UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 1997
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COMMISSION FILE NUMBER: 0-18267
Noise Cancellation Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
(410) 636-8700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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.
x Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
122,857,145 shares outstanding as of May 14, 1997
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended March 31,
----------------------------------------
1996 1997
-------- --------
<S> <C> <C>
REVENUES:
Technology licensing fees $ 355 $ 3,000
Product sales, net 135 234
Engineering and development services 191 81
------- --------
Total revenues $ 681 $ 3,315
------- --------
COSTS AND EXPENSES:
Costs of sales $ 178 $ 199
Costs of engineering and development services 131 91
Selling, general and administrative 970 834
Research and development 1,601 1,592
Equity in net loss of unconsolidated affiliates 80 -
Interest (income) expense (4) -
------- --------
Total costs and expenses $ 2,956 $ 2,716
------- --------
NET PROFIT/(LOSS) $(2,275) $ 599
======= ========
Weighted average number of common
shares outstanding 93,328 111,978
======= ========
NET PROFIT/(LOSS) PER COMMON SHARE $ (0.02) $ 0.01
======= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
December 31, March 31,
1996 1997
------------ -----------
ASSETS
Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 368 $ 1,171
Accounts receivable:
Trade:
Technology license fees $ 150 $ 3,000
Joint ventures and affiliates 2 151
Other 392 304
Unbilled 63 63
Allowance for doubtful accounts (123) (63)
---------- ----------
Total accounts receivable $ 484 $ 3,455
Inventories, net of reserves (Note 2) 900 1,227
Other current assets 207 74
---------- ----------
Total current assets $ 1,959 $ 5,927
Property and equipment, net 2,053 1,870
Patent rights and other intangibles, net 1,823 1,740
Other assets 46 277
---------- ----------
$ 5,881 $ 9,814
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable: $ 1,465 $ 1,637
Accrued expenses 1,187 1,046
Accrued payroll, taxes and related expenses 618 417
Customers' advances 1 86
---------- ----------
Total current liabilities $ 3,271 $ 3,186
---------- ----------
Long term obligations $ - $ 3,075
Commitments and contingencies (Note 4)
---------- ----------
Total other liabilities $ - $ 3,075
---------- ----------
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, $.10 par value, 10,000,000 shares
authorized, none issued
Common stock, $.01 par value, 140,000,000 shares
authorized; issued and outstanding 111,614,405
and 112,849,971 shares, respectively $ 1,116 $ 1,129
Additional paid-in-capital 85,025 85,366
Accumulated deficit (83,673) (83,074)
Cumulative translation adjustment 142 132
---------- ----------
Total stockholders' equity $ 2,610 $ 3,553
---------- ----------
$ 5,881 $ 9,814
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
(Thousands of dollars)
Three Months
Ended March 31,
-----------------------
1996 1997
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (2,275) $ 599
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 232 229
Provision for doubtful accounts 45 (209)
Equity in net loss of unconsolidated
affiliates 80 -
Unrealized foreign currency (gain) loss 127 (27)
Loss on disposition of fixed assets - 63
Changes in operating assets and liabilities:
(Increase) in accounts receivable (213) (2,765)
(Increase) decrease in inventories 193 (330)
(Increase) decrease in other assets 89 (100)
Increase in accounts payable and
accrued expenses 62 104
(Decrease) in other liabilities (16) (178)
-------- --------
Net cash (used in) operating activities $ (1,676) $ (2,614)
-------- --------
Cash flows from investing activities:
Capital expenditures $ (229) $ (11)
-------- --------
Net cash (used in) investing activities $ (229) $ (11)
-------- --------
Cash flows from financing activities:
Proceeds from:
Notes (net) $ - $ 3,428
Sale of common stock 688 -
Stock subscription receivable 13 -
-------- --------
Net cash provided by financing activities $ 701 $ 3,428
-------- --------
Net increase (decrease) in cash and cash equivalents $ (1,204) $ 803
Cash and cash equivalents - beginning of period 1,831 368
-------- --------
Cash and cash equivalents - end of period $ 627 $ 1,171
======== ========
Cash paid for interest $ - $ 1
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and certain adjustments to reserves and allowances)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1997, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Noise Cancellation Technologies, Inc. (the
"Company" or "NCT") Annual Report on Form 10-K, as amended, for the year ended
December 31, 1996.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $83.1 million on a
cumulative basis through March 31, 1997. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing fees and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the technology licensing fees and engineering and development funds provided to
the venture or the Company are recovered.
Cash, cash equivalents and short-term investments amount to $1.2 million at
March 31, 1997, increasing from $0.4 million at December 31, 1996. Management
does not believe that available funds are sufficient to sustain the Company for
the next 12 months. Management believes that available cash and cash anticipated
from the exercise of warrants and options, the funding derived from forecasted
technology licensing fees, royalties and product sales, and engineering and
development revenue, the operating cost savings from the reduction in employees,
and reduced capital expenditures and the "First Quarter 1997 Financing"
discussed below should be sufficient to sustain the Company's anticipated future
level of operations into 1998. However, the period during 1998 through which it
can be sustained is dependent upon the level of realization of funding from
technology licensing fees and royalties and product sales and engineering and
development revenue and the achievement of the operating cost savings from the
events described above, all of which are presently uncertain. In the event that
forecasted technology licensing fees, royalties and product sales, and
engineering and development revenue are not realized as planned, then management
believes available funds will only be sufficient to sustain the Company into the
third quarter of 1997 unless additional working capital financing can be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that additional funding will be provided by the
Company's efforts to raise additional capital or by technology licensing fees,
royalties and product sales and engineering and development revenue. In that
event, the Company would have to further and substantially cut back its level of
operations in order to conserve cash. These reductions could have an adverse
effect on the Company's relations with its strategic partners and customers.
Uncertainty exists with respect to the adequacy of current funds to support the
Company's activities until positive cash flow from operations can be achieved,
and with respect to the availability of financing from other sources to fund any
cash deficiencies.
Between January 15, 1997 and March 25, 1997, the Company entered into a
series of subscription agreements to sell an aggregate amount of $3.9 million of
non-voting subordinated convertible debentures (the "Debentures") in a private
placement to five unrelated investors (the "Investors") through multiple dealers
(the "First Quarter 1997 Financing"). Of these subscriptions, sales of
Debentures in an aggregate amount of $3.4 million were completed from which the
net proceeds to the Company were $3.2 million. An additional $0.5 million of
Debentures has been subscribed for by one investor which is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
Debentures into common stock of the Company. The Debentures, issued pursuant to
Regulation S of the Securities Act of 1933, as amended, are due between January
15, 2000 and March 25, 2000 and earn 8% interest per annum, payable quarterly in
either cash or the Company's common stock at the Company's sole option. Subject
to certain common stock resale restrictions, the Investors, at their discretion,
have the right to convert the principal due on the Debentures into the Company's
common stock at any time after the 45th day following the date of the sale of
the Debentures to the Investors. In the event of such a conversion, the
conversion price is the lesser of 85% of the closing bid price of the Company's
common stock on the closing date of the Debentures' sale or between 75% to 60%
(depending on the Investor and other conditions) of the average closing bid
price for the five trading days immediately preceding the conversion. To provide
for the above noted conversion and interest payment options, the Company
reserved 15 million shares of the Company's common stock for issuance upon such
conversion. Subject to certain conditions, the Company also has the right to
require the Investors to convert all or part of the Debentures under the above
noted conversion price conditions after February 15, 1998.
On March 28, 1997, the Company and New Transducers Ltd. ("NXT"), a wholly
owned subsidiary of Verity Group PLC ("Verity") executed a cross licensing
agreement. Under terms of the agreement, the Company will license patents and
patents pending which relate to Flat Panel Transducer(TM) ("FPT(TM)") technology
to NXT, and NXT will license patents and patents pending which relate to
parallel technology to the Company. In consideration of the license, NCT
recorded a $3.0 million license fee receivable from NXT as well as royalties on
future licensing and product revenue. Concurrent with the cross licensing
agreement, the Company and Verity executed agreements granting each an option
for a four year period commencing on March 28, 1998, to acquire a specified
amount of the common stock of the other subject to certain conditions and
restrictions. With respect to the Company's option to Verity, 3.8 million shares
of common stock (approximately 3.4% of the then issued and outstanding common
stock) of the Company are covered by such option, and 5.0 million ordinary
shares (approximately 2.0% of the then issued and outstanding ordinary shares)
of Verity are covered by the option granted by Verity to the Company. The
exercise price under each option is the fair value of a share of the applicable
stock on March 28, 1997, the date of grant. If the Company does not obtain
stockholder approval of an amendment to its Certificate of Incorporation
increasing its common stock capital by an amount sufficient to provide shares of
the Company's common stock issuable upon the full exercise of the option granted
to Verity by September 30, 1997, both options expire.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described above raise substantial doubt at March 31, 1997, about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets or the amount of liabilities that might
result from the outcome of these uncertainties.
2. INVENTORIES:
Inventories comprise the following:
(Thousands of dollars) December 31, March 31,
1996 1997
------------ ---------
Components
$ 543 $ 489
Finished Goods
619 906
----------- ---------
Gross Inventory $1,162 $ 1,395
Reserve for Obsolete & Slow Moving
Inventory (262) (168)
---------- ---------
Inventory, Net of Reserves $ 900 $ 1,227
========== =========
<PAGE>
3. STOCKHOLDERS EQUITY:
<TABLE>
<CAPTION>
The changes in stockholders' equity during the three months ended March 31,
1997, were as follows:
(In thousands)
Net
Balance at Sale of Net (loss) Balance at
December 31, Common for the Translation March 31,
1996 Stock Period Adjustment 1997
------------ ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Common Stock:
Shares 111,614 1,236 -- -- 112,850
Amount $ 1,116 $ 13 $ -- $ -- $ 1,129
Additional
Paid-in Capital 85,025 341 -- -- 85,366
Accumulated
Deficit (83,673) -- 599 -- (83,074)
Cumulative
Translation
Adjustment 142 -- -- (10) 132
</TABLE>
4. LITIGATION:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira ($18.9 million); and (vi) order the
Company to pay damages for the harm done to Mr. Valerio's image for an amount
such as the judge shall deem equitable and in case for no less than 500 million
Lira ($3.1 million). The Company retained an Italian law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the Company, through its Italian counsel, filed a brief of reply with the
Tribunal of Milan setting forth the Company's position that: (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is groundless since the parties never entered into an agreement, and (iii)
because Mr. Valerio is not enrolled in the official Register of Agents, under
applicable Italian law Mr. Valerio is not entitled to any compensation for his
alleged activities. A preliminary hearing before the Tribunal was held on May
30, 1996, certain pretrial discovery has been completed and a hearing before a
Discovery Judge was held on October 17, 1996. Submissions of the parties final
pleadings were to be made in connection with the next hearing which was
scheduled for April 3, 1997. On April 3, 1997, the Discovery Judge postponed
this hearing to May 19, 1998, due to a reorganization of all proceedings before
the Tribunal of Milan. Management is of the opinion that the lawsuit is without
merit and will contest it vigorously. In the opinion of management, after
consultation with outside counsel, resolution of this suit should not have a
material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a severe material effect
on quarterly or annual operating results.
5. SUBSEQUENT EVENTS
As noted above in Note 1., between January 15, 1997 and March 25, 1997, the
Company entered into a series of subscription agreements to sell an aggregate
amount of $3.9 million of Debentures. Of these subscriptions, sales of
Debentures in an aggregate amount of $3.4 million were completed. As of May 14,
1997, the Investors had converted $2.4 million of the Debentures into 10.9
million shares of the Company's common stock. At the Company's election,
interest due through the conversion dates of the Debentures was paid through the
issuance of an additional 0.1 million shares of the Company's common stock.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
GENERAL BUSINESS ENVIRONMENT
The Company is in transition from a firm focused principally on research and
development of new technology to a firm focused on the commercialization of its
technology through technology licensing fees, royalties and product sales. In
prior years, the Company derived the majority of its revenues from engineering
and development funding provided by established companies willing to assist the
Company in the development of its active noise and vibration control technology,
and from technology licensing fees paid by such companies. The Company's
strategy generally has been to obtain technology licensing fees when initiating
joint ventures and alliances with new strategic partners. Revenues from product
sales were limited to sales of specialty products and prototypes. During the
first three months of 1997, the Company received approximately 2.4% of its
operating revenues from engineering and development funding. Since 1991,
excluding quarter to quarter variations, revenues from product sales have been
increasing and management expects that technology licensing fees, royalties and
product sales will become the principal source of the Company's revenue as the
commercialization of its technology proceeds.
The Company has shifted its focus to technology licensing fees, royalties and
products that represent near term revenue generation. This is reflected in the
fact that 91% of the Company's total revenue in the first three months of 1997
represents technology licensing fees. There can be no assurance that additional
technology licensing fees, will continue at that level.
Note 1. to the accompanying Condensed Consolidated Financial Statements and
the liquidity and capital resources section which follows describe the current
status of the Company's available cash balances and the uncertainties which
exist that raise substantial doubt as to the Company's ability to continue as a
going concern.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of active noise and
vibration control build, revenues from technology licensing fees, royalties and
product sales are forecast to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding.
From the Company's inception through March 31, 1997, its operating revenues,
including technology licensing fees and royalties, product sales and engineering
and development services, have consisted of approximately 21% product sales, 47%
engineering and development services and 32% technology licensing fees.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and into their manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed. The sluggish worldwide economy over the past five years has slowed
the adoption and market acceptance of many new technologies.
The Company continues to sell and ship ProActive(TM) and Noisebuster(TM)
headsets in 1997. The Company is now selling products through three of its
alliances: Walker is manufacturing and selling industrial silencers; Siemens is
buying and contracting with the Company to install quieting headsets for patient
use in Siemens' MRI machines; and Ultra is installing production model aircraft
cabin quieting systems in turboprop aircraft. The Company is entitled to receive
royalties from Walker on its sales of industrial silencers, direct product sales
revenue from Siemens' purchase of headsets, and commencing in 1998, royalties
from Ultra on its sale of aircraft cabin quieting systems. Management believes
these activities help demonstrate the range of commercial potential for the
Company's technology and will contribute to the Company's transition from
engineering and development to technology licensing fees, royalties and product
sales.
<PAGE>
Product revenues for the three months ended March 31, 1996 and 1997 were:
<TABLE>
<CAPTION>
PRODUCT REVENUES
(Thousands of dollars)
Three Months Ended March 31,
----------------------------------------------
Amount As a % of Total
------------------ --------------------
Product 1996 1997 1996 1997
- --------------------- ----- ----- ------ ------
<S> <C> <C> <C> <C>
Headsets $ 130 $ 213 96.3% 91.0%
Other 6 9 4.4% 3.8%
Fan Quieting Products (1) 6 -0.7% 2.6%
Communications - 6 -% 2.6%
----- ----- ------ ------
Total $ 135 $ 234 100.0% 100.0%
===== ===== ====== ======
</TABLE>
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products.
Management believes that the Company's investment in its technology has resulted
in the expansion of its intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
Between January 15, 1997 and March 25, 1997, the Company entered into a
series of subscription agreements to sell an aggregate amount of $3.9 million of
non-voting subordinated convertible debentures (the "Debentures") in a private
placement to five unrelated investors (the "Investors") through multiple dealers
(the "First Quarter 1997 Financing"). Of these subscriptions, sales of
Debentures in an aggregate amount of $3.4 million were completed from which the
net proceeds to the Company were $3.2 million. An additional $0.5 million of
Debentures has been subscribed for by one investor which is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
Debentures into common stock of the Company. The Debentures, issued pursuant to
Regulation S of the Securities Act of 1933, as amended, are due between January
15, 2000 and March 25, 2000 and earn 8% interest per annum, payable quarterly in
either cash or the Company's common stock at the Company's sole option. Subject
to certain common stock resale restrictions, the Investors, at their discretion,
have the right to convert the principal due on the Debentures into the Company's
common stock at any time after the 45th day following the date of the sale of
the Debentures to the Investors. In the event of such a conversion, the
conversion price is the lesser of 85% of the closing bid price of the Company's
common stock on the closing date of the Debentures' sale or between 75% to 60%
(depending on the Investor and other conditions) of the average closing bid
price for the five trading days immediately preceding the conversion. To provide
for the above noted conversion and interest payment options, the Company
reserved 15 million shares of the Company's common stock for issuance upon such
conversion. Subject to certain conditions, the Company also has the right to
require the Investors to convert all or part of the Debentures under the above
noted conversion price conditions after February 15, 1998.
Management believes that available cash and cash anticipated from the
exercise of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue, the operating cost savings from the reduction in employees, and reduced
capital expenditures and the First Quarter 1997 Financing should be sufficient
to sustain the Company's anticipated future level of operations into 1998.
However, the period during 1998 through which it can be sustained is dependent
upon the level of realization of funding from technology licensing fees and
royalties and product sales and engineering and development revenue and the
achievement of the operating cost savings from the events described above, all
of which are presently uncertain. In the event that forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue are not realized as planned, then management believes available funds
will only be sufficient to sustain the Company into the third quarter of 1997
unless additional working capital financing can be obtained. There is no
assurance any such financing is or would become available.
There can be no assurance that additional funding will be provided by the
Company's efforts to raise additional capital or by technology licensing fees,
royalties and product sales and engineering and development revenue. In that
event, the Company would have to further and substantially cut back its level of
operations in order to conserve cash. These reductions could have an adverse
effect on the Company's relations with its strategic partners and customers.
Uncertainty exists with respect to the adequacy of current funds to support the
Company's activities until positive cash flow from operations can be achieved,
and with respect to the availability of financing from other sources to fund any
cash deficiencies.
Management believes that the funding provided by the additional capital
referred to above coupled with anticipated increased product sales, technology
licensing fees, royalties, and cost savings, if realized, should enable the
Company to continue operations into 1998. If the Company is not able to generate
additional capital, increase technology licensing fees, royalties and product
sales, or generate additional capital, it will have to further cut its level of
operations substantially in order to conserve cash. (Refer to "Liquidity and
Capital Resources" below and to Note 1. - "Notes to the Condensed Consolidated
Financial Statements" for a further discussion relating to continuity of
operations.)
RESULTS OF OPERATIONS
Total revenues for the first three months of 1997 were $3.3 million compared
to $0.7 million for the same period in 1996, an increase of $2.6 million or
387%.
Product sales increased to $0.2 million versus $0.1 million in 1996, a
increase of $0.1 million or 73% primarily reflecting increased NoiseBuster(TM)
sales. Engineering and development services decreased to $0.1 million from $0.2
million in 1996, a decrease of $0.1 million or 58%.
Technology licensing fees in the first three months of 1997 were $3.0 million
versus $0.4 million in 1996, an increase of $2.6 million or 745% primarily due
to the $3.0 million Verity license fee noted above.
Cost of product sales were unchanged remaining at $0.2 million in both 1996
and 1997. Product margin increased to 15% from (32)% during the same period in
1996 reflecting first quarter 1996 lower price and margin on NoiseBuster(TM) and
product returns. Cost of engineering and development services decreased 31% to
$0.1 million due to decreased contract revenue. The gross margin on engineering
and development services decreased to (12)% from 31% during the same period in
1996, primarily due to more profitable contracts in 1996.
Selling, general and administrative expenses for the first three months were
$0.8 million versus $1.0 million in 1996, a decrease of $0.2 million or 14%
primarily due to a one-time adjustment in reserves for bad debt reflecting the
collection of previously fully reserved receivables.
Research and development expenditures for the first three months of 1997 were
$1.6 million, unchanged from 1996. The Company continues to be focused on
products to be developed within a short term..
Under most of the Company's joint venture agreements, the Company is not
required to fund any capital requirements of these joint ventures beyond its
initial capital contribution. In accordance with U.S. generally accepted
accounting principles, when the Company's share of cumulative losses equals its
investment and the Company has no obligation or intention to fund such
additional losses, the Company suspends applying the equity method of accounting
for its investment. The Company will not be able to record any equity in income
with respect to an entity until its share of future profits is sufficient to
recover any cumulative losses that have not previously been recorded. During the
first quarter 1996, the Company recognized a $0.1 million charge related to its
share of losses in OnActive Technologies, L.L.C. which brought the Company's
equity in the joint venture to zero. There was no such charge in the first
quarter 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $83.1 million on a
cumulative basis through March 31, 1997. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing fees and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the license fees and engineering and development funds provided to the venture
or the Company are recovered.
In January 1996, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1997.
Under this plan, as amended, the Company needed to generate approximately $17
million to fund its operations for 1996. The Company believed that it could
generate these funds from operations in 1996, and the additional cash funding
obtained from sales of common stock (refer to Note 1. "Notes to the Condensed
Consolidated Financial Statements."). Included in such amount was approximately
$8.9 million in sales of new products and approximately $9.0 million of
technology licensing fees and royalties. The Company did not meet its revenue
targets for 1996.
<PAGE>
Between January 15, 1997 and March 25, 1997, the Company conducted the
First Quarter 1997 Financing by entering into a series of subscription
agreements to sell an aggregate amount of $3.9 million of Debentures in a
private placement to the five Investors. Of these subscriptions, sales of
Debentures in an aggregate amount of $3.4 million were completed from which the
net proceeds to the Company were $3.2 million. An additional $0.5 million of
Debentures has been subscribed for by one investor which is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
Debentures into common stock of the Company. The Debentures, issued pursuant to
Regulation S of the Securities Act of 1933, as amended, are due between January
15, 2000 and March 25, 2000 and earn 8% interest per annum, payable quarterly in
either cash or the Company's common stock at the Company's sole option. Subject
to certain common stock resale restrictions, the Investors, at their discretion,
have the right to convert the principal due on the Debentures into the Company's
common stock at any time after the 45th day following the date of the sale of
the Debentures to the Investors. In the event of such a conversion, the
conversion price is the lesser of 85% of the closing bid price of the Company's
common stock on the closing date of the Debentures' sale or between 75% to 60%
(depending on the Investor and other conditions) of the average closing bid
price for the five trading days immediately preceding the conversion. To provide
for the above noted conversion and interest payment options, the Company
reserved 15 million shares of the Company's common stock for issuance upon such
conversion. Subject to certain conditions, the Company also has the right to
require the Investors to convert all or part of the Debentures under the above
noted conversion price conditions after February 15, 1998.
Management believes that available cash and cash anticipated from the
exercise of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue, the operating cost savings from the reduction in employees, and reduced
capital expenditures and the First Quarter 1997 Financing should be sufficient
to sustain the Company's anticipated future level of operations into 1998.
However, the period during 1998 through which it can be sustained is dependent
upon the level of realization of funding from technology licensing fees and
royalties and product sales and engineering and development revenue and the
achievement of the operating cost savings from the events described above, all
of which are presently uncertain. In the event that forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue are not realized as planned, then management believes available funds
will only be sufficient to sustain the Company into the third quarter of 1997
unless additional working capital financing can be obtained. There is no
assurance any such financing is or would become available.
There can be no assurance that additional funding will be provided by the
Company's efforts to raise additional capital or by technology licensing fees,
royalties and product sales and engineering and development revenue. In that
event, the Company would have to further and substantially cut back its level of
operations in order to conserve cash. These reductions could have an adverse
effect on the Company's relations with its strategic partners and customers.
Uncertainty exists with respect to the adequacy of current funds to support the
Company's activities until positive cash flow from operations can be achieved,
and with respect to the availability of financing from other sources to fund any
cash deficiencies.
Management believes that the funding provided by the additional capital
referred to above coupled with anticipated increased product sales, technology
licensing fees, royalties, and cost savings, if realized, should enable the
Company to continue operations into 1998. (Refer to Note 1. - "Notes to the
Condensed Consolidated Financial Statements" for a further discussion relating
to continuity of operations.) Success in generating technology licensing fees,
royalties and product sales are significant and critical to the Company's
ability to overcome its present financial difficulties. The Company cannot
predict whether it will be successful in obtaining market acceptance of its new
products or in completing its current negotiations with respect to licenses and
royalty revenues. The Company will monitor its performance against the plan on a
monthly basis and, if necessary, reduce its level of operations accordingly. The
Company believes that the plan discussed above constitutes a viable plan for the
continuation of the Company's business into 1998.
There can be no assurance that funding will be provided by additional
capital, technology licensing fees, royalties, product sales, engineering and
development revenue. In that event, the Company would have to further cut back
its level of operations substantially in order to conserve cash. These
reductions could have an adverse effect on the Company's relations with its
strategic partners and customers. The uncertainty with respect to the adequacy
of current funds to support the Company's activities until positive cash flow
from operations can be achieved, and with respect to the availability of
financing from other sources to fund any cash deficiencies, raises substantial
doubt about the Company's ability to continue as a going concern. Further
discussion of these uncertainties is presented in Note 1. - "Notes to the
Condensed Consolidated Financial Statements".
<PAGE>
At March 31, 1997, cash and short-term investments were $1.2 million. The
available resources were invested in interest bearing money market accounts. The
Company's investment objective is preservation of capital while earning a
moderate rate of return.
The Company's working capital increased to $2.7 million at March 31, 1997,
from $(1.3) million at December 31, 1996. This increase of $4.0 million was
funded primarily by the transactions described above and used primarily to fund
operations for the period.
During the first three months of 1997, the net cash used in operating
activities was $2.6 million, compared to $1.7 million used in operating
activities during the same period of 1996.
Net inventory increased during the first three months of 1997 by $0.3 million
due primarily to stocking for anticipated sales of the ProActiveTM headsets.
Cash provided by financing activities amounted to $3.4 million reflecting
the sale of secured convertible term notes described above.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company to
integrate its active technology into products with limited capital investment in
production facilities and manufacturing personnel; and (iii) access to
well-established channels of distribution and marketing capability of leaders in
several market segments.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
There were no material commitments for capital expenditures as of March 31,
1997, and no material commitments are anticipated in the near future.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 4 - "Notes to the Condensed
Consolidated Financial Statements" which is incorporated by reference herein.
ITEM 6 -EXHIBITS
(a) Exhibits
Exhibit No. Description
----------- -----------
11 Computation of Net Profit (Loss) Per Share
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarterly
period covered by this report:
(1) A report on Form 8-K was filed on January 27, 1997, reporting a
change in the terms of a contemplated private placement as previously
described in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996, and reporting the sale of
non-voting subordinated convertible debentures pursuant to Regulation
S.
(2) A report on Form 8-K was filed on February 7, 1997, reporting the
sale of non-voting subordinated convertible debentures pursuant to
Regulation S.
(3) A report on Form 8-K was filed on February 25, 1997, reporting
the sale of non-voting subordinated convertible debentures pursuant
to Regulation S.
(4) A report on Form 8-K was filed on March 25, 1995, reporting the
sale of non-voting subordinated convertible debentures pursuant to
Regulation S.
(5) A report on Form 8-K was filed on April 15, 1997, reporting the
Company's net tangible assets at April 14, 1997, being in compliance
with certain listing criteria of the Nasdaq National Market System as
reflected on the Company's unaudited summary balance sheet at such
date included therewith as an exhibit.
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella, President
By: /s/ JEFFREY C. ZEITLIN
-----------------------
Jeffrey C. Zeitlin
Senior Vice President, Operations, and
Chief Financial Officer
Dated: May 20, 1997
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
Computation of Net Profit (Loss) Per Share
(In thousands, except per share amounts)
Three months ended March 31,
---------------------------------------
1996 1997
------------------ -----------------
<S> <C> <C>
PRIMARY
Net profit (loss) $ (2,275) $ 599
Less: reduction of interest expense or interest
earned attributable to utilization of assumed
proceeds from exercise of options and warrants
in excess of amounts required to repurchase
20% of the outstanding common stock at average
market price
--------- --------
ADJUSTED NET PROFIT (LOSS) $ (2,275) $ 599
======== ========
Weighted average number of shares outstanding 93,328 111,978
Add: common equivalent shares (determined using
the "Treasury Stock" method) representing shares
issuable upon assumed exercise of options and
warrants in excess of average market price 4,166 520
Shares issuable upon conversion of Series B
preferred shares - -
-------- --------
SHARES USED FOR COMPUTATION 97,494 112,498
======== ========
PRIMARY NET PROFIT (LOSS) PER SHARE $ (0.02) $ 0.01
======== ========
FULLY DILUTED
Net profit (loss) $ (2,275) $ 599
Less: reduction of interest expense or interest
earned attributable to utilization of assumed
proceeds from exercise of options and warrants
in excess of amounts required to repurchase
20% of the outstanding common stock at year-end
market price if greater than average market price
-------- --------
ADJUSTED NET PROFIT (LOSS) $ (2,275) $ 599
======== ========
Weighted average number of shares outstanding. 93,328 111,978
Add: common equivalent shares (determined using
the "Treasury Stock" method) representing shares
issuable upon assumed exercise of options and
warrants in excess of year-end market price
if greater than average market price 4,166 520
Shares issuable upon conversion of Series B
preferred shares - -
-------- --------
SHARES USED FOR COMPUTATION 97,494 112,498
======== ========
FULLY DILUTED NET PROFIT (LOSS) PER SHARE $ (0.02) $ 0.01
======== ========
</TABLE>
The above per share data are not reported on the statement of operations because
such data is anti-dilutive.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED AND NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996, AS AMENDED, FILED ON APRIL 15, 1997.
</LEGEND>
<CIK> 0000722051
<NAME> NOISE CANCELLATION TECHNOLOGIES, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 0
<CASH> 1171
<SECURITIES> 0
<RECEIVABLES> 3518
<ALLOWANCES> 63
<INVENTORY> 1227
<CURRENT-ASSETS> 5927
<PP&E> 5304
<DEPRECIATION> 3435
<TOTAL-ASSETS> 9589
<CURRENT-LIABILITIES> 3186
<BONDS> 0
0
0
<COMMON> 1129
<OTHER-SE> 2199
<TOTAL-LIABILITY-AND-EQUITY> 9589
<SALES> 234
<TOTAL-REVENUES> 3315
<CGS> 199
<TOTAL-COSTS> 290
<OTHER-EXPENSES> 2426
<LOSS-PROVISION> (209)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 599
<INCOME-TAX> 0
<INCOME-CONTINUING> 599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 599
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
