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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number: 0-18267
Noise Cancellation Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware
59-2501025
(State or other jurisdiction of incorporation (I.R.S. Employer
organization) Identification No.)
1025 West Nursery Road, Linthicum, MD. 21090
(Address of principal executiveoffices) (Zip Code)
(410) 636-8700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: Common stock, $.01
par value.
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant is $56.3 million as of March 25, 1997.
The number of shares outstanding of the Registrant's common stock is 112,571,959
as of March 25, 1997.
DOCUMENTS INCORPORATED BY REFERENCE.
NONE
PART I
ITEM 1. BUSINESS
A. General Development of Business
Noise Cancellation Technologies, Inc. ("NCT" or the "Company") believes it is
the industry leader in the design, development, licensing, production and
distribution of electronic systems for Active Wave ManagementTM including
systems that electronically reduce noise and vibration. The Company's systems
are designed for integration into a wide range of products serving major markets
in the transportation, manufacturing, commercial, consumer products and
communications industries. The Company has begun commercial application of its
technology, with 16 product lines sold or currently being sold, including the
NoiseBuster(TM) and NoiseBuster Extreme(TM), ClearSpeech-Mic(TM)("CSM"),
Adaptive Speech Filter(TM) ("ASF"), consumer headsets, the ProActive(TM) line of
industrial/commercial active noise reduction ("ANR") headsets, an aviation
headset for pilots, an industrial muffler or "silencer" for use with large
vacuums and blowers, quieting headsets for patient use in magnetic resonance
imaging ("MRI") machines, an aircraft cabin quieting system and quieting systems
for heating, ventilation and air conditioning ("HVAC") ducts (NoiseEater(TM)).
In 1995, the Company introduced industrial headsets and its Adaptive Speech
FilterTM ("ASFTM"), which the Company believes will have wide application in the
communications and automotive industries.
In keeping with the direction established in late 1994, during 1996 the Company
continued the active practice of marketing its technology through licensing to
third parties for fees and subsequent royalties. See G. "Strategic Alliances"
and Note 3. - "Notes to Consolidated Financial Statements."
In 1997, the Company plans to introduce additional products for the
communications marketplace, and additional industrial headset products. The
Company is also refining its NoiseEater(TM) product for introduction into
international markets. The Company has entered into a joint venture with Applied
Acoustic Research, L.L.C. ("AAR") and Johnson Controls, Inc. ("JCI") called
OnActive Technologies, L.L.C. ("OAT") which is developing Flat Panel
Transducer(TM) ("FPT(TM)") systems utilizing Top Down Surround
Sound(TM)(TDSS(TM)) for automotive applications. See C. "Technology."
In late 1995 the Company redefined its corporate mission to be the worldwide
leader in the advancement and commercialization of Active Wave ManagementTM
technology. Active Wave ManagementTM is the electronic and/or mechanical
manipulation of sound or signal waves to reduce noise, improve signal-to-noise
ratio and/or enhance sound quality. This redefinition is the result of the
development of new technologies, as previously noted, such as ASFTM, TDSSTM,
FPTTM, and the Silicon Micromachined Microphone ("SMM"), which can be used for
products that the Company believes will be utilized in areas beyond noise
attenuation and control. These technologies and products are consistent with the
shift of the Company's focus to technology licensing fees, royalties and
products that represent near term revenue generation.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of Active Wave
ManagementTM build, revenues from technology licensing fees, royalties and
product sales are forecasted to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding. This progression is
reflected in the revenue percentages discussed briefly below and more fully in
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Active Wave ManagementTM is an evolving industry. The proportion of the
Company's operating revenues, including technology licensing fees, derived from
engineering and development services, is reflective of this fact. From the
Company's inception through December 31, 1996, approximately 22% of its
operating revenues have come from the sale of products and 27% of its operating
revenues have come from licensing of the Company's technology, while
approximately 51% of its operating revenues have come from engineering and
development services.
Active noise control offers many advantages over traditional passive methods
of noise control such as conventional mufflers, ear protectors and acoustical
padding. Active noise control systems: (i) generally reduce only unwanted noise
and permit desired sounds such as the human voice, music or warning tones to
pass freely, (ii) are more successful in attenuating low frequency noise, (iii)
contribute to energy savings and provide other economic benefits in various
applications, and (iv) generally are smaller and lighter.
Active Wave ManagementTM is the utilization of active noise attenuation
technology and certain other technologies which results in the electronic and
mechanical manipulation of sound or signal waves to reduce noise, improve
signal-to-noise ratio and/or enhance sound quality.
NCT believes that it has the leading position in Active Wave ManagementTM
technology, holding more patents and intellectual property than any other firm
in the field. The Company also has an exclusive license to advanced technology
for attenuating noise in a large space, such as the interior of an aircraft or
the passenger compartment of an automobile, using multiple interactive sensors,
such as microphones, and actuators, such as speakers. Additionally the Company
has expanded its portfolio by the acquisition of various patents.
The Company has entered into a number of strategic supply, manufacturing and
marketing alliances with leading global companies to commercialize its
technology. These strategic alliances historically have funded a majority of the
Company's research and development, and provided the Company with reliable
sources of components, manufacturing expertise and capacity, as well as
extensive marketing and distribution capabilities. In exchange for this funding,
the other party generally received a preference in the distribution of cash
and/or profits or royalties from these alliances until such time as the support
funding, plus an "interest" factor in some instances, is recovered. Due to the
restructuring of various alliances, as described in G. "Strategic Alliances,"
there were no preferred distributions due to strategic allies from future
profits of the alliances at December 31, 1996. NCT has established continuing
relationships with Walker Manufacturing Company ("Walker") (a division of
Tennessee Gas Pipeline Company, a wholly owned subsidiary of Tenneco, Inc.), AB
Electrolux ("Electrolux"), Foster Electric Company, Ltd. ("Foster"), Analog
Devices, Inc. ("ADI"), Ultra Electronics Ltd. ("Ultra"), The Charles Stark
Draper Laboratory, Inc. ("Draper"), Coherent Technologies, Inc. ("Coherent"),
Applied Acoustic Research, L.L.C. ("AAR"), Johnson Controls, Inc. (JCI") and New
Transducers, Ltd. ("NXT"), among others, in order to penetrate major markets
more rapidly and efficiently, while minimizing the Company's own capital
expenditures. There have been substantial changes to the terms governing certain
of the foregoing relationships as described below and in Note 3. - "Notes to the
Consolidated Financial Statements".
In February 1995 the Company purchased from Foster Electric, Inc. ("Foster")
the exclusive right to manufacture headsets in the Far East. Due to the
acquisition by the Company in 1994 of the sole ownership of Chaplin Patents
Holding Co., Inc. ("CPH"), neither the Company nor Foster believed there was any
necessity to continue their supply joint venture, Foster/NCT Supply Ltd.
("FNS"). The Company and Foster accordingly dissolved FNS. The Company and
Foster remain active in the Far East through the Foster/NCT Headsets
International ("FNH") and NCT Far East, Inc. ("NCTFE") marketing and
distribution alliances between the Company and Foster. Foster produced six
products for NCT in 1996.
In March 1995, the Company and 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
acquired the Company's active aircraft quieting business based in Cambridge,
England, leased a portion of the Company's Cambridge facility and employed
certain of the Company's employees.
On November 15, 1995, the Company and Walker executed a series of related
agreements (the "Restructuring Agreements") 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 provided for the transfer of the Company's interest in WNCT (an
equally owned partnership between Walker and the Company) to Walker, the
elimination of the Company's previously expensed obligation to fund the
remaining $2.4 million of product and technology development work, 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.
An important factor for the Company's continuing development is its ability
to recruit and retain key personnel. As of March 25, 1997, the Company had 71
employees, including 41 engineers and technical staff. Among its engineering
staff and consultants are several scientists and inventors that the Company
believes are preeminent in the active noise and vibration control field
worldwide.
The Company was incorporated in Nevada on May 24, 1983. In April 1985, the
Company moved its corporate domicile to Florida and assumed its present name,
and in January 1987, following the assumption of control of the Company by the
present management, it changed its state of incorporation to Delaware. NCT's
executive offices, research and product development facility are located at 1025
West Nursery Road, Linthicum, Maryland 21090; telephone number (410) 636-8700.
NCT maintains sales and marketing offices at 1 Dock Street, Suite 300, Stamford,
Connecticut 06902; telephone number (203) 961-0500. The Company's European
operations are conducted through its product development and marketing facility
in Cambridge, England. NCT also maintains a marketing facility in Tokyo, Japan.
B. Business Strategy
NCT's goal is to reinforce its position as the world's leader in the design,
development and sale of Active Wave ManagementTM technology and products.
The Company revised its strategy and redefined its mission during 1994 and
1995. The acquisition of certain assets and all of the intellectual property of
Active Noise and Vibration Technologies, Inc. ("ANVT") broadened the Company's
portfolio of intellectual property and removed restrictions on the Company
regarding licensing of the Chaplin Patents to unaffiliated third parties. The
Company can now license the Chaplin Patents directly to unaffiliated third
parties, which provides the Company with a greater ability to earn technology
licensing fees and royalties from such patents. Thus, while the Company
continues to focus on products which the Company believes will generate near
term revenue, it is increasing its emphasis on technology licensing fees and
royalties. Further, the Company is working continuously to lower the cost of its
products and improve their technological performance.
In late 1995, as previously noted, the Company redefined its corporate
mission to be the worldwide leader in the advancement and commercialization of
Active Wave ManagementTM technology. Active Wave ManagementTM is the electronic
and/or mechanical manipulation of sound or signal waves to reduce noise, improve
signal-to-noise ratio and/or enhance sound quality. The redefinition of
corporate mission is reflected in the revised business plan which the Company
began to implement during the first quarter of 1996.
In the area of technology licensing fees and royalties, the Company
successfully concluded negotiations with Ultra in the first quarter of 1995,
which amended the teaming agreement and instituted a licensing and royalty
agreement. In November of 1995, the Company concluded similar negotiations with
Walker. During the course of 1996, the Company successfully concluded certain
other licensing agreements. The Company is pursuing other negotiations and plans
to expand this sector of the business during 1997.
NCT produces and sells MRI headsets and industrial headsets through various
distributors, and also licenses, produces and sells ASFTM. The Company is
offering its NoiseBusterTM headset to consumer markets at a suggested retail
price of $79, and is selling the NoiseBusterTM through various distribution
channels, including specialty electronics retail stores, specialty catalogs and
direct sales by advertising a dedicated "800" telephone number. In the first
quarter of 1997, the Company began shipping its second generation consumer
headset line of products which is expanded to include the NoiseBuster
Extreme!(TM) and headsets for communications, cellular telephone and telephony
applications.
In 1997, the Company plans to introduce additional headset products and
additional communications systems products that improve the intelligibility and
quality of voice and data transmission and recognition.
At the core of the Company's strategy is its leadership in Active Wave
ManagementTM technology. NCT secured its basic technology by acquiring its
interest in the Chaplin Patents and the exclusive ownership of 10 patents known
as the "NRDC Patents" described below under Item D. "NCT Proprietary Rights and
Protection". The Company further solidified its position regarding the Chaplin
Patents through the 1994 acquisition of the intellectual property of ANVT, which
also brought a number of other patents to NCT. In addition, the Company has
developed or acquired a number of patents, licenses and proprietary inventions
that improve and enhance the features and capabilities of its basic technology.
NCT's basic and enhanced technologies have enabled the Company to develop and
patent specific product applications in Active Wave ManagementTM, as well as
enter new markets such as telecommunications and audio.
The Company has implemented its business strategy in the past by forming
strategic supply, manufacturing and marketing alliances with leading global
companies in an effort to commercialize its technology. The strategic alliances
established by NCT have historically funded a majority of the Company's research
and development and currently provide reliable sources of components,
manufacturing expertise and capacity, as well as extensive marketing and
distribution capabilities. The Company continues this practice. However, the
acquisition of the intellectual property of ANVT, as previously noted, allows
the Company more flexibility in the type of alliances and license agreements it
concludes.
C. Technology
Active noise attenuation is not a new idea. Creating a mirror image of an
unwanted noise or sound wave and using it to cancel or reduce the original sound
wave dates back to the early part of this century. The first systems used a
simple "delay and invert" approach and showed some promise, but the prohibitive
cost of computing power and the inadequacy of acoustics and related technologies
limited their effectiveness.
In the mid-1970's, a major breakthrough took place with the application of
adaptive filters to generate anti-noise. These filters allowed for the
development of active control systems that could continuously adapt to changes
in noise output both in the external world and from control components. A second
breakthrough in the mid-1970's was made by Professor G.B.B. Chaplin. He
recognized that many noise sources, particularly machines, exhibit 'tonal' or
repetitive noise. Chaplin further recognized that the predictability of
repetitive noise allows for creation of an accurate anti-noise signal and,
therefore, more effective cancellation or attenuation.
Practical application of this technology was still not possible as the
electronic technology available at the time was insufficient for implementation
of active noise reduction systems. Since that time, digital computer technology
has evolved to the point where cost-effective microprocessors, known as digital
signal processors ("DSP") can perform the complex calculations involved in noise
cancellation and reduction. This advance has made it feasible to apply active
noise reduction to previously unsolveable problems in low frequency noise at a
reasonable cost.
Active Noise Reduction. Active noise reduction systems are particularly
effective at reducing low frequency noise. As opposed to a passive noise control
system that is designed to mask a noise, active noise control removes a
significant portion of the noise energy from the environment by creating sound
waves that are equal in frequency but opposite in phase. The illustration below
shows the relationship, in time, of a noise signal, an anti-noise signal and the
residual noise that results when they meet.
ACTIVE NOISE REDUCTION
-------------------------------------------
[GRAPHIC OMITTED]
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Active Wave ManagementTM. Active Wave ManagementTM is the combination of
active noise reduction technology and certain other technologies which results
in the electronic and/or mechanical manipulation of sound or signal waves to
reduce noise, improve signal-to-noise ratio and/or enhance sound quality.
Signal Enhancement. Active Wave ManagementTM technology also can be used to
attenuate unwanted signals that enter into a communications network, as when
background noise enters telecommunications or radio systems from a telephone
receiver, or microphone. The Company has developed patented technology that will
attenuate the background noise "in-wire", so that the signals carried by the
communications network include less of the unwanted noise, allowing the speaker
to be heard more clearly over the network. An application of this technology is
in-wire attenuation of siren noise over two-way radio communications between
emergency vehicles and dispatchers at hospitals and police or fire stations.
Silicon Micromachined Microphone (SMM). In 1994, NCT purchased the exclusive
rights to manufacture and commercialize a silicon micromachined microphone. NCT
is currently in negotiation with hearing aid manufacturers and others to provide
the SMM as a replacement for the more expensive electret microphones. The SMM
has potential applications not only in the audible range of frequencies, but in
the ultrasonic range as well.
Adaptive Speech Filter(TM) ("ASF(TM)"). The Adaptive Speech FilterTM
algorithm (ASFTM) removes noise from voice transmissions. ASFTM parameters can
be adjusted to optimize performance for a particular noise, or can be set to
provide noise reduction across a wide range of noises. ASF applications include
teleconferencing systems, cellular telephones and "airphones", telephone
switches, echo cancellers, and communications systems in which background noise
is predominant. ASFTM is currently available for use on three hardware
platforms. The Company added an echo cancellation algorithm to its Windows-based
ACM version of ASF and has begun testing.
NCT Audio. The Company has expanded its audio transducer work to include
audio systems for the reproduction of speech and music. The Company is
developing Top Down Surround SoundTM ("TDSSTM") for the automobile audio market,
in both original equipment manufacturer ("OEM") and after-market versions.
TDSSTM employs Flat Panel TransducersTM ("FPTTM") to produce sound much closer
to the listener's ear than conventional speakers. This placement allows for a
High Impact SoundTM listening experience. The Company is also developing FPTTM
for personal computers and telecommunications. In these applications, the slim
profile of the FPTTM allows for speaker placement where conventional speakers
cannot be accommodated.
D. NCT Proprietary Rights and Protection
NCT believes it has the leading position in Active Wave ManagementTM, holding
a large number of patents and patent applications. The Company's strategy has
been to build upon its base of core technology patents with newer advanced
technology patents developed by, purchased by or exclusively licensed to the
Company. In many instances, the Company has incorporated the technology embodied
in its core patents into patents covering specific product applications,
including the products' design and packaging. The Company believes this
building-block approach provides greater protection to the Company than relying
solely on the original core patents. As its patent holdings increase, the
Company believes the importance of its core patents will diminish from a
competitive viewpoint.
During 1994 the Company purchased certain assets of ANVT, which included all
of ANVT's intellectual property rights. See Note 14. - "Notes to the
Consolidated Financial Statements". Among the ANVT intellectual property rights
were ANVT's interest in the 10 basic Chaplin Patents which are now solely owned
by NCT as the sole shareholder of CPH. These patents cover inventions made by
Professor G.B.B. Chaplin in the late 1970s and early 1980s (some of which have
now expired).
The Chaplin Patents form only one group of core patents upon which NCT's
technology is based. In March 1990, the Company acquired exclusive ownership of
10 patents developed under the auspices of the National Research Development
Corporation ("NRDC"), an organization sponsored by the British Government. Among
other things, the NRDC Patents, of which the Swinbanks and Ross patents are the
most important, utilize the adaptive feed forward approach to active noise
control. The Swinbanks patent covers an improved method of analyzing the
incoming noise or vibration through the use of a "frequency domain" adaptive
filter which splits the incoming noise into different frequency bands for
analysis and recombines the data to generate the anti-noise signal. The Ross
patent covers the use of a "time domain" filter which uses input and error
signals to enhance a system's ability to compensate for feedback from actuators
to sensors. Without this filter, the system will detect and begin canceling its
own self-generated anti-noise.
The Company has built upon these core patents with a number of advanced
patents and patent applications. These include the Digital Virtual EarthTM
patent, which covers digital feedback control, and patents on multi-channel
noise control. The Company has also applied for patents on combined feedforward
and feedback control, control using harmonic filters, filters for signal
enhancement and speech filtering, control systems for noise shaping and others.
As part of the purchase of certain ANVT assets, the Company acquired all the
rights to nine inventions previously belonging to the Topexpress Group in the
United Kingdom. The international patent coverage of these inventions varies but
eight have been granted patent protection with numerous counterpart foreign
applications still pending. Among the other intellectual property acquired from
ANVT are patents relating to active auto mufflers and noise suppression
headrests, several patent applications on advanced algorithms, and active noise
headsets, many related disclosures and various disclosures in other areas of
active attenuation of noise and vibration. Additionally, the Company acquired
the rights to three basic inventions known as the Warnaka Patents.
In 1994, the Company purchased the exclusive rights to the silicon
micromachined microphone technology developed by Draper in Cambridge,
Massachusetts. At this time, two patents describing the basic technology have
been issued and one is pending.
In 1995 the Company also acquired several U.S. patents dealing with adaptive
speech filtering which it hopes to license to third parties.
The Company holds or has rights to 231 inventions as of December 31, 1996,
including 86 United States patents and over 165 corresponding foreign patents.
The Company has pending 204 US and foreign patent applications. NCT's engineers
have made 86 invention disclosures for which the Company is in the process of
preparing patent applications.
No assurance can be given as to the range or degree of protection any patent
issued to, or licensed by, the Company will afford or that such patents or
licenses will provide protection that has commercial significance or will
provide competitive advantages for the Company's products. No assurance can be
given that the Company's owned or licensed patents will afford protection
against competitors with similar technology, or that others will not obtain
patents claiming aspects similar to those covered by the Company's owned or
licensed patents or patent applications. No assurance exists that the Company's
owned or licensed patents will not be challenged by third parties, invalidated,
rendered unenforceable or designed around. Furthermore, there can be no
assurance that any pending patent applications or applications filed in the
future will result in the issuance of a patent. The invalidation, abandonment or
expiration of patents owned or licensed by the Company and believed by the
Company to be commercially significant could permit increased competition, with
potential adverse effects on the Company and its business prospects.
Annuities and maintenance fees for the Company's extensive patent portfolio
are a significant portion of the Company's annual expenses. If, for the reasons
described in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- "Liquidity and Capital Resources" below, it becomes
necessary for the Company to reduce its level of operations, the Company will
not be able to continue to meet the extensive monetary outlay for annuities and
maintenance fees to keep all the patents and applications from becoming
abandoned and will have to prioritize its portfolio accordingly.
The Company has conducted only limited patent searches and no assurances can
be given that patents do not exist or will not be issued in the future that
would have an adverse effect on the Company's ability to market its products or
maintain its competitive position with respect to its products. Substantial
resources may be required to obtain and defend patent and other rights to
protect present and future technology and other property of the Company.
The Company's policy is to enter into confidentiality agreements with all of
its executive officers, key technical personnel and advisors, but no assurances
can be made that Company know-how, inventions and other secret or unprotected
intellectual property will not be disclosed to third parties by such persons.
E. Existing Products
NCT Hearing Products
MRI Headphones. Since 1991, the Company has been producing active noise
reduction headsets for use by patients undergoing MRI procedures. NCT's MRI
headphone reduces the noise generated by the gradient coils of the
superconducting MRI magnet. This noise is known to be disturbing to patients and
is a factor in a patient's ability to tolerate the scanning procedure. The
Company's product is an implementation of a patented technology owned by NCT
which permits the delivery of anti-noise signals and music directly to the
patient while the patient is in the bore of the MRI scanner. While undergoing
the MRI examination, a patient can be communicated with by the doctor or scan
operator through NCT's system. The Company is a supplier to Siemens, a leading
manufacturer of MRI machines in the U.S.
NoiseBusterTM. NCT is currently marketing its NoiseBusterTM personal active
noise reduction headphone for consumers at a suggested retail price of $79. This
active headphone selectively reduces unwanted noise generated by aircraft
engines, lawnmowers, street traffic, household appliances and other annoying
noise sources, permitting the user to hear desired sounds, such as human
conversation, warning signals or music. The NoiseBusterTM is a lightweight,
portable headphone wired to a small controller that can be clipped to the user's
clothing or belt. The NoiseBusterTM contains a port where the consumer can plug
in personal audio devices such as a radio, tape player or compact disc player so
the user can enjoy music while in a noisy setting. The product can also be used
with an aircraft's in-flight entertainment system.
NoiseBusterTM is the largest selling consumer product of its kind.
NoiseBusterTM was awarded the 1994 Discover Magazine Technological Innovation
Award and the Electronics Industry Association's Innovation 95 Award.
The Company is marketing the NoiseBusterTM through distribution channels,
including electronics retail stores, specialty catalogues and directly through a
toll-free "800" number. Initial product shipments were made in September 1993.
NoiseBuster Extreme!(TM). The NoiseBuster Extreme!(TM) line is being expanded
to include communications headsets for cellular, multimedia and telephony. The
products will be the first ANR(TM) offerings for these applications and will
improve speech intelligibility in the presence of background noise. Product
shipments began during the first quarter of 1997.
NB-AVC. In August 1994, the Company began shipping an active noise reduction
communications headset specifically designed for use by commercial aviation
pilots. The product is FAA-TSO certified and sold by Telex as the Airman ANRTM.
At 6.9 oz, one-third the weight of other active noise reduction headsets, the
Airman ANRTM is the first ultra-lightweight, open-back headset of its kind
developed for the general aviation market. A high-performance noise canceling
electret microphone is connected to a flexible boom. The controller pack accepts
four AA batteries for a minimum of 40 hours continuous operations and includes a
belt clip.
ProActive(TM) 1000/1500. In March 1995, the Company began shipping its
ProActiveTM 1000 headphones and ProActiveTM 1500 communications headsets. These
products are lightweight, openback in style and can provide up to 20dB of active
noise reduction between 30-1200Hz. When used in work settings dominated by
low-frequency noise, these products improve comfort, reduce fatigue and improve
concentration and productivity for the user. In the case of the ProActiveTM 1500
two-way and mobile communications version, the clarity and intelligibility of
communications is improved when the masking effect of background noise is
reduced. These products are powered by a rechargeable NICAD battery designed for
use during a 12-hour work day. The battery fits into a small, lightweight
belt-pack that can be clipped onto the belt. The battery can be recharged
overnight using NCT's personal charger which is included with the product.
ProActive(TM) 3000/3500. In August 1995, the Company expanded its industrial
headset product line to include the ProActiveTM 3000 series. These products
combine active noise reduction of low-frequency noise with a closed-back passive
ear muff, appropriate for general industrial use. This is the first product of
its kind in which the active electronics as well as the power source have been
totally integrated into the earmuff, providing the user with mobility and
safety. The electronics are powered by a NICAD rechargeable battery specifically
designed for use during a 12-hour work day. The battery can be recharged
overnight using NCT's personal charger. The ProActiveTM 3000 active earmuff and
ProActiveTM 3500 active communications earmuff address the hearing protection
requirements of a variety of industries.
ProActive(TM) 3100/3600. In December 1995, the Company announced a hard hat
version of its ProActiveTM 3000 line. This will be the first implementation of
active noise reduction earmuffs in a hard hat style and will address the needs
of industries such as construction, utilities and others requiring both hearing
protection and hard hats for workers. Product shipments commenced in the second
quarter of 1996.
NCT Communications
Adaptive Speech Filter ("ASF(TM)"). ASFTM removes background noise from voice
and data transmission and recognition. Available in real-time double precision
fixed-point DSP, floating-point DSP, and Windows 95/Windows NT ACM driver
versions, ASFTM can be used as a pre-processor for voice and data compression
algorithms, and also contributes to improved voice and data recognition.
Additional uses include teleconferencing systems, cellular and airphones,
telephone switches, echo cancellers and communications systems in which
background noise is predominant.
ClearSpeech-Microphone ("CSM(TM)). NCT has introduced its ClearSpeech (TM)
line of digital communications accessories. These products employ the NCT
patented ASF technology to cancel background noise from either transmitted or
received speech. These products can be used with hands-free cellular phone
cradles, two-way radios, AM/FM radios, SMR networks and speaker phones. Users
will benefit from clearer, more intelligible conversations, free of background
noise and other transmission interference.
NCT Fans
Duct Quieting System-NoiseEaterTM
The Company has developed low-cost quieting systems for installation into
existing HVAC ducts. The Company began offering this product line commercially
as the NoiseEaterTM in January 1994 selling through distributors, and is
currently offering these systems for sale in the United States. In 1995, the
Company entered into license and royalty agreements for the NoiseEater(TM) with
distributors in Europe and Japan.
Revenues
Product Revenues
The following table sets forth the percentage contribution of the separate
classes of the Company's products to the Company's product revenues for the year
ended December 31, 1996.
(000's) As a %
Products Amount of Total
Headsets $1,351 98.0%
Microphones 20 1.5%
Other 8 0.5%
Total $1,379 100.0%
Technology Licensing Fees
The following table sets forth the percentage contribution of the separate
classes of the Company's technology to the Company's technology licensing
revenue for the year ended December 31, 1996.
(000's) As a %
Technology Amount of Total
Communications $ 500 40.4%
Audio 713 57.6%
Other 25 2.0%
Total $1,238 100.0%
F. Products Under Development
NCT Hearing Products
NB-PCU. The Company is working with a leading manufacturer and supplier of
aircraft cabin products on the integration of NCT's EarPeaceTM active noise
control technology into in-flight passenger entertainment systems. As a
component of the system, NCT is also developing a low-cost headset specifically
for in-flight use to be used in conjunction with the integrated electronics.
NCT's technology electronically reduces aircraft engine noise while enhancing
the audibility of desired sounds like speech, music and warning signals.
Lowering the engine drone can help alleviate the anxiety and fatigue often
associated with flying. While the system is in use, passengers inside an
aircraft cabin can carry on conversations at a comfortable level or hear
in-flight movies and music without over amplification and distortion. Production
systems should be available in the second half of 1997.
Advanced Digital Electronic Headsets. NCT is working to develop advanced
headset models using its proprietary digital technology. Management believes
that there is a broad market for specialty industrial headsets that will permit
factory and assembly workers to operate close to loud machinery in the marine,
steel, textile, paper, construction, road building and metalworking industries,
among others. Conventional ear muffs and protectors are not as effective as the
Company's active headsets, which can selectively block machinery noise while
allowing the worker to listen to ordinary human communications and, where
appropriate, to hear warning signals, tones or bells. The Company is working to
develop headset models that will operate on a lightweight, rechargeable battery
pack, thus allowing the worker to move freely about the factory.
NCT Communications
ClearSpeech Product Line. There are several communications products under
development. Design improvements are being made to the current ClearSpeech(TM)
product line to improve market penetration. In addition, the design of a
daughter card PCB for integration onto a T1 line card is being developed. NCT is
exploring relationships with ADI and other chip manufacturers to develop custom
ICs for the ASF technology to reduce the cost of the ClearSpeech product line as
well as for use as a new product.
NCT Microphones
Silicon Micromachined Microphone ("SMM"). In 1994, NCT purchased the exclusive
rights to manufacture and commercialize a silicon micromachined microphone. A
small, compact, surface-mountable silicon actuator, the SMM provides customers
with improved and adjustable sensitivity, a low noise floor and resistance to
environmental extremes. The ability to integrate additional circuitry on the SMM
chip has also proven attractive to potential users. The SMM's low noise floor
and adjustable sensitivity improve voice recognition in high ambient noise
environments. NCT is working with voice processing and computer hardware
companies to utilize the SMM to enhance the performance of their systems. In the
first quarter of 1996, NCT released initial prototypes of the devices. The
Company is currently refining the manufacturing process and identifying a
facility for production. Production of a general purpose SMM is expected to
commence in 1998.
NCT Audio
Top Down Surround Sound(TM). TDSS(TM) is a novel automobile audio speaker
system developed by the Company. Initial demonstrations and listener tests have
indicated a high degree of enthusiasm for the High Impact SoundTM which TDSSTM
generates. The Company has established a joint venture, OnActive, with AAR and
JCI for the automobile audio speaker market and is also exploring applications
for High Impact SoundTM technology in the home audio and home theater
environments.
Flat Panel Transducers(TM). Using a similar FPTTM technology to that employed
in TDSSTM, multi-media FPTTM targets such applications as notebook computers and
video telephones. In these applications the slim profile of the FPTTM offers an
audio transducer solution where room may be lacking to implement a conventional
speaker.
On March 28, 1997, the Company concluded a Cross License Agreement with NXT,
described below in "G. Strategic Alliances". (See Note 15, "Notes to the
Consolidated Financial Statements".)
Small Fans
Household Appliances. NCT has developed fan quieting systems for multiple
applications, including a quiet kitchen hood fan and a quiet vacuum cleaner.
NCT's active fan systems are designed with higher efficiency than conventional
fans and have demonstrated up to a 30% reduction in energy usage. The cost
sensitivity of the consumer appliance marketplace has been a barrier to prior
introduction of this technology. As a result of relationships NCT enjoys with
its component supply joint venture partners, the Company believes that the price
sensitivity issues of consumer product markets may be addressed in the near-term
as miniaturization of the technology continues and the unit cost of NCT's
electronic components continues to decline. Management believes that NCT's
proprietary technology will be incorporated in a wide range of other products,
including air conditioners, dishwashers, clothes washers and dryers, hair dryers
and other types of fans.
Panels and Enclosures
Electric Utility Transformers. Electric power distribution by utilities
requires the use of large transformers, often placed in residential and
commercial neighborhoods, which emit a low frequency "hum" that irritates people
living and working nearby. Utilities try to mask this noise by passive means,
although usually not very successfully. The Company has developed active
enclosure and active panel systems which reduce the "hum" of transformer noise
by use of flat actuators that cause the enclosure or panels to vibrate in a
manner to reduce the noise. The Company can install its active panel system
directly to the metal sides or "skin" of an installed transformer, thus making
its systems available to retrofit markets as well as to OEMs. As an alternative,
an active enclosure can be built to house the transformer.
In March 1995, the Company entered into an agreement with QuietPower Systems,
Inc., ("QSI") (see Item 13. "Certain Relationships and Related Transactions" and
Note 8. - "Notes to the Consolidated Financial Statements") by which QSI
received the exclusive rights to market, sell and distribute transformer
quieting products and gas turbine quieting products in the utility industry.
Under the agreement QSI funds development of the systems. The agreement
generally provides that the Company manufactures the products and receives a
royalty of 6% from QSI on the sales of the products.
G. Strategic Alliances
The Company's strategy is to obtain technology licensing fees and royalties,
and, in certain areas, to produce, market and sell Active Wave ManagementTM
products.
The Company's transition from a concern primarily engaged in research and
development to one engaged in the licensing production, marketing and sale of
Active Wave ManagementTM systems is predicated upon the establishment of
strategic alliances with major domestic and international business concerns. In
exchange for the benefits to such concerns' own products offered by the
Company's technology, these alliances provide marketing, distribution and
manufacturing capabilities for the Company's products and enable the Company to
limit the expense of its own research and development activities. In order to
ensure dependable sources of supply and to maintain quality control and cost
effectiveness for components and integrated circuits incorporated in the
Company's systems, an important element of the Company's strategy has been to
identify and enter into alliances with integrated circuit manufacturers that
will develop and produce custom-made chips for NCT product applications, and
with manufacturers of components that will supply and integrate components for
NCT systems. The following is a summary of the Company's key alliances:
- -----------------------------------------------------------------------------
Date Initial
Relationship
Key Strategic Alliances Established Applications
Walker Manufacturing Company (a division Nov. 1989 Mufflers,
of Tennessee Industrial
Gas Pipeline Company)............. Silencers and Other
Vehicular
Applications
AB Electrolux..................... Oct. 1990 Consumer Appliances
Foster Electric Company, Ltd...... Mar. 1991 Headsets and
Electronics
Ultra Electronics, Ltd............ June 1991 Aircraft Cabin
Quieting Systems
Analog Devices, Inc............... June 1992 Integrated Circuits
and Related
Products
Harris Corporation................ Sept. 1993 Integrated Circuits
and Electronic
Components
The Charles Stark Draper Laboratory, Inc July 1994 Microphones
Coherent Communications System June 1995 Telecommunications
Corporation
Applied Acoustic Research, L.L.C.. Aug. 1995 TDSSTM
Johnson Controls, Inc. May 1996 TDSS(TM)
New Transducers Ltd. Mar. 1997 FPT(TM)
- -----------------------------------------------------------------------------
Walker Manufacturing Company (a division of Tennessee Gas Pipeline Company)
(U.S.) Walker Electronic Mufflers, Inc. (A wholly owned subsidiary of Tennessee
Gas Pipeline Company) (U.S.)
In November 1989, NCT signed its strategic alliance with Walker, a
world-leading manufacturer of automotive parts and mufflers. The alliance
consisted of a Joint Venture and Partnership Agreement with ownership in the
resulting joint venture WNCT shared equally between NCT Muffler, Inc. and Walker
Electronic Mufflers, Inc. ("WEM"), a wholly owned subsidiary of Tennessee Gas
Pipeline Company. WNCT conducts research and develops, manufactures, markets,
sells and distributes electronic mufflers principally for use on non-military,
land-based vehicles on an exclusive basis, and for the industrial (e.g.,
compressors, diesel generators and gas turbines), marine, consumer and aerospace
sectors on a non-exclusive basis. The agreement between NCT and Walker was
expanded and extended in 1991. WNCT is currently producing and selling
industrial silencers.
In December 1993, Tenneco Automotive, another division of Tennessee Gas
Pipeline Company, and the Company entered into an agreement pursuant to which
Tenneco Automotive purchased 1,110,083 shares of the Company's common stock for
$3.0 million in cash. Pursuant to the agreement, the Company contributed $1.0
million to the capital of the WNCT following which WNCT repaid $1.0 million of
the capital advances previously made to WNCT by WEM and representatives of WEM
and the Company agreed to restructure WNCT. Such restructuring included giving
WNCT worldwide rights for the manufacture and sale of all muffler products
except those manufactured and sold in the consumer and defense markets. WNCT
also was expanded to have, in addition to rights it has with respect to
vehicular mufflers, worldwide non exclusive rights to all silencing and
vibration applications (e.g., mufflers, cabin quieting, engine mounts, fan
quieting and engine block quieting) for all vehicles except trains, aircraft and
watercraft. The Company committed to help fund $4.0 million of product and
technology development work of the Company attributable to WNCT. Also pursuant
to the agreement with Tenneco Automotive, Walker's right to acquire the
Company's interest in WNCT upon the occurrence of certain events was eliminated
and Tenneco Automotive had the right to have a representative serve on the
Company's Board of Directors.
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 provided 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 repurchase by the Company of its common
stock which it had sold to Tenneco Automotive in December 1993, 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 3. - Notes to the Consolidated Financial Statements).
AB Electrolux (Sweden)
The Company's relationship with Electrolux, one of the world's leading
producers of white goods, was initiated in October 1990. The Company signed its
current agreement with Electrolux, a Joint Development and Supply Agreement, in
June 1991. This agreement provides for NCT to design, develop and supply active
systems for quieting Electrolux products. Electrolux has agreed to purchase the
electronic components for its active noise control products exclusively from
NCT, provided the Company and its supply joint ventures are price and quality
competitive. To date, NCT has completed development of two household appliance
products for Electrolux. No date has been established for product introduction.
Foster Electric Company, Ltd. (Japan)
In March 1991, NCT and Foster, the largest original equipment manufacturer of
speakers in the world and a major producer of stereo headsets and high-fidelity
components for the consumer electronics and automotive industries, established a
joint venture, FNH, to develop, design, manufacture and sell active noise
attenuation headset systems. Foster is responsible for production of the
NoiseBusterTM consumer headset, the aviation headset and the industrial
headsets. Ownership was shared equally between Foster and NCT.
In addition to their headset joint venture, in April 1991, NCT and Foster
entered into a supply joint venture, FNS, (owned 30% by NCT) to build and supply
the customized components NCT requires to build its active systems, including
sensors, microphones, amplifiers, transducers and controllers. These components
were sold by FNS to NCT which distributes them to other NCT production and
distribution ventures and customers.
In December 1993, Foster and the Company entered into an agreement pursuant
to which Foster purchased 740,055 shares of the Company's common stock for $2.0
million (the "Foster Shares"). Under the terms of the agreement, Foster paid the
purchase price by means of a cash payment of one cent ($.01) per share (the par
value of the common stock) and the delivery of a series of promissory notes (the
"Foster Notes") in aggregate principal amount equal to the balance of the
purchase price. The Foster Notes were full recourse notes of Foster bearing
interest at one percent above the rate of three-year United States Treasury
Notes and were to mature on April 17, 1997. The Foster Notes were collateralized
by the Foster Shares until paid or "earned out" as described in the next
paragraph. As of December 31, 1995, the Foster Notes had been paid in full.
Foster and the Company also agreed that Foster would provide and the Company
would purchase $2.0 million of various product and market development services
deemed necessary by the Company for the commercialization of several new headset
and other products and the further development of the Company's Japanese markets
during the period from December 1993 to April 1997. The Company would define
each project or phase of this work and Foster would provide related budgets and
performance milestones. Upon completion of each such project or phase, the
agreed budgeted amount therefor would be billed to the Company and will be paid,
at the Company's election, either in cash or by discharge of an equivalent
amount of the Foster Notes, in which latter event an appropriate number of the
Foster Shares would be released from the collateralization restrictions.
In February 1995, the Company and Foster agreed to liquidate FNS. Foster and
the Company have agreed that the acquisition of certain assets of ANVT by NCT
(see Note 14. - Notes to the Consolidated Financial Statements) removed the
necessity for the continued existence of FNS. An orderly liquidation of FNS was
completed in April 1995. The agreement provided for the Company's repurchase
from Foster for $0.6 million of the exclusive headset manufacturing rights in
the Far East (see FNH note above) and an immediate minimum 5% reduction in the
price of headset products to be produced by Foster for the Company. The Company
accrued a $0.8 million charge in 1994 relating to this agreement, of which $0.2
million was reflected as a current liability at December 31, 1994.
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.
The Company and Foster remain active in the Far East through NCTFE, a sales
and marketing joint venture between the Company and Foster. Foster produced six
products for NCT in 1995, primarily industrial headsets
The Company's Far East marketing and product showroom facility is maintained
at Foster's facilities in Tokyo, Japan.
Ultra Electronics Ltd. (U.K.)
Since 1991, NCT and Ultra and its predecessor, part of the Dowty Group, have
been designing and developing systems to enhance passenger comfort by quieting
aircraft passenger compartments in certain propeller driven aircraft, which
Ultra sells to the worldwide turbo-prop aircraft market. In May 1993, Ultra and
the Company signed a teaming agreement to produce and install the NCT cabin
quieting system on the SAAB 340 aircraft. Deliveries under this agreement began
in 1994. In March 1995, the Company and Ultra amended the teaming agreement and
concluded a licensing and royalty agreement for $2.6 million. In addition, Ultra
will pay the Company a royalty of 1 1/2% of sales of products incorporating NCT
technology beginning in 1998.
Analog Devices, Inc. (U.S.)
In June 1992, NCT and ADI formed an equally owned joint venture to design,
develop, and manufacture computer chips to be incorporated in the Company's
active noise and vibration control systems. ADI is a leading manufacturer of
precision, high-performance integrated circuits used in analog and digital
signal processing applications. Under the terms of the agreement, ADI, as a
subcontractor to the joint venture, will complete the design and development of
specialized chips incorporating NCT's technology.
Harris Corporation (U.S.)
In September 1993, the Company and Harris entered into an agreement to form
an equally owned limited liability company to design, develop and manufacture
custom electronic components incorporating NCT patents and technology for use in
the Company's active noise and vibration control systems and to sell such
components to NCT and NCT's customers. Harris is a worldwide designer and
supplier of advanced electronic systems, semi-custom and custom integrated
circuits and semiconductors, communications systems and equipment and electronic
office products. Under the terms of the agreement, Harris, as a subcontractor to
the limited liability company, is working with the Company in the design and
development of custom and semi-custom electronic components and will manufacture
the specialized components incorporating the Company's technology.
The Charles Stark Draper Laboratory, Inc. (U.S.)
In July 1994, NCT and Draper Laboratory of Cambridge, Massachusetts entered
into an agreement whereby NCT became the exclusive licensee to a new silicon
micromachined microphone developed by Draper. Under terms of the agreement and
subsequent agreements, Draper will perform engineering services for NCT to
further develop the technology. The microphone technology has application in a
wide variety of applications within the acoustic and communications fields.
Coherent Communications Systems Corporation (U.S.)
In June 1995, NCT and Coherent of Leesburg, Virginia entered into an
agreement whereby NCT granted a license to Coherent to sell and Coherent and NCT
will work together to develop and sell certain telecommunication products.
Applied Acoustic Research, L.L.C, (U.S.)
In December, 1995, NCT and AAR of State College, Pennsylvania formed a joint
venture, OnActive Technologies, L.L.C. ("OAT"), to commercialize advanced audio
applications, such as FPTTM and TDSSTM, into total audio systems and solutions
for the ground based vehicle market. Both partners, who own equal shares of the
joint venture, have licensed their proprietary technology to the joint venture.
In May, 1996, Hoover Universal, Inc., a wholly owned subsidiary of Johnson
Controls, Inc. ("JCI") acquired a 15% equity interest in OAT for $1.5 million
and acquired rights to certain of the Company's and AAR's related patents for a
total of $1.5 million, half of which was paid to the Company and half of which
was paid to AAR.
New Transducers Ltd (UK).
On March 28, 1997, the Company and New Transducers Ltd. ("NXT"), a wholly
owned subsidiary of Verity Group PLC ("Verity") executed a cross licensing
agreement. Under terms of the agreement, the Company will license patents and
patents pending which relate to FPT(TM) technology to NXT, and NXT will license
patents and patents pending which relate to parallel technology to the Company.
In consideration of the license, NCT recorded a $3.0 million license fee
receivable from NXT as well as royalties on future licensing and product
revenue. Concurrently with the cross licensing agreement, the Company and Verity
executed agreements granting each an option for a four year period commencing on
March 28, 1998, to acquire a specified amount of the common stock of the other
subject to certain conditions and restrictions. With respect to the Company's
option to Verity, 3.8 million shares of common stock (approximately 3.4% of the
then issued and outstanding common stock) of the Company are covered by such
option, and 5.0 million ordinary shares (approximately 2.0% of the then issued
and outstanding ordinary shares) of Verity are covered by the option granted by
Verity to the Company. The exercise price under each option is the fair value of
a share of the applicable stock on March 28, 1997, the date of grant. If the
Company does not obtain stockholder approval of an amendment to its Certificate
of Incorporation increasing its authorized common stock capital by an amount
sufficient to provide shares of the Company's common stock issuable upon the
full exercise of the option granted to Verity by September 30, 1997, both
options expire. (See Note 15. - "Notes to the Consolidated Financial
Statements".)
H. Marketing and Sales
In addition to marketing its Active Wave ManagementTM technology and systems
through its strategic alliances as described above, the Company also uses an
internal sales force of eight people, its executive officers and directors, and
two independent sales representatives. The independent sales representatives may
earn commissions of generally up to 6% of revenues generated from sales of NCT
products to customers introduced to NCT by them, and up to 5% of research and
development funding revenues provided by such customers. The Company intends to
continue to expand its internal sales force on a limited basis as resources
become available.
Note 12. - "Notes to the Consolidated Financial Statements" sets forth
financial information relating to foreign and domestic operations and sales for
the years ended December 31, 1996, 1995 and 1994.
The Company does not have a significant foreign exchange transaction risk
because the majority of its non-U.S. revenue is in U.S. dollars. The remaining
revenue is in British pounds sterling and the Company's underlying cost is also
in pounds sterling creating a natural foreign exchange protection.
I. Competition
The Company is aware of a number of direct competitors in the field of Active
Wave Management(TM). Indirect competition also exists in the field of passive
sound and vibration attenuation. The Company's principal known competitors in
active control systems are Andrea Electronics Corporation, Bose Corporation,
Digisonix (a division of Nelson Industries, Inc.), Group Lotus PLC and Lotus
Cars Limited, Lord Corporation, Matsushita Electric Industrial Co., Ltd.,
Sennheiser Electronic Corp. and Sony Corporation, among others. To the Company's
knowledge, each of such entities is pursuing its own technology in active
control systems, either on its own or in collaboration with others, and has
recently commenced attempts to commercially exploit such technology. NCT also
believes that a number of other large companies, such as the major domestic and
foreign automobile and appliance manufacturers, and aircraft parts suppliers and
manufacturers, have research and development efforts underway in Active Wave
Management(TM) and active noise and vibration control. Many of these companies,
as well as the Company's potential competitors in the passive sound and
vibration attenuation field and other entities which could enter the active
noise and vibration attenuation field and other fields of Active Wave
Management(TM) as the industry develops, are well established and have
substantially greater management, technical, financial, marketing and product
development resources than the Company.
J. Government Contracts
The Company has acted as a government subcontractor in connection with its
performance of certain engineering and development services. No such contracts
were in effect during 1996. Government contracts provide for their cancellation
at the government's sole discretion, in which event the contractor or
subcontractor may recover its actual costs up to the date of cancellation, plus
a specified profit percentage. Governmental expenditures for defense are subject
to the political process and to rapidly changing world events, either or both of
which may result in significant reductions in such expenditures in the proximate
future. Government contracts are not viewed as a significant part of the
Company's business.
K. Research and Development
Company-sponsored research and development expenses aggregated $7.0 million,
$4.8 million and $9.5 million for the fiscal years ended December 31, 1996, 1995
and 1994, respectively.
L. Environmental Regulation Compliance
Compliance with Federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, does not have any material effect upon the capital
expenditures, earnings or competitive position of the Company.
Compliance by existing and potential customers of the Company with Federal,
state and local laws and regulations pertaining to maximum permissible noise
levels occurring from the operation of machinery or equipment or the conduct of
other activities could be beneficial to sellers of noise reduction products and
enhance demand for certain applications of the Company's technology as well as
products developed or to be developed by the Company. However, at the present
time it is too early to determine what quantitative effect such laws and
regulations will have on the sale of the Company's products and technology.
M. Employees
The Company had 71 employees on March 25, 1997. None of such employees is
represented by a labor union. The Company considers its relationships with
employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's executive office is located at the site of its research and
technical support laboratory in Linthicum, Maryland, where it leases
approximately 40,000 square feet of space under leases which expire in July
2000. The leases provide for current monthly rentals of approximately $35,000,
subject to annual inflationary adjustments
The Company maintains a sales and marketing office in Stamford, Connecticut
where it leases approximately 5,000 square feet of space under a lease which
expires in December 2001 and provides for a current monthly rental of
approximately $5,000.
The Company's United Kingdom operations are conducted in Cambridge, England
where it leases 12,500 square feet of space under a lease which expires in March
1999, and provides for a current monthly rental of approximately $14,000.
ITEM 3. LEGAL PROCEEDINGS
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira ($18.9 million); and (vi) order the
Company to pay damages for the harm done to Mr. Valerio's image for an amount
such as the judge shall deem equitable and in case for no less than 500 million
Lira ($3.1 million). The Company retained an Italian law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the Company, through its Italian counsel, filed a brief of reply with the
Tribunal of Milan setting forth the Company's position that: (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is groundless since the parties never entered into an agreement, and (iii)
because Mr. Valerio is not enrolled in the official Register of Agents, under
applicable Italian law Mr. Valerio is not entitled to any compensation for his
alleged activities. A preliminary hearing before the Tribunal was held on May
30, 1996, certain pretrial discovery has been completed and a hearing before a
Discovery Judge was held on October 17, 1996. Submissions of the parties final
pleadings were to be made in connection with the next hearing which was
scheduled for April 3, 1997. On April 3, 1997, the Discovery Judge postponed
this hearing to May 19, 1998, due to reorganization of all proceedings pending
before the Tribunal of Milan. Management is of the opinion that the lawsuit is
without merit and will contest it vigorously. In the opinion of management,
after consultation with outside counsel, resolution of this suit should not have
a material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a severe material effect
on quarterly or annual operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1996.
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock is currently traded on the NASDAQ National Market
System under the symbol "NCTI". High and low last sale information for 1996 and
1995 for the common stock for specified quarterly periods is set forth below:
1996 1995
HIGH LOW HIGH LOW
1st Quarter 7/8 17/32 1 3/16 9/16
2nd Quarter 1 5/32 21/32 1 3/16 9/16
3rd Quarter 15/16 5/8 1 9/16 1/2
4th Quarter 11/16 11/32 1 1/16 9/16
(b) At December 31, 1996, there were approximately 3,856 record holders of the
Company's common stock.
(c) The Company has neither declared nor paid any dividends on its shares of
common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below are derived from the
historical financial statements of the Company. The data set forth below is
qualified in its entirety
by and should be read in conjunction with the Company's "Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that are included elsewhere herein.
(In Thousands of Dollars and Shares)
Years Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
---------------------------------------------------
STATEMENTS OF OPERATIONS
DATA:
REVENUES
Product Sales $740 $1,728 $2,337 $1,589 $1,379
Engineering and 3,779 3,598 4,335 2,297 547
development services
Technology licensing fees
and other 62 60 452 6,580 1,238
Total revenues _
$4,581 $5,386 $7,124 $10,466 $3,164
COSTS AND EXPENSES:
Cost of sales $608 $1,309 $4,073 $1,579 $1,586
Cost of engineering and 2,748 2,803 4,193 2,340 250
development services
Selling, general and 5,151 7,231 9,281 5,416 4,890
administrative
Research and development 4,214 7,963 9,522 4,776 6,974
Interest (income) expense, (169) (311) (580) (49) 17
net
Compensation 7,442 --- --- ---
expense-removal of vesting --
condition (1)
Equity in net (income) 117 3,582(2) 1,824 (80) 80
loss of unconsolidated
affiliates
Other expense, net
89 --- 718 552 192
Total costs and
expenses $20,200 $22,577 $29,031 $14,534 $13,989
Net loss $(15,619)($(17,191)(2)$(21,907) $(4,068) $(10,825)
Weighted average number of
common
shares outstanding(3)
61,712 70,416 82,906 87,921 101,191
Net loss per share
$(0.25)(1)$(0.24)(2) $(0.26) $(0.05) $(0.11)
December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
---------------------------------------------------
BALANCE SHEET DATA:
Total assets $15,771 $29,541 $12,371 $9,583 $5,881
Total liabilities 2,069 6,301 6,903 2,699 3,271
Long-term debt --- --- --- 105 --
Accumulated deficit (29,682) (46,873) (68,780) (72,848) ($83,673)
Stockholders equity(4) 13,702 23,239 5,468 6,884 2,610
Working capital 11,038 19,990 923 1,734 (1,312)
(deficiency)
(1)Includes a one-time non-cash charge of $7,441,875 or $.12 per share for the
year ended December 31, 1992, related to the removal of the vesting
conditions to certain warrants. This charge removed any potential future
charge to earnings related to such warrants.
(2)In connection with the sale of Common Stock to Tenneco Automotive in December
1993, the Company recognized its share of cumulative losses not previously
recorded with respect to its joint venture with Walker amounting to
$3,581,682.
(3) Does not include shares issuable upon the exercise of outstanding stock
options and warrants, since their effect would be antidilutive.
(4) The Company has never declared nor paid cash dividends on its Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. Prior
to 1995, 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. In 1996, the
Company received approximately 17% of its operating revenues from engineering
and development funding, compared with 22% in 1995. Since 1991, revenues from
product sales have generally been increasing, although in 1996 product sales
declined due to delays in production and reduced pricing of certain products.
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.
As a result of the 1994 acquisition of certain ANVT assets, the Company
became the exclusive licensee of ten seminal patents, the Chaplin Patents,
through its wholly owned subsidiary, CPH. The Company's ability to license the
Chaplin Patents directly to unaffiliated third parties provides the Company with
a greater ability to earn technology licensing fees and royalties from such
patents. Further, the Company believes that its intellectual property portfolio
prevents other competitors and potential competitors in the field of Active Wave
ManagementTM from participating in certain commercial areas without licenses
from the Company.
Notes 1. and 15. to the accompanying 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 previously disclosed, the Company implemented changes in its organization
and focus in late 1994. Additionally, in late 1995 the Company redefined its
corporate mission to be the worldwide leader in the advancement and
commercialization of Active Wave ManagementTM technology. Active Wave
ManagementTM is the electronic and/or mechanical manipulation of sound or signal
waves to reduce noise, improve signal-to-noise ratio and/or enhance sound
quality. This redefinition is the result of the development of new technologies,
as previously noted, such as ASFTM, TDSSTM, FPTTM, and the SMM, which create
products that the Company believes will be utilized in areas beyond noise and
vibration reduction and control. These technologies and products are consistent
with shifting the Company's focus to technology licensing fees, royalties and
products that represent near term revenue generation. The redefinition of
corporate mission is reflected in the revised business plan which the Company
began to implement in the first quarter of 1996.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of Active Wave
ManagementTM build as anticipated by management, revenues from technology
licensing fees, royalties and product sales are forecasted to fund an increasing
share of the Company's requirements. The funding from these sources, if
realized, will reduce the Company's dependence on engineering and development
funding. The beginning of this process is shown in the shifting percentages of
operating revenue, discussed below.
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
Consolidated Financial Statements."). The Company did not meet its revenue
targets for 1996.
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.
From the Company's inception through December 31, 1996, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 22%
product sales, 51% engineering and development services and 27% technology
licensing fees.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and into their manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed.
The Company began shipping ProActiveTM headsets in 1995 and continues to sell
NoiseBuster(TM) consumer headsets. The Company is now selling products through
three of its alliances: Walker is manufacturing and selling industrial
silencers; Siemens is buying and contracting with the Company to install
quieting headsets for patient use in Siemens' MRI machines; and in the fourth
quarter of 1994 Ultra began installing production model aircraft cabin quieting
systems in the SAAB 340 turboprop aircraft. Management believes these
developments and those previously disclosed 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.
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 and other suppliers to reduce the size and cost of the
Company's systems, so that the Company will be able to offer low-cost
electronics and other components suitable for high-volume production.
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. During
1994, the Company acquired a license to two patents in the field of
micro-machined microphones and concluded the acquisition of all of the patents,
know-how and intellectual property of a former competitor, ANVT. 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.
The Company has become certified under the International Standards
Organization product quality program known as "ISO 9000", and has successfully
undergone two quality audits. Since the third quarter of 1994, the Company has
reduced its worldwide work force by 59% from 173 to 71 current employees as of
March 25, 1997.
Because the Company did not met its revenue targets for 1996, it entered into
certain 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. The
purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation D of the Securities Act of 1933,
as amended. The stock purchase agreement relating to this sale of common stock
required the Company to file a registration statement with the Securities and
Exchange Commission covering the registration of the shares for resale by the
purchaser. Such a registration statement was declared effective by the
Commission on September 3, 1996.
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. 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 common stock capital to 140,000,000 shares of common
stock.
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.
On August 29, 1996, the Company sold 1.8 million shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common stock in November, 1995. The Company received $0.9 million of net
proceeds. The purchaser is subject to certain resale and transfer restrictions
with respect to these shares.
On November 19, 1996, the Company entered into an agreement to sell an
aggregate amount of $3.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before November 27, 1996. The Debentures, issued pursuant to Regulation S
promulgated under the Securities Act of 1933 ("the November 1996 Financing")
were to be 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 sole
option. Subject to certain common stock resale restrictions, the Investor, at
its discretion, would be able to convert the principal and interest 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 would be the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date or 70% of the average closing bid price for the five trading days
immediately preceding the conversion. To provide for the above noted conversion
and interest payment options, the Company would, at closing, reserve and
subsequently cause to be deposited with an escrow agent 15 million shares of the
Company's common stock. Subject to certain conditions, the Company also had the
right to require the Investor to convert all or part of the Debentures under the
above noted conversion price conditions after February 15, 1998. Subsequent to
the closing date of the above financing, the Company was to use its best efforts
to carry out the necessary actions to effect at least a 10:1 reverse split of
the Company's common stock.
The November 1996 financing was not completed as described above. The
Company increased the aggregate amount of debentures offered to $4.0 million and
obtained subscriptions for $3.9 million of such amount, of which $3.4 million
was completed with five investors that are different than the Investor described
above, between January 15, 1997 and March 25, 1997, which resulted in net
proceeds to the Company of $3.2 million. An additional $0.5 million of
debentures has been subscribed for by one investor is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
debentures into common stock of the Company. The terms of the debentures are
similar to those described above, but the conversion price, if the average bid
price of the stock for the five days preceding conversion is used as the basis
for computing conversion, ranges from 75% to 60% of that price and there is no
requirement that the Company use its best efforts to carry out the necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.
Management believes that the funding provided by increased product sales,
technology licensing fees, royalties, and cost savings, if realized, coupled
with the additional capital referred to above, should enable the Company to
continue operations into 1998. If the Company is not able to realize such
increased technology licensing fees, royalties and product sales, or generate
additional capital, it will have to further cut its level of operations
substantially in order to conserve cash. (Refer to "Liquidity and Capital
Resources" below and to Note 1. - "Notes to the Consolidated Financial
Statements" for a further discussion relating to continuity of operations.)
Results of Operations
Year ended December 31, 1996 compared with year ended December 31, 1995.
Total revenues in 1996 decreased by 70% to $3,164,000 from $10,466,000 in
1995. Total expenses during the same period decreased by 4% or $545,000,
reflecting the continuing results of cost reduction plans, and the refocus of
expenditures to more immediate markets.
Technology licensing fees decreased by 81% or $5,342,000 to $1,238,000. The
1995 amount was derived principally from a $2.6 million license fee from Ultra,
a $ 3.3 million license fee from Walker and other licenses aggregating $0.7
million. The 1996 amount is derived from smaller, more numerous license fees,
reflecting the Company's continuing emphasis on expanding technology licensing
fee revenue and the shortfall in generation of such revenue referred to above.
See Note 3. - "Notes to the Consolidated Financial Statements".
Product sales decreased by 13% to $1,379,000 reflecting decreased aviation
headset sales, decreased NoiseBuster(TM) sales at lower prices and a decrease in
industrial silencer sales in connection with the transfer of that business to
Walker.
Engineering and development services decreased by 76% to $ 547,000, primarily
due to a deemphasis of engineering development funding as a primary source of
revenue, 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.
Cost of product sales increased 0.4% to $1,586,000 from $1,579,000 and the
product margin decreased to (15)% from 1% in 1995. The negative margin in 1996
was primarily due to the lower sales price of the NoiseBusterTM and a reserve
for tooling obsolescence in the amount of $300,000. In 1995, the low product
margin was primarily due to the lower sales price of the NoiseBusterTM.
Cost of engineering and development services decreased 89% to $250,000
primarily due to the changes noted above.
Selling, general and administrative expenses for the year decreased by 10% to
$4,890,000 from $5,416,000 for 1995. Of this decrease, $616,000 was directly
attributable to reductions in salaries and related expenses. Advertising and
marketing expenses decreased by 32% to $463,000. Office and occupancy expenses
decreased by 6% or $19,000. Professional fees increased by 6% to $1,818,000.
Travel and entertainment increased by 18% or $71,000.
Depreciation and amortization included in selling, general and administrative
expenses increased by $285,000 or 143%, from $199,000 to $484,000, primarily due
to increased amortization of patents allocated to selling, general and
administrative expenses from research and development.
Research and development expenditures for 1996 increased by 46% to $6,974,000
from $4,776,000 for 1995, primarily due to increases to internally funded
development projects.
In 1996, interest income decreased to $28,000 from $53,000 in 1995 reflecting
the decrease in 1996 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1996, 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. As of December 31, 1995, the Company recognized
$80,000 of income relating to its 1995 profit in OAT. As of December 31, 1996,
the Company reversed the $80,000 of income which related to its share of the
1996 loss in OAT.
The Company has net operating loss carryforwards of $67.4 million and
research and development credit carryforwards of $1.2 million for federal income
tax purposes at December 31, 1996. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
Year ended December 31, 1995 compared with year ended December 31, 1994.
Total revenues in 1995 increased by 47% to $10,466,000 from $7,124,000 in
1994. Total expenses during the same period decreased by 50% or $14,497,000,
reflecting the continuing results of cost reduction plans.
Technology licensing fees increased by 1,356% or $6,128,000 to $6,580,000,
reflecting the Company's continuing emphasis on expanding technology licensing
fee revenue. The 1995 amount is principally derived from a $2.6 million license
fee from Ultra, a $ 3.3 million license fee from Walker and other licenses
aggregating $0.7 million. In 1994, technology license fees amounted to $0.5
million. See Note 3. - "Notes to the Consolidated Financial Statements".
Product sales decreased by 32% to $1,589,000 reflecting a reduction in orders
for MRI headsets from Siemens, decreased revenue from NoiseBusterTM sales due to
reductions in average price and units sold, and a decrease in industrial
silencer sales in connection with the transfer of that business to Walker.
Engineering and development services decreased by 47% to $ 2,297,000,
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.
Cost of product sales decreased 61% to $1,579,000 from $4,073,000 and the
product margin increased to 1% from (74%) in 1994. The negative margin in 1994
was primarily due to a reserve for slow moving and obsolete inventory in the
amount of $1,855,300. In 1995, the low product margin was primarily due to the
lower sales price of the NoiseBusterTM.
Cost of engineering and development services decreased 44% to $2,340,000
primarily due to the changes in the Ultra and Walker relationships, as noted
above.
Selling, general and administrative expenses for the year decreased by 42% to
$5,416,000 from $9,281,000 for 1994. Of this decrease, $1,202,000 was directly
attributable to reductions in salaries and related expenses. Advertising and
marketing expenses decreased by 65% to $677,000. Office and occupancy expenses
decreased by 73% or $537,000. Professional fees increased by 55% to $1,933,000
primarily due to legal fees related to litigation and patent prosecution and
maintenance. Travel and entertainment decreased by 58% or $533,000.
Depreciation and amortization included in selling, general and administrative
expenses decreased by $22,000 or 10%, from $221,000 to $199,000.
Research and development expenditures for 1995 decreased by 50% to $4,776,000
from $9,522,000 for 1994, primarily due to realizations from the cost savings
plans and staff reductions.
In 1995, interest income decreased to $53,000 from $587,000 in 1994
reflecting the decrease in 1995 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1995, 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 agreement with Tenneco Automotive entered
into in December 1993 resulted in the recognition of 1994 losses with respect to
the joint venture with Walker in the amount of $1,453,200. The aggregate amount
of the Company's share of losses in all of its joint ventures in excess of the
Company's investments which has not been recorded was approximately $0.9 million
at December 31, 1994. Due to the Company's sale and transfer of its interest in
various of its joint ventures in 1995, there was no such unrecorded losses as of
December 31, 1995.
The Company has net operating loss carryforwards of $58.7 million and
research and development credit carryforwards of $1.2 million for federal income
tax purposes at December 31, 1996. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
Liquidity and Capital Resources
The Company received $0.1 million from the exercise of stock purchase
warrants and options during 1996, $0.7 million in 1995 and $1.0 million in 1994.
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, the Company needed to generate approximately $19 million to
fund its operations for 1996. The Company believed that it could generate these
funds from operations in 1996, although there was no certainty that the Company
would achieve this goal. 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. During 1996, the Company generated $1.2 million in licensing
fees and $1.4 million in product sales.
Because the Company did not meet its revenue targets for 1996, it entered
into the following transactions:
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. The
purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation D of the Securities Act of 1933,
as amended. The stock purchase agreement relating to this sale of common stock
required the Company to file a registration statement with the Securities and
Exchange Commission covering the registration of the shares for resale by the
purchaser. Such a registration statement was declared effective by the
Commission on September 3, 1996.
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. 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 common stock capital to 140,000,000 shares of common
stock.
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.
On August 29, 1996, the Company sold 1.8 million shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common stock in November, 1995. The Company received $0.9 million of net
proceeds. The purchaser is subject to certain resale and transfer restrictions
with respect to these 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 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.
On November 19, 1996, the Company entered into an agreement to sell an
aggregate amount of $3.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before November 27, 1996. The Debentures, issued pursuant to Regulation S
promulgated under the Securities Act of 1933 ("the November 1996 Financing")
were to be 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 sole
option. Subject to certain common stock resale restrictions, the Investor, at
its discretion, would be able to convert the principal and interest 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 would be the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date or 70% of the average closing bid price for the five trading days
immediately preceding the conversion. To provide for the above noted conversion
and interest payment options, the Company would, at closing, reserve and
subsequently cause to be deposited with an escrow agent 15 million shares of the
Company's common stock. Subject to certain conditions, the Company also had the
right to require the Investor to convert all or part of the Debentures under the
above noted conversion price conditions after February 15, 1998. Subsequent to
the closing date of the above financing, the Company was to use its best efforts
to carry out the necessary actions to effect at least a 10:1 reverse split of
the Company's common stock.
The November 1996 financing was not completed as described above. The
Company increased the aggregate amount of debentures offered to $4.0 million and
obtained subscriptions for $3.9 million of such amount, of which $3.4 million
was completed with five investors that are different than the Investor described
above, between January 15, 1997 and March 25, 1997, which resulted in net
proceeds to the Company of $3.2 million. An additional $0.5 million of
debentures has been subscribed for by one investor which is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
debentures into common stock of the Company. The terms of the debentures are
similar to those described above, but the conversion price, if the average bid
price of the stock for the five days preceding conversion is used as the basis
for computing conversion, ranges from 75% to 60% of that price and there is no
requirement that the Company use its best efforts to carry out the necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $83.7 million on a
cumulative basis through December 31, 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 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 1997, the Company adopted a plan that management believes should
generate sufficient funds for the Company to continue its operations into 1998.
Under this plan, the Company needs to generate approximately $21 million to fund
its operations in 1997. Included in such amount is approximately $8.9 million in
sales of new products and approximately $9.0 million of technology licensing
fees and royalties. The Company believes that it can generate these funds from
1997 operations and the sale of the debentures referred to above, although there
is no certainty that the Company will achieve this goal. While the Company has
exceeded its expectations to date in 1997 regarding technology licensing fees,
production delays have slowed new product sales. Success in generating
technology licensing fees, royalties and product sales are significant and
critical to the Company's ability to overcome its present financial
difficulties. The Company cannot predict whether it will be successful in
obtaining market acceptance of its new products or in completing its current
negotiations with respect to licenses and royalty revenues. If, during the
course of 1997, management of the Company determines that it will be unable to
meet or exceed the plan discussed above, the Company will consider additional
financing alternatives. The Company's ability to raise additional capital
through sales of common stock will be severely limited until the Company's
stockholders approve an amendment to the Company's Certificate of Incorporation
authorizing an increase in its authorized capital stock. The Company will
monitor its performance against the plan on a monthly basis and, if necessary,
reduce its level of operations accordingly. The Company believes that the plan
discussed above constitutes a viable plan for the continuation of the Company's
business into 1998.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties, product sales, engineering and development
revenue or additional capital. 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 Notes 1. and 15. - "Notes to
the Consolidated Financial Statements".
At December 31, 1996, cash and short-term investments were $368,000. 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 from $1,734,000 at December 31, 1995,
to $(1,312,000) as of December 31, 1996. This decrease was due primarily to the
1996 revenue shortfall discussed above.
During 1996, the net cash used in operating activities was $7.8 million. This
utilization reflects the emphasis on the commercial development of its
technology into several product applications which were scheduled for
introduction in 1996 and 1997.
Net inventory declined during 1995 by $801,000, primarily reflecting sales of
the original NoiseBusterTM product.
During the year ended December 31, 1996, accounts receivable reserves were
increased by $4,000 as the Company wrote off certain accounts and added certain
amounts to its reserves.
The Company's available cash balances at December 31, 1996 are lower than
projected at the end of 1995, primarily due to the revenue shortfall noted
above.
The net cash used in investing activities amounted to $186,000 during the
year primarily for capital expenditures. The net cash provided by financing
activities amounted to $6,481,000 primarily from the exercise of options and
warrants and the private placements noted above.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
The Company believes that the level of financial resources available to it is
an essential competitive factor. The Company 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 although the
Company's ability to raise additional capital through sales of common stock will
be severely limited until the Company's stockholders approve an amendment to the
Company's Certificate of Incorporation authorizing additional capital stock.
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
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies;
(ii) utilization of the manufacturing capacity of the Company's allies, enabling
the Company to integrate its active technology into products with limited
capital investment; and (iii) access to well-established channels of
distribution and marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of December
31, 1996, and no material commitments are anticipated in the near future.
ITEM 8. FINANCIAL STATEMENTS
The Reports of the Independent Auditors Richard A. Eisner & Company, L.L.P. and
the financial statements and accompanying notes are attached.
Page
Reports of Independent F-1
Auditors.....................................................
Consolidated Balance Sheets, as of December 31, 1995, and F-2
1996..................................
Consolidated Statements of Operations, for the years ended
December 31, 1994, 1995 and F-3
1996..................................................
Consolidated Statements of Stockholders' Equity, for the
years ended
December 31, 1994, 1995 and F-4
1996..................................................
Consolidated Statements of Cash Flows, for the years ended
December 31, 1994, 1995 and F-5
1996..................................................
Notes to the Consolidated Financial Statements F-6
...........................................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no disagreements with independent accountants on accounting
and financial disclosure matters.
PART III
The information called for by Items 11 and 12 is incorporated by reference to
the Company's 1997 Annual Meeting of Shareholders - Notice and Proxy Statement
(to be filed pursuant to Regulation 14A not later than 120 days after the close
of the fiscal year), which meeting involves the election of directors, in
accordance with the General Instruction G to the Annual Report on Form 10-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages, positions and the offices
held by each of the executive officers and directors of the Company as of March
31, 1997:
Name Age Positions and Offices
Jay M. Haft 61 Chairman of the Board of Directors
John J. McCloy II 59 Director
Michael J. Parrella 49 President and Director
Stephen J. 47 Senior Vice President, Chief Financial
Fogarty, CPA Officer
Irene Lebovics 44 Senior Vice President, Marketing and
Secretary
Jeffery Zeitlin 48 Senior Vice President, Operations
Cy E. Hammond 42 Vice President, Controller
Michael A. Hayes, 44 Vice President of Research
Ph.D.
John B. Horton 62 Senior Vice President, General Counsel
and Secretary
Samuel A. Oolie 60 Director
Jay M. Haft currently serves as Chairman of the Board of Directors of the
Company. He served as President of the Company from November 1994 to July 1995.
He is a strategic and financial consultant for growth stage companies. He is
active in international corporate finance, mergers and acquisitions, as well as
in the representation of emerging growth companies. He has actively participated
in strategic planning and fund raising for many high-tech companies, leading
edge medical technology companies and technical product, service and marketing
companies. He is a Managing General Partner of Venture Capital Associates, Ltd.
and of Gen Am "1" Venture Fund, a domestic and an international venture capital
fund, respectively. Mr. Haft is also a Director of numerous other public and
private corporations, including Robotic Vision Systems, Inc. (OTC), Extech Inc.
(OTC), Healthcare Acquisition Corp. (OTC), Viragen, Inc. (OTC), PC Service
Source, INC. (OTC), DUSA Pharmaceuticals, Inc. (OTC), Oryx Technology Corp.
(OTC) and Jenna Lane, Inc. (OTC). He serves as Chairman of the Board of Extech,
Inc., Healthcare Acquisition Corp. and Jenna Lane, Inc. He is currently of
counsel to Parker Duryee Rosoff & Haft, in New York. He was previously a senior
corporate partner of such firm (1989-1994), and prior to that a founding partner
of Wolfsey, Certilman, Haft, et. al. (1966-1988). He is a member of the Florida
Commission for Government Accountability to the People, Co-President of the Dade
Venue of the Miami Ballet and a Director of the Concert Association of Florida.
He is a graduate of Yale College and Yale Law School.
John J. McCloy II currently serves as a Director of the Company. He served as
Chief Executive Officer of the Company from September 1987 to November 1994 and
as its Chairman of the Board from September 1986 to November 1994. Additionally
he served as Chief Financial Officer from November 1990 to February 1993 and as
its Secretary-Treasurer from October 1986 to September 1987. Since 1981, he has
also been a private investor concentrating on venture capital and early stage
investment projects in a variety of industries. Mr. McCloy is also a director of
American University in Cairo, the Sound Shore Fund, Inc., and the Atlantic
Council.
Michael J. Parrella currently serves as President and Director of the
Company. He was elected President and Chief Operating Officer of the Company in
February 1988 and served in that capacity until November 1994. From November
1994 to July 1995 Mr. Parrella served as Executive Vice President of the
Company. He initially became a director in 1986 after evaluating the application
potential of the Company's noise cancellation technology. At that time, he
formed an investment group to acquire control of the Board and to raise new
capital to restructure the Company and its research and development efforts. He
was also Chairman of the Board of Environmental Research Information, Inc., an
environmental consulting firm, from December 1987 to March 1991.
Stephen J. Fogarty, CPA, currently serves as Senior Vice President and Chief
Financial Officer of the Company. He joined the Company as Vice President of
Production in May 1990, was appointed a Senior Vice President in January 1993
and subsequently appointed Chief Financial Officer on November 15, 1994. Between
1987 and 1990, he worked for Relay Communications, a PC-to-PC and
PC-to-mainframe communications software company, where he served as Vice
President and Chief Financial Officer and managed operations and administration.
Following that company's acquisition by Microcom Software in 1988, he served as
Vice President of Operations. Prior to 1987, he spent over 12 years in public
accounting.
Irene Lebovics currently serves as Senior Vice President, Marketing and
Communications, and President of NCT Headsets. She joined the Company as Vice
President of NCT and President of NCT Medical Systems (NCTM) in July 1989. In
March 1990 NCTM became part of NCT Personal Quieting and Ms. Lebovics served as
President. In January 1993 she was appointed Senior Vice President of the
Company. In November 1994, Ms. Lebovics became President of NCT Headsets. From
August 1, 1995, to May 1, 1996, she also served as Secretary of the Company. Ms.
Lebovics has held various positions in product marketing with Bristol-Myers, a
consumer products company, and in advertising with McCaffrey and McCall.
Jeffrey C. Zeitlin currently serves as Senior Vice President of Operations.
He was initially a consultant to the Company in October 1995 and became an
employee in January 1996. Prior to joining the Company he was an independent
consultant for X-Ray Optical Systems, Inc., a high technology start-up company,
Ambase Corporation, a financial services holding organization, and Integrated
Liner Technologies, Inc., a start-up manufacturing organization. He has also
served as Vice President and Chief Financial Officer of CBI Holding Company,
Inc., a drug wholesaler representing all major drug manufacturers. From 1981 to
1992 Mr. Zeitlin served in several accounting and treasury positions at Hoechst
Celanese Corporation, the most recent of which was Vice President of Venture
Funds and Financial Projects. He is a member of the Executive Advisory Committee
of Integrated Liner Technologies, Inc. of Watervliet, New York.
Cy E. Hammond currently serves as Vice President, Controller of the Company.
He joined the Company as Controller in January 1990 and was appointed a Vice
President in February 1994. During 1989, he was Treasurer and Director of
Finance for Alcolac, Inc., a multinational specialty chemical producer. Prior to
1989 and from 1973, Mr. Hammond served in several senior finance positions at
the Research Division of W.R. Grace & Co., the last of which included management
of the division's worldwide financial operations.
John B. Horton, Esq., currently serves as Senior Vice President, General
Counsel and Secretary. He joined the Company as Vice President and General
Counsel in September 1991, assumed the office of Secretary in October 1991 and
was appointed a Senior Vice President in January 1993. From November 1, 1994 to
May 1 1996, Mr. Horton engaged in the private practice of law and served as a
legal consultant to the Company. On May 1, 1996, he rejoined the Company as
Senior Vice President, General Counsel and Secretary. Between 1988 and 1991, he
was a Vice President/Partner at Korn/Ferry International, a worldwide executive
search firm. From 1986 through 1988, Mr. Horton was Vice President and General
Counsel at Montchanin Management Corporation, a private investment banking firm.
Prior thereto and from 1963, he was engaged in the private practice of law,
first as an associate and then a partner at Satterlee, Warfield & Stephens in
New York City and subsequently as a partner at Hall, McNicol, Hamilton & Clark
in New York City and Stamford, Connecticut. At both law firms, Mr. Horton was a
member of the firm's corporate practice group.
Michael A. Hayes, Ph.D., currently serves as Vice President of Research after
joining the Company in 1996. During 1995 and 1994 Dr. Hayes served as Deputy
Project Director, Research Support for Antarctic Support Associates, with
operations in Chile, New Zealand, Australia, and Antarctica. From 1991 to 1994
he served as Deputy Program Manager, Special Payloads, for Martin Marietta
Government Services (formerly a division of General Electric) while directly
managing critical spacecraft sub-system and instrument development for Goddard
Space Flight Center. Prior to 1991 Dr. Hayes served as a research faculty member
at Georgia Institute of Technology, and as a Senior Process Engineer at Texas
Instruments.
Samuel A. Oolie currently serves as a Director of the Company. He is Chairman
and Chief Executive Officer of NoFire Technologies, Inc., a manufacturer of high
performance fire retardant products, and has held that position since August
1995. He is also Chairman of Oolie Enterprises, an investment company, and has
held that position since July 1985. Mr. Oolie currently serves as a director of
Avesis, Inc. and Comverse Technology, Inc. He has also been a director of CFC
Associates, a venture capital partnership, since January 1984.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish the
Company with copies of all such reports. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no reports were required for those persons, the Company
believes that, during the period from January 1, 1995, to December 31, 1996, all
filing requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's 1997 Annual Meeting of Shareholders - Notice and Proxy Statement (to
be filed pursuant to Regulation 14-A not later than 120 days after the close of
the 1996 fiscal year).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's 1997 Annual Meeting of Shareholders - Notice and Proxy Statement (to
be filed pursuant to Regulation 14-A not later than 120 days after the close of
the 1996 fiscal year).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1990, the Company's Board of Directors authorized the issuance of
warrants to acquire 420,000 shares of common stock to each of Messrs. McCloy,
Parrella and Oolie and Ms. Lebovics, exercisable through September 30, 1994, at
$.375 per share, being the market price of the Company's common stock on the
date of such authorization, based upon each such person's commitment to extend
his or her personal guarantee on a joint and several basis with the others in
support of the Company's attempt to secure bank or other institutional
financing, the amount of which to be covered by the guarantee would not exceed
$350,000. No firm commitment for any such financing has been secured by the
Company and at present no such financing is being sought. However, each of such
persons' commitment to furnish said guarantee continues in full force and
effect.
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Co-Chairman, and Chief
Executive Officer of the Company, shares investment control over an additional
24% of the outstanding capital of ERI. The Company believes that the respective
terms of both the establishment of the joint venture with ERI and its
termination were comparable to those that could have been negotiated with other
persons or entities. During the fiscal year ended December 31, 1996, the Company
was not required to make any such payments to ERI under these agreements.
In 1993, the Company entered into three Marketing Agreements with QuietPower
Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical Solutions,
Inc."), a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing Agreements, QSI has undertaken to use its best
efforts to seek research and development funding for the Company from electric
and natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will record a charge for the amount by which the market price of the Common
Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1994, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
Under the terms of the second of the three Marketing Agreements, QSI is
granted a non-exclusive right to market the Company's products that are or will
be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the Company in the feeder
bowl area. The initial term of this Marketing Agreement is three years with
subsequent automatic one-year renewals unless a party elects not to renew.
Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with equipment used by electric and/or natural gas utilities for
retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products equal to 129% of QSI's
marketing expenses attributable to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues received by the Company from the sale of such products. QSI is
also entitled to receive a 5% commission on research and development funding
similar to that described above. QSI's exclusive rights continue for an
indefinite term provided it meets certain performance criteria relating to
marketing efforts during the first two years following product availability in
commercial quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights become non-exclusive, depending on the circumstances
causing such change, the initial term then becomes either three or five years
from the date of this Marketing Agreement, with subsequent one-year automatic
renewals in each instance unless either party elects not to renew. During the
fiscal year ended December 31, 1996, the Company was not required to pay any
commissions to QSI under any of these Marketing Agreements.
The Company has also entered into a Teaming Agreement with QSI under which
each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1996, the Company made
no payments to QSI for project management services.
In March 1995, the Company entered into a Master Agreement with QSI under
which QSI was granted an exclusive worldwide license under certain NCT patents
and technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances include
NCT's failure to develop the products or the failure of the parties to agree on
certain development matters. In consideration of the rights granted under the
Master Agreement, QSI is to pay the Company a royalty of 6% of the gross
revenues received from the sale of the products and 50% of the gross revenues
received from sublicensing the rights granted to QSI under the Master Agreement
after QSI has recouped 150% of the costs incurred by QSI in the development of
the products in question. The Company is obligated to pay similar royalties to
QSI on its sale of the products and the licensing of rights covered under the
Master Agreement outside the utility industry and from sales and licensing
within the utility industry in the Far East. In addition to the foregoing
royalties, QSI is to pay an exclusivity fee to the Company of $750,000; $250,000
of which QSI paid to the Company in June 1994. The balance is payable in equal
monthly installments of $16,667 beginning in April 1995. QSI's exclusive rights
become non-exclusive with respect to all products if it fails to pay any
installment of the exclusivity fee when due and QSI loses such rights with
respect to any given product in the event it fails to make any development
funding payment applicable to that product. The Master Agreement supersedes all
other agreements relating to the products covered under the Master Agreement,
including those agreements between the Company and QSI described above.
Immediately following the execution to the Master Agreement, the Company and
QSI entered into a letter agreement providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.
In April 1995, the Company and QSI entered into another letter agreement
under which QSI agreed to forfeit and surrender the five year warrant to
purchase 750,000 shares of the Company's common stock issued to QSI under the
first Marketing Agreement described above. In addition, the $500,000 balance of
the exclusivity fee provided for under the Master Agreement was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the indebtedness to be paid under the letter agreement described in the
preceding paragraph was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million, whichever
first occurs. Such indebtedness is to be evidenced by a promissory note, non
payment of which is to constitute an event of termination under the Master
Agreement.
On May 21, 1996, the Company and QSI entered into another letter agreement
extending the time by which the payments from QSI to the Company under the April
1995 letter agreement described above were to be made. Under the letter the
payment of certain arrearages in the payment of the exclusivity fee was to be
made not later than June 15, 1996, with the balance continuing to be payable by
monthly payments of $8,333 and as provided in the May 1995 letter agreement. In
addition the payment of the other indebtedness owed by QSI to the Company was to
be paid by a payment of $25,000 at the time QSI obtained certain anticipated
financing with the balance paid by monthly payments of $15,000 each. Default in
QSI's timely payment of any of the amounts specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.
On April 9, 1997, the Company and QSI entered into another letter agreement
revising the payment schedule set forth in the May 21, 1996 letter agreement
applicable to the payment of the indebtedness owed to the Company by QSI other
than the unpaid portion of the exclusivity fee. Under the revised schedule, the
full amount of such indebtedness is to be paid by an initial payment of $125,000
on or before April 21, 1997, and a second payment of $200,000 upon the closing
of a proposed financing in June 1997 or on January 1, 1998, whichever first
occurs. The Company is also entitled to receive 15% of any other financing
obtained by QSI in the interim as well as interest at the rate of 10% per annum
on the unpaid amount of such indebtedness from July 1, 1997. The letter
agreement also provides for the continuation of QSI's payment of the exclusivity
fee in accordance with the earlier letter agreements as well as the payment of
$11,108 by April 21, 1997, for headset products sold by the Company to QSI in
1996. In the event of a default in QSI's timely payment of any of the amounts
specified in the April 9, 1997 letter agreement, the Company has the right to
cause the termination of the Master Agreement and all rights granted by QSI
thereunder upon 10 days notice of termination to QSI.
As of April 10, 1997, QSI has paid all installments due and payable for the
exclusivity fee and, other than as described above, owes no other amounts to the
Company.
The Company believes that the terms of its agreements with QSI are comparable
to those that it could have negotiated with other persons or entities.
PART IV
ITEM 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
Reports of Independent Auditors.
Consolidated Balance Sheets, as of December 31, 1995, and 1996.
Consolidated Statements of Operations, for the years ended December 31, 1994,
1995 and 1996.
Consolidated Statements of Stockholders' Equity, for the years ended December
31, 1994, 1995 and 1996.
Consolidated Statements of Cash Flows, for the years ended December 31, 1994,
1995 and 1996.
Notes to the Consolidated Financial Statements.
(2) Financial Statement Schedules.
Report of Independent Auditors with Respect to Schedule.
Schedule:
II. Valuation and Qualifying Accounts.
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.
(3) Exhibits.
Exhibit
Number Description of Exhibit
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, incorporated herein by reference to Exhibit 3(a)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
3(b) By-laws of the Company, incorporated herein by reference to
Exhibit 3(b) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
4(a) Warrant to purchase 125,000 shares of Common Stock of the Company at
a purchase price of $.20 per share issued to John J. McCloy II,
incorporated herein by reference to Exhibit 4(a) to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of Common Stock of the
Company at a purchase price of $.75 per share issued to John J.
McCloy II.
4(c) Warrant #BW-2-R to purchase 862,500 shares of Common Stock of the
Company at a purchase price of $.75 per share issued to Michael J.
Parrella.
4(d) Warrant #BW-4-R to purchase 201,250 shares of Common Stock of the
Company at a purchase price of $.75 per share issued to Irene
Lebovics.
4(e) Warrant #BW-9-R and #BW-46-R to purchase 218,500 shares of Common
Stock of the Company at a purchase price of $.75 per share issued
to Jay M. Haft.
4(f) Warrant Agreement, dated as of January 20, 1988, between the Company
and American Stock Transfer Company, as Warrant Agent, relating to
certain warrants to purchase Common Stock of the Company at a price
of $.40 per share issued to Sam Oolie, Oolie Enterprises, John J.
McCloy II, and Michael J. Parrella, incorporated herein by reference
to Exhibit 4(gg) to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
*10(a) 1987 Incentive Stock Option Plan, incorporated herein by
reference to Exhibit 10(b) to Amendment No. 1 on Form S-1 to the
Company's Registration Statement on Form S-18 (Registration
No. 33-19926).
*10(b) Stock Option Agreement, dated as of February 26, 1987, between the
Company and John J. McCloy II, incorporated herein by reference to
Exhibit 10(b) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
*10(c) Stock Option Agreement, dated as of February 26, 1987, between the
Company and Michael J. Parrella, incorporated herein by reference to
Exhibit 10(c) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
*10(d) Stock Option Agreement, dated as of February 26, 1987, between the
Company and Sam Oolie, incorporated herein by reference to Exhibit
10(d) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
*10(e) Stock Option Agreement, dated as of June 17, 1987, between the
Company and John J. McCloy II, incorporated herein by reference to
Exhibit 10(f) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
*10(f) Stock Option Agreement, dated as of March 29, 1990, between the
Company and Jay M. Haft, incorporated herein by reference to Exhibit
10(m) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10(g) Lease, dated December 20, 1991, between West Nursery Land Holding
Limited Partnership ("West Nursery") and the Company, as amended by
a letter amendment, dated December 20, 1991, between West Nursery
and the Company, incorporated herein by reference to Exhibit 10(u)
to Amendment No. 1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
10(h) Lease, dated February 26, 1991, between West Nursery and the
Company, as amended by a letter amendment, dated February 26, 1991,
between West Nursery and the Company, incorporated herein by
reference to Exhibit 10(v) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10(i) Lease (undated), between West Nursery and the Company, as amended by
a letter amendment, dated April 23, 1990, between West Nursery and
the Company, incorporated herein by reference to Exhibit 10(w) to
Amendment No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991;
10(j) Agreement, dated March 4, 1991, between West Nursery and the Company
as amended by the First Amendment of Agreement, dated December 20,
1991, between West Nursery and the Company, incorporated herein by
reference to Exhibit 10(x) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10(k) Patent Assignment Agreement, dated as of June 21, 1989, among
George B.B. Chaplin, Sound Alternators Limited, the Company,
Active Noise and Vibration Technologies, Inc. and Chaplin Patents
Holding Co., Inc., incorporated herein by reference to Exhibit
10(aa) to Amendment No. 2 on Form S-1 to the Company's
Registration Statement on Form S-18 (Registration No. 33-19926).
10(l) Joint Venture and Partnership Agreement, dated as of November 8,
1989, among the Company, Walker Manufacturing Company, a division of
Tenneco, Walker Electronic Mufflers, Inc. and NCT Muffler, Inc.,
incorporated herein by reference to Exhibit (c)(1) to the Company's
Current Report on Form 8-K, dated November 8, 1989, as amended on
Form 8, dated January 24, 1990.
10(l)(1) Letter Agreement between Tenneco Automotive, a division of Tennessee
Gas Pipeline Company, and the Company dated November 22, 1993,
incorporated herein by reference to Exhibit 10(a) to the Company's
Current Report on Form 8-K dated November 22, 1993.
10(l)(2) Stock Purchase Agreement between Tenneco Automotive, a division of
Tennessee Gas Pipeline Company, and the Company dated December 14,
1993, incorporated herein by reference to Exhibit 10(b) to the
Company's Current Report on Form 8-K dated November 24, 1993.
10(l)(3) Transfer Agreement among Walker Manufacturing Company a division of
Tennessee Gas Pipeline Company, Walker Electronic Mufflers, Inc.,
the Company, NCT Muffler, Inc., Chaplin Patents Holding Co., Inc.
and Walker Noise Cancellation Technologies dated November 15, 1995,
incorporated herein by reference to Exhibit 10(l)(3) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. **
10(l)(4) License Agreement between Chaplin Patents Holding Co., Inc.
and Walker Electronic Mufflers, Inc. dated November 15, 1995,
incorporated herein by reference to Exhibit 10(l)(4) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. **
10(l)(5) License Agreement between the Company and Walker Electronic
Mufflers, Inc. dated November 15, 1995, incorporated herein by
reference to Exhibit 10(l)(5) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995. **
10(l)(6) Support, Research and Development Agreement among Walker
Electronic Mufflers, Inc., the Company, NCT Muffler, Inc. and
Chaplin Patents Holding Co., Inc. dated November 15, 1995,
incorporated herein by reference to Exhibit 10(l)(6)to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. **
10(l)(7) Mutual Limited Release by (i) the Company, NCT Muffler, Inc. and
Chaplin Patent Holding Co., Inc. and (ii) Tennessee Gas Pipeline
Company and Walker Electronic Mufflers, Inc. dated November 15,
1995, incorporated herein by reference to Exhibit 10(l)(7)
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995. **
10(m) Technical Assistance and License Agreement, dated March 25,
1991, among the Company, Foster Electric Co., Ltd. and Foster/NCT
Headsets International Ltd., incorporated herein by reference to
Exhibit 10(nn) to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.**
10(m)(1) Amendment, dated April 16, 1991, to Technical Assistance and License
Agreement, dated March 25, 1991, among the Company, Foster Electric
Co., Ltd. and Foster/NCT Headsets International Ltd., incorporated
herein by reference to Exhibit 10(nn)(1) to Amendment No. 5 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(m)(2) Letter Agreement between Foster Electric Co., Ltd. and the
Company dated November 22, 1993, incorporated herein by
reference to Exhibit 10(b) to the Company's Current Report on
Form 8-K dated November 22,1993.
10(m)(3) Letter agreement among Foster Electric Co., Ltd., Foster NCT
Headsets International, Ltd. and the Company dated July 28, 1995,
incorporated herein by reference to Exhibit 10(a) of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
10(n) Joint Development Cooperation Agreement, dated June 28, 1991,
between AB Electrolux and the Company, incorporated herein by
reference to Exhibit 10(oo) to Amendment No. 3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.**
10(n)(1) Amendments to the Joint Development Cooperation Agreement, dated
June 28, 1991, between AB Electrolux and the Company as set forth in
the First Amendment to Joint Development Cooperation Agreement,
dated September 1, 1993, between AB Electrolux and the Company,
incorporated herein by reference to Exhibit 10(z)(1) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.**
10(n)(2) Second Amendment to Joint Development Cooperation Agreement, dated
January, 1994 between AB Electrolux and the Company, incorporated
herein by reference to the Exhibit 10(z)(2) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
10(o) Letter Agreement, dated March 19, 1992, between Siemens Medical
Systems, Inc. and NCT Medical Systems, Inc., incorporated
herein by reference to Exhibit 10(pp) to Amendment No. 1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10(o)(1) OEM Agreement between the Company and Siemens AG dated November 24,
1993, incorporated herein by reference to Exhibit 10(a) to the
Company's Current Report on Form 8-K dated November 24, 1993.
*10(p) 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(q) Master Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated March 27, 1995, incorporated
herein by reference to Exhibit 10(a) of the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on August 4, 1995.
10(q)(1) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated April 21, 1995, incorporated
herein by reference to Exhibit 10(b) of the Company's Current
Report on Form 8-K filed August 4, 1995.
10(q)(2) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated May 21, 1996.
10(q)(3) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated April 9, 1997.
10(r) Asset Purchase Agreement, dated September 16, 1994, between Active
Noise and Vibration Technologies, Inc. and the Company, incorporated
herein by reference to Exhibit 2 to the Company's Current Report on
Form 8-K filed September 19, 1994.
*10(s) 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 and Exchange Commission on August 30, 1996
(Reg. No. 333-11209).
10(t) Variation of Teaming Agreement between Noise Cancellation
Technologies, Inc. and Ultra Electronics Limited dated April 6,
1995, incorporated herein by reference to Exhibit 10(c) of the
Company's Current Report on Form 8-K filed August 4, 1995.)
10(t)(1) Agreement for Sale and Purchase of Part of the Business and Certain
Assets among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited and Ultra Electronics Limited
dated April 6, 1995, incorporated herein by reference to Exhibit
10(d) of the Company's Current Report on Form
8-K filed August 4, 1995.
10(t)(2) Patent License Agreement among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated April 6, 1995, incorporated herein by
reference to Exhibit 10(e) of the Company's Current Report on Form
8-K filed August 4, 1995)
10(t)(3) License Agreement between Chaplin Patents Holding Co., Inc. and
Ultra Electronics Limited dated April 6, 1995, incorporated herein
by reference to Exhibit 10(f) of the Company's Current Report on
Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated May 15, 1995, incorporated herein by
reference to Exhibit 10(g) of the Company's Current Report on Form
8-K filed August 4, 1995.
*10(u) Agreement among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited, Dr. Andrew John
Langley, Dr. Graham Paul Eatwell and Dr. Colin Fraser Ross
dated April 6, 1995, incorporated herein by reference to Exhibit
10(h) of the Company's Current Report on Form 8-K filed
August 4, 1995.
10(v) Securities Purchase Agreement dated April 8, 1996, by and among the
Company and Kingdon Associates, L.P., Kingdon Partners, L.P. and M.
Kingdon Offshore NV, together with Exhibit A-1 thereto, Form of
Secured Convertible Note and Exhibit A-2 thereto, Registration
Rights Agreement, incorporated herein by reference to Exhibit 10(a)
of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
10(v)(1) Security Agreement dated April 10, 1996, between the Company and
Kingdon Associates, L.P., Kingdon Partners, L.P. and M. Kingdon
Offshore NV, dated August 13, 1996, incorporated herein by reference
to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
10(v)(2) 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(v)(3) 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 herein by reference to Exhibit
10(d) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996.
11 Computation of net (loss) per share.
21 Subsidiaries.
23(a) Consent of Richard A. Eisner & Company, L.L.P.
27 Financial Data Schedule.
99 Letter from Peters Elworthy & Moore, Chartered Accountants, to
Richard A. Eisner & Company regarding audited financial statements
of the Company's U.K. subsidiaries and reports of Peters Elworthy &
Moore, Chartered Accountants, on their audits of such financial
statements.
- -----------------------
* Pertains to a management contract or compensation plan or arrangement.
** Confidential treatment requested for portions of this document. Such
portions have been omitted from the document and identified by asterisks. Such
portions also have been filed separately with the Commission pursuant to the
Company's application for confidential treatment.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
Exhibit 10(q)(2)
(NCT Letterhead)
May 21, 1996
Dr. Jonathan Charry
QuietPower Systems, Inc.
1675 Broadway, Suite 2600
New York, NY 10019
Dear Jonathan:
This letter, when countersigned by you on behalf of QuietPower Systems, Inc.
("QuietPower"), will constitute a further amendment to the Master Agreement
dated March 27, 1995 as amended by the memorandum signed by you on behalf of
QuietPower on March 29, 1995, and Stephen J. Fogarty on behalf of Noise
Cancellation Technologies, Inc. ("NCT") on March 28, 1995, and the Letter
Agreement dated April 21, 1995 (collectively the "Master Agreement").
1. The exclusivity fee payable to NCT pursuant to Section 3.1 of the Master
Agreement shall be paid as follows:
(a) $25,000.00 shall be paid at the closing of the first $200,000.00 tranche
of financing to be provided by Sundance Venture Partners ("Sundance") to
QuietPower, and
(b) all outstanding arrearages under the payment schedule set forth in the
April 21, 1995 Letter Agreement shall be paid at the closing of the second
$300,000.00 tranche of the Sundance financing.
In no event shall such $25,000.00 payment be made any later than June 1, 1996
and in no event shall payment of the full amount of such arrearages be made
later than June 15, 1996. In the event either of such payments have not been
made on or before the applicable date set forth in the immediately preceding
sentence, the Master Agreement and all rights granted to QuietPower shall
immediately terminate and no longer be of any force or effect, and all amounts
to be paid to NCT by QuietPower under the Master Agreement, the Note provided
for therein and this letter which remain unpaid shall be immediately due and
payable in full without further notice or demand.
2. The "Debt" owed to NCT described in paragraph 3 of the April 21, 1995 Letter
Agreement shall be paid as follows:
(a) $25,000.00 shall be paid at the closing of the second tranche of the
Sundance financing described in paragraph 1 above, and
(b) the balance of such Debt and all other indebtedness not hereinbefore
specifically provided for shall be paid in monthly installments of
$15,000.00 each on the first day of each month commencing with the first
day of the month following the month in which the closing of the second
tranche of Sundance financing occurs. In addition, one half of the total
amount of such indebtedness which remains unpaid at the closing
of the contemplated $1,000,000.00 private placement to be managed by
Ringhorne, Horn, Konsult AB shall be paid to NCT at such closing and the
full amount thereof shall be paid no later than thirty (30) days
following the closing of QuietPower's contemplated public offering of
securities.
Any default in the timely payment of any of the payments set forth in this
paragraph 2 shall cause the immediate termination of the Master Agreement and
any and all rights and licenses granted to QuietPower thereunder and all amounts
remaining due and payable to NCT by QuietPower under the Master Agreement, the
Note provided for therein and this letter which remain unpaid shall be
immediately due and payable in full without further notice or demand. With
respect to any $15,000.00 monthly installment described in clause (b) above,
payment shall be deemed to have been timely made if received by NCT within ten
(10) days of NCT's notice to QuietPower that such installment has not been
received.
3. Clause (a) of Section 2.1 of the Master Agreement is hereby amended to remove
the qualifications to QuietPower's exclusive rights in the Far East provided,
however, that in the event QuietPower's activities in the Far East give rise to
any claims by third parties for a sales commissions, fees or other compensation
or consideration related to such activities whether sought from NCT or
QuietPower, QuietPower shall be solely responsible for the full payment of such
claims.
4. Sections 4.1 and 4.2 of the Master Agreement are amended to provide that
QuietPower is free to fund product development work itself or through a third
party without the precondition of first negotiating with NCT a mutually
acceptable "Development Schedule" as therein defined provided, however, that
nothing in this amendment shall reduce in any way QuietPower's royalty
obligations to NCT.
5. Clause (a)(iv) of Section 5.2 is amended to eliminate QuietPower's obligation
to pay NCT "a royalty of six (6%) percent of the alternatively manufactured
cost" provided for therein and Clause (a)(i) of Section 3.2 is amended to
increase the royalty on the Gross Revenues provided for therein from six percent
(6%) of all such Gross Revenues received by QuietPower to nine percent (9%) of
the first $6,000,000.00 of such Gross Revenues received by QuietPower and six
percent (6%) of all such Gross Revenues received by QuietPower in excess of
$6,000,000.00.
6. It is understood that QuietPower intends to purchase piezo ceramic actuators
for transformer quieting applications from NCT provided NCT can meet the cost,
quality and deliverability requirements of QuietPower.
Kindly signify QuietPower's agreement to the foregoing by executing a
counterpart of this letter in the space provided below and returning it by
facsimile transmission confirmed by delivery of an executed copy by regular
mail.
Sincerely,
/s/ MICHAEL J. PARRELLA
- -----------------------
Michael J. Parrella
President
Agreed
and
Accepted:
QuietPower Systems, Inc.
By: /s/ JONATHAN M. CHARRY
----------------------
Jonathan M. Charry, President
Exhibit 10(q)(3)
(NCT Letterhead)
April 8, 1997
Dr. Jonathan Charry
QuietPower Systems, Inc.
1675 Broadway, Suite 2600
New York, NY 10019
Dear Jonathan:
This letter, when countersigned by you on behalf of QuietPower Systems, Inc.
("QuietPower"), will constitute a further amendment to the Master Agreement
dated March 27, 1995 as amended by the memorandum signed by you on behalf of
QuietPower on March 29, 1995, and Stephen J. Fogarty on behalf of Noise
Cancellation Technologies, Inc. ("NCT") on March 28, 1995, the Letter Agreement
dated April 21, 1995 and the Letter Agreement dated May 21, 1996 (collectively
the "Master Agreement").
1. As of the date hereof there is an outstanding balance payable by QuietPower
to NCT with respect to the exclusivity fee as provided under Section 3.1 of the
Master Agreement, as amended. This amount shall continue to be paid at the rate
of $8,333.00 per month, payable on the twenty-first day of each month until
payment in full has been received. With respect to any such $8,333.00 monthly
payment, payments shall be deemed to have been timely made if received by NCT
within 5 days of the due date. No notice of payment or of default in any such
payment shall be required.
2. As of the date hereof there is an outstanding balance payable by QuietPower
to NCT with respect to the "Debt" owed to NCT described in Paragraph 3 of the
April 21, 1995 Letter Agreement. QuietPower is in arrears with respect to the
payments of the Debt which were to be made under the terms of the April 21, 1995
Letter Agreement. Accordingly, this amount shall be paid to NCT by QuietPower as
follows:
(a) $125,000 shall be paid on or before April 21, 1997.
(b) $200,000 shall be paid upon the earlier of: (i) the closing date of the
contemplated initial public offering of QuietPower's common stock
scheduled to occur in June, 1997, or (ii) January 1, 1998.
(c) Until both of the payments described in clauses (a) and (b) above have
been received by NCT, QuietPower will pay NCT 15% of all funds received by
QuietPower from all financing activities other than the public offering
referred to in clause (b)(i) and NCT shall credit all amounts received by
it under this clause (c) against the amount owed by QuietPower with
respect to the Debt.
(d) After July 1, 1997, QuietPower shall pay interest to NCT at the rate of
10% per annum on the unpaid balance of the Debt, such interest to be paid
quarterly on the first day of each calendar quarter.
The foregoing amounts do not include the amount of $11,107.55 which QuietPower
owes to NCT for headset products delivered to or for the account of QuietPower
during 1996. This amount (the "Headset Amount") shall be paid to NCT by
QuietPower by April 15, 1997.
3. All payments to be made to NCT hereunder shall be by wire transfer in
accordance with NCT's instructions or by delivery of QuietPower's good,
collectible check, drawn on immediately available New York, New York funds.
4. In the event any payment provided for herein is not received by NCT on the
applicable date and in the form set forth in Paragraph 3 above, NCT shall have
the right to terminate the Master Agreement and all rights granted thereunder to
QuietPower forthwith. Such termination shall be effective immediately upon
QuietPower's receipt of NCT's notice of termination and all amounts to be paid
to NCT by QuietPower under the Master Agreement with respect to the exclusivity
fee, the Debt (in the full amount outstanding on the date hereof irrespective of
the amounts set forth in Paragraph 2 above) and the Headset Amount which remain
unpaid shall be immediately due and payable in full without further notice or
demand.
Kindly signify QuietPower's agreement to the foregoing by executing a
counterpart of this letter in the space provided below and returning it by
facsimile transmission confirmed by delivery of an executed copy by regular
mail.
Sincerely,
/s/ MICHAEL J. PARRELLA
- -----------------------
Michael J. Parrella
President
Agreed
and
Accepted:
QuietPower Systems, Inc.
By: /s/ JONATHAN M. CHARRY
----------------------
Jonathan M. Charry, President
Exhibit 21
NOISE CANCELLATION TECHNOLOGIES, INC.
SUBSIDIARIES
Jurisdiction
Name of Incorporation
Ownership or Organization Equity
NCT Muffler, Inc. Delaware 100%
NCT Far East, Inc. Delaware 100%
NCT Medical Systems, Inc. Delaware 90%
Noise Cancellation Technologies, UK 100%
(UK)
Limited
2020 Science Limited UK 100%
Analog/NCT Supply Ltd. Delaware 50%
Chaplin Patents Holding Co., Inc. Delaware 100%
Harris NCT Supply L.L.C. Delaware 50%
OnActive Technologies, L.L.C. Delaware 42.5%
Exhibit 23(a)
(Richard A. Eisner & Company, L.L.P. Letterhead)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements
of Noise Cancellation Technologies, Inc. on Form S-3 (File Nos. 33-47611,
33-51468, 33-74442, 33-84694 and 333-10545), on Form S-1 (File Nos. 33-19926,
33-38584 and 33-44790) and on Form S-8 (File No. 33-64792, 333-11209 and
333-11213) of our report, which contains an exception for the omission of
information required under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", dated February 28, 1997 (with respect
to Note 15, March 28, 1997, and Note 8, April 10, 1997, respectively), on our
audits of the consolidated financial statements and schedules of the Company as
of December 31, 1996, December 31, 1995 and for the years ended December 31.
1996, December 31, 1995 and December 31, 1994 which report is included in this
Annual Report on Form 10-K.
/s/ RICHARD A. EISNER & COMPANY, L.L.P.
New York, New York
April 10, 1997
Exhibit 99
[PETERS ELWORTHY & MOORE LETTERHEAD]
Salisbury House, Station Road
Cambridge CB1 2LA England
Date: 13 March 1997
Our Ref: PRC/J/5799
Mr. R. Soreff
Richard A. Eisner & Company
575 Madison Avenue
New York, NY 10022-2597 USA
Dear Sirs:
We enclose the audited financial statements for Noise Cancellation Technologies
(UK) Limited for the year ended 31 December 1996.
These statements have been prepared in accordance with applicable Accounting
Standards in the United Kingdom and audited in accordance with Auditing
Standards issued by the Auditing Practices Board.
As a result of our review of the financial statements we are not aware of any
significant deviations from United States generally accepted accounting
principles.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
Noise Cancellation Technologies (UK) Ltd
Auditors' Report to the Shareholders
on the Financial Statements for the year ended 31 December 1996
We have audited the financial statements on pages 6 to 15, which have been
prepared under the historical cost convention and the accounting policies set
out on page 10.
Respective Responsibilities of the Directors and Auditors
As described on page 4 the Company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report out
opinion to you.
Basis of Opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the Company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all information and
explanations which we consider necessary in order to provide us with sufficient
evidence to give reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of the information in the financial statements.
Going Concern
In forming our opinion, we have considered the adequacy of the disclosures made
in note 1 of the financial statements concerning the Company's operational
results and financial position. In view of the significance of the Company
continuing to generate adequate working capital, and its reliance on continued
financial support from the parent company we consider that it should be drawn to
your attention but our opinion is not qualified in this respect.
Opinion
In our opinion the financial statements give a true and fare view of the state
of the Company's affairs as at 31 December 1996 and of its loss for the year
then ended and have been properly prepared in accordance with the provisions of
the Companies Act 1985 applicable to small companies.
/s/ PETERS ELWORTHY & MOORE
Chartered Accountants and
Registered Auditor
Cambridge
7 March 1997
SIGNATURES
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 Date: April 15, 1997
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
-----------------------------------------------------------------------
/s/ MICHAEL J. PARRELLA President and Director April 15, 1997
------------------------ (Principal Executive
Michael J.Parrella Officer)
/s/ STEPHEN J. FOGARTY Senior Vice President and April 15, 1997
------------------------ Chief Financial Officer
Stephen J. Fogarty (Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Chairman of the Board April 15, 1997
------------------------ of Directors and Director
Jay M. Haft
/s/ JOHN J. McCLOY II Director April 15, 1997
------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director April 15, 1997
------------------------
Samuel A. Oolie
F-3
(Richard A. Eisner & Company, L.L.P. Letterhead)
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
Noise Cancellation Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Noise
Cancellation Technologies, Inc. and subsidiaries as at December 31, 1995 and
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
1994, 1995 and 1996 financial statements of the Company's two foreign
subsidiaries. These subsidiaries accounted for revenues of approximately
$1,800,000, $1,200,000 and $407,000 for the years ended December 31, 1994,
December 31, 1995 and December 31, 1996, respectively, and assets of
approximately $1,900,000, $586,000 and $515,000 at December 31, 1994, December
31, 1995 and December 31, 1996, respectively. These statements were audited by
other auditors whose reports have been furnished to us, one of which contained a
reference to the uncertainty relating to the Company's ability to continue as a
going concern. Our opinion, insofar as it relates to the amounts included for
these entities, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As indicated in Note 7, the Company has not provided the information
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123") which it contemplates filing by
amendment.
In our opinion, based on our audits and the reports of the other auditors,
except for the omission of information required under SFAS No. 123 as discussed
in the preceding paragraph, the financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of Noise
Cancellation Technologies, Inc. and subsidiaries as at December 31, 1995 and
December 31, 1996 and the results of their operations and cash flows for each of
the years in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has incurred recurring operating
losses, has a working capital deficiency at December 31, 1996 and will require
additional financing. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/ RICHARD A. EISNER & COMPANY, L.L.P.
New York, New York
February 28, 1997
With respect to Note 15
March 28, 1997
With respect to Note 8
April 10, 1997
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
---------------------------------
ASSETS 1995 1996
---------------------------------
Current assets:
Cash and cash equivalents (Notes 1 and 2) $ 1,831 $ 368
Accounts receivable (Notes 2 and 3):
Trade :
Technology licensing fees -- 150
Joint ventures and affiliates 241 2
Other 189 392
Unbilled 260 63
Allowance for doubtful accounts (119) (123)
-------- --------
Total accounts receivable $ 571 484
Inventories, net of reserves (Notes 2 and 4) 1,701 900
Other current assets 225 207
-------- --------
Total current assets $ 4,328 $ 1,959
Property and equipment, net (Notes 2 and 5) 2,897 2,053
Patent rights and other intangibles, net (Notes 2 and 14) 2,194 1,823
Other assets 164 46
-------- --------
$ 9,583 $ 5,881
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,836 $ 1,465
Accrued expenses 571 1,187
Accrued payroll, taxes and related expenses 144 618
Customers' advances 43 1
-------- --------
Total current liabilities $ 2,594 $ 3,271
-------- --------
Long term obligations $ 105 --
-------- --------
Total other liabilities $ 105 --
-------- --------
Commitments and contingencies (Notes 3, 10 and 11)
STOCKHOLDERS' EQUITY (Notes 6 and 7)
Preferred stock, $.10 par value, 10,000,000 shares authorized, none issued
Common stock, $.01 par value, 140,000,000 shares authorized; issued and
outstanding 92,828,407 and 111,614,405
shares, respectively $ 928 $ 1,116
Additional paid-in-capital 78,667 85,025
Accumulated deficit (72,848) (83,673)
Cumulative translation adjustment 150 142
Common stock subscriptions receivable (13) --
-------- --------
Total stockholders' equity $ 6,884 $ 2,610
-------- --------
$ 9,583 $ 5,881
======== ========
Attention is directed to the foregoing accountant's reports and to the
accompanying notes to the consolidated financial statements.
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------------
1994 1995 1996
------------------------------------------
REVENUES:
Technology licensing fees (Notes 2 and 3) $ 452 $ 6,580 $ 1,238
Product sales, net 2,337 1,589 1,379
Engineering and development services 4,335 2,297 547
------------- ------------ ------------
Total revenues $ 7,124 $ 10,466 $ 3,164
------------- ------------ ------------
COSTS AND EXPENSES:
Costs of sales $ 4,073 $ 1,579 $ 1,586
Costs of engineering and development services 4,193 2,340 250
Selling, general and administrative 9,281 5,416 4,890
Research and development (including $500,000
of purchased research and development in 1994) 9,522 4,776 6,974
Equity in net loss (income) of unconsolidated
affiliates 1,824 (80) 80
Provision for doubtful accounts 718 552 192
Interest expense 7 4 45
Interest income (587) (53) (28)
------------- ------------ ------------
Total costs and expenses $ 29,031 $ 14,534 $ 13,989
------------- ------------ ------------
NET (LOSS) $ (21,907) $ (4,068) $ (10,825)
============= ============ ============
Weighted average number of common
shares outstanding 82,906 87,921 101,191
============= ============ ============
NET LOSS PER COMMON SHARE $ (.26) $ (.05) $ (.11)
============= ============ ============
Attention is directed to the foregoing accountant's reports and to the
accompanying notes to the consolidated financial statements.
- ------------------------------------------------------------------------------
F-4
- ------------------------------------------------------------------------------
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
Expenses
Common Stock Additional Cumulative Stock to be
-------------------- Paid-In Accumulated Translation Subscription Paid With
Shares Amount Capital eficit Adjustment Receivable Common Stock Total
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1993 81,251 $ 813 $ 71,244 $ (46,873) $ 94 $ (1,993) $ (46) $ 23,239
Shares issued for acquisition
of certain assets 2,025 20 2,206 - - - - 2,226
Consulting expense attributable
to warrants - - 10 - - - - 10
Shares issued upon exercise of
warrants & options 2,208 22 944 - - - - 966
Receipt of services in payment
of stock subscription - - - - - 797 - 797
Settlement of obligations 560 6 694 - - - (700) -
Net loss - - - (21,907) - - - (21,907)
Translation adjustment - - - - 58 - - 58
Restricted shares issued for
Director's compensation 45 - 99 - - - - 99
Expenses related to prior sale
of common stock - - (20) - - - - (20)
---------- --------- --------- --------- --------- --------- ---------- ---------
Balance at December 31, 1994 86,089 $ 861 $ 75,177 $ (68,780) $ 152 $ (1,196) $ (746) $ 5,468
Sale of common stock, less
expenses of $271 6,800 68 3,921 - - - - 3,989
Consulting expense attributable
to warrants - - 8 - - - - 8
Shares issued upon exercise of
warrants & options 1,050 10 692 - - (13) - 689
Receipt of services in payment
of stock subscription - - - - - 1,196 - 1,196
Settlement of obligations - - (344) - - - 746 402
Net loss - - - (4,068) - - - (4,068)
Translation adjustment - - - - (2) - - (2)
Retirement of shares attributable
to license revenue (Note 3) (1,110) (11) (787) - - - - (798)
--------- --------- --------- --------- --------- --------- --------- ----------
Balance at December 31, 1995 92,829 $ 928 $ 78,667 $ (72,848) 150 $ (13) - $ 6,884
Sale of common stock, less
expenses of $245 18,595 186 6,178 - - 13 - 6,377
Shares issued upon exercise
of warrants & options 204 2 102 - - - - 104
Net loss - - - (10,825) - - - (10,825)
Translation adjustment - - - - (8) - - (8)
Restricted shares issued for
Director's compensation 20 - 13 - - - - 13
Consulting expense attributable
to options - - 96 - - - - 96
Retirement of shares related
to patent acquisition (25) - (26) - - - - (26)
Retirement of shares in
settlement of employee
receivable (8) - (5) - - - - (5)
--------- --------- --------- --------- --------- --------- --------- ---------
========= ========= ========= ========= ========= ========= ========= =========
Balance at December 31, 1996 111,615 $ 1,116 $ 85,025 $ (83,673) $ 142 $ - $ - $ 2,610
========= ========= ========= ========= ========= ========= ======== =========
Attention is directed to the foregoing accountant's reports and to the
accompanying notes to the consolidated financial statements.
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years
Ended December 31,
--------------------------------------------------------------
1994 1995 1996
------------------- -------------------- --------------------
Cash flows from operating activities:
Net loss $ (21,907) $ (4,068) $ (10,825)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 994 1,127 1,000
Common stock and warrants issued as consideration for:
Compensation 109 8 109
Rent and marketing expenses - 355 -
Research and development 500 - -
Common stock retired in settlement of employee account
receivable - - (5)
Receipt of license fee in exchange for inventory and
release of obligation - (3,266) -
Receipt of services in payment of stock subscription 165 - -
Provision for slow moving and obsolete inventory 2,032 - -
Provision for tooling costs and write-off 100 94 371
Provision for doubtful accounts 718 552 192
Realized loss on sale of short-term investments 375 - -
Equity in net loss (income) of unconsolidated affiliates 1,824 (80) 80
Unrealized foreign currency (gain) loss 16 32 (45)
Loss on disposition of fixed assets - 107 83
Disposition of short-term investments 18,527 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (921) 302 61
(Increase) decrease in license fees receivable 180 - (150)
(Increase) decrease in inventories (1,518) 212 813
(Increase) decrease in other assets (283) 299 67
Increase (decrease) in accounts payable and
accrued expenses 283 (190) 55
Increase (decrease) in other liabilities (1,324) (482) 436
------------------- -------------------- --------------------
Net cash used in operating activities $ (130) $ (4,998) $ (7,758)
------------------- -------------------- --------------------
Cash flows from investing activities:
Capital expenditures $ (1,286) $ (80) $ (186)
Acquisition of patent rights (70) (210) -
Investment in joint ventures (191) - -
Sales of short term investments - 18 -
------------------- -------------------- --------------------
Net cash used in investing activities $ (1,547) $ (272) $ (186)
------------------- -------------------- --------------------
Cash flows from financing activities:
Proceeds from:
Sale of common stock $ - $ 3,989 $ 6,377
Expenses related to prior sale of common stock (20) - -
Exercise of stock purchase warrants and options 966 689 104
------------------- -------------------- --------------------
Net cash provided by financing activities $ 946 $ 4,678 $ 6,481
------------------- -------------------- --------------------
Net decrease in cash and cash equivalents $ (731) $ (592) $ (1,463)
Cash and cash equivalents - beginning of period 3,154 2,423 1,831
------------------- -------------------- --------------------
Cash and cash equivalents - end of period $ 2,423 $ 1,831 $ 368
=================== ==================== ====================
Cash paid for interest $ 7 $ 4 $ 4
=================== ==================== ====================
Non-cash investing and financing activity:
Issuance of common stock in exchange
for certain assets of ANVT $ 2,200 $ - $ -
=================== ==================== ====================
See Notes 6, 8 and 11 with respect to settlement of certain obligations by
issuance of securities and see Note 3 with respect to issuance of common stock
in exchange for notes receivable.
Attention is directed to the foregoing accountant's reports and to the
acompanying notes to the consolidated financial statements.
F-38
[GRAPHIC OMITTED]
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. Background:
Noise Cancellation Technologies, Inc. ("NCT" or the "Company") is engaged in
the design, development, licensing, production and distribution of electronic
systems for Active Wave ManagementTM including systems that electronically
reduce noise and vibration, principally through joint ventures and other forms
of strategic alliances. The Company's systems are designed for integration into
a wide range of products serving markets in the transportation, manufacturing,
commercial, consumer products and communications industries. The Company's
activities to date have principally involved the developing of its electronic
systems for commercial use and providing engineering and development services
under contracts with strategic partners and third parties.
The technology supporting the Company's electronic systems was developed
using technology maintained under various patents (the "Chaplin Patents") held
by Chaplin-Patents Holding Co., Inc. ("CPH") as well as patented technology
acquired or developed by the Company. CPH, formerly a joint venture with Active
Noise Vibration Technologies, Inc. ("ANVT") was established to maintain and
defend these patent rights. The former joint venture agreement relating to the
Chaplin Patents required that the Company only license or share the related
technology with entities who are affiliates of the Company. As a result, the
Company established various joint ventures and formed other strategic alliances
(see Note 3.) to further develop the technology and electronic systems and
components based on the Chaplin Patents, to develop such technology into
commercial applications, to integrate the electronic systems into existing
products and to distribute such systems and products into various industrial,
commercial and consumer markets.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $83.7 million on a
cumulative basis through December 31, 1996 and has a working capital deficiency
of $1.3 million at December 31, 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. As discussed in
Note 3., 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 the 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 and cash equivalents amount to $0.4 million at December 31, 1996,
decreasing from $1.8 million at December 31, 1995. Management does not believe
that available funds at December 31, 1996 are sufficient to sustain the Company
for the next twelve months. Management believes that cash and the cash
anticipated from the exercise of warrants and options, the funding derived from
forecasted technology license fees, royalties, and product sales, and
engineering and development revenue, the operating cost savings from the
reduction in employees, reduced capital expenditures, and the sale of the
debentures referred to below (see Notes 6. And 7.) should be sufficient to
sustain the Company's anticipated future level of operations into 1998. However,
the period during 1998 through which it can be sustained is dependent upon the
level of realization of funding from technology license fees, royalties and
product sales, and engineering and development revenue and the achievement of
the operating cost savings from the events described above, all of which are
presently uncertain.
There can be no assurance that additional funding will be provided by
technology license 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 (see Note 15. with
respect to recent financing).
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 in the preceding paragraphs raise substantial doubt at
December 31, 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. Summary of Significant Accounting Policies:
Consolidation:
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material inter-company transactions and account balances
have been eliminated in consolidation.
Unconsolidated affiliates include joint ventures and other entities not
controlled by the Company, but over which the Company maintains significant
influence and in which the Company's ownership interest is 50% or less. The
Company's investments in these entities are accounted for on the equity method.
When the Company's equity in cumulative losses exceeds its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method (see Note 3.). 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.
Revenue Recognition:
Products Sales:
Revenue is recognized as the product is shipped.
Engineering and development services:
Revenue from engineering and development contracts is recognized and billed
as the services are performed. However, revenue from certain engineering and
development contracts are recognized as services are performed under the
percentage of completion method after 10% of the total estimated costs have been
incurred. Under the percentage of completion method, revenues and gross profit
are recognized as work is performed based on the relationship between actual
costs incurred and total estimated costs at completion. Estimated losses are
recorded when identified.
Revenues recorded under the percentage of completion method amounted to
$249,700, $249,000 and $9,000 for the years ended December 31, 1994, 1995 and
1996, respectively. Retainage balances were $8,200 at December 31, 1996 and
1995. The 1996 balance is expected to be collected within one year.
Technology Licensing Fees:
Technology licensing fees paid by joint venturers, co-venturers, strategic
partners or other licensees which are nonrefundable, are recognized in income
upon execution of the license agreement or upon completion of any performance
criteria specified within the agreement. See Note 3, with respect to the license
fee recorded by the Company in connection with the Walker Noise Cancellation
Technologies and Ultra Electronics, Ltd. Transactions in 1995.
Cash equivalents and short-term investments:
The Company considers all money market accounts and investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
Short-term investments principally comprise high quality investments in
fixed-income securities funds and mid-term, high quality bond funds.
Inventories:
Inventories are stated at the lower of cost (first in, first out) or market.
With regard to the Company's assessment of the realizability of inventory,
the Company periodically conducts a complete physical inventory; currently this
is done on a quarterly basis. At the same time, the Company reviews the movement
of inventory on an item by item basis to determine the value of items which are
either slow moving or have become obsolete since the last quarterly review.
After applying the above noted measurement criteria, as well as looking forward
to assess the potential for near term product engineering changes and/or
technological obsolescence, the Company determines the current need for
inventory reserves. After applying the above noted measurement criteria at
December 31, 1996, and December 31, 1995, the Company determined that a reserve
of $262,000 and $355,000, respectively, was adequate.
Property and Equipment:
Property and equipment are stated at cost and depreciation is recorded on the
straight-line method over the estimated useful lives of the respective assets.
Leasehold improvements are amortized over the shorter of their useful lives or
the related lease term.
Patent Rights:
Patent rights are stated at cost and are amortized on a straight line basis
over the remaining average life of the patents (ranging from 1 to 15 years).
Amortization expense was $166,700, $398,100 and $403,500 for 1994, 1995 and
1996, respectively. Accumulated amortization was $1,074,800 and $1,478,300 at
December 31, 1995 and 1996, respectively.
It is the Company's policy to review its individual patents on a regular
basis to determine whether any event has occurred which could impair the
valuation of any such patent.
Foreign currency translation:
The financial statements for the United Kingdom operations are translated
into U.S. dollars at year-end exchange rates for assets and liabilities and
weighted average exchange rates for revenues and expenses. The effects of
foreign currency translation adjustments are included as a component of
stockholders' equity and gains and losses resulting from foreign currency
transactions are included in income.
Loss per common share:
The net loss per common share has been determined on the basis of the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents (including stock options and warrants) have not been
considered since their effect would be antidilutive.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, short-term
investments and trade receivables. The Company primarily holds its cash and cash
equivalents in two banks. Deposits in excess of federally insured limits were
$0.2 million at December 31, 1996. The Company had no short-term investments at
December 31, 1996. The Company sells its products and services to original
equipment manufacturers, distributors and end users in various industries
worldwide. As shown below, the Company's five largest customers accounted for
approximately 58% of revenues during 1996 and 45% of gross accounts receivable
at December 31, 1996. The Company does not require collateral or other security
to support customer receivables.
As of December 31, 1996,
and for the Year then Ended
---------------------------------
Accounts
Customer Receivable Revenue
-------- ---------- ----------
Johnson Controls, Inc. $ 4,500 $ 712,500
Rockwell International 150,000 500,000
Telex Communications, Inc. 73,600 168,800
Siemens Medical Systems, Inc. 3,500 319,100
Brookstone 42,600 145,600
All Other 209,600 1,317,600
---------- ----------
Total $ 483,800 $3,163,600
========= ==========
The Company regularly assesses the realizability of its accounts receivable
and performs a detailed analysis of its aged accounts receivable on no less than
a quarterly basis. When quantifying the realizability of accounts receivable,
the Company takes into consideration the value of receivables in the 90+ day
category, the nature of disputes, if any, and the progression of conversations
and/or correspondence between the Company and customers regarding the underlying
cause for the age of such receivables. After applying the above noted
measurement criteria as of December 31, 1996 and December 31, 1995, the Company
determined that a reserve of $123,000 and $119,000, respectively, was adequate.
Reclassifications:
Certain reclassifications have been made to the 1994 financial statements
to conform with the 1995 and 1996 presentation.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation:
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). The
provisions of SFAS No. 123 allow the Company to either expense the estimated
fair value of stock options and warrants or to continue to follow the intrinsic
value method set forth in APB Opinion 25, "Accounting for Stock Issued to
Employees" (APB 25) but disclose the pro forma effects on net income (loss) had
the fair value of the options or warrants been expensed. The Company has elected
to continue to apply APB 25 in accounting for its stock option and warrant
incentive plans. Please refer to Note 7. for further information.
3. Joint Ventures and Other Strategic Alliances:
The following is a summary of the Company's joint ventures and other
strategic alliances as of December 31, 1996.
The Company and certain of its wholly-owned subsidiaries have entered into
agreements to establish joint ventures and other strategic alliances related to
the design, development, manufacture, marketing and distribution of its
electronic systems and products containing such systems. These agreements
generally provide that the Company license technology and contribute a nominal
amount of initial capital and that the other parties provide substantially all
of the funding to support the venture or alliance. This support funding
generally includes amounts paid or services rendered for engineering and
development. In exchange for this funding, the other party generally receives a
preference in the distribution of cash and/or profits from the joint ventures or
royalties from these alliances until such time that the support funding (plus an
"interest" factor in some instances) is recovered. At December 31, 1996, there
were no preferred distributions due to joint venture partners from future
profits of the joint ventures.
Technology licensing fees and engineering and development fees paid by joint
ventures to the Company are recorded as income since there is no recourse to the
Company for these amounts or any commitment by the Company to fund the
obligations of the venture.
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. The aggregate amount of the
Company's share of losses in these joint ventures in excess of the Company's
investments which has not been recorded was zero at December 31, 1996. 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.
Certain of the joint ventures will be suppliers to the Company and to other
of the joint ventures and will transfer products to the related entities based
upon pricing formulas established in the agreements. The formula is generally
based upon fully burdened cost, as defined in the agreements, plus a nominal
profit.
Total revenues recorded by the Company relating to the joint ventures and
alliances, or their principals, for technology licensing fees, engineering and
development services and product sales were as follows:
Years Ended December 31,
Joint Venture/Alliance 1994 1995 1996
Walker Noise Cancellation $1,701,700 $3,993,500 $90,100
Technologies
Ultra Electronics, Ltd. 1,072,400 3,153,400 61,700
ELESA --- 424,000 28,300
Siemens Medical Systems, Inc. 533,000 259,900 319,100
Foster/NCT Supply, Ltd. 144,700 133,200 9,700
AB Electrolux 162,500 129,000 12,000
Interkeller AG 105,600 --- ---
Johnson Controls, Inc. --- --- 712,500
---------- ---------- ----------
Total $3,719,900 $8,093,000 $1,233,400
========== ========== ==========
Outlined below is a summary of the nature and terms of these ventures or
alliances:
Joint Ventures
Chaplin Patents Holding Company ("CPH") was co-owned on a 50/50 basis by the
Company and ANVT, a former competitor. On September 16, 1994, the Company
acquired the patents, technology, other intellectual property and certain
related tangible assets of ANVT. The Company also acquired all rights under
certain joint venture and customer agreements subject to the consent of the
other parties to those agreements. Included in the acquisition was ANVT's 50%
interest in CPH at which time the Company became the sole shareholder of CPH.
CPH acquired certain patent rights relating to the reduction and elimination of
noise and vibration from the Company, ANVT and a third party. The Company and
ANVT had licensed co-exclusive rights to the Chaplin Patents from CPH. The joint
venture agreement related to the Chaplin Patents required that the Company may
only license or share the related technology with entities who are affiliates of
the Company. As a result, the Company has established several joint ventures and
formed other strategic alliances to further develop the technology and
electronic systems and components based on the Chaplin Patents, to develop such
technology into commercial applications, to integrate the electronic systems
into existing products and to distribute such systems and products into various
industrial, commercial and consumer markets. Initial capital contributions by
the Company and ANVT of $150,000 each to CPH were used to acquire certain rights
owned by the third party. Pursuant to the patent license agreement, and until
September 16, 1994 the Company and ANVT contributed cash equally to CPH to fund
administrative costs and provide for maintenance and protection of the related
patents. After September 16, 1994, the Company, as sole shareholder of CPH, was
responsible for 100% of CPH's funding requirements.
Walker Noise Cancellation Technologies ("WNCT") was a 50/50 general
partnership between NCT Muffler, Inc., a wholly-owned subsidiary of the Company
and Walker Electronic Mufflers, Inc. ("WEM"), a wholly-owned subsidiary of
Tennessee Gas Pipeline 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 provided 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 Tenneco 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. The shares delivered to the Company were retired on
November 16, 1995. Accordingly, the Company recorded $3.6 million as a
technology licensing fee relating to the net effect of the above noted
Restructuring Agreements in the fourth quarter of 1995.
WNCT was established in 1989 to develop, manufacture and distribute active
mufflers for use in automobiles and other vehicles and other industrial
applications. The agreement between NCT and Walker was expanded and extended in
1991.
Initial capital contributions by the Company and WEM were $750,000 each, and
such amounts were paid by WNCT to the Company as a license fee in 1989. The
joint venture agreement provided that WEM will make preferred contributions to
WNCT for the purpose of funding engineering and development performed by the
Company and engineering performed by WEM. Aggregate preferred contributions made
by WEM to WNCT (net of return of capital advances to WEM) through December 31,
1994, amounted to $7.6 million, of which $4.2 million was paid to the Company
and $3.4 million was credited by WNCT to WEM's capital account for the cost of
engineering services performed. Interest on the engineering preferred
contributions and certain portions of the engineering and development
contributions was compounded monthly at 1% less than the bank prime rate until
repaid through preferred distributions. WEM's obligation to fund engineering and
development expired at the end of the first quarter of 1994.
The Company recorded income of $750,000 from the license fee in 1989. The
Company has also recorded as income its engineering and development payments
from WNCT, amounting to $1.1 million, $1.1 million and $0.7 million for each of
the years in the three year period ended December 31, 1995, respectively. The
Company recorded no such payments from WNCT in 1996. There is no recourse to the
Company for these payments. 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.
In December, 1993, Tenneco Automotive, a division of Tennessee Gas Pipeline
Company, purchased shares of common stock of the Company for $3.0 million in
cash, at a price per share of approximately $2.70, which was equal to 94% of the
price to the public of the shares of the Company's common stock then offered.
Immediately thereafter, the Company contributed $1.0 million to the capital of
WNCT, following which WNCT repaid $1.0 million of the capital advances made to
WNCT by WEM and representatives of WEM. The Company agreed to restructure WNCT.
Such restructuring would include giving WNCT worldwide rights for the
manufacture and sale of all muffler products except those manufactured and sold
in the consumer and defense markets. WNCT also would be expanded to have, in
addition to rights it has with respect to vehicular mufflers, worldwide rights
to all silencing and vibration applications (e.g., mufflers, cabin quieting,
engine mounts, fan quieting and engine block quieting) for all vehicles except
trains, aircraft and watercraft. In addition, the Company committed to help fund
$4.0 million of product and technology development work of the Company
attributable to WNCT. Also pursuant to the agreement with Tenneco Automotive,
Walker's right to acquire the Company's interest in WNCT upon the occurrence of
certain events was eliminated and Tenneco Automotive had the right to have a
representative serve on the Company's Board of Directors. The agreement with
Tenneco Automotive and the Company's related funding commitment resulted in 1993
recognition of $3.6 million of previously unrecognized losses and 1994
recognition of $1.4 million of current year losses with respect to the joint
venture with WEM. Such losses exceeding the Company's remaining investment in
WNCT amounted to $2.9 million at December 31, 1994. Of the $2.9 million, $1.5
million recorded as a current liability. The balance of $1.4 million was
classified as a long term liability. The above noted November 15, 1995
Restructuring Agreements significantly altered the foregoing terms of the
December 1993 agreement.
Prior to December 31, 1994, the Company's share of cumulative losses equaled
its investment and commitment to the joint venture. The Company had no further
obligation or intention to fund any additional losses therefore, the Company
suspended applying the equity method.
Foster/NCT Headsets International, Ltd. ("FNH") was a 50/50 joint venture
between Foster Electric Company, Ltd. ("Foster") and the Company. FNH was
established as a limited liability company in Japan in March 1991 to develop,
design, manufacture and sell active noise cancellation headset systems. FNH had
exclusive manufacturing rights for the headsets in the Far East and
non-exclusive marketing rights worldwide. Additionally, another joint venture
with Foster/NCT Supply, Ltd., ("FNS" as described below) served as a supply
joint venture for FNH.
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.
Initial capital contributions made by the Company and Foster under the FNH
joint venture agreement were 6.5 million yen (historical cost of approximately
$47,000) each. In March, 1994 the Company and Foster agreed to jointly and
equally increase the capitalization of FNH to a total of 52 million yen
resulting in the Company's additional investment of $191,000. The increase in
capitalization enabled FNH to launch an expanded marketing effort in the
Company's products in the Far East.
Under related agreements, Foster paid a license fee to the Company of $1
million, which was recognized as income in 1991, and agreed to pay an additional
$700,000 to the Company at a rate of two percent of sales after cumulative sales
by FNH reach $50 million and the accumulated deficit in FNH is reduced to zero.
The license fees paid to date in the amount of $1.0 million are not subject to
repayment.
As part of the February 10, 1995 agreement to dissolve the FNS joint venture,
(see FNS Note below) NCT has repurchased the exclusive manufacturing rights for
headsets in the Far East from Foster. The Company recorded a charge of $780,000
in 1994 relating to these transactions.
In return for technical and management assistance provided by Foster, FNH has
agreed to pay Foster up to an aggregate amount of $1.4 million based on three
percent of sales; the first $700,000 of which are to be paid without restriction
based upon sales amount, the remaining $700,000 begin to be paid to Foster when
the FNH accumulated deficit is reduced to zero. Through December 31, 1994, the
accumulated deficit of FNH was $543,000.
The Company's above noted incremental investment resulted in the recognition
of $42,000 of previously unrecognized losses and $149,000 of current losses with
respect to the FNH joint venture in 1994.
The Company has purchased certain tooling for use by FNH which it has
recorded on its books. The tooling will be amortized against products sold by
NCT.
Analog/NCT Supply Ltd. ("ADI/NCT") is a 50/50 joint venture between Analog
Devices, Inc. ("ADI") and the Company which was established in June 1992.
ADI/NCT was formed to design, develop and manufacture computer chips to be
incorporated into the Company's electronic systems. Initial capital
contributions by the Company and ADI were nominal. The joint venture and related
agreements provide that each party will bear their respective cost of design and
development of the computer chips. ADI will manufacture and sell the computer
chips to ADI/NCT, based on orders provided to ADI/NCT by the Company, at prices
to be agreed upon by the Company and ADI. Administrative services required by
ADI/NCT will be provided by ADI, the costs of which will be funded by the joint
venture. No such services have been charged to or incurred by the joint venture
as of December 31, 1996.
Harris/NCT Supply, L.L.C. ("HARNCT") is a 50/50 limited liability company
owned equally by Harris Corporation ("Harris") and the Company under a Limited
Liability Company Agreement concluded in September, 1993 (the "LLC Agreement").
HARNCT will develop and manufacture silicon chips to be incorporated into the
Company's electronic systems. Initial capital contributions by the Company and
Harris were nominal. The LLC Agreement provides that each party will bear their
respective cost of design and development of the silicon chips. Harris will
manufacture and sell the silicon chips to HARNCT, based on orders provided to
HARNCT by the Company, at prices to be agreed upon by the Company and Harris.
Administrative services required by HARNCT will be provided by Harris, the costs
of which will be funded by HARNCT. No such services have been charged to or
incurred by HARNCT as of December 31, 1996.
OnActive Technologies, L.L.C. ("OAT") is a limited liability company
currently owned 42.5% by Applied Acoustic Research, L.L.C. ("AAR"), 42.5% by the
Company and 15.0% by Hoover Universal, Inc., a wholly owned subsidiary of
Johnson Controls, Inc.("JCI") (collectively, the "Members") under an Operating
Agreement concluded in December, 1995 and amended in May, 1996. OAT will design,
develop, manufacture, market, distribute and sell Flat Panel Transducers(TM)
("FPT(TM)") and related components for use in audio applications and audio
systems installed in ground based vehicles. Initial capital contributions by the
Company and AAR were nominal and no Member is required to make any additional
contribution to OAT. In May, 1996, JCI acquired a $1.5 million, 15% equity
interest in OAT and acquired exclusive rights in the automotive OEM market to
certain of the Company's and AAR's related patents for a total of $1.5 million,
which was paid 50/50 to the Company and AAR. In connection therewith, the
Company recorded a license fee of $750,000 during the year ended December 31,
1996. The Operating Agreement provides that services and subcontracts provided
to OAT by the Members are to be compensated by OAT at 115% of the Members fully
burdened cost. However, during 1996, administrative services required by OAT
were provided by the Company and not charged to OAT. As of December 31, 1995 the
Company recognized $80,000 of income relating to its share of 1995 profit in
OAT. As of December 31, 1996 the Company reversed the $80,000 of income which
related to its share of the 1996 loss in OAT.
Foster/NCT Supply, Ltd., ("FNS") was a 30/70 joint venture between the
Company and Foster which was established in June 1991 to serve as a supply joint
venture for the Company's worldwide activities.
In late 1994, Foster and the Company agreed that the acquisition of certain
assets of ANVT by NCT (see Note 14.) removed the necessity for the continued
existence of FNS. An orderly liquidation of FNS was completed in April 1995. The
agreement provided for the Company's repurchase from Foster for $0.6 million of
the exclusive headset manufacturing rights in the Far East (see FNH note above)
and an immediate minimum 5% reduction in the price of headset products to be
produced by Foster for the Company. The Company accrued a $0.8 million charge in
1994 relating to this agreement, of which $0.2 million was reflected as a
current liability at December 31, 1994.
Capital contributions required under the joint venture agreement were 3
million yen from the Company and 7 million yen from Foster (approximately
$22,000 and $51,000, respectively). Foster was also required to provide
assistance to FNS for research and development activities amounting to $50,000
per month up to an aggregate of $1.2 million, which FNS was to repay to Foster
at the rate of one percent of the amount of each month's sales. There was no
recourse to the Company should FNS not record sufficient sales for Foster to
recover such research and development costs.
Boet Systeme Actif S.A. ("BSA") was a 49/51 joint venture between NCT
Muffler, Inc., a wholly-owned subsidiary of the Company, and S.A. Andre Boet
("Boet"), respectively. BSA was established in 1991 to develop, manufacture in
France, and sell worldwide NCT electronic silencers for use on non-automotive
internal combustion engines. BSA was responsible for the customization,
marketing and sales of the silencers. The Company was to assist BSA with product
development and employee training. All supplies were to be purchased by BSA from
either Boet or NCT Muffler. Initial capital contributions by NCT Muffler and
Boet were not significant.
As a result of the April, 1994 transfer to WNCT of the rights to market the
Company's industrial silencer products and anticipation of the Company's
November 15, 1995 agreement with Tenneco Automotive and Walker (see WNCT Note
above), in October, 1995 Boet assumed all liabilities of BSA and the Board of
Directors of BSA approved the dissolution of the joint venture.
BSA funded the Company's cost of research and engineering, at a predetermined
rate, and reimbursed materials, equipment, tools, supplies and out-of-pocket
expenses to Boet and the Company. The joint venture agreement provided that Boet
would advance funding for the development, operation and working capital needs
of BSA. BSA was to repay Boet through preferential distributions from its excess
cash in amounts not to exceed 20% of BSA's net income in each year. Boet
contributed an aggregate of approximately $496,000 to BSA through December 31,
1994, none of which was repaid.
Payments from BSA to the Company for research and engineering aggregated
approximately $120,000 through December 31, 1994. License fees from BSA to NCT
Muffler aggregated $240,000 through December 31, 1994. The above amounts were
recognized as income by the Company since there was no commitment or intention
for NCT Muffler to fund any obligations of BSA, nor was there any recourse to
NCT Muffler for these payments.
Other Strategic Alliances:
Foster and the Company entered into an agreement in December 1993, pursuant
to which Foster purchased shares of common stock at a value of $2.0 million (the
"Foster Shares"), at a price per share of approximately $2.70 equal to 94% of
the price to the public of the shares of common stock in the December 1993
offering. Foster paid the purchase price by means of a cash payment of one cent
($.01) per share (the par value of the common stock) and the delivery of a
series of promissory notes (the "Foster Notes") in an aggregate principal amount
equal to the balance of the purchase price. The Foster Notes were full recourse
notes of Foster bearing interest at one percent above the rate of three-year
United States Treasury Notes and were to mature on April 17, 1997. The Foster
Notes were secured by the Foster Shares until paid or "earned out" as described
in the next paragraph. The Foster Notes were recorded as a Common Stock
subscription receivable by the Company.
Foster and the Company entered into an agreement under which Foster provided
and the Company purchased $2.0 million of various product and market development
services deemed necessary by the Company for commercialization of several new
headset and other products and the further development of the Company's Japanese
markets. Upon completion of each such project or phase, the agreed budgeted
amount therefore was billed to the Company and paid, at the Company's election,
either in cash or by discharge of an equivalent amount of the Foster Notes, in
which an appropriate number of the Foster Shares were released from the
collateralization restrictions and the Common Stock subscription receivable was
reduced. During 1995, $1.3 million of such services and assets were purchased by
the Company and, at the Company's election was satisfied through the discharge
of an equivalent amount of the Foster Notes. As of December 31, 1995, the Foster
Notes have been paid-in-full.
Foster and the Company's wholly owned subsidiary, NCT Far East ("NCTFE")
entered into a marketing agreement in November 1991 under which Foster agreed to
fund up to $500,000 for the establishment of a marketing office in Tokyo. This
funding was reimbursed through the issuance of 150,000 shares of common stock of
the Company to Foster in 1992 and future payments to Foster by NCTFE equal to
25% of NCTFE pretax profits, as defined, until Foster has recovered 100% of
funding in excess of $300,000. The market value of the Company's common stock
issued to Foster ($300,000) was charged to operations in 1992. Through December
31, 1995, $185,200 has been funded by Foster under the marketing agreement.
Further, commissions payable by NCTFE to Foster under this agreement are based
upon sales by customer and 5% of any engineering and development or working
capital funding acquired through Foster's efforts.
Interkeller AG ("Interkeller"), a member of Rieter Holding Limited, and the
Company entered into a strategic alliance in June 1992 to improve the noise
reduction in vehicles through the combination of NCT's active cabin quieting
system ("ACQS") and Interkeller technology. Under the agreement, Interkeller
performed acoustic studies in the field of electronic cabin quieting in
vehicles, and the Company sold Interkeller a prototype ACQS and licensed
Interkeller the right to use related software in connection with acoustic
studies under the agreement, for which Interkeller has paid a license fee and
contributed $240,000 to the Company over a two year period, ending June 1994. As
of December 31, 1994, the Company has recognized cumulative license fee income
of $180,000 and $97,000 for consultation and development under the June 1992
agreement. The contract has not been renewed.
AB Electrolux ("Electrolux") and the Company entered into a Joint Development
Cooperation Agreement in June 1991 which provides for the Company to design,
develop and supply active systems for quieting certain Electrolux products.
Electrolux agreed to pay the Company $65,000 per month for two years, which the
Company has recorded as engineering and development income. These development
costs may be recovered by Electrolux through royalties on net sales to other
manufacturers of competing products up to 250% of the engineering and
development costs funded by Electrolux. Electrolux agreed to purchase components
for the manufacture of related systems for its products from the Company. If
Electrolux purchases such components from other sources, a royalty of 6% of the
net invoice price will be due to the Company.
Further, the Company granted Electrolux a worldwide non-exclusive license to
utilize related proprietary technology for the life of such patents for a fee of
$500,000 payable in monthly installments of $20,000, and agreed to limit the
Company's licensing of such technology to five white goods manufacturers for a
period of five years. In January 1994 such limitations on the Company's
technology licensing were terminated by an amendment to the original agreement.
The $500,000 license fee was recognized as income in 1991, all of which was paid
as of December 31, 1993.
Ultra Electronics Ltd. (formerly Dowty Maritime Limited) ("Ultra") and the
Company entered into a teaming agreement in May 1993 to collaborate on the
design, manufacture and installation of products to reduce noise in the cabins
of various types of aircraft. In accordance with the agreement, the Company
provided informational and technical assistance relating to the aircraft
quieting system and Ultra reimbursed the Company for expenses incurred in
connection with such assistance. Ultra was responsible for the marketing and
sales of the products. The Company was to supply Ultra with electronic
components required for the aircraft quieting system, at a defined cost, to be
paid by Ultra.
In March 1995, the Company and Ultra amended the 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.
Accordingly, the Company recorded $2.6 million as a technology licensing fee
relating to the net amount received from above noted amended teaming agreement
and the licensing and royalty agreement in the first quarter of 1995.
Siemens Medical Systems, Inc. ("Siemens") and NCT Medical Systems, Inc.
("NCTM"), a 90%-owned subsidiary of the Company, entered into an agreement in
March 1992 to supply Siemens with NCTM/MRI systems, a noise cancellation and
audio system for Magnetic Resonance Imaging systems ("MRI"), on an exclusive
basis at specified quantities over two years. In return, Siemens agreed to
utilize only NCTM/MRI systems in their MRI's during the two year period. During
1994, 1995 and 1996 NCTM has sold 48, 26 and 35 units, respectively, to Siemens.
In late November 1993, the Company and Siemens signed a new agreement,
superseding the 1992 agreement, which provides for the purchase by Siemens from
the Company of European and U.S. versions of the Company's MRI headsets suitable
for use with Siemens' MRI machines.
4. Inventories:
Inventories comprise the following:
December 31,
1995 1996
Components $716,200 $542,700
Finished goods 1,339,900 619,600
------------- -------------
Gross inventory $2,056,100 $1,162,300
Reserve for obsolete & slow moving (355,000) (262,100)
inventory
------------- -------------
Inventory, net of reserves $1,701,100 $900,200
============= =============
5. Property and Equipment:
Property and equipment comprise the following:
Estimated
Useful Life December 31,
(Years) 1995 1996
Machinery and equipment 5 $1,852,800 $1,763,000
Furniture and fixtures 5 777,600 749,200
Leasehold improvements 7-10 1,155,600 1,185,400
Tooling 1-3 1,430,300 1,061,900
Other 5-10 118,400 166,600
----------- -----------
Gross $5,334,700 $4,926,100
Less, accumulated depreciation (2,437,600) (2,873,600)
----------- -----------
Net $2,897,100 $2,052,500
=========== ===========
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
was $531,000, $588,000 and $518,000, respectively.
6. Common Stock:
Private Placements:
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 was subject to certain resale and transfer
restrictions including those under Regulation S of the United States Securities
Act of 1933, as amended.
The Company completed a private placement of 2.0 million shares of its common
stock on August 4, 1995 receiving approximately $0.7 million in net proceeds.
The purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation D of the Securities Act of 1933,
as amended. As provided for in the Stock Purchase Agreement, within nine months
of the closing date, the Company was obligated to file a registration statement
with the Securities and Exchange Commission covering the registration of the
shares for resale by the purchaser.
On March 28, 1996, the Company sold 2.0 million shares of its common stock in
a second private placement with the investor in the private placement described
in the preceding paragraph that provided net proceeds to the Company of $0.7
million under terms and conditions substantially the same as those of the
earlier private placement. A registration statement covering the 4.0 million
shares of the Company's common stock issued in connection with this private
placement and the one described in the preceding paragraph was declared
effective by the Commission on September 3, 1996.
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.
On July 17, 1996, the Company's stockholders authorized an increase in the
Company's authorized capital to 140,000,000 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.
On August 29, 1996, the Company sold 1.8 million shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common stock in November, 1995. The Company received $0.9 million of net
proceeds. The purchaser is subject to certain resale and transfer restrictions
with respect to these shares.
See Note 15. "Subsequent Events" with respect to private placements of the
Company's common stock subsequent to December 31, 1996.
Expenses paid with common stock:
During 1994, the Company entered into agreements with third parties to issue
common stock in satisfaction of certain obligations which amounted to $700,000.
Stock subscription receivable:
The $13,000 stock subscription receivable at December 31, 1995 was due from a
former director and was paid in 1996.
In December 1993, Foster and the Company entered into a definitive agreement
pursuant to which Foster purchased shares of common stock for a cash payment of
one cent ($.01) per share (the par value of the common stock) and the delivery
of a series of promissory notes (the "Foster Notes") in an aggregate principal
amount equal to the balance of the purchase price. The Foster Notes were full
recourse notes of Foster bearing interest at one percent above the rate of
three-year United States Treasury Notes and were to mature on April 17, 1997.
The Foster Notes were collateralized by the Foster Shares until paid or "earned
out" (see Note 3). No shares could be sold by Foster, irrespective of the
payment of any of the Foster Notes, until June 23, 1994. As of December 31, 1995
the Foster Notes have been paid-in-full.
Shares reserved for common stock options and warrants:
At December 31, 1996, aggregate shares reserved for issuance under common
stock option plans and warrants amounted to 15.7 million shares of which common
stock options and warrants for 12.5 million shares are outstanding (see Note 7.)
and 12.3 million shares are exercisable.
7. Common Stock Options and Warrants:
To be filed by amendment.
8. Related Parties:
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Chairman of the Board
of Directors of the Company, shares investment control over an additional 24% of
the outstanding capital of ERI. During the fiscal year ended December 31, 1996,
the Company was not required to make any such payments to ERI under these
agreements.
In 1993, the Company entered into three Marketing Agreements with QuietPower
Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical Solutions,
Inc."), a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing Agreements, QSI has undertaken to use its best
efforts to seek research and development funding for the Company from electric
and natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will record a charge for the amount by which the market price of the Common
Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1993, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
Under the terms of the second of the three Marketing Agreements, QSI is
granted a non-exclusive right to market the Company's products that are or will
be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the Company in the feeder
bowl area. The initial term of this Marketing Agreement is three years with
subsequent automatic one-year renewals unless a party elects not to renew.
Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with equipment used by electric and/or natural gas utilities for
retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products equal to 129% of QSI's
marketing expenses attributable to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues received by the Company from the sale of such products. QSI is
also entitled to receive a 5% commission on research and development funding
similar to that described above. QSI's exclusive rights continue for an
indefinite term provided it meets certain performance criteria relating to
marketing efforts during the first two years following product availability in
commercial quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights become non-exclusive, depending on the circumstances
causing such change, the initial term then becomes either three or five years
from the date of this Marketing Agreement, with subsequent one-year automatic
renewals in each instance unless either party elects not to renew. During the
fiscal year ended December 31, 1996, the Company was not required to pay any
commissions to QSI under any of these Marketing Agreements.
The Company has also entered into a Teaming Agreement with QSI under which
each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1996, the Company made
no payments to QSI.
In March 1995, the Company entered into a Master Agreement with QSI under
which QSI was granted an exclusive worldwide license under certain NCT patents
and technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances include
NCT's failure to develop the products or the failure of the parties to agree on
certain development matters. In consideration of the rights granted under the
Master Agreement, QSI is to pay the Company a royalty of 6% of the gross
revenues received from the sale of the products and 50% of the gross revenues
received from sublicensing the rights granted to QSI under the Master Agreement
after QSI has recouped 150% of the costs incurred by QSI in the development of
the products in question. The Company is obligated to pay similar royalties to
QSI on its sale of the products and the licensing of rights covered under the
Master Agreement outside the utility industry and from sales and licensing
within the utility industry in the Far East. In addition to the foregoing
royalties, QSI is to pay an exclusivity fee to the Company of $750,000; $250,000
of which QSI paid to the Company in June 1994. The balance is payable in equal
monthly installments of $16,667 beginning in April 1995. QSI's exclusive rights
become non-exclusive with respect to all products if it fails to pay any
installment of the exclusivity fee when due and QSI loses such rights with
respect to any given product in the event it fails to make any development
funding payment applicable to that product. The Master Agreement supersedes all
other agreements relating to the products covered under the Master Agreement,
including those agreements between the Company and QSI described above.
Immediately following the execution to the Master Agreement, the Company and
QSI entered into a letter agreement providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.
In April 1995, the Company and QSI entered into another letter agreement
under which QSI agreed to forfeit and surrender the five year warrant to
purchase 750,000 shares of the Company's common stock issued to QSI under the
first Marketing Agreement described above. In addition, the $500,000 balance of
the exclusivity fee provided for under the Master Agreement was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the indebtedness to be paid under the letter agreement described in the
preceding paragraph was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million, whichever
first occurs. Such indebtedness is to be evidenced by a promissory note, non
payment of which is to constitute an event of termination under the Master
Agreement.
On May 21, 1996, the Company and QSI entered into another letter agreement
extending the time by which the payments from QSI to the Company under the April
1995 letter agreement described above were to be made. Under the letter the
payment of certain arrearages in the payment of the exclusivity fee was to be
made not later than June 15, 1996, with the balance continuing to be payable by
monthly payments of $8,333 and as provided in the May 1995 letter agreement. In
addition the payment of the other indebtedness owed by QSI to the Company was to
be paid by a payment of $25,000 at the time QSI obtained certain anticipated
financing with the balance paid by monthly payments of $15,000 each. Default in
QSI's timely payment of any of the amounts specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.
On April 9, 1997, the Company and QSI entered into another letter agreement
revising the payment schedule set forth in the May 21, 1996 letter agreement
applicable to the payment of the indebtedness owed to the Company by QSI other
than the unpaid portion of the exclusivity fee. Under the revised schedule, the
full amount of such indebtedness is to be paid by an initial payment of $125,000
on or before April 21, 1997, and a second payment of $200,000 upon the closing
of a proposed financing in June 1997 or on January 1, 1998, whichever first
occurs. The Company is also entitled to receive 15% of any other financing
obtained by QSI in the interim as well as interest at the rate of 10% per annum
on the unpaid amount of such indebtedness from July 1, 1997. The letter
agreement also provides for the continuation of QSI's payment of the exclusivity
fee in accordance with the earlier letter agreements as well as the payment of
$11,108 by April 21, 1997, for headset products sold by the Company to QSI in
1996. In the event of a default in QSI's timely payment of any of the amounts
specified in the April 9, 1997 letter agreement, the Company has the right to
cause the termination of the Master Agreement and all rights granted by QSI
thereunder upon 10 days notice of termination to QSI.
As of April 10, 1997, QSI has paid all installments due and payable for the
exclusivity fee and, other than as described above, owes no other amounts to the
Company.
During 1994, 1995 and 1996 the Company purchased $2.2 million, $0.5 million
and $0.6 million respectively, of products from its various manufacturing joint
venture entities of which $0.3 million was included in accounts payable at
December 31, 1995. There were no accounts payable related to manufacturing joint
venture entities at December 31, 1996 reflecting the termination or transfer of
ownership of the subject ventures in 1995 (see Note 3.).
As discussed in Note 6., the Company had stock subscription receivables from
a joint venture partner in 1994 and a former director in 1995, which were paid
in 1996.
9. Income Taxes:
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
Accordingly, deferred tax assets and liabilities are established for temporary
differences between tax and financial reporting bases of assets and liabilities.
A valuation allowance is established when the Company determines that it is more
likely than not that a deferred tax asset will not be realized. The Company's
temporary differences primarily result from depreciation related to machinery
and equipment, compensation expense related to warrants, options and reserves.
The adoption of the aforementioned accounting standard had no effect on
previously reported results of operations.
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $67.4 million and research and development credit
carryforwards of $1.2 million for federal income tax purposes which expire as
follows:
Research and
Net Operating Development
Year Losses Credits
-------------------- ----------------
1999 $151,500 --
2000 129,300 --
2001 787,200 --
2002 2,119,000 --
2003 1,974,000 --
2004 1,620,500 --
2005 3,869,900 $141,000
2006 1,822,500 191,900
2007 6,865,800 117,800
2008 13,455,500 320,500
2009 16,292,500 413,200
2010 9,385,900 61,400
2011 8,887,400 --
------------------- ----------------
Total $67,361,000 $1,245,800
=================== ================
The Company's ability to utilize its net operating loss carryforwards may be
subject to an annual limitation. The difference between the statutory tax rate
of 34% and the Company's effective tax rate of 0% is due to the increase in the
valuation allowance of $5,883,600, $1,395,000 and $3,251,100 in 1994, 1995 and
1996, respectively.
The types of temporary differences that give rise to significant portions of
the deferred tax assets and the federal and state tax effect of those
differences as well as federal net operating loss and research and development
credit at December 31, 1995, and 1996 were as follows:
1995 1996
--------------- ------------
Accounts receivable $280,900 $280,700
Inventory 155,700 107,800
Property and equipment 102,000 187,300
Accrued expenses 36,600 243,300
Stock compensation 2,651,400 2,684,000
Other 349,100 324,100
--------------- ------------
Total temporary differences $3,575,700 3,827,100
Federal net operating losses 19,964,500 22,902,800
Federal research and development
credits 1,184,400 1,245,800
--------------- ------------
$24,724,600 $27,975,700
Less: Valuation allowance (24,724,600) (27,975,700
Deferred taxes $ --- $ ---
================ ============
10. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira ($18.9 million); and (vi) order the
Company to pay damages for the harm done to Mr. Valerio's image for an amount
such as the judge shall deem equitable and in case for no less than 500 million
Lira ($3.1 million). The Company retained an Italian law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the Company, through its Italian counsel, filed a brief of reply with the
Tribunal of Milan setting forth the Company's position that: (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is groundless since the parties never entered into an agreement, and (iii)
because Mr. Valerio is not enrolled in the official Register of Agents, under
applicable Italian law Mr. Valerio is not entitled to any compensation for his
alleged activities. A preliminary hearing before the Tribunal was held on May
30, 1996, certain pretrial discovery has been completed and a hearing before a
Discovery Judge was held on October 17, 1996. Submissions of the parties final
pleadings were to be made in connection with the next hearing which was
scheduled for April 3, 1997. On April 3, 1997, the Discovery Judge postponed
this hearing to May 19, 1998, due to a reorganization of all proceedings before
the Tribunal of Milan. Management is of the opinion that the lawsuit is without
merit and will contest it vigorously. In the opinion of management, after
consultation with outside counsel, resolution of this suit should not have a
material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a severe material effect
on quarterly or annual operating results.
11. Commitments and Contingencies:
The Company is obligated for minimum annual rentals (net of sublease income)
under operating leases for offices and laboratory space, expiring through
December 2001 with various renewal options, as follows:
Year Ending
December 31, Amount
1997 $440,000
1998 443,000
1999 383,000
2000 221,000
2001 13,000
==========
Total $1,500,000
==========
Rent expense was $760,400, $794,200 and $573,000 for each of the three years
ended December 31, 1994, 1995 and 1996, respectively. During 1995, rent expense
was paid, in part, through the issuance of common stock (see Note 6.).
In April, 1996, the Company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, certain
health care benefits to employees and directors of the Company's United States
operations. The Company administers this modified self insured Benefit Plan
through a commercial third party administrative health care provider. The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million while combined individual and family benefit exposure in
each Benefit Plan fiscal year is limited to $35,000. Benefit claims in excess of
the above mentioned individual or the maximum aggregate stop loss are covered by
a commercial third party insurance provider to which the Company pays a nominal
premium for the subject stop loss coverage. The Company records benefit claim
expense in the period in which the benefit claim is incurred. As of March 25,
1997, the Company was not aware of any material benefit claim liability.
12. Information on Business Segments:
The Company operates in only one business segment, specifically engaged in
the design, development, production and distribution of electronic systems that
actively reduce noise and vibration. The Company's worldwide activities consist
of operations in the United States, Europe and Japan. Revenue, (income) loss and
identifiable assets by geographic area are as follows:
---------------------------------------
Twelve Months Ended December 31,
1994 1995 1996
----------- ----------- -----------
Revenues
United States $4,610,600 $6,095,300 $2,673,500
Europe 2,130,900 4,065,200 480,400
Far East 382,400 305,800 9,700
----------- ----------- -----------
Total $7,123,900 $10,466,300 $3,163,600
=========== =========== ===========
Net (Income) Loss
United States $21,446,600 $3,761,100 $9,752,000
Europe (12,100) (36,000) 911,500
Far East 472,200 343,400 160,800
----------- ----------- -----------
Total $21,906,700 $4,068,500 $10,824,300
=========== =========== ===========
Identifiable Assets
United States $10,493,900 $8,997,400 $5,366,000
Europe 1,877,500 586,000 515,200
----------- ----------- -----------
Total $12,371,400 $9,583,400 $5,881,200
=========== =========== ===========
13. Accounting for Certain Investments in Debt and Equity Securities:
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, (SFAS No. 115) "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 prescribes the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. The Company has classified its
investments, consisting of a portfolio of short term U.S. Treasury Bills and
related investments, as trading securities which are reported at fair market
value. The cumulative effect of adoption of the new standard as of January 1,
1994, is not material. During the twelve month period ended December 31, 1994,
the Company recorded charges totaling $375,200 relating to realized and
unrealized losses in its investments. No such charge was incurred in 1995 or
1996. Interest income from investments was $587,000, $53,000 and $28,000 for the
twelve months ended December 31, 1994, 1995 and 1996 respectively.
14. Acquisition of Certain ANVT Assets:
On September 16, 1994, the Company acquired the patents, technology, other
intellectual property and certain related tangible assets of ANVT. The Company
also acquired all rights under certain joint venture and customer agreements
subject to the consent of the other parties to those agreements.
Under the acquisition agreement, the Company paid $200,000 plus 2,000,000
shares of its common stock resulting in a total purchase price of $2,400,000. In
addition, ANVT is entitled to a future contingent earn-out based on revenues
generated by the ANVT contracts assigned to the Company as well as certain types
of agreements to be entered into by the Company with parties previously having a
business relationship with ANVT. Future contingent payments, if any, will be
charged against the associated revenues. Companies that were parties to
agreements with ANVT on the closing date include Fiat CIEI S.p.A. (a
Fiat/Gilardini affiliate), Alpine Electronics, Inc., Applied Acoustic Research,
Inc., GEC-Marconi Avionics Limited and Arvin Industries, Inc. As of the period
ended December 31, 1996, no such contingent earn-out or payments were due ANVT.
The shares of common stock issued to ANVT were valued at the average of the
published price (less a discount to reflect the time required to register the
subject shares) of the Company's common stock during the period commencing with
the announcement of the transaction and ending on September 16, 1994. The
purchase price has been allocated to the following assets, under the purchase
method of accounting, based upon their estimated fair value at the date of
acquisition as follows:
Patents and Other Intangibles $1,700,000
Research and Development 500,000
In-Process
Property and Equipment 200,000
Total $2,400,000
The Company allocated $500,000 to in-process research and development
projects, resulting in a corresponding charge to the Company's operations in
1994.
The patents are being amortized over their respective remaining lives, which
at the time of acquisition ranged from one to seventeen years.
15. Subsequent Events:
On November 19, 1996, the Company entered into an agreement to sell an
aggregate amount of $3.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before November 27, 1996. The Debentures, issued pursuant to Regulation S of the
Securities Act of 1933 ("the November 1996 Financing") were to be 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 sole option. Subject to certain common
stock resale restrictions, the Investor, at its discretion, would have been able
to convert the principal and interest 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 would be the lessor of 85% of the closing bid
price of the Company's common stock on the closing date or 70% of the average
closing bid price for the five trading days immediately preceding the
conversion. To provide for the above noted conversion and interest payment
options, the Company would, at closing, reserve and subsequently cause to be
deposited with an escrow agent 15 million shares of the Company's common stock.
Subject to certain conditions, the Company also had the right to require the
Investor to convert all or part of the Debentures under the above noted
conversion price conditions after February 15, 1998. Subsequent to the closing
date of the above financing, the Company was to use its best efforts to carry
out the necessary actions to effect at least a 10:1 reverse split of the
Company's common stock.
The November 1996 financing was not completed as described above. The Company
increased the aggregate amount of debentures offered to $4.0 million and
obtained subscriptions for $3.9 million of such amount, of which $3.4 million
was completed with five investors that are different than the Investor described
above, between January 15, 1997 and March 25, 1997, which resulted in net
proceeds to the Company of $3.2 million. An additional $0.5 million of
debentures has been subscribed for by one investor which is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
debentures into common stock of the Company. The terms of the debentures are
similar to those described above, but the conversion price, if the average bid
price of the stock for the five days preceding conversion is used as the basis
for computing conversion, ranges from 75% to 60%% of that price and there is no
requirement that the Company use its best efforts to carry out the necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.
On March 28, 1997, the Company and New Transducers Ltd. ("NXT"), a wholly
owned subsidiary of Verity Group PLC ("Verity") executed a cross licensing
agreement. Under terms of the agreement, the Company will license patents and
patents pending which relate to FPT(TM) technology to NXT, and NXT will license
patents and patents pending which relate to parallel technology to the Company.
In consideration of the license, NCT recorded a $3.0 million license fee
receivable from NXT as well as royalties on future licensing and product
revenue. Concurrently with the cross licensing agreement, the Company and Verity
executed agreements granting each an option for a four year period commencing on
March 28, 1998, to acquire a specified amount of the common stock of the other
subject to certain conditions and restrictions. With respect to the Company's
option to Verity, 3.8 million shares of common stock (approximately 3.4% of the
then issued and outstanding common stock) of the Company are covered by such
option, and 5.0 million ordinary shares (approximately 2.0% of the then issued
and outstanding ordinary shares) of Verity are covered by the option granted by
Verity to the Company. The exercise price under each option is the fair value of
a share of the applicable stock on March 28, 1997, the date of grant. If the
Company does not obtain stockholder approval of an amendment to its Certificate
of Incorporation increasing its common stock capital by an amount sufficient to
provide shares of the Company's common stock issuable upon the full exercise of
the option granted to Verity by September 30, 1997, both options expire.
==============================================================================
==============================================================================
(Richard A. Eisner & Company, L.L.P. Letterhead)
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
Board of Directors and Stockholders
Noise Cancellation Technologies, Inc.
The audits referred to in our report, which except for omission of
information required under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", dated February 28, 1997 (with respect
to Note 15, March 28, 1997 and Note 8, April 10, 1997), included Schedule II for
the years ended December 31, 1996, December 31, 1995 and December 31, 1994. In
our opinion, such schedule presents fairly the information set forth therein in
compliance with the applicable accounting regulation of the Securities and
Exchange Commission.
/s/ RICHARD A. EISNER & COMPANY, L.L.P.
New York, New York
February 28, 1997
With respect to Note 15
March 28, 1997
With respect to Note 8
April 10, 1997
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------------------
Additions
---------------------------------
(1) (2)
---------------------------------
Balance at Charged to Charged to
beginning of costs and other accounts - Deductions Balance at
Description Period expenses describe describe end of period
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994:
Allowance for doubtful accounts $ 184 $ 871 $ - $ 154 $ 901
=============== =============== ================= ================== ==============
Year ended December 31, 1995:
Allowance for doubtful accounts $ 901 $ 552 $ - $ 1,334 (2) $ 119
=============== =============== ================= ================== ==============
Year ended December 31, 1996:
Allowance for doubtful accounts $ 119 $ 192 $ - $ 188 (2) $ 123
=============== =============== ================= ================== ==============
Year ended December 31, 1994:
Allowance for inventory obsolence $ 170 $ 1,855 $ - $ - $ 2,025
=============== =============== ================= ================== ==============
Year ended December 31, 1995:
Allowance for inventory obsolence $ 2,025 $ 452 $ - $ 2,122 (1) $ 355
=============== =============== ================= ================== ==============
Year ended December 31, 1996:
Allowance for inventory obsolence $ 355 $ - $ - $ 93 (1) $ 262
=============== =============== ================= ================== ==============
Attention is directed to the foregoing accountant's report's and to the
accompanying notes to the consolidated financial statements. (1) To write off
reserves applied to December 31, 1994 inventory. (2) To write off fully reserved
accounts receivable deemed uncollectible at December 31, 1995 and 1996.
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES EXHIBIT 11
Computation of Net (Loss) Per Share
(In thousands, except per share amounts)
Year Ended December 31,
--------- --------- ---------
PRIMARY 1994 1995 1996
--------- --------- ---------
Net (loss) ($ 21,907) ($ 4,068) ($ 10,825)
Less: reduction of interest expense or interest
earned attributable to utilization of assumed
proceeds from exercise of options and warrants
in excess of amounts required to repurchase
20% of the outstanding common stock at average
market price
========= ========= =========
ADJUSTED NET (LOSS) ($ 21,907) ($ 4,068) ($ 10,825)
========= ========= =========
Weighted average number of shares outstanding 82,906 87,921 101,191
Add: common equivalent shares (determined using
the "Treasury Stock" method) representing shares
issuable upon assumed exercise of options and
warrants in excess of average market price 5,488 4,428 3,904
Shares issuable upon conversion of Series B
preferred shares -- -- --
========= ========= =========
SHARES USED FOR COMPUTATION 88,394 92,349 105,095
========= ========= =========
PRIMARY NET (LOSS) PER SHARE ($ 0.25) ($ 0.04) ($ 0.10)
========= ========= =========
FULLY DILUTED
Net (loss) ($ 21,907) ($ 4,068) ($ 10,825)
Less: reduction of interest expense or interest earned attributable to
utilization of assumed proceeds from exercise of options and warrants in
excess of amounts required to repurchase 20% of the outstanding common stock
at year-end market price if greater than average market price
========= ========= =========
ADJUSTED NET (LOSS) ($ 21,907) ($ 4,068) ($ 10,825)
========= ========= =========
Weighted average number of shares outstanding 82,906 87,921 101,191
Add: common equivalent shares (determined using
the "Treasury Stock" method) representing shares
issuable upon assumed exercise of options and
warrants in excess of year-end market price
if greater than average market price 5,488 4,428 3,904
Shares issuable upon conversion of Series B
preferred shares -- -- --
========= ========= =========
SHARES USED FOR COMPUTATION 88,394 92,349 105,095
========= ========= =========
FULLY DILUTED NET (LOSS) PER SHARE ($ 0.25) ($ 0.04) ($ 0.10)
========= ========= =========
The above per share data are not reported on the statement of operations
because such data is anti-dilutive