UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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)
<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
-----------------------------
1997 1998
--------------- --------------
REVENUES:
<S> <C> <C>
Technology licensing fees and royalties $ 3,000 $ 310
Product sales, net 234 402
Engineering and development services 81 22
---------- -----------
Total revenues $ 3,315 $ 734
---------- -----------
COSTS AND EXPENSES:
Costs of sales $ 199 $ 303
Costs of engineering and development
services 91 22
Selling, general and administrative 834 2,677
Research and development 1,592 1,464
Interest (income) expense - (121)
---------- -----------
Total costs and expenses $ 2,716 $ 4,345
---------- -----------
NET INCOME/(LOSS) $ 599 $ (3,611)
Preferred stock dividend requirement - 1,690
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock - 385
---------- -----------
NET INCOME/(LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ 599 $ (5,686)
========== ===========
Basic income per share $ 0.01 $ (0.04)
========== ===========
Diluted income per share $ 0.01 $ (0.04)
========== ===========
Weighted average common shares outstanding -
basic income per share 111,978 133,161
Effect of potential common shares 520 -
---------- -----------
Weighted average common shares outstanding -
diluted income per share 112,498 133,161
========== ===========
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands of dollars)
Three months ended March 31,
----------------------------
1997 1998
--------- ----------
<S> <C> <C>
NET INCOME/(LOSS) $ 599 $ (3,611)
Other comprehensive income/(loss)
Currency translation adjustment (10) (3)
--------- ----------
COMPREHENSIVE INCOME/(LOSS) $ 589 $ (3,614)
========= ==========
</TABLE>
The accompanying notes are an integral part of the condensed 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,
1997 1998
------------ -----------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 1) $12,604 $ 8,299
Accounts receivable:
Trade:
Technology license fees and royalties 200 35
Joint ventures and affiliates - 132
Other 368 597
Unbilled - 49
Allowance for doubtful accounts (38) (42)
------------ -----------
Total accounts receivable $ 530 $ 771
Inventories, net of reserves (Note 2) 1,333 2,174
Other current assets 213 369
------------ -----------
Total current assets $14,680 $11,613
Property and equipment, net 1,144 1,187
Patent rights and other intangibles, net 1,488 1,405
Other assets 49 50
------------ -----------
$17,361 $14,255
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,324 $ 1,585
Accrued expenses 1,392 1,517
Accrued payroll, taxes and related expenses 181 190
Customers' advances 87 87
----------- -----------
Total current liabilities $ 2,984 $ 3,379
----------- -----------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, $.10 par value, 10,000,000 shares authorized,
13,250 issued (redemption amount $13,314,399) $10,458 $12,533
Common stock, $.01 par value, 185,000,000 shares, authorized;
issued and outstanding 133,160,212 and 133,161,773
shares, respectively 1,332 1,332
Additional paid-in-capital 96,379 94,480
Unearned portion of compensatory warrants - (127)
Accumulated deficit (93,521) (97,132)
Cumulative translation adjustment 119 116
Common stock subscriptions receivable (390) (326)
----------- -----------
Total stockholders' equity $14,377 $10,876
----------- -----------
$17,361 $14,255
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
(in thousands of dollars)
Three months ended March 31,
----------------------------
1997 1998
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net income/(loss) $ 599 $ (3,611)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 229 241
Common stock options and warrants issued as consideration for:
Compensation - 68
Provision for tooling costs and write off - 3
Provision for doubtful accounts (209) 4
Loss on disposition of fixed assets 63 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,765) (446)
Decrease in license fees receivable - 200
(Increase) in inventories (330) (841)
(Increase) in other assets (100) (157)
Increase in accounts payable and accrued expenses 104 375
Increase (decrease) in other liabilities (178) 22
--------- ---------
Net cash (used in) operating activities $ (2,587) $ (4,142)
--------- ---------
Cash flows from investing activities:
Capital expenditures $ (11) $ (198)
--------- ---------
Net cash (used in) investing activities $ (11) $ (198)
--------- ---------
Cash flows from financing activities:
Proceeds from:
Convertible debt (net) $ 3,428 $ -
Sale of preferred stock (net) - (9)
Sale of subsidiary stock (net) - (10)
Stock subscription receivable - 64
--------- $--------
Net cash provided by financing activities $ 3,428 $ 45
--------- ---------
Effect of exchange rate changes on cash $ (27) $ (10)
--------- ---------
Net increase (decrease) in cash and cash equivalents $ 803 $ (4,305)
Cash and cash equivalents - beginning of period 368 12,604
--------- $--------
Cash and cash equivalents - end of period $ 1,171 $ 8,299
========= =========
Cash paid for interest $ 1 -
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed 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, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, for the
year ended December 31, 1997 as amended by Amendment No. 1 thereto filed on
April 30, 1998 and Amendment No. 2 thereto filed on May 4, 1998.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $97.1 million on a
cumulative basis through March 31, 1998. 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 amounted to $8.3 million
at March 31, 1998, decreasing from $12.6 million at December 31, 1997.
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, and the sale of shares of stock of Verity Group plc ("Verity"),
discussed below, should be sufficient to sustain the Company's anticipated
future level of operations into 1999. However, the period during 1999 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, all of which are presently uncertain.
Management believes that the funding provided by the sources referred to
above including the anticipated increased product sales, technology licensing
fees and royalties, if realized, should enable the Company to continue
operations into 1999. 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 cut its level of operations substantially in
order to conserve cash. (Refer to "Liquidity and Capital Resources" below for a
further discussion relating to continuity of operations.)
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, 1998, 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.
<PAGE>
2. INVENTORIES:
Inventories comprise the following:
(Thousands of dollars)
---------------------------
December 31, March 31,
1997 1998
------------ ------------
Components $ 514 $ 570
Finished Goods 1,291 1,733
Gross Inventory $ 1,805 $ 2,303
Reserve for Obsolete & Slow Moving
Inventory (472) (129)
-------- --------
Inventory, Net of Reserves $ 1,333 $ 2,174
======== ========
The reserve for obsolete and slow moving inventory at March 31, 1998
decreased due to the application of reserves to slow moving inventory.
3. STOCKHOLDERS' EQUITY:
The changes in stockholders' equity during the three months ended March
31, 1998, were as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
Balance at Net Sale of Net Sale Stock Compensatory Balance at
December Preferred of Common Subscription Options/ Accumulated Translation March
31, 1997 Stock Stock Receivable Warrants (Deficit) Adjustment 31, 1998
---------- --------- ------ ------------ -------- ----------- ----------- ----------
Preferred Stock:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares 13 - - - - - - 13
Amount 10,458 2,075 - - - - - 12,533
Common Stock:
Shares 133,162 - - - - - - 133,162
Amount 1,332 - - - - - - 1,332
Additional
Paid-in Capital 96,379 (2,084) (10) - 195 - - 94,480
Accumulated
Surplus (Deficit) (93,521) - - - - (3,611) - (97,132)
Cumulative
Translation
Adjustment 119 - - - - - (3) 116
Stock Subscription
Receivable (390) - - 64 - - - (326)
Unearned Compensatory
Stock Options/Warrants - - - - (127) - - (127)
</TABLE>
<PAGE>
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.
On September 16, 1997, Ally Capital Corporation ("Ally") filed suit
against the Company, John J. McCloy II, Michael J. Parrella, Jay M. Haft and
Alistair J. Keith in the United States District Court for the District of
Connecticut (the "District Court"). The complaint was not served on the Company
until January 16, 1998, and has yet to be served on the individual defendants.
The individual defendants are current and former officers and directors of the
Company. The complaint alleges three (3) causes of action arising out of an
agreement (the "Asset Purchase Agreement") which the Company entered into with
another entity known as Active Noise and Vibration Technologies, Inc. ("ANVT")
whereby the Company agreed to acquire ANVT's patented and unpatented
intellectual property, the rights and obligations under a defined list of
agreements between ANVT and twenty-one (21) other parties (the "Listed Parties")
relating to existing or potential joint ventures, licensing and other business
relationships, and certain items of office and laboratory equipment. For these
assets, the Company paid ANVT two hundred thousand ($200,000.00) dollars and
issued ANVT two million (2,000,000) shares of the Company's common stock. The
Asset Purchase Agreement also provided ANVT with the right to certain contingent
payments, to the extent the Company generated certain levels of revenue from
joint venture, licensing or other contractual relationships with any of the
Listed Parties. Plaintiff Ally is an unsecured creditor of ANVT and is not a
party to the Asset Purchase Agreement; however, Ally asserts an interest to part
of the consideration paid ANVT by virtue of an escrow agreement between ANVT and
the escrow agent for the benefit of ANVT's secured and unsecured creditors. Ally
purports to allege claims of fraud, negligent misrepresentation and a claim
under the Connecticut Unfair Trade Practice Act based upon purported
representations made to ANVT, not Ally. Thus, it is alleged that the Company
misrepresented to ANVT the Company's financial condition, the number of shares
it could issue and the value of the contingent payment rights under the Asset
Purchase Agreement. In connection with the claims, Ally seeks compensatory
damages in excess of one million two hundred thousand ($1,200,000.00) dollars,
punitive damages and attorney fees. On March 4, 1998, the Company served its
motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12.
The basis for the motion include: that the summons and complaint were not served
for more than one hundred twenty (120) days after the complaint was filed, in
violation of Federal Rule of Civil Procedure 4; that Ally lacks standing to
bring its claims as they are based on purported representations made by the
Company to ANVT, not Ally; that the claims are legally insufficient under
Connecticut law; and that plaintiff has failed to join necessary parties, ANVT
and the escrow agent. As no discovery has taken place, the Company is unable to
assess the likelihood of an adverse result. Management, however, believes it has
meritorious defenses and intends a vigorous defense of this lawsuit. However, in
the event this 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.
<PAGE>
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. The summons and complaint in the suit were served on the Company and
Mr. Parrella on June 24, 1998. The complaint alleges the Company breached, and
Mr. Parrella interfered with, a purported contract entered into "in 1996"
between the Company and SCI under which SCI was to be paid commissions by the
Company when the Company received capital from investors who purchased
debentures or convertible preferred stock of the Company during a period
presumably commencing on the date of the alleged contract and allegedly
extending at least to May 1, 1998. In this regard, the complaint alleges that
SCI by virtue of a purported right of first refusal that the Company did not
honor, is entitled to commissions totaling $1,500,000 in connection with the
Company's sale of $13,300,000 of preferred stock and a subsidiary of the
Company's sale of $4,000,000 of stock convertible into stock of the Company. In
the complaint SCI demands judgment against the Company for compensatory damages
of $1,673,000, punitive damages of $50,000 and attorneys' fees of $50,000 and
demands judgment against Mr. Parrella for compensatory damages of $150,000,
punitive damages of $500,000 and attorneys' fees of $50,000 as well as
unspecified other appropriate relief. Because the Company has only recently been
served in the suit and no discovery has taken place, the Company is unable to
assess the likelihood of an adverse result. Management, however, believes it has
meritorious defenses and intends a vigorous defense of this suit. However, in
the event this suit 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. Common Stock
At March 31, 1998, the aggregate number of shares required to be reserved
for issuance upon the exercise of all outstanding options and warrants amounted
to 17.7 million shares. The number of shares currently available for the
exercise of options and warrants was 18.6 million and of the outstanding options
and warrants, options and warrants to purchase 17.3 million shares were
currently exercisable.
6. Common Stock Options
On January 15, 1998, the Board of Directors amended the Noise Cancellation
Technologies, Inc. Stock Incentive Plan (the "1992 Plan"), subject to
stockholder approval, to increase the aggregate number of shares of the
Company's common stock reserved for awards of restricted stock and for issuance
upon the exercise of stock options granted under the 1992 Plan from 10,000,000
shares to 30,000,000 shares and to amend certain administrative provisions of
the 1992 Plan (the "1992 Plan Amendment"). The Company plans to seek stockholder
approval of the 1992 Plan Amendment at the next annual meeting of stockholders
of the Company.
On October 6, 1997, the Board of Directors had also granted options to
purchase 1.9 million shares of the Company's common stock to four officers of
the Company subject to the approval by the Company's stockholders of an increase
in the number of shares covered by the 1992 Plan.
On January 15, 1998, the Board of Directors granted options to purchase
6.6 million shares of the Company's common stock, in the aggregate, to the
Company's President and its four non-employee directors, subject to stockholder
approval of the 1992 Plan Amendment. While none of the options to purchase such
6.6 million shares of the Company's common stock become vested or exercisable
until stockholder approval of the 1992 Plan Amendment, options to purchase 4.0
million of such shares, will not become vested and exercisable thereafter until
the satisfaction of additional vesting requirements. On January 15, 1998, the
Company also granted an option to purchase 2,000 shares of the Company's common
stock under the 1992 Plan in connection with an offer of employment. Such option
will become vested and exercisable on the six month anniversary of employment.
On February 14, 1998, the Board of Directors granted options to purchase
3.6 million shares of the Company's common stock to certain officers, other
employees and consultants of the Company subject to stockholder approval of the
1992 Plan Amendment. While none of the options to purchase said 3.6 million
shares of the Company's common stock become vested or exercisable until
stockholder approval of the 1992 Plan Amendment, options to purchase 2.1 million
of such shares will not become vested or exercisable thereafter until the
satisfaction of additional vesting requirements.
All of the foregoing options were granted with exercise prices equal to
the fair value of the Company's common stock on the date of grant. The fair
value of the Company's common stock was $0.6875 on October 6, 1997, $1.0625 on
January 15, 1998, and $1.0313 on February 14, 1998, as determined from the last
sale price of the Company's common stock as reported by the NASDAQ National
Market System on those dates.
<PAGE>
At the time of such stockholder approval, if the market value of the
Company's stock exceeds the exercise price of the subject options noted above,
the Company will incur a non-cash charge to earnings equal to the spread between
the exercise price of the option and market price, times the number of options
involved.
7. Common Stock Warrants
On January15, 1998, the Company granted a warrant to purchase 350,000
shares of the Company's common stock to a financial consultant in partial
consideration for past services in connection with equity financing.
On February 14, 1998, the Company granted warrants to purchase 464,250
shares, in the aggregate, of the Company's common stock to two other financial
consultants in partial consideration for past services in connection with equity
financing. On this date the Company also granted a warrant to purchase 200,000
shares of the Company's common stock to a consultant in consideration for
services which does not become exercisable until the earlier of conclusion by
the Company of certain contemplated significant commercial agreements or
December 31, 1999. The Company has recognized $68,000 of expense in connection
with the grant of warrants to this consultant as of March 31, 1998.
All of the foregoing warrants were granted with exercise prices equal to
the fair value of the Company's common stock on the date of grant determined as
described in Note 6 above.
8. Subsequent Events
On April 30, 1998, the Company completed the sale of 5.0 million ordinary
shares of Verity acquired upon the Company's exercise on April 7, 1998 of the
option it held to purchase such shares at a price of 50 pence per share. This
option was acquired by the Company in connection with the cross license
agreement entered into by the Company, Verity and Verity's wholly-owned
subsidiary, New Transducers Limited ("NXT"). The Company realized $3.2 million
net proceeds from the exercise of such option and the sale of the Verity
ordinary shares received therefrom.
9. Recently Issued Accounting Pronouncements
The Company will be required to implement No. 131, Disclosure About
Segments of an Enterprise and Related Information, in the fourth quarter of
1998. The Company has not yet determined whether the above pronouncements will
have a significant effect on the information presented in the financial
statements.
10. Net Income (Loss) Per Share of Common Stock
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Dilutive earnings per
share is very similar to the previously reported fully diluted earnings per
share. The Company adopted Statement No. 128 and has retroactively applied the
effects thereof for all periods presented. The impact on the per share amounts
previously reported was not significant. The effects of potential common shares
such as warrants, options, and convertible preferred stock has not been
included, if the effect would be antidilutive.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1998
FORWARD LOOKING STATEMENTS
Statements in this filing which are not historical facts are
forward-looking statements under provisions of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. The Company wishes to caution readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, the Company's actual results and could cause its actual results in
fiscal 1998 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems for Active Wave Management; produce a cost
effective product that will gain acceptance in relevant consumer and other
product markets; increase revenues from products; realize funding from
technology licensing fees, royalties, product sales, and engineering and
development revenues to sustain the Company's current level of operation; timely
introduce new products; continue its current level of operations to support the
fees associated with the Company's patent portfolio; maintain satisfactory
relations with its five customers that accounted for 71% of the Company's
revenues in 1997; attract and retain key personnel; prevent invalidation,
abandonment or expiration of patents owned or licensed by the Company and expand
its patent holdings to diminish reliance on core patents; have its products
utilized beyond noise attenuation and control; maintain and expand its strategic
alliances; and protect Company know-how, inventions and other secret or
unprotected intellectual property.
GENERAL BUSINESS ENVIRONMENT
The Company is 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. With the exception of sales
of the Company's NoiseBuster(R) headsets, historically revenues from product
sales were limited to sales of specialty products and prototypes. The Company
plans to introduce and sell twenty-five new products and accessories in
commercial quantities in various markets during the first half of 1998. During
the first quarter of 1998 the Company received 55% of its revenue from product
sales, 42% from license fees and royalties and only 3% from engineering and
development services. 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.
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.
As previously disclosed, the Company implemented changes in its
organization and focus in late 1994. Additionally, in late 1995 the Company
redefined its corporate mission to be the worldwide leader in the advancement
and commercialization of Active Wave Management technology. Active Wave
Management is the electronic and/or mechanical manipulation of sound or signal
waves to reduce noise, improve signal-to-noise ratios and/or enhance sound
quality. This redefinition is the result of the development of new technologies
which the Company believes can produce products for fields beyond noise and
vibration reduction and control. These technologies and products are consistent
with shifting the Company's focus to technology licensing and product marketing
in more innovative industries having greater potential for near term revenue
generation.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of the Company's
technologies build as anticipated by management, revenues from technology
licensing fees, royalties and product sales are forecasted 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. The beginning of this process is shown in the shifting percentages of
operating revenue, discussed below.
From the Company's inception through March 31, 1998, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 24%
product sales, 45% engineering and development services and 31% technology
licensing fees.
<PAGE>
During the first quarter of 1998, the Company's source of revenue had
shifted to approximately 55% product sales, 3% engineering and development
services and 42% technology licensing fees and royalties.
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 Company continues to sell and ship ProActive(TM) and NoiseBuster(R)
headsets in 1998. The Company is now selling products through three of its
alliances: Walker Electronic Silencing, Inc. ("Walker") is manufacturing and
selling industrial silencers; Siemens Medical Systems, Inc. ("Siemens") is
buying and contracting with the Company to install quieting headsets for patient
use in Siemens' MRI machines; and Ultra Electronics, Limited ("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 and from Ultra on its sale of aircraft cabin quieting
systems. The Company also is entitled to receive direct product sales revenue
from Siemens' purchase of headsets. In addition, the Company is entitled to
royalties from NXT on its sale of certain audio products and from suppliers to
United Airlines and another major carrier for integrated noise cancellation
active-ready passenger headsets.
Product revenues for the three months ended March 31, 1997 and 1998
were:
PRODUCT REVENUES
(Thousands of dollars Three Months Ended March 31,
----------------------------------------
Amount As a % of Total
------------------- -------------------
Product 1997 1998 1997 1998
------------------ -------- --------- --------- --------
Hearing $213 $236 91.0% 58.7%
Communications 6 147 2.6% 36.6%
Audio - 12 0.0% 3.0%
Other 15 7 6.4% 1.7%
-------- --------- --------- --------
Total $234 $402 100.0% 100.0%
======== ========= ========= ========
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.
On April 30, 1998, the Company completed the sale of 5.0 million ordinary
shares of Verity acquired upon the Company's exercise on April 7, 1998 of the
option it held to purchase such shares at a price of 50 pence per share. This
option was acquired by the Company in connection with the cross license
agreement entered into by the Company, Verity and NXT. The Company realized $3.2
million net proceeds from the exercise of such option and the sale of the Verity
ordinary shares received therefrom.
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, and the sale of Verity shares should be sufficient to sustain the
Company's anticipated future level of operations into 1999. However, the period
during 1999 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, all of which are presently
uncertain. 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 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" above for a further
discussion relating to continuity of operations.)
<PAGE>
RESULTS OF OPERATIONS
Total revenues for the first three months of 1998 were $0.7 million
compared to $3.3 million for the same period in 1997, a decrease of $2.6 million
or 78%. The first quarter 1997 revenue included a one-time $3.0 million cross
license fee from Verity (see below). The timing and relative value of license
fee revenue can and has created significant variability in the Company's
quarter-to-quarter revenue comparisons. The absence of a first quarter 1998
license fee similar to the 1997 Verity cross license fee caused such variability
in the Company's quarter-to-quarter revenue performance. Such variability is not
uncommon given the high value and low frequency of receipt of such sizable
license fees.
Consistent with the Company's objectives, product sales have generally
been increasing on a quarter-to-quarter basis, accompanied by increasing
margins. Product sales are accounting for a greater share of the Company's total
revenues. Product sales increased to $0.4 million versus $0.2 million in 1997,
an increase of $0.2 million or 72% primarily reflecting increased NoiseBuster(R)
sales and ClearSpeech(TM) sales. While product sales have been generally
increasing, engineering and development services, having little or no margins,
have been decreasing on a quarter-to-quarter basis and are accounting for a much
lower share of the Company's total revenues, reaching an insignificant level in
the current quarter. Engineering and development services decreased to less than
$0.1 million from $0.1 million in 1997, a decrease of 73%.
As discussed above, the timing of realization of technology license fees
often creates significant variability in the Company's quarter-to-quarter
revenue comparisons. Technology licensing fees and royalties in the first three
months of 1998 were $0.3 million versus $3.0 million in 1997, a decrease of $2.7
million or 90% primarily due to the receipt in 1997 of the $3.0 million Verity
license fee. While overall revenue in this category declined significantly owing
to the Verity cross license fee in 1997, for the first time the Company realized
royalties from existing licensees including Ultra Electronics, Ltd. and United
Airlines. Royalties from these and other licensees are expected to account for a
greater share of the Company's revenue in future quarters.
Cost of product sales increased to $0.3 million versus $0.2 million in
1997, an increase of $0.1 million or 52% primarily reflecting the above noted
increase in product sales. Product margin increased to 25% from 15% during the
same period in 1997 due to an increase in the margin on NoiseBuster Extreme!(TM)
sales and the introduction of ClearSpeech(TM) sales. Cost of engineering and
development services decreased to less than $0.1 million versus $0.1 million in
1997, due to a reduction in contract revenue. The gross margin on engineering
and development services increased to break even from (12)% during the same
period in 1997.
Selling, general and administrative expenses for the first three months of
1998 were $2.7 million versus $0.8 million in 1997, an increase of $1.9 million
or 221% primarily due to a substantial increase in the number of sales and
marketing personnel and a substantial increase in sales and marketing efforts,
including advertising, to support the introduction of several new product lines
in 1998.
Research and development expenditures for the first three months of 1998
were $1.5 million versus $1.6 million in 1997, a decrease of $0.1 million or 8%
primarily due to continued efforts to focus on near-term product sales and
technology licensing fees. The Company continues to focus on products utilizing
its hearing products, audio, communications and microphone technologies,
products which have been developed within a short time period and are targeted
for rapidly emerging markets.
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. The
Company had no such equity in income to recognize for the first three months of
1998 or 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $97.1 million on a
cumulative basis through March 31, 1998. 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.
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, and the sale of the Verity shares (see "General Business Environment")
should be sufficient to sustain the Company's anticipated future level of
operations into 1999. However, the period during 1999 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, all of which are presently uncertain.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development revenue.
In that event, the Company would have to substantially cut back its level of
operations. 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.
These uncertainties raise substantial doubt at March 31, 1998, about the
Company's ability to continue as a going concern.
At March 31, 1998, cash and short-term investments were $8.3 million. The
available resources were invested in interest bearing money market accounts and
commercial paper. The Company's investment objective is preservation of capital
while earning a moderate rate of return.
The Company's working capital decreased to $8.2 million at March 31, 1998,
from $11.7 million at December 31, 1997. This decrease of $3.5 million was
primarily due to increasing efforts to develop and introduce new product lines
and to fund operations for the period.
During the first three months of 1998, the net cash used in operating
activities was $4.1 million, compared to $2.6 million used in operating
activities during the same period of 1997.
Net inventory increased during the first three months of 1998 by $0.8
million primarily due to stocking for anticipated sales of the NoiseBuster(R)
line of headsets and the Gekko(TM) flat speaker.
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, 1998, 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 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements 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,
Chief Executive Officer
By: /s/ CY E. HAMMOND
-----------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: July 1, 1998
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997, FILED ON MARCH 31, 1998, AS AMENDED APRIL
30, 1998 (AMENDMENT NO. 1) AND MAY 4, 1998 (AMENDMENT NO. 2).
</LEGEND>
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<NAME> NOISE CANCELLATION TECHNOLOGIES, INC.
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