<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, 1997
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)
13114 Evening Creek Drive South, San Diego, California 92128
- ------------------------------------------------------ ----------
(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 [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, par value $.001 56,413,405
- ----------------------------- ---------------------------------
(Class) (Outstanding at February 2, 1998)
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, 1997 and
March 31, 1997 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended December 31, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1997 and 1996 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
$ $
----------------- --------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 442,260 176,158
Accounts receivable, less allowance for doubtful
accounts of $953 and $36,330, respectively 99,955 30,097
Earnings in excess of billings on development contract 60,928 --
Inventory [note 4] 1,583,768 1,648,863
Property and equipment held for sale -- 68,567
Prepaid expenses and other 11,849 --
----------------- --------------
2,198,760 1,923,685
----------------- --------------
Property and equipment, net 152,191 199,320
Other intangible assets, net of accumulated amortization of
$37,924 and $32,341 respectively 36,485 42,068
----------------- --------------
188,676 241,388
----------------- --------------
TOTAL ASSETS 2,387,436 2,165,073
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable, trade 663,660 1,264,150
Other accounts payable and accrued liabilities [note 11] 636,777 1,049,697
Advances in excess of earnings on development contract -- 174,341
Current portion of term note payable [note 5] 36,603 --
----------------- --------------
1,337,040 2,488,188
----------------- --------------
LONG-TERM [NOTE 5]
Secured notes payable 500,000 --
Term note payable, net of current portion 111,030 --
----------------- --------------
611,030 --
----------------- --------------
TOTAL LIABILITIES 1,948,070 2,488,188
----------------- --------------
Contingencies [note 13]
REDEEMABLE PREFERRED STOCK
Series A, $.001 par value (redeemable at anytime at variable prices of $10 or
more), 8% cumulative and convertible voting preferred stock, $10 liquidation
preference, 100,000 shares authorized, 99,500 shares issued
and outstanding at December 31, 1997 [note 6] 957,500 --
----------------- --------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock, $0.001 par value, authorized 60,000,000 and
60,000,000 respectively; 56,413,405 and 23,370,008 shares
outstanding, respectively [notes 7 and 16] 56,413 23,370
Additional paid-in capital 31,262,328 28,459,269
Prepaid warrants [note 8] 903,996 3,276,505
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (34,333,187) (33,674,575)
----------------- --------------
(518,134) (323,115)
----------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 2,387,436 2,165,073
================= ==============
</TABLE>
See notes to interim consolidated financial statements
3
<PAGE> 4
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31 December 31
1997 1996 1997 1996
$ $ $ $
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
REVENUE:
Product sales 60,224 463,167 330,338 764,710
Development services 128,394 -- 562,683 --
---------- ---------- ---------- ----------
Total revenues 188,618 463,167 893,021 764,710
---------- ---------- ---------- ----------
COST OF REVENUES:
Cost of product sales 58,280 727,806 301,062 1,777,124
Cost of development services 116,848 -- 358,760 --
---------- ---------- ---------- ----------
Total cost of revenues 175,128 727,806 659,822 1,777,124
---------- ---------- ---------- ----------
Gross profit (loss) 13,490 (264,639) 233,199 (1,012,414)
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling and administrative 237,581 1,016,456 811,357 3,466,105
Research and related expenditures 99,232 226,569 203,631 634,254
Restructuring and related expenditures -- 1,495,500 -- 1,495,500
---------- ---------- ---------- ----------
Total operating expenses 336,813 2,738,525 1,014,988 5,595,859
---------- ---------- ---------- ----------
Operating loss (323,324) (3,003,164) (781,790) (6,608,273)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest expense (16,695) (1,077) (39,308) (78,599)
Interest income 6,604 3,898 9,486 28,679
Other income [note 10] -- 25,000 153,000 25,000
---------- ---------- ---------- ----------
Other income (expense) (10,091) 27,821 123,178 (24,920)
---------- ---------- ---------- ----------
Loss before provision for income taxes (333,415) (2,975,343) (658,612) (6,633,193)
Provision for income taxes -- -- -- --
---------- ---------- ---------- ----------
NET LOSS (333,415) (2,975,343) (658,612) (6,633,193)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE [NOTE 15] (0.01) (0.13) (0.02) (0.31)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES 56,119,927 22,424,573 44,823,993 21,610,362
========== ========== ========== ==========
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE> 5
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
1997 1996
OPERATING ACTIVITIES $ $
---------- ----------
<S> <C> <C>
Net loss (658,612) (6,633,193)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 59,946 314,700
Gain on sale of investment -- (25,000)
Gain on disposal of property and equipment (12,088) --
Interest paid by issuance of common stock -- 33,773
Professional services paid by issuance of common stock 42,708 305,953
Legal settlement paid by issuance of common stock -- 127,500
Changes in assets and liabilities:
Accounts receivable (69,858) (298,547)
Earnings in excess of billings on development contract (60,928) --
Inventory 65,095 1,134,486
Prepaid expenses and other (11,849) 101,037
Accounts payable, trade (84,472) (920,263)
Other accounts payable and accrued liabilities (325,420) 224,059
Advances on research and development contract (174,341) --
---------- ----------
Cash (used in) operating activities (1,229,818) (5,635,495)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (7,234) (146,525)
Proceeds on sale of investments -- 25,000
Proceeds on disposal of property and equipment 80,654 --
---------- ----------
Cash provided by (used in) investing activities 73,420 (121,525)
---------- ----------
FINANCING ACTIVITIES
Repayments under demand loan payable -- (2,185,546)
Repayments under term note payable (35,000)
Principal payments on capital lease obligations -- (1,524)
Proceeds from secured notes payable 500,000 --
Proceeds from sale of preferred stock 957,500 --
Proceeds from issuance of common shares and warrants -- 5,131,589
---------- ----------
Cash provided by financing activities 1,422,500 2,944,519
---------- ----------
Net increase (decrease) in cash 266,102 (2,812,501)
Cash and cash equivalents, beginning of period 176,158 2,843,540
---------- ----------
Cash and cash equivalents, end of period 442,260 31,039
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period for:
Interest 39,308 78,599
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Interest paid by issuance of common stock -- 33,773
Professional services paid by issuance of common stock 42,708 305,953
Legal settlement paid by issuance of common stock -- 127,500
Conversion of long-term convertible note to common stock -- 3,033,773
Common stock issued on exercise of prepaid warrants 2,372,509 --
Accounts payable and accruals paid by issuance of common stock 420,885 --
Settlement of accrued lease termination by issuance of term note 182,633 --
</TABLE>
See notes to interim consolidated financial statements
5
<PAGE> 6
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1997
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 and exploiting proprietary electronic
technologies.
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, 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 nine month period ended
December 31, 1997 and has an accumulated deficit of $34,333,187 at December 31,
1997. The Company's operational plan involves focusing on licensing and product
development on a contract basis and for the Company's own account. The Company's
ability to continue as a going concern is in doubt and is dependent upon
achieving a profitable level of operations.
These interim consolidated financial statements do not give effect to any
adjustments which would be necessary should the Company be unable to continue as
a going concern and therefore be required to realize its assets and discharge
its liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying interim consolidated
financial statements.
These interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted for interim financial information
and the instructions to Form 10-QSB. They do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. The interim consolidated financial statements and notes
thereto should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the fiscal year ended March 31, 1997.
Loss per common share is computed by dividing net loss, adjusted for dividends
related to the Company's preferred stock, by the weighted average number of
common shares and common share equivalents, unless antidilutive, outstanding
during the period (see Note 15).
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, 1997 are not necessarily indicative of
the results that may be expected for the fiscal year ending March 31, 1998.
3. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and Statement of
Financial Accounting Standards No. 129 "Disclosures of Information About an
Entity's Capital Structure." SFAS No. 128 provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128
provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. SFAS No. 129 establishes standards for
disclosing information about an entity's capital structure. SFAS No. 128 and
SFAS No. 129 are effective for financial statements issued for periods ending
after December 15, 1997. Their implementation is not expected to have a material
effect on the financial statements.
6
<PAGE> 7
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1997
3. NEW ACCOUNTING PRONOUNCEMENTS (Cont'd)
The Financial Accounting Standards Board has also issued SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that has the same
prominence as other financial statements. SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS No. 130 and No. 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on the future financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
4. INVENTORY
Inventory of raw material, 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, 1997 March 31, 1997
----------------- --------------
<S> <C> <C>
Raw material $ 786,936 $ 666,634
Work in process 170,485 179,967
Finished goods 626,347 802,262
---------- ----------
$1,583,768 $1,648,863
========== ==========
</TABLE>
5. LONG-TERM DEBT
Secured Notes Payable
The secured notes payable bear interest at 12%, payable quarterly. The notes are
collateralized by the Company's issued and pending patents and the FLASHBACK
technology. The notes are convertible at the lowest warrant conversion price
used by the Prepaid Warrant holders (see Note 8, currently $0.0875 per share),
subject to certain future adjustments. Upon conversion, the note holders will
receive a stock purchase warrant exercisable into the same number of shares as
converted at the conversion price for a period of three years. At December 31,
1997 these notes would have been convertible into approximately 5.7 million
common shares with warrants exercisable into a like number of shares at $0.0875
per share for three years.
Term Note Payable
A 10% unsecured term note was issued effective September 30, 1997 in connection
with the settlement of accrued balances owing related to the Company's former
facility lease. The Company made a principal payment of $25,000 in October 1997.
The note requires monthly payments of principal and interest of $5,000 for 38
months through November 1, 2000. At December 31, 1997 the total note obligation
was $147,633 of which $36,603 was the current portion.
6. REDEEMABLE PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of $.001 par value preferred
stock in one or more series from time to time by action of the Board of
Directors. During September 1997, the first series, consisting of up to 100,000
shares, was designated by the Board of Directors as Series A (the "Series A
Stock"). The Series A Stock has voting rights equal to the number of shares of
Common Stock into which the Series A Stock is convertible. Dividends of 8% per
annum are cumulative and may be payable in cash or shares of Common Stock, at
the Company's election. The Series A Stock has a liquidation preference of
$10.00 per share, plus accrued and unpaid dividends, with no participation after
the preference is paid.
The Series A Stock is convertible into shares of Common Stock computed by
dividing $10.00 plus accrued and unpaid dividends by the lesser of (i) $0.0875
or (ii) 80% of the average closing bid price for the Common Stock for the ten
trading days immediately following any and each distribution in shares,
subdivision, split up, combination, reclassification, or other
7
<PAGE> 8
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1997
6. REDEEMABLE PREFERRED STOCK (Cont'd)
change in Common Stock. At December 31, 1997, the Series A Stock would have been
convertible into approximately 11.6 million common shares. The Company is
required to redeem the Series A Stock on September 1, 2000 ("Mandatory
Redemption Date") and upon the occurrence of certain other events. The Company
may redeem the Series A Stock earlier only if there are sufficient shares
available for conversion of the Series A Stock. The redemption price is $10.00
per share plus accrued and unpaid dividends if there are sufficient shares
available for conversion of the Series A Stock, otherwise the redemption price
is equal to the greater of (i) $10.00 per share plus accrued and unpaid
dividends or (ii) an amount equal to a five day market price multiplied by the
shares into which the Series A Stock would be convertible if shares were
authorized, plus a 10% premium.
During September and October 1997 the Company sold 99,500 shares of Series A
Stock at $10.00 per share for gross proceeds of $995,000 and net proceeds of
$957,500.
7. COMMON STOCK
The following table summarizes common equity transactions during the nine month
period ended December 31, 1997 (see Note 6 for preferred stock transactions):
<TABLE>
<CAPTION>
Additional
paid-in Prepaid Contributed Accumulated
Shares Amount capital Warrants Surplus Deficit Total
---------- ------- ------------ ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 23,370,008 $23,370 $ 28,459,269 $3,276,505 $ 1,592,316 $(33,674,575) $(323,115)
Stock issued on exercise of
prepaid warrants 30,805,455 30,805 2,341,704 (2,372,509) -- --
Stock issued pursuant to private
placement fees 457,484 457 (457) -- -- --
Stock issued in debt settlement 400,000 400 87,100 -- -- -- 87,500
Stock issued as payment for
accrued professional services
and compensation 1,380,458 1,381 374,712 -- -- -- 376,093
Net loss -- -- -- -- -- (658,611) (658,611)
---------- ------- ------------ ---------- ----------- ------------ ---------
Balance, December 31, 1997 56,413,405 $56,413 $ 31,262,328 $ 903,996 $ 1,592,316 $(34,333,186) $(518,133)
========== ======= ============ ========== =========== ============ =========
</TABLE>
8. PREPAID WARRANTS
At December 31, 1997 the Company had Prepaid Warrants recorded at $903,996, net
of offering costs. The terms of the Prepaid Warrants, as amended, provide that
the face amount of the warrants or $1,012,956 is exercisable, without further
cash payment, into common shares of the Company at a fixed exercise price at
$0.0875 per share, subject to certain adjustments. The fixed price of $0.0875
per share may be adjusted down (i) to 80% of the market price following certain
changes in the Company's Common Stock including a reverse stock split, and (ii)
to the price at which new securities are issued if at a price below $0.0875 per
share. The number of shares issuable also is increased for certain registration
penalty shares and further increases by 7% per annum. The Prepaid Warrants would
have been convertible into approximately 14.5 million shares as of December 31,
1997. The expiration date of the Prepaid Warrants is January 2000 at which time
they convert to common shares.
8
<PAGE> 9
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1997
9. WARRANTS AND OPTIONS
At December 31, 1997, other warrants, in addition to the Prepaid Warrants, were
outstanding/exercisable into the following listed shares. Also see Note 5 for
additional warrants that may become issuable upon conversion of secured notes
payable.
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Expiration Date
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Warrants 200,000 2.00 September 1998
Warrants 33,750 4.00 June 1999
Warrants 450,000 1.75 July 1999
Warrants 82,100 4.00 August 1999
Warrants 20,570 0.25 February 2000
Warrants 25,000 0.25 March 2000
Warrants 27,500 0.25 March 2001
Warrants 401,924 0.25 July 2001
Warrants 400,000 0.25 August 2001
Warrants 150,000 0.15625 October 2001
Warrants 128,067 0.25 October 2005
- ---------------------------------------------------------------------------------------------
Total 1,918,911
=============================================================================================
</TABLE>
The following table summarizes stock option activity for the period:
<TABLE>
<S> <C>
Outstanding at March 31, 1997 1,170,658
Granted 1,920,000
Exercised -
Expired (347,818)
Canceled (1,075,156)
----------
Outstanding at December 31, 1997 1,667,684
=========
</TABLE>
Options granted above were granted pursuant to the 1994 Stock Option Plan, as
amended. Options outstanding are exercisable at prices ranging from $0.1562 to
$3.65 and expire over the period from 1998 to 2002.
10. OTHER INCOME
The Company received $153,000 from a former vendor resulting from prior period
overpayments. The overpayments were recorded as an expense in the prior period
because of uncertainty regarding the amount and likelihood of recovery.
11. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $2,228,001 in fiscal 1997
resulting from the change in the Company's operations due to the discontinuance
of contract manufacturing services. At March 31, 1997, a total of $162,423 was
included in other accounts payable and accrued liabilities relating to the
restructuring. During the fiscal quarter ended June 30, 1997, the restructuring
was completed.
12. 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 $15,682,000 and $11,213,000 for federal and state tax purposes,
respectively, subject to certain limitations.
13. CONTINGENT LIABILITY
The Company may have a liability to certain security holders due to a 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
previously 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 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. See notes
7 and 8 for partial conversions to Common Stock by these security holders.
9
<PAGE> 10
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1997
14. ACCOUNTING FOR CONVERTIBLE SECURITIES AT A DISCOUNT
The position of the Securities & Exchange Commission on convertible preferred
stock and convertible debt that are in the money at the time of issuance
requires recording the discount as a non-cash dividend or interest. The imputed
dividend or interest is recognized beginning with the issuance of the security
to the first date that conversion can occur and is adjusted for certain future
changes. The Secured Notes (Note 5) issued in June 1997 and the Series A Stock
(Note 6) issued in September 1997 were not convertible at issuance due to
certain restrictions including the unavailability of authorized but unissued
common shares. Therefor, the Company did not record any imputed dividend or
interest on the Series A Stock or Secured Notes at issuance. Effective on the
increase in authorized shares on January 5, 1998 (see Note 16) these securities
became convertible. At that date the market price was below the conversion price
and accordingly no discount and no imputed interest or dividend was recognizable
on the securities.
15. NET LOSS PER COMMON SHARE
Net loss per share applicable to common stockholders is calculated as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net loss $ (333,414) $ (2,975,343) $ (658,611) $ (6,633,193)
Preferred stock dividends
at stated rate (19,450) -- (20,535) --
------------ ------------ ------------ ------------
Net loss applicable to
common stockholders $ (352,864) $ (2,975,343) $ (679,146) $ (6,633,193)
============ ============ ============ ============
Net loss per common share $ (0.01) $ (0.13) $ (0.02) $ (0.31)
Weighted average shares
outstanding 56,119,927 22,424,573 44,823,993 21,610,362
</TABLE>
16. SUBSEQUENT EVENT
On January 5, 1998 the stockholders approved an increase in authorized common
shares from 60 million shares to 120 million shares. On January 14, 1998, the
Company filed an amendment to its Certificate of Incorporation to effect the
increase in authorized common shares.
10
<PAGE> 11
----------
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, 1997.
GENERAL
The Company has completed the transition from a manufacturing and sales
organization to an OEM provider of technology, product development services, and
technology licensing. The Company, as a consequence, anticipates that the
majority of its future revenues will be from license and royalty fees, private
label arrangements for the Company's Flashback family of products and from
contract development services for custom digital products.
The Company is actively developing licensing, private label, and OEM (Original
Equipment Manufacturer) opportunities seeking to penetrate the digital sound
recording and playback market. The Company has contracts with Sanyo Information
Systems UK Ltd. and Lanier Worldwide, Inc. Under the terms of the Sanyo
Agreement, as amended, Sanyo is private labeling current Company products
(principally, FLASHBACK, SOUNDCLIP and VOICELINK) under an exclusive arrangement
in Europe. The agreement, which terminates in October 1999, provides that Sanyo
must purchase at least 500 product units per month (plus or minus 20%) in order
to maintain exclusivity. As of December 31, 1997, the Company has received
approximately $414,000 in orders from Sanyo, of which approximately $304,000 has
been shipped. Under the terms of the Lanier Agreement, the Company is receiving
non-recurring engineering expense ("NRE"), upon the satisfaction of certain
milestones, to develop a new portable digital voice recorder and related
accessory products. The Lanier Agreement contemplates that the products to be
developed will be completed in early 1998, with the Company to provide Lanier
with manufactured product thereafter to be sold by Lanier's sales force
worldwide. As of December 31, 1997, the Company was on schedule, as amended by
Lanier, with respect to the product to be developed. The Company, as of such
date, in connection therewith, has received NRE of approximately $514,000. The
agreement is for an initial term of three years, terminating January 6, 2000.
The quantity of product to be purchased and sold by Lanier is to be determined
by Lanier according to periodic forecast reports submitted to the Company.
As a result of the restructuring and change in the source of revenues,
comparisons to prior results are less meaningful and prior results are not
necessarily indicative of future results.
The Company has incurred operating losses in each of the last three fiscal years
and these losses have been material. The Company incurred an operating loss of
$7.9 million in fiscal 1996 and $8.7 million in fiscal 1997 (including a
restructuring charge of $2.2 million). As a result of the restructuring of the
Company to discontinue its contract manufacturing operations and focus on
licensing and contract development, the Company has reduced its monthly cash
operating costs from an average of approximately $540,000 per month in fiscal
1997 to approximately $130,000 per month at the current time. However, the
Company intends to increase expenditure levels in future periods to support its
new Flashback Audio technology and support OEM customers. Accordingly, the
Company's losses are expected to continue until such time as the Company is able
to increase sales of Flashback proprietary products and/or 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 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 Flashback recorder and Mobile Office
products (including VoiceLink) introduced into the domestic retail channel in
September 1996 never met management's expectations due to a variety of factors
including competitive pressure in the portable recording industry and
insufficient financial resources to meet the demands of the retail distribution
market. However, management believes initial shipments of the foregoing to the
Company's OEM customer, Sanyo, for distribution on an international basis have
been positively received. Management is focused on OEM licensing with respect to
the Micro OS Imbedded Operating System 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, as well as
continuing sales of the Company's private labeled Flashback and related products
are expected to be subject to significant month to month variability resulting
from the limited market penetration and license activity to date, the timing and
delays associated with OEM new product introductions and the seasonal nature of
demand for consumer electronic products. Development and OEM contracts may be
delayed or terminated by customers and are subject to a number of factors beyond
the Company's control. The termination of either the Sanyo or Lanier agreements
would have a material adverse effect on operations. The markets for consumer
electronic products are subject to rapidly changing customer tastes and a high
level of competition. Demand for
11
<PAGE> 12
the Company's products is expected to be influenced by OEM market success,
technological developments and general economic conditions. Because these
factors can change rapidly, customer demand for the Company's technology can
also shift quickly. The Company may not be able to respond to technical
developments by competitors because of the time required and risks involved in
the development or introduction of new or improved technology and due to limited
financial resources.
RESULTS OF OPERATIONS
For the first nine months of fiscal 1998, the Company reported revenues of
$893,021, a 17% increase over revenues of $764,710 for the first nine months of
fiscal 1997. For the three months ended December 31, 1997, revenues were
$188,618 versus $463,167 for the third quarter of the prior fiscal year. The
prior year's third fiscal quarter included $214,250 of initial stocking
shipments to Sanyo. Revenue for the first nine months of fiscal 1998 included
$330,338 of product sales to OEMs and development services of $562,683. Two
customers accounted for 75% of fiscal 1998's first nine months of revenues and
the loss of a customer could have a material adverse impact on the Company. The
Company's development arrangements are designed to produce limited current
revenues while creating proprietary OEM products to be sold to OEM customers or
to be produced under long-term license or royalty arrangements. The Company had
no development services revenues for the first nine months of the prior year and
the $764,710 of the prior year's first nine months revenues included $249,730 of
contract manufacturing sales which have since been discontinued. The Company's
future revenues are expected to consist primarily of product sales to OEM
customers and development, license and royalty fees.
For the nine months ended December 31, 1997, the Company reported a gross profit
of $233,199 or 26% of revenues as compared to a gross loss of $1,012,414 for the
first nine months of fiscal 1997. The gross profit for the third fiscal 1998
quarter was $13,490 or 7% of revenues versus a gross loss of $264,639 for the
prior comparable quarter. The improvement in gross margins resulted from the
restructuring of the Company which has resulted in the termination of
manufacturing overhead and the addition of new development services. The lower
gross margin in the third quarter versus the first two quarters resulted from
increased development resources assigned to the Lanier contract during the third
quarter. There can be no assurance the Company can maintain positive gross
margins in the future.
Total operating expenses (consisting of research and related expenditures and
selling and administrative expenses) for the three and nine months ended
December 31, 1997 were $336,813 and $1,014,988 respectively, as compared to
$1,243,025 and $4,100,359, respectively, for the three and nine months ended
December 31, 1996 (excluding a third quarter fiscal 1997 restructuring charge of
$1,495,500). In connection with and resulting from its restructuring, the
Company dramatically reduced the number of personnel and related operating
costs. Accordingly, comparisons of costs with prior periods are less meaningful.
Selling and administrative costs aggregated $811,357 in the first nine months of
fiscal 1998 compared to $3,466,105 in the prior period. The $2.6 million
reduction was comprised primarily of a $1,207,000 decrease in compensation
costs, a $255,000 decrease in legal and related costs, a $254,000 decrease in
depreciation and amortization, a $542,000 decrease in advertising and related
costs, and a $222,000 reduction in occupancy related costs.
Research and related expenditures for the three and nine months ended December
31, 1997 were $99,232 and $203,631 respectively, as compared to $226,569 and
$634,254, respectively, for the three and nine months ended December 31, 1996.
An aggregate of $358,760 of development costs were incurred for contract
development work during the nine months ended December 31, 1997 and are included
in cost of revenues. This included approximately $239,000 of personnel costs
which were included in research and related expenditures in the prior comparable
period. Research and development costs are subject to significant quarterly
variations depending on the use of outside services, the assignment of engineers
to development projects and the availability of financial resources.
The Company reported an operating loss of $781,789 for the nine months ended
December 31, 1997, as compared to an operating loss of $6,608,273 for the nine
months ended December 31, 1996 with the decreased loss resulting primarily from
the improved gross margins combined with the reduction in operating expenses
described above. In addition to variances in operating expenses, the Company's
operating losses are impacted by the timing and amount of OEM product sales and
the recognition of contract service revenues. Accordingly, there is substantial
uncertainty about future operating results and the results for the first nine
months are not necessarily indicative of operating results for future periods or
the fiscal year.
The Company's interest expense for the nine months ended December 31, 1997 was
$39,308, a reduction from the $78,599 for the prior period resulting from the
retirement of demand loans and other interest bearing debt outstanding during
fiscal 1997. The Company also received a $153,000 payment from a former vendor
in the first fiscal 1998 quarter resulting from prior year overpayments by the
Company. This payment has been included in other income.
The Company reported a net loss for the first nine months of the current fiscal
year of $658,611 compared to a net loss of $6,633,193 for the prior year's first
nine months. The Company anticipates reduced losses during the current fiscal
year as compared to fiscal 1997, however there can be no assurance of future
profitability.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $861,720 compared to a
working capital deficit of $564,503 at March 31, 1997. The Company had
approximately $1.6 million of working capital invested in inventories at
December 31, 1997. The increase in working capital was a result of a long-term
preferred stock issuance as well as a settlement of an accrued lease obligation
through the issuance of a three year term note offset by the Company's
continuing losses which consumed working capital during the period.
In June 1997 the Company sold $500,000 of long-term 12% secured notes due
September 30, 1999 with limited common stock conversion rights and stock
purchase warrants issuable on conversion to nine investors. In September and
October 1997 the Company sold 99,500 shares of Series A Preferred Stock at
$10.00 per share for net proceeds of $957,500. The proceeds are being applied to
reduce debt and for working capital.
The Company also paid accrued liabilities or operating expenses aggregating
$463,593 through the issuance of Common Stock during the first nine months. The
Company also obtained $73,421 of proceeds from net equipment disposals during
the first nine months.
For the nine months ended December 31, 1997, net cash increased by $266,102.
Cash used in operating activities was $1,264,820. Major components using cash
were a net loss of $658,611 reduced by $59,946 of aggregate depreciation and
amortization and $42,708 of expenses paid in shares and increased by $12,088 of
equipment sale gains, or a net loss use of cash of $568,045. The major change in
assets and liabilities providing net cash used in operating activities was a
reduction in inventory of $65,095. The major changes in assets and liabilities
using operating cash was an increase in accounts receivable of $69,858, a
reduction in other payables and accrued liabilities of $444,894 and a change in
development contract components of $235,269.
Based on the Company's cash position assuming continuation of existing OEM
development arrangements and currently planned expenditures and level of
operations, the Company estimates it will require additional capital within the
next twelve months to meet its debts as they become due and to continue as a
going concern. Given such assumptions, the Company estimates that at current
expenditure levels and projected working capital requirements it will require a
minimum of an additional $900,000 to continue operating for the next twelve
months. The Company's OEM and licensing business may be able to generate the
additional funding required depending on the ability of OEM and licensing
activities to generate additional revenues, however there can be no assurance
thereof. The Company is currently pursuing various alternatives to meet its
needs for 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.
MANAGEMENT'S PLANS FOR IMPROVING OPERATIONS
Management has taken steps to improve operations with the goal of sustaining the
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 Company's private label product offering by introducing
VoiceLink and Mobile Office products to OEMs; (iii) focusing sales and marketing
on the OEM markets; and (iv) controlling overhead and operating expenses. There
can be no assurance the Company can attain profitable operations in the future.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company was in arrears on an operating equipment lease obligation to
Comdisco, Inc. during fiscal 1997, but has negotiated a settlement providing for
future payments of approximately $515,000 from time to time based on agreed upon
percentages of future equity raises.
The Company recently announced a new Flashback Audio(TM) technology that
provides the means of near CD-quality, stereo audio playback from a
CompactFlash(TM) cartridge. This technology can be employed in a stand-alone
product, or integrated into a variety of products, such as laptop or hand-held
PC's, pagers, cellular phones, etc. The Company's plans are to continue to
develop the technology and seek OEM partnerships to exploit the technology. The
Company may require additional funds to continue development of this and other
technologies and the extent of such requirements are not presently determinable
by management.
If, in the future, operations of the Company increase significantly, the Company
may require additional funds. The Company might also require additional capital
to finance future developments, acquisitions or expansion of facilities. The
Company currently has no plans, arrangements or understandings regarding any
acquisitions.
13
<PAGE> 14
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 and substantial
business risk factors described above and in the Company's Annual Report on Form
10-KSB for the year ended March 31, 1997 and not to place undue reliance on the
forward-looking statements contained herein, which speak only as of the date
hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements, to reflect events or circumstances that may arise
after the date hereof.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to the conduct of its
business. There are currently no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES
(a) On January 5, 1998 the common stockholders approved an increase in
authorized common shares from 60 million common shares to 120 million common
shares. On January 14, 1998, the Company filed an amendment to its Certificate
of Incorporation to effect the increase in authorized common shares. The effect
of this amendment was to make certain outstanding securities (secured notes and
Series A Preferred Stock) convertible pursuant to their terms at the option of
holders (see Notes 5 and 6 to the interim financial statements included
herewith). Such securities were not previously convertible due to insufficient
authorized common shares. The amendment made no other modifications to the
rights of common stockholders.
(b) and (c) NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's fiscal 1997 Annual Meeting of Stockholders held on January 5,
1998 the following members, constituting all of the members, were elected to the
Board of Directors: Elwood G. Norris, Alfred H. Falk and Robert Putnam.
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
1. Election of Directors:
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C> <C>
Elwood G. Norris 51,002,976 -0- 529,496
Alfred H. Falk 51,002,976 -0- 377,946
Robert Putnam 51,002,976 -0- 1,840,716
</TABLE>
2. Authorization to approve an amendment to the Company's 1994 Stock
Option Plan to increase the number of shares reserved for issuance
thereunder by 6,000,000 to an aggregate of 10,000,000 shares.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C>
29,428,720 3,026,154 339,643
</TABLE>
3. Authorization to approve an increase in the number of shares of
common stock that the Corporation is authorized to issue from 60,000,000
to 120,000,000.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C>
43,356,307 1,058,159 306,598
</TABLE>
4. Authorization to ratify the appointment of Ernst & Young as
independent accountants for the Company for fiscal year ending March 31,
1998.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C>
50,763,984 114,000 197,218
</TABLE>
14
<PAGE> 15
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1.1 Certificate of Amendment of Certificate of Incorporation of
Norris Communications, Inc. filed with the State of Delaware on
January 14, 1998
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. On October 3, 1997 (for an event dated September 19, 1997) the
Company filed a Form 8-K reporting an Item 9 event and accompanying
exhibit related to a preferred stock financing.
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 9, 1998 By: /s/RENEE' WARDEN
----------------------------
Renee' Warden
Controller
(Principal Financial and Accounting
Officer and duly authorized to sign on
behalf of the Registrant)
15
<PAGE> 1
Exhibit 3.1.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NORRIS COMMUNICATIONS, INC.
(Pursuant to Sections 222 and 242 of the General
Corporation Law of the State of Delaware)
NORRIS COMMUNICATIONS, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
FIRST: That the Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on February 29, 1996,
and was amended and restated on May 31, 1996.
SECOND: That the Board of Directors of the Corporation has duly adopted
resolutions setting forth a proposed amendment to the Certificate of
Incorporation of the Corporation, declaring such amendment to be advisable and
directing that such amendment be submitted to the stockholders of the
Corporation for approval. The resolution setting forth the proposed amendment is
as follows:
"RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by amending Article FOURTH to read in full as
follows:
'FOURTH: The aggregate number of shares which the Corporation
shall have authority to issue is One hundred Twenty-Five Million
(125,000,000), divided into One Hundred Twenty Million (120,000,000)
shares of common stock of the par value of $.001 per share, and Five
Million (5,000,000) shares of preferred stock of the par value of $.001
per share.' "
THIRD: That thereafter, pursuant to resolution of the Board of
Directors, the annual meeting of stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
FOURTH: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE> 2
Exhibit 3.1.1
FIFTH: The foregoing amendment to the Certificate of Incorporation shall
be effective on and as of the date of filing of this Certificate of Amendment
with the office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed by Alfred H. Falk, its President, and attested by
Robert Putnam, its Secretary, this 12th day of January, 1998.
NORRIS COMMUNICATIONS, INC.
By: /s/ Alfred H. Falk
-----------------------------
Alfred H. Falk, President
[SEAL]
ATTEST:
By: /s/ Robert Putnam
----------------------------
Robert Putnam, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
UNAUDITED INTERIM STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) QUARTERLY REPORT ON FORM
10-QSB FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 442,260
<SECURITIES> 0
<RECEIVABLES> 100,908
<ALLOWANCES> 953
<INVENTORY> 1,583,768
<CURRENT-ASSETS> 2,198,760
<PP&E> 421,221
<DEPRECIATION> 269,030
<TOTAL-ASSETS> 2,387,436
<CURRENT-LIABILITIES> 1,337,040
<BONDS> 611,030
957,500
0
<COMMON> 56,413
<OTHER-SE> (574,547)
<TOTAL-LIABILITY-AND-EQUITY> 2,387,436
<SALES> 330,338
<TOTAL-REVENUES> 893,021
<CGS> 301,062
<TOTAL-COSTS> 659,822
<OTHER-EXPENSES> 1,014,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,308
<INCOME-PRETAX> (658,612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (658,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (658,612)
<EPS-PRIMARY> (.020)
<EPS-DILUTED> (.020)
</TABLE>
