<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For quarterly period ended December 31, 1996
Commission File Number 0-20734
NORRIS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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:
<TABLE>
<S> <C>
Common Stock, $.001 par value 22,788,828
- ------------------------------- ----------
(Class) (Outstanding at February 12, 1997)
</TABLE>
Transitional Small Business Disclosure Format (check one): YES NO X
---- ----
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<PAGE> 2
NORRIS COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
and March 31, 1996 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended December 31, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended December 31, 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 *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</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>
December 31, 1996 March 31, 1996
$ $
----------------- --------------
<S> <C> <C>
ASSETS
Current
Cash 31,039 2,843,540
Accounts receivable, less allowance for doubtful
accounts of $11,647 and $11,647, respectively 393,166 94,619
Inventory (note 3) 2,108,759 3,243,245
Prepaid expenses and other 125,399 226,436
----------- -----------
Total current assets 2,658,363 6,407,840
Property and equipment, net 1,197,200 1,359,791
Other intangible assets, net of accumulated amortization of
$30,480 and $24,896 respectively 43,929 49,513
----------- -----------
Total assets 3,899,492 7,817,144
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current
Demand loan payable (note 4 ) 2,185,546
Accounts payable, trade 1,633,946 2,554,209
Other accounts payable and accrued liabilities 667,284 443,225
Current portion of capital lease obligations 167,307 168,831
----------- -----------
Total current liabilities 2,468,537 5,351,811
----------- -----------
Convertible notes payables -- 3,000,000
----------- -----------
Total liabilities 2,468,537 8,351,811
----------- -----------
Stockholders' equity (deficiency)
Preferred stock, $.001 par value, 5,000,000 shares authorized;
none issued. -- --
Common stock, $.001 par value, authorized 60,000,000 and 30,000,000
respectively; 22,788,828 and 15,103,703 shares
outstanding, respectively (note 5) 26,964,647 21,762,337
Pre-paid Warrants (note 6) 3,396,505 --
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (30,522,513) (23,889,320)
----------- -----------
Total stockholders' equity (deficiency) 1,430,955 (534,667)
----------- -----------
Total liabilities and stockholders' equity (deficiency) 3,899,492 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 Nine months ended
December 31 December 31
1996 1995 1996 1995
$ $ $ $
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 463,167 573,095 764,710 1,379,698
Cost of sales 727,806 1,074,342 1,777,124 3,266,747
---------- ---------- ---------- ---------
Gross profit (loss) (264,639) (501,247) (1,012,414) (1,887,049)
---------- ---------- ---------- ---------
Operating expense (income)
Selling and administration 1,016,456 924,793 3,466,105 2,620,525
Research and related expenditures 226,569 139,679 634,254 743,769
Restructuring cost (note 8) 1,495,500 -- 1,495,500 --
Interest expense 1,077 109,051 78,599 290,991
Interest income (3,898) (7,232) (28,679) (27,641)
Gain on sale of investment (25,000) -- (25,000) --
---------- ---------- ---------- ---------
2,710,704 1,166,291 5,620,779 3,627,644
---------- ---------- ---------- ---------
Operating loss (2,975,343) (1,667,538) (6,633,193) (5,514,693)
---------- ---------- ---------- ---------
Provision for income taxes (note 9) -- -- -- --
---------- ---------- ---------- ---------
Net loss (2,975,343) (1,667,538) (6,633,193) (5,514,693)
========== ========== ========== ==========
Net loss per share (note 10) (0.13) (0.12) (0.31) (0.45)
========== ========== ========== ==========
Weighted average shares 22,424,573 13,748,152 21,610,362 12,381,062
========== ========== ========== ==========
</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 nine months ended
December 31
1996 1995
OPERATING ACTIVITIES $ $
----------- -----------
<S> <C> <C>
Net loss (6,633,193) (5,514,693)
Adjustments to reconcile net loss to net cash
used by operating activites:
Depreciation and amortization 314,700 373,049
Loss on disposal of property and equipment 38,550
Gain on sale of investment (25,000) -
Interest paid by issuance of common stock 33,773 -
Professional services paid by issuance of common stock 305,953 -
Legal settlement paid by issuance of common stock 127,500 -
Changes in assets and liabilities:
Accounts receivable (298,547) (219,876)
Inventory 1,134,486 (762,444)
Prepaid expenses and other 101,037 (30,077)
Accounts payable, trade (920,263) 950,731
Other accounts payable and accrued liabilities 224,059 (329,489)
---------- ----------
Cash used in operating activities (5,610,495) (5,494,249)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (146,525) (35,506)
Proceeds on disposal of property and equipment - 28,300
Proceeds on sale of investment 25,000 -
Investment in patents and intangibles - (3,937)
---------- ----------
Cash used in investing activities (146,525) (11,143)
---------- ----------
FINANCING ACTIVITIES
Repayments under demand loan payable (2,185,546) (296,354)
Principal payments on capital lease obligations (1,524) (24,245)
Proceeds from issuance of shares and warrants 5,131,589 3,912,586
---------- ----------
Cash provided by financing activities 2,944,519 3,591,987
---------- ----------
Net decrease in cash (2,812,501) (1,913,405)
Cash, beginning of period 2,843,540 3,291,203
---------- ----------
Cash, end of period 31,039 1,377,798
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest 78,599 290,991
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)
December 31, 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 developing, manufacturing and exploiting
proprietary electronic technology and products.
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 nine month periods
ended December 31, 1996 and has an accumulated deficit of $30,522,513 at
December 31, 1996. The Company's operational plan involves reducing operating
expenditures and focusing on licensing and product development on a contract
basis and for the Company's own account. See Note 8. 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 nine month periods ended December 31, 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>
December 31, 1996 March 31, 1996
----------------- --------------
<S> <C> <C>
Raw material $1,141,471 $1,569,812
Work in process 147,748 194,437
Finished goods 819,540 1,478,996
---------- ----------
$2,108,759 $3,243,245
========== ==========
</TABLE>
4. DEMAND LOAN PAYABLE
The demand loan payable to CVD Financial Corporation plus accrued interest was
retired on July 31, 1996.
6
<PAGE> 7
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1996
5. COMMON STOCK
The following table summarizes shares issued during the nine month period ended
December 31, 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
Stock issued for accounts payable at $0.4375
to $0.87 per share 460.000 233,953
Stock issued for executives at $0.594 per share 60,000 35,640
- -------------------------------------------------------------------------------------------
Balance, December 31, 1996 22,788,828 $26,964,647
===========================================================================================
</TABLE>
6. PRE-PAID WARRANTS
Represents proceeds from warrants pre-paid for cash net of offering costs of
$409,395. 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 $3,000,000 of warrants) or a 30% discount to the 5 day
moving average bid price of the common shares on the day prior to exercise. The
exercise price of the warrants will be further discounted by 7% per year and
for other events until the warrants are exercised. At December 31, 1996 these
warrants were exercisable into approximately 5.5 million common shares.
7. OPTIONS AND WARRANTS
At December 31, 1996 warrants were outstanding/exercisable into the following
listed shares:
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ 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 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
Warrants (a) 150,000 0.65625 October 2001
Warrants (a) 128,067 1.25 October 2005
- --------------------------------------------------------------------------------------------------------
Total 1,770,071
========================================================================================================
</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)
December 31, 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 December 31, 1996 1,422,658
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.90 to $6.01 and
expire over a period from 1997 to 2000.
8. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $1,495,500 in December 1996
which included a $989,500 inventory writedown, $98,500 in losses on purchase
commitments, $47,000 in severance costs, a $310,500 loss on disposal of
manufacturing equipment and $50,000 related to facility reduction and other
costs. At December 31, 1996 a total of $506,000 was accrued relating to the
restructuring charges which is expected to be substantially completed by fiscal
year end (March 31, 1997). The restructuring charge is a result of the change
in the Company's operations due to the discontinuation of contract
manufacturing services due to a decision to focus on OEM and licensing
activities related to the Company's FLASHBACK technology.
9. 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.
10. 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.
________________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO
THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS
DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER
THE SUB-HEADING, "BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB FOR THE YEAR ENDED MARCH 31, 1996.
GENERAL
The Company's historical revenues have consisted primarily of contract
manufacturing services and sales of FLASHBACK products. In December 1996 the
Company incurred a restructuring charge associated with discontinuing contract
manufacturing services. The Company anticipates the majority of its future
revenues will be from license and royalty fees and from contract development
services. In November 1996 the Company entered into an OEM contract with Sanyo
Information Systems U.K. Ltd. and in January 1997 entered into an OEM and
development contract with Lanier Worldwide, Inc.
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. As a result of the restructuring and focus on licensing and
contract development, the Company has reduced its monthly cash operating costs
from approximately $450,000 per month to $200,000 per month. However, the
Company's losses are
8
<PAGE> 9
expected to continue until such time as the Company is able to obtain
licensing, royalty and development revenues sufficient to cover fixed costs of
operations. Should the Company be unable to accomplish the foregoing and
operate profitably, the Company may be forced to further 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.
Sales of and demand for the Company's branded FLASHBACK recorder did not meet
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. As a result management
has elected to focus on OEM licensing with respect to the NCI MicroOS imbedded
operating system and Multichip modules and contract development of private
label and custom-designed products for computers, dictation systems, computer
peripherals and telecommunication equipment.
Revenues from licensing, royalties and development services are expected to be
subject to significant month to month variability resulting from the limited
number of licensees to date, the timing and delays associated with OEM 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 technology is expected to be influenced by OEM market success,
technological developments and general economic conditions. Because these
factors can change rapidly, customer demand and the demand for the Company's
technology can also shift quickly. The Company may not be able to respond to
technical developments by competitors because of the time required and risks
involved in the development or introduction of new or improved technology and
due to limited financial resources.
RESULTS OF OPERATIONS
For the first nine months of fiscal 1997, the Company reported revenues of
$764,710, 4530% less than revenues of $1,379,698 for the first nine months of
fiscal 1996. For the three months ended December 31, 1996 revenues were
$463,167 compared to $573,095 for the same quarter of the prior year. The
decrease in revenues is due primarily to reduced FLASHBACK sales compared 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. Revenue for the third
fiscal quarter of 1997 included $214,250 of OEM revenue. The Company's future
revenues are expected to consist primarily of license and royalty fees and
contract development services.
For the first nine months of fiscal 1997, the Company reported a gross loss of
$1,012,414 as compared to a gross loss of $1,887,049 for the first nine
months of fiscal 1996. The gross loss for the third fiscal 1997 quarter was
$264,639 compared to a gross loss of $501,247 for the third 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 continued 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 usable due to technical changes
in FLASHBACK models. In connection with the Company's restructuring, it is
disposing of first generation FLASHBACK materials and inventory, with some
products expected to be sold to OEM licensees of the Company's FLASHBACK
technology. There can be no assurance the Company can achieve positive gross
margins in the future.
Total operating expenses (including research and related expenditures, selling
and administrative, restructuring costs and interest expense less interest
income) were $5.6 million (including a $1.5 million restructuring charge) for
the nine months ended December 31, 1996 as compared to $3.6 million for the
nine months ended December 31, 1995. Total operating expenses for the third
fiscal quarter of 1997 were $2.7 million (including the $1.5 million
restructuring charge) compared to $1.2 million for the second fiscal quarter of
1996. Selling and administrative expenses increased in the first nine months of
fiscal 1997 to $3.5 million compared to $2.6 million for the comparable period
of the prior year. The increase of $0.9 million in the current nine month
period included an increase in personnel and consulting of $510,000 due
primarily to additional sales and marketing personnel, $65,000 costs of an
office in U.K., a $65,000 increase in marketing travel, and a $185,000 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 $634,254 for the first nine months of fiscal
1997, as compared to $743,769 for the first nine months of fiscal 1996 which
included $370,000 of FLASHBACK pre-production development costs. Excluding this
item, the $260,000 increase in the current period resulted primarily from a
$100,000 increase in personnel costs due to increased staffing and a $115,000
increase in outside design and consulting cost. Research and development costs
are subject to significant quarterly variations depending on the use of outside
services and the availability of financial resources.
9
<PAGE> 10
The Company recorded a restructuring charge of $1,495,500 in December 1996
which included a $989,500 inventory writedown, $98,500 in losses on purchase
commitments, $47,000 in severance costs, a $310,500 loss on disposal of
manufacturing equipment and $50,000 related to facility reduction and other
costs. At December 31, 1996 a total of $506,000 was accrued relating to the
restructuring charges which is expected to be substantially completed by fiscal
year end (March 31, 1997). The restructuring charge is a result of the change
in the Company's operations due to the discontinuation of contract
manufacturing services and the decision to focus on OEM and licensing
activities related to the Company's FLASHBACK technology. Licensing to OEMs
relates primarily to the Company's core digital flash memory audio recording
technology.
As a result of the restructuring and reduction in personnel, the Company has
reduced monthly cash operating costs from approximately $450,000 per month to
$200,000 per month.
The Company's interest expense for the nine months ended December 31, 1996 was
$78,599 a reduction from $290,991 for the prior period resulting from the
retirement of demand loans and other interest bearing debt outstanding during
fiscal 1996 and 1997 and more reliance on equity to finance operations.
The Company reported a net loss of $3.0 million for the third quarter of
fiscal 1997, as compared to an operating loss of $1.7 million for the third
quarter of fiscal 1996 with the increase due primarily to the restructuring
charge and increased research and development expenses offset in part by a
reduced gross loss. For the nine months ended December 31, 1996 the operating
loss was $6.6 million compared to $5.5 million for the prior period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $189,826, compared to
working capital of $1.1 million at March 31, 1996. The Company had
approximately $2.1 million of working capital invested in inventories at
December 31, 1996. The decrease in working capital is a result of the Company's
continuing losses which consumed working capital during the period.
Approximately $5.6 million in cash was used in operating activities by the
Company in the nine months ended December 31, 1996 which included a $0.7
million reduction in accounts payable and accrued liabilities and a $0.3
million increase in accounts receivable.
During the first nine 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 nine 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 rate of revenues and
expenditures and level of operations after the restructuring, the Company will
require additional capital within the next 2 months to meet its debts as they
become due and to continue as a going concern. The Company is currently
financing its operations from the sale of equipment and inventory and from
funds received from OEM agreements. The Company estimates that at current
expenditure levels and projected working capital requirements it will require a
minimum of an additional $1 million to continue operating for the next twelve
months without any contribution from operations. The existing OEM and licensing
business may be able to generate some of the additional funding required
depending on the ability of OEM and licensing activities to generate revenues,
however there can be no assurance thereof. The Company is currently pursuing
various alternatives to meet its needs for additional capital. There can be no
assurance the Company will be successful and any such financing may be dilutive
to current shareholders. The failure to raise additional funds could have a
material adverse effect on the Company and could force the Company to further
reduce or curtail operations.
The Company may, from time to time, seek additional funds through lines of
credit, public or private debt or equity financing. The Company estimates that
it will require additional capital to finance future developments and
improvements to its technology. There can be no assurances that additional
capital will be available when needed.
CHANGES IN CASH
For the nine months ended December 31, 1996, net cash decreased by $2.8
million. Cash used in operating activities was $5.6 million. Major
components using cash were a net loss of $6.6 million after depreciation and a
decrease in other accounts payable and accruals of $0.7 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.
10
<PAGE> 11
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). The Company is selling a significant portion of its
manufacturing equipment and retiring leases accordingly. Estimated remaining
commitments are included in the cash requirements discussed above. The Company
is currently in arrears and in breach of payment obligations totaling $0.6
million for one capital lease. The Company, however, has not received notice of
default from the lessor and plans to dispose of the equipment.
The Company has been committed to purchase orders providing for the future
delivery of components in accordance with previous production schedules. The
Company has accrued $98,500 to settle outstanding commitments connected with
the termination of production activities.
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
operations. The Company currently has no plans, arrangements or understanding
regarding any acquisitions.
MANAGEMENT'S PLANS FOR IMPROVING OPERATIONS
Management's actions to improve operations by increasing its contract
manufacturing business have not been successful. Accordingly the Company took a
$1,495,500 restructuring charge in December 1996 as described above and has
dramatically reduced personnel and operating expenses. The Company's strategy
is to expand existing and obtain new revenues from OEM and licensing agreements
with companies like Sanyo and Lanier. The Company believes the successful
implementation of this strategy 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 operating results 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 to fund
the continuing losses from operations and cash flow deficits, (ii) substantial
inventory investment, (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.
BUSINESS RISKS
This report contains a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated. In this report, the words
"anticipates," "believes," "expects," "intends," "future" and similar
expressions identify forward-looking statements. Readers are cautioned to
consider the specific risk factors described above and in the Company's Annual
Report on Form 10-KSB for the year ended March 31, 1996 and not to place undue
reliance on the forward-looking statements contained herein, which speak only
as of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that may
arise after the date hereof.
11
<PAGE> 12
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
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: February 14, 1997 By: /s/ Kathleen E. Terry
------------------------
Kathleen E. Terry
Chief Financial Officer
(Principal Financial and Accounting
Officer and duly authorized to sign on
behalf of the Registrant)
12
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