
7. Authorization to eliminate the personal liability of directors to
the fullest extent allowed under Delaware law.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
5,796,392 374,167 92,825
8. Authorization to provide officers, directors, employees and agents
of the Corporation certain indemnification rights in addition to those
previously provided.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
5,827,707 333,949 101,728
9. Approval of the action of the Board of Directors in amending the
1994 Stock Option Plan to increase the number of shares available for
option from a maximum of 500,000 to a maximum of 4,000,000.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
5,803,857 407,629 51,898
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
On August 30, 1996 the Company filed a Form 8-K reporting in Item 5 the terms of
the Company's financing activities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NORRIS COMMUNICATIONS INC.
Date: May 9, 1997 By: /s/Renee Warden
---------------------------------------
Renee Warden
Chief Accounting Officer
(Principal Financial and Accounting
Officer and duly authorized to sign on
behalf of the Registrant)
14
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