<PAGE> 1
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 JUNE 30, 1998
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 59,867,842
- ----------------------------- ----------
(Class) (Outstanding at July 31, 1998)
Transitional Small Business Disclosure Format (check one): YES ___ NO X
<PAGE> 2
NORRIS COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1998
and March 31, 1998 (unaudited) 3
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the three
Months ended June 30, 1998 and 1997 (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 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
$ $
----------- -----------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 645,122 62,370
Accounts receivable, less allowance for doubtful
accounts of $953 and $953, respectively 10,503 54,659
Amounts received on research and development contract 143,799 167,981
Inventory [note 4] 168,254 180,751
Prepaid expenses and other 9,658 10,240
----------- -----------
TOTAL CURRENT ASSETS 977,336 476,001
----------- -----------
Property and equipment, net 109,856 137,890
Other intangible assets, net of accumulated amortization of
$10,374 and $9,764 respectively 14,035 14,645
----------- -----------
123,891 152,535
----------- -----------
TOTAL ASSETS 1,101,227 628,536
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable, trade 582,479 682,927
Other accounts payable and accrued liabilities 660,297 655,781
Current portion of term note payable [note 5] 36,698 48,334
Convertible promissory notes [notes 5 and 12] 1,000,000 --
----------- -----------
TOTAL CURRENT LIABILITIES 2,279,474 1,387,042
----------- -----------
LONG-TERM [NOTE 5]
Secured notes payable 475,000 500,000
Term note payable, net of current portion 90,084 90,084
----------- -----------
TOTAL LIABILITIES 2,844,558 1,977,126
----------- -----------
Commitments and contingencies [note 11]
PREFERRED STOCKHOLDERS' EQUITY
Series A, convertible voting preferred stock, $0.001 par value,
redeemable at $10 plus accrued and unpaid dividends at 8%
cumulative, 100,000 shares authorized, 99,500 outstanding
[note 6] 100 100
Additional paid-in-capital 1,022,408 1,002,562
----------- -----------
TOTAL PREFERRED STOCKHOLDERS' EQUITY 1,022,508 1,002,662
----------- -----------
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $0.001 par value, authorized 120,000,000,
59,279,255 and 57,171,119 shares outstanding, respectively [note 7] 59,279 57,171
Additional paid-in capital 31,492,698 31,333,437
Prepaid warrants [note 8] 792,578 903,996
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (36,702,710) (36,238,172)
----------- -----------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (2,765,839) (2,351,252)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 1,101,227 628,536
=========== ===========
</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
June 30,
1998 1997
$ $
----------- -----------
<S> <C> <C>
REVENUE:
Product sales 22,496 162,208
Development services 75,693 226,851
----------- -----------
Total revenues 98,189 389,059
----------- -----------
COST OF REVENUES:
Cost of product sales 36,892 154,900
Cost of development services 82,878 142,528
----------- -----------
Total cost of revenues 119,770 297,428
----------- -----------
Gross profit (loss) (21,581) 91,631
----------- -----------
OPERATING EXPENSES:
Selling and administrative 220,758 319,858
Research and related expenditures 145,848 52,871
----------- -----------
Total operating expenses 366,606 372,729
----------- -----------
Operating loss (388,187) (281,098)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (28,394) (7,490)
Interest income 907 1,415
Non-cash interest [note 12] (44,797) --
Loss on disposal of property and equipment (4,067) --
Other income -- 153,000
----------- -----------
Other income (expense) (76,351) 146,925
----------- -----------
Loss before provision for income taxes (464,538) (134,173)
Provision for income taxes -- --
----------- -----------
NET LOSS (464,538) (134,173)
=========== ===========
NET LOSS PER COMMON SHARE (0.01) (0.01)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 58,446,738 25,678,434
=========== ===========
</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 three months ended
June 30,
1998 1997
OPERATING ACTIVITIES $ $
---------- ----------
<S> <C> <C>
Net loss (464,538) (134,173)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 15,969 20,355
Loss on disposal of property and equipment 4,067 --
Non-cash interest expense 44,797 --
Changes in assets and liabilities:
Accounts receivable 44,156 (147,925)
Amounts received on research and development contract 24,182 --
Inventory 12,497 43,655
Prepaid expenses and other 582 --
Accounts payable, trade (100,448) (32,310)
Other accounts payable and accrued liabilities 4,516 (76,127)
Advances on research and development contract -- (80,412)
---------- ----------
Cash (used in) operating activities (414,220) (406,937)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment -- (2,332)
Proceeds on disposal of property and equipment 8,608 66,109
---------- ----------
Cash provided by investing activities 8,608 63,777
---------- ----------
FINANCING ACTIVITIES
Repayments under term note payable (11,636) --
Proceeds from secured notes payable -- 500,000
Proceeds from convertible promissory notes 1,000,000 --
---------- ----------
Cash provided by financing activities 988,364 500,000
---------- ----------
Net increase (decrease) in cash 582,752 156,840
Cash and cash equivalents, beginning of period 62,370 176,158
---------- ----------
Cash and cash equivalents, end of period 645,122 332,998
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION: Cash paid
during the period for:
Interest 28,394 7,490
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of secured notes payable to common stock 25,000 --
Common stock issued on exercise of prepaid warrants -- 913,346
Accounts payable and accruals paid by issuance of common stock -- 333,385
</TABLE>
See notes to interim consolidated financial statements
5
<PAGE> 6
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
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, 1997 and on September 4,
1997 reincorporated into Delaware. The Company is engaged through its
wholly-owned U.S. subsidiary in developing and exploiting advanced electronic
product designs and technologies for the portable computing, digital recording,
mobile office and telecommunication markets.
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 three month period ended June
30, 1998 and has an accumulated deficit of $36,706,710 at June 30, 1998. 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, and if necessary, obtaining
additional financing.
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, 1998.
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." SFAS No. 128 provides for the calculation of
"Basic" and "Diluted" earnings per share ("EPS"). Basic EPS includes no dilution
and is computed by dividing income available to common stockholders, after
deduction for cumulative unpaid dividends, by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. The Company's losses for the periods presented
cause the inclusion of potential common stock instruments outstanding to be
antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not
required to present a diluted EPS. Stock options, warrants, convertible notes
payable, redeemable convertible preferred stock and prepaid warrants exercisable
into 45,352,047 shares of common stock were outstanding as at June 30, 1998.
These securities were not included in the computation of diluted EPS because of
the losses, but could potentially dilute EPS in future years.
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
month period ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 1999.
6
<PAGE> 7
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
3. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. 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. 132 standardizes the disclosure requirements for pensions
and other postretirement benefits and requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis.
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. SFAS No. 132 is effective for years beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated, unless such information is not readily available. The adoption
of these statements will have no material impact on the Company's consolidated
financial statements and the results of operations and financial position will
be unaffected by their implementation.
4. INVENTORY
Inventory of raw material 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>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Raw material $119,852 $109,960
Finished goods 48,402 70,791
--------- ---------
$168,254 $180,751
======== ========
</TABLE>
5. CONVERTIBLE, TERM AND SECURED DEBT
Convertible Promissory Notes
In June 1998, the Company completed the sale of $1,000,000 of 12% Convertible
Promissory Notes with Limited Guaranty ("notes") due May 15, 1999. The notes and
interest are convertible into shares of Common Stock at $0.0875 per share,
subject to certain future adjustments. At June 30, 1998 these Notes would have
been convertible into approximately 11.5 million shares of common stock.
Secured Notes Payable
In June 1997, the Company issued $500,000 of secured notes due September 30,
1999 with interest at 12%, payable quarterly in cash. The notes are
collateralized by the Company's issued and pending patents and FlashBack
technology. The notes are convertible in to shares of Common Stock at a
conversion price of $0.0875 per share, subject to certain future adjustments.
Upon conversion, the note holders receive a stock purchase warrant for the
number of converted shares exercisable at the conversion price for a period of
three years. At June 30, 1998, the $475,000 balance of these notes would have
been convertible into approximately 5.4 million common shares with warrants
issuable on conversion and exercisable into a like number of shares at $0.0875
per share. Subsequent to June 30, 1998, $25,000 of secured notes were converted
into 285,714 common shares and a warrant.
7
<PAGE> 8
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
5. CONVERTIBLE, TERM AND SECURED DEBT (Cont'd)
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 June 30, 1998, the note obligation was
$126,782 of which $36,698 was the current portion.
6. REDEEMABLE PREFERRED STOCK
The 99,500 shares of Series A Stock outstanding at June 30, 1998 are convertible
into shares of Common Stock computed by dividing $10.00 plus accrued and unpaid
dividends at 8% per annum by $0.0875, subject to certain future adjustments. At
June 30, 1998, the Series A Stock was convertible into approximately 12 million
common shares. Subsequent to June 30, 1998, a total of 2,500 shares of Series A
Stock were converted into 302,873 common shares.
7. COMMON STOCK
The following table summarizes common stockholders' equity transactions during
the three month period ended June 30, 1998 (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, 1998 57,171,119 $ 57,171 $ 31,333,437 $ 903,996 $ 1,592,316 $(36,238,172) $ (2,351,252)
Stock issued on exercise of
prepaid warrants 1,822,422 1,822 109,596 (111,418) -- -- --
Stock issued on conversion of
notes payable 285,714 286 24,714 -- -- -- 25,000
Noncash interest on convertible
notes -- -- 44,797 -- -- -- 44,797
Dividends on Series A preferred
stock -- -- (19,846) -- -- -- (19,846)
Net loss -- -- -- -- -- (464,538) (464,538)
Balance, June 30, 1998 59,279,255 59,279 31,492,698 792,578 1,592,316 $(36,702,710) $ (2,765,839)
============ ============ ============ ============ ============ ============ ============
</TABLE>
8. PREPAID WARRANTS
At June 30, 1998, the Company had Prepaid Warrants outstanding of $792,578, net
of offering costs. The terms of the Prepaid Warrants, as amended, provide that
the face amount of the warrants or $888,108 is exercisable, without further cash
payment, into common shares of the Company at a fixed exercise price at $0.0875
per share, subject to certain future adjustments. The number of shares issuable
is increased for certain registration penalty shares and by 7% per annum. At
June 30, 1998, the Prepaid Warrants would have been convertible into
approximately 13.1 million common shares. The expiration date of the Prepaid
Warrants is January 2000 at which time they convert to common shares.
8
<PAGE> 9
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
9. WARRANTS AND OPTIONS
At June 30, 1998, other warrants, in addition to the Prepaid Warrants, were
outstanding/exercisable into the following listed shares. Also see Note 5 for
additional warrants that may become issuable upon conversion of secured notes
payable.
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ 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 571,429 0.0875 June 2001
Warrants 285,714 0.0875 July 2001
Warrants 401,924 0.25 July 2001
Warrants 400,000 0.25 August 2001
Warrants 150,000 0.15625 October 2001
Warrants 2,000,000 0.10 June 2003
Warrants 128,067 0.25 October 2005
--------- ------- ------------
Total 4,776,054
=========
</TABLE>
Subsequent to June 30, 1998, in connection with the conversion of $25,000 of
secured notes payable, the Company issued a stock purchase warrant on 285,714
common shares exercisable at $0.0875 per share until July 2001.
The following table summarizes stock option activity for the period:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at March 31, 1998 2,735,340 $ 0.222
Granted 1,852,660 $0.0875
Exercised --
Expired --
Canceled --
---------
Outstanding at June 30, 1998 4,588,000 $ 0.176
=========
Exercisable at June 30, 1998 3,568,158 $ 0.201
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.0875 to $3.65 and
expire over the period from 1998 to 2002 with an average life of 4.3 years.
10. 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 $27,386,000 and $11,980,000 for federal and state tax purposes,
respectively, subject to certain limitations.
11. CONTINGENT LIABILITY
The Company has been notified by the Internal Revenue Service of a potential tax
liability of approximately $450,000 plus interest relating to the imposition of
withholding taxes on imputed interest from purported loans from the Company's
former Canadian parent company to operating subsidiaries. The Company intends to
vigorously contest this proposed tax liability and believes it has a number of
valid defenses, including that the purported loans were capital contributions.
The Company also believes that should the liability ultimately be sustained
through various appeals that the former Canadian parent company may have claims
for refunds of such withheld taxes if imputed from the subsidiaries. This matter
is in the early stages and the Company has engaged legal counsel to vigorously
contest this matter.
9
<PAGE> 10
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
12. 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 12% Convertible Promissory Notes (note 5) issued in June 1998 were
convertible at a discount at the time of issuance. Therefore, the Company
recorded $44,797 as imputed noncash interest at issuance in the first fiscal
quarter.
===============================
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, 1998.
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 and from
contract development services for and sales to OEMs of custom digital products.
The Company is actively developing licensing, private label, and OEM
opportunities seeking to penetrate the digital sound recording and playback
market. The Company has a development and manufacturing agreement with Lanier
Worldwide, Inc. Under the terms of the Lanier agreement, the Company is
receiving NRE (non-recurring engineering expenses), 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 late calendar 1998, with the Company to provide
Lanier with manufactured product thereafter to be sold by Lanier's sales force
worldwide. As of June 30, 1998, the Company was on schedule, as amended by
Lanier, with respect to the product to be developed. The Company, as of such
date from inception, in connection therewith, had received NRE of approximately
$570,000. The agreement, as amended, is for an initial term terminating December
2001. 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.
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
$8.7 million in fiscal 1997 (including a restructuring charge of $2.2 million)
and $2.6 million in fiscal 1998 (including an inventory write-off of $1.3
million). The Company has reduced the level of its monthly cash operating costs
to approximately $120,000 per month. However, the Company may increase
expenditure levels in future periods to support its new FlashBack(TM) Audio
Technology and support OEM customers. Accordingly, the Company's losses are
expected to continue until such time as the Company is able to obtain supply,
licensing, royalty and development revenues sufficient to cover fixed cost of
operations. The Company continues to be subject to the risks normally associated
with any new business activity, including unforeseeable expenses, delays and
complications. Accordingly, there is no assurance the Company can or will report
operating profits in the future.
Management is focused on OEM Licensing with respect to the MicroOS(TM) file
system and contract development of private label and custom-designed products
for computers, dictation systems, computer peripherals and telecommunication
equipment. Revenue from licensing, royalties and development services, and
future product supply arrangements, if any, are expected to be subject to
significant month to month variability resulting from the limited market
penetration and license activity to date, the timing and delays associated with
OEM new product introductions and the seasonal nature of demand for consumer
electronic products. Development and OEM contracts may be delayed or terminated
by customers and are subject to a number of factors beyond the Company's
control. The termination of the Lanier agreement would have a material adverse
effect on operations. The markets for consumer electronic products are subject
to rapidly changing customer tastes and a high level of competition. Demand for
the Company's products is expected to be influenced by OEM market success,
technological developments and general economic conditions. Because these
factors can change rapidly, customer demand for the Company's technology can
also shift quickly. The Company may not be able to respond to technical
developments by competitors because of the time required and risks involved in
the development or introduction of new or improved technology and due to limited
financial resources.
RESULTS OF OPERATIONS
For the first three months of fiscal 1999, the Company reported revenues of
$98,189, a 75% decrease from revenues of $389,059 for the first three months of
fiscal 1998. Revenue for the first three months of fiscal 1998 included $22,496
of product sales to OEMs and development services of $75,693. Two customers
accounted for 95% of fiscal 1998's first three months of revenues and the loss
of a customer could have a material adverse impact on the Company. Product sales
in the first quarter of the prior year included sales to Sanyo under an
arrangement which has since been discontinued. The Company does not anticipate
any significant product sales in future periods until the Company can
successfully produce products under the Lanier agreement. The Company's
development arrangements are designed to produce limited current revenues while
11
<PAGE> 12
creating proprietary OEM products to be sold to OEM customers or to be produced
under long-term license or royalty arrangements.
For the three months ended June 30, 1998, the Company reported a gross loss of
$21,581 as compared to a gross profit of $91,631 for the first three months of
fiscal 1998. Cost of sales consisted of $36,892 of product costs and $82,878 of
contract services consisting mostly of research and development labor being
funded primarily by the Lanier development agreement. There can be no assurance
the Company can attain positive gross margins in the future.
Total operating expenses (consisting of research and related expenditures and
selling and administrative expenses) for the three months ended June 30, 1998,
were $366,606 as compared to $372,729 for the three months ended June 30, 1998.
Selling and administrative costs aggregated $220,758 in the first three months
of fiscal 1999 compared to $319,858 in the prior period. The $99,100 reduction
was comprised primarily of a $22,000 decrease in compensation and related cost,
a $32,000 decrease in depreciation, amortization and business property tax, and
a $30,000 reduction in occupancy related costs. The Company continues its
efforts to control and minimize operating costs.
Research and related expenditures for the three months ended June 30, 1998 were
$145,848 as compared to $52,871, for the three months ended June 30, 1997. An
aggregate of $82,878 of development costs were incurred for contract development
work during the three months ended June 30, 1998 and are included in cost of
revenues. Research and development costs are subject to significant quarterly
variations depending on the use of outside services, the assignment of engineers
to development projects and the availability of financial resources.
The Company reported an operating loss of $388,187 for the three months ended
June 30, 1998, as compared to an operating loss of $281,098 for the three months
ended June 30, 1997. The Company's operating losses are impacted by the timing
and amount of product sales and the recognition of contract service revenues.
Accordingly, there is substantial uncertainty about future operating results and
the results for the first three months are not necessarily indicative of
operating results for future periods or the fiscal year.
The Company's interest expense for the three months ended June 30, 1998 was
$28,394, an increase from the $7,490 for the prior period resulting from the
interest bearing debt outstanding during fiscal 1999. The Company also incurred
during the first quarter $44,797 as a one time noncash interest expense on
convertible promissory notes convertible at a discount.
The Company reported a net loss for the first three months of the current fiscal
year of $464,538 compared to a net loss of $134,173 for the prior year's first
three months.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had a working capital deficit of $1,302,138
compared to a working capital deficit of $911,041 at March 31, 1998. The Company
had approximately $168,000 of working capital invested in inventories at June
30, 1998. The decrease in working capital was a result of the Company's
continuing losses which consumed working capital during the period.
In June 1998, the Company completed the sale of $1,000,000 of 12% Convertible
Promissory Notes with Limited Guaranty due May 15, 1999. The proceeds are being
applied for continued operating capital.
For the three months ended June 30, 1998, net cash increased by $582,752. Cash
used in operating activities was $414,220. Major components using cash were a
net loss of $464,538 reduced by $15,969 of aggregate depreciation and
amortization, $4,067 of loss on disposal of property and equipment and $44,797
of noncash interest, or a net loss use of cash of $399,597. The major change in
assets and liabilities providing cash from operating activities was a reduction
in inventory of $12,497 and a reduction in accounts receivable of $44,156 and a
reduction in amounts receivable from research and development contract of
$24,182. The major changes in assets and liabilities using operating cash a
reduction in accounts payable trade of $100,488.
Based on the Company's cash position assuming continuation of existing OEM
development arrangements and currently planned expenditures and level of
operations and no new product sales or development agreements, 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 $750,000 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
12
<PAGE> 13
ability of OEM and licensing activities to generate additional revenues, however
there can be no assurance thereof. The failure to raise additional funds, if
required, could have a material adverse effect on the Company and could force
the Company to reduce or curtail operations.
The Company may, from time to time, seek additional funds through 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 undertaken steps as part of a plan to improve operations with the
goal of sustaining Company operations for the next twelve months and beyond.
These steps include (i) focusing sales and marketing on the OEM markets, (ii)
focusing on the completion of the Lanier development agreement and planned OEM
products manufacturing and (iii) controlling overhead and expenses. There can be
no assurance the Company can attain profitable operations in the future.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company has an obligation and agreement with Comdisco, Inc. providing for
future payments of approximately $515,000 from time to time based on agreed upon
percentages of future equity raised.
The Company expects to commence production during fiscal year 1999 pursuant to
future Lanier purchase orders from the portable digital recorder currently under
development. The Company may require significant working capital funds for the
production of these anticipated orders, if realized. The amount of such funds is
subject to a variety of factors including some beyond the Company's control.
These factors include the size and frequency of Lanier purchase orders, if any,
and the terms of any future contract manufacturing arrangement, lead times on
components and a variety of other factors.
The Company's plans for its FlashBack Audio(TM) technology are to continue to
develop the technology and seek OEM partnerships to exploit the technology. The
Company may require additional funds to continue development of this and other
technologies and the extent of such requirements is not presently determinable
by management.
If, in the future, operations of the Company increase significantly, the Company
may require additional funds. The Company might also require additional capital
to finance future developments, acquisitions or expansion of facilities. The
Company currently has no plans, arrangements or understandings regarding any
acquisitions.
YEAR 2000 COMPLIANCE
The Company, like most owners of computer software, will be required to modify
significant portions of its software so that it will function properly in the
year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $10,000 to $20,000. Since the Company
mainly uses third party "off-the-shelf" software, it does not anticipate a
problem in resolving the year 2000 problem in a timely manner. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.
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, 1998 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.
13
<PAGE> 14
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) and (b) NONE
(c) The following is a description of equity securities sold by the Company
during the first fiscal quarter ended June 20, 1998 that were not registered
under the Securities Act:
In May and June of 1998, the Company completed the sale for cash of
$1,000,000 of 12% Convertible Promissory Notes with Limited Guaranty
("Notes") due May 15, 1999 to six accredited investors. The Notes and
interest are convertible into shares of Common Stock at $0.0875 per
share, subject to certain adjustments. Accordingly, if converted at
issue, these Notes would have been convertible into 11,428,571 shares
of Common Stock. These securities were offered and sold without
registration under the Act, in reliance upon the exemption provided by
Regulation D thereunder and an appropriate legend was placed on the
Notes.
The securities were sold by the Company without an underwriter.
However, in connection with the sale, the Company issued warrants on
571,428 shares of Common Stock exercisable at $0.0875 per share and
paid $55,760 in fees and expenses to Renwick Corporate Finance, Inc. as
a finder's fee. The Company also granted warrants to Elwood G. Norris
and Robert Putnam (officers, directors and shareholders of the Company)
on an aggregate of 2,000,000 common shares exercisable at $0.10 per
share for certain guarantees and inducements granted by them to
purchasers of the Notes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
14
<PAGE> 15
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: August 12, 1998 By: /s/RENEE WARDEN
--------------------------------
Renee Warden
Controller
(Principal Financial and Accounting
Officer and duly authorized to sign
on behalf of the Registrant)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 645,122
<SECURITIES> 0
<RECEIVABLES> 155,255
<ALLOWANCES> 953
<INVENTORY> 168,254
<CURRENT-ASSETS> 977,336
<PP&E> 394,139
<DEPRECIATION> 284,283
<TOTAL-ASSETS> 1,101,227
<CURRENT-LIABILITIES> 2,279,474
<BONDS> 0
1,022,508
0
<COMMON> 59,279
<OTHER-SE> (2,825,118)
<TOTAL-LIABILITY-AND-EQUITY> 1,101,227
<SALES> 22,496
<TOTAL-REVENUES> 98,189
<CGS> 36,892
<TOTAL-COSTS> 119,770
<OTHER-EXPENSES> 366,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,394
<INCOME-PRETAX> (464,538)
<INCOME-TAX> 0
<INCOME-CONTINUING> (464,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (464,538)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
