1
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, 1996
------------------
COMMISSION FILE NUMBER: 0-18267
- --------------------------------------------------------------------------------
Noise Cancellation Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
(410) 636-8700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x Yes No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
111,639,405 shares outstanding as of November 6, 1996
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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,
-------------------------------- --------------------------------
1995 1996 1995 1996
--------------- ------------- --------------- --------------
REVENUES:
Technology licensing fees $140 $160 $3,365 $1,229
Product sales, net 551 358 1,239 1,049
Engineering and development services 430 1 1,877 225
-------------- ------------- ------------ --------------
Total revenues $1,121 $519 $6,481 $2,503
-------------- ------------- ------------ --------------
COSTS AND EXPENSES:
Costs of sales $467 $276 $1,062 $850
Costs of engineering and development services 360 8 1,927 175
Selling, general and administrative 1,411 1,779 4,729 4,105
Research and development 1,214 2,029 3,579 4,790
Equity in net loss of unconsolidated affiliates - - - 80
Interest (income) expense 1 2 (14) 26
-------------- ------------- ------------ --------------
Total costs and expenses $3,453 $4,094 $11,283 $10,026
-------------- ------------- ------------ --------------
NET (LOSS) $(2,332) $(3,575) $(4,802) $(7,523)
============== ============= ============ ==============
Weighted average number of common
shares outstanding 87,708 103,840 86,804 98,060
============== ============= ============ ==============
NET LOSS PER COMMON SHARE $ (.03) $ (.03) $ (.06) $ (.08)
============== ============= ============ ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (NOTE 1)
(UNAUDITED)
(In thousands of dollars)
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents (Note 1) $ 1,831 $ 2,222
Accounts receivable:
Trade:
Joint ventures and affiliates 241 46
Other 189 542
Unbilled 260 93
Allowance for doubtful accounts (119) (118)
---------- -----------
Total accounts receivable $ 571 $ 563
Inventories, net of reserves (Note 2) 1,701 1,129
Other current assets 225 113
---------- -----------
Total current assets $ 4,328 $ 4,027
Property and equipment, net 2,897 2,550
Patent rights and other intangibles, net 2,194 1,891
Other assets 164 47
---------- -----------
$ 9,583 $ 8,515
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,836 $ 889
Accrued expenses 571 1,181
Accrued payroll, taxes and related expenses 144 363
Customers' advances 43 -
---------- -----------
Total current liabilities $ 2,594 $ 2,433
---------- -----------
Long term obligations $ 105 $ 75
Commitments and contingencies (Note 4)
---------- -----------
Total other liabilities $ 105 $ 75
---------- -----------
STOCKHOLDERS' EQUITY (Note 3)
Common stock, $.01 par value, 140,000,000 shares authorized; issued
and outstanding 92,828,407 and 111,639,405 shares, respectively $ 928 $ 1,116
Additional paid-in-capital 78,667 84,955
Accumulated deficit (72,848) (80,371)
Cumulative translation adjustment 150 307
Common stock subscriptions receivable (13) -
---------- -----------
Total stockholders' equity $ 6,884 $ 6,007
---------- -----------
$ 9,583 $ 8,515
========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(UNAUDITED)
(THOUSANDS OF DOLLARS)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1995 1996
----------- -----------
Cash flows from operating activities:
Net loss $ (4,802) $ (7,523)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 912 706
Common stock issued as consideration for:
Compensation 8 13
Rent 335 -
Common stock retired as consideration for:
Employee expenses - (5)
Provision for doubtful accounts 371 74
Equity in net loss of unconsolidated affiliates - 80
Unrealized foreign currency (gain) loss 9 168
Loss on disposition of fixed assets 30 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 277 (65)
Decrease in inventories 18 682
Decrease in other assets 55 152
Increase (decrease) in accounts payable and accrued expenses 152 (354)
Increase (decrease) in other liabilities (643) 161
----------- -----------
Net cash (used in) operating activities $ (3,278) $ (5,911)
----------- -----------
Cash flows from investing activities:
Capital expenditures $ (42) $ (179)
Acquisition of patent rights (210) -
----------- -----------
Net cash (used in) investing activities $ (252) $ (179)
----------- -----------
Cash flows from financing activities:
Proceeds from:
Sale of common stock $ 660 $ 6,377
Exercise of stock purchase warrants and options 684 104
----------- -----------
Net cash provided by financing activities $ 1,344 $ 6,481
----------- -----------
Net increase (decrease) in cash and cash equivalents $ (2,186) $ 391
Cash and cash equivalents - beginning of period 2,423 1,831
----------- -----------
Cash and cash equivalents - end of period $ 237 $ 2,222
=========== ===========
Cash paid for interest $ 12 $ 5
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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,
1996, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. 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, 1995.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $80.4 million on a
cumulative basis through September 30, 1996. These losses, which include the
costs for development of products for commercial use, have been funded
primarily from the sale of common stock, including the exercise of warrants or
options to purchase common stock, and by technology licensing fees and
engineering and development funds received from joint venture and other
strategic partners. Agreements with joint venture and other strategic partners
generally require that a portion of the initial cash flows, if any, generated
by the ventures or alliances be paid on a preferential basis to the Company's
co-venturers until the technology licensing fees and engineering and
development funds provided to the venture or the Company are recovered.
Cash, cash equivalents and short-term investments amount to $2.2 million
at September 30, 1996, increasing from $1.8 million at December 31, 1995.
Management does not believe that available funds are sufficient to sustain the
Company for the next 12 months. Management believes that available cash and
cash anticipated from the exercise of warrants and options, the funding derived
from forecasted technology licensing fees, royalties and product sales and
engineering and development revenue, the operating cost savings from the
reduction in employees, and reduced capital expenditures together with the cash
to be received by the Company at the closing of the November 19, 1996,
financing agreement discussed below should be sufficient to sustain the
Company's anticipated future level of operations into 1997. However, the period
during 1997 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 as well as the closing
of such financing agreement, all of which are presently uncertain. In the
event the two stage closing of such November 1996 financing transaction does
not occur as scheduled on November 27, 1996, and December 16, 1996 or by the
end of 1996, then management believes available funds will only be sufficient
to sustain the Company through the first quarter of 1997 unless additional
working capital financing can be obtained. There is no assurance any such
financing is or would become available.
There can be no assurance that additional funding will be provided by
the Company's efforts to raise additional capital or by technology licensing
fees, royalties and product sales and engineering and development revenue. In
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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.
On April 10, 1996, the Company sold 1,000,000 shares, in the aggregate,
of its common stock to three institutional investors in a private placement
that provided net proceeds to the Company of $0.3 million (the "April 1996
Financing"). Contemporaneously, the Company sold secured convertible term
notes in the aggregate principal amount of $1.2 million to those institutional
investors and granted them each an option to purchase an aggregate of $3.45
million of additional shares of the Company's common stock. The per share
conversion price under the notes and the exercise price under the options were
to be equal to the price received by the Company for the sale of the 1,000,000
shares subject to certain adjustments. The conversion of the notes and the
exercise of the options were both subject to stockholder approval of an
appropriate amendment to the Company's Certificate of Incorporation increasing
its authorized capital to provide for the requisite shares. On July 17, 1996,
the Company's stockholders authorized an increase in the Company's authorized
capital to 140,000,000 shares, an increase sufficient to provide for the
requisite shares.
On August 13, 1996, the three institutional investors converted their
secured, convertible term notes and exercised their options in full. As a
result, the Company issued 13,403,130 shares, in the aggregate, of its common
stock to such investors, received $3.45 million in cash, and effected by
conversion to its common stock the payment of the notes together with the
accrued interest thereon.
In conjunction with the foregoing sale of common stock and convertible
term notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and to
use its best efforts to have such registration statement declared effective by
the SEC as soon as practicable. The relevant agreements provide for
significant monetary penalties in the event such registration statement is not
declared effective on or before November 14, 1996 and in the event its
effectiveness is suspended for other than brief permissible periods. However,
the registration statement was declared effective by the SEC on September 3,
1996. The agreements also prohibit the Company from concluding any further
financing arrangements which involve the sale of equity or debt with an equity
feature without the investors' consent prior to October 8, 1996, and granted the
investors a right of first refusal with respect to any such further financing
until April 10, 1997.
On November 19, 1996, the Company, through a Canadian broker, received a
commitment from a Canadian institutional investor to purchase from the Company
on November 27, 1996 $2.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended (the "November 1996
Financing"). The commitment also contains and undertaking to purchase an
additional $1.0 million of Debentures from the Company on December 16, 1996,
subject to the Company's delivering certain information concerning its
operations and capitalization to the investor by December 10, 1996. This
commitment provides for the closing of the Company's sale of the first $2.0
million of Debentures on November 27, 1996, pursuant to a subscription
agreement and debenture substantially in the forms annexed to the commitment
and, provided the Company delivers certain information concerning its
operations and capitalizations to the investor by December 10, 1996, the
closing of the Company's sale of a second $1.0 million of Debentures on
December 16, 1996. The Debentures are due December 31, 1999 and earn 8%
interest per annum, payable quarterly in either cash or the Company's common
stock at the Company's option. The investor, at its option, may convert the
principal due on the Debentures into the Company's common stock at any time on
or after January 20, 1997. In the event of such a conversion, the conversion
price will be the lesser of 85% of the closing bid price of the Company's
common stock on the closing date or 70% over the average closing bid price for
the five trading days immediately preceding the conversion date. To provide
for the above noted conversion and interest payment options, the Company will,
at closing, reserve 15 million shares of the Company's common stock for such
purposes. Subject to certain conditions, the Company also has the right to
require the investor to convert all or part of the Debentures at the above
noted conversion price after February 15, 1998. The Company also undertakes to
use its best efforts to complete the requisite corporate action to increase the
Company's authorized capital in an amount sufficient to permit the Canadian
broker to exercise a right to arrange further financing for the Company by
means of the Company's issuance of up to $15,000,000 par value of 8% non-voting
convertible debentures subject to a 25% discount and a 10% origination fee.
However, if the Company, acting reasonably, determines such further financing
is not in the Company's best interest at that time, then the broker, in lieu of
such right, is granted a right of first refusal to arrange for funds for any
debenture or convertible preferred stock financing undertaken by the Company
thereafter for a period of one year from May 1, 1997, or the date of such
increase in the Company's authorized capital, whichever is later. The three
investors in the April 1996 Financing have waived their rights of first refusal
with respect to the November 1996 Financing.
7
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 September 30, 1996,
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. INVENTORIES:
Inventories comprise the following:
(THOUSANDS OF DOLLARS) DECEMBER 31, SEPTEMBER 30,
1995 1996
---------------------- ---------------------
Components $716 $566
Finished Goods 1,340 960
---------------------- ---------------------
Gross Inventory $2,056 $1,526
Reserve for Obsolete & Slow
Moving Inventory (355) (397)
---------------------- ---------------------
Inventory, Net of Reserves $1,701 $1,129
====================== =====================
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3. STOCKHOLDERS EQUITY:
The changes in stockholders' equity during the six months ended September
30, 1996, were as follows:
(IN THOUSANDS) NET EXERCISE OF
BALANCE AT SALE OF WARRANTS STOCK NET (LOSS) BALANCE AT
DECEMBER 31, COMMON AND SUBSCRIPTION FOR THE TRANSLATION SEPTEMBER 30
1995 STOCK OPTIONS RECEIVABLE PERIOD ADJUSTMENT 1996
------------ -------- ----------- ------------ ---------- ----------- ------------
Common Stock:
Shares 92,828 18,607 204 -- -- -- 111,639
Amount $ 928 $ 186 $ 2 $ -- $ -- $ -- $ 1,116
Additional
Paid-in Capital 78,667 6,186 102 -- -- -- 84,955
Accumulated
Deficit (72,848) -- -- -- (7,523) -- (80,371)
Cumulative
Translation
Adjustment 150 -- -- -- -- 157 307
Stock
Subscription
Receivable (13) -- -- 13 -- -- --
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 any 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, and pretrial discovery is scheduled to
take place over the next few months. Management is of the opinion that the
lawsuit is without merit and will contest
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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 judgement against the Company, said
judgement could have a severe material effect on quarterly or annual operating
results.
5. COMMON STOCK OPTIONS:
On January 22, 1996, the Company granted to certain employees and
consultants options to purchase the Company's common stock at the then fair
market value of such stock. Certain of the grants were made in connection with
offers of employment and under the terms of consulting contracts. Other grants
were made in lieu of cash bonuses for 1995, and in two instances in lieu of
additional cash compensation for 1996.
The option grants involved options to purchase a total of 1,901,500 shares
of the Company's common stock. Options to purchase 1,425,000 were granted to
officers of the Company. Options to purchase 276,500 are exercisable from the
date of grant until their date of expiration. The remaining options to purchase
1,625,000 shares are not exercisable until the date on which the requisite
corporate action to increase the authorized capital of the Company and reserve
the required number of shares of common stock for issuance upon the exercise
has been completed. Such action was completed on July 17, 1996.
The fair market value of the Company's common stock on January 22, 1996
was $0.6563 per share, the closing price of the Company's common stock on the
NASDAQ National Market System.
6. SUBSEQUENT EVENT
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On November 19, 1996, the Company, through a Canadian broker, received a
commitment from a Canadian institutional investor to purchase from the Company
on November 27, 1996 $2.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended (the "November 1996
Financing"). The commitment also contains and undertaking to purchase an
additional $1.0 million of Debentures from the Company on December 16, 1996,
subject to the Company's delivering certain information concerning its
operations and capitalization to the investor by December 10, 1996. This
commitment provides for the closing of the Company's sale of the first $2.0
million of Debentures on November 27, 1996, pursuant to a subscription
agreement and debenture substantially in the forms annexed to the commitment
and, provided the Company delivers certain information concerning its
operations and capitalizations to the investor by December 10, 1996, the
closing of the Company's sale of a second $1.0 million of Debentures on
December 16, 1996. The Debentures are due December 31, 1999 and earn 8%
interest per annum, payable quarterly in either cash or the Company's common
stock at the Company's option. The investor, at its option, may convert the
principal due on the Debentures into the Company's common stock at any time on
or after January 20, 1997. In the event of such a conversion, the conversion
price will be the lesser of 85% of the closing bid price of the Company's
common stock on the closing date or 70% over the average closing bid price for
the five trading days immediately preceding the conversion date. To provide
for the above noted conversion and interest payment options, the Company will,
at closing, reserve 15 million shares of the Company's common stock for such
purposes. Subject to certain conditions, the Company also has the right to
require the investor to convert all or part of the Debentures at the above
noted conversion price after February 15, 1998. The Company also undertakes to
use its best efforts to complete the requisite corporate action to increase the
Company's authorized capital in an amount sufficient to permit the Canadian
broker to exercise a right to arrange further financing for the Company by
means of the Company's issuance of up to $15,000,000 par value of 8% non-voting
convertible debentures subject to a 25% discount and a 10% origination fee.
However, if the Company, acting reasonably, determines such further financing
is not in the Company's best interest at that time, then the broker, in lieu of
such right, is granted a right of first refusal to arrange for funds for any
debenture or convertible preferred stock financing undertaken by the Company
thereafter for a period of one year from May 1, 1997, or the date of such
increase in the Company's authorized capital, whichever is later. The three
investors in the April 1996 Financing have waived their rights of first refusal
with respect to the November 1996 Financing.
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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, 1996
GENERAL BUSINESS ENVIRONMENT
The Company is in transition from a firm focused principally on research
and development of new technology to a firm focused on the commercialization of
its technology through technology licensing fees, royalties and product sales.
In prior years, the Company derived the majority of its revenues from
engineering and development funding provided by established companies willing
to assist the Company in the development of its active noise and vibration
control technology, and from technology licensing fees paid by such companies.
The Company's strategy generally has been to obtain technology licensing fees
when initiating joint ventures and alliances with new strategic partners.
Revenues from product sales were limited to sales of specialty products and
prototypes. During the first nine months of 1996, the Company received
approximately 14% of its operating revenues from engineering and development
funding. Since 1991, excluding quarter to quarter variations, revenues from
product sales have been increasing and management expects that technology
licensing fees, royalties and product sales will become the principal source of
the Company's revenue as the commercialization of its technology proceeds.
The Company has shifted its focus to technology licensing fees, royalties
and products that represent near term revenue generation. This is reflected in
the fact that 47% of the Company's total revenue in the first nine months of
1996 represents technology licensing fees. There can be no assurance that
additional technology licensing fees, will continue at that level.
Note 1 to the accompanying Condensed Consolidated Financial Statements and
the liquidity and capital resources section which follows describe the current
status of the Company's available cash balances and the uncertainties which
exist that raise substantial doubt as to the Company's ability to continue as a
going concern.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of active noise and
vibration control build, revenues from technology licensing fees, royalties and
product sales are forecast to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding.
From the Company's inception through September 30, 1996, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 22%
product sales, 50% engineering and development services and 28% technology
licensing fees.
12
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization
of its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and into their manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed. The sluggish worldwide economy over the past four years has slowed
the adoption and market acceptance of many new technologies.
The Company continues to sell and ship ProActive(TM) and Noisebuster(TM)
headsets in 1996. Three alliances are selling the Company's products: Walker
is manufacturing and selling industrial silencers; Siemens is buying and
contracting with the Company to install quieting headsets for patient use in
Siemens' MRI machines; and Ultra is installing production model aircraft cabin
quieting systems in turboprop aircraft. The Company is entitled to receive
royalties from Walker on its sales of industrial silencers, direct product
sales revenue from Siemens' purchase of headsets, and commencing in 1998,
royalties from Ultra on its sale of aircraft cabin quieting systems.
Management believes these activities help demonstrate the range of commercial
potential for the Company's technology and will contribute to the Company's
transition from engineering and development to technology licensing fees,
royalties and product sales.
Product revenues for the nine months ended September 30, 1995 and 1996
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 1995 1996 1995 1996 1995 1996 1995 1996
- ------------------------ ------ ------ ------ ------ ------ ------- ------ -------
Headsets $541 $355 98.0% 99.4% $1,215 $1,022 98.1% 97.4%
Other - 2 - 0.6% 11 27 0.9% 2.6%
Fan Quieting Products - - - - (1) - (0.1)% -
Industrial Silencers 11 - 2.0% - 14 - 1.1% -
----- ------ ------ ------ ------ ------ ------- -------
Total $552 $357 100.0% 100.0% $1,239 $1,049 100.0% 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 10, 1996, the Company sold 1,000,000 shares, in the aggregate,
of its common stock in a private placement with three institutional investors
that provided net proceeds to the Company of $0.3 million. Contemporaneously,
the Company sold secured convertible term notes in the aggregate principal
amount of $1.2 million to those institutional investors and granted them each
an option to purchase an aggregate of $3.45
13
million of additional shares of the Company's common stock. The per
share conversion price under the notes and the exercise price under the options
was equal to $0.35 per share subject to certain adjustments. The conversion of
the notes and the exercise of the options were both subject to stockholder
approval of an appropriate amendment to the Company's Certificate of
Incorporation increasing its authorized capital to provide for the requisite
shares. In conjunction with the foregoing sale of common stock and convertible
term notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and
to use its best efforts to have such registration statement declared effective
by the SEC as soon as practicable. The relevant agreements provide for
significant monetary penalties in the event such registration statement is not
declared effective by November 14, 1996 and in the event its effectiveness is
suspended for other than brief permissible periods. However, the registration
statement was declared effective by the SEC on September 3, 1996. The
agreements also prohibit the Company from concluding any further financing
arrangements which involve the sale of equity or debt with an equity feature
without the investors' consent prior to October 8, 1996, and granted the
investors a right of first refusal with respect to any such further financing
until April 10, 1997. (Refer to Notes 1. and 6. - "Notes to the Condensed
Consolidated Financial Statements.")
On July 17, 1996, the stockholders of the Company approved the amendments
referred to above. On August 13, 1996, the three institutional investors
converted their secured convertible term notes and exercised their options in
full. The total number of shares of common stock issued the investors referred
to above on August 13, 1996 amounted to 13,403,130, of which 9,857,142 were
issued upon the exercise of the option and 3,545,988 were issued to convert the
notes and pay the accrued interest on the notes. Both the option exercise
price and the note conversion price were at $0.35 per share. The Company
received $3.45 million from these transaction on August 13, 1996. (Refer to
Notes 1. and 6. - "Notes to the Condensed Consolidated Financial Statements.")
On November 19, 1996, the Company, through a Canadian broker, received a
commitment from a Canadian institutional investor to purchase from the Company
on November 27, 1996 $2.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended (the "November 1996
Financing"). The commitment also contains and undertaking to purchase an
additional $1.0 million of Debentures from the Company on December 16, 1996,
subject to the Company's delivering certain information concerning its
operations and capitalization to the investor by December 10, 1996. This
commitment provides for the closing of the Company's sale of the first $2.0
million of Debentures on November 27, 1996, pursuant to a subscription
agreement and debenture substantially in the forms annexed to the commitment
and, provided the Company delivers certain information concerning its
operations and capitalizations to the investor by December 10, 1996, the
closing of the Company's sale of a second $1.0 million of Debentures on
December 16, 1996. The Debentures are due December 31, 1999 and earn 8%
interest per annum, payable quarterly in either cash or the Company's common
stock at the Company's option. The investor, at its option, may convert the
principal due on the Debentures into the Company's common stock at any time on
or after January 20, 1997. In the event of such a conversion, the conversion
price will be the lesser of 85% of the closing bid price of the Company's
common stock on the closing date or 70% over the average closing bid price for
the five trading days immediately preceding the conversion date. To provide
for the above noted conversion and interest payment options, the Company will,
at closing, reserve 15 million shares of the Company's common stock for such
purposes. Subject to certain conditions, the Company also has the right to
require the investor to convert all or part of the Debentures at the above
noted conversion price after February 15, 1998. The Company also undertakes to
use its best efforts to complete the requisite corporate action to increase the
Company's authorized capital in an amount sufficient to permit the Canadian
broker to exercise a right to arrange further financing for the Company by
means of the Company's issuance of up to $15,000,000 par value of 8% non-voting
convertible debentures subject to a 25% discount and a 10% origination fee.
However, if the Company, acting reasonably, determines such further financing
is not in the Company's best interest at that time, then the broker, in lieu of
such right, is granted a right of first refusal to arrange for funds for any
debenture or convertible preferred stock financing undertaken by the Company
thereafter for a period of one year from May 1, 1997, or the date of such
increase in the Company's authorized capital, whichever is later. The three
investors in the April 1996 Financing have waived their rights of first refusal
with respect to the November 1996 Financing.
14
Management believes that the funding provided by the additional capital
referred to above coupled with anticipated increased product sales, technology
licensing fees, royalties, and cost savings, if realized, should enable the
Company to continue operations into 1997. If the Company is not able to
generate additional capital, increase technology licensing fees, royalties and
product sales, or generate additional capital, it will have to further cut its
level of operations substantially in order to conserve cash. In the event the
two stage closing of the November 1996 Financing transaction does not occur as
scheduled on November 27, 1996, and December 16, 1996 or by the end of 1996,
then Management believes available funds will only be sufficient to sustain the
Company through the first quarter of 1997 unless additional working capital
financing can be obtained. There is no assurance any such financing is or
would become available. (Refer to "Liquidity and Capital Resources" below and
to Note 1. - "Notes to the Condensed Consolidated Financial Statements" for a
further discussion relating to continuity of operations.)
RESULTS OF OPERATIONS
Total revenues for the first nine months of 1996 decreased by 61% to
$2,503,000 from $6,481,000 when compared with the same period in 1995.
Product sales decreased 15% to $1,229,000 reflecting decreased aviation
headset sales, a lower price and decreased NoiseBuster(TM) sales and a
decrease in industrial silencer sales in connection with the transfer of that
business to Walker. Engineering and development services decreased by 88% to $
225,000, 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
from Walker in connection with the transfer of that business to Walker in the
fourth quarter of 1995 and staff reductions.
Technology licensing fees in the first nine months of 1996 decreased by
63% or $2,136,000, primarily because the $2.6 million licensing fee from Ultra
was recognized by the Company in the first quarter of 1995 and because of the
shortfall in such fees referred to above.
Cost of product sales decreased by 20% to $850,000 and the product margin
increased to 19% from 14% during the same period in 1995. Cost of engineering
and development services decreased 91% to $176,000 due to decreased contract
revenue. The gross margin on engineering and development services increased to
22% from (3)% during the same period in 1995, primarily due to more profitable
contracts in 1996.
Selling, general and administrative expenses for the first nine months
decreased by 13% to $4,105,000 from $4,729,000 for the same period in 1995,
primarily due to continued cost savings from the revised business plan.
Research and development expenditures for the first nine months of 1996
increased by 34% to $4,790,000 from $3,579,000 for the same period in 1995,
primarily due to increased emphasis on products to be developed within a short
term.
In the first nine months of 1996, interest (income) expense increased to
$26,000 from ($14,000) for the same period of 1995 reflecting the interest
expense on the note payable previously discussed.
15
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 $80.4 million on a
cumulative basis through September 30, 1996. These losses, which include the
costs for development of products for commercial use, have been funded
primarily from the sale of common stock, including the exercise of warrants or
options to purchase common stock, and by technology licensing fees and
engineering and development funds received from joint venture and other
strategic partners. Agreements with joint venture and other strategic partners
generally require that a portion of the initial cash flows, if any, generated
by the ventures or alliances be paid on a preferential basis to the Company's
co-venturers until the license fees and engineering and development funds
provided to the venture or the Company are recovered.
In January 1996, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1997.
Under this plan, as amended, the Company needed to generate approximately $17
million to fund its operations for 1996. The Company believed that it could
generate these funds from operations in 1996, and the additional cash funding
obtained from sales of common stock (refer to Notes 1. and 6. - "Notes to the
Condensed Consolidated Financial Statements."). Included in such amount was
approximately $8.9 million in sales of new products and approximately $9.0
million of technology licensing fees and royalties. The Company did not meet
its revenue targets for the first nine months of 1996.
Management believes that the funding provided by the additional capital
referred to below coupled with anticipated increased product sales, technology
licensing fees, royalties, and cost savings, if realized, should enable the
Company to continue operations into 1997. In the event the
two stage closing of the November 1996 Financing transaction does not occur as
scheduled on November 27, 1996, and December 16, 1996 or by the end of 1996,
then Management believes available funds will only be sufficient to sustain the
Company through the first quarter of 1997 unless additional working capital
financing can be obtained. There is no assurance any such financing is or
would become available. (Refer to Note 1. - "Notes to the Condensed
Consolidated Financial Statements" for a further discussion relating to
continuity of operations.) Success in generating technology licensing fees,
royalties and product sales are significant and critical to the Company's
ability to overcome its present financial difficulties. The Company cannot
predict whether it will be successful in obtaining market acceptance of its new
products or in completing its current negotiations with respect to licenses and
royalty revenues. The Company will monitor its performance against the plan on
a monthly basis and, if necessary, reduce its level of operations accordingly.
The Company
16
believes that the plan discussed above constitutes a viable plan for the
continuation of the Company's business into 1997.
There can be no assurance that funding will be provided by additional
capital, technology licensing fees, royalties, product sales, engineering and
development revenue. In that event, the Company would have to further cut back
its level of operations substantially in order to conserve cash. These
reductions could have an adverse effect on the Company's relations with its
strategic partners and customers. The uncertainty with respect to the adequacy
of current funds to support the Company's activities until positive cash flow
from operations can be achieved, and with respect to the availability of
financing from other sources to fund any cash deficiencies, raises substantial
doubt about the Company's ability to continue as a going concern. Further
discussion of these uncertainties is presented in Note 1. - "Notes to the
Condensed Consolidated Financial Statements".
Because the Company did not meet its revenue targets for the first,
second and third quarters of 1996, it entered into three transactions, which
provided additional funding as follows:
On March 28, 1996, the Company sold 2,000,000 shares of its common stock
in a private placement that provided net proceeds to the Company of $0.7
million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in the
aggregate, of its common stock in a private placement with three institutional
investors that provided net proceeds to the Company of $0.3 million.
Contemporaneously, the Company sold secured convertible term notes in the
aggregate principal amount of $1.2 million to those institutional investors and
granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion
price under the notes and the exercise price under the options are equal to the
price received by the Company for the sale of such 1,000,000 shares subject to
certain adjustments. The conversion of the notes and the exercise of the
options are both subject to stockholder approval of an appropriate amendment to
the Company's Certificate of Incorporation increasing its authorized capital to
provide for the requisite shares. On July 17 1996, the stockholders of the
Company approved such an amendment. On August 13, 1996, the three
institutional investors converted their secured convertible term notes and
exercised their options in full. The total number of shares of common stock
issued the investors referred to above on August 13, 1996 amounted to
13,403,130, of which 9,857,142 were issued upon the exercise of the option and
3,545,988 were issued to convert the notes and pay the accrued interest on the
notes. Both the option exercise price and the note conversion price were at
$0.35 per share. The Company received $3.45 million from these transactions on
August 13, 1996. (Refer to Notes 1. And 6. - "Notes to the Condensed
Consolidated Financial Statements.")
In conjunction with the foregoing sale of common stock and convertible
term notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and
to use its best efforts to have such registration statement declared effective
by the SEC as soon as practicable. The relevant agreements provide for
significant monetary penalties in the event such registration statement is not
declared effective on or before November 14, 1996, and in the event its
effectiveness is suspended for other than brief permissible periods. However,
the registration statement was declared effective by the SEC on September 3,
1996. The agreements also prohibit the Company from concluding any further
financing arrangements which involve the sale of equity or debt with an equity
feature without the investors' consent prior to October 8, 1996, and granted the
investors a right of first refusal with respect to any such further financing
until April 10, 1997.
17
On November 19, 1996, the Company, through a Canadian broker, received a
commitment from a Canadian institutional investor to purchase from the Company
on November 27, 1996 $2.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended (the "November 1996
Financing"). The commitment also contains and undertaking to purchase an
additional $1.0 million of Debentures from the Company on December 16, 1996,
subject to the Company's delivering certain information concerning its
operations and capitalization to the investor by December 10, 1996. This
commitment provides for the closing of the Company's sale of the first $2.0
million of Debentures on November 27, 1996, pursuant to a subscription
agreement and debenture substantially in the forms annexed to the commitment
and, provided the Company delivers certain information concerning its
operations and capitalizations to the investor by December 10, 1996, the
closing of the Company's sale of a second $1.0 million of Debentures on
December 16, 1996. The Debentures are due December 31, 1999 and earn 8%
interest per annum, payable quarterly in either cash or the Company's common
stock at the Company's option. The investor, at its option, may convert the
principal due on the Debentures into the Company's common stock at any time on
or after January 20, 1997. In the event of such a conversion, the conversion
price will be the lesser of 85% of the closing bid price of the Company's
common stock on the closing date or 70% over the average closing bid price for
the five trading days immediately preceding the conversion date. To provide
for the above noted conversion and interest payment options, the Company will,
at closing, reserve 15 million shares of the Company's common stock for such
purposes. Subject to certain conditions, the Company also has the right to
require the investor to convert all or part of the Debentures at the above
noted conversion price after February 15, 1998. The Company also undertakes to
use its best efforts to complete the requisite corporate action to increase the
Company's authorized capital in an amount sufficient to permit the Canadian
broker to exercise a right to arrange further financing for the Company by
means of the Company's issuance of up to $15,000,000 par value of 8% non-voting
convertible debentures subject to a 25% discount and a 10% origination fee.
However, if the Company, acting reasonably, determines such further financing
is not in the Company's best interest at that time, then the broker, in lieu of
such right, is granted a right of first refusal to arrange for funds for any
debenture or convertible preferred stock financing undertaken by the Company
thereafter for a period of one year from May 1, 1997, or the date of such
increase in the Company's authorized capital, whichever is later. The three
investors in the April 1996 Financing have waived their rights of first refusal
with respect to the November 1996 Financing.
The Company believes that the level of financial resources available to it
is an essential competitive factor. As noted above, the Company asked its
shareholders to approve the amendment of the Company's Certificate of
Incorporation to increase the number of shares of Common Stock authorized
thereunder from 100,000,000 shares to 140,000,000 shares, and such amendment
was approved at the Annual Meeting of Stockholders held on July 17, 1996.
At September 30, 1996, cash and short-term investments were $2.2 million.
The available resources were invested in interest bearing money market
accounts. The Company's investment objective is preservation of capital while
earning a moderate rate of return.
The Company's working capital decreased to $1.6 million at September 30,
1996, from $1.7 million at December 31, 1995. This decrease of $0.1 million
was funded primarily by the transactions described above and used primarily to
fund the net loss of $7.5 million reported for the period. On August 13,
1996, the secured convertible term notes in the aggregate principal amount of
$1.2 million together with accrued interest thereon
18
were converted at the option of the three institutional investors to common
stock of the Company as described above.
During the first nine months of 1996, the net cash used in operating
activities was $5.9 million, compared to $3.3 million used in operating
activities during the same period of 1995.
Net inventory declined during the first nine months of 1996 by $0.6
million due primarily to sales of the NoiseBuster(TM), ProActive(TM) and MRI
headsets.
The Company's available cash balances at June 30, 1996 are lower than
anticipated at the end of 1995 primarily due to lower product sales than
forecasted and delays in certain technology licensing agreements.
The net cash used in investing activities amounted to $0.2 million during
the period. The net cash provided by financing activities amounted to $6.5
million primarily from the private placements of common stock and the sale of
secured convertible term notes described above.
The Company has no lines of credit with banks or other lending
institutions and therefore has no unused borrowing capacity.
19
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
September 30, 1996, and no material commitments are anticipated in the near
future.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of stockholders of the Company was held on July 17,
1996. At the meeting, Jay M. Haft, John J. McCloy II, Michael J. Parrella, Sam
Oolie and Alastair Keith were elected directors, each to serve until the next
annual meeting of stockholders and until their successors are elected and
qualified. The Stockholders also approved the amendment of the Company's
Certificate of Incorporation to increase the number of shares of Common Stock
authorized thereunder from 100,000,000 shares to 140,000,000 shares, the
adoption of an amendment of the Noise Cancellation Technologies, Inc. Stock
Incentive Plan, the adoption of an amendment of the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors, and ratified the
appointment of Richard A. Eisner & Company, LLP as the Company's independent
auditors for the year ending December 31, 1996. The vote taken at such meeting
was as follows:
20
(a) With respect to the election of the directors
FOR WITHHELD
Jay M. Haft 77,202,791 2,445,588
John J. McCloy II 77,225,591 2,422,788
Michael J. Parrella 77,175,416 2,472,963
Sam Oolie 77,215,091 2,433,288
Alastair Keith 77,216,191 2,432,188
(b) With respect to the proposal to approve the amendment of the Company's
Certificate of Incorporation
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
73,783,674 4,177,831 667,295
(c) With respect to the proposal to approve the adoption of the amendment
of the Noise Cancellation Technologies, Inc. Stock Incentive Plan
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
66,647,528 6,500,324 765,694
(d) With respect to the proposal to approve the adoption of the amendment
of the Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
69,751,838 6,659,702 917,472
(e) With respect to the proposal to ratify the selection of Richard A.
Eisner & Company, LLP independent auditors for the Company's fiscal
year ending December 31, 1996
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
78,407,087 713,069 528,223
ITEM 6 -EXHIBITS
EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3(a) Restated Certificate of Incorporation of the Company filed
in the Office of the Secretary of State of the State of
Delaware on September 23, 1996.
21
10(a) Notices of Exercise of Options to Purchase Common Stock
by Kingdon Associates, L.P., Kingdon Partners, L.P., and
M. Kingdon Offshore, NV, dated August 13, 1996, incorporated
by reference to Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996. 10(b)
Notices of Conversion of Secured Convertible Notes by Kingdon
Associates, L.P., Kingdon Partners, L.P. and M. Kingdon
Offshore NV, dated August 13, 1996, incorporated by reference
to Exhibit 10(d) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.
* 10(c) Noise Cancellation Technologies, Inc. Stock Incentive Plan (as
adopted April 14, 1993, and amended through August 16, 1996),
incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 filed with the Securities &
Exchange Commission on August 30, 1996 (Reg. No. 333-11213).
* 10(d) Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors (as adopted November 15, 1994 and amended through
August 16, 1996), incorporated herein by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 filed
with the Securities & Exchange Commission on August 30, 1996
(Reg. No. 333-11209).
11 Computation of Net (Loss) Per Share
27 Financial Data Schedule
22
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
- -------------------------------
Stephen J. Fogarty
Senior Vice President and
Chief Financial Officer
Dated: November 14, 1996