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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 SEPTEMBER 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.
89,136,901 shares outstanding as of November 7, 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 Nine Months
Ended September 30, Ended September 30,
------------------------------- -----------------------------
1994 1995 1994 1995
------------- ------------- ------------ -------------
REVENUES:
Technology licensing fees $201 $140 $451 $3,365
Product sales, net 873 551 1,930 1,239
Engineering and development services 1,585 430 3,601 1,877
---------- -------- -------- --------
Total revenues $2,659 $1,121 $5,982 $6,481
---------- -------- -------- --------
COSTS AND EXPENSES:
Costs of sales $1,600 $467 $2,425 $1,062
Costs of engineering and development services 1,620 360 3,542 1,927
Selling, general and administrative 2,399 1,040 6,632 4,358
Research and development 2,497 1,214 6,681 3,579
Equity in net loss of unconsolidated affiliates 509 - 1,465 -
Provision for doubtful accounts 200 371 200 371
Interest (income) expense (191) 1 (495) (14)
---------- -------- -------- --------
Total costs and expenses $8,634 $3,453 $20,450 $11,283
---------- -------- -------- --------
NET (LOSS) $(5,975) $(2,332) $(14,468) $(4,802)
========== ======== ======== ========
Weighted average number of common
shares outstanding 82,694 87,708 81,970 86,804
========== ======== ======== ========
NET LOSS PER COMMON SHARE $(.07) $(.03) $(.18) $(.06)
========== ======== ======== ========
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NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(Unaudited)
(Thousands of dollars)
December 31, September 30,
1994 1995
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $2,423 $237
Short-term investments 18 18
Accounts receivable:
Trade:
Technology licensing fees (Note 3) 105 -
Joint Ventures and affiliates (Note 3) 1,123 764
Other (Note 3) 874 984
Unbilled 333 313
Allowance for doubtful accounts (901) (1,168)
-------- ---------
Total accounts receivable $1,534 $893
Inventories, net of reserves (Note 4) 2,124 2,105
Other current assets 314 150
-------- ---------
Total current assets $6,413 $3,403
Property and equipment, net 3,331 3,251
Patent rights and other intangibles, net 2,336 2,299
Other assets 291 294
-------- ---------
$12,371 $9,247
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,490 $2,283
Accrued expenses 672 488
Losses in excess of investment in joint ventures 1,680 1,420
Accrued payroll, taxes and related expenses 602 348
Customers' advances 46 55
-------- ---------
Total current liabilities $5,490 $4,594
-------- ---------
Losses in excess of investment in joint ventures $1,413 $1,038
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Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 100,000,000 shares authorized; issued
and outstanding 86,088,644 and 89,136,901 shares, respectively $861 $891
Additional paid-in-capital 75,177 76,205
Accumulated deficit (68,780) (73,582)
Cumulative translation adjustment 152 171
Common stock subscriptions receivable (1,196) -
Expenses to be paid with common stock (746) (70)
-------- ---------
Total stockholders' equity $5,468 $3,615
-------- ---------
$12,371 $9,247
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NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
(Thousands of dollars)
Nine Months
Ended September 30,
---------------------------------
1994 1995
------------ -------------
Cash flows from operating activities:
Net loss ($14,468) ($4,802)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 494 912
Common stock issued as consideration for:
Compensation 73 8
Rent - 335
Reserve against tooling costs 300 -
Reserve against inventory 620 -
Provision for doubtful accounts 200 371
Charge for acquisition of research and development 500 -
Equity in net loss of unconsolidated affiliates 1,465 -
Unrealized foreign currency loss 60 9
Loss on disposition of fixed assets - 30
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (909) 277
(Increase) in license fees receivable (50) -
(Increase) decrease in inventories (1,491) 18
Decrease in other assets 447 55
Increase (decrease) in accounts payable and accrued expenses (778) 152
(Decrease) in other liabilities (1,367) (643)
------------ -------------
Net cash (used in) operating activities $(14,904) $(3,278)
------------ -------------
Cash flows from investing activities:
Capital expenditures ($1,914) ($42)
Acquisition of patent rights (70) (210)
Investment in joint ventures (191) -
Proceeds of sales of short-term investments (net) 15,070 -
------------ -------------
Net cash provided by (used in) investing activities $12,895 $(252)
------------ -------------
Cash flows from financing activities:
Proceeds from:
Sale of common stock $ - $660
Expenses related to prior sale of common stock (20) -
Exercise of stock purchase warrants and options 830 684
------------ -------------
Net cash provided by financing activities $810 $1,344
------------ -------------
Net (decrease) in cash and cash equivalents $(1,199) $(2,186)
Cash and cash equivalents - beginning of period 3,154 2,423
------------ -------------
Cash and cash equivalents - end of period $1,955 $237
============ =============
Cash paid for interest $5 $12
============ =============
Non-cash investing and financing activity:
Issuance of common stock in exchange for certain assets of ANVT $2,200 $ -
============ =============
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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 nine-month period ended September 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 $73.6 million on a
cumulative basis through September 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 $0.3
million at September 30, 1995, decreasing from $2.4 million at December 31,
1994. On November 8, 1995 the Company entered into a stock purchase agreement
for the sale of 4.8 million shares of its common stock in a private
placement that resulted in $3.3 million in net proceeds to the Company (see
Note 7). The closing of the transaction occurred on November 14, 1995.
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 the November 14, 1995 private placement, 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
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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 plan adopted by the Company in December 1994,
all of which are presently uncertain.
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
September 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 nine months ended September
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
nine months ended September 30, 1995, the Company funded $0.4 million of the
above noted $2.9 million liability for product and technology development
attributable to WNCT, none of which related to the third quarter.
On November 15, 1995, the Company and Walker executed a series of
related agreements (the "Restructuring Agreements") and concluded previously
noted
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negotiations with Tenneco Automotive and Walker regarding the Company's
commitment to help fund $4.0 million of product and technology development work
and the transfer of the Company's 50% interest in WNCT to Walker. The
Restructuring Agreements provide for the transfer of the Company's interest in
WNCT to Walker, the elimination of the Company's previously expensed
obligation to fund the remaining $2.4 million of product and technology
development work noted above, the transfer to Walker of certain Company owned
tangible assets related to the business of WNCT, the expansion of certain
existing technology licenses and the Company's performance of certain research
and development activities for Walker at Walker's expense as to future
activities (see Note 7).
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.
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 the 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.
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 September 30, 1995,
and December 31, 1994, respectively.
4. INVENTORIES:
Inventories comprise the following:
(Thousands of dollars) DECEMBER 31, SEPTEMBER 30,
1994 1995
-------------- --------------
Components $2,452 $2,354
Finished Goods 1,036 1,036
-------------- --------------
Gross Inventory $4,149 $3,390
Reserve for Obsolete & Slow Moving Inventory (2,025) (1,285)
-------------- --------------
Inventory, Net of Reserves $2,124 $2,105
============== ==============
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5. STOCKHOLDERS EQUITY:
The changes in stockholders' equity during the nine months ended
September 30, 1995, were as follows:
(In thousands)
Excersice of
Balance at Sale of Warrants Settlement Net (loss) Balance at
December 31, Common and of Foster for the Translation September, 30
1994 Stock Options Obligation Notes Period Adjustment 1995
------------- ---------------- ----------- ------------ --------- ------------ ----------- -------------
Common Stock:
Shares 86,089 2,000 1,048 -- -- -- -- 89,137
Amount $861 $20 $10 $ -- $ $ -- $ -- $891
Additional
Paid-in Capital 75,177 640 674 (286) -- -- -- 76,205
Accumulated
Deficit (68,780) -- -- -- -- (4,802) -- (73,582)
Cumulative
Translation
Adjustment 152 -- -- -- -- -- 19 171
Stock
Subscription
Receivable (1,196) -- -- -- 1,196 -- -- --
Expenses to be
Paid with
Common Stock (746) -- -- 676 -- -- -- (70)
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 Limited (collectively "Lotus") in Patents County Court in the
United Kingdom for
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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 EVENTS:
On November 8, 1995 the Company entered into a stock purchase
agreement for the sale of 4.8 million shares of its common stock in a private
placement to a foreign investor in consideration for $3.3 million in net
proceeds to the Company. The closing of the transaction occurred on November
14, 1995. The purchaser of the common stock is subject to certain resale and
transfer restrictions including those under Regulation S of the United States
Securities Act of 1933, as amended.
On November 15, 1995, the Company and Walker executed a series of
related agreements (the "Restructuring Agreements") and concluded previously
noted negotiations with Tenneco Automotive and Walker regarding the Company's
commitment to help fund $4.0 million of product and technology development work
and the transfer of the Company's 50% interest in WNCT to Walker. The
Restructuring Agreements provide for the transfer of the Company's interest in
WNCT to Walker, the elimination of the Company's previously expensed obligation
to fund the remaining $2.4 million of product and technology development work
noted above, the transfer to Walker of certain Company owned tangible assets
related to the business of WNCT, the expansion of certain existing technology
licenses and the Company's performance of certain research and development
activities for Walker at Walker's expense as to future activities. In
consideration for the above, Walker paid the Company $0.3 million, delivered to
the Company 1,110,083 shares of the Company's common stock which Tanneco
Automotive had purchased from the Company in December 1993 and has undertaken
to pay the Company certain royalties from the exploitation of the intellectual
property rights granted to Walker under the expansion of existing technology
licenses.
Other than certain future Walker funded research and development
activities noted above, the Company has no current plans, obligation or
intention to provide additional funding to WNCT.
The above noted transactions will be reflected in the financial
results of the Company for the quarter ending December 31, 1995.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 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 nine months ended September 30, 1995, the Company received
approximately 60% 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 52% of the Company's total revenue in the first
nine months of 1995 is derived from technology licensing fees and 19% 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 and third 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 nine months ended September
30, 1994 and 1995 were:
PRODUCT REVENUES
(Thousands of dollars) Three Months Ended September 30, Nine Months Ended September 30,
Amount As a % of Total Amount As a % of Total
---------------------- ------------------------ ---------------------- ------------------------
Product 1994 1995 1994 1995 1994 1995 1994 1995
- ------------------------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Headsets $732 $533 83.7% 96.7% $1,744 $1,199 90.4% 96.7%
Other 65 10 7.4% 1.8% 110 27 5.7% 2.2%
Fan Quieting Products 44 (3) 5.0% (0.6)% 50 (1) 2.6% -
Industrial Silencers 32 11 3.7% 2.0% 26 14 1.3% 1.1%
----- ----- ------ ------ ------- ------- ------ ------
Total $873 $551 100.0% 100.0% $1,930 $1,239 100.0% 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, and the proceeds from the November 14, 1995,
private placement 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 nine months of 1995 increased by 8% to
$6,481,000 from $5,982,000 when compared with the same period in 1994. Total
expenses during the same period decreased by 45% or $9,167,000, reflecting the
continuing results of the cost reduction plan adopted in December 1994.
Product sales decreased 36 % to $1,239,000 reflecting a reduction 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
48% to $ 1,877,000, 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, a decrease in the amount of muffler
development funding and staff reductions.
Technology licensing fees for the first nine months of 1995 increased
by 646% to $3,365,000, reflecting the Company's emphasis on expanding
technology licensing fee revenue. Technology licensing fees during the same
period in 1994 amounted to $451,000.
Cost of product sales decreased 56% to $1,062,000 and the product
margin increased to 14% from (26)% during the same period in 1994, primarily
due to a $550,000 inventory reserve charged in September of 1994, profitable
headset sales, and reduced industrial muffler sales. Cost of engineering and
development services decreased 46% to $1,927,000, primarily due to staff
reductions.
Selling, general and administrative expenses for the first nine months
of 1995 decreased by 34% to $4,358,000 from $6,632,000 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, $958,000 was directly attributable
to salaries and related expenses. Advertising and marketing expenses decreased
by 58% to $560,000. Office and occupancy expenses decreased by 63% or
$443,000. Professional fees increased by 85% to $1,587,000 primarily due to
legal fees related to litigation and patent prosecution and maintenance.
Travel and entertainment decreased by 67% or $491,000.
Depreciation and amortization included in selling, general and
administrative expenses increased by 49% or $58,000, from $119,000 to
$177,000, reflecting the increased amortization of intellectual property.
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Research and development expenditures for the first nine months of
1995 decreased by 46% to $3,579,000 from $6,681,000 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 nine months of 1995, interest (income) expense decreased
to $(14,000) from $(495,000) 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 $73.6 million on a
cumulative basis through September 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 the private
placements discussed below, 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 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
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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 September 30, 1995, the Company has generated $3.4 million in license
fees and $1.2 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 September 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.
On August 4, 1995, the Company sold 2,000,000 shares of its common
stock in a private placement that resulted in $660,000 net proceeds to the
Company. Additionally, on November 14, 1995, the Company sold 4,800,000 shares
of its common stock in a private placement that resulted in $3.3 million net
proceeds to the Company.
On November 15, 1995, the Company and Walker executed a series of
related agreements (the "Restructuring Agreements") and concluded previously
noted negotiations with Tenneco Automotive and Walker regarding the Company's
commitment to help fund $4.0 million of product and technology development work
and the transfer of the Company's 50% interest in WNCT to Walker. The
Restructuring Agreements provide for the transfer of the Company's
interest in WNCT to Walker, the elimination of the Company's previously
expensed obligation to fund the remaining $2.4 million of product and
technology development work noted above, the transfer to Walker of certain
Company owned tangible assets related to the business of WNCT, the expansion
of certain existing technology licenses and the Company's performance of
certain research and development activities for Walker at Walker's expense as
to future activities. (Refer to Notes 2 and 7 - "Notes to the Condensed
Consolidated Financial Statements" for further discussion.)
The above noted November 14, 1995 private placement and WNCT
restructuring transactions will be reflected in the financial results of the
Company for the quarter ending December 31, 1995.
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
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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 September 30, 1995, cash and short-term investments amounted to
$0.3 million. On November 14, 1995 the Company received 3.3 million from the
private placement described above. 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 decreased to $ (1.2) million at
September 30, 1995, from $0.9 million at December 31, 1994. This decrease of
$2.1 million was due primarily to the net loss of $4.8 million reported for the
period.
During the first nine months of 1995, the net cash used in operating
activities was $3.3 million, compared with $14.9 million used in operating
activities during the first nine months of 1994.
The net cash used in investing activities amounted to $0.3 million
during the period primarily relating to the acquisition of patent rights.
The net cash provided by financing activities amounted to $1.3 million, of
which $0.7 million related to the sale of stock in the private placement on
August 4, 1995 discussed above and the remainder was 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.
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There were no material commitments for capital expenditures as of
September 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
September 30, 1995 was $2.4 million. (Refer the discussion above and to Notes
2 and 7 - "Notes to the Condensed Consolidated Financial Statements" for
further discussion of the WNCT funding commitment.)
PART III - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
For a 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.
11 Computation of Net (loss) Per Share
27 Financial Data Schedule
(b) The following report on Form 8-K was filed during the period covered
by this report:
(1) A report on Form 8-K was filed on August 4, 1995, reporting
the filing of eight (8) exhibits to the Company report on
Form 10Q for the quarterly period ended June 30, 1995.
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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: November 15, 1995
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