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THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON APRIL 1, 1998
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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, 1997
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 (I.R.S. Employer or
incorporation organization) Identification No.)
1025 West Nursery Road, Suite 120, Linthicum, MD. 21090
(Address of principal executive offices) (Zip Code)
(410) 636-8700
(Registrant's telephone number, including area code)
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 $115.5 million as of March 23, 1998.
The number of shares outstanding of the Registrant's common stock is 132,938,948
as of March 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on June 29, 1998, are incorporated by reference into Part III of
this Form 10-K.
PART I
ITEM 1. BUSINESS
A. General Development of Business
Noise Cancellation Technologies, Inc. ("NCT" or the "Company") designs,
develops, licenses, produces and distributes electronic systems for Active Wave
Management 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 through a number of product lines, with 70
products currently being sold, including NoiseBuster(R) communications headsets
and NoiseBuster Extreme!(TM) consumer headsets, Gekko(TM) flat speakers, flat
panel transducers ("FPT(TM)"), ClearSpeech(TM), microphones, speakers and other
products, adaptive speech filters ("ASF"), 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, and an aircraft cabin quieting system.
In early 1998, the Company introduced the GekkoTM flat speakers and the
ClearSpeechTM corporate intranet telephone software (the "I-Phone") which the
Company believes will have wide application in the audio and communications
industries. As part of its product line expansion plans, the Company plans to
introduce over 25 new products and associated accessories during the first six
months of 1998.
In keeping with the direction established in late 1994, during 1997 the
Company continued the practice of marketing its technology through licensing to
third parties for fees and subsequent royalties. During 1997, the Company
entered into ten new technology license agreements. See G. "Strategic Alliances"
and Note 3 - "Notes to Consolidated Financial Statements."
In late 1995 the Company redefined its corporate mission to be the worldwide
leader in the advancement and commercialization of Active Wave Management
technology. Active Wave Management is the electronic and/or mechanical
manipulation of sound or signal waves to reduce noise, improve signal-to-noise
ratio and/or enhance sound quality.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of the Company's
technologies build, revenues from technology licensing fees, royalties and
product sales are forecasted to fund an increasing share of the Company's
requirements. The revenues from these sources, if realized, will reduce the
Company's dependence on engineering and development revenues. 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."
From the Company's inception through December 31, 1997, approximately 23% of
its operating revenues have come from the sale of products and 31% of its
operating revenues have come from licensing of the Company's technology, while
approximately 46% 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 Management is the utilization of active noise control 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 a significant position in Active Wave Management
technology, holding 256 patents and an extensive portfolio of know-how and other
unpatented technology.
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. NCT has continuing
relationships with Walker Manufacturing Company ("Walker") (a division of
Tennessee Gas Pipeline Company, a wholly owned subsidiary of Tenneco, Inc.), AB
Electrolux ("Electrolux"), Analog Devices, Inc. ("ADI"), Ultra Electronics Ltd.
("Ultra"), The Charles Stark Draper Laboratory, Inc. ("Draper"), Applied
Acoustic Research, L.L.C. ("AAR"), Hoover Universal, Inc. ("Hoover") 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.
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.
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 February 28, 1998 the Company had 85
employees, including 47 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, Suite 120, 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
The Company revised its strategy and redefined its mission during 1994 and
1995, expanding its technology development into areas outside of traditional
active noise and vibration control in order to address markets having greater
opportunities such as communications and audio. 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 (see C. "Technology") 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.
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]
Active Wave Management. Active Wave Management 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 Management 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 as a
technically superior and less expensive alternative to currently available
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 ("ASF"). The adaptive speech filter algorithm removes
noise from voice transmissions. ASF 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.
ASF 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 flat panel transducer technology to
include audio systems for the reproduction of speech and music. The Company is
developing Top Down Surround SoundTM ("TDSS") for the automobile audio market,
in both original equipment manufacturer ("OEM") and after-market versions. TDSS
employs FPT(TM) to produce sound much closer to the listener's ear than
conventional speakers. This placement and revolutionary technology allows for a
"sweet space" listening experience as opposed to a conventional speaker system's
"sweet spot" listening experience. The Company has also developed flat audio
speaker products utilizing FPT(TM) technology for commercial and consumer use.
D. NCT Proprietary Rights and Protection
NCT holds a large number of patents and patent applications. The Company's
intellectual property 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. 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 Earth(TM)
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 obtained a license for 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 acquired several U.S. patents dealing with ASF which is
used in the Company's Clear Speech(TM) product line.
In 1996 and 1997 the Company was granted 90 new patents in the field of
Active Wave Management.
The Company holds or has rights to 256 inventions as of December 31, 1997,
including 96 United States patents and over 245 corresponding foreign patents.
The Company has pending 177 US and foreign patent applications. NCT's engineers
have made 122 invention disclosures for which the Company is in the process of
preparing patent applications. The Company's presently owned patents have
expiration dates which will occur during the years 1998 through 2015 with the
majority occurring during or after 2009.
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 has been granted the following trademarks:
Mark Field of Use
NCT logo company logo
NoiseBuster(R) headsets
NoiseEater(R) HVAC systems
The Company has also applied for 22 trademarks including:
Mark Field of Use
NoiseBuster Extreme!(TM) headsets
Variactive(TM) headsets
FPT(TM) flat panel transducers
ClearSpeech(TM) adaptive speech filter products
Gekko(TM) flat audio speakers
Sweet Space(TM) flat audio speakers
Sound Gallery(TM) flat audio speakers
ProActive(TM) headsets
Top Down Surround Sound(TM) vehicular audio speakers
No assurance can be given as to the range or degree of protection any
trademark issued to, or licensed by, the Company will afford or that such
trademarks 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 trademarks will afford
protection against competitors with similar products or trademarks. No assurance
exists that the Company's owned or licensed trademarks will not be challenged by
third parties, invalidated, or rendered unenforceable. Furthermore, there can be
no assurance that any pending trademark applications or applications filed in
the future will result in the issuance of a trademark. The invalidation,
abandonment or expiration of trademarks 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.
The Company has conducted only limited trademark searches and no assurances
can be given that trademarks 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 trademark rights 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.
NoiseBuster Extreme!(TM). NCT is currently marketing its NoiseBuster
Extreme!(TM) personal active noise reduction headphone for consumers at a
suggested retail price of $69. 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
NoiseBuster Extreme!(TM) is a lightweight, portable headphone wired to a small
controller that can be clipped to the user's clothing or belt. The controller
pack accepts two AAA batteries for a minimum of 100 hours continuous operation.
The NoiseBuster Extreme!(TM) 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.
The Company is marketing the NoiseBuster Extreme!TM through distribution
channels, including electronics retail stores, specialty catalogues and directly
through a toll-free "800" number. Initial product shipments of the original
NoiseBuster(R) were made in September 1993. Product shipments of the NoiseBuster
Extreme!(TM) began during the first quarter of 1997.
The NoiseBuster Extreme!(TM) line is being expanded to include communications
headsets for cellular, multimedia and telephony. The products will be the first
ANR offerings for these applications and will improve speech intelligibility in
the presence of background noise.
Product shipments began during the first quarter of 1998.
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 ANR. At
6.9 oz, one-third the weight of other active noise reduction headsets, the
Airman ANR 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
ProActive(TM) 1000 headphones and ProActive(TM) 1500 communications headsets.
These products are lightweight, open-back 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
ProActive(TM) 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 ProActive(TM) 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 ProActive(TM) 3000 active earmuff
and ProActive(TM) 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
behind-the-head version of its ProActive(TM) 3000 line for use with hard hats.
This is 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.
NB-PCU. The Company is working with a leading manufacturer and supplier of
aircraft cabin products on the integration of NCT's active noise control
technology into in-flight passenger entertainment systems. As a component of the
system, NCT has also developed 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. Installation of this product in commercial
airliners commenced during the fourth quarter of 1997.
NCT Communications
Adaptive Speech Filter ("ASF"). ASF 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, ASF 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(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.
Gekko(TM) Flat Speaker. In January, 1998, the Company introduced the
Gekko(TM) Flat Speaker product line for home theater and home audio. Gekko(TM)
Flat Speakers feature the Company's FPT(TM) patented audio technology which
evenly disperses high-quality sound and a unique, slim design for wall mounting
as picture frames with quality artwork. The Gekko(TM) Flat Speaker received the
Best of Showcase Honoree award in the home theater category from Innovations '98
at the 1998 International Winter Consumer Electronics Show in Las Vegas in
January, 1998. Initial product shipments are expected to commence in the second
quarter 1998.
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, 1997.
(000's) As a %
Products Amount of Total
-------- ------- --------
Hearing Products $1,652 96.0%
Communications 27 1.6%
Other 41 2.4%
-------- ----------
Total $1,720 100.0%
======== ==========
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 and
royalty revenue for the year ended December 31, 1997.
(000's) As a %
Technology Amount of Total
---------- ------- --------
Audio $3,000 82.6%
Communications 345 9.5%
Microphones 200 5.6%
Other 85 2.3%
------- --------
Total $3,630 100.0%
======= ========
F. Products Under Development
NCT Hearing Products
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(TM) Product Line. There are several additional communications
products under development. Design improvements are being made to the current
ClearSpeech(TM) product line to improve market penetration. NCT is exploring
relationships with chip manufacturers to develop custom integrated circuits for
the ASF technology to reduce the cost of the ClearSpeech(TM) product line as
well as for use as a new product.
NCT Microphones
Silicon Micromachined Microphone ("SMM"). In 1994, NCT obtained a license to
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. In December, 1997, the Company announced that Siemens
Semiconductors of Siemens AG ("Siemens") had licensed the Company's SMM
technology and that Siemens would develop, manufacture and market the SMM.
Samples are expected to be available in the fourth quarter 1998. Initial
production is scheduled to commence in the first quarter 1999.
NCT Audio
Top Down Surround Sound(TM). TDSS 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 "sweet space" which TDSS
generates. The Company has established a joint venture, OnActive, with AAR and
Hoover for the automobile audio speaker market.
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 transition from a concern primarily engaged in research and
development to one engaged in the licensing production, marketing and sale of
Active Wave Management systems has been facilitated by the establishment and
maintenance 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 under the terms of their
joint venture agreements or licenses 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 Nov. 1989 Mufflers,
(a division of Tennessee Gas Industrial
Pipeline Company) Silencers and Other
Vehicular
Applications
AB Electrolux Oct. 1990 Consumer Appliances
Ultra Electronics, Ltd. June 1991 Aircraft Cabin
Quieting Systems
Analog Devices, Inc. June 1992 Integrated Circuits
and Related Products
The Charles Stark Draper July 1994 Microphones
Laboratory, Inc.
Applied Acoustic Research, Aug. 1995 TDSS
L.L.C.
Hoover Universal, Inc. May 1996 TDSS
(a wholly owned subsidiary of
Johnson Controls, Inc.)
New Transducers Ltd. Mar. 1997 FPT(TM)
Oki Electronic Industry Co. Oct. 1997 Communications
Ltd.
Siemens AG Dec. 1997 Microphones
VLSI Technology, Inc. Feb. 1998 Communications
- ---------------------------------------------------------------------
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. On November 15, 1995, the Company and Walker executed a series
of related agreements (the "Restructuring Agreements") that provided for, among
other matters, the transfer of the Company's 50% interest in WNCT to Walker, the
transfer to Walker of certain Company owned tangible assets related to the
business of WNCT and the expansion of certain existing technology licenses. WNCT
is currently producing and selling industrial silencers on which the Company
receives a royalty.
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.
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.
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.
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 TDSS, into total audio systems and solutions for
the ground based vehicle market. Both partners, who initially owned 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).
New Transducers Ltd.(NXT), a wholly owned subsidiary of Verity Group PLC
("Verity") and the Company executed a cross licensing agreement (the "Cross
License") on March 28, 1997. Under terms of the Cross License, the Company
licensed patents and patents pending which relate to FPT technology to NXT, and
NXT licensed patents and patents pending which relate to parallel technology to
the Company. In consideration of the license, during the first quarter 1997, NCT
recorded a $3.0 million license fee from NXT and the Company will receive
royalties on future NXT licensing and product revenue. On April 15, 1997,
Verity, NXT and the Company executed several agreements and other documents (the
"New Agreements") terminating the Cross License, and certain related agreements
and replacing them with a new cross license (the "New Cross License"), and new
related agreements. The material changes effected by the New Agreements included
the inclusion of Verity as a party along with its wholly owned subsidiary NXT;
providing that the license fee payable to NCT could be paid in ordinary shares
of Verity stock. The subject license fee was paid to the Company in ordinary
shares of Verity stock which were subsequently sold by the Company. On September
27, 1997, Verity, NXT, NCT Audio Products, Inc. ("NCT Audio") and the Company
executed several agreements and other documents, terminating the New Cross
License and a related security deed and replacing them with new agreements
(respectively, the "Cross License Agreement dated September 27, 1997" and the
"Master License Agreement"). The material changes effected by the most recent
agreements included an expansion of the fields of use applicable to the
exclusive licenses granted to Verity and NXT and an increase in the royalties
payable on future licensing and product revenues.
Oki Electronic Industry Co., Ltd. (`Oki")
In October, 1997, the Company and Oki executed a license agreement. Under the
terms of the agreement which included an up-front license fee and future per
unit royalties, Oki licensed the Company's ClearSpeech(TM) noise cancellation
algorithm for integration onto large-scale integrated circuits for
communications applications. The Company has granted Oki the right to
manufacture, use and sell products incorporating the algorithm. The algorithm is
specifically designed to remove background noise from speech and other
transmitted signals, greatly improving intelligibility and clarity of
communications.
Siemens Semiconductors, Siemens AG ("Siemens")
In December, 1997, the Company and Siemens executed a license agreement.
Under the terms of the agreement, which included an up-front license fee and
future per unit royalties, Siemens licensed the Company's SSM and will develop,
manufacture and market such microphones as surface mountable devices. The SMM
technology delivers microphone technology on a silicon chip, a breakthrough in
the microphone marketplace. Siemens and the Company have targeted the SMM to the
multimedia, cellular phone, wireless phone, voice recognition and other related
markets. The SMM's small chip dimensions of only 3 mm on each side make it
useful for packaging into products with tight size constraints, such as noise
cancelling ear plugs and hearing aids.
VLSI Technology, Inc. ("VLSI")
In February, 1998, the Company and VLSI executed a license agreement. Under
the terms of the agreement, which included up-front development fees and future
per unit royalties, VLSI licensed the Company's ClearSpeech(TM) noise
cancellation and echo cancellation algorithms for use with VLSI's current and
future integrated circuits targeted to the digital cellular and PCS phone
market, as well as emerging computer telephony markets. The noise cancellation
algorithm is specifically designed to remove background noise from speech and
other transmitted signals, greatly improving intelligibility and clarity of
communications. The echo cancellation algorithm cancels acoustical echo for
hands-free telephony operations including cellular and speaker phones.
H. Marketing and Sales
In addition to marketing its Active Wave Management technology and systems
through its strategic alliances as described above, the Company has an internal
sales and marketing force of seventeen people, its executive officers and
directors, and eight 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. During
1997 and through February 1998, the Company expanded its internal sales and
marketing force by nine, from eight to seventeen professionals and will continue
to expand its internal sales force on a limited basis as the need dictates.
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, 1997, 1996 and 1995.
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. Concentrations of Credit Risk
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
71% of revenues during 1997 and 59% of gross accounts receivable at December 31,
1997. The Company does not require collateral or other security to support
customer receivables.
(in thousands of dollars)
As of December 31, 1997,
and for the year then ended
---------------------------------
Accounts
CUSTOMER Receivable Revenue
-------------------------------- ------------ --------------
Verity Group.plc $--- $3,000
Telex Communications, Inc. --- 391
The Sharper Image 53 236
Brookstone 60 228
Siemens AG 200 200
All Other 217 1,663
------------ --------------
Total $530 $5,718
============ ==============
The Company regularly assesses the realizability of its accounts receivable
and performs a detailed analysis of its aged accounts receivable. When
quantifying the realizability of accounts receivable, the Company takes into
consideration the value of past due receivables and the collectibility of such
receivables, based on credit worthiness.
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and trade
receivables. 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. The Company primarily holds its cash and cash equivalents in
two banks and commercial paper. Deposits in excess of federally insured limits
were $12.4 million at December 31, 1997.
J. Competition
The Company is aware of a number of direct competitors in the field of Active
Wave Management. Indirect competition also exists in the field of passive sound
and vibration attenuation. The Company's principal competitors in active control
systems include 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. The Company's principal
competitors in other fields of Active Wave Management include IBM Corporation,
Lucent Technologies, Inc. and Texas Instruments, Incorporated. 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 communications, computer, automobile and appliance manufacturers, and
aircraft parts suppliers and manufacturers, have research and development
efforts underway in Active Wave Management 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 as the industry develops, are well established and have
substantially greater management, technical, financial, marketing and product
development resources than the Company.
K. 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 1997. 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.
L. Research and Development
Company-sponsored research and development expenses aggregated $6.2
million, $7.0 million and $4.8 million for the fiscal years ended December 31,
1997, 1996 and 1995, respectively.
M. 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.
N. Employees
The Company had 85 employees on February 28, 1998. 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 Lire ($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
Lire ($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.
On September 16, 1997, Ally Capital Corporation ("Ally") filed suit
against the Company, John J. McCloy II, Michael J. Parrella, Jay M. Haft and
Alistair J. Keith in the United States District Court for the District of
Connecticut (the "District Court"). The complaint was not served on the Company
until January 15, 1998, and has yet to be served on the individual defendants.
The individual defendants are current and former officers and directors of the
Company. The complaint alleges three (3) causes of action arising out of an
agreement (the "Asset Purchase Agreement") which the Company entered into with
another entity known as Active Noise and Vibration Technologies, Inc. ("ANVT")
whereby the Company agreed to acquire ANVT's patented and unpatented
intellectual property, the rights and obligations under a defined list of
agreements between ANVT and twenty-one (21) other parties (the "Listed Parties")
relating to existing or potential joint ventures, licensing and other business
relationships, and certain items of office and laboratory equipment. For these
assets, the Company paid ANVT two hundred thousand ($200,000.00) dollars and
issued ANVT two million (2,000,000) shares of the Company's common stock. The
Asset Purchase Agreement also provided ANVT with the right to certain contingent
payments, to the extent the Company generated certain levels of revenue from
joint venture, licensing or other contractual relationships with any of the
Listed Parties. Plaintiff Ally is an unsecured creditor of ANVT and is not a
party to the Asset Purchase Agreement; however, Ally asserts an interest to part
of the consideration paid ANVT by virtue of an escrow agreement between ANVT and
the escrow agent for the benefit of ANVT's secured and unsecured creditors. Ally
purports to allege claims of fraud, negligent misrepresentation and a claim
under the Connecticut Unfair Trade Practice Act based upon purported
representations made to ANVT, not Ally. Thus, it is alleged that the Company
isrepresented to ANVT the Company's financial condition, the number of shares
it could issue and the value of the contingent payment rights under the Asset
Purchase Agreement. In connection with the claims, Ally seeks compensatory
damages in excess of one million two hundred thousand ($1,200,000.00) dollars,
punitive damages and attorney fees. On March 4, 1998, the Company served its
motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12.
The basis for the motion include: that the summons and complaint were not served
for more than one hundred twenty (120) days after the complaint was filed, in
violation of Federal Rule of Civil Procedure 4; that Ally lacks standing to
bring its claims as they are based on purported representations made by the
Company to ANVT, not Ally; that the claims are legally insufficient under
Connecticut law; and that plaintiff has failed to join necessary parties, ANVT
and the escrow agent. On March 16, 1998, Ally filed a notice of voluntary
dismissal as to the individual defendants, Messrs. McCloy, Parrella, Haft and
Keith. As no discovery has taken place, the Company is unable to assess the
likelihood of an adverse result. Management, however, believes it has
meritorious defenses and intends a vigorous defense of this lawsuit. However, in
the event this lawsuit does result in a substantial final judgment against the
Company, said judgment could have a severe material effect on quarterly or
annual operating results.
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, 1997.
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 1997 and
1996 for the Common Stock for specified quarterly periods is set forth below:
1997 1996
---------------- --------------------
HIGH LOW HIGH LOW
1st Quarter 29/32 3/8 7/8 17/32
2nd Quarter 15/32 7/32 1 5/32 21/32
3rd Quarter 1 1/8 7/32 15/16 5/8
4th Quarter 2 1/32 9/16 11/16 11/32
(b) At December 31, 1997, there were approximately 4,500 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.
(d) See Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview" for a description of the Company's sales
of unregistered securities during the year ended December 31, 1997.
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,
------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------
STATEMENTS OF OPERATIONS
DATA:
REVENUES
Product Sales $1,728 $2,337 $1,589 $1,379 $1,720
Engineering and 3,598 4,335 2,297 547 368
development services
Technology licensing
fees and other 60 452 6,580 1,238 3.630
-- --- ----- ----- -----
Total revenues
$5,386 $7,124 $10,466 $3,164 $5,718
------ ------ ------- ------ ------
COSTS AND EXPENSES:
Cost of sales $1,309 $4,073 $1,579 $ 1,586 $2,271
Cost of engineering and 2,803 4,193 2,340 250 316
development services
Selling, general and 7,231 9,281 5,416 4,890 5,217
administrative
Research and development 7,963 9,522 4,776 6,974 6,235
Interest (income)
expense, net (311) (580) (49) 17 1,397 (4)
Equity in net (income) 3,582(1) 1,824 (80) 80 --
loss of unconsolidated
affiliates
Other expense, net
--- 718 552 192 130
--- --- --- --- ---
Total costs and
expenses $22,577 $29,031 $14,534 $ 13,989 $15,566
------- ------- ------- ------- -------
Net loss
$(17,191)(1)$(21,907) $(4,068) $(10,825) $(9,848)
Less:
Preferred stock
dividend requirement - - - - 1,623
Accretion of difference
between carrying
amount and redemption
amount of redeemable
preferred stock - - - - 285
------ -------- ------- -------- --------
Net (loss) attributable
to common
stockholders $(17,191)(1)$(21,907) $(4,068) $(10,825) $(11,756)
======= ======== ======= ======== ========
Weighted average number
of common shares
outstanding(2)- basic
and diluted 70,416 87,921 101,191 124,101 82,906
========== ======= ======= ======= ======
Basic and Diluted Net
loss per share $ (0.24)(1) $(0.26) $ (0.05) $ (0.11) $ (.09)
========== ======= ======= ======= ======
December 31,
------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------
BALANCE SHEET DATA:
Total assets $29,541 $12,371 $9,583 $5,881 $17,361
Total liabilities 6,301 6,903 2,699 3,271 2,984
Long-term debt --- --- 105 -- --
Accumulated deficit (46,873) (68,780) (72,848) (83,673) (93,520)
Stockholders equity(3) 23,239 5,468 6,884 2,610 14,377
Working capital
(deficiency) 19,990 923 1,734 (1,312) 11,696
(1)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 approximately $3.6 million.
(2)Does not include shares issuable upon the exercise of outstanding stock
options, warrants and convertible Preferred Stock, since their effect would
be antidilutive.
(3) The Company has never declared nor paid cash dividends on its Common Stock.
(4) Includes interest expenses of approximately $1.4 million relating to
the beneficial conversion feature on convertible debt issued in 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Statements in this filing which are not historical facts are forward-looking
statements under provisions of the Private Securities Litigation Reform Act of
1995. All forward-looking statements involve risks and uncertainties. The
Company wishes to caution readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause its actual results in fiscal 1998 and
beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems for Active Wave Management; produce a cost
effective product that will gain acceptance in relevant consumer and other
product markets; increase revenues from products; realize funding from
technology licensing fees, royalties, product sales, and engineering and
development revenues to sustain the Company's current level of operation; timely
introduce new products; continue its current level of operations to support the
fees associated with the Company's patent portfolio; maintain satisfactory
relations with its five customers that accounted for 71% of the Company's
revenues in 1997; attract and retain key personnel; prevent invalidation,
abandonment or expiration of patents owned or licensed by the Company and expand
its patent holdings to diminish reliance on core patents; have its products
utilized beyond noise attenuation and control; maintain and expand its strategic
alliances; and protect Company know-how, inventions and other secret or
unprotected intellectual property.
Overview
The Company is continuing the transition initiated in 1995 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 1997, the Company received approximately
6% of its operating revenues from engineering and development funding, compared
with 17% in 1996. Since 1991, revenues from product sales have generally been
increasing, although in 1996 product sales declined slightly due to delays in
production and reduced pricing of certain products. In 1997, revenues from
product sales resumed its year-to year increase. 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
Management from participating in certain commercial areas without licenses from
the Company.
Subsequent paragraphs in this "Overview"), Note 1 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.
As previously disclosed, the Company implemented changes in its
organization and focus in late 1994. Additionally, in late 1995 the Company
redefined its corporate mission to be the worldwide leader in the advancement
and commercialization of Active Wave Management technology. Active Wave
Management is the electronic and/or mechanical manipulation of sound or signal
waves to reduce noise, improve signal-to-noise ratio and/or enhance sound
quality. This redefinition is the result of the development of new technologies,
as previously noted, such as ASF, TDSS, FPT(TM), and the SMM, which the Company
believes can produce products for fields beyond noise and vibration reduction
and control. These technologies and products are consistent with shifting the
Company's focus to technology licensing and product marketing in more innovative
industries having greater potential for near term revenue generation. The
redefinition of corporate mission is reflected in the revised business plan
which the Company began to implement during the first quarter of 1996 and has
continued through 1997.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of the Company's
technologies build as anticipated by management, revenues from technology
licensing fees, royalties and product sales are forecasted to fund an increasing
share of the Company's requirements. The funding from these sources, if
realized, will reduce the Company's dependence on engineering and development
funding. The beginning of this process is shown in the shifting percentages of
operating revenue, discussed below.
In January 1996, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1997.
The Company did not meet the plan's revenue targets for 1996 or 1997 and as
noted below, found it necessary to raise additional capital to fund it's
operations for 1997 and beyond (refer to "Liquidity and Capital Resources" below
and to Notes 1 and 6 - "Notes to the Consolidated Financial Statements.").
Success in generating technology licensing fees, royalties and product sales
are significant and critical to the Company's success. 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, 1997, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 23%
product sales, 46% engineering and development services and 31% 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 Company's 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 ProActive(TM) headsets in 1995 and continues to
sell NoiseBuster Extreme!(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. During 1995 the
Company acquired several U.S. patents dealing with adaptive speech filtering
which is used in the Company's ClearSpeech(TM) product line. In 1996 and 1997
the Company was granted 90 new patents for various applications in the field of
Active Wave Management. 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 51% from 173 to 85 current employees as of
February 28, 1998.
Because the Company did not meet its revenue targets for 1996 and 1997, it
entered into certain transactions, which provided additional funding as follows:
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S of
the Securities Act of 1933, as amended, (the "Securities Act") to five unrelated
investors (the "Investors") through multiple dealers (the "First Quarter 1997
Financing") from which the Company realized $3.2 million of net proceeds. The
Debentures were to mature between January 15, 2000 and March 25, 2000 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 Investors, at their discretion, had the right to convert the
principal due on the Debentures into the Company's common stock at any time
after the 45th day following the date of the sale of the Debentures to the
Investors. In the event of such a conversion, the conversion price was the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date of the Debentures' sale or between 75% to 60% (depending on the
Investor and other conditions) 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 reserved 15 million
shares of the Company's common stock for issuance upon such conversion. Subject
to certain conditions, the Company also had the right to require the Investors
to convert all or part of the Debentures under the above noted conversion price
conditions after February 15, 1998. As of June 6, 1997, the Investors had
converted all $3.4 million of the Debentures into 16.3 million shares of the
Company's common stock. At the Company's election, interest due through the
conversion dates of the Debentures was paid through the issuance of an
additional 0.2 million shares of the Company's common stock. In conjunction with
the Debentures, the Company granted a warrant to purchase 75,000 shares of
common stock to one investor. During the year ended December 31, 1997, the
Company valued this warrant, using the Black-Scholes pricing model, at which
$34,000 which was expensed as debt discount. The Company has recorded a $1.4
million non-cash interest expense attributable to the conversions of the
Debentures in the first and second quarter of 1997 as an adjustment during the
fourth quarter of 1997. If the shares were issued in lieu of debt at the
respective issuance dates of the debt, supplementary basic and diluted net loss
per share for the year ended December 31, 1997 would have been a loss of $0.08
per share.
On July 30, 1997, in a private placement pursuant to Section 4(2) of the Act,
the Company sold 2.9 million shares, in the aggregate, of its common stock at a
price of $0.175 per share that provided net proceeds to the Company of $0.5
million (the "July 30, 1997 Private Placement").
On September 4, 1997, the Company transferred $5,000 cash and all of the
business and assets of its Audio Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated company, NCT Audio, in consideration for 5,867 shares of NCT
Audio common stock whereupon NCT Audio became a wholly owned subsidiary of the
Company. The Company also granted NCT Audio an exclusive worldwide license with
respect to all of the Company's relevant patented and unpatented technology
relating to FPT(TM) and FPT(TM) based audio speaker products for all markets for
such products excluding (a) markets licensed to or reserved by Verity and NXT
under the Company's cross licensing agreements with Verity and NXT, (b) the
ground based vehicle market licensed to OAT, (c) all markets for hearing aids
and other hearing enhancing or assisting devices, and (d) all markets for
headsets, headphones and other products performing functions substantially the
same as those performed by such products in consideration for a license fee of
$3.0 million to be paid when proceeds are available from the sale of NCT Audio
common stock and on-going future royalties payable by NCT Audio to the Company
as provided in such license agreement. In addition, the Company agreed to
transfer all of its rights and obligations under its cross licensing agreements
with Verity and NXT to NCT Audio and to transfer the Company's interest in OAT
to NCT Audio. Between October 10, 1997 and December 4, 1997 NCT Audio issued
2,145 shares of its common stock (including 533 shares issued to Verity) for an
aggregate purchase price of $4.0 million in a private placement pursuant to
Regulation D under the Securities Act (the "NCT Audio Financing"). NCT Audio has
not met certain conditions regarding the filing of a registration statement for
NCT Audio common stock. As such, holders of NCT Audio common stock have a right
to convert their NCT Audio common stock into a sufficient number of restricted
shares of NCT common stock to equal their original cash investment in NCT Audio,
plus a 20% discount to market. As of February 27, 1998, no NCT Audio shareholder
has exercised their right to convert NCT Audio common stock into NCT common
stock under the terms noted above.
Between October 28, 1997 and December 11, 1997, the Company entered into a
series of subscription agreements (the "Subscription Agreements") to sell an
aggregate amount of $13.3 million of Series C Convertible Preferred Stock (the
"Preferred Stock") in a private placement, pursuant to Regulation D of the
Securities Act, to 32 unrelated accredited investors through two dealers (the
"1997 Preferred Stock Private Placement"). The total Preferred Stock offering
was completed on December 11, 1997. The aggregate net proceeds to the Company of
the 1997 Preferred Stock Private Placement were $11.9 million. Each share of the
Preferred Stock has a par value of $.10 per share and a stated value of one
thousand dollars ($1,000) with an accretion rate of four percent (4%) per annum
on the stated value. Each share of Preferred Stock is convertible into fully
paid and nonassessable shares of the Company's Common Stock subject to certain
limitations. Under the terms of the Subscription Agreements the Company was
required to exercise its best efforts to file a registration statement
("Registration Statement") on Form S-3 covering the resale of all shares of
Common Stock of the Company issuable upon conversion of the Preferred Stock then
outstanding within sixty (60) days after the first Closing of the 1997 Preferred
Stock Private Placement. Such Registration Statement was filed with the SEC on
December 29, 1997. The shares of Preferred Stock become convertible into shares
of Common Stock at any time commencing after the earlier of (i) the effective
date of the Registration Statement; or ii) ninety (90) days after the date of
filing of the Registration Statement. Each share of Preferred Stock is
convertible into a number of shares of Common Stock of the Company as determined
in accordance with the following formula (the "Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
Conversion Price
where
N = the number of days between (i) the Closing Date of the
Series C Convertible Preferred Stock being converted,
and (ii) the Conversion Date thereof.
Conversion
Price = the lesser of (x) 120% of the five (5) day average
Closing Bid Price of Common Stock immediately prior to
the Closing Date of the Series C Convertible Preferred
Stock being converted or (y) 20% below the five (5) day
average Closing Bid Price of Common Stock immediately
prior to the Conversion Date thereof.
Closing
Date = the date of the Closing as set forth in the
subscription agreement pertaining to the Series C
Convertible Preferred Stock being converted.
The conversion terms of the Preferred Stock also provide that in no event
shall the average closing bid price referred to in the Conversion Formula be
less than $0.625 per share and in no event shall the Company be obligated to
issue more than 26.0 million shares of its Common Stock in the aggregate in
connection with the conversion of the Preferred Stock. Under the terms of the
Subscription Agreements the Company may be subject to a penalty if the
Registration Statement is not declared effective within one hundred twenty (120)
days after the first closing of any incremental portion of the offering of
Preferred Stock, such penalty to be in an amount equal to one and one half
percent (1.5%) per month of the aggregate amount of Preferred Stock sold in the
offering up to a maximum of ten percent (10%) of such aggregate amount. The
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Subscription Agreements and ending ninety (90) days after the
closing of the offering the Company will be prohibited from issuing any debt or
equity securities other than Preferred Stock, and that the Corporation will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner or in the event it fails to reserve sufficient
authorized but unissued Common Stock for issuance upon conversion of the
Preferred Stock.
Cash and cash equivalents amounted to $12.6 million at December 31, 1997.
Management believes that currently available funds may not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options, the funding derived from
technology licensing fees, royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditure alone
may not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties and
product sales, and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that 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 substantially cut back its
level of operations. These reductions could have an adverse effect on the
Company's relations with its strategic partners and customers. Uncertainty
exists with respect to the adequacy of current funds to support the Company's
activities until positive cash flow from operations can be achieved, and with
respect to the availability of financing from other sources to fund any cash
deficiencies.
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, 1997 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.
Results of Operations
Year ended December 31, 1997 compared with year ended December 31, 1996.
Total revenues in 1997 increased by 81% to $5.7 million from $3.2 million in
1996. Total expenses during the same period increased by 11% or $1.6 million,
primarily reflecting the one-time $1.4 million non-cash interest charge
associated with the First Quarter 1997 Financing. See Note 6 - "Notes to the
Consolidated Financial Statements."
Technology licensing fees and royalties increased by 193% or $2.4 million to
$3.6 million from $1.2 million in 1996. The 1996 amount was derived principally
from numerous technology license fees reflecting the Company's continuing
emphasis on expanding technology license fee revenue. The 1997 amount is
primarily due to the $3.0 million technology license fee from Verity and other
technology licensing fees aggregating $0.6 million. See Note 3 - "Notes to the
Consolidated Financial Statements".
Product sales increased in 1997 by 25% to $1.7 million from $1.4 million in
1996 reflecting increases in NoiseBuster Extreme!(TM) and aviation headset
sales.
Engineering and development services decreased by 33% to $0.4 million from
$0.5 million in 1996, primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company.
Cost of product sales increased 44% to $2.3 million from $1.6 million in 1996
and the product margin decreased to (32)% from (15)% in 1996. The negative
margin of $0.6 million in 1997 was primarily due to reserves for inventory
movement and tooling obsolescence in the amount of $0.7 million related to the
industrial headset product lines. The negative margin in 1996 was primarily due
to a lower sales price of the NoiseBuster(R) and a reserve for tooling
obsolescence in the amount of $0.3 million.
Cost of engineering and development services increased 26% to $0.3 million
from $0.2 million in 1996 primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company as noted
above.
Selling, general and administrative expenses for the year increased by 7% or
$0.3 million to $5.2 million from $4.9 million for 1996 which was primarily due
to increased professional fees and related expenses.
Depreciation and amortization included in selling, general and administrative
expenses decreased from $0.5 million in 1996 to $0.4 primarily due to an
increase in fully depreciated machinery and equipment.
Research and development expenditures for 1997 decreased by 11% to $6.2
million from $7.0 million in 1996, primarily due to limited cash resources
during most of 1997 to fund internal development projects.
In 1997, interest income increased to $0.1 million from near zero in 1996
reflecting the increase in late 1997 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1997, the Company was not required to fund any capital requirements of these
joint ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment.
The Company has net operating loss carryforwards of $76.9 million and
research and development credit carryforwards of $1.3 million for federal income
tax purposes at December 31, 1997. 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, 1996 compared with year ended December 31, 1995.
Total revenues in 1996 decreased by 70% to $3.2 million from $10.5 in 1995.
Total expenses during the same period decreased by 4% or $0.5 million,
reflecting the continuing results of cost reduction plans, and the refocus of
expenditures to more immediate markets.
Technology licensing fees decreased by 81% or $5.3 million to $1.2 million.
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 $1.4 million reflecting decreased aviation
headset sales, decreased NoiseBuster(R) 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 $0.5 million,
primarily due to a de-emphasis 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 remained unchanged at $1.6 million and product margin
decreased to (15)% from 1% in 1995. The negative margin in 1996 was primarily
due to the lower sales price of the NoiseBuster(R) and a reserve for tooling
obsolescence in the amount of $0.3 million. In 1995, the low product margin was
primarily due to the lower sales price of the NoiseBuster(R).
Cost of engineering and development services decreased 89% to $0.3 million
primarily due to the changes noted above.
Selling, general and administrative expenses for the year decreased by 10% to
$4.9 million from $5.4 million for 1995. Of this decrease, $0.6 million was
directly attributable to reductions in salaries and related expenses.
Advertising and marketing expenses decreased by 32% to $0.5 million.
Professional fees increased by 6% to $1.8 million. Travel and entertainment
increased by 18% or $0.1 million.
Depreciation and amortization included in selling, general and administrative
expenses increased by $0.3 million or 143%, from $0.2 million to $0.5 million,
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 $7.0
million from $4.8 million for 1995, primarily due to increases to internally
funded development projects.
In 1996, interest income decreased to near zero from $0.1 million 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
1997, the Company was 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.
Liquidity and Capital Resources
The Company received $1.1 million from the exercise of stock purchase
warrants and options during 1997, $1.0 million in 1996 and $0.7 million in 1995.
In January 1996, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1997.
The Company did not meet the plan's revenue targets for 1996 or 1997 and as
noted below, found it necessary to raise additional capital to fund it's
operations for 1997 and beyond (refer to Notes 1 and 6 - "Notes to the
Consolidated Financial Statements.").
Because the Company did not meet its revenue targets for 1997, it entered
into certain transactions, which provided additional funding as follows:
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of the Debentures in the First Quarter 1997
Financing from which the Company realized $3.2 million of net proceeds. The
Debentures were to mature between January 15, 2000 and March 25, 2000 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 Investors, at their discretion, had the right to convert the
principal due on the Debentures into the Company's common stock at any time
after the 45th day following the date of the sale of the Debentures to the
Investors. In the event of such a conversion, the conversion price was the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date of the Debentures' sale or between 75% to 60% (depending on the
Investor and other conditions) 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 reserved 15 million
shares of the Company's common stock for issuance upon such conversion. Subject
to certain conditions, the Company also had the right to require the Investors
to convert all or part of the Debentures under the above noted conversion price
conditions after February 15, 1998. As of June 6, 1997, the Investors had
converted all $3.4 million of the Debentures into 16.3 million shares of the
Company's common stock. At the Company's election, interest due through the
conversion dates of the Debentures was paid through the issuance of an
additional 0.2 million shares of the Company's common stock. In conjunction with
the Debentures, the Company granted a warrant to purchase 75,000 shares of
common stock to one investor. During the year ended December 31, 1997, the
Company valued this warrant, using the Black-Scholes pricing model, at which
$34,000 which was expensed as debt discount. The Company has recorded $1.4
million of non-cash interest expense attributable to the conversions of the
Debentures in the first and second quarter of 1997 as an adjustment during the
fourth quarter of 1997. If the shares were issued in lieu of debt at the
respective issuance dates of the debt, supplementary basic and diluted net loss
per share for the year ended December 31, 1997 would have been a loss of $0.08
per share.
On July 30, 1997 the Company sold 2.9 million shares, in the aggregate, of
its common stock at a price of $0.175 per share in the July 30, 1997 Private
Placement that provided net proceeds to the Company of $0.5 million.
On September 4, 1997, the Company transferred $5,000 cash and all of the
business and assets of its Audio Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated company, NCT Audio, in consideration for 5,867 shares of NCT
Audio common stock whereupon NCT Audio became a wholly owned subsidiary of the
Company. The Company also granted NCT Audio an exclusive worldwide license with
respect to all of the Company's relevant patented and unpatented technology
relating to FPTs(TM) and FPT(TM) based audio speaker products for all markets
for such products excluding (a) markets licensed to or reserved by Verity and
NXT under the Company's cross licensing agreements with Verity and NXT, (b) the
ground based vehicle market licensed to OAT, (c) all markets for hearing aids
and other hearing enhancing or assisting devices, and (d) all markets for
headsets, headphones and other products performing functions substantially the
same as those performed by such products in consideration for a license fee of
$3.0 million (eliminated on consolidation) to be paid when proceeds are
available from the sale of NCT Audio common stock and on-going future royalties
payable by NCT Audio to the Company as provided in such license agreement. In
addition, the Company agreed to transfer all of its rights and obligations under
its cross licensing agreements with Verity and NXT to NCT Audio and to transfer
the Company's interest in OAT to NCT Audio. Between October 10, 1997 and
December 4, 1997 NCT Audio issued 2,145 shares of its common stock (including
533 shares issued to Verity) for an aggregate purchase price of $4.0 million in
the NCT Audio Financing. NCT Audio has not met certain conditions regarding the
filing of a registration statement for NCT Audio common stock. As such, holders
of NCT Audio common stock have a right to convert their NCT Audio common stock
into a sufficient number of restricted shares of NCT common stock to equal their
original cash investment in NCT Audio, plus a 20% discount to market. As of
February 27, 1998, no NCT Audio shareholder has exercised their right to convert
NCT Audio common stock into NCT common stock under the terms noted above.
Between October 28, 1997 and December 11, 1997, the Company entered into the
Subscription Agreements to sell an aggregate amount of $13.3 million of the
Preferred Stock in the 1997 Preferred Stock Private Placement. The total
Preferred Stock offering was completed on December 11, 1997. The aggregate net
proceeds to the Company of the 1997 Preferred Stock Private Placement were $11.9
million. Each share of the Preferred Stock has a par value of $.10 per share and
a stated value of one thousand dollars ($1,000) with an accretion rate of four
percent (4%) per annum on the stated value. Each share of Preferred Stock is
convertible into fully paid and nonassessable shares of the Company's Common
Stock subject to certain limitations. Under the terms of the Subscription
Agreements the Company was required to exercise its best efforts to file a
Registration Statement covering the resale of all shares of Common Stock of the
Company issuable upon conversion of the Preferred Stock then outstanding within
sixty (60) days after the first Closing of the 1997 Preferred Stock Private
Placement. The Registration Statement was filed with the SEC on December 29,
1997. The shares of Preferred Stock become convertible into shares of Common
Stock at any time commencing after the earlier of (i) the effective date of the
Registration Statement; or (ii) ninety (90) days after the date of filing of the
Registration Statement. Each share of Preferred Stock is convertible into a
number of shares of Common Stock of the Company as determined in accordance with
the Conversion Formula described above under "Overview".
The conversion terms of the Preferred Stock also provide that in no event
shall the average closing bid price referred to in the Conversion Formula be
less than $0.625 per share and in no event shall the Company be obligated to
issue more than 26.0 million shares of its Common Stock in the aggregate in
connection with the conversion of the Preferred Stock. Under the terms of the
Subscription Agreements the Company may be subject to a penalty if the
Registration Statement is not declared effective within one hundred twenty (120)
days after the first closing of any incremental portion of the offering of
Preferred Stock, such penalty to be in an amount equal to one and one half
percent (1.5%) per month of the aggregate amount of Preferred Stock sold in the
offering up to a maximum of ten percent (10%) of such aggregate amount. The
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Subscription Agreements and ending ninety (90) days after the
closing of the offering the Company will be prohibited from issuing any debt or
equity securities other than Preferred Stock, and that the Corporation will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner or in the event it fails to reserve sufficient
authorized but unissued Common Stock for issuance upon conversion of the
Preferred Stock.
Management believes that currently available funds may not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options, the funding derived from
technology licensing fees, royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditure alone
may not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties and
product sales, and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that 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 substantially cut back its
level of operations. These reductions could have an adverse effect on the
Company's relations with its strategic partners and customers. Uncertainty
exists with respect to the adequacy of current funds to support the Company's
activities until positive cash flow from operations can be achieved, and with
respect to the availability of financing from other sources to fund any cash
deficiencies.
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, 1997 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.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $93.5 million on a
cumulative basis through December 31, 1997. 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 1998, the Company adopted a plan that management believes should
generate sufficient additional funds for the Company to continue its operations
into 1999. Under this plan, the Company needs to generate approximately $31.5
million to fund its operations in 1998. Included in such amount is approximately
$23.3 million in sales of new products and approximately $8.1 million of
technology licensing fees and royalties. The Company believes that it can
generate these funds from 1998 operations, although there is no certainty that
the Company will achieve this goal. Success in generating technology licensing
fees, royalties and product sales are significant and critical to the Company's
ability to succeed. 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 1998, management of the Company determines that it will be unable to
meet or exceed the plan discussed above, the Company will consider cost
reductions and/or additional financing alternatives. 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 1999. See "Forward Looking Statements" above.
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 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. See Note 1 - "Notes to the Consolidated
Financial Statements".
At December 31, 1997, cash and cash equivalents were $12.6 million. The
available resources were invested in interest bearing money market accounts and
commercial paper. The Company's investment objective is preservation of capital
while earning a moderate rate of return.
The Company's working capital increased from $(1.3) million at December 31,
1996, to $11.7 million as of December 31, 1997. This increase was due primarily
to the 1997 financings discussed above.
During 1997, the net cash used in operating activities was $7.4 million. This
utilization reflects the emphasis on the commercial development of its
technology into several product applications which were scheduled for
introduction in 1997 and 1998.
The Company's available cash balances at December 31, 1997 are higher than
projected at the end of 1996, primarily due to the 1997 financings noted above.
The net cash used in investing activities amounted to $0.2 million during the
year primarily for capital expenditures. The net cash provided by financing
activities amounted to $19.9 million primarily from the exercise of options and
warrants and the 1997 financings 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.
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, 1997, and no material commitments are anticipated in the near future.
Year 2000 Compliance
The Company believes the cost of administrating its Year 2000 Compliance
program will not have a material adverse impact on future earnings. However, the
potential costs and uncertainties associated with any Year 2000 Compliance
program will depend on a number of factors, including software, hardware and the
nature of the industry in which the Company, its subsidiaries, suppliers and
customers operate. In addition, companies must coordinate with other entities
with which they electronically interact, such as customers, suppliers, financial
institutions, etc.
Although the Company's evaluation of its systems is still in process, there
has been no indication that the Year 2000 Compliance issue, as it relates to
internal systems, will have a material impact on future earnings. While the
Company is not aware of any material Year 2000 Compliance issues at its
customers and suppliers, such potential problems remain a possibility and could
have a material adverse impact on the Company's future results.
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
Independent Auditors Report F-1
Consolidated Balance Sheets, as of December 31, 1996, and F-2
1997
Consolidated Statements of Operations, for the years ended F-3
December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity, for the F-4
years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows, for the years ended
December 31, 1995, 1996 and 1997 F-5
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
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, 1998:
Name Age Positions and Offices
Jay M. Haft 62 Chairman of the Board of Directors
Michael J. Parrella 50 President and Director
Irene Lebovics 45 Senior Vice President, Marketing
Cy E. Hammond 43 Senior Vice President, Chief Financial Officer
John B. Horton 63 Senior Vice President, General Counsel and Secretary
Michael A. Hayes, PhD 45 Senior Vice President, Chief Technical Officer
John J. McCloy II 60 Director
Samuel A. Oolie 61 Director
Stephan Carlquist 42 Director
Morton Salkind 65 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 also a Director of the Company's subsidiary, NCT Audio Products, Inc., a
position which he has held since August 25, 1997. Mr. Haft 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 Gen Am "1" Venture Fund, an international venture
capital fund. Mr. Haft is also a Director of numerous other public and private
corporations, including Robotic Vision Systems, Inc. (OTC), Extech, Inc. (OTC),
Encore Medical Corporation (OTC), Viragen, Inc. (OTC), PC Service Source, Inc.
(OTC), DUSA Pharmaceuticals, Inc. (OTC), Oryx Technology Corp. (OTC), Thrift
Management, Inc. (OTC) and Conserver Corporation of America (OTC). He serves as
Chairman of the Board of Extech, 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 Wofsey,
Certilman, Haft et al (1966-1988). He is a member of the Florida Commission for
Government Accountability to the People, a National Vice-President of the Miami
Ballet and a Director of the Concert Association of Florida.
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. Mr.
Parrella serves as President of NCT Audio Products, Inc., a position to which he
was elected on September 4, 1997, and was appointed a Director on August 25,
1998. He was also Chairman of the Board of Environmental Research Information,
Inc., an environmental consulting firm, from December 1987 to March 1991.
Irene Lebovics currently serves as Senior Vice President, Marketing and
Communications, and President of NCT Headsets, a division of the Company. 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.
Cy E. Hammond currently serves as Senior Vice President, Chief Financial
Officer of the Company. He joined the Company as Controller in January 1990 and
was appointed a Vice President in February 1994. Mr. Hammond also serves as
Treasurer of NCT Audio Products, Inc., a position to which he was elected on
September 4, 1997. 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. Mr. Horton also serves as
Secretary of NCT Audio Products, Inc., a position to which he was elected on
September 4, 1997. 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 Senior Vice President, Chief
Technical Officer 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.
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. Mr. McCloy was
appointed a Director of the Company's subsidiary, NCT Audio Products, Inc., on
November 14, 1997, and currently serves as a Director. 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.
Sam Oolie currently serves as a Director of the Company. Mr. Oolie also
serves as a Director of the Company's subsidiary, NCT Audio Products, Inc., a
position to which he was appointed on September 4, 1997. 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.
Stephan Carlquist was elected as a Director of the Company on July 14, 1997,
and currently serves as a Director of the Company. Mr. Carlquist also has served
as a Director of NCT Audio Products, Inc. since November 14, 1997 and continues
to serve as a Director of that company. He is President of ABB Financial
Services, Inc. (USA), one of four business segments in the ABB Group and has
held that position since May 1993. Mr. Carlquist is also President of ABB
Treasury Center (USA), Inc. and has held that position since June, 1990. From
April, 1988 to 1990 he was the Executive Vice President of ABB World Treasury
Center, Zurich, and from April, 1986 to April, 1988 he was the President of the
Geneva branch of Asea Capital Corporation. Mr. Carlquist joined Asea AB in
September, 1983 as Manager, International Cash Management and served in that
capacity until April, 1986. From February, 1981 to April, 1983 he was employed
as a Foreign Exchange/Cash Manager at Atlas Copco AB. Mr. Carlquist serves as a
member of the following Boards: ABB Financial Services, Inc., ABB Treasury
Center USA, Inc., ABB Treasury Center (Canada), ABB Treasury Center (Brazil),
ABB Project & Trade Finance, Inc., ABB Investment Management Corporation, ABB
Credit, Inc., Sirius Americas Corporation, ABB Industrial Systems, Inc., SUSA,
Inc., and Swedish-American Chamber of Commerce, New York.
Morton Salkind currently serves as a Director of the Company. Mr. Salkind was
elected as a Director of the Company's subsidiary, NCT Audio Products, Inc., on
September 4, 1997 and currently also serves as a Director of that subsidiary.
Formerly he served as a New Jersey State Lottery Commissioner for five years.
This followed previous elective and appointive offices at the state, county and
municipal levels. Mr. Salkind is currently retired.
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, 1997, to December 31, 1997, all
filing requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with, except that Morton Salkind and Stephan
Carlquist each filed a Form 3 late and Sam Oolie and Jay Haft each filed a Form
5 late.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in a definitive proxy
statement which the Registrant anticipates will be filed by April 30, 1998, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information required under this item is contained in a definitive proxy
statement which the Registrant anticipates will be filed by April 30, 1998, and
is incorporated herein by reference.
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
ertain 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 February 27, 1998, QSI has paid all installments due and payable for
the exclusivity fee and owes the Company $150,000 which was due on January 1,
1998 and is fully reserved, 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.
Independent Auditors Report
Consolidated Balance Sheets, as of December 31, 1996, and 1997.
Consolidated Statements of Operations, for the years ended December 31, 1995,
1996 and 1997.
Consolidated Statements of Stockholders' Equity, for the years ended December
31, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows, for the years ended December 31, 1995,
1996 and 1997.
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) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the
Secretary of State of the State of Delaware on June 20, 1997,
incorporated by reference to Exhibit 3(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
* 3(c) Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock of the Company filed in
the Office of the Secretary of State of the State of Delaware
on October 29, 1997.
* 3(d) Certificate of Increase in the Number of Shares in the
Series C Convertible Preferred Stock of the Company filed in
the Office of the Secretary of State of the State of Delaware
on November 14, 1997.
3(e) 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, incorporated herein by reference to Exhibit
4(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
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, incorporated herein by reference to
Exhibit 4(c) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
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, incorporated herein by reference to Exhibit
4(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
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, incorporated herein by reference
to Exhibit 4(e) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
* 4(f) Secretary's Certificate dated March 20, 1998, as to a two
(2) year extension of the expiration dates of the Warrants
described in 4(b), (c), (d) and (e) above.
4(g) 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 Quiet Power 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, incorporated
herein by reference to Exhibit 10(q)(2) of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10(q)(3) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated April 9, 1997, incorporated
herein by reference to Exhibit 10(q)(3) of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
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.
10(w)(1) Cross License Agreement dated April 15, 1997, among Verity
Group plc, New Transducers Limited and Noise Cancellation
Technologies, Inc., incorporated by reference to Exhibit 10(a)
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.***
10(w)(2) Security Deed dated April 14, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
10(w)(3) Common Stock Purchase Option dated April 15, 1997, from Noise
Cancellation Technologies, Inc. to Verity Group plc,
incorporated by reference to Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
10(w)(4) Letter Agreement dated April 17, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by
reference to Exhibit 10(d) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
10(x)(1) New Cross License Agreement dated September 27, 1997, among
Verity Group plc, New Transducers Limited, Noise Cancellation
Technologies, Inc. and NCT Audio Products, Inc., incorporated
by reference to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
10(x)(2) Master License Agreement dated September 27, 1997, between New
Transducers Limited and NCT Audio Products, Inc., incorporated
by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
10(x)(3) Letter Agreement dated September 27, 1997, from Noise
Cancellation Technologies, Inc. to Verity Group plc,
incorporated by reference to Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
10(x)(4) License Agreement dated September 4, 1997, between Noise
Cancellation Technologies, Inc. and NCT Audio Products, Inc.,
incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
* 21 Subsidiaries
* 23(a) Consent of Richard A. Eisner & Company, L.L.P.
* 27 Financial Data Schedule.
* 99(a) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. 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 as at December
31, 1997 and for the year ended December 31, 1997.
* 99(b) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. 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 as at December
31, 1996 and for the year ended December 31, 1996.
* 99(c) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. 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 as at December
31, 1995 and for the year ended December 31, 1995.
* 99(d) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. regarding confirma-
tion that the accounts for the year end December 31, 1997 were
audited under auditing standards substantially similar to U.S.
General Accepted Auditing Standards.
* 99(e) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. regarding confirma-
tion that the accounts for the year end December 31, 1996 were
audited under auditing standards substantially similar to U.S.
General Accepted Auditing Standards.
* 99(f) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. regarding confirma-
tion that the accounts for the year end December 31, 1995 were
audited under auditing standards substantially similar to U.S.
General Accepted Auditing Standards.
- -----------------------
* Filed herewith.
** 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) The following report on Form 8-K was filed during the last quarter of the
period covered by this Report:
A report on Form 8-K was filed on November 14, 1997, reporting the receipt
and acceptance by the Company of Series C Convertible Preferred Stock
subscription agreements and the consideration received by the Company
thereunder as of November 13, 1997, and including unaudited condensed
consolidated balance sheets of the Company and its subsidiaries reflecting
the reported transactions.
F-1
(Richard A. Eisner & Company, L.L.P. Letterhead)
INDEPENDENT AUDITORS' REPORT
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, 1996 and
1997, 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, 1997. 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 1995, 1996 and
1997 financial statements of the Company's two foreign subsidiaries. These
subsidiaries accounted for revenues of approximately $1,200,000, $407,000 and
$67,000 for the years ended December 31, 1995, 1996 and 1997, respectively, and
assets of approximately $586,000, $515,000 and $301,000 at December 31, 1995,
1996 and 1997, respectively. These statements were audited by other auditors
whose reports have been furnished to us, one of which contained a reference to
dependence on the parent for continued financial support. 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
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, 1996 and 1997 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 1997 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 not been able to generate
sufficient cash flow from operating activities to sustain its operations and
since it has incurred net losses since inception, it has been and continues to
be dependent on equity financing and joint venture arrangements to support its
business efforts. 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, LLP
New York, New York
February 27, 1998
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars except share and per share amounts)
F-2
December 31,
--------------------
1996 1997
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 368 $12,604
Accounts receivable:
Trade:
Technology license fees and royalties 150 200
Joint Ventures and affiliates 2 -
Other 392 368
Unbilled 63 -
Allowance for doubtful accounts (123) (38)
---------- ---------
Total accounts receivable $ 484 $ 530
Inventories, net of reserves 900 1,333
Other current assets 207 213
---------- ---------
Total current assets $ 1,959 $ 14,680
Property and equipment, net 2,053 1,144
Patent rights and other intangibles, net 1,823 1,488
Other assets 46 49
--------- ---------
$ 5,881 $ 17,361
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,465 $ 1,324
Accrued expenses 1,187 1,392
Accrued payroll, taxes and related expenses 618 181
Customers' advances 1 87
--------- ---------
Total current liabilities $ 3,271 $ 2,984
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 10,000,000 shares
authorized, 13,250 Series C issued (redemption
amount $13,314) $ - $ 10,458
Common stock, $.01 par value, 140,000,000 and
185,000,000 shares, respectively, authorized;
issued and outstanding 111,614,405 and
133,160,212 shares, respectively 1,116 1,332
Additional paid-in-capital 85,025 96,379
Accumulated deficit (83,673) (93,521)
Cumulative translation adjustment 142 119
Common stock subscriptions receivable - (390)
---------- ---------
Total stockholders' equity $ 2,610 $ 14,377
---------- ---------
$ 5,881 $ 17,361
========== =========
See notes to consolidated financial statements.
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
F-3
(in thousands, except per
share amounts)
Years ended December 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
REVENUES:
Technology licensing fees $ 6,580 $ 1,238 $ 3,630
Product sales, net 1,589 1,379 1,720
Engineering and development services 2,297 547 368
---------- ---------- ----------
Total revenues $ 10,466 $ 3,164 $ 5,718
---------- ---------- ----------
COSTS AND EXPENSES:
Costs of sales $ 1,579 $ 1,586 $ 2,271
Costs of engineering and development services 2,340 250 316
Selling, general and administrative 5,416 4,890 5,217
Research and development 4,776 6,974 6,235
Equity in net loss (income) of unconsolidated
affiliates (80) 80 -
Provision for doubtful accounts 552 192 130
Interest expense (includes $1,420 of discounts
on beneficial conversion feature on convertible
debt in 1997) 4 45 1,514
Interest income (53) (28) (117)
---------- ---------- ----------
Total costs and expenses $ 14,534 $ 13,989 $ 15,566
---------- ---------- ----------
NET (LOSS) $ (4,068) $(10,825) $ (9,848)
Preferred stock beneficial conversion feature - - 1,623
Accretion of difference between carrying
amount and redemption amount of redeemable
preferred stock - - 285
---------- ---------- ----------
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,068) $ (10,825) $ (11,756)
========== ========== ==========
Weighted average number of common
shares outstanding - basic and diluted
87,921 101,191 124,101
========== ========== ==========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.05) $ (0.11) $ (0.09)
========== ========== ==========
See notes to consolidated financial statements.
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
F-4
(In thousands of dollars and shares)
Cumul- Expenses
Series C ative Stock to be
Convertible Trans- Subscrip- Paid
Preferred Stock Common Stock Additional Accumu- lation tion With
----------------- ---------------- Paid-In lated Adjust- Receiv- Common
Shares Amount Shares Amount Capital Deficit ment able Stock Total
------- ------ ------ ------ ---------- ------- ------- --------- -------- -----
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 Directors' 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
Sale of common stock - - 2,857 29 471 - - - - 500
Shares issued upon exercise
of warrants and options - - 1,996 20 1,115 - - (64) - 1,071
Sale of Series C preferred
stock less expenses
of $551 13 11,863 - - - - - - - 11,863
Discount on beneficial
conversion price to
preferred shareholders - (3,313) - - 3,313 - - - - -
Amortization of discount
on beneficial conversion
price to preferred
shareholders - 1,908 - - (1,908) - - - - -
Sale of subsidiary common
stock, less expenses
of $65 - - - - 3,573 - - (326) - 3,247
Common stock issued upon
conversion of convertible
debt, less expense of $168 - - 16,683 167 4,714 - - - - 4,881
Net loss - - - - - (9,848) - - - (9,848)
Translation adjustment - - - - - - (23) - - (23)
Restricted shares issued
for Directors' compensation - - 10 - 2 - - - - 2
Warrant issued in
conjunction with
convertible debt - - - - 34 - - - - 34
Compensatory stock
options and warrants - - - - 40 - - - - 40
================================================================================================
Balance at
December 31, 1997 13 $ 10,458 133,161 $ 1,332 $96,379 $(93,521) $ 119 $(390) $ - $ 14,377
================================================================================================
See notes to consolidated financial statements.
F-42
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Years Ended December 31,
------------------------------------
1995 1996 1997
--------- ---------- --------
Cash flows from operating activities:
Net loss $(4,068) $(10,825) $(9,848)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization 1,127 1,000 899
Common stock, options and warrants issued as
consideration for:
Compensation 8 109 42
Rent and marketing expenses 355 - -
Interest on debentures - - 51
Convertible debt - - 34
Debt cost incurred related to convertible debt - - 211
Common stock retired in settlement of employee
account receivable - (5) -
Receipt of license fee in exchange for inventory
and release of obligation (3,266) - -
Discount on beneficial conversion feature on
convertible debt - - 1,420
Provision for tooling costs and write off 94 371 515
Provision for doubtful accounts 552 192 130
Equity in net (income) loss of unconsolidated a
affiliates (80) 80 -
Unrealized foreign currency (gain) loss 32 (45) 8
(Gain) Loss on disposition of fixed assets 107 83 (4)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 302 61 (127)
(Increase) in license fees receivable - (150) (50)
(Increase) decrease in inventories 212 813 (433)
(Increase) decrease in other assets 299 67 (12)
Increase (decrease) in accounts payable and
accrued expenses (190) 55 135
Increase (decrease) in other liabilities (482) 436 (414)
--------- -------- --------
Net cash (used in) operating activities $(4,998) $(7,758) $(7,443)
--------- -------- --------
Cash flows from investing activities:
Capital expenditures $ (80) $ (186) $ (244)
Acquisition of patent rights (210) - -
Sales of short term investments 18 - -
Sale of capital expenditures - - 67
--------- -------- --------
Net cash (used in) investing activities $ (272) $ (186) $ (177)
--------- -------- --------
Cash flows from financing activities:
Proceeds from:
Convertible debt (net) $ - $ - $ 3,199
Sale of common stock (net) 3,989 6,377 500
Sale of preferred stock (net) - - 11,863
Sale of subsidiary stock (net) - - 3,247
Exercise of stock purchase warrants and options 689 104 1,071
--------- -------- ---------
Net cash provided by financing activities $ 4,678 $ 6,481 $ 19,880
--------- -------- --------
Effect of exchange rate changes on cash $ - $ - $ (24)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents $ (592) $(1,463) $ 12,236
Cash and cash equivalents - beginning of period 2,423 1,831 368
--------- -------- --------
Cash and cash equivalents - end of period $ 1,831 $ 368 $ 12,604
========= ======== ========
Cash paid for interest $ 4 $ 4 $ 8
========= ======== ========
See Notes 6 and 11 with respect to settlement of certain obligation by
issuance of securities.
See notes to consolidated financial statements.
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. Background:
Noise Cancellation Technologies, Inc. ("NCT" or the "Company") designs,
develops, licenses, produces and distributes electronic systems for Active Wave
Management 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 through a number of product lines, with 70
products currently being sold, including NoiseBuster(R) communications headsets
and NoiseBuster Extreme!(TM) consumer headsets, Gekko(TM) flat speakers, flat
panel transducers ("FPT(TM)"), ClearSpeech(TM), microphones, speakers and other
products, adaptive speech filters ("ASF"), 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, and an aircraft cabin quieting system.
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 $93.5 million on a
cumulative basis through December 31, 1997 and has working capital of $11.7
million at December 31, 1997. These losses, which include the costs for
development of products for commercial use, have been funded primarily from the
sale of common stock and preferred 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 amounted to $12.6 million at December 31, 1997.
Management believes that currently available funds may not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options, the funding derived from
technology licensing fees, royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditure alone
may not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties and
product sales, and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that 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 substantially cut back its
level of operations. These reductions could have an adverse effect on the
Company's relations with its strategic partners and customers. Uncertainty
exists with respect to the adequacy of current funds to support the Company's
activities until positive cash flow from operations can be achieved, and with
respect to the availability of financing from other sources to fund any cash
deficiencies (see Note 6 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, 1997 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 majority
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
$249,000, $9,000 and zero for the years ended December 31, 1995, 1996 and 1997,
respectively.
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 Ultra Electronics, Ltd. in 1995
and New Transducers, Ltd. in 1997.
Advertising:
Advertising costs are expensed as incurred. Expense for years ended
December 31, 1995, 1996 and 1997 was $0.6 million, $0.5 million and $0.5
million, respectively.
Cash and cash equivalents:
The Company considers all money market accounts and highly liquid
investments with original maturities of three months or less at the time of
purchase (principally comprise high quality investments in commercial paper) to
be cash equivalents.
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, and reviews the
movement of inventory on an item by item basis to determine the value of items
which are slow moving. After considering the potential for near term product
engineering changes and/or technological obsolescence and current realizability,
the Company determines the current need for inventory reserves. After applying
the above noted measurement criteria at December 31, 1996, and December 31,
1997, the Company determined that a reserve of $0.3 million and $0.5 million,
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 life of each patent (ranging from 1 to 15 years).
Amortization expense was $0.4 million, $0.4 million and $0.3 million for 1995,
1996 and 1997, respectively. Accumulated amortization was $1.5 million and $1.8
at December 31, 1996 and 1997, respectively.
It is the Company's policy to review its individual patents when events
have occurred which could impair the valuation on 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 and have not been material.
Loss per common share:
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings Per Share," in the year ended December 31, 1997 and has
retroactively applied the effects thereof for all periods presented.
Accordingly, the presentation of per share information includes calculations of
basic and dilutive loss per share. The impact on the per share amounts
previously reported (primary and fully diluted) was not significant. The effects
of potential common shares such as warrants, options, and convertible preferred
stock has not been included, as the effect would be antidilutive. (See Notes 3,
6 and 7.)
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents. 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. The Company
primarily holds its cash and cash equivalents in two banks and commercial paper.
Deposits in excess of federally insured limits were $12.4 million at December
31, 1997. 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
71% of revenues during 1997 and 59% of accounts receivable at December 31, 1997.
The Company does not require collateral or other security to support customer
receivables.
(in thousands of dollars)
As of December 31, 1997,
and for the year then ended
---------------------------------
Accounts
CUSTOMER Receivable Revenue
-------------------------------- ------------ --------------
Verity Group.plc $--- $3,000
Telex Communications, Inc. --- 391
The Sharper Image 53 236
Brookstone 60 228
Siemens AG 200 200
All Other 217 1,663
------------ --------------
Total $530 $5,718
============ ==============
The Company regularly assesses the realizability of its accounts receivable
and performs a detailed analysis of its aged accounts receivable. When
quantifying the realizability of accounts receivable, the Company takes into
consideration the value of past due receivables and the collectibility of such
receivables, based on credit worthiness.
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 employee stock option and
warrant incentive plans. Please refer to Note 7 for further information.
Recently issued accounting pronouncements:
In, June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure", No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has not yet determined whether the above pronouncements will have a
significant effect on the information presented in the financial statements.
3. Joint Ventures and Other Strategic Alliances:
The following is a summary of certain of the Company's joint ventures and
other strategic alliances as of December 31, 1997.
The Company and certain of its majority-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, 1997, 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, 1997. 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:
(in thousands of dollars)
Years ended December 31,
-------------------------------------
Joint Venture/Alliance 1995 1996 1997
- -------------------------------------- ----------- ----------- -----------
Walker Noise Cancellation $3,994 $90 $61
Technologies
Ultra Electronics, Ltd. 3,153 62 ---
ELESA 424 28 ---
Siemens Medical Systems, Inc. 260 319 172
Foster/NCT Supply, Ltd. 133 10 28
AB Electrolux 129 12 34
Hoover Universal, Inc. --- 713 ---
Verity Group plc --- --- 3,000
----------- ----------- -----------
Total $8,093 $1,234 $3,295
=========== =========== ===========
Outlined below is a summary of the nature and terms of selected ventures or
alliances:
Joint Ventures
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
("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. During 1996 such services
were nominal. 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. In consideration for certain marketing services to be provided by the
Company and Oxford International, Ltd. (Oxford), an affiliate of AAR, OnActive
will pay the Company and Oxford two percent (2%) each of the revenues or thirty
percent (30%) each of the gross margin (whichever is less) received by OnActive
from the sale of Top Down Surround Sound(TM) ("TDSS") systems and the licensing
of TDSS technology to certain original equipment manufacturers.
Other Strategic Alliances:
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.
New Transducers Ltd.(NXT), a wholly owned subsidiary of Verity Group PLC
("Verity") and the Company executed a cross licensing agreement (the "Cross
License") on March 28, 1997. Under terms of the Cross License, the Company
licensed patents and patents pending which relate to FPT(TM) technology to NXT,
and NXT licensed patents and patents pending which relate to parallel technology
to the Company. In consideration of the license, during the first quarter 1997,
NCT recorded a $3.0 million license fee receivable from NXT as well as royalties
on future licensing and product revenue. The Company also executed a security
deed (the "Security Deed") in favor of NXT granting NXT a conditional assignment
in the patents and patents pending licensed to NXT under the Cross License in
the event a default in a certain payment to be made by the Company under the
Cross License continued beyond fifteen days. Concurrent with the Cross License,
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 (the "Verity Option"), 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 the Company executed
a registration rights agreement (the "Registration Rights Agreement") covering
such shares. Five 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. On April
15, 1997, Verity, NXT and the Company executed several agreements and other
documents (the "New Agreements") terminating the Cross License, the Security
Deed, the Verity Option and the Registration Rights Agreement and replacing them
with new agreements (respectively the "New Cross License", the "New Security
Deed", the "New Verity Option" and the "New Registration Rights Agreement"). The
material changes effected by the New Agreements were the inclusion of Verity as
a party along with its wholly owned subsidiary NXT; providing that the license
fee payable to NCT could be paid in ordinary shares of Verity stock; and
reducing the exercise price under the option granted to Verity to purchase
shares of the Company's common stock to $0.30 per share. The subject license fee
was paid to the Company in ordinary shares of Verity stock which were
subsequently sold by the Company. On September 27, 1997, Verity, NXT, NCT Audio
Products, Inc. ("NCT Audio") and the Company executed several agreements and
other documents, terminating the New Cross License and the New Security Deed and
replacing them with new agreements (respectively, the "Cross License Agreement
dated September 27, 1997" and the "Master License Agreement"). The material
changes effected by the most recent agreements were an expansion of the fields
of use applicable to the exclusive licenses granted to Verity and NXT, an
increase in the royalties payable on future licensing and product revenues,
cancellation of the New Security Deed covering the patents licensed by the
Company, and the acceleration of the date on which the parties can exercise
their respective stock purchase option to September 27, 1997.
4. Inventories:
Inventories comprise the following:
(in thousands of dollars)
December 31,
----------------------------
1996 1997
------------- -------------
Components $543 $514
Finished goods 619 1,291
------------- -------------
Gross inventory $1,162 $1,805
Reserve for obsolete & slow moving inventory (262) (472)
------------- -------------
Inventory, net of reserves $900 $1,333
============= =============
5. Property and Equipment:
Property and equipment comprise the following:
(in thousands of
dollars)
Estimated December 31,
Useful Life -------------------------
(Years) 1996 1997
------------- ------------ ------------
Machinery and equipment 3-5 $1,763 $1,801
Furniture and fixtures 3-5 749 869
Leasehold improvements 7-10 1,185 1,177
Tooling 1-3 1,062 670
Other 5-10 167 74
------------ ------------
Gross $4,926 $4,591
Less accumulated (2,873) (3,447)
depreciation
------------ ------------
Net $2,053 $1,144
============ ============
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was $0.6 million, $ 0.5 million and $0.6 million, 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 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.
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S of
the Securities Act of 1933, as amended, (the "Securities Act") to five unrelated
investors (the "Investors") through multiple dealers (the "First Quarter 1997
Financing") from which the Company realized $3.2 million of net proceeds. The
Debentures were to mature between January 15, 2000 and March 25, 2000 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 Investors, at their discretion, had the right to convert the
principal due on the Debentures into the Company's common stock at any time
after the 45th day following the date of the sale of the Debentures to the
Investors. In the event of such a conversion, the conversion price was the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date of the Debentures' sale or between 75% to 60% (depending on the
Investor and other conditions) 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 reserved 15 million
shares of the Company's common stock for issuance upon such conversion. Subject
to certain conditions, the Company also had the right to require the Investors
to convert all or part of the Debentures under the above noted conversion price
conditions after February 15, 1998. As of June 6, 1997, the Investors had
converted all $3.4 million of the Debentures into 16.5 million shares of the
Company's common stock. At the Company's election, interest due through the
conversion dates of the Debentures was paid through the issuance of an
additional 0.2 million shares of the Company's common stock. In conjunction with
the Debentures, the Company granted a warrant to purchase 75,000 shares of
common stock to one investor. During the year ended December 31, 1997, the
Company valued this warrant, using the Black-Scholes pricing model at $34,000
which was expensed as debt discount. The Company has recorded a $1.4 million
non-cash interest expense attributable to the conversions of the Debentures in
the first and second quarters of 1997 as an adjustment during the fourt quarter
of 1997. If the shares were issued in lieu of debt at the respective issuance
dates of the debt, supplementary basic and diluted net loss per share for the
year ended December 31, 1997 would have been a loss of $0.08 per share.
On June 19, 1997 the stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock from 140 million shares to 185 million shares. The
Company has reserved 3.9 million shares of such additional shares for issuance
upon the exercise of the New Verity Option and 2.6 million shares of such
additional shares for issuance upon the exercise of options granted or to be
granted and future grants of restricted stock awards under the Noise
Cancellation Technologies, Inc. Stock Incentive Plan (the "1992 Plan").
On July 30, 1997 the Company sold 2.9 million shares, in the aggregate, of
its common stock at a price of $0.175 per share in the July 30, 1997 Private
Placement that provided net proceeds to the Company of $0.5 million.
On September 4, 1997, the Company transferred $5,000 cash and all of the
business and assets of its Audio Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated company, NCT Audio, in consideration for 5,867 shares of NCT
Audio common stock whereupon NCT Audio became a wholly owned subsidiary of the
Company. The Company also granted NCT Audio an exclusive worldwide license with
respect to all of the Company's relevant patented and unpatented technology
relating to FPT(TM) and FPT(TM) based audio speaker products for all markets for
such products excluding (a) markets licensed to or reserved by Verity and NXT
under the Company's cross licensing agreements with Verity and NXT, (b) the
ground based vehicle market licensed to OAT, (c) all markets for hearing aids
and other hearing enhancing or assisting devices, and (d) all markets for
headsets, headphones and other products performing functions substantially the
same as those performed by such products in consideration for a license fee of
$3.0 million (eliminated in consolidation) to be paid when proceeds are
available from the sale of NCT Audio common stock and on-going future royalties
payable by NCT Audio to the Company as provided in such license agreement. In
addition, the Company agreed to transfer all of its rights and obligations under
its cross licensing agreements with Verity and NXT to NCT Audio and to transfer
the Company's interest in OAT to NCT Audio. Between October 10, 1997 and
December 4, 1997 NCT Audio issued 2,145 shares of its common stock (including
533 shares issued to Verity) for an aggregate purchase price of $4.0 million in
a private placement pursuant to Regulation D under the Securities Act (the "NCT
Audio Financing"). NCT Audio has not met certain conditions regarding the filing
of a registration statement for NCT Audio common stock. As such, holders of NCT
Audio common stock have a right to convert their NCT Audio common stock into a
sufficient number of restricted shares of NCT common stock to equal their
original cash investment in NCT Audio, plus a 20% discount to market. As of
February 27, 1998, no NCT Audio shareholder has exercised their right to convert
NCT Audio common stock into NCT common stock under the terms noted above.
Between October 28, 1997 and December 11, 1997, the Company entered into a
series of subscription agreements (the "Subscription Agreements") to sell an
aggregate amount of $13.3 million of Series C Convertible Preferred Stock (the
"Preferred Stock") in a private placement, pursuant to Regulation D of the
Securities Act, to 32 unrelated accredited investors through two dealers (the
"1997 Preferred Stock Private Placement"). The total Preferred Stock Offering
was completed on December 11, 1997. The aggregate net proceeds to the Company of
the 1997 Preferred Stock Private Placement were $11.9 million. Each share of the
Preferred Stock has a par value of $.10 per share and a stated value of one
thousand dollars ($1,000) with an accretion rate of four percent (4%) per annum
on the stated value. Each share of Preferred Stock is convertible into fully
paid and nonassessable shares of the Company's Common Stock subject to certain
limitations. Under the terms of the Subscription Agreements the Company is
required to exercise its best efforts to file a registration statement
("Registration Statement") on Form S-3 covering the resale of all shares of
Common Stock of the Company issuable upon conversion of the Preferred Stock then
outstanding within sixty (60) days after the first Closing of the 1997 Preferred
Stock Private Placement. The shares of Preferred Stock become convertible into
shares of Common Stock at any time commencing after the earlier of (i) the
effective date of the Registration Statement; or (ii) ninety (90) days after the
date of filing of the Registration Statement. Each share of Preferred Stock is
convertible into a number of shares of Common Stock of the Company as determined
in accordance with the Conversion Formula as set forth in the agreement using a
conversion price equal to the lesser of (x) 120% of the five (5) day average
closing bid price of Common Stock immediately prior to the closing date of the
Preferred Stock being converted or (y) 20% below the five (5) day average
closing bid price of Common Stock immediately prior to the conversion date
thereof. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" for a description of the
Conversion Formula.
The conversion terms of the Preferred Stock also provide that in no event
shall the average closing bid price referred to in the Conversion Formula be
less than $0.625 per share and in no event shall the Company be obligated to
issue more than 26.0 million shares of its Common Stock in the aggregate in
connection with the conversion of the Preferred Stock. Accordingly, 26.0 million
shares of Common Stock which could be issuable upon conversion of the Preferred
Stock are included in the offering to which the prospectus relates. Under the
terms of the Subscription Agreements the Company may be subject to a penalty if
the Registration Statement is not declared effective within one hundred twenty
(120) days after the first closing of any incremental portion of the offering of
Preferred Stock, such penalty to be in an amount equal to one and one half
percent (1.5%) per month of the aggregate amount of Preferred Stock sold in the
offering up to a maximum of ten percent (10%) of such aggregate amount. The
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Subscription Agreements and ending ninety (90) days after the
closing of the offering the Company will be prohibited from issuing any debt or
equity securities other than Preferred Stock, and that the Corporation will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner or in the event it fails to reserve sufficient
authorized but unissued Common Stock for issuance upon conversion of the
Preferred Stock.
The Securities and Exchange Commission (the "SEC") has taken the position
that when preferred stock is convertible to common stock at a conversion rate
that is the lower of a rate fixed at issuance or a fixed discount from the
common stock market price at the time of conversion, the discounted amount is an
assured incremental yield, the "beneficial conversion feature", to the preferred
shareholders and should be accounted for as an embedded dividend to preferred
shareholders. As such, this dividend was recognized in the earnings per share
calculation.
Stock subscription receivable:
The $0.4 million stock subscription receivable at December 31, 1997
represents a receivable of $0.1 million due from a director which was paid in
1998, and a $0.3 million receivable from the escrow agent for the NCT Audio
financing which has not yet been paid.
Shares reserved for common stock options and warrants:
At December 31, 1997 aggregate shares reserved for issuance under common
stock option plans and warrants amounted to 17.7 million shares of which common
stock options and warrants for 18.6 million shares are outstanding (see Note 7)
and 16.2 million shares are exercisable.
7. Common Stock Options and Warrants:
The Company applies APB 25 in accounting for its various employee stock
option incentive plans and warrants and, accordingly, recognizes compensation
expense as the difference, if any, between the market price of the underlying
common stock and the exercise price of the option on the date of grant. The
effect of applying SFAS No. 123 on 1995, 1996 and 1997 pro forma net loss as
stated above is not necessarily representative of the effects on reported net
loss for future periods due to, among other factors, (i) the vesting period of
the stock options and (ii) the fair value of additional stock option grants in
future periods. If compensation expense for the Company's stock option plans and
warrants had been determined based on the fair value of the options or warrants
at the grant date for awards under the plans in accordance with the methodology
prescribed under SFAS No. 123, the Company's net loss would have been $5.8
million, $12.8 million and $15.8 million, or $(.07), $(0.13) and $(0.14) per
share in 1995, 1996 and 1997, respectively. The fair value of the options and
warrants granted in 1995, 1996 and 1997 are estimated in the range of $0.44 to
$1.25, $0.48 to $0.58 and $0.16 to $4.07 per share, respectively, on the date of
grant using the Black-Scholes option-pricing model utilizing the following
assumptions: dividend yield 0%, volatility of 1.040, 1.225 and 1.289 in 1995,
1996 and 1997, respectively, risk free interest rates in the range of 5.63% to
7.84%, 5.05% to 6.50% and 5.79% to 6.63% for 1995, 1996 and 1997, respectively,
and expected life of 3 years. The weighted average fair value of options granted
during 1995, 1996 and 1997 are estimated in the range of $0.37 to $0.66, $0.49,
and $0.13 to $0.58 per share, respectively also using the Black-Scholes
option-pricing model.
Stock Options:
The Company's 1987 Stock Option Plan (the "1987 Plan") provides for the
granting of up to 4,000,000 shares of common stock as either incentive stock
options or nonstatutory stock options. Options to purchase shares may be granted
under the 1987 Plan to persons who, in the case of incentive stock options, are
full-time employees (including officers and directors) of the Company; or, in
the case of nonstatutory stock options, are employees or non-employee directors
of the Company. The exercise price of all incentive stock options must be at
least equal to the fair market value of such shares on the date of the grant and
may be exercisable over a ten-year period. The exercise price and duration of
the nonstatutory stock options are to be determined by the Board of Directors.
Information with respect to 1987 Plan activity is summarized as follows:
Years Ended December 31,
---------------------------------------------------------
1995 1996 1997
--------- ------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- -------- --------- -------- --------
Outstanding at
beginning of year 1,790,472 $0.58 1,540,000 $0.56 1,500,000 $0.54
Options granted - - - - 1,350,000 0.51
Options exercised (232,651) 0.66 - - - -
Options canceled,
expired or forfeited (17,821) 1.39 (40,000) 1.31 (1,500,000 (0.54)
========= ========== ==========
Outstanding at end
of year 1,540,000 $0.56 1,500,000 $0.54 1,350,000 $0.51
========= ========== ==========
Options exercisable
at year-end 1,540,000 $0.56 1,500,000 $0.54 1,350,000 $0.51
========= ========== ==========
As of December 31, 1997, options for the purchase of 217,821 shares were
available for future grant under the 1987 Plan.
Information with respect to non-plan stock option activity is summarized as
follows:
Years Ended December 31,
---------------------------------------------------------
1995 1996 1997
---------------- ----------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------- -------- ------ --------
Outstanding at
beginning of year 1,641,995 $1.98 403,116 $1.04 372,449 $1.08
Options granted - - - - 7,844,449 0.41
Options exercised (328,667) 0.51 (26,667) 0.50 - -
Options canceled,
expired or forfeited (910,212) 2.92 (4,000) 1.33 (3,897,449) 0.53
======== ======= =========
Outstanding at end
of year 403,116 $1.04 372,449 $1.08 4,319,449 $0.36
======== ======= =========
Options exercisable
at year-end 399,116 $1.02 370,449 $1.07 4,319,449 $0.36
======== ======= =========
On October 6, 1992, the Company adopted a stock option plan as amended (the
"1992 Plan") for the granting of options to purchase up to 10,000,000 shares of
common stock to officers, employees and certain directors.
Information with respect to 1992 Plan activity is summarized as follows:
Years Ended December 31,
---------------------------------------------------------
1995 1996 1997
------------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- ------ --------
Outstanding at
beginning of year 4,058,542 $2.75 4,004,248 $1.00 6,022,765 $0.86
Options granted 5,386,422 1.04 2,156,500 0.67 4,652,222 0.55
Options exercised (161,423) 0.85 (33,533) 0.75 (1,141,795 (0.64)
Options canceled,
expired or forfeited (5,279,293) 2.29 (104,450) 1.37 (503,256) (0.99)
========= ========= =========
Outstanding at end
of year 4,004,248 1.00 6,022,765 $0.86 9,029,936 $0.72
========= ========= =========
Options exercisable
at year-end 1,534,335 $1.31 5,835,265 $0.86 6,592,436 $0.73
========= ========= =========
As of December 31, 1997, no shares were available for future grants of
restricted stock awards and for options to purchase common stock under the 1992
Plan.
As of December 31, 1997, 1.9 million options have been granted but are not
exercisable until such time as the Company's stockholders approve an increase in
the number of shares of the Company's Common Stock included in the 1992 Plan. At
the time of such stockholder approval, if the market value of the Company's
stock exceeds the exercise price of the subject options, the Company will incur
a non-cash charge to earnings equal to the spread between the exercise price of
the option and market price, times the number of options involved.
On November 15, 1994, the Board of Directors adopted the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors (the "Directors Plan"), as
amended. Under the Directors Plan 821,000 shares have been approved by the Board
of Directors for issuance. The options granted under the Directors Plan have
exercise prices equal to the fair market value of the Common Stock on the grant
dates, and expire five years from date of grant.
Information with respect to Directors Plan activity is summarized as follows:
Years Ended December 31,
----------------------------------------------------------
1995 1996 1997
------------------- ---------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at
beginning of year 240,000 $0.97 821,000 $0.73 746,000 $0.73
Options granted 1,076,000 0.77 - - - -
Options exercised - - - - - -
Options canceled,
expired or
forfeited (495,000) 0.92 (75,000) 0.75 - -
======= ======= ========
Outstanding at end
of year 821,000 $0.73 746,000 $0.73 746,000 $0.73
======= ======= ========
Options exercisable
at year-end 305,000 $0.70 746,000 $0.73 746,000 $0.73
======= ======= ========
As of December 31, 1997, there were 75,000 options for the purchase of
shares available for future grants under the Directors Plan.
The following information summarizes information about the Company's stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
-------------------------- -------------------
Weighted
Average
Remaining
Contrac- Weighted Weighted
Number tual Life Average Number Average
Plan Range of Out- (In Exercise Exer- Exercise
Plan Exercise Price standing Years) Price cisable Price
- -------------- -------------- --------- --------- ------- ------- -------
1987 Plan $0.50 to $0.63 1,350,000 1.18 $0.51 1,350,000 $0.51
Non-Plan $0.27 to $5.09 4,319,449 4.14 $0.36 4,319,449 $0.36
1992 Plan $0.27 to $4.00 9,029,936 4.89 $0.72 6,592,436 $0.73
Director's Plan $0.66 to $0.75 746,000 1.88 $0.73 746,000 $0.73
Warrants:
The Company had shares of its common stock reserved at December 31, 1995,
December 31, 1996, and December 31, 1997, for warrants outstanding, all of which
are exercisable.
Information with respect to warrant activity is summarized as follows:
Years Ended December 31,
--------------------------------------------------------
1995 1996 1997
---------------- ----------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding at
beginning of year 4,829,896 $1.20 4,032,541 $0.71 3,888,539 $0.72
Warrants granted 2,418,750 0.76 - - 2,846,923 0.76
Warrants exercised (327,105) 0.76 (144,002) 0.45 (854,119) (0.41)
Warrants canceled,
expired or
forfeited (2,889,000) 1.57 - (2,734,423 (0.75)
========= ========= =========
Outstanding at
end of year 4,032,541 $0.71 3,888,539 $0.72 3,146,920 $0.81
========= ========= =========
Warrants
exercisable
at year end 4,032,541 $0.71 3,888,539 $0.72 3,146,920 $0.81
========= ========= =========
The following table summarizes information about warrants outstanding at
December 31, 1997:
Warrants Outstanding Warrants Exercisable
----------------------------------- ---------------------
Weighted
Average
Remaining
Contractual Weighted Weighted
Life Average Average
Number (In Exercise NumberPrice Exercise
Range of Exercise Outstanding Years) Price Exercisable Price
- ----------------- ----------- ------------ -------- ----------- --------
$0.69 to $4.00 3,146,920 2.06 $0.81 3,146,920 $0.81
8. Related Parties:
Environmental Research Information, Inc.
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.
Quiet Power Systems, Inc.
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.
For the years ended December 31, 1995, 1996 and 1997 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, 1995, 1996 and 1997
no payments were required to be made 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 February 27, 1998, QSI has paid all installments due and payable for
the exclusivity fee and owes the Company $150,000 which was due on January 1,
1998 and is fully reserved, and other than as described above, owes no other
amounts to the Company.
Other Parties
During 1995, 1996 and 1997 the Company purchased $0.5 million, $0.6 million
and $0.7 million respectively, of products from its various manufacturing joint
venture entities.
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, 1997, the Company had available net operating loss
carryforwards of approximately $76.9 million and research and development credit
carryforwards of $1.3 million for federal income tax purposes which expire as
follows:
(in thousands of dollars)
----------------------------------
Research and
Net Operating Development
Year Losses Credits
---- ---------------- ----------------
1999 $151 --
2000 129 --
2001 787 --
2002 2,119 --
2003 1,974 --
2004 1,620 --
2005 3,870 $141
2006 1,823 192
2007 6,866 118
2008 13,456 321
2009 16,293 413
2010 9,386 61
2011 8,980 67
2012 9,457 (1)
---------------- ----------------
Total $76,911 $1,313
================ ================
(1)Includes approximately $4.1 million net operating loss relating to NCT Audio
Products, Inc.
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 $1.4 million , $3.3 million and $3.0 million in 1995,
1996 and 1997, 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, 1996 and 1997 were as follows:
(in thousands of
dollars)
------------------------
1996 1997
--------- ----------
Accounts receivable $ 281 $ 207
Inventory 108 191
Property and equipment 187 68
Accrued expenses 243 69
Stock compensation 2,684 2,698
Other 324 299
-------- ----------
Total temporary differences $ 3,827 $ 3,532
Federal net operating losses 22,903 26,149
Federal research and development 1,246 1,313
credits
-------- ----------
$ 27,976 $ 30,994
Less: Valuation allowance (27,976) (30,994)
--------- ----------
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 Lire ($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
Lire ($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.
On September 16, 1997, Ally Capital Corporation ("Ally") filed suit against
the Company, John J. McCloy II, Michael J. Parrella, Jay M. Haft and Alistair J.
Keith in the United States District Court for the District of Connecticut (the
"District Court"). The complaint was not served on the Company until January 16,
1998, and has yet to be served on the individual defendants. The individual
defendants are current and former officers and directors of the Company. The
complaint alleges three (3) causes of action arising out of an agreement (the
"Asset Purchase Agreement") which the Company entered into with another entity
known as Active Noise and Vibration Technologies, Inc. ("ANVT") whereby the
Company agreed to acquire ANVT's patented and unpatented intellectual property,
the rights and obligations under a defined list of agreements between ANVT and
twenty-one (21) other parties (the "Listed Parties") relating to existing or
potential joint ventures, licensing and other business relationships, and
certain items of office and laboratory equipment. For these assets, the Company
paid ANVT two hundred thousand ($200,000.00) dollars and issued ANVT two million
(2,000,000) shares of the Company's common stock. The Asset Purchase Agreement
also provided ANVT with the right to certain contingent payments, to the extent
the Company generated certain levels of revenue from joint venture, licensing or
other contractual relationships with any of the Listed Parties. Plaintiff Ally
is an unsecured creditor of ANVT and is not a party to the Asset Purchase
Agreement; however, Ally asserts an interest to part of the consideration paid
ANVT by virtue of an escrow agreement between ANVT and the escrow agent for the
benefit of ANVT's secured and unsecured creditors. Ally purports to allege
claims of fraud, negligent misrepresentation and a claim under the Connecticut
Unfair Trade Practice Act based upon purported representations made to ANVT, not
Ally. Thus, it is alleged that the Company misrepresented to ANVT the Company's
financial condition, the number of shares it could issue and the value of the
contingent payment rights under the Asset Purchase Agreement. In connection with
the claims, Ally seeks compensatory damages in excess of one million two hundred
thousand ($1,200,000.00) dollars, punitive damages and attorney fees. On March
4, 1998, the Company served its motion to dismiss the complaint pursuant to
Federal Rule of Civil Procedure 12. The basis for the motion include: that the
summons and complaint were not served for more than one hundred twenty (120)
days after the complaint was filed, in violation of Federal Rule of Civil
Procedure 4; that Ally lacks standing to bring its claims as they are based on
purported representations made by the Company to ANVT, not Ally; that the claims
are legally insufficient under Connecticut law; and that plaintiff has failed to
join necessary parties, ANVT and the escrow agent. As no discovery has taken
place, the Company is unable to assess the likelihood of an adverse result.
Management, however, believes it has meritorious defenses and intends a vigorous
defense of this lawsuit. However, in the event this lawsuit does result in a
substantial final judgment against the Company, said judgment could have a
severe material effect on quarterly or annual operating results.
11. Commitments and Contingencies:
The Company is obligated for minimum annual rentals (net of sublease income)
under operating leases for offices, warehouse space and laboratory space,
expiring through April 2007 with various renewal options, as follows:
(in thousands
of dollars)
-------------
Year Ending
December 31, Amount
--------------------- -------------
1998 $ 436
1999 437
2000 296
2001 77
2002 63
Thereafter 266
=============
Total $1,575
=============
Rent expense (net of sublease income) was $0.8 million, $0.6 million and $0.4
million for each of the three years ended December 31, 1995, 1996 and 1997,
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 February 27,
1998, the Company was not aware of any material benefit claim liability.
On September 16, 1994, the Company acquired the patents, technology, other
intellectual property and certain related tangible assets of ANVT. 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. As of the period ended December 31,
1997, no such contingent earn-out or payments were due ANVT.
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:
(in thousands of dollars)
December 31,
-----------------------------------------
1995 1996 1997
------------ ------------ ------------
Revenues
United States $6,095 $2,674 $2,089
Europe 4,065 480 3,270
Far East 306 10 359
------------ ------------ ------------
Total $10,466 $3,164 $5,718
============ ============ ============
Net (Income) Loss
United States $3,761 $9,752 $9,211
Europe (36) 912 411
Far East 343 161 226
------------ ------------ ------------
Total $4,068 $10,825 $9,848
============ ============ ============
Identifiable Assets
United States $8,997 $5,366 $17,060
Europe 586 515 301
------------ ------------ ------------
Total $9,583 $5,881 $17,361
============ ============ ============
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: March 31, 1998
-----------------------
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 March 31, 1998
---------------------------- (Principal Executive
Michael J. Parrella Officer)
/s/ CY E. HAMMOND Senior Vice President and March 31, 1998
---------------------------- Chief Financial Officer
Cy E. Hammond (Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Chairman of the Board
---------------------------- of Directors and Director March 31, 1998
Jay M. Haft
/s/ JOHN J. McCLOY II Director March 31, 1998
----------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director March 31, 1998
----------------------------
Samuel A. Oolie
/s/ MORTON SALKIND Director March 31, 1998
----------------------------
Morton Salkind
/s/ STEPHAN CARLQUIST Director March 31, 1998
----------------------------
Stephan Carlquist
(Richard A. Eisner & Company, LLP Letterhead)
INDEPENDENT AUDITORS' REPORT ON SCHEDULE II
Board of Directors and Stockholders OF
Noise Cancellation Technologies, Inc.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The information
included on Schedule II is presented for purposes of additional analysis and is
not a required part of the basic consolidated financial statements as at
December 31, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997 taken as a whole. The information included on Schedule
II is presented for purposes of additional analysis and is not a required part
of the basic consolidated financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole. Also, such schedule presents fairly the information set forth
therein in compliance with the applicable accounting regulations of the
Securities and Exchange Commission.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
February 27, 1998
SCHEDULE II
NOISE CANCELLATION TECHNOLOGIES, INC. AND
SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ---------------------------------------------------------------------------------------------------------------------------
Additions
Balance at charged to Balance
beginning costs and Decuctions Deductions at end
Description of Period expenses describe describe of period
- --------------------------- ---------- ---------- ---------- ---------- ---------
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, 1997:
Allowance for doubtful accounts $ 123 $ 130 $ 65(2) $ 150(3) $ 38
========== ========== ========== ========== =========
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
========== ========== ========== ========== =========
Year ended December 31, 1997:
Allowance for inventory obsolence $ 262 $ 210 $ - $ - $ 472
========== ========== ========== ========== =========
Attention is directed to the foregoing accountants' reports and to the accompanying notes to the consolidated financial statements.
(1) To write off reserves applied to December 31, 1994 and December 31, 1995
inventory.
(2) To write off fully reserved accounts receivable deemed uncollectible.
(3) To reduce reserve for accounts collected.