<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-11213
4,093,135 SHARES
NOISE CANCELLATION TECHNOLOGIES, INC.
COMMON STOCK
--------------
This offering consists of the resale of 4,093,135 shares of Common
Stock of Noise Cancellation Technologies, Inc. (the "Company") which are
issuable upon the exercise of outstanding options to purchase shares of Common
Stock (the "Option Shares") granted under the Noise Cancellation Technologies,
Inc. Stock Incentive Plan (the "1992 Plan") or upon the grant of restricted
Common Stock awards under the 1992 Plan to persons who may be deemed
"affiliates" of the Company, as that term is defined under the Securities Act
of 1933 (the "Securities Act"), all of which may be offered for sale by such
persons as Selling Stockholders (see "Selling Stockholders"). The proceeds, if
any, from the exercise of any such options will be added to the Company's
working capital. The Company will not receive any of the proceeds from the sale
of Option Shares by the Selling Stockholders.
In addition, this offering relates to any additional shares of Common
Stock which may become issuable upon the exercise of options to purchase shares
of Common Stock to be granted to such persons under the 1992 Plan in the future
as well as any additional shares of Common Stock which may be issued in the
future to such persons upon the grant of restricted Common Stock awards under
the 1992 Plan. The number of any such additional shares and the names of such
persons will be set forth in a supplement to this Prospectus (see "Selling
Stockholders").
The Company has been advised by the Selling Stockholders that
there are no underwriting arrangements with respect to the sale of the shares,
that such shares will be sold from time to time in public sales in the
over-the-counter market at then prevailing prices or at prices related to the
then current market price or in private transactions at negotiated prices. The
shares may be sold through purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this Prospectus or
in ordinary brokerage transactions and transactions in which the broker
solicits purchasers. In effecting sales, brokers or dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to participate.
Brokers or dealers will receive commissions or discounts from Selling
Stockholders in amounts to be negotiated immediately prior to the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act in connection
with such sales. (see "Selling Stockholders").
-----------------
SEE "RISK FACTORS" ON PAGES 11 THROUGH 19 FOR CERTAIN INFORMATION RELATING TO
THE COMPANY AND THIS OFFERING.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------------
The Company's Common Stock is currently quoted on the NASDAQ
National Market System under the symbol NCTI. The closing price for such
Common Stock, as quoted by NASDAQ, was $0.75 per share on August 30, 1996.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 3, 1996.
<PAGE> 2
AVAILABLE INFORMATION
The Company is subject to certain of the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy and
information statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, NW, Washington, DC 20549 and at the following
regional offices of the Commission: Seven World Trade Center, Suite 1300, New
York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60611. Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, NW, Washington,
DC 20549 at prescribed rates.
The Company has filed with the Commission certain Registration
Statements under the Securities Act with respect to the securities being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statements, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statements.
________________
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE COMMON STOCK TO
WHICH IT RELATES OR A SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
<PAGE> 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the
Commission pursuant to the Exchange Act (File No. 0-18267) and are
incorporated herein by reference and made a part hereof:
(1) the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, (including Amendment No. 1 thereto filed on April 29, 1996,
Amendment No. 2 thereto filed on May 8, 1996, Amendment No. 3 thereto filed on
May 24, 1996, Amendment No. 4 thereto filed on June 11, 1996 and Amendment No.
5 thereto filed on June 13, 1996);
(2) the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1996 and June 30, 1996; and
(3) the description of capital stock found in Item 1 of the
Company's Registration Statement on Form 8-A filed with the Commission on
January 30, 1990.
All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of filing of this
Prospectus and prior to the termination of the offering of the Common Stock
covered by this Prospectus are deemed to be incorporated by reference and shall
be a part hereof from their respective dates of filing.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained in this Prospectus or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a
copy of this Prospectus is delivered, upon written or oral request, a copy of
any and all of the information that has been incorporated by reference in this
Prospectus, but not including exhibits to such information unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates. Requests for copies of such information should be
directed to Krystyna Marushak, Investor Relations, Noise Cancellation
Technologies, Inc., One Dock Street, Stamford, Connecticut 06902, telephone
number (203) 961-0500, extension 391.
<PAGE> 4
THE COMPANY
Noise Cancellation Technologies, Inc. ("NCT" or the "Company")
believes it is the industry leader in the design, development, licensing,
production and distribution of electronic systems for Active Wave
Management(TM) including systems that electronically reduce noise and
vibration. The Company's systems are designed for integration into a wide
range of products serving multi-billion dollar markets in the transportation,
manufacturing, commercial, consumer products and communications industries. The
Company began commercial application of its technology, with ten products sold
or currently being sold, including the NoiseBuster(TM) consumer headset, the
ProActive(TM) line of industrial/commercial active noise reduction headsets, an
aviation headset for pilots, an industrial muffler or "silencer" for use with
large vacuums and blowers, quieting headsets for patient use in magnetic
resonance imaging ("MRI") machines, an aircraft cabin quieting system and
quieting systems for heating, ventilation and air conditioning ("HVAC") ducts
("NoiseEater(TM)").
In 1995, the Company introduced industrial headsets and its Adaptive
Speech Filter(TM) ("ASF(TM)"), which the Company believes will have wide
application in the communications and automotive industries.
In keeping with the direction established in late 1994, during 1995
the Company began the active practice of marketing its technology through
licensing to third parties for fees and subsequent royalties. In April 1995,
the Company licensed its aircraft cabin quieting technology exclusively to
Ultra Electronics, Ltd. ("Ultra") for a license fee and future royalties. In
November 1995, the Company concluded negotiations with Walker Manufacturing
Company ("Walker"), a division of Tenneco Automotive, which resulted in the
restructuring of the Walker/NCT joint venture ("WNCT") and the licensing of
certain additional automotive related technology to Walker for a fee and future
royalties.
In 1996, the Company plans to introduce additional products for the
communications marketplace, a silicon micro-machined microphone ("SMM"), which
may be used independently or in conjunction with noise reduction, and
additional industrial headset products. The Company is also refining its
NoiseEater(TM) product for introduction into international markets. The
Company has entered into a joint venture with Applied Acoustic Research, L.L.C.
called OnActive Technologies, L.L.C. which is developing Flat Panel
Transducer(TM) ("FPT(TM)") systems utilizing TopDown Surround Sound(TM)
("TDSS(TM)") for automotive applications.
In late 1995 the Company redefined its corporate mission to be the
worldwide leader in the advancement and commercialization of Active Wave
Management(TM) technology. Active Wave Management(TM) is the electronic and
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(TM), TDSS(TM), FPT(TM), and the SMM, which creates products that the
Company believes will be utilized in areas beyond noise attenuation and
control. These technologies and products are consistent with the shift of the
Company's focus to technology licensing fees, royalties and products that
represent near term revenue generation. The redefinition of corporate mission
is reflected in the revised business plan which the Company began to implement
during the first quarter of 1996.
As distribution channels are established and as product sales and
market acceptance and awareness of the commercial applications of Active Wave
Management(TM) build, revenues from technology licensing fees, royalties and
product sales are forecasted to fund an increasing share of the Company's
<PAGE> 5
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding.
Active Wave Management(TM) is an evolving industry. The proportion of
the Company's operating revenues, including technology licensing fees, derived
from engineering and development services, is reflective of this fact. From the
Company's inception through June 30, 1996 approximately 21% of its operating
revenues have come from the sale of products and 27% of its operating revenues
have come from licensing of the Company's technology, while approximately 52%
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(TM) is the utilization of active noise
attenuation technology and certain other technologies which results in the
electronic and mechanical manipulation of sound or signal waves to reduce
noise, improve signal-to-noise ratio and/or enhance sound quality.
NCT believes that it has the leading position in Active Wave
Management(TM) technology, holding more patents and intellectual property than
any other firm in the field. The Company also has an exclusive license to
advanced technology for attenuating noise in a large space, such as the
interior of an aircraft or the passenger compartment of an automobile, using
multiple interactive sensors, such as microphones, and actuators, such as
speakers. Additionally the Company has expanded its portfolio by the
acquisition of various patents, including, in particular the purchase in 1994
of the intellectual property of Active Noise Vibration Technologies, Inc.
The Company has entered into a number of strategic supply,
manufacturing and marketing alliances with leading global companies to
commercialize its technology. These strategic alliances historically have
funded a majority of the Company's research and development, and provided the
Company with reliable sources of components, manufacturing expertise and
capacity, as well as extensive marketing and distribution capabilities. In
exchange for this funding, the other party generally received a preference in
the distribution of cash and/or profits or royalties from these alliances until
such time as the support funding, plus an "interest" factor in some instances,
is recovered. NCT has established continuing relationships with Walker
Manufacturing Company ("Walker") (a division of Tennessee Gas Pipeline Company,
a wholly owned subsidiary of Tenneco, Inc.), AB Electrolux ("Electrolux"),
Foster Electric Company, Ltd. ("Foster"), Analog Devices, Inc. ("ADI"), Ultra
Electronics Ltd. ("Ultra"),Harris Corporation ("Harris"), The Charles Stark
Draper Laboratory, Inc. ("Draper"), Coherent Technologies, Inc. ("Coherent"),
Applied Acoustic Research, L.L.C. ("AAR") and Hoover Universal, Inc.
("Hoover") (a wholly owned subsidiary of Johnson Controls, Inc.), among others,
in order to penetrate major markets more rapidly and efficiently, while
minimizing the Company's own capital expenditures. There have been
substantial changes to the terms governing certain of the foregoing
relationships as described below.
In February 1995 the Company purchased from Foster the exclusive right
to manufacture headsets in the Far East. Due to the acquisition by the Company
in 1994 of the sole ownership of Chaplin Patents Holding Co., Inc. ("CPH"),
neither the Company nor Foster believed there was any necessity to continue
their supply joint venture, Foster/NCT Supply Ltd. ("FNS"). The Company and
Foster dissolved FNS.
<PAGE> 6
The Company and Foster remain active in the Far East through Foster/NCT
Headsets International, Ltd. ("FNH") and NCT Far East, Inc. ("NCTFE") which
are marketing and distribution alliances between the Company and Foster.
Foster produced six products for NCT in 1995.
In March 1995, the Company and Ultra amended their teaming agreement
and concluded a licensing and royalty agreement for $2.6 million and a future
royalty of 1 1/2% of sales commencing in 1998. Under the agreement, Ultra
acquired the Company's active aircraft quieting business based in Cambridge,
England, leased a portion of the Company's Cambridge facility and employed
certain of the Company's employees.
On November 15, 1995, the Company and Walker executed a series of
related agreements (the "Restructuring Agreements") and concluded previously
noted negotiations with Tenneco Automotive and Walker regarding the Company's
commitment to help fund $4.0 million of product and technology development work
and the transfer of the Company's 50% interest in WNCT to Walker. The
Restructuring Agreements provided for the transfer of the Company's interest in
WNCT to Walker, the elimination of the Company's previously expensed obligation
to fund the remaining $2.4 million of product and technology development work,
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 July 18, 1996, the Company
had 75 employees, including 32 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. Consistent with the Company's revised
strategy to focus on near term product commercialization, technology licensing
fees and royalties, during 1995, the Company significantly reduced its work
force and consolidated substantially all of its corporate functions in
Maryland.
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 facilities
are located at 1025 West Nursery Road, Linthicum, Maryland 21090; telephone
number (410) 636-8700. NCT maintains sales and marketing offices at One 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.
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
incorporated by reference into this Prospectus. Operating results for the
six month period ended June 30, 1996, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1991 1992 1993 1994 1995
-------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES
Technology licensing fees and other $1,742 $62 $60 $452 $6,580
Product Sales 610 740 1,728 2,337 1,589
Engineering and development services 3,513 3,779 3,598 4,335 2,297
-------- ------------ ------------ --------- -------
Total revenues $5,865 $4,581 $5,386 $7,124 $10,466
-------- ------------ ------------ --------- -------
COSTS AND EXPENSES:
Cost of sales $312 $608 $1,309 $4,073 $1,579
Cost of engineering and development services 2,705 2,748 2,803 4,193 2,340
Selling, general and administrative 3,148 5,150 7,231 9,281 5,416
Research and development 1,445 4,214 7,963 9,522 4,776
Interest (income) expense, net 94 (169) (311) (580) (49)
Compensation expense-removal of
vesting condition --- 7,442 --- --- ---
Equity in net (income) loss of
unconsolidated affiliates --- 117 3,582(2) 1,824 (80)
Other (income) expense, net 54 89 --- 718 552
-------- ------------ ------------ --------- -------
Total costs and expenses $7,758 $20,199 $22,577 $29,031 $14,534
-------- ------------ ------------ --------- -------
Loss before income taxes $(1,893) $(15,618) $(17,191) $(21,907) $(4,068)
Income taxes 100 --- --- --- ---
-------- ----------- ------------ --------- --------
Net loss $(1,993) $(15,618)(1) $(17,191)(2) $(21,907) $(4,068)
======== =========== ============ ========= ========
Weighted average number of common
shares outstanding(3) 52,694 61,712 70,416 82,906 87,921
======== ============ ============ ========= ========
Net loss per share $(0.04) $(0.25)(1) $(0.24)(2) $(0.26) $(0.05)
======== ============ ============ ========= ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1995 1996
----- ------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES
Technology licensing fees and other $3,225 $1,068
Product Sales 688 692
Engineering and development services 1,447 224
-------- ------------
Total revenues $ 5,360 $1,984
-------- ------------
COSTS AND EXPENSES:
Cost of sales $ 595 $574
Cost of engineering and development services 1,567 168
Selling, general and administrative 3,318 2,325
Research and development 2,365 2,761
Interest (income) expense, net (15) 24
Compensation expense-removal of
vesting condition --- ---
Equity in net (income) loss of
unconsolidated affiliates --- 80
Other (income) expense, net --- ---
-------- ------------
Total costs and expenses $ 7,830 $5,932
-------- ------------
Loss before income taxes $(2,470) $(3,948)
Income taxes --- ---
-------- ------------
Net loss $(2,470) $(3,948)
======== ============
Weighted average number of common
shares outstanding(3) 86,215 94,468
======== ============
Net loss per share $(0.03) $(0.04)
======== ============
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $5,484 $15,771 $29,541 $12,371 $9,583 $7,638
Total liabilities 1,457 2,069 6,301 6,903 2,699 3,610
Long-term debt 3 --- --- --- 105 75
Accumulated deficit (14,065) (29,682) (46,873) (68,780) (72,848) (76,796)
Stockholders equity(4) 4,027 13,702 23,239 5,468 6,884 4,028
Working capital (deficiency) 1,971 11,038 19,990 923 1,734 (588)
</TABLE>
(1) Includes a one-time non-cash charge of $7,441,875 or $.12 per share
for the year ended December 31, 1992, related to the removal of the
vesting conditions to certain warrants. This charge removed any
potential future charge to earnings related to such warrants.
(2) In connection with the sale of Common Stock to Tenneco Automotive in
December 1993, the Company recognized its share of cumulative losses
not previously recorded with respect to its joint venture with Walker
amounting to $3,581,682.
(3) Does not include shares issuable upon the exercise of outstanding
stock options, warrants and, where applicable in 1991, outstanding
shares of Series A and Series B Convertible Preferred Stock, since
their effect would be antidilutive.
(4) The Company has never declared nor paid cash dividends on its Common
Stock.
8
<PAGE> 9
THE OFFERING
This offering consists of the resale of 4,093,135 shares of Common Stock
which are issuable upon the exercise of outstanding options to purchase shares
of Common Stock (the "Option Shares") granted under the 1992 Plan or upon the
grant of restricted Common Stock awards under the 1992 Plan to persons who may
be deemed "affiliates" of the Company, as that term is defined under the
Securities Act, all of which may be offered for sale by such persons as Selling
Stockholders (see "Selling Stockholders"). The proceeds, if any, from the
exercise of any such options will be added to the Company's working capital.
The Company will not receive any of the proceeds from the sale of the Option
Shares by the Selling Stockholders.
In addition, this offering relates to any additional shares of Common
Stock which may become issuable upon the exercise of options to purchase shares
of Common Stock to be granted to such persons under the 1992 Plan in the future
as well as any additional shares of Common Stock which may be issued in the
future to such persons upon the grant of restricted Common Stock awards under
the 1992 Plan. The number of any such additional shares and the names of such
persons will be set forth in a supplement to this Prospectus (see "Selling
Stockholders").
<PAGE> 10
RISK FACTORS
The shares of Common Stock offered hereby represent a speculative
investment and entail elements of risk. The following factors, in addition to
the other information included or incorporated by reference herein, should be
carefully considered before any decision is made to purchase any of the shares
of Common Stock offered hereby.
CURRENT FINANCIAL CONDITION; CASH POSITION; INADEQUACY OF CURRENTLY
AVAILABLE FUNDS TO SUSTAIN COMPANY; LIMITATION ON ABILITY TO SELL ADDITIONAL
COMMON STOCK. Cash, cash equivalents and short-term investments amounted to
$0.9 million at June 30, 1996, decreasing from $1.8 million at December
31, 1995. On April 10, 1996, the Company sold 1,000,000 shares, in the
aggregate of its Common Stock in a private placement with three institutional
investors (the "April 1996 Private Placement"). Contemporaneously, the Company
sold secured convertible term notes in the aggregate principal amount of
$1,200,000 to those institutional investors and granted them each an option to
purchase an aggregate of $3,450,000 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 exercised their options and converted
their secured convertible term notes. On August 29, 1996, the Company sold
1,753,968 shares of its Common Stock in a private placement with a Canadian
institutional investor (the "August 1996 Private Placement"). The cash raised
from the April 1996 Private Placement and the August 1996 Private Placement,
the exercise of warrants and options, including the options granted to the
three institutional investors in the April 1996 Private Placement, the funding
derived from forecasted technology licensing fees and royalties, and product
sales and engineering and development revenue income, the operating cost
savings from the reduction in employees and reduced capital expenditures
should be sufficient to sustain the Company's anticipated future level of
operations into 1997. However, the current available funds are not sufficient
to sustain the Company for the next twelve months. The period during 1997
through which the Company can be sustained is dependent upon the level of
realization of funding from technology license fees and royalties and product
sales and engineering and development revenue and the achievement of the
operating cost savings from the events described above, all of which are
presently uncertain.
Success in generating technology licensing fees, royalties and product
sales are significant and critical to the Company's ability to overcome its
present financial difficulties. In January 1996, the Company adopted a plan
that management believes should generate sufficient funds for the Company to
continue its operations into 1997. 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 1996, management of the Company determines
that it will be unable to meet or exceed the plan referred to above, the
Company will consider fund raising alternatives.
As a condition to the sale of Common Stock of seemed convertible term
notes to three institutional investors in the April 1996 Private Placement the
Company agreed not to sell any additional equity financing (including debt
financing with an equity component) without such investors' consent prior to
October 8, 1996 and granted the three institutional investors a right of first
refusal with respect to any such additional financing until April 10, 1997.
The Company's ability to raise additional capital through sales of Common
Stock will be severely limited until the termination of these restrictions on
further equity financing. 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 1997.
There can be no assurance that additional funding will be provided by
technology license fees, royalties and product sales and engineering and
development revenue. In that event, the Company would have to further and
substantially cut back its level of operations in order to conserve cash.
These reductions could have an adverse effect on the Company's relations with
its strategic partners and customers. Uncertainty exists with respect to the
adequacy of current funds to support the Company's activities until positive
cash flow from operations can be achieved, and with respect to the availability
of financing from other sources to fund any cash deficiencies.
The Company expects to continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business and its
<PAGE> 11
financial statements have been prepared on that basis. This 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 paragraph raise
substantial doubt at March 31, 1996, about the Company's ability to continue as
a going concern. The Company's financial statements do not include any
adjustments relating to the recoverability of the carrying value of recorded
assets or the amount of liabilities that might result from the outcome of these
uncertainties.
The Company has never declared nor paid dividends on its common stock
and has no present intention to do so.
GOING CONCERN EMPHASIS PARAGRAPH IN ACCOUNTANTS' OPINION. On March 8,
1996, Richard A. Eisner & Company, LLP issued its report on the Company's
consolidated financial statements as of and for the year ended December 31,
1995. With respect to Note 15 to those financial statements, such report was
dated April 10, 1996. The report of Richard A. Eisner & Company, LLP contains
a paragraph which emphasizes certain factors which are described in Note 1 to
the financial statements covered by the report. This paragraph notes that such
factors raise substantial doubt as to the Company's ability to continue as a
going concern. See "Experts-Report of Independent Auditors" below.
Prospective investors are urged to read carefully the report of Richard A.
Eisner & Company, LLP as well as the consolidated financial statements of the
Company and the notes thereto, which are incorporated herein by reference to
Amendment No. 5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, filed on June 13, 1996.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company
incurred a net loss of $4.1 million for the year ended December 31, 1995, and
an additional net loss of $3.9 million for the six months ended June 30,
1996. The Company's accumulated deficit at June 30, 1996 was $76.8 million,
attributable in substantial part to the costs of developing its proprietary
technology. To achieve profitability, NCT must, independently and with
strategic allies, successfully develop, manufacture, introduce and market its
products in commercial quantities and receive fees and royalties from licensing
its proprietary technology.
LIMITED REVENUES. Although the Company has engaged in marketing
activities with regard to the sale or licensing of electronic systems for
Active Wave Management(TM) including systems that electronically reduce noise
and vibration based upon prototypes of such systems, its operating revenues
from inception through June 30, 1996, have been limited, aggregating
$8.4 million from the sale of such systems, $10.7 million from the
licensing of technology relating to such systems and $20.6 million from the
performance of engineering and development services, respectively. Although
the Company has begun commercial sales of active noise attenuation and other
products in a limited number of applications, significant further development
will be necessary before many of the Company's potential products will achieve
expected commercial end-use applications.
MATERIAL DEPENDENCE UPON CERTAIN PATENT RIGHTS; UNCERTAIN PROPRIETARY
PROTECTION. 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
<PAGE> 12
applications filed in the future will result in the issuance of a patent.
The invalidation 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. Although the Company intends to file for extensions to certain
patents, the Company can make no assurances that the U.S. or foreign government
patent authorities will grant such extensions.
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 rights to
protect present and future technology of the Company.
There has been a claim challenging the use of one of the Company's
trademarks and an interference proceeding has been initiated with respect to
one of the Company's patent applications. There has also been an inquiry
regarding the product design configuration of one of the Company's products as
it relates to a patent held by another company. The Company believes that such
claims and inquiry are without merit and intends to oppose them vigorously.
Moreover, if such inquiry proves to have any merit, the Company believes it
could, without significant cost, modify its product design configuration so as
to avoid infringement. The Company does not believe that any damages or costs
it may incur as a result of such claims or inquiry would have a material
adverse effect on the financial condition 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.
RAPID TECHNOLOGICAL CHANGE. Active Wave Management(TM) is an evolving
industry, characterized by rapid technological change. The Company intends to
engage continually in research and development activities, including the
improvement of current products and development of new products. There can be
no assurance, however, that active noise and vibration attenuation or other
applications of Active Wave Management(TM) will be accepted by the commercial
marketplace, that the introduction of new products or the development of new
technologies by others will not render the Company's products obsolete or
unmarketable, or that the Company will be able to hire and retain adequate
research personnel or be able to finance research activities in this regard.
RELIANCE UPON STRATEGIC ALLIANCES; COMMERCIAL ACCEPTANCE OF
END-PRODUCTS. The Company and certain of its wholly owned subsidiaries have
entered into agreements to establish 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 its technology and contribute a nominal amount of initial
capital and that the other party provide substantially all of the funding to
support the alliance. In exchange for this funding, the other party generally
receives a preference in the distribution of cash and/or profits or royalties
from these alliances until such time as the support funding, plus an "interest"
factor in some instances, is recovered. At June 30, 1996, there were no
preferred distributions due to joint venture partners from future profits of
the joint ventures.
The Company conducts its marketing efforts primarily by identifying
specific market segments for active noise and vibration attenuation and other
Active Wave Management (TM) products and,
<PAGE> 13
thereafter, seeking to establish strategic alliances with major domestic and
international business concerns to support product development, and to
manufacture and distribute products for such market segments. The Company's
ability to enter into new markets is materially dependent upon determinations
by such concerns that the Company's products are suitable for use in their
respective end-products, and on the ability and willingness of those concerns
to market such products successfully. During 1995 and the first quarter of
1996, active headset product sales did not increase at the rate previously
anticipated and orders for active vehicular mufflers, kitchen exhaust and HVAC
fan quieting systems and industrial headsets were not received at volumes or
within time frames that had been anticipated by the Company.
The Company arranges for the supply of actuators, integrated circuits
and other electronic components for its active control systems through
alliances with manufacturers the Company believes will serve as dependable
sources of supply. The Company makes no assurances that these concerns will
meet the Company's and its customers' needs for quality components in
sufficient quantities at commercially reasonable prices.
CUMULATIVE LOSSES IN JOINT VENTURES. When the Company's share of
cumulative losses in a strategic alliance exceeds its investment and the
Company has no obligation to fund such additional losses, the Company suspends
applying the equity method of accounting for its investment in such alliance.
The aggregate amount of losses in the Company's strategic alliances in excess
of the Company's investments which has not been recorded was zero at June 30,
1996. The Company will not be able to record any equity in income with respect
to an entity until its share of future profits is sufficient to recover any
cumulative losses that have not previously been recorded.
DEPENDENCE UPON EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL. The
Company's operations are, and for the proximate future will be, materially
dependent upon the efforts of its executive officers and key technical
employees, all of whom serve the Company on a full-time basis but none of whom
are contractually obligated to remain in the Company's employ for any material
term. Moreover, the Company's growth and expansion into new product
applications could require additional expertise in areas such as manufacturing,
marketing and distribution, which would place increased demands on the
Company's resources and would require the addition of new personnel and the
development of additional expertise by existing personnel. Certain academic
consultants serve the Company on a part-time basis, and could terminate their
relationship with the Company at any time.
Certain employees and consultants of the Company have been approached
by the Company's competitors, and no assurances can be given that the
competition will not successfully recruit such personnel. The loss of key
personnel or the failure to recruit necessary additional personnel could impede
the achievement of the Company's development, commercialization and marketing
objectives.
AGREEMENTS WITH RELATED PARTIES; COMMISSIONS AND EXCLUSIVE
DISTRIBUTORSHIPS. In 1993 the Company entered into four agreements with
QuietPower Systems, Inc. ("QPS") (formerly Active Acoustical Solutions, Inc.)
and in 1994 entered into a fifth agreement with QPS. QPS is 33% owned by
Environmental Research Information, Inc. ("ERI") and 2% owned by Jay M. Haft,
Co-Chairman and Chief Executive Officer of the Company. Michael J. Parrella,
President of the Company owns approximately 12% of the outstanding capital of
ERI and Mr. Haft shares investment control over an additional 24% of the
outstanding capital of ERI. Under these agreements, QPS is given rights to
market certain of the Company's products and technologies to electric and/or
natural gas utilities and for use in or with feeder bowls. In one of these
agreements, QPS's rights are on an exclusive basis so long as QPS meets certain
performance criteria relating to marketing efforts and sales performance.
Under one of these agreements, QPS is entitled to receive a sales commission
equal to 129% of QPS's marketing
<PAGE> 14
expenses attributable to the marketing of the products in question, which
expenses are to be deemed to be the lesser of QPS's actual expenses or 35% of
the revenues received by the Company from the sale of such products.
Commissions and fees payable under all of the other agreements are in
accordance with the Company's standard terms and conditions and do not exceed
6%. As of the date of this Prospectus, the Company has not been required to
pay any commissions to QPS under these agreements.
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 including 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 proceeding 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 was to be evidenced by a promissory
note, non-payment of which would constitute an event of termination under the
Master Agreement.
In May 1996, the Company and QSI entered into a third letter agreement
which revised the payment schedules for QSI's payment to the Company of the
balance of the exclusivity fee and the outstanding indebtedness for other
amounts owed the Company. Under this letter agreement, if QSI does not pay the
full amount of arrearages in the payment of the exclusivity fee by June 15,
1996 or defaults in the timely payment of any installment of the other
indebtedness, the Master Agreement and all rights granted to QSI thereunder
terminate. The letter agreement also amends certain provisions concerning
<PAGE> 15
royalties and administrative matters which should not materially adversely
effect the Company's economic rights under the Master Agreement. As of the
date of this Prospectus, QSI has paid the full amount of such exclusivity fee
arrearages and has not defaulted in the timely payment of any amounts that have
become due and payable under the other indebtedness.
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.
COMPETITION. The Company is aware of a number of direct competitors
in the field of active noise and vibration attenuation. Indirect competition
also exists in the field of passive sound and vibration attenuation. The
primary bases of competition for each product or potential product of the
Company are the cost of an active system and its system performance measured by
the level of noise or vibration attenuation compared to the cost and
performance of an alternative active or passive solution for the problem in
question. At the present time passive solutions generally are less expensive
than active solutions, although passive solutions do not provide as great a
level of sound attenuation at the more harmful lower frequencies. The
Company's principal known competitors in active control systems are Andrea
Electronics Corporation, Bose Corporation, Digisonix (a division of Nelson
Industries, Inc.), Hitachi, Ltd., Group Lotus PLC and Lotus Cars Limited, Lord
Corporation, Matsushita Electric Industrial Co., Ltd., Sennheiser Electronic
Corp., Sony Corporation, Toshiba Corp., Koss Corporation and Recoton, Inc.
among others. To the Company's knowledge, each of such entities is pursuing
its own technology in active control systems, either on its own or in
collaboration with others, and has recently commenced attempts to exploit
commercially such technology. The Company also believes that a number of
other large companies, such as the major domestic and foreign automobile and
appliance manufacturers, and aircraft parts suppliers and manufacturers, have
research and development efforts underway in active noise and vibration
control. Many of these companies, as well as the Company's potential
competitors in the passive sound attenuation field and other entities that
could enter the active noise and vibration attenuation field as the industry
develops, are well established and have substantially greater management,
technical, financial, marketing and product development resources than the
Company. In addition, the Company is aware that Andrea Electronics Corporation
is proceeding with the commercialization of in-wire noise cancellation with one
or more major providers of telephone services. The Company also believes that
a number of major telecommunications and other electronics companies such as
AT&T Corporation, Texas Instruments Inc. and Motorola Inc. are or may be
developing in wire noise cancellation and electronic speech filtering
technologies similar to those being developed and commercialized by the
Company. The Company is unable to determine at the present time what impact
such efforts might have on the Company's ability to successfully commercialize
its in-wire technology for use in telephones and other communications
applications.
POSSIBLE NEED FOR ADDITIONAL FINANCING. Historically, the Company
financed its operations through public and private placements of equity and
through the exercise of options and warrants granted to directors, employees
and others, as well as with license fees and research and development funding
from its strategic allies. The cash raised from the April 1996 Private
Placement and the August 1996 Private Placement, the exercise of warrants and
options including the options granted to the three institutional investors in
the April 1996 Private Placement, the funding derived from forecasted
technology license fees, royalties and product sales and engineering and
development revenue, the operating cost savings from the reduction in
employees and reduced capital expenditures should be sufficient to sustain the
Company's anticipated future level of operations into 1997. However, the
current available funds are not sufficient to sustain the Company for the next
twelve months. The period during 1997 through which the Company can be
sustained is dependent upon the level of realization of funding from license
fees, royalties and product sales and engineering and development income and
the achievement of the operating cost savings from the events described above,
all of which are presently uncertain.
<PAGE> 16
Success in generating technology licensing fees, royalties and
product sales are significant and critical to the Company's ability to overcome
its present financial difficulties. In January 1996, the Company adopted a
plan that management believes should generate sufficient funds for the Company
to continue its operations into 1997. 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 1996, management of the Company determines
that it will be unable to meet or exceed the plan referred to above, the
Company will consider fund raising alternatives. The Company's ability to
raise additional capital through sales of common stock will be severely limited
until the termination of the one year restriction on further equity financing
undertaken by the Company in connection with the sale of common stock and
convertible term notes to three institutional investors in the April 1996
Private Placement. 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 1997.
There can be no assurance that additional funding will be provided by
technology license fees, royalties and product sales and engineering and
development revenue. In that event, the Company would have to further and
substantially cut back its level of operations in order to conserve cash.
These reductions could have an adverse effect on the Company's relations with
its strategic partners and customers. Uncertainty exists with respect to the
adequacy of current funds to support the Company's activities until positive
cash flow from operations can be achieved, and with respect to the availability
of financing from other sources to fund any cash deficiencies.
POSSIBLE PUBLIC SALES OF COMMON STOCK. On October 6, 1992, the
Company adopted the 1992 Plan covering 6,000,000 shares of the Company's Common
Stock and providing for the grant of options to purchase Common Stock of the
Company and awards of restricted common stock to employees, officers and
directors of the Company. The 1992 Plan was approved by the stockholders at the
1993 Annual Meeting of Stockholders following which said 6,000,000 shares were
registered under the Securities Act. An amendment to the 1992 Plan adopted by
the Option Committee on November 8, 1995, and approved by the stockholders at
the 1996 Annual Meeting of Stockholders (the "1996 Annual Meeting"), increased
the number of shares of Common Stock covered by the 1992 Plan to 10,000,000
shares and added active consultants to the Company as persons who are eligible
to participate under the 1992 Plan. The Company has reserved 10,000,000 shares
of Common Stock for issuance upon the exercise of options granted under the
1992 Plan and for issuance upon the grant of restricted stock awards under the
1992 Plan. All of such shares are registered under the Securities Act.
<PAGE> 17
As of August 23, 1996, the Company has granted options to purchase
5,661,043 shares of Common Stock which are currently exercisable and 65,000
shares of restricted stock under the 1992 Plan.
On November 15, 1994, the Company adopted and on May 8, 1995 and
November 8, 1995 amended the Noise Cancellation Technologies, Inc. Option Plan
for Certain Directors (the "Directors Plan"), pursuant to which options to
purchase in the aggregate 821,000 shares of Common Stock were granted to two
directors of the Company. The Directors Plan was approved by the stockholders
at the Company's 1995 Annual Meeting of Stockholders as to options to purchase
in the aggregate 725,000 shares of Common Stock. An amendment to the Directors
Plan adopted by the Board of Directors on November 8, 1995, and approved by the
stockholders at the 1996 Annual Meeting, increased the number of shares of
Common Stock covered by the Plan to 821,000 shares and made certain minor
changes concerning the Plan's administration. The Company has reserved 821,000
shares of Common Stock for issuance upon the exercise of the options granted
under the Directors Plan and has registered such 821,000 shares under the
Securities Act. As of August 23, 1996, the Company has granted options to
purchase 821,000 shares of Common Stock which are currently exercisable under
the Directors Plan.
In the April 1996 Private Placement, the Company sold 1,000,000 shares,
in the aggregate, of its Common Stock to three institutional investors.
Contemporaneously, the Company sold secured convertible term notes in the
aggregate principal amount of $1,200,000 to those institutional investors and
granted them each an option to purchase an aggregate of $3,450,000 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 Company issued 13,403,130 shares,
in the aggregate, of its Common Stock in connection with the three
institutional investors' exercise of their options and conversion of their
secured convertible term notes. In conjunction with the April 1996 Private
Placement, the Company also agreed to file a registration statement with the
Commission covering the applicable shares and to use its best efforts to have
such registration statement declared effective by the Commission as soon as
practicable. On September 3, 1996, a regisitration statement registering all
of such shares as well as 4,000,00 shares of Common Stock sold by the Company in
two private placements on August 4, 1995, and March 28, 1996, was declared
effective by the Commission.
On August 22, 1996 the Company issued 350,000 shares of its common
stock to a financial consultant in partial consideration for services rendered
in connection with the April 1996 Private Placement. The Company intends to
register all of such shares under the Securities Act.
As of August 23, 1996, the Company has reserved 6,006,710 shares of
Common Stock for issuance upon the exercise of warrants and options granted
outside the 1992 Plan, the Directors Plan and the April 1996 Private Placement
all of which the Company has registered under the Securities Act.
At August 23, 1996, the weighted average exercise price for all
currently exercisable and outstanding warrants and options was $0.7842.
On November 14, 1995, the Company sold 4,800,000 shares of Common
Stock and on August 29, 1996, the Company sold 1,753,968 shares of Common Stock
in two private placements to a Canadian institutional investor pursuant to
Regulation S under the Securities Act. The Company also issued 87,698 shares
of its Common Stock to a financial consultant in consideration for services
rendered in connection with the August 29, 1996 Private Placement.
The possibility of the sale of the shares of Common Stock described in
the preceding seven paragraphs, all of which the Company plans to register under
the Securities Act to the extent they are not now so registered or exempt from
the registration requirements of the Securities Act, may adversely
affect the market price of the Company's Common Stock.
NASDAQ/NMS LISTING REQUIREMENTS; DISCLOSURE RELATING TO LOW-PRICED
STOCKS. The Company's Common Stock currently is quoted on the National
Association of Securities Dealers, Inc. Automated Quotation National Market
System ("NASDAQ/NMS"). The NASDAQ/NMS has adopted quantitative maintenance
criteria for continued listing by the NASDAQ/NMS under which a company is
required, among other things, to maintain net tangible assets of at least (i)
$2,000,000 if it has sustained losses from continuing operations and/or net
losses in two of its three most recent fiscal years or (ii) $4,000,000 if it
has sustained losses from continuing operations and/or net losses in three of
its four most recent fiscal years. Failure of the Company to continue to meet
the maintenance requirements could result in the Common Stock losing its
NASDAQ/NMS designation. The NASDAQ/NMS provides brokers and others with
immediate access to the best bid and asked prices and other information about
<PAGE> 18
the Common Stock during each trading day. If the Company were to lose its
NASDAQ/NMS designation, real-time price information for the Common Stock might
cease to be available. As a result, a stockholder might find it more difficult
to dispose of, or to obtain accurate quotations as to the price of, the Common
Stock. In addition, if the Company were to lose the NASDAQ/NMS designation,
the Common Stock might no longer qualify as a "margin security" as defined by
the Federal Reserve Board.
If the Company were to lose its NASDAQ/NMS designation and, at any
time following the loss of such designation, did not have either (i) net
tangible assets in excess of $2,000,000 or (ii) average revenue of at least
$6,000,000 for the last three years, the Common Stock could become subject to
the Commission's "penny stock" rules. The penny stock rules impose additional
sales practice requirements on broker-dealers who sell securities designated as
penny stocks to persons other than established customers and certain types of
accredited investors. For transactions covered by the penny stock rules, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to the sale. The rules require the delivery, prior to the transaction, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. The rules also require disclosure by the broker-dealer of commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. If the broker-dealer is the sole market-maker
for the penny stock, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in
the customer's account and information on the limited market in penny stocks.
The additional burdens imposed upon broker-dealers by the penny stock rules may
discourage broker-dealers from effecting transactions in penny stocks. Thus,
if the Common Stock were to fall within the definition of a penny stock, the
liquidity of the Common Stock could be reduced and there could be a material
effect on the trading market for the Common Stock.
POSSIBLE VOLATILITY OF COMMON STOCK. The market prices for securities
of emerging and high-technology companies have historically been highly
volatile. Future announcements concerning the Company or its competitors could
have a significant impact on the market price of the Common Stock.
BLANK CHECK PREFERRED STOCK. The Board of Directors has total
discretion in the issuance and the determination of the rights and privileges
of any shares of Preferred Stock which might be issued in the future, which
rights and privileges may be detrimental to the holders of the Common Stock.
The Company is authorized to issue 10,000,000 shares of Preferred Stock none of
which has been designated to date. The issuance of Preferred Stock in the
future could discourage or impede a tender offer, proxy contest or other
similar transaction involving a potential change in control of the Company,
which transaction might be viewed favorably by other shareholders.
<PAGE> 19
SELLING STOCKHOLDERS
The following table sets forth certain information with
respect to the Selling Stockholders. The Company will not receive any proceeds
from the sale of the shares by the Selling Stockholders.
Of the 10,000,000 shares of the Common Stock reserved for
issuance under the 1992 Plan, as of August 23, 1996, 3,235,153 shares are
available for the grant of options to purchase shares of Common Stock and
restricted Common Stock awards to be made in the Company's discretion
throughout the remainder of the term of the 1992 Plan which, unless terminated
earlier in accordance with the terms of the 1992 Plan, will terminate on May
27, 2003. Under the terms of the 1992 Plan grants may be made to one or more
of the Selling Stockholders or to other persons who may be deemed "Affiliates"
of the Company, as that term is defined under the Securities Act, in which
event the information set forth in the following table will be amended by a
supplement to this Prospectus.
EDIT TABLE
<TABLE>
<CAPTION>
Beneficial Ownership Number of Beneficial Ownership of
of Shares of Shares of Shares of Common Stock
Name of Common Stock at Common Stock After Giving Effect
Selling Stockholder Relationship with the Company August 23, 1996(1) Offered For Sale (1) to Proposed Sale(1)
- -------------------------- ----------------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Jeffrey N. Denenberg (2) 278,846 104,846 174,000
Joseph C. Dolan (2) 260,000 260,000 0
Graham Eatwell (2) 212,950 137,950 75,000
Stephen J. Fogarty Senior Vice President and 233,200 233,200 0
Chief Financial Officer
Art Garofalo (2) 150,000 150,000 0
William W. Gerecke (2) 47,150 12,150 35,000
Jay M. Haft Chairman Of The Board 1,207,000 200,000 1,007,000
And Director
Cy E. Hammond Vice President and 269,718 244,718 25,000
Controller
Michael Hayes Vice President 50,000 50,000 0
James W. Hiney (2) 59,554 59,554 0
John B. Horton Senior Vice President 519,417 489,417 30,000
General Counsel and
Secretary
Willis J. Hullings, III (2) 415,000 165,000 250,000
Alastair Keith Director 297,500 15,000 282,500
Andrew J. Langley (2) 49,450 49,450 0
Irene Lebovics Senior Vice President 1,288,067 291,300 996,767
John L. Lesher (2) 105,000 85,000 20,000
Sam Oolle Director 645,000 15,000 630,000
Michael J. Parrella President And Director 2,749,789 1,174,500 1,575,289
Colin F. Ross (2) 60,800 60,800 0
Jeff Zeitlin Senior Vice President 275,000 275,000 0
Eldon W. Ziegler, Jr. (2) 176,772 20,250 156,522
---------------------------------------------------------------------
Total 9,350,213 4,093,135 5,257,078
=====================================================================
</TABLE>
(1) Includes shares issuable upon exercise of non-contingent, currently
outstanding options and warrants.
(2) Represents a person who was either an officer or a director of the Company
within three years of the date hereof or an affiliate thereof.
<PAGE> 20
LEGAL MATTERS
Matters relating to the legality of the shares of Common Stock
being offered by this Prospectus have been passed upon for the Company by John
B. Horton, Esq., Senior Vice President, General Counsel and Secretary of the
Company. As of August 23, 1996, Mr. Horton owned 30,000 shares of Common Stock,
including 20,000 shares subject to acquisition upon the exercise of currently
exercisable warrants, none of which are being offered by this Prospectus. In
addition, Mr. Horton has been granted currently exercisable options to
purchase 489,417 shares of Common Stock under the 1992 Plan all of which are
offered hereby.
EXPERTS
The consolidated financial statements of the Company at and for the
year ended December 31, 1994 and 1995 the related financial statement schedule
incorporated into this Registration Statement by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as
amended by Amendment Nos. 1, 2, 3, 4 and 5 thereto on the Company's five Form
10K/A's filed respectively on April 29, 1996, May 8, 1996, May 24, 1996, June
11, 1996 and June 13, 1996 have been audited by Richard A. Eisner & Company,
LLP, Independent Certified Public Accountants, as set forth in their reports
included therein (which contains an explainatory paragraph relating to the
Company's ability to continue as a going concern) and have been so incorporated
in reliance upon such reports given upon the authority of such firm as experts
in auditing and accounting.
The consolidated financial statements of the Company at and for the
year ended December 31, 1993 and the related financial statement schedules
incorporated into this Registration Statement by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as
amended by Amendment Nos. 1, 2, 3, 4 and 5 thereto on the Company's five Form
10K/A's filed respectively on April 29, 1996, May 8, 1996, May 24, 1996, June
11, 1996 and June 13, 1996, have been audited by Coopers and Lybrand L.L.P.,
Independent Accountants, as set forth in their reports included therein and
have been so incorporated in reliance upon such reports given upon the
authority of such firm as experts in auditing and accounting. The report of
Coopers & Lybrand, L.L.P. contains a paragraph which emphasizes certain
uncertainties arising subsequent to the date of their original report which are
disclosed in the Company's Form 10-K for the year ended December 31, 1995
incorporated by reference herein and in "Risk Factors" included elsewhere in
this registration statement.
