<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 SEPTEMBER 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:
<TABLE>
<CAPTION>
Common Stock, par value $.001 65,193,752
- ----------------------------- ----------
<S> <C>
(Class) (Outstanding at November 10, 1998)
</TABLE>
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
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<PAGE> 2
NORRIS COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30, 1998 and
and March 31, 1998 3
Consolidated Statements of Operations for the three and six
months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three and six
months ended September 30, 1998 and 1997 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
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>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
$ $
----------- -----------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 195,702 62,370
Accounts receivable 20,092 54,659
Accounts receivable on research and development contracts 213,712 167,981
Inventory [note 4] 121,008 180,751
Prepaid expenses and other 9,658 10,240
----------- -----------
TOTAL CURRENT ASSETS 560,172 476,001
----------- -----------
Property and equipment, net 88,886 137,890
Other intangible assets, net of accumulated amortization of
$11,391 and $9,764 respectively 13,018 14,645
----------- -----------
101,904 152,535
----------- -----------
TOTAL ASSETS 662,076 628,536
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable, trade 553,795 682,927
Other accounts payable and accrued liabilities 661,686 655,781
Current portion of term note payable [note 5] 48,334 48,334
Convertible promissory notes, net of unamortized note
discount of $72,728 [notes 5 and 12] 927,272 --
----------- -----------
TOTAL CURRENT LIABILITIES 2,191,087 1,387,042
----------- -----------
LONG-TERM [NOTE 5]
Secured notes payable 450,000 500,000
Term note payable, net of current portion 66,519 90,084
----------- -----------
TOTAL LIABILITIES 2,707,606 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, 92,500 outstanding [note 6] 93 100
Additional paid-in-capital 962,248 1,002,562
----------- -----------
TOTAL PREFERRED STOCKHOLDERS' EQUITY 962,341 1,002,662
----------- -----------
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) [NOTE 7]
Common stock, $0.001 par value, authorized 120,000,000,
63,694,464 and 57,171,119 shares outstanding, respectively 63,694 57,171
Additional paid-in capital 31,899,785 31,333,437
Prepaid warrants [note 8] 596,243 903,996
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (37,159,909) (36,238,172)
----------- -----------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (3,007,871) (2,351,252)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 662,076 628,536
=========== ===========
</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 Six months ended
September 30 September 30
----------------------------- -----------------------------
1998 1997 1998 1997
$ $ $ $
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Product sales 51,399 107,906 73,895 270,114
Development services 105,853 207,438 181,546 434,289
---------- ---------- ---------- ----------
Total revenues 157,252 315,344 255,441 704,403
---------- ---------- ---------- ----------
COST OF REVENUES:
Cost of product sales 33,421 87,882 70,313 242,782
Cost of development services 184,214 106,683 267,092 241,912
---------- ---------- ---------- ----------
Total cost of revenues 217,635 194,565 337,405 484,694
---------- ---------- ---------- ----------
Gross profit (loss) (60,383) 120,779 (81,964) 219,709
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling and administrative 143,774 253,918 364,532 573,776
Research and related expenditures 146,641 44,229 292,489 104,399
---------- ---------- ---------- ----------
Total operating expenses 290,415 298,147 657,021 678,175
---------- ---------- ---------- ----------
Operating loss (350,798) (177,368) (738,985) (458,466)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 4,600 1,467 5,507 2,882
Interest expense (7,993) (15,123) (36,387) (22,613)
Non-cash interest [note 12] (66,692) -- (111,489) --
Loss on disposal of property and equipment (7,166) -- (11,233) --
Other (29,150) -- (29,150) 153,000
---------- ---------- ---------- ----------
Other income (expense) (106,401) (13,656) (182,752) 133,269
---------- ---------- ---------- ----------
Loss before provision for income taxes (457,199) (191,024) (921,737) (325,197)
Provision for income taxes -- -- -- --
---------- ---------- ---------- ----------
NET LOSS (457,199) (191,024) (921,737) (325,197)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE (0.008) (0.004) (0.02) (0.01)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES 60,706,795 52,465,515 59,575,141 39,145,164
========== ========== ========== ==========
</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 six months ended
September 30,
1998 1997
OPERATING ACTIVITIES $ $
---------- ----------
<S> <C> <C>
Net loss (921,737) (325,197)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 28,366 40,733
(Gain) loss on disposal of property and equipment 11,233 (12,088)
Services paid by issuance of common stock or warrants 30,000 42,708
Non-cash interest expense 111,489 --
Changes in assets and liabilities:
Accounts receivable 34,567 (223,607)
Accounts receivable on research and development contracts (45,731) --
Inventory 59,743 62,386
Prepaid expenses and other 582 (6,199)
Accounts payable, trade (129,132) 9,918
Other accounts payable and accrued liabilities (33,515) (220,133)
Advances on research and development contract -- (119,375)
---------- ----------
Cash (used in) operating activities (854,135) (750,854)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (1,077) (4,663)
Proceeds on disposal of property and equipment 12,109 80,919
---------- ----------
Cash provided by investing activities 11,032 76,256
---------- ----------
FINANCING ACTIVITIES
Repayments under term note payable (23,565) --
Proceeds from secured notes payable -- 500,000
Proceeds from sale of preferred stock -- 782,500
Proceeds from convertible promissory notes 1,000,000 --
---------- ----------
Cash provided by financing activities 976,435 1,282,500
---------- ----------
Net increase (decrease) in cash 133,332 607,902
Cash and cash equivalents, beginning of period 62,370 176,158
---------- ----------
Cash and cash equivalents, end of period 195,702 784,060
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period for:
Interest 36,387 15,123
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of secured notes payable to common stock 50,000 --
Common stock issued on conversion of prepaid warrants 307,753 2,309,578
Common stock issued on conversion of Series A preferred stock 74,665 --
Accounts payable and accruals paid by issuance of common stock -- 420,885
Services paid by issuance of common stock or warrants 30,000 42,708
Settlement of accrued lease termination by issuance of term note -- 182,633
Stock dividends on Series A preferred stock 34,344 --
</TABLE>
See notes to interim consolidated financial statements
5
<PAGE> 6
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 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 six fiscal years and for the six month period ended
September 30, 1998 and has an accumulated deficit of $37,159,909 at September
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 52,954,804 shares of Common Stock were outstanding as at September 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 six
month period ended September 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)
September 30, 1998
3. RECENT ACCOUNTING PRONOUNCEMENTS
Effective April 1, 1998, the Company adopted the Financial Accounting Standards
Board SFAS No. 130, "Reporting Comprehensive Income". This statement established
standards for reporting and display of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The adoption of this statement
had no material impact on the Company's financial condition or results of
operation as of September 30, 1998 and for the three and six-month periods ended
September 30, 1998 and 1997. Total comprehensive income did not differ from the
Company's net loss for the three and six months ended September 30, 1998 or
1997.
The Company has also adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way that public companies
report 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
disclosures regarding products and services, geographic areas and major
customers. SFAS 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. Quarterly disclosures are not required in this first year
of adoption. Management believes that SFAS 131 will not have a significant
impact on the Company's disclosure of segment information in the future.
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>
September 30, 1998 March 31, 1998
------------------ --------------
<S> <C> <C>
Raw material $107,620 $109,960
Finished goods 13,388 70,791
-------- --------
$121,008 $180,751
======== ========
</TABLE>
5. CONVERTIBLE, SECURED AND TERM DEBT
Convertible Promissory Notes
In June 1998, the Company completed the sale of $1,000,000 of 12% Convertible
Promissory Notes with Limited Guaranty ("CP Notes") due May 15, 1999. The CP
Notes and interest are convertible into shares of Common Stock at $0.0875 per
share, subject to certain future adjustments. At September 30, 1998 these CP
Notes would have been convertible into approximately 11.9 million shares of
Common Stock.
In connection with the issuance of the CP Notes, the Company granted two
directors an aggregate of 2,000,000 warrants exercisable at $0.10 per share for
providing the noteholders certain guarantees and inducements. The Company
calculated the fair value of the warrants at issuance and is amortizing this
amount as non-cash interest expense over the term of the notes.
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 into 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
six years. At September 30, 1998, the $450,000 balance of these notes would have
been convertible into approximately 5.1 million shares of Common Stock with
warrants issuable on conversion and exercisable into a like number of shares at
$0.0875 per share.
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.
7
<PAGE> 8
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
The note requires monthly payments of principal and interest of $5,000 for 38
months through November 1, 2000. At September 30, 1998, the note obligation was
$114,853 of which $48,334 was the current portion.
6. REDEEMABLE PREFERRED STOCK [See note 7 for Preferred Stock transactions]
The 92,500 shares of Series A Stock outstanding at September 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 September 30, 1998, the Series A Stock was convertible into
approximately 11.4 million shares of Common Stock. The Company is required to
redeem the Series A Stock on September 1, 2000 and upon the occurrence of
certain other events.
7. COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
The following table summarizes Common Stockholders' equity transactions during
the six month period ended September 30, 1998 (see Note 6 for preferred stock
transactions):
<TABLE>
<CAPTION>
Additional
paid-in Prepaid
Shares Amount capital Warrants
<S> <C> <C> <C> <C>
Balance, March 31, 1998 57,171,119 $ 57,171 $ 31,333,437 $ 903,996
Stock issued on exercise of
prepaid warrants 5,098,598 5,098 302,655 (307,753)
Stock issued on conversion of
Secured notes payable 571,428 572 49,428 --
Noncash interest on convertible
notes -- -- 44,797 --
Stock issued on conversion of
7,000 shares of Series A
preferred stock 853,319 853 73,812 --
Dividends on Series A preferred
stock -- -- (34,344) --
Value assigned to 2,000,000
warrants granted in connection
with issuance of promissory notes -- -- 100,000 --
Value assigned to 571,489
Warrant issued for services -- -- 30,000 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, September 30, 1998 63,694,464 $ 63,694 $ 31,899,785 $ 596,243
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Contributed Accumulated
Surplus Deficit Total
<S> <C> <C> <C>
Balance, March 31, 1998 $ 1,592,316 $(36,238,172) $ (2,351,252)
Stock issued on exercise of
prepaid warrants -- -- --
Stock issued on conversion of
Secured notes payable -- -- 50,000
Noncash interest on convertible
notes -- -- 44,797
Stock issued on conversion of
7,000 shares of Series A
preferred stock -- -- 74,665
Dividends on Series A preferred
stock -- -- (34,344)
Value assigned to 2,000,000
warrants granted in connection
with issuance of promissory notes -- -- 100,000
Value assigned to 571,489
Warrant issued for services -- -- 30,000
Net loss -- (921,737) (921,737)
------------ ------------ ------------
Balance, September 30, 1998 $ 1,592,316 $(37,159,909) $ (3,007,871)
============ ============ ============
</TABLE>
8. PREPAID WARRANTS
At September 30, 1998, the Company had Prepaid Warrants outstanding of $596,243,
net of offering costs. The terms of the Prepaid Warrants, as amended, provide
that the face amount of the warrants or $668,108 is exercisable, without further
cash payment, into shares of Common Stock of the Company at a fixed exercise
price at $0.0875 per share, subject to certain future adjustments. The number of
shares issuable is increased for certain registration penalty shares and by 7%
per annum. At September 30, 1998, the Prepaid Warrants would have been
convertible into approximately 9.9 million shares of Common Stock. The
expiration date of the Prepaid Warrants is January 2000 at which time they
convert to shares of Common Stock.
9. WARRANTS AND OPTIONS
At September 30, 1998, other warrants, in addition to the Prepaid Warrants, were
outstanding/exercisable into the following listed shares. Also see Note 5 for
additional warrants that may become issuable upon conversion of secured notes
payable.
8
<PAGE> 9
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Expiration Date
- ----------- ------ ----- ---------------
<S> <C> <C> <C>
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 571,428 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 4,861,768
=========
</TABLE>
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 (50,000)
---------
Outstanding at September 30, 1998 4,538,000 $ 0.177
=========
Exercisable at September 30, 1998 3,555,658 $ 0.202
=========
</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 4.1 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. This matter is in the
early stages and the Company has engaged legal counsel 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.
12. ACCOUNTING FOR CONVERTIBLE SECURITIES AT A DISCOUNT
The position of the Securities and 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 non-cash interest at issuance in the first fiscal
quarter.
9
<PAGE> 10
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 (Original Equipment Manufacturer) 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
licenses, royalty fees, private label agreements for products employing the
Company's MicroOS(TM) technology and from contract development services for and
sales to OEMs of custom digital products.
The Company recently announced $3 million of initial production orders from
Lanier Worldwide, Inc. ("Lanier") resulting from a January 1997 development and
supply agreement (the "Lanier Agreement"). The Company has designed, developed
and intends to supply, through a subcontractor, a new digital voice recorder and
computer docking station targeted for the medical industry. Management estimates
initial shipments pursuant to these orders will commence in early calendar 1999.
The Company has also entered into a development agreement with Intel Corporation
("Intel") to design and develop a digital voice recorder. Under the agreement
Intel is paying non-recurring engineering fees for design and development of
prototypes.
The Company also announced it has received the second and third in a series of
patents protecting its core technology, the MicroOS(TM) file system.
The Company is actively developing licensing, private label, and OEM
opportunities seeking to penetrate the digital sound recording and playback
market. Under the terms of the Lanier Agreement, the Company is receiving NRE
(non-recurring engineering expenses), upon the satisfaction of certain
milestones. The Lanier Agreement contemplates that the Company will provide
Lanier with manufactured product to be sold by Lanier's sales force worldwide.
From inception through September 30, 1998 in connection therewith, the Company
had received NRE of approximately $580,000. The Lanier 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 initial $3 million order is for
the first five months of such forecast.
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 costs 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 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
10
<PAGE> 11
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 six months of fiscal 1999, the Company reported revenues of
$255,441, a 64% decrease from revenues of $704,403 for the first six months of
fiscal 1998. Three customers accounted for 95% of fiscal 1998's first six months
of revenues and the loss of a customer could have a material adverse impact on
the Company.
Revenue for the first six months of fiscal 1999 included $73,895 of product
sales to OEMs versus $270,114 for the prior comparable period. Product sales are
less in the current period, as the prior year included sales to Sanyo under an
arrangement which has since been discontinued. Product sales for the three
months ended September 30, 1998 were $51,399 or about half of the prior year's
second quarter total of $107,906, primarily due to the winding up of the Sanyo
arrangement. The Company does not anticipate any significant product sales in
future periods until the Company can successfully produce products under the
Lanier Agreement, currently scheduled for production during the fourth fiscal
quarter (ending March 31, 1999).
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. Development
service revenue of $181,546 for the six months ended September 30, 1998 are less
than the $434,289 for the prior year's first six months primarily due to the
Company being in the final development stage of the Lanier Agreement which
accounted for substantially all development revenues in the prior period.
Development services for the second fiscal 1999 quarter were $105,853 compared
to $207,438 for the prior year's second quarter. The decrease is consistent with
the reduction in Lanier activity. Second quarter fiscal 1999 revenue included
$22,376 recognized under the Intel development agreement.
For the six months ended September 30, 1998, the Company reported a gross loss
of $81,964 as compared to a gross profit of $219,709 for the first six months of
fiscal 1998. Cost of sales consisted of $70,313 of product costs and $267,092 of
contract services consisting mostly of research and development labor being
funded in part by the Lanier and Intel development agreements. The Company has
devoted additional resources over a longer than originally estimated time period
to complete the Lanier development without corresponding increases in
development revenues. This has produced the current period gross loss. There can
be no assurance the Company can attain positive gross margins in the future. Due
to the same factors the gross loss for the three months ended September 30, 1998
was $60,383, compared to a gross profit of $120,779 for the prior comparable
period.
Total operating expenses (consisting of research and related expenditures and
selling and administrative expenses) for the six months ended September 30,
1998, were $657,021, as compared to $678,175 for the six months ended September
30, 1997. Selling and administrative costs aggregated $364,532 in the first six
months of fiscal 1999 compared to $573,776 in the prior period. The $209,244
reduction was comprised primarily of a $53,000 decrease in compensation and
related cost, a $44,800 decrease in depreciation, amortization and business
property tax, and a $101,900 reduction in occupancy related costs. The Company
continues its efforts to control and minimize operating costs. For the second
fiscal 1999 quarter total operating expenses were $290,415 comparable to
$298,147 for the prior year's second quarter.
Research and related expenditures for the six months ended September 30, 1998
were $292,489, as compared to $104,399, for the six months ended September 30,
1997. An aggregate of $267,092 of development costs were incurred for contract
development work during the six months ended September 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.
Research related expenditures for the second fiscal 1999 quarter were $146,641,
a $102,412 increase from the comparable second quarter in the prior year. The
increase can be attributed to expanded engineering activities associated with
the development of new company technology.
The Company reported an operating loss of $738,985 for the six months ended
September 30, 1998, as compared to an operating loss of $458,466 for the six
months ended September 30, 1997. The operating loss for the second quarter of
fiscal 1999 was $350,798 compared to $177,368 in the second quarter of the prior
year. The increase in operating losses in the current fiscal year are directly
attributable to the gross losses from development activities. Management
believes, but there can be no assurance, that investments in OEM developments
with supply or royalty provisions will provide positive margins in future
periods. The Company's operating losses are impacted by the timing and amount of
product sales and the
11
<PAGE> 12
recognition of contract service revenues. Accordingly, there is substantial
uncertainty about future operating results and the results for the first six
months are not necessarily indicative of operating results for future periods or
the fiscal year.
The Company's cash interest expense for the six months ended September 30, 1998
was $36,387, an increase from the $15,123 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 non-cash interest
expense on convertible promissory notes convertible at a discount and recognized
during the second quarter $27,272 as non-cash interest from the amortization of
note discount.
The Company reported a net loss for the first six months of the current fiscal
year of $921,737 compared to a net loss of $325,197 for the prior year's first
six months.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had a working capital deficit of $1,630,915
compared to a working capital deficit of $911,041 at March 31, 1998. The Company
had approximately $121,000 of working capital invested in inventories at
September 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 six months ended September 30, 1998, net cash increased by $133,332.
Cash used in operating activities was $854,135. Major components using cash were
a net loss of $921,737 reduced by $28,366 of aggregate depreciation and
amortization, $11,233 of loss on disposal of property and equipment, $30,000 for
services paid by issuance of warrants and $111,489 of non-cash interest, or a
net loss use of cash of $740,469. The major change in assets and liabilities
providing cash from operating activities was a reduction in inventory of $59,743
and a reduction in accounts receivable of $34,567. The major changes in assets
and liabilities using operating cash was a reduction in accounts payable trade
of $129,132 and an increase in accounts receivable on research and development
contract of $45,731.
Other than cash on hand and accounts receivable, the Company has no material
unused sources of liquidity at this time. Based on the Company's cash position
assuming (i) continuation of existing OEM development arrangements, (ii)
currently planned expenditures and level of operation, (iii) no new product
sales or new 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 projected working capital requirements will require a
minimum of an additional $750,000 to continue operating for the next twelve
months. Management estimates that margins from supplying product under the
Lanier supply agreement can provide a significant amount of this requirements
assuming shipments commence in early calendar year 1999. Based on anticipated
Lanier product results management estimates that the Company will require
approximately $250,000 to continue operating at planned levels of operations for
the next twelve months. However actual results could differ significantly from
management plans. The actual future margins to be realized, if any, and the
timing of shipments and the amount and quantities of Lanier orders and reorders
are subject to many factors and risks, many outside the control of the Company.
The Company currently has $3 million of orders from Lanier, backlog estimated to
commence shipment in early 1999.
The Company's OEM and licensing business may also be able to contribute
additional funding required depending on the success of OEM and licensing
activities, however there can be no assurance thereof. Should additional funds
not be available, the Company may be required to curtail or scale back staffing
or operations and may not be able to meet its obligations as due. There can be
no assurance that additional funding will be available or on what terms.
Potential sources of such funds include exercise of outstanding warrants and
options, loans from shareholders or other debt financing or additional equity
offerings.
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. Any future financings may also be
dilutive to existing shareholders.
12
<PAGE> 13
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 and planned product
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 in early 1999 on the Lanier products.
Management believes it has negotiated a third party contract manufacturing
arrangement to minimize the working capital funds required for the production of
Lanier orders. The Company is subject to the risk that should this arrangement
be modified or not produce the desired results, that it would be required to
supply substantial working capital for the production of the Lanier orders. The
Company will be relying on a third party manufacturer for production of the
Lanier products and will therefore be subject to the substantial risks
associated with using a sole supplier.
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 is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as the computer
operation of virtually every company will be affected in some way.
The Company, like most owners of computer software, will be required to modify
significant potions 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. 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.
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. The
Company is currently taking steps to ensure that its computer systems and
services will continue to operate on and after January 1, 2000. However, there
can be no assurance that Year 2000 problems will not occur with respect to the
Company's computer systems. Furthermore, the Year 2000 problem may impact other
entities with which the Company transacts business, and the Company cannot
predict the effect of the Year 2000 problem on such entities or the resulting
effect on the Company. As a result, if preventative and/or corrective actions by
the Company and those the Company does business with are not made in a timely
manner, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has not yet developed a contingency plan to operate in the event that any
noncompliant critical systems are not remedied by January 1, 2000, but the
Company intends to develop such a plan in the near future.
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
13
<PAGE> 14
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
NONE
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: November 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 SIX MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 195,702
<SECURITIES> 0
<RECEIVABLES> 234,757
<ALLOWANCES> 953
<INVENTORY> 121,008
<CURRENT-ASSETS> 560,173
<PP&E> 283,216
<DEPRECIATION> 194,330
<TOTAL-ASSETS> 662,076
<CURRENT-LIABILITIES> 2,191,087
<BONDS> 516,519
962,341
0
<COMMON> 63,694
<OTHER-SE> (3,074,565)
<TOTAL-LIABILITY-AND-EQUITY> 662,076
<SALES> 73,895
<TOTAL-REVENUES> 255,441
<CGS> 70,313
<TOTAL-COSTS> 337,405
<OTHER-EXPENSES> 657,021
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147,876
<INCOME-PRETAX> (921,737)
<INCOME-TAX> 0
<INCOME-CONTINUING> (921,737)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (921,737)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
