Part 8 Prospectus
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The comments which are set out below are based on the consolidated financial statements of the Company and the notes thereto which are included elsewhere in this prospectus. See "Consolidated Financial Statements".
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
NINE MONTHS ENDED DECEMBER 31, 1996
Results of operations
Revenues for the nine months ended December 31, 1997 were $5,456,000, an increase of 17.6% from revenues realized for the nine months ended December 31, 1996. The increase represents higher sales of the Company's existing product line.
Cost of sales increased from $3,903,000 in 1996 to $4,620,000 in the corresponding period in 1997, representing an increase of approximately 18.4%. This increase is consistent with the increase in revenues for the period.
Gross research and development expenditures (before investment tax credits) of $1,265,000 for the nine months ended December 31, 1997 compared to $565,000 for the corresponding nine month period in 1996. The increased spending in fiscal 1998 is attributable to employing additional resources to V-Chip Technology product development (including $500,000 paid to CVCD for consulting work done in support of the development of commercial applications of the V-Chip Technology).
Selling, general and administrative expenses increased from $502,000 in the nine months ended December 31, 1996 to $840,000 for the nine months ended December 31, 1997. This increase represents higher spending on marketing efforts to gear up for the upcoming V-Chip Technology product launch.
The net loss after taxes for the period was $99,000 compared to a $14,000 profit for the corresponding period in 1996 due largely to increased spending on selling, general and administrative and financial expenses associated with V-Chip Technology product launch.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Results of operations
Revenues for the fiscal year ended March 31, 1997 were $6,682,000, an increase of 7% over the revenues for the fiscal year ended March 31, 1996. The increase represents higher sales of the Company's proprietary infra-red technology products, while the sales of non-proprietary and refurbished products decreased.
Cost of sales for fiscal 1997 was $5,319,000 or 79.6% of sales as compared to $4,943,000 or 79.2% of sales in fiscal 1996.
Gross research and development expenditures (before investment tax credits) increased from $681,000 to $943,000 during the comparative period. The increased spending during the fiscal year ended March 31, 1997 was attributable to employing additional resources to V-Chip Technology product development. Development costs written off to expense (included in operating expenses) increased to $234,000 compared to $57,000 for the same comparative period in fiscal 1996 relating to a project that the Company determined not to proceed with.
Selling, general and administrative expenses decreased from $895,000 in the fiscal year ended March 31, 1996 to $797,000 for the fiscal year ended March 31, 1997. This decrease was as a result of lower spending on marketing efforts outside of Canada due to the Company's focus on the V-Chip Technology, and a gain in foreign currency translation due to favourable exchange rates.
Net income after taxes for the fiscal year ended March 31, 1997 increased slightly to $230,000 compared to $222,000 for the corresponding period.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Results of operations
Revenues for the fiscal year ended March 31, 1996 were $6,241,000 as compared to the previous year's revenues of $7,143,000, a decrease of 12.6%. The decline was attributable to a reduction in revenues from the international segment which dropped from $2,427,000 in fiscal 1995 to $485,000 in fiscal 1996, whereas sales to Canadian and U.S. market segments increased from $2,957,000 and $1,759,000 in fiscal 1995 to $3,709,000 and $2,047,000 respectively in fiscal 1996. The increase represents higher sales of the Company's proprietary infra-red technology products, while the sales of non-proprietary and refurbished products decreased mainly in the international segment due to a significant decline in the value of the Mexican peso resulting in higher costs for imported products and the imposition of a ban on refurbished products by the Government of Argentina.
Cost of sales for fiscal 1996 was $4,943,000 as compared with $5,751,000 in fiscal 1995. As a percentage of sales, cost of sales was 79.2% in fiscal 1996 as opposed to 80.5% in fiscal 1995.
Gross research and development expenditures (before investment tax credits) were $681,000 in the year ended March 31, 1996 as compared to $635,000 during the previous year. Development costs written-off to expense in fiscal 1996 were $57,000 in comparison with $280,000 in fiscal 1995.
Selling, general and administrative expenses decreased to $895,000 in fiscal 1996 from $1,093,000 during the same period in fiscal 1995 due to cost saving measures (including the closure of sales offices in Montreal, Quebec and Pensicola, Florida) taken by management to keep the Company profitable in view of a decline in sales.
Net income after taxes increased to $223,000 in fiscal 1996 as compared to $10,000 in fiscal 1995. The improvement in profitability was due to management action to rationalize the Company's operations to reduce costs and maximize efficiencies and the decrease in the write-off of development costs.
Liquidity and Capital Resources
Historically the Company has funded its operations through bank indebtedness and equity financings. The completion of a private placement of special warrants in October 1996 provided the Company with net cash proceeds of approximately $2,258,000, which proceeds have been used as to: $200,000 to satisfy initial payments in connection with the Company's acquisition of the worldwide rights to the V-Chip Technology; $690,000 to fund research and development expenditures (with over 75% of such expenditures in connection with the V-Chip Technology); and $1,368,000 to reduce bank indebtedness and to satisfy accounts payable and accrued liabilities (see "Private Placement" and "Rights to the V-Chip Technology").
The Company has an operating line of credit with a Canadian chartered bank in the amount of $1,500,000 with interest payable monthly at a rate of prime plus 1%. At December 31, 1997, $1,092,986 of the operating line had been drawn down by the Company.
Since December 19, 1997, five directors of the Company have advanced to the Company funds in the aggregate amount of $750,000. Such funds are being used for working capital purposes. The loans are unsecured, repayable on demand and bear interest at the rate of 1.25% per month. As of March 17, 1998, the Company has repaid $374,000 of the loans and $376,000 remains outstanding.
In addition to ongoing general and administrative expenses, the Company's planned expenditures for the next two fiscal years are as disclosed under the heading "Use of Proceeds". Of these expenditures, all are discretionary with the exception of $1,900,000 payable to VCCE in connection with the acquisition of the worldwide rights to the V-Chip Technology. Management believes that the Company's current cash resources, available operating lines and net proceeds from the Public Offering of approximately $10,695,000 will be sufficient to fund these expenditures. In addition, to the extent the Over-Allotment Option and/or Warrants are exercised, additional funds would be available to the Company.
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