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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 JUNE 30, 1995
-------------------
COMMISSION FILE NUMBER: 0-18267
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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, 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.
88,761,184 shares outstanding as of August 8, 1995
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1994 1995 1994 1995
-------- -------- -------- --------
REVENUES:
TECHNOLOGY LICENSING FEES $250 $625 $250 $3,225
PRODUCT SALES, NET 693 309 1,057 688
ENGINEERING AND DEVELOPMENT SERVICES 1,224 491 2,016 1,447
-------- -------- -------- --------
TOTAL REVENUES $2,167 $1,425 $3,323 $5,360
-------- -------- -------- --------
COSTS AND EXPENSES:
COSTS OF SALES $588 262 $825 $595
COSTS OF ENGINEERING AND DEVELOPMENT SERVICES 1,170 497 1,922 1,567
SELLING, GENERAL AND ADMINISTRATIVE 2,406 1,921 4,233 3,318
RESEARCH AND DEVELOPMENT 2,026 1,016 4,184 2,365
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES 566 - 956 -
INTEREST (INCOME) EXPENSE (178) (20) (304) (15)
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES $6,578 $3,676 $11,816 $7,830
-------- -------- -------- --------
NET (LOSS) $(4,411) $(2,251) $(8,493) $(2,470)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 81,627 86,288 81,518 86,215
======== ======== ======== ========
NET LOSS PER COMMON SHARE $(.05) $(.03) $(.10) $(.03)
======== ======== ======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (NOTE 1)
(UNAUDITED) (THOUSANDS OF DOLLARS)
DECEMBER 31, JUNE 30,
ASSETS 1994 1995
----------- --------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS (NOTE 2) $2,423 $1,130
SHORT-TERM INVESTMENTS 18 18
ACCOUNTS RECEIVABLE:
TRADE:
TECHNOLOGY LICENSING FEES 105 -
JOINT VENTURES AND AFFILIATES (NOTE 3) 1,123 820
OTHER 874 756
UNBILLED 333 434
ALLOWANCE FOR DOUBTFUL ACCOUNTS (901) (886)
--------- ---------
TOTAL ACCOUNTS RECEIVABLE $1,534 $1,124
INVENTORIES, NET OF RESERVES (NOTE 4) 2,124 2,100
OTHER CURRENT ASSETS 314 106
--------- ---------
TOTAL CURRENT ASSETS $6,413 $4,478
PROPERTY AND EQUIPMENT, NET 3,331 3,451
PATENT RIGHTS AND OTHER INTANGIBLES, NET 2,336 2,397
OTHER ASSETS 291 294
--------- ---------
$12,371 $10,620
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $2,490 $2,572
ACCRUED EXPENSES 672 587
LOSSES IN EXCESS OF INVESTMENT IN JOINT VENTURES 1,680 1,420
ACCRUED PAYROLL, TAXES AND RELATED EXPENSES 602 372
CUSTOMERS' ADVANCES 46 -
--------- ---------
TOTAL CURRENT LIABILITIES $5,490 $4,951
--------- ---------
LOSSES IN EXCESS OF INVESTMENT IN JOINT VENTURES $1,413 $1,097
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
COMMON STOCK, $.01 PAR VALUE, 100,000,000 SHARES AUTHORIZED; ISSUED
AND OUTSTANDING 86,088,644 AND 86,293,658 SHARES, RESPECTIVELY $861 $863
ADDITIONAL PAID-IN-CAPITAL 75,177 75,154
ACCUMULATED DEFICIT (68,780) (71,250)
CUMULATIVE TRANSLATION ADJUSTMENT 152 177
COMMON STOCK SUBSCRIPTIONS RECEIVABLE (1,196) -
EXPENSES TO BE PAID WITH COMMON STOCK (746) (372)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $5,468 $4,572
--------- ---------
$12,371 $10,620
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited) (THOUSANDS OF DOLLARS)
SIX MONTHS
ENDED JUNE 30,
---------------------
1994 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(8,493) $(2,470)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 339 599
COMMON STOCK ISSUED AS CONSIDERATION FOR:
COMPENSATION - 7
RENT 73 191
PROVISION FOR DOUBTFUL ACCOUNTS - 86
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES 956 -
UNREALIZED FOREIGN CURRENCY (GAIN) LOSS 4 9
LOSS ON DISPOSITION OF FIXED ASSETS - 30
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE (768) 338
DECREASE IN LICENSE FEES RECEIVABLE 30 -
(INCREASE) DECREASE IN INVENTORIES (1,626) 24
(INCREASE) DECREASE IN OTHER ASSETS (594) 99
INCREASE (DECREASE) IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES (1,009) 577
(DECREASE) IN OTHER LIABILITIES (425) (656)
-------- --------
NET CASH (USED IN) OPERATING ACTIVITIES $(11,513) $(1,166)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES $(628) $(25)
ACQUISITION OF PATENT RIGHTS (70) (210)
INVESTMENT IN JOINT VENTURES (191)
PROCEEDS OF SALES OF SHORT-TERM INVESTMENTS (NET) 10,623 -
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $9,734 $(235)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM:
EXPENSES RELATED TO PRIOR SALE OF COMMON STOCK $(20)
EXERCISE OF STOCK PURCHASE WARRANTS AND OPTIONS 208 108
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES $188 $108
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,591) $(1,293)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,154 2,423
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $1,563 $1,130
======== ========
CASH PAID FOR INTEREST $2 $7
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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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 six-month period ended June 30, 1995, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1994.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $71.3 million on a
cumulative basis through June 30, 1995. 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 $1.1
million at June 30, 1995, decreasing from $2.4 million at December 31, 1994.
Management does not believe that available funds are sufficient to sustain the
Company for the next twelve 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 should be sufficient to
sustain the Company's anticipated future level of operations into 1996.
However, the period during 1996 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.
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There can be no assurance that additional funding will be provided 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.
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 financing and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraph raise substantial doubt at
June 30, 1995, 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. JOINT VENTURES AND OTHER STRATEGIC ALLIANCES:
The following is a summary of selected activity in the Company's joint
ventures and other strategic alliances during the six months ended June 30,
1995.
In the December 1993 agreement with Tenneco Automotive (a division of
Tennessee Gas Pipeline Company), the Company agreed to fund up to $4.0 million
of product and technology development work of the Company attributable to
Walker Noise Cancellation Technologies ("WNCT"), a 50/50 general partnership
between NCT Muffler, Inc., a wholly-owned subsidiary of the Company, and Walker
Electronic Mufflers, Inc. ("Walker"), a wholly-owned subsidiary of Tennessee
Gas Pipeline Company. The Company has recorded its entire share of the losses
of WNCT as of December 31, 1994. Such losses which exceed the Company's
remaining investment in WNCT amounted to $2.9 million at December 31, 1994. Of
the $2.9 million, $1.5 million was recorded as a current liability. The
balance of $1.4 million was classified as a long term liability. During the
six months ended June 30, 1995, the Company funded $.4 million of the above
noted $2.9 million liability for product and technology development
attributable to WNCT, of which $.3 million related to the second quarter.
The Company is continuing negotiations with Tenneco Automotive
regarding the anticipated level of funding of WNCT for 1995 and beyond. These
negotiations include the Company's commitment (discussed above) to help fund
$4.0 million of product and technology development work and the future percent
ownership by Tenneco Automotive and the Company in WNCT. The Company is unable
to predict the outcome of such negotiations at this time. Except for the
obligation to help fund $4.0 million of product
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and technology work as discussed above, as such commitment may be modified as a
result of the Company's ongoing negotiations with Tenneco Automotive, the
Company has no current plans, obligation or intention to provide additional
funding to WNCT.
In March 1995, the Company and Ultra Electronics Ltd. ("Ultra")
amended their teaming agreement and concluded a licensing and royalty agreement
for $2.6 million and a future royalty of 1 1/2% of sales commencing in 1998.
Under the agreement, Ultra has also acquired the Company's active aircraft
quieting business based in Cambridge, England, leased a portion of the
Cambridge facility and has employed certain of the Company's employees.
3. ACCOUNTS RECEIVABLE:
Accounts receivable include amounts due (fully reserved) from
QuietPower Systems, Inc. (formerly Active Acoustical Solutions, Inc.) a related
party, in the amount of $0.6 million and $0.5 million at June 30, 1995, and
December 31, 1994, respectively.
4. INVENTORIES:
Inventories comprise the following:
(Thousands of dollars) DECEMBER 31, JUNE 30,
1994 1995
------------ --------
Components $2,452 $2,363
Finished Goods 1,697 1,022
------------ --------
Gross Inventory $4,149 $3,385
Reserve for Obsolete & Slow Moving Inventory (2,025) (1,285)
------------ --------
Inventory, Net of Reserves $2,124 $2,100
============ ========
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5. STOCKHOLDERS EQUITY:
The changes in stockholders' equity during the six months ended June
30, 1995, were as follows:
(In thousands) Exercise of
Balance at Warrants Settlement Net (loss) Balance at
December 31, and of Foster for the Translation June 30,
1994 Options Obligation Notes Period Adjustment 1995
------------ ----------- ---------- ------ ---------- ----------- ----------
Common Stock:
Shares 86,089 205 -- -- -- -- 86,294
Amount $861 $2 $ -- $ -- $ -- $ -- $863
Additional
Paid-in Capital 75,177 107 (130) -- -- -- 75,154
Accumulated
Deficit (68,780) -- -- -- (2,470) -- (71,250)
Cumulative
Translation
Adjustment 152 -- -- -- -- 25 177
Stock
Subscription
Receivable (1,196) -- -- 1,196 -- -- --
Expenses to be
Paid with
Common Stock (746) -- 374 -- -- -- (372)
6. LITIGATION:
On September 17, 1992, Harris Landgarten, a former officer and
director of the Company filed suit against the Company in the United States
District Court for the Southern District of New York claiming that the Company
breached contractual promises with him and that the Company fraudulently
deprived him of certain securities. The operative amended complaint demanded
actual damages of approximately $3 million and punitive damages of $5 million.
At the conclusion of the trial on May 1, 1995, the jury returned a verdict in
favor of the Company with respect to two claims, for fraud and breach of
contract, for which Landgarten sought the most damages. On a claim of
non-payment of a consulting fee, the jury awarded Landgarten $104,000. The
jury also rendered an advisory verdict in favor of Landgarten for $35,000 on a
claim of unjust enrichment. On July 26, 1995, the Company and Landgarten
executed a settlement agreement pursuant to which the company paid Landgarten
$125,000 and the suit was dismissed with prejudice.
As previously disclosed, Chaplin Patents Holding Company, Inc.("CPH"),
a wholly owned subsidiary of the Company, had sued Lotus Cars Limited and
Group Lotus
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Limited (collectively "Lotus") in Patents County Court in the United
Kingdom for infringement of certain of the Chaplin Patents. On July 13, 1995,
CPH, the Company and Lotus executed a settlement agreement pursuant to which the
action against Lotus and the counterclaims against CPH and the Company were
withdrawn and not to be re-commenced, Lotus was granted a non-exclusive license
for various applications in the land and water based vehicular field, subject to
prior rights, with respect to the three Chaplin Patents that were the subject of
the suit, and CPH paid L125,000 (approximately $190,000) to Lotus, which amount
had previously been transferred to the Court and was being held as security for
costs.
On June 22, 1995, Wilhelm & Dauster, a German law firm, commenced a
suit against the Company in the United States District Court for the District
of Maryland, Southern Division, to recover $125,000 claimed to be owed by the
Company to that firm for legal services, disbursements and costs rendered to
and incurred on behalf of the Company with respect to intellectual property
matters in Europe. The Company expects to conclude a settlement of this claim
on terms that should not have a material effect on the Company's financial
condition or future operating results.
7. SUBSEQUENT EVENT:
On July 28, 1995, Foster Electric Co., Ltd. ("Foster"), Foster NCT
Headsets International ("FNH") and the Company executed a letter agreement
amending the 1991 agreement covering their headset joint venture company, FNH.
Pursuant to that agreement Foster acquired the Company's 50% interest in FNH
and a license to manufacture headsets for FNH and NCT with tooling currently
owned by NCT in consideration for Foster's assumption of FNH's outstanding
liabilities of $303,000. The agreement also grants FNH the right to sell
certain headsets on an exclusive basis in Japan and a non-exclusive basis
throughout the rest of the Far East, in consideration for a royalty on the sale
of such headsets.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
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.
From the Company's inception through June 30, 1995, approximately 25%
of its operating revenues, which exclude technology licensing fees, royalties
and other revenue, have come from the sale of the Company's active noise
cancellation systems, while approximately 75% of its operating revenues, which
exclude technology licensing fees, royalties and other revenue have come from
the performance of engineering and development services.
During the six months ended June 30, 1995, the Company received
approximately 68% of its operating revenues, which excludes technology
licensing fees and other revenue, from engineering and development funding.
In connection with this transition, the Company has shifted its focus
to applications and products that represent near term revenue generation. This
is reflected in the fact that 60% of the Company's total revenue in the first
half of 1995 is derived from technology licensing fees and 13% of its total
revenue came from product sales. There can be no assurance that future
technology licensing fees and product sales will continue at that level.
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.
Note 1 to the accompanying Condensed Consolidated Financial Statements
and the liquidity and capital resources section which follows describe the
current status of the
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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.
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.
In the first quarter of 1995, the Company began shipping ProActive(TM)
industrial headsets and continued to ship those headsets and the
NoiseBuster(TM) consumer headsets throughout the second quarter. The Company
is also currently selling products through two of its alliances: the Company's
joint venture with Walker is manufacturing and selling industrial silencers and
Siemens is buying and contracting with the Company to install quieting headsets
for patient use in Siemens' MRI machines.
Product revenues for the three months and six months ended June 30,
1994 and 1995 were:
PRODUCT REVENUES
(Thousands of dollars) Three Months Ended June 30, Six Months Ended June 30,
Amount As a % of Total Amount As a % of Total
-------------- ---------------- --------------- ------------------
Product 1994 1995 1994 1995 1994 1995 1994 1995
- ----------------------------- ---- ---- ---- ---- ---- ---- ---- ----
Headsets $680 $296 98.1% 95.7% $1,012 $667 95.7% 97.0%
Other 44 5 6.3% 1.6% 44 16 4.2% 2.3%
Fan Quieting Products 6 2 0.9% 0.7% 7 2 0.7% 0.3%
Industrial Silencers (37) 6 (5.3)% 1.9% (6) 3 (0.6)% 0.4%
---- ---- ----- ----- ----- ---- ----- -----
Total $693 $309 100.0% 100.0% $1,057 $688 100.0% 100.0%
==== ==== ===== ===== ====== ==== ===== =====
The availability of high-quality, low-cost electronic components for
integration into the Company's products also is critical to the
commercialization of the Company's technology. The Company is working with its
strategic partners, Analog Devices, Inc. and Harris Corporation, to reduce the
size and cost of the Company's active control systems. The Company is working
with suppliers to standardize electronic components used in the Company's
systems. Management believes that, by working with its strategic partners and
other suppliers, the Company will be able to offer low-cost electronic
controllers and components suitable for high-volume production.
The Company continues to make 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.
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Management believes that the funding provided by technology licensing
fees, royalties and product sales, if realized, coupled with the cost savings
obtained from its staff reductions, should enable the Company to continue
operations into 1996. If the Company is not able to increase technology
licensing fees, royalties and product sales, it will have to further cut its
level of operations substantially in order to conserve cash. (Refer 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 six months of 1995 increased by 61% to
$5,360,000 from $3,323,000 when compared with the same period in 1994.
Product sales decreased 35% to $688,000 reflecting a recuction in
orders for MRI headsets from Siemens, decreased revenue from NoiseBuster(TM)
sales due to reductions in average price and units sold, and a decrease in
industrial silencers sales. Engineering and development services decreased by
28% to $ 1,447,000, primarily due to the elimination of funding from Ultra for
aircraft cabin quieting in connection with the transfer of that business to
Ultra in the first quarter of 1995 and from staff reductions.
Technology licensing fees in the first six months of 1995 amounted to
$3,225,000, reflecting the Company's emphasis on expanding technology licensing
fee revenue. Technology licensing fees during the same period in 1994 amounted
to $250,000.
Cost of product sales decreased 28% to $595,000 and the product margin
decreased to 14% from 22% during the same period in 1994, primarily due to
lower NoiseBuster(TM) sales as noted above. Cost of engineering and
development services decreased 18% to $1,567,000, primarily due to staff
reductions. The gross margin on engineering and development services decreased
to (8)% from 5% during the same period in 1994, primarily due to cost overruns
on several contracts.
Selling, general and administrative expenses for the first half of
1995 decreased by 22% to $3,318,000 from $4,233,000 for the same period in
1994, primarily due to realizations of cost savings from the plans initiated in
the latter part of 1994. Of this decrease, $736,000 was directly attributable
to salaries and related expenses. Advertising and marketing expenses decreased
by 24% to 506,000. Office and occupancy expenses decreased by 43% or $130,000.
Professional fees increased by 109% to $1,122,000 primarily due to legal fees
related to litigation and patent prosecution and maintenance. Travel and
entertainment decreased by 68% or $341,000.
Depreciation and amortization included in selling, general and
administrative expenses increased by 23% or $61,000, from $210,000 to
$271,000, reflecting the increased amortization of intellectual property.
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Research and development expenditures for the first six months of 1995
decreased by 44% to $2,365,000 from $4,184,000 for the same period in 1994,
primarily due to realizations of cost savings from the plans initiated in the
latter part of 1994.
In the first half of 1995, interest (income) expense decreased to
$(15,000) from $(304,000) for the same period of 1994 reflecting the decrease
in 1995 of available funds to invest.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $71.3 million on a
cumulative basis through June 30, 1995. 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 license fees and engineering and development funds provided to
the venture or the Company are recovered.
Management believes that with 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 should be sufficient to sustain the
Company's anticipated future level of operations into 1996. Management does
not believe that available funds are sufficient to sustain the Company for the
next twelve months. However, the period during 1996 through which it can be
sustained is dependent upon the level of realization of funding from technology
licensing fees, royalties, product sales and development revenue, and the
achievement of the operating cost savings from the events described above, all
of which are presently uncertain.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties, product sales and 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
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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 to
the accompanying "Notes to the Condensed Consolidated Financial Statements".
In December 1994, the Company adopted a plan that management believed
would generate sufficient funds for the Company to continue its operations into
1996. Under this plan, the Company needed to generate approximately $15.5
million to fund its operations for 1995. The Company believed that it could
generate approximately $14.5 million from operations in 1995, with the
shortfall of $1.0 million to be taken from cash reserves. Included in such
amount was approximately $5.0 million in sales of new products and
approximately $3.0 million of technology licensing fees and royalties.
Through June 30, 1995, the Company has generated $3.2 million in license fees
and $.07 million in product sales. While the Company has exceeded its
expectations to date regarding technology licensing fees, production delays
have slowed new product sales. Management believes that the shortfall in
product sales will be mitigated by additional license fees, although there is
no certainty that additional license fees will be realized in an amount
sufficient to eliminate such shortfall. Additionally, operating expenses have
been reduced and through June were less than projected in the plan adopted in
December of 1994. 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. If, during the remainder of 1995, management of the Company
determines that it will be unable to meet or exceed the plan discussed above,
the Board of Directors of the Company has mandated that the Company reduce its
level of operations to a level that can be sustained with cash generated in
1995, utilizing approximately $1.0 to $1.5 million of cash reserves. The
Company will continue to 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 1996.
The Company believes that the level of financial resources available
to it is an essential competitive factor. While the Company has no plans to do
so at present, it may elect to raise additional capital, from time to time,
through equity or debt financing in order to capitalize on business
opportunities and market conditions.
At June 30, 1995, cash and short-term investments amounted to $1.1
million. Additionally, on August 4, 1995, the Company sold 2,000,000 shares of
its common stock in a private placement that resulted in $660,000 to the
Company. As part of the purchase agreement for such shares, the Company agreed
to use its best efforts to register these shares for resale under the
Securities Act within nine months of the date of closing. The available
resources were invested in interest bearing money market accounts. The
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Company's investment objective is preservation of capital while earning a
moderate rate of return.
The Company's working capital decreased to $(0.5) million at June 30,
1995, from $0.9 million at December 31, 1994. This decrease of $1.4 million
was due primarily to the net loss of $2.5 million reported for the period.
During the first half of 1995, the net cash used in operating
activities was $1.2 million, compared with $11.5 million used in operating
activities during the first half of 1994.
The net cash used in investing activities amounted to $0.2 million
during the period primarily relating to the acquisition of patent rights.
The net cash provided by financing activities amounted to $0.1 million
primarily from the exercise of options and warrants.
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 June
30, 1995, and no material commitments are anticipated in the near future other
than the Company's commitment to help fund the product and technology
development work of the Company attributable to WNCT. Of the original $4.0
million commitment, the Company's remaining obligation at June 30, 1995 was
$2.5 million. (Refer to Note 2 - "Notes to the Condensed Consolidated
Financial Statements" for further discussion of the WNCT funding commitment.)
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PART III - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 6 - "Notes to the
Condensed Consolidated Financial Statements" which is incorporated by reference
herein.
ITEM 6 - EXHIBITS
(a) Exhibits.
Exhibit No. Description
----------- -----------
10(a) Letter agreement among Foster Electric Co., Ltd., Foster NCT Headsets
International, Ltd. and the Company dated July 28, 1995.
10(b) Master Agreement between Noise Cancellation Technologies, Inc. and Quiet Power
Systems, Inc. dated March 27, 1995. (Incorporated by reference to Exhibit 10(a)
of the Company's report on Form 8-K filed with the Securities and Exchange
commission on August 4, 1995)
10(c) Letter Agreement between Noise Cancellation Technologies, Inc. and Quiet Power
Systems, Inc. dated April 21, 1995. (Incorporated by reference to Exhibit 10(b)
of the Company's report on Form 8-K filed with the Securities and Exchange
commission on August 4, 1995)
10(d) Variation of Teaming Agreement between Noise Cancellation Technologies, Inc. and
Ultra Electronics Limited dated April 6, 1995. (Incorporated by reference to
Exhibit 10(c) of the Company's report on Form 8-K filed with the Securities and
Exchange commission on August 4, 1995.)
10(e) Agreement for Sale and Purchase of Part of the Business and Certain Assets among
Noise Cancellation Technologies, Inc., Noise Cancellation Technologies (UK)
Limited and Ultra Electronics Limited dated April 6, 1995. (Incorporated by
reference to Exhibit 10(d) of the Company's report on Form 8-K filed with the
Securities and Exchange commission on August 4, 1995.)
10(f) Patent License Agreement among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited and Ultra Electronics Limited dated April
6, 1995. (Incorporated by reference to Exhibit 10(e) of the Company's report on
Form 8-K filed with the Securities and Exchange commission on August 4, 1995.)
10(g) License Agreement between Chaplin Patents Holding Co., Inc. and
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Ultra Electronics Limited dated April 6, 1995. (Incorporated by reference to
Exhibit 10(f) of the Company's report on Form 8-K filed with the Securities and
Exchange commission on August 4, 1995.)
10(h) Patent Sub-License Agreement among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited and Ultra Electronics Limited dated May
15, 1995. (Incorporated by reference to Exhibit 10(g) of the Company's report on
Form 8-K filed with the Securities and Exchange commission on August 4, 1995.)
*10(i) Agreement among Noise Cancellation Technologies, Inc., Noise Cancellation
Technologies (UK) Limited, Dr. Andrew John Langley, Dr. Graham Paul Eatwell and
Dr. Colin Fraser Ross dated April 6, 1995. (Incorporated by reference to Exhibit
10(h) of the Company's report on Form 8-K filed with the Securities and Exchange
commission on August 4, 1995.)
11 Computation of Net (Loss) Per Share
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the period covered by this report:
(1) A report on Form 8-K was filed on January 6, 1995, reporting the engagement of
Richard A. Eisner & Company L.L.P. as the Company's independent accountant.
(2) A report on Form 8-K was filed on March 22, 1995, reporting a ruling by the court
in the suit by Harris Landgarten against the Company.
(3) A report on Form 8-K was filed on August 4, 1995, reporting the filing of
Exhibits 10(b) - 10(i) of this report.
- -------------------------
* Pertains to a management contract
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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/ Stephen J. Fogarty
-----------------------
Senior Vice President and
Chief Financial Officer
Dated: August 14, 1995
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