<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Noise Cancellation Technologies, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE> 2
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 WEST NURSERY ROAD SUITE 120
LINTHICUM, MARYLAND 21090
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 17, 1996
------------------------
To the Stockholders of
NOISE CANCELLATION TECHNOLOGIES, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Noise
Cancellation Technologies, Inc., a Delaware corporation (the "Company"), will be
held at the Ball Room at the International Plaza Hotel, 700 Main Street,
Stamford, CT 06901 on Wednesday, July 17, 1996, at 2:00 P.M., for the following
purposes:
1. To elect five directors for the year following the Annual Meeting or
until their successors are elected.
2. To approve the amendment of the Company's Certificate of Incorporation
to increase the number of shares of Common Stock authorized thereunder
from 100,000,000 shares to 140,000,000 shares.
3. To approve the adoption of an amendment of the Noise Cancellation
Technologies, Inc. Stock Incentive Plan (the "Incentive Plan").
4. To approve the adoption of an amendment of the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors (the "Directors
Plan").
5. To ratify the appointment of Richard A. Eisner & Company, LLP as the
Company's independent auditors for the fiscal year ending December 31,
1996.
6. To transact such other business as may properly come before the Meeting.
Only stockholders of record at the close of business on May 20, 1996, are
entitled to notice of and to vote at the Meeting or at any adjournment thereof.
JOHN B. HORTON
Secretary
Linthicum, Maryland
May 22, 1996
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY SIGN THE ACCOMPANYING PROXY, WHICH
IS SOLICITED BY THE COMPANY'S BOARD OF DIRECTORS, AND MAIL IT IN THE ENCLOSED
POSTAGE PAID ENVELOPE. ANY STOCKHOLDER MAY REVOKE HIS OR HER PROXY AT ANY TIME
BEFORE THE MEETING BY WRITTEN NOTICE TO SUCH EFFECT, BY SUBMITTING A
SUBSEQUENTLY DATED PROXY OR BY ATTENDING THE MEETING AND VOTING IN PERSON.
<PAGE> 3
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 WEST NURSERY ROAD SUITE 120
LINTHICUM, MARYLAND 21090
------------------------
PROXY STATEMENT
------------------------
SOLICITATION OF PROXY, REVOCABILITY AND VOTING
SOLICITATION
This Proxy Statement is being mailed on or about May 22, 1996, to all
stockholders of record at the close of business on May 20, 1996, in connection
with the solicitation by the Board of Directors of Proxies for the Annual
Meeting of Stockholders to be held on July 17, 1996. Proxies will be solicited
by mail, and all expenses of preparing and soliciting such proxies will be paid
by the Company. All proxies duly executed and received by the persons designated
as proxy thereon will be voted on all matters presented at the Meeting in
accordance with the instructions given thereon by the person executing such
Proxy or, in the absence of specific instructions, will be voted in favor of
each of the proposals indicated on such Proxy. Management does not know of any
other matter that may be brought before the Meeting, but, in the event that any
other matter should properly come before the Meeting, or any nominee should not
be available for election, the persons named as proxy will have authority to
vote all proxies not marked to the contrary in their discretion as they deem
advisable.
REVOCABILITY
Any stockholder may revoke his or her Proxy at any time before the Meeting
by written notice to such effect received by the Company at the address shown
above, attention: Corporate Secretary, by delivery of a subsequently dated
Proxy, or by attending the Meeting and voting in person.
VOTING
The total number of shares of common stock of the Company outstanding as of
May 20, 1996, was 95,935,802. The common stock is the only class of securities
of the Company entitled to vote, each share being entitled to one noncumulative
vote. Only stockholders of record as of the close of business on May 20, 1996,
will be entitled to vote. A majority of the shares outstanding and entitled to
vote, or 47,967,902 shares, must be present at the Meeting in person or by proxy
in order to constitute a quorum for the transaction of business. The affirmative
vote of a majority of all of the outstanding shares of common stock of the
Company is required to approve the amendment of the Company's Certificate of
Incorporation. The affirmative vote of a plurality of the shares of common stock
present and voting in person or by proxy at the Meeting is required to elect
directors and the affirmative vote of a majority of the shares of common stock
present and voting in person or by proxy at the Meeting is required to approve
the adoption of the amendment of the Incentive Plan, to approve the adoption of
the amendment of the Directors Plan, to ratify the appointment of the Company's
independent auditors for
<PAGE> 4
the year ending December 31, 1996, and to transact such other business as may
properly come before the Meeting. With respect to abstentions, shares are
considered present at the Meeting for a particular proposal, but as they are not
affirmative votes for the proposal, they will have the same effect as votes
against the proposal. With respect to broker non-votes, shares are not
considered present at the Meeting for the particular proposal for which the
broker withheld authority and, accordingly, will have the same effect as votes
against approval of the amendment of the Company's Certificate of Incorporation
and will have no effect on the other proposals.
A list of stockholders entitled to vote at the Meeting will be available at
the Company's offices, 1025 West Nursery Road Suite 120 Linthicum, MD. 21090,
for a period of ten (10) days prior to the Meeting for examination by any
stockholder, and at the Meeting itself.
ELECTION OF DIRECTORS
Five directors are to be elected at the Annual Meeting of Stockholders to
serve until the next Annual Meeting of Stockholders of the Company and until
their successors are elected and qualified. Proxies not marked to the contrary
will be voted in favor of the election of each named nominee.
INFORMATION CONCERNING NOMINEES
The following table sets forth the positions and offices presently held
with the Company by each nominee, his age, and the year from which such
nominee's service on the Company's Board of Directors dates:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES DIRECTOR
NAME AGE PRESENTLY HELD WITH THE COMPANY SINCE
-------------------------- --- -------------------------------------- --------
<S> <C> <C> <C>
Jay M. Haft............... 60 Co-Chairman of the Board, 1990
Chief Executive Officer and Director
John J. McCloy II......... 58 Co-Chairman of the Board and Director 1986
Michael J. Parrella....... 48 President and Director 1986
Sam Oolie................. 59 Director 1986
Alastair Keith............ 49 Director 1991
</TABLE>
JAY M. HAFT currently serves as Chief Executive Officer and Co-Chairman of
the Board of Directors of the Company. He served as President of the Company
from November 1994 to July 1995. He is counsel to the law firm of Parker Duryee
Rosoff & Haft in New York, and has been engaged in the practice of law since
1959. Mr. Haft also serves as a director of Robotic Vision Systems Inc., Nova
Technology, Inc., Extech Corporation, Oryx Technology, Inc., CAS Medical
Systems, Inc., and Viragen, Inc.
JOHN J. MCCLOY II currently serves as Co-Chairman of the Board of
Directors. 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.
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Since 1981, he has also been a private investor concentrating on venture capital
and early stage investment projects in a variety of industries. Mr. McCloy is
also a director of American University in Cairo, the Sound Shore Fund, Inc., and
the Atlantic Council.
MICHAEL J. PARRELLA currently serves as President and Director of the
Company. He was elected President and Chief Operating Officer of the Company in
February 1988 and served in that capacity until November 1994. From November
1994 to July 1995 Mr. Parrella served as Executive Vice President of the
Company. He initially became a director in 1986 after evaluating the application
potential of the Company's noise cancellation technology. At that time, he
formed an investment group to acquire control of the Board and to raise new
capital to restructure the Company and its research and development efforts. He
was also Chairman of the Board of Environmental Research Information, Inc., an
environmental consulting firm, from December 1987 to March 1991.
SAM OOLIE currently serves as a Director of the Company. He is Chairman and
Chief Executive Officer of NoFire Technologies, Inc., a manufacturer of high
performance fire retardant products, and has held those positions 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.
ALASTAIR KEITH currently serves as a Director of the Company. He has been a
general partner of CA Partners, a general partner in three investment funds,
since March 1992. From January 1992 to April 1995 he acted as an advisor to the
Ministry of Privatization in the Czech Republic. For 20 years prior thereto, he
was employed by Brown Brothers Harriman & Company where he held senior
management positions in a variety of the firm's domestic and international
banking businesses.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish the
Company with copies of all such reports. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no reports were required for those persons, the Company
believes that, during the period from January 1, 1995, to December 31, 1995, all
filing requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with except that John J. McCloy, II, Co-Chairman of
the Board of Directors, failed to file two Form 4's reporting four transactions.
Such transactions were reported on Form 5 which was filed late.
INFORMATION CONCERNING THE BOARD
The Board of Directors of the Company held six meetings (not including six
actions by unanimous written consent) during the fiscal year ended December 31,
1995. No incumbent director during such time was in attendance at fewer than 75%
of the aggregate of: (i) the total number of meetings of the
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<PAGE> 6
Board of Directors held during the period; and (ii) the total number of meetings
held by all committees of the Board of Directors on which he served.
The Company has a Compensation Committee, an Option Committee and an Audit
Committee. During the period between January 1, 1995, and February 15, 1995, the
Board of Directors delegated the authority and responsibilities of the Option
Committee described below to the Compensation Committee. The Compensation
Committee, which reviews and determines the compensation of the Company's senior
management, is composed of Messrs. Keith, McCloy, and Oolie. The Option
Committee reviews and takes action with respect to matters relating to the grant
or issuance of warrants or options to acquire shares of the Company's common
stock and other securities of the Company or rights to acquire other derivative
securities of the Company and in this regard to establish and provide for the
administration of plans under which any of the same may be granted or issued.
The Option Committee is composed of Messrs. McCloy and Oolie, each of whom is a
"disinterested person" as defined under Rule 16b-3 promulgated under the
Exchange Act. During the fiscal year ended December 31, 1995, the Compensation
Committee held one meeting and took action by unanimous written consent twice
and the Option Committee took all of its action by unanimous written consent on
five occasions.
The Audit Committee, which reviews the activities of the Company's
independent auditors and which is composed of Messrs. McCloy, Keith and Oolie
held two meetings during the fiscal year ended December 31, 1995.
The Company does not have a nominating committee. The functions of
recommending potential nominees for Board positions are performed by the Board
as a whole. The Board will consider stockholder recommendations for Board
positions which are made in writing to the Company's Co-Chairmen.
DIRECTORS' FEES, RESTRICTED STOCK AND STOCK OPTIONS
With the exception of the consulting fee paid to Mr. Haft, and the options
granted under the Directors Plan, as described below under "Compensation
Arrangements for Certain Officers and Directors," none of the Company's
directors received any fees for his services as a director during 1995, except
that under the Incentive Plan, each non-employee director of the Company is
granted 5,000 restricted shares of the Company's common stock each year for
service as a director of the Company. Such restricted shares are granted to each
non-employee director upon his or her initial election to the Board and upon
each subsequent election. All of such restricted shares are made subject to a
restriction period of three (3) years from the date of grant during which such
shares may not be transferred or encumbered. On November 8, 1995, 5,000
restricted shares were granted to each of Messrs. Keith, and Oolie, pursuant to
the Incentive Plan. In addition, all new non-employee directors will be granted
stock options for 75,000 shares of the Company's common stock as an inducement
to become members of the Board of Directors. Such grants will be made upon a new
director's initial election to the Board of Directors at an exercise price equal
to the market value of the Company's common stock on the date of grant. Such
options will vest as to 25,000 shares on the date of initial election to the
Board of Directors and 25,000 shares on each of the first and second
anniversaries of such election.
4
<PAGE> 7
AMENDMENT OF CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED CAPITALIZATION
The Board of Directors has approved and declared advisable an amendment to
the Company's Certificate of Incorporation to increase the number of shares of
common stock, par value $.01 per share, which the Company shall be authorized to
issue, from 100,000,000 to 140,000,000. As of the record date, the Company had
outstanding 95,935,802 shares of common stock and had reserved an additional
4,042,839 shares of common stock for issuance upon the exercise of options and
warrants. The Board believes such action to be in the best interest of the
Company so as to make additional shares of common stock available for
obligations undertaken by the Company in connection with the "Kingdon Private
Placement" described below, acquisitions, public or private financings, stock
splits and dividends, present and future employee benefit programs and other
corporate purposes. Except as noted in the next sentence, the Company does not
have any plans, arrangements or understandings for the issuance of any of such
additional shares. For the reasons set forth in the immediately succeeding
paragraphs describing the "Exchange Program", the "Directors' Standstill
Agreements" and the "Kingdon Private Placement" and under "Adoption of an
Amendment to the Incentive Plan" and "Adoption of an Amendment to the Directors
Plan" below, the Company plans to reserve: (i) 8,581,329 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 Incentive Plan,
of which 2,045,749 shares will be reserved for issuance upon the exercise of
"New Options" granted under the "Exchange Program" (as defined below) with the
balance reserved for future grants of options and restricted stock awards, (ii)
591,000 shares of such additional shares for issuance upon the exercise of
options granted under the Directors Plan, of which 591,000 shares will be
reserved for issuance upon the exercise of "New Options" granted under the
"Exchange Program" (as defined below) (iii) 2,418,750 shares of such additional
shares for issuance upon the exercise of "New Warrants" granted under the
Exchange Program (as defined below); (iv) 2,390,000 shares of such additional
shares for issuance upon the exercise of options held by the Directors of the
Company which are subject to the "Directors' Standstill Agreements" (as defined
below), and (v) approximately 15,000,000 shares of such additional shares for
issuance or possible issuance under the continuing provisions of the "Kingdon
Private Placement" described below.
On November 8, 1995 the Company received an offer from a Canadian
institutional investor to purchase 4,800,000 shares of the Company's common
stock at a price of $0.75 per share, the fair market value of such shares on
that date. At that time virtually all of the Company's authorized capital of
100,000,000 shares of common stock was issued and outstanding or reserved for
issuance upon the exercise of outstanding warrants and options to purchase
common stock of the Company. Therefore, in order to make sufficient shares
available to effect the sale of 4,800,000 shares of common stock to such
investor, the Company adopted a program (the "Exchange Program"), to be
partially implemented through the Incentive Plan and the Directors Plan and
partially outside such plans, under which all directors, officers, certain
active consultants (all of whom were former directors or officers of the
Company) and all current employees were given the right to exchange presently
owned warrants and options that had shares of common stock reserved for issuance
upon their exercise (respectively, "Old Warrants" and "Old Options") for new
warrants and options which initially, and until the requisite corporate action
was taken to increase the authorized capital of the Company and reserve the
required
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<PAGE> 8
number of shares of common stock for issuance upon their exercise, would not
have any shares of common stock reserved for issuance upon their exercise
(respectively, "New Warrants" and "New Options"). The exercise price of the New
Warrants and New Options was established at $0.75 per share, the fair market
value of the Company's common stock on November 8, 1995, the date the Exchange
Program was adopted, and exchanges were to be effected starting with the Old
Warrants and Old Options having the highest exercise prices and proceeding in
descending order of exercise prices until sufficient shares of common stock
became available for the Company to implement the sale of common stock to the
Canadian investor. If possible, no exchanges were to be made which would involve
Old Warrants or Old Options having an exercise price below $0.75 per share, and,
in fact, no such exchanges were required. The exercise prices of the Old
Warrants and Old Options exchanged for New Warrants and New Options ranged from
a high of $5.09 per share to $0.75 per share.
The consideration to the participants in the Exchange Program for
exchanging Old Warrants and Old Options that had shares of common stock of the
Company reserved for issuance upon their exercise at exercise prices above $0.75
per share for New Warrants and New Options initially having no shares reserved
for issuance upon their exercise was the reduction in the exercise price. With
respect to Old Warrants and Old Options having an exercise price of $0.75 per
share that were exchanged for New Warrants and New Options that did not have
shares reserved for issuance upon their exercise, such consideration was
provided by a provision in the Exchange Program that granted the holders of such
Old Warrants and Old Options New Warrants and New Options having the right to
purchase 115% of the shares available for purchase upon the exercise of the Old
Warrants and Old Options exchanged.
The New Warrants and New Options became fully vested upon the surrender and
forfeiture of Old Warrants and Old Options to purchase a corresponding number of
shares (as adjusted in accordance with the foregoing formula in the case of
those having a $0.75 per share exercise price). However, the New Warrants and
New Options do not become exercisable until: (i) approval by the Company's
stockholders of an amendment to the Certificate of Incorporation increasing the
authorized capital by an amount of additional shares of common stock at least
sufficient to provide the number of shares needed to be reserved to permit the
exercise of all New Warrants and New Options, and (ii) the completion of such
further corporate action including amendments to the Incentive Plan and the
Directors Plan that may be necessary or appropriate in connection with the
implementation of the Exchange Program. The expiration dates of the New Warrants
and New Options are the same as the expiration dates of the Old Warrants and Old
Options exchanged except that if such expiration date occurs prior to the date
on which the New Warrants or New Options become exercisable, the expiration date
for such New Warrants or New Options will be ninety (90) days following the date
on which such New Warrants and New Options become exercisable. In all other
respects, the terms and conditions of the New Warrants and New Options are the
same as the terms and conditions of the Old Warrants and Old Options exchanged.
Under the Exchange Program, 4,800,249 shares of the Company's common stock
were made available for issuance to the Canadian institutional investor
(4,800,000 of which were sold and delivered to such investor on November 14,
1995) and it will be necessary in order to make the New Warrants and New Options
fully exercisable for the Company to take the appropriate corporate action to
reserve
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<PAGE> 9
5,055,499 shares of the Company's common stock for issuance upon their exercise.
For this reason and in order to provide the Company the continued ability to
attract and retain the services of qualified executives, employees, directors
and consultants while providing an incentive for such persons to make a maximum
contribution to the Company's success and aligning their interests with those of
the Company's stockholders, the Company, as described below, is seeking
stockholder approval of an amendment to the Incentive Plan increasing the
aggregate number of shares of the Company's common stock reserved for issuance
under the Incentive Plan from 6,000,000 shares to 10,000,000 shares. Solely for
the purpose of providing sufficient shares for issuance upon the exercise of New
Options which were exchanged under the Exchange Program for Old Options
originally granted under the Directors Plan, the Company is also seeking, as
described below, stockholder approval of an amendment to the Directors Plan
increasing from 725,000 shares to 821,000 shares the aggregate number of shares
of common stock issuable upon the exercise of options granted under the
Directors Plan.
On March 5, 1996, in order to enable the Company to obtain 2,390,000
authorized but unissued shares of common stock to sell to four investors in two
private placements to raise additional working capital, each member of the Board
of Directors agreed not to exercise any warrants or options to purchase common
stock of the Company which had exercise prices between $0.50 and $0.75 per share
and to permit the Company to issue the shares reserved for issuance upon the
exercise of such warrants and options in the two proposed private placements
(individually, a "Directors' Standstill Agreement" and collectively, the
"Directors Standstill Agreements"). In consideration for this action by the
directors, the Company agreed to reserve sufficient shares of common stock of
the Company to permit the full exercise of all such warrants and options once
the Company had obtained sufficient additional authorized shares of common stock
to permit such action by the Company. These 2,390,000 "unreserved" shares of
common stock when added to the authorized and unissued shares of common stock
then remaining in the Company's authorized capital provided the Company with
3,000,000 shares of common stock that were available for sale in the proposed
private placements.
On March 28, 1996, the Company sold 2,000,000 shares of its common stock in
a private placement to one investor.
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 (the "Kingdon 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. In conjunction with this sale
of common stock and secured convertible term notes, the Company also agreed to
file a registration statement with the Securities and Exchange 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. The conversion of the notes and the exercise of the options are
both subject to an appropriate amendment to the Company's Certificate of
Incorporation increasing its authorized capital to provide for the requisite
shares. The amendment to the Company's Certificate of
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<PAGE> 10
Incorporation for which stockholder approval is being sought included such
shares as well as shares of common stock reserved for the payment of interest on
the notes and other amounts payable by the Company to said investors in the
event such notes are not paid or such registration statement does not become
effective on a timely basis.
The additional shares of common stock to be authorized pursuant to the
proposed amendment may be issued from time to time as the Board of Directors may
determine without further action of the stockholders of the Company.
Stockholders of the Company do not currently possess, nor upon the adoption
of the proposed amendment will they acquire, preemptive rights which would
entitle such persons, as a matter of right, to subscribe for the purchase of any
securities of the Company.
The affirmative vote of the holders of a majority of all the outstanding
shares of Common Stock of the Company is required for approval of this proposal.
The Board of Directors recommends a vote FOR such proposal.
ADOPTION OF AN AMENDMENT TO THE INCENTIVE PLAN
On October 6, 1992, the Company adopted, subject to stockholder approval,
the Incentive Plan, under which options to purchase shares of the Company's
common stock were granted to officers, employees and certain directors of the
Company in consideration and recognition of the rights those persons forfeited
as a result of the cancellation of the Company's stock appreciation rights
program and the forfeiture of stock options by certain officers and employees
agreed to by such persons in furtherance of the Company's efforts to conclude a
private placement of shares of the Company's common stock with various
institutional and other qualified investors by the end of August 1992. On April
14, 1993, the Option Committee amended the Incentive Plan, subject to
stockholder approval, to provide ongoing benefits to officers, employees and
non-employee directors of the Company in a manner which would enhance the
Company's ability to attract and retain the services of qualified executives,
employees and directors while providing an incentive for such persons to make a
maximum contribution to the Company's success and aligning their interests with
those of the Company's stockholders. On May 27, 1993 the stockholders approved
the Incentive Plan as adopted on October 6, 1992 and amended on April 14, 1993.
On November 8, 1995 the Option Committee amended the Incentive Plan,
subject to stockholder approval, to increase the aggregate number of shares of
the Company's common stock reserved for awards of restricted stock and for
issuance upon the exercise of stock options granted under the Incentive Plan
from 6,000,000 to 10,000,000 shares and to add to those persons who are eligible
to participate under the Incentive Plan active consultants to the Company. The
purpose of the amendment was to enable the Company to continue in the future to
provide benefits to officers, employees, non-employee directors and active
consultants of the Company in a manner that would enhance the Company's ability
to attract and retain the services of qualified executives, employees, directors
and consultants while providing an incentive for such persons to make a maximum
contribution to the Company's success and aligning their interests with those of
the Company's stockholders.
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<PAGE> 11
The material ongoing features of the Incentive Plan, as amended, include the
following:
- - The aggregate number of shares of the Company's common stock reserved for
grants of restricted stock and grants of options to purchase shares of the
Company's common stock is 10,000,000 shares. The amendment for which
stockholder approval is being sought increased the number of shares so
reserved from 6,000,000 shares to 10,000,000 shares.
- - The Incentive Plan is administered by the Option Committee of the Board of
Directors, no member of which has received or will be eligible to receive
restricted stock or options under the Incentive Plan except in a manner which
will not preclude the receiving member from acting as a "disinterested
administrator" as defined for the purposes of Rule 16b-3 (or any successor
rule) under the Exchange Act.
- - The Incentive Plan authorizes the granting of options which may be either
non-statutory options or "incentive stock options" (as defined in the Internal
Revenue Code of 1986, as amended) and restricted stock awards.
- - The shares of common stock covered by the Incentive Plan may be either
treasury shares or authorized but unissued shares. If any option granted under
the Incentive Plan expires or terminates without having been exercised in full
or any restricted stock award is forfeited, the shares covered by the
unexercised portion of the option or by the forfeited restricted stock award
may be used again for new grants under the Incentive Plan.
- - There is no maximum number of shares that can be allowed to one participant in
any grant of non-statutory options or restricted stock awards, but the
aggregate fair market value of the shares, at the time of grant, with respect
to which options intended to be incentive stock options are exercisable for
the first time by a participant in any calendar year may not exceed one
hundred thousand ($100,000) dollars.
- - The persons who are eligible to participate under the Incentive Plan
("Participants") include executive officers (currently 8 persons),
non-employee directors (currently 2 persons), non-executive officer employees
(currently 65 persons) and persons retained by the Company for consulting
services (currently 8 persons). Non-employee directors are only eligible to
receive options and restricted stock awards in accordance with the formulas
set forth in the Incentive Plan. The amendment for which stockholder approval
is being sought added active consultants to the Company as persons who are
eligible to participate under the Incentive Plan.
- - The exercise price for all of the options to be granted under the Incentive
Plan is to be not less than the market value of a share of the Company's
common stock on the date of the grant of the option.
- - Any grant of an option or restricted stock award under the Incentive Plan must
be made no later than May 27, 2003, ten (10) years from the date the Incentive
Plan originally was approved by the stockholders.
- - The Incentive Plan provides for adjustments in the number of shares subject to
the Incentive Plan and other relevant provisions in the event of a stock
split, merger or similar occurrence.
9
<PAGE> 12
- - The Option Committee, in its discretion, may determine the provisions of the
options granted under the Incentive Plan, including installment exercise terms
for an option under which the option may be exercised in a series of
cumulative installments; the form of consideration, including cash, shares of
common stock or any combination thereof, which may be accepted in payment of
the purchase price of shares purchased pursuant to the exercise of an option;
special rules regarding exercise in the case of retirement, death, disability
or other termination of employment; and other provisions consistent with the
terms of the Incentive Plan and applicable law.
- - The Option Committee may determine the term of each option granted but no
option may be exercised after the expiration of ten (10) years from the date
it is granted.
- - Options may be granted under the Incentive Plan on such terms and conditions
as the Option Committee considers appropriate which may differ from those
provided in the Incentive Plan where such options (substitute options) are
granted in substitution for stock options held by employees of other companies
who concurrently become employees of the Company or a subsidiary of the
Company as the result of a merger or consolidation of the other company with,
or the acquisition of the property or stock of the other company by, the
Company or a subsidiary of the Company.
- - All new non-employee directors will be granted stock options for 75,000 shares
of the Company's common stock upon a new director's initial election to the
Board of Directors at an exercise price equal to the market value of the
Company's common stock on the date of grant, such option to vest as to 25,000
shares on the date of initial election to the Board of Directors and 25,000
shares on each of the first and second anniversaries of such election.
- - Each non-employee director of the Company will be granted 5,000 restricted
shares of the Company's common stock each year for service as a director of
the Company, such grants to be made upon a director's initial election to the
Board and upon each subsequent election with all such restricted shares
subject to a restriction period of three (3) years from the date of grant
during which such shares may not be transferred or encumbered.
- - In addition to the foregoing restricted stock awards to non-employee
directors, the Option Committee may grant restricted stock awards of shares of
the Company's common stock to any other Participant under the Incentive Plan.
The Option Committee in its discretion may determine the provisions of grants
of restricted stock awards including the time at which such awards become
non-forfeitable and fully transferable, the terms of forfeiture, the
entitlement of grantees to vote the shares and receive dividends paid thereon
and any other provisions consistent with the terms of the Incentive Plan and
applicable law.
- - The Option Committee may at any time or times amend the Incentive Plan
provided that, except as required by adjustments in the case of changes in
capitalization, no such amendment shall without the approval of the
stockholders of the Company: (i) increase the maximum number of shares of
common stock for which options or restricted stock awards may be granted under
the Incentive Plan; (ii) reduce the price at which options may be granted
below the price describe above; (iii) reduce the exercise price of outstanding
options; (iv) extend the period during which options or restricted stock
awards may be granted; (v) extend the period during which an outstanding
option may be exercised
10
<PAGE> 13
beyond the maximum period provided for under the Incentive Plan; (vi)
materially increase in any other way the benefits accruing to Participants;
(vii) change the class of persons eligible to be Participants, or (viii)
disqualify an optionee or grantee under the Incentive Plan that is a member of
the Option Committee from being a "disinterested administrator" (as defined
for the purposes of Rule 16b-3 (or any successor rule) under the Exchange Act)
of the Incentive Plan or of any other stock-based employee benefit plan of the
Company. The Incentive Plan provides that the formula setting the amount of
options and restricted stock awards to which a non-employee director may be
entitled may not be amended more than once every six (6) months.
The following table sets forth certain additional details concerning the
Incentive Plan.
NEW PLAN BENEFITS
AS ADDED BY AMENDMENT FOR WHICH APPROVAL IS SOUGHT
<TABLE>
<CAPTION>
ADDED BY AMENDMENT
ADOPTED 11/8/95(1)
--------------------------------------
NAME AND POSITION(2) $ VALUE(3) NUMBER OF UNITS
---------------------------------------------- ------------------ ---------------
<S> <C> <C>
Jay M. Haft, Co-Chairman and Chief Executive
Officer..................................... $ -- --
Michael J. Parrella, President................ -- --
Stephen J. Fogarty, Senior Vice President and
Chief Financial Officer..................... -- --
James W. Hiney, Vice President, General
Counsel and Secretary....................... -- --
Executive Group(4)............................ -- --
Non-Executive Director Group(5)............... -- --
Non-Executive Officer Employee group(6)....... -- --
Active consultant Group(7).................... 890,072 1,186,763
</TABLE>
- ---------------
(1) The table includes grants under the Exchange Program to 7 active consultants
to the Company who recently had ceased being employees and who forfeited Old
Options under the Exchange Program. The New Options granted to such
consultants will not be exercisable until certain action is taken by the
stockholders and the Company authorizing and reserving shares of common
stock of the Company for issuance upon their exercise. See "Amendment of
Certificate of Incorporation to Increase Authorized Capitalization" above.
(2) Named executive officers are those for the 1995 fiscal year.
(3) The value per unit in the case of options equals the exercise price of the
options, the fair market value on the date of grant. The fair market value
of the Company's common stock on November 8, 1995 was $0.75 per share. The
value per unit in the case of restricted stock awards to non-executive
directors is the fair market value of the Company's common stock on the date
of grant, the date of election or re-election as a director. The last Annual
Meeting of Stockholders at which directors were elected was November 8, 1995
on which date the fair market value of the Company's common stock was $0.75.
(4) 6 persons on 11/8/95.
(5) 0 persons on 11/8/95.
(6) 17 persons on 11/8/95.
(7) 7 persons on 11/8/95.
11
<PAGE> 14
Nonstatutory stock options without ascertainable fair market value at grant
for federal income tax purposes are not taxed to the participant until exercised
or otherwise disposed of. If the option is exercised, the participant realizes
compensation income equal to the fair market value of the stock at the time it
is transferred to him or her less the amount paid for it (the option or exercise
price). If the Company satisfies its tax withholding obligations arising from
the exercise of the options, it would receive a business expense deduction for
the amount that the participant must include in gross income as compensation
because of the exercise of a nonstatutory stock option. This deduction is taken
for the same year in which or within which that income is taxable to the
participant. If the participant later sells the stock, any further gain would be
capital gain.
With respect to incentive stock options, in general, no income to a
participant will result for federal tax purposes upon either the granting or the
exercise of an option under the Incentive Plan. If the participant later sells
the acquired stock at least two years after the date the option is granted and a
least one year after the transfer of the acquired stock to the participant, the
participant would realize capital gain equal to the difference between the
option price and the proceeds of the sale. If the participant's gain is taxed as
capital gain, the Company would not be allowed a business expense deduction. If
the participants dispose of the acquired stock before the end of the required
holding periods, the participant would realize ordinary income in the year of
disposition equal to the lesser of: (i) the difference between the option price
and the fair market value of the stock on the exercise date, or (ii) if the
disposition is a taxable sale or exchange, the amount of gain realized; the
Company would receive an equivalent deduction. If the participant later sells
the stock, any further gain would be capital gain.
With respect to restricted stock awards, the participant would generally
realize ordinary income in the year the shares of common stock covered by the
award become non-forfeitable or fully transferable, in an amount equal to the
fair market value of the shares on the date they become non-forfeitable or fully
transferable. The Company would be entitled to an equivalent deduction. If the
participant later sells the stock, any further gain would be capital gain.
Further, the participant may elect to treat the award as ordinary income in the
year of grant within thirty (30) days of the date of grant. If the participant
makes such an election, the Company would be entitled to an equivalent
deduction.
The Board of Directors recommends a vote FOR approval of the adoption of
the amendment of the Incentive Plan described above.
ADOPTION OF AN AMENDMENT TO THE DIRECTORS PLAN
On November 15, 1994, the Board of Directors adopted, subject to
stockholder approval, the Directors Plan and on May 8, 1995 amended the
Directors Plan subject to stockholder approval. Under the Directors Plan,
options to purchase shares of the Company's common stock were granted to two (2)
Directors of the Company, Messrs. Haft and Keith, in consideration and
recognition of Mr. Haft assuming additional responsibilities as President and
Chief Executive Officer and Mr. Keith assuming additional responsibilities as
Chairman of the Finance Committee of the Company and for the purpose of
promoting the interests of the Company and its stockholders by providing Messrs.
Haft and Keith with an incentive to share in the increase in the value of the
common stock of the Company and to exert
12
<PAGE> 15
their maximum efforts on behalf of the Company in fulfilling such additional
responsibilities. On November 8, 1995 the stockholders approved the Directors
Plan as adopted on November 15, 1994 and as amended on May 8, 1995.
On November 8, 1995 the Board of Directors further amended the Directors
Plan to provide: (i) that it be administered by the Option Committee, and (ii)
that thereafter options under the Directors Plan may be granted to the
participants on dates and in amounts and with terms relating to vesting
exercisability, expiration and exercise prices other than as specifically set
forth in the Directors Plan as may be determined from time to time by the Option
Committee. Then, also on November 8, 1995, the Option Committee amended the
Directors Plan, subject to the approval of the stockholders, to: (i) increase
from 725,000 shares to 821,000 shares the aggregate number of shares of common
stock of the Company issuable upon the exercise of stock options to be granted
pursuant to the Directors Plan; (ii) provide that options may be granted to the
participants on such other dates in such other amounts and with such other terms
relating to vesting exercisability, expiration and exercise prices than those
specifically set forth in the Directors Plan as may be determined from time to
time by the Option Committee; (iii) provide that if any option granted under the
Directors Plan expires or terminates without having been exercised in full, the
shares covered by the unexercised portion of such option may be used again for
new grants under the Directors Plan; and (iv) provide that no grant of an option
may be made after November 15, 2004 and no options granted may be exercised
after the expiration of ten years from the date it is granted.
The purpose of the amendment adopted on November 8, 1995 was to enable the
Company to implement the Exchange Program as it applied to options granted under
the Directors Plan and effect certain procedural changes in the administration
of the Directors Plan.
The material features of the Director's Plan as amended include the following:
- - The aggregate number of shares of the Company's common stock reserved for
grants of options to purchase shares of the Company's common stock is 821,000
shares. The amendment for which stockholder approval is being sought increased
the number of shares so reserved from 725,000 shares to 821,000 shares.
- - The Directors Plan is administered by the Option Committee of the Board of
Directors. Prior to the amendment of the Directors Plan by the Board of
Directors on November 8, 1995 the Directors Plan was administered by the Board
of Directors. The Option Committee is composed of two (2) Directors each of
which is a "disinterested person" as defined under Rule 16b-3 promulgated
under the Exchange Act.
- - The persons who are eligible to receive options under the Directors Plan are
limited solely to the members of the Board of Directors who served in the
positions of: (a) Co-Chairman, President and Chief Executive Officer, and (b)
Chairman of the Finance Committee on November 15, 1994.
13
<PAGE> 16
- - Under the Directors Plan options were granted as follows:
-- Mr. Haft, Co-Chairman, President and Chief Executive Officer of the
Company on November 15, 1994, was granted options to purchase 525,000
shares of common stock of the Company on the following dates in the
amounts set forth opposite each such date:
<TABLE>
<CAPTION>
GRANT DATE NUMBER OF SHARES EXERCISE PRICE
-------------------------------------------- ---------------- --------------
<S> <C> <C>
November 15, 1994........................... 120,000 $ 1.0625
December 15, 1994........................... 45,000 0.75
January 15, 1995............................ 45,000 0.875
February 15, 1995........................... 45,000 0.6875
March 15, 1995.............................. 45,000 0.7813
April 15, 1995.............................. 45,000 0.6875
May 15, 1995................................ 45,000 0.75
June 15, 1995............................... 45,000 0.6563
July 15, 1995............................... 45,000 0.7188
August 15, 1995............................. 45,000 1.2188
</TABLE>
-- Mr. Keith, Chairman of the Finance Committee of the Company on November
15, 1994, was granted options to purchase 200,000 shares of common stock
of the Company on the following dates in the amounts set forth opposite
each such date:
<TABLE>
<CAPTION>
GRANT DATE NUMBER OF SHARES EXERCISE PRICE
-------------------------------------------- ---------------- --------------
<S> <C> <C>
November 15, 1994........................... 50,000 $ 1.0625
December 15, 1994........................... 25,000 0.75
January 15, 1995............................ 25,000 0.875
February 15, 1995........................... 25,000 0.6875
March 15, 1995.............................. 25,000 0.7813
April 15, 1995.............................. 25,000 0.6875
May 15, 1995................................ 25,000 0.75
</TABLE>
- - Under the amendment for which stockholder approval is being sought no grant of
an option may be made after November 15, 2004.
- - Options granted under the Directors Plan prior to November 8, 1995 became
fully exercisable on November 8, 1995. Under the amendment for which
stockholder approval is being sought, thereafter options may be granted with
such terms relating to vesting and exercisability as may be determined from
time to time by the Option Committee provided that no option may be exercised
after the expiration of ten (10) years from the date it is granted.
- - All options granted under the Directors Plan expire on November 15, 1999.
Under the amendment for which stockholder approval is being sought, after such
approval options may be granted with such terms relating to expiration as may
be determined from time to time by the Option Committee
14
<PAGE> 17
provided that no option may be exercised after the expiration of ten (10)
years from the date it is granted.
- - The purchase price for each share of common stock subject to an option granted
under the Directors Plan prior to November 8, 1995 is the fair market value of
the common stock on the relevant grant date. Under the amendment for which
stockholder approval is being sought, thereafter said purchase price shall be
as may be determined from time to time by the Option Committee.
- - The Board of Directors may, in its discretion, make loans available to the
participants, on reasonable terms, with funds to be provided by the Company,
to facilitate the payment by a participant of the exercise price of, or any
tax withholding obligation incurred with respect to, any options granted under
the Directors Plan.
- - If there is a change in the number or type of outstanding shares of the
Company's common stock by reason of a stock dividend, stock split,
recapitalization, merger, consolidation, combination or other similar event,
or if there is a distribution to stockholders of the Company's common stock
other than a cash dividend, appropriate adjustments shall be made to the
number and kind of shares subject to options under the Directors Plan; the
purchase price for shares of common stock covered by options; and other
relevant provisions, to the extent that the Option Committee in its sole
discretion, determines that such changes make such adjustment necessary to be
equitable.
- - Options are non-assignable and non-transferable other than by will or the laws
of descent and distribution.
- - The Option Committee may at any time or times amend the Directors Plan or
amend any outstanding options for the purpose of satisfying the requirements
of any changes in applicable laws or regulations or for any other purpose
which at the time may be permitted by law provided that no amendment of any
outstanding option shall contain terms or conditions inconsistent with the
provisions of the Directors Plan and provided that no amendment of the
Directors Plan or of any outstanding option shall without the approval of the
stockholders: (i) increase the maximum number of shares of common stock to
which options may be granted under the Directors Plan; (ii) reduce the price
at which options may be granted below the price specified in the Directors
Plan; (iii) reduce the exercise price of outstanding options; (iv) extend the
period during which an outstanding option may be exercised beyond the maximum
period specified in the Directors Plan; (v) materially increase in any other
way the benefits accruing to the participants; or (vi) change the class of
persons eligible to be participants.
15
<PAGE> 18
The following table sets forth certain additional details concerning the
Directors Plan.
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
ADDED BY AMENDMENT
ADOPTED 11/8/95(1)
------------------------------
NAME AND POSITION $ VALUE NUMBER OF UNITS
----------------------------------------------------- ---------- ---------------
<S> <C> <C>
Jay M. Haft, Co-chairman,
President and Chief Executive Officer.............. $ 10,125 13,500
Alastair Keith, Chairman, Finance Committee.......... 65,875 82,500
Executive Group(3)................................... 10,125 13,500
Non-Executive Director Group(4)...................... 65,875 82,500
Non-Executive Officer Employee Group(5).............. -- --
</TABLE>
- ---------------
(1) The table includes grants under the Exchange Program which will not be
exercisable until certain action is taken by the stockholders and the
Company authorizing and reserving shares of common stock of the Company for
issuance upon their exercise. See "Amendment of Certificate of Incorporation
to Increase Authorized Capitalization" above.
(2) The value per unit in the case of options equals the exercise price of the
options, the fair market value on the date of grant. The fair market value
of the Company's common stock on November 8, 1995 was $0.75 per share.
(3) One person.
(4) One person.
(5) None.
Nonstatutory stock options without ascertainable fair market value at grant
for federal income tax purposes are not taxed to the participant until exercised
or otherwise disposed of. If the option is exercised, the participant realizes
compensation income equal to the fair market value of the stock at the time it
is transferred to him or her less the amount paid for it (the option or exercise
price). If the Company satisfies its tax withholding obligations arising from
the exercise of the options, it would receive a business expense deduction for
the amount that the participant must include in gross income as compensation
because of the exercise of a nonstatutory stock option. This deduction is taken
for the same year in which or within which that income is taxable to the
participant. If the participant later sells the stock, any further gain would be
capital gain.
The Board of Directors recommends a vote FOR approval of the adoption of
the amendment of the Directors Plan, as described above.
INDEPENDENT AUDITORS
INDEPENDENT ACCOUNTANTS FOR 1996
The Board of Directors, upon the recommendation of its Audit Committee, has
selected Richard A. Eisner & Company, LLP to audit the accounts of the Company
for the fiscal year ending December 31, 1996. Such firm has reported to the
Company that none of its members has any direct financial interest
16
<PAGE> 19
or material indirect financial interest in the Company. The Company's Audit
Committee is composed of Messrs. McCloy, Keith and Oolie and has responsibility
for selecting auditors.
Richard A. Eisner & Company, LLP was selected by the Board of Directors to
audit the accounts of the Company for the fiscal year ended December 31, 1995.
Representatives of Richard A. Eisner & Company, LLP are expected to be
present at the Annual Meeting of Stockholders. Such persons will have an
opportunity to make a statement if they desire to do so and will be available to
respond to appropriate questions.
The Board of Directors recommends a vote FOR the ratification of the
appointment of Richard A. Eisner & Company, LLP as independent auditors.
CHANGE IN INDEPENDENT ACCOUNTANTS
On December 21, 1994, Coopers & Lybrand LLP (formerly Coopers & Lybrand),
the independent accountants who audited the Company's consolidated financial
statements for the fiscal year ended December 31, 1993, notified the Company
that the client-auditor relationship between the Company and Coopers & Lybrand
LLP had ceased.
During the Company's fiscal year ended December 31, 1993, and during the
interim period preceding their resignation as the Company's independent
accountants there were no disagreements with Coopers & Lybrand LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of Coopers & Lybrand LLP, would have caused it to make reference to
the subject matter of the disagreement(s) in connection with its report.
The report of Coopers & Lybrand LLP dated March 24, 1994 on the Company's
consolidated financial statements as of and for the year ended December 31,
1993, did not contain an adverse opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. On December 19, 1994, Coopers
& Lybrand LLP reissued its report on the Company's consolidated financial
statements as of and for the fiscal year ended December 31, 1993, which reissued
report was filed in the Company's Current Report on Form 8-K on December 19,
1994, and is contained in the Company's 1994 Annual Report. The reissued report
of Coopers & Lybrand LLP contains a paragraph which emphasizes certain
uncertainties arising subsequent to the date of their original report which are
described in "Risk Factors -- Current Financial Condition; Cash Position"
appearing in the Company's Current Report on Form 8-K, Item 5, filed on December
19, 1994. Such subsequent uncertainties with respect to the availability of
funds to sustain the Company's activities indicated at December 19, 1994 that
the Company may be unable to continue as a going concern through 1995.
On January 5, 1995, the Company engaged Richard A. Eisner & Company LLP
(formerly Richard A. Eisner & Company) as independent accountants to audit the
consolidated financial statements of the Company for the year ended December 31,
1994, replacing Coopers & Lybrand LLP. The decision to engage Richard A. Eisner
& Company LLP was approved by the Audit Committee of the Company's Board of
Directors. During the fiscal year ended December 31, 1993, and the subsequent
period, neither
17
<PAGE> 20
the Company nor any person on the Company's behalf consulted Richard A. Eisner &
Company LLP regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
As reported in the Compensation Committee Report for the fiscal year ended
December 31, 1994, contained in the 1995 Proxy Statement, on November 15, 1994,
the Compensation Committee awarded Mr. Haft a consulting fee of $10,000 per
month for a period of six months and granted him options to purchase 390,000
shares of the Company's common stock in monthly installments over that six month
period as compensation to Mr. Haft for his services as Co-chairman of the Board
of Directors, Chief Executive Officer and President of the Company. In May, 1995
the Compensation Committee extended Mr. Haft's compensation of $10,000 per month
for an additional three months and granted him further options to purchase
135,000 shares of the Company's common stock in three equal installments over
the three month extension period. On July 6, 1995, Mr. Haft resigned as
President and, with the approval of the Board retained, for an indefinite term,
the titles and responsibilities of Chief Executive Officer and Co-chairman of
the Board of Directors. At this time, Mr. Parrella was elected President of the
Company. In light of these changes in their respective responsibilities, Mr.
Haft's compensation was reduced by $4,000 per month and Mr. Parrella's salary
was increased by $4,000 per month effective August 16, 1995. On August 1, 1995,
Mr. Haft's status changed from that of consultant to an employee of the Company.
This change did not result in any change in Mr. Haft's compensation although as
an employee he became covered by the Company's health and dental benefits
program.
From January 1, 1995 to August 16, 1995, Mr. Parrella's salary was at the
rate of $70,000 per year, the salary approved by the Compensation Committee on
November 15, 1994 at the time of the restructuring of the Company's senior
management as reported previously. As stated above, effective August 16, 1995,
Mr. Parrella's base salary was increased to an annual rate of $118,000. In
addition to this cash compensation, Mr. Parrella was also granted options to
purchase 15,000 shares of the Company's common stock on the fifteenth day of
each of the first eight months of 1995. On May 8, 1995, the Compensation
Committee, in recognition of the efforts of Mr. Parrella under the difficult
conditions the Company was then facing and in recognition of the importance of
his continued services to the ongoing restructuring program, awarded Mr.
Parrella a cash bonus of $25,000 plus 1% of the cash to be received by the
Company upon the establishment of certain significant business relationships.
Any such percentage bonus was made contingent upon the execution of relevant
documentation or other form of closing with regard to these relationships prior
to January 1, 1996. Mr. Parrella was paid a bonus of $20,168 under this
percentage bonus arrangement. On July 11, 1995, in order to enable the Company
to obtain 1,100,000 authorized but unissued shares of common stock to sell to an
investor in a private placement to raise additional working capital, Mr.
Parrella forfeited options to purchase 500,000 shares of the Company's common
stock. In recognition of the ongoing efforts of Mr. Parrella on behalf of the
18
<PAGE> 21
Company and the fact that his cash compensation had been significantly reduced
the prior year, the Company agreed that if the private placement was
successfully concluded and Mr. Parrella agreed to work for the Company through
1996 (without any obligation on the part of the Company to employ him for any
given period), Mr. Parrella would be granted options to purchase 500,000 shares
of common stock under the Incentive Plan. Of this amount, 250,000 options would
become vested and exercisable immediately. The other 250,000 options would
become vested and exercisable either on December 31, 1996 provided Mr. Parrella
was employed by the Company on that date or on such earlier date if the price of
the Company's common stock as traded on the NASDAQ Stock Market had maintained a
price of $1.25 per share or above for the previous 45 days. On December 12, 1995
the Option Committee granted Mr. Parrella options to purchase 500,000 shares of
common stock subject to the foregoing terms and conditions. The exercise price
of such options is $0.6563 per share, the fair market value of the Company's
common stock on the date of grant. On August 1, 1995, the Company reinstated Mr.
Parrella's $16,450 annual automobile allowance.
The base salary of Messrs. Fogarty and Hiney for 1995 was established at
$104,434 and $81,144 respectively. In addition, on June 15, 1995, Mr. Fogarty
was awarded a cash bonus of $10,083 and on June 15, 1995 and July 15, 1995, Mr.
Hiney was awarded a cash bonus of $20,000 in connection with his resignation as
an officer and employee of the Company on June 15, 1995. On January 22, 1996,
Mr. Fogarty was awarded a further bonus of a grant of options to purchase 75,000
shares of the Company's common stock, which options, however would not be
exercisable until certain action by the stockholders and the Company to
authorize and reserve shares for issuance upon the exercise of such options was
completed. See "Amendment of Certificate of Incorporation to Increase Authorized
Capitalization", "Adoption of Amendment to the Incentive Plan" and "Adoption of
Amendment to the Directors Plan" above.
On January 3, 1995, Mr. Fogarty, in consideration for his agreeing to
remain an employee of the Company to July 1, 1995, was granted the right to
exchange options to buy 158,200 shares of common stock of the Company having
exercise prices of between $2.38 and $4.00 per share for an equal number of
options having an exercise price of $1.25 per share. Mr. Hiney, for the same
consideration, was granted the right to exchange 34,554 of such options for an
equal number of options having an exercise price of $1.50 per share. Messrs.
Fogarty and Hiney each exercised this right of option exchange. As part of Mr.
Hiney's severance arrangement relating to his leaving the Company on June 15,
1995, the condition of continuing employment to July 1, 1995 was waived by the
Company. See "Repricing of Options/SARs" below.
On November 8, 1995, as participants in the Exchange Program, each of
Messrs. Haft, Parrella and Fogarty were given the right to exchange and did
exchange Old Warrants and Old Options having exercise prices of $0.75 per share
or more and having shares of common stock reserved for issuance upon their
exercise for New Warrants and New Options having exercise prices of $0.75 per
share but having no shares reserved for issuance upon their exercise until the
stockholders and the Company completed the action necessary to authorize and
reserve such shares. In this regard, Mr. Haft forfeited Old Warrants to purchase
190,000 shares of common stock at $0.75 per share and was granted New Warrants
to purchase 218,500 shares of common stock at $0.75 per share. He also forfeited
Old Options
19
<PAGE> 22
to purchase 345,000 shares of common stock at prices between $0.75 and $1.22 per
share and was granted New Options to purchase 358,500 shares of common stock at
$0.75 per share. Mr. Parrella forfeited Old Warrants to purchase 750,000 shares
of common stock at $0.75 per share and was granted New Warrants to purchase
862,500 shares of common stock at $0.75 per share. He also forfeited Old Options
to purchase 135,000 shares of common stock at prices between $0.75 and $1.22 per
share and was granted New Options to purchase 139,500 shares of common stock at
$0.75 per share. Mr. Fogarty forfeited Old Options to purchase 158,200 shares of
common stock at $1.25 per share and was granted New Options to purchase 158,200
share of common stock at $0.75 per share. As described above, the reason for the
Exchange Program was to enable the Company to obtain 4,800,000 authorized but
unissued shares of common stock for use in a private placement to raise needed
working capital. See "Repricing of Options/SARs" below and "Amendment of
Certificate of Incorporation" above.
Because of the Company's uncertain business prospects and limited cash
resources, in determining the appropriate levels of compensation for the Chief
Executive Officer and the named executive officers, the Compensation Committee
did not deem it relevant, useful or even feasible to consider the compensation
practices of other companies having more certain prospects and greater cash
resources. Rather, the Compensation Committee took into consideration the
contribution being made to the Company's turn-around by these officers, the
extent to which they had received previous reductions in their overall level of
compensation in November of 1994 in connection with the Company's restructuring,
the importance of the Company continuing to receive their services and the
benefit of their knowledge of the Company's technologies, and the Company's
ability to provide them with adequate levels of remuneration either in cash or
in securities.
COMPENSATION
Set forth below is certain information for the three fiscal years ended
December 31, 1995, 1994 and 1993 relating to compensation received by the
Company's Chief Executive Officer and all executive officers of the Company
other than the Chief Executive Officer (collectively the "Named Executive
Officers") whose total annual salary and bonus for the fiscal year ended
December 31, 1995, exceeded $100,000 for services rendered in all capacities.
20
<PAGE> 23
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------
----------------------------------------------- RESTRICTED OPTIONS
OTHER ANNUAL STOCK WARRANTS ALL OTHER
NAME AND POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS SARS(#) COMPENSATION
- --------------------------- ---- --------- -------- --------------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jay M. Haft................ 1995 $ 110,000(1) $ -- $-- $-- 937,000(4) $--
Co-Chairman, Chief 1994 30,000 -- -- 8,750 165,000 --
Executive Officer &
President(1)
Michael J. Parrella........ 1995 90,833 47,168 6,395 -- 1,622,000(5) --
President; Executive Vice 1994 195,000 -- 9,458 -- 75,000 3,858
President(1) 1993 165,000 50,000 8,907 -- 250,000 5,676
James W. Hiney............. 1995 81,144 20,000 -- -- 69,554(6) --
Vice President/Patent 1994 85,000 50,000 -- -- 30,000 --
Counsel; Vice President 1993 80,000 -- -- -- 30,000 --
General Counsel &
Secretary(3)
Stephen J. Fogarty......... 1995 104,434 10,083 -- -- 391,400(7) --
Senior Vice President and 1994 110,000 -- -- -- -- --
Chief Financial Officer 1993 100,000 30,000 -- -- 50,000 --
</TABLE>
- ---------------
(1) Mr. Haft, an employee and director of the Company, was elected Co-Chairman
of the Board, Chief Executive Officer and President on November 15, 1994. On
July 6, 1995, the former Executive Vice President was elected President and
Mr. Haft retained the positions of Co-Chairman of the Board and Chief
Executive Officer.
(2) Consists of 5,000 restricted shares of the Company's common stock granted to
Mr. Haft on May 11, 1994 pursuant to the Company's Stock Incentive Plan
valued at $1.75 per share, the market price of the common stock on that
date. See "Directors' Fees and Stock Options." As of December 31, 1995, Mr.
Haft held 10,000 restricted shares of common stock which were worth $6,250
based on the market price of the common stock on that date.
(3) On June 15, 1995, Mr. Hiney resigned as Vice President, General Counsel and
Secretary and ceased being an employee of the Company.
(4) Excludes options and warrants to purchase 585,000 shares of the Company's
common stock forfeited under the Exchange Program and other activity for a
net new grant of 402,000 options and warrants of which none are exercisable.
(5) Excludes options and warrants to purchase 1,385,000 shares of the Company's
common stock forfeited under the Exchange Program and other activity for a
net new grant of 237,000 options and warrants.
(6) Excludes options to purchase 39,554 shares of the Company's common stock
forfeited for a net new grant of 30,000 options of which 25,000 are
exercisable.
(7) Excludes options to purchase 316,000 shares of the Company's common stock
forfeited under the Exchange Program and other activity for a net new grant
of 75,000 of which none are exercisable.
(8) Consists of the annual premiums for a $2 million personal life insurance
policy for 1993, and 1994 paid by the Company on behalf of Mr. Parrella in
1993 and 1994.
21
<PAGE> 24
STOCK OPTIONS AND WARRANTS
The following tables summarize the Named Executive Officers' stock option
and warrant activity during 1995. The Options and Warrants Granted Table
includes information relating to options granted on January 22, 1996 as part of
bonus compensation for 1995.
OPTIONS AND WARRANTS GRANTED IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL
RATES OF STOCK PRICE
PERCENT OF TOTAL APPRECIATION FOR
SHARES OPTIONS AND OPTION AND WARRANT
UNDERLYING WARRANTS GRANTED EXERCISE TERM(6)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------------
NAME GRANTED(#)(1) IN 1995(1) $/SHARE DATE 5% 10%
- ----------------------- ------------- ---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Haft(2)......... 45,000 0.5% $ 0.8750 11/15/99 $ 10,472 $ 23,039
45,000 0.5 0.6875 11/15/99 8,069 17,714
45,000 0.5 0.7813 11115/99 8,990 19,694
45,000 0.5 0.6875 11115/99 7,753 16,948
45,000 0.5 0.7500 11/15/99 8,286 18,075
45,000 0.5 0.6562 11/15/99 7,101 15,456
45,000 0.5 0.7187 11/15/99 7,614 16,538
45,000 0.5 1.2187 11/15/99 12,637 27,388
218,500 2.5 0.7500 12/31/97 18,100 37,216
358,500 4.0 0.7500 11/15/99 61,955 134,277
Michael J.
Parrella(3).......... 15,000 0.2 0.8750 11/15/99 3,491 7,680
15,000 0.2 0.6875 11/15/99 2,690 5,905
15,000 0.2 0.7812 11/15/99 2,996 6,564
15,000 0.2 0.6876 11/15/99 2,585 5,650
15,000 0.2 0.7500 11/15/99 2,762 6,025
15,000 0.2 0.7187 11/15/99 2,592 5,643
15,000 0.2 0.7187 11/15/99 2,538 5,513
15,000 0.2 1.2187 11/15/99 4,212 9,129
139,500 1.6 0.7500 11/15/99 22,668 48,841
500,000 5.6 0.6563 11/15/99 69,261 148,872
862,500 9.7 0.7500 12/31/97 71,446 146,904
James W. Hiney......... 5,000 0.1 1.5000 02/11/01 2,603 5,921
30,000 0.3 0.8750 12/31/98 4,867 10,346
34,654 0.4 1.5000 12/31/98 9,610 20,428
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL
RATES OF STOCK PRICE
PERCENT OF TOTAL APPRECIATION FOR
SHARES OPTIONS AND OPTION AND WARRANT
UNDERLYING WARRANTS GRANTED EXERCISE TERM(6)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------------
NAME GRANTED(#)(1) IN 1995(1) $/SHARE DATE 5% 10%
- ----------------------- ------------- ---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen J.
Fogarty(4)........... 43,200 0.5 1.2500 05/27/00 16,277 36,347
43,200 0.5 0.7500 05/27/00 9,766 21,808
50,000 0.6 1.2500 02/11/01 21,688 49,342
50,000 0.6 0.7500 02/11/01 13,013 29,605
65,000 0.7 1.2500 07/15/00 25,182 56,427
65,000 0.7 0.7500 07/15/00 15,109 33,856
75,000 0.8 0.6563 01/22/03 20,039 46,698
</TABLE>
- ---------------
(1) The Options and Warrants Granted Table includes grants under the Exchange
Program which will not be exercisable until certain action is taken by the
stockholders and the Company authorizing and reserving shares of common
stock of the Company for issuance upon their exercise. See "Amendment of
Certificate of Incorporation to Increase Authorized Capitalization",
"Adoption of Amendment to the Incentive Plan" and "Adoption of Amendment to
the Directors Plan" above.
(2) Options to purchase 360,000 shares granted to Mr. Haft were granted pursuant
to the Directors Plan and are fully vested. Of these, options to purchase
180,000 shares were forfeited under the Exchange Program along with other
options to purchase 165,000 shares following which New Options to purchase
358,500 shares were granted to Mr. Haft under the Directors Plan and the
Exchange Program which will not be exercisable until the action described in
footnote (1) is completed. New Warrants to purchase 218,500 shares were
granted to Mr. Haft pursuant to the Exchange Program following the
forfeiture of warrants to purchase 190,000 shares. Such New Warrants will
not be exercisable until the action described in footnote (1) is completed.
(3) Options to purchase 620,000 shares granted to Mr. Parrella were granted
pursuant to the Incentive Plan and are fully vested. Of these, 370,000
options were immediately exercisable, 250,000 will become exercisable on
December 31, 1996 if Mr. Parrella is employed by the Company on that date or
on such earlier date as the Company's common stock as traded on the NASDAQ
Stock Market has maintained a price of $1.25 or more for the preceding
forty-five days, and options to purchase 60,000 shares were forfeited under
the Exchange Program along with other options to purchase 75,000 shares
following which New Options to purchase 139,500 shares were granted to Mr.
Parrella under the Incentive Plan and the Exchange Program. Such New Options
will not be exercisable until the action described in footnote (1) is
completed. New Warrants to purchase 862,500 shares were granted to Mr.
Parrella pursuant to the Exchange Program following the forfeiture of
warrants to purchase 750,000 shares. Such New Warrants will not be
exercisable until the action described in footnote (1) is completed.
(4) Options to purchase 391,400 shares granted to Mr. Fogarty were granted
pursuant to the Incentive Plan and are fully vested. Of these, options to
purchase 158,200 shares were granted on January 3, 1995, in consideration of
Mr. Fogarty agreeing to remain with the Company to July 1, 1995, and his
forfeiting options to purchase 158,200 shares (see "Compensation Committee
Report on Executive Compensation" above). These options to purchase 158,200
shares were forfeited under the Exchange Program following which New Options
to purchase 158,200 shares were granted to Mr. Fogarty under the Incentive
Plan and the Exchange Program none of which will be exercisable until the
action described in footnote (1) is completed. The other options to purchase
75,000 shares also will not be exercisable until the action described in
footnote (1) is completed.
(5) Options to purchase 34,554 shares granted to Mr. Hiney were granted pursuant
to the Incentive Plan and are fully vested and exercisable. These options
were granted on January 3, 1995 in consideration of Mr. Hiney agreeing to
remain with the Company to July 1, 1995 and his forfeiting options to
purchase 34,554 shares (see "Compensation Committee Report on Executive
Compensation" above).
(6) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates required by the SEC and, therefore, are not intended to
forecast possible future appreciation if any, of the stock price.
23
<PAGE> 26
1995 AGGREGATED OPTIONS AND WARRANT EXERCISES AND
DECEMBER 31, 1995 OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
NUMBER OF AND WARRANTS AT AND WARRANTS AT
SHARES ACQUIRED VALUE DECEMBER 31, 1995 DECEMBER 31, 1995
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------- --------------- -------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Haft............ -- $ -- 788,500 218,500 $ 15,625 $ --
Michael J. Parrella.... -- -- 1,009,456 1,252,000 132,378 --
Stephen J. Fogarty..... 205,000 91,588 233,200 -- -- --
James W. Hiney......... 25,000 7,500 59,554 -- -- --
</TABLE>
REPRICING OF OPTIONS, WARRANTS AND SAR'S
The following table summarizes the repricings of options, warrants and
SAR's held by any then executive officer during the last ten completed fiscal
years.
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES EXERCISE ORIGINAL OPTION
UNDERLYING MARKET PRICE OF PRICE AT TERM
OPTIONS/SARS STOCK AT TIME OF TIME OF REMAINING AT DATE
REPRICED OR REPRICING OR REPRICING OR NEW EXERCISE OF REPRICING OR
NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE($) AMENDMENT
- ------------------ --------- ------------ ------------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Haft
Options 11/8/95 120,000 0.750 1.063 0.750 11/15/99
11/8/95 103,500 0.750 0.750 0.750 11/15/99
11/8/95 45,000 0.750 0.875 0.750 11/15/99
11/8/95 45,000 0.750 0.781 0.750 11/15/99
11/8/95 45,000 0.750 1.219 0.750 11/15/99
Warrants 11/8/95 218,500 0.750 0.750 0.750 12/31/97
Michael J.
Parrella
Options 10/6/92 250,000 3.000 2.000 2.375 10/6/99
11/8/95 60,000 0.750 1.063 0.750 11/15/99
11/8/95 30,000 0.750 0.750 0.750 11/15/99
11/8/95 15,000 0.750 0.875 0.750 11/15/99
11/8/95 15,000 0.750 0.781 0.750 11/15/99
11/8/95 15,000 0.750 1.219 0.750 11/15/99
Warrants 11/8/95 862,500 0.750 0.750 0.750 12/31/97
6/17/87 80,435 0.7500 0.200 0.000 12/31/97
6/17/87 40,217 0.7500 0.200 1.000 12/31/97
11/9/90 40,217 0.2815 1.000 0.400 12/31/97
11/9/90 375,109 0.2815 1.000 0.400 12/31/97
11/9/90 9,130 0.2815 1.000 0.400 12/31/97
11/9/90 25,000 0.2815 1.000 0.400 12/31/97
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES EXERCISE ORIGINAL OPTION
UNDERLYING MARKET PRICE OF PRICE AT TERM
OPTIONS/SARS STOCK AT TIME OF TIME OF REMAINING AT DATE
REPRICED OR REPRICING OR REPRICING OR NEW EXERCISE OF REPRICING OR
NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE($) AMENDMENT
- ------------------ --------- ------------ ------------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Fogarty
Options 1/3/95 43,200 1.250 2.375 1.250 5/27/00
1/3/95 65,000 1.250 4.000 1.250 7/15/00
1/3/95 50,000 1.250 2.875 1.250 2/11/01
Options 11/8/95 43,200 0.750 1.250 0.750 5/27/00
11/8/95 65,000 0.750 1.250 0.750 7/15/00
11/8/95 50,000 0.750 1.250 0.750 2/11/01
Jim Hiney
Options 1/3/95 4,554 1.500 2.375 1.500 5/27/00
1/3/95 25,000 1.500 4.000 1.500 7/15/00
1/3/95 5,000 1.500 2.875 1.500 2/11/01
John J. McCloy II
Options 10/6/92 250,000 3.000 2.000 0.375 10/6/99
Warrants 6/17/87 270,435 0.7500 0.200 0.000 12/31/97
6/17/87 135,217 0.7500 0.200 1.000 12/31/97
6/17/87 43,478 0.4375 1.000 0.400 12/31/97
6/17/87 33,967 0.4375 1.000 0.400 12/31/97
6/17/87 13,587 0.4375 1.000 0.400 12/31/97
Irene Lebovics
Warrants 2/19/90 600,000 0.5000 0.7800 0.500 12/31/97
Luc Verschueren
Options 10/6/92 16,200 3.0000 2.0000 2.3750 10/6/99
10/6/92 212,054 3.0000 0.5600 2.3750 10/6/99
</TABLE>
COMPENSATION ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
On November 15, 1994, the Board of Directors and its Compensation Committee
took a number of compensation actions. Mr. Haft was to be paid a consulting fee
of $10,000 per month for such period that he serves as Chief Executive Officer
and President of the Company. Mr. McCloy's salary was reduced to $75,000 per
year and Mr. Parrella's salary was reduced to $70,000 per year. In connection
with the reduction in his salary, Mr. Parrella was granted five year options to
purchase 150,000 shares of the Company's common stock under the Company's Stock
Incentive Plan, of which options to purchase 60,000 shares were granted
immediately and options to purchase 15,000 shares were to be deemed granted on
the 15th day of each month from December 1994 through May 1995 provided that Mr.
Parrella was employed by the Company on each such date. The options granted Mr.
Parrella under the Stock Incentive Plan have exercise prices equal to the fair
market value of the Company's common stock on the grant dates. On May 8, 1995,
The Compensation Committee granted Mr. Parrella additional five year options to
purchase 45,000 shares of the Company's common stock of which options to
purchase 15,000 shares were to be deemed granted on the 15th day of June, July
and August 1995.
25
<PAGE> 28
Such options have exercise prices equal to the fair market value of the common
stock on their respective grant dates and were subject to the same other terms
and conditions as the earlier options. In addition the Compensation Committee
also awarded Mr. Parrella a $25,000 cash bonus and an incentive bonus equal to
1% of the cash received by the Company at the execution of the agreement or
other documentation evidencing transactions with unaffiliated parties (other
than certain parties involved in transactions then in negotiation) or otherwise
received at the closing of said transactions which occurred between May 8, 1995
and January 1, 1996. On November 15, 1994, the Board also adopted the Directors
Plan. Under the Directors Plan, which was adopted subject to stockholder
approval, Mr. Haft was granted five-year options to purchase 390,000 shares of
the Company's common stock, of which options to purchase 120,000 shares were
granted immediately and options to purchase 45,000 shares were to be deemed
granted on the 15th day of each month from December 1994 through May 1995, and
Mr. Keith was granted five-year options to purchase 200,000 shares of common
stock, of which options to purchase 50,000 shares were granted immediately and
options to purchase 25,000 shares were to be deemed granted on the 15th day of
each month from December 1994 through May 1995, provided, in each instance, that
Mr. Haft or Mr. Keith was a director of the Company on such date. On May 8,
1995, under an amendment to the Directors Plan, which was also subject to
shareholder approval, Mr. Haft was granted additional five-year options to
purchase 135,000 shares of the Company's common stock of which options to
purchase 45,000 shares of common stock were to be deemed granted on the 15th day
of June, July and August 1995. Such options were subject to the same other terms
and conditions as the earlier options. The options granted under the Directors
Plan have exercise prices equal to the fair market value of the Company's common
stock on the grant dates. The stockholders approved the Directors Plan, as
amended, at the Annual Meeting of Stockholders held on November 8, 1995.
On July 6, 1995, Mr. Haft relinquished the title of President of the
Company and Mr. Parrella was elected as President of the Company at which time,
effective August 16, 1995, Mr. Haft's consulting fee was reduced to $6,000 per
month and Mr. Parrella's salary was increased to $118,000 per year.
On July 11, 1995, in order to enable the Company to obtain 1,100,000
authorized but unissued shares of common stock to sell to an investor in a
private placement to raise additional working capital, Mr. Parrella forfeited
options to purchase 500,000 shares of the Company's common stock. Three other
directors, Messrs. Haft, McCloy and Oolie, also forfeited options to purchase
respectively 50,000; 500,000 and 50,000 shares of the Company's common stock for
the same reason. In recognition of the on-going efforts of Mr. Parrella on
behalf of the Company and the fact that his cash compensation had been
significantly reduced the prior year, the Company agreed that if the private
placement was successfully concluded and Mr. Parrella agreed to work for the
Company through 1996 (without any obligation on the part of the Company to
employ him for any given period), Mr. Parrella would be granted options to
purchase 500,000 shares of common stock under the Incentive Plan. Of this
amount, 250,000 options would become vested and exercisable immediately. The
other 250,000 options would become vested and exercisable either on December 31,
1996 provided Mr. Parrella was employed by the Company on that date or on such
earlier date if the price of the Company's common stock as traded on the NASDAQ
Stock Market had maintained a price of $1.25 per share or above for the previous
45 days. On December 12, 1995 the Option Committee granted Mr. Parrella options
to purchase 500,000 shares of common stock subject to the foregoing terms and
conditions. The exercise price of
26
<PAGE> 29
such options is $0.6563 per share, the fair market value of the Company's common
stock on the date of grant.
On November 8, 1995, as participants in the Exchange Program, each of
Messrs. Haft, McCloy, Parrella and Keith were given the right to exchange and
did exchange Old Warrants and Old Options having exercise prices of $0.75 per
share or more and having shares of common stock reserved for issuance upon their
exercise for New Warrants and New Options having exercise prices of $0.75 per
share but having no shares reserved for issuance upon their exercise until the
stockholders and the Company completed the action necessary to authorize and
reserve such shares. In this regard, Mr. Haft forfeited Old Warrants to purchase
190,000 shares of common stock at $0.75 per share and was granted New Warrants
to purchase 218,500 shares of common stock at $0.75 per share. He also forfeited
Old Options to purchase 345,000 shares of common stock at prices between $0.75
and $1.22 per share and was granted New Options to purchase 358,500 shares of
common stock at $0.75 per share. Mr. McCloy forfeited Old Warrants to purchase
750,000 shares of common stock at $0.75 per share and was granted New Warrants
to purchase 862,500 shares of common stock at $0.75 per share. Mr. Parrella
forfeited Old Warrants to purchase 750,000 shares of common stock at $0.75 per
share and was granted New Warrants to purchase 862,500 shares of common stock at
$0.75 per share. He also forfeited Old Options to purchase 135,000 shares of
common stock at prices between $0.75 and $1.22 per share and was granted New
Options to purchase 139,500 shares of common stock at $0.75 per share. Mr. Keith
forfeited Old Options to purchase 225,000 shares of common stock at prices
between $0.75 and $1.50 per share and was granted New Options to purchase
232,500 shares of common stock at $0.75 per share. As described above, the
reason for the Exchange Program was to enable the Company to obtain 4,800,000
authorized but unissued shares of common stock for use in a private placement to
raise needed working capital. See "Repricing of Options/SAR's" below and
"Amendment of Certificate of Incorporation" above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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,
27
<PAGE> 30
"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, Executive Vice 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, President 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, 1995, 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 the Company's common stock at $3.00
per share. The last sale price for the Company's 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 its 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 nonexclusive right to market the Company's products that are or will
be designed and sold for use in or with feeder
28
<PAGE> 31
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, 1994, 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, 1994, 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
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
29
<PAGE> 32
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.
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.
30
<PAGE> 33
PERFORMANCE GRAPH
Note: The stock price performance shown on the graph below is not necessarily
indicative of future price performance.
NOISE CANCELLATION TECHNOLOGIES, INC. --STOCK PERFORMANCE(1)
<TABLE>
<CAPTION>
NASDAQ
ELECTRONIC
NASDAQ COMPONENTS
MEASUREMENT PERIOD COMPOSITE STOCK IN-
(FISCAL YEAR COVERED) NCT INDEX DEX(3)
<S> <C> <C> <C>
12/31/90 100 100 100
12/31/91 1123 161 142
12/31/92 852 187 222
12/31/93 668 215 306
12/31/94 170 210 337
12/31/95 143 296 560
</TABLE>
- ---------------
(1) Assumes an investment of $100.00 in the Company's common stock and in each
index on December 31, 1990.
31
<PAGE> 34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of May 15, 1996, information concerning
the shares of common stock beneficially owned by each person who, to the
knowledge of the Company, is the holder of 5% or more of the common stock of the
Company, each Director, and each Named Executive Officer, and all executive
officers and Directors of the Company as a group. Except as otherwise noted,
each beneficial owner has sole investment and voting power with respect to the
listed shares.
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT AND NATURE PERCENTAGE
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1)(2) OF CLASS(1)(2)
- --------------------------------------------------- ----------------------------- --------------
<S> <C> <C>
John J. McCloy II.................................. 1,260,717(3) 1.31
Michael J. Parrella................................ 590,998(4) 0.61
Sam Oolie.......................................... 954,567(5) 0.99
Jay M. Haft........................................ 44,891(6) 0.05
Alastair Keith..................................... 40,000(7) 0.04
Stephen J. Fogarty................................. --(8) --
James W. Hiney..................................... 59,554(9) 0.06
All executive officers & Directors as a group
(18 persons)..................................... 4,552,227(10) 4.53
Carole Salkind..................................... 4,000,000(11) 4.17
Her Majesty The Queen, Province of Alberta
Canada........................................... 4,800,000(12) 5.01
</TABLE>
- ---------------
(1) On March 5, 1996, in order to enable the Company to obtain 2,390,000
authorized but unissued shares of common stock to sell to four investors in
two private placements to raise additional working capital, each member of
the Board of Directors agreed not to exercise any warrants or options to
purchase common stock of the Company which had exercise prices between
$0.50 and $0.75 per share and to permit the Company to issue the shares
reserved for issuance upon the exercise of such warrants and options in the
two proposed private placements (individually, a "Directors' Standstill
Agreement" and collectively, the "Directors Standstill Agreements"). In
consideration for this action by the directors, the Company agreed to
reserve sufficient shares of common stock of the Company to permit the full
exercise of all such warrants and options once the Company had obtained
sufficient additional authorized shares of common stock to permit such
action by the Company.
(2) Assumes the exercise of currently exercisable outstanding options or
warrants to purchase shares of common stock and therefore does not include
New Options or New Warrants granted under the Exchange Program, options
subject to a Director's Standstill Agreement or options to purchase shares
of common stock granted to certain executive officers under the Stock
Incentive Plan on January 22, 1996 ("1/22/96 Options"), none of which will
become exercisable until the action described above under "Amendment of
Certificate of Incorporation to Increase Authorized Capital", "Adoption of
Amendment to Incentive Plan" and "Adoption of Amendment to Directors Plan"
is completed. The percent of class ownership is calculated separately for
each person based on the assumption that the person listed on the table has
exercised all options and warrants shown for that person, but that no other
holder of options or warrants has exercised such options or warrants.
(3) Includes 222,825 shares issuable upon the exercise of currently exercisable
warrants. Excludes 862,500 shares issuable upon the exercise of New
Warrants, and 850,000 shares issuable upon the exercise of options subject
to a Director's Standstill Agreement, none of which will become exercisable
until the action referred to in footnote (2) is completed.
(4) Includes 449,456 shares issuable upon the exercise of currently exercisable
warrants. Excludes 862,500 shares issuable upon the exercise of New
Warrants, 139,500 shares issuable upon the exercise of New Options, 810,000
shares issuable upon the exercise of options subject to a Director's
Standstill Agreement and 475,000 shares issuable upon the exercise of
1/22/96 Options, none of which will become exercisable until the action
referred to in footnote (2) is completed.
(5) Includes 146,900 shares issuable upon the exercise of currently exercisable
warrants and 15,000 restricted shares. Excludes 250,000 shares issuable
upon the exercise of options subject to a Director's Standstill Agreement,
none of which will become exercisable until the action referred to in
footnote (2) is completed.
(6) Includes 10,000 restricted shares. Excludes 218,500 shares issuable upon
the exercise of New Warrants, 358,500 shares issuable upon the exercise of
New Options, 430,000 shares issuable upon the exercise of options subject
to a Director's Standstill Agreement and 200,000 shares issuable upon the
exercise of 1/22/96 Options, none of which will become exercisable until
the action referred to in footnote (2) is completed.
32
<PAGE> 35
(7) Includes 15,000 restricted shares. Excludes 232,500 shares issuable upon
the exercise of New Options and 50,000 shares issuable upon the exercise of
options subject to a Director's Standstill Agreement, none of which will
become exercisable until the action referred to in footnote (2) is
completed.
(8) Excludes 158,200 shares issuable upon the exercise of New Options and
75,000 shares issuable upon the exercise of 1/22/96 Options, none of which
will become exercisable until the action referred to in footnote (2) is
completed.
(9) Includes 59,554 shares issuable upon the exercise of currently exercisable
options. On June 15, 1995, Mr. Hiney resigned as Vice President, General
Counsel and Secretary and ceased being an employee of the Company.
(10) Includes 863,771 shares issuable to 5 executive officers and Directors of
the Company upon the exercise of currently exercisable warrants, 888,229
shares issuable to 7 executive officers of the Company upon the exercise of
currently exercisable options and 40,000 restricted shares issued to 3
directors of the Company. Excludes 2,144,750 shares issuable to 4 officers
and directors of the Company upon the exercise of New Warrants, 2,053,110
shares issuable to 10 officers and directors of the Company upon the
exercise of New Options, 2,390,000 shares issuable to 5 directors of the
Company upon the exercise of Options subject to Directors' Standstill
Agreements and 1,250,000 shares issuable to 7 executive officers upon the
exercise of 1/22/96 options none of which will become exercisable until the
action referred to in footnote (2) is completed.
(11) Carole Salkind's address is 801 Harmon Cove Towers, Secaucus, New Jersey
07094.
(12) Her Majesty The Queen, Province of Alberta, Canada's address is Room 530,
Terrace Building, 9515 107th Street, Edmondton, Alberta T5K 2C3, Canada.
33
<PAGE> 36
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the Company's 1997 Annual
Meeting of Stockholders must be received by the Company by December 6, 1996, for
inclusion in the Company's proxy statement and form of proxy relating to that
meeting.
Linthicum, Maryland
May 22, 1996
34
<PAGE> 37
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 WEST NURSERY ROAD SUITE 120
LINTHICUM, MD 21090
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jay M. Haft, Michael J. Parrella and Stephen J.
Fogarty, as Proxies, each with the power to appoint his substitute, and hereby
authorizes them, and each of them, to represent and vote, as designated below,
all the shares of Common Stock of Noise Cancellation Technologies, Inc. held of
record by the undersigned on May 20, 1996, at the Annual Meeting of Stockholders
to be held on July 17, 1996, or any adjournment thereof.
1. ELECTION OF DIRECTORS WITHHOLD AUTHORITY to vote for
FOR all nominees listed below all nominees listed below / /
(except as marked to the contrary) / /
JAY M. HAFT, JOHN J. MCCLOY II, MICHAEL J. PARRELLA, ALASTAIR KEITH, SAM OOLIE
(TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S
NAME ON THE SPACE PROVIDED BELOW.)
- --------------------------------------------------------------------------------
2. To approve the amendment of the Company's Certificate of Incorporation to
increase the number of shares of Common Stock authorized thereunder from
100,000,000 shares to 140,000,000 shares.
FOR / / AGAINST / / ABSTAIN / /
3. To approve the adoption of the amendment of the Noise Cancellation
Technologies, Inc. Stock Incentive Plan.
FOR / / AGAINST / / ABSTAIN / /
4. To approve the adoption of the amendment of the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors.
FOR / / AGAINST / / ABSTAIN / /
5. To ratify the selection of Richard A. Eisner & Company, LLP as independent
auditors for the fiscal year ending December 31, 1996.
FOR / / AGAINST / / ABSTAIN / /
6. At their discretion, the Proxies are authorized to vote upon such other
matter as may properly come before the meeting.
(continued on reverse side)
<PAGE> 38
This proxy, when properly executed, will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted FOR
Proposals 1, 2, 3, 4 and 5.
Dated: , 1996
----------
-------------------------------
Signature
-------------------------------
Signature if held jointly
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give title. If a corporation, please sign in full
corporate name by the president or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE> 39
[NOISE CANCELLATION TECHNOLOGIES LOGO]
NOISE CANCELLATION TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
1995 ANNUAL REPORT
<PAGE> 40
CORPORATE PROFILE
Noise Cancellation Technologies, Inc. is the industry leader in the design,
development, production and distribution of Active Wave Management(TM) Systems
including systems that electronically reduce noise and vibration. Active Wave
Management(TM) is the electronic and mechanical manipulation of sound signal
waves to reduce noise, improve signal-to-noise ratio and/or enhance sound
quality.
The company has executive offices in Linthicum, Maryland, research and product
development facilities in Linthicum, Maryland and Cambridge, England; and
marketing and technical support offices in Stamford, Connecticut, Cambridge,
England and Tokyo, Japan.
The company has a number of strategic supply, manufacturing and marketing
alliances with world-class corporations to facilitate commercialization of the
technology.
The applications for the company's systems cover a wide range of multi-billion
dollar markets, including those served by the transportation, manufacturing,
commercial, consumer products and communications industries. Major product areas
include headsets, fans, communications, microphones and mufflers.
CONTENTS
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1
- -----------------------------------------------------------------------------
LETTER TO OUR SHAREHOLDERS 2
- -----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS 4
- -----------------------------------------------------------------------------
THE FINANCIAL STATEMENTS 14
- -----------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS 18
- -----------------------------------------------------------------------------
CORPORATE INFORMATION 36
- -----------------------------------------------------------------------------
INVESTOR INFORMATION 37
- -----------------------------------------------------------------------------
</TABLE>
<PAGE> 41
[NOISE CANCELLATION TECHNOLOGIES LOGO]
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1995 1994
- -----------------------------------------------------------
(Thousands of dollars, except per share amounts)
<S> <C> <C>
Technology licensing fees $ 6,580 $ 452
Product sales, net 1,589 2,337
Engineering and development
services 2,297 4,335
Total Revenues 10,466 7,124
Company Funded R & D 4,776 9,522
Net Loss $(4,068) $(21,907)
Net Loss Per Share $(.05) $(.26)
Total Assets 9,583 12,371
Working Capital 1,734 924
Stockholders' Equity 6,884 5,469
Employees 73 114
</TABLE>
1
<PAGE> 42
Dear Fellow Shareholders:
1995 was a transitional year for NCT in which the Company executed several key
objectives. When compared to 1994, the Company increased total revenue by 47%
and decreased total expenses by 50%. We concluded the licensing of the aircraft
cabin quieting business to Ultra Electronics, Ltd., and completed the
restructuring of our agreements with Walker Manufacturing. On the product side,
a new line of industrial headsets was introduced with encouraging early results,
and targeted development has begun in several promising areas outside of NCT's
traditional focus of active low frequency noise reduction.
EXPANDED FOCUS CREATES NEW OPPORTUNITIES
NCT's expertise and technology leadership in the generation and manipulation of
sound waves, which is at the core of successful active noise reduction, has led
to an expansion into synergistic areas requiring similar know-how. We have
initiated several targeted development programs in the areas of communications,
microphones and audio that will lead to products in 1996 and 1997. As a result
of this expansion, an evolution of NCT's corporate mission is taking place.
Where the Company's core activity had previously been described as "active noise
reduction" it can now be more accurately termed "Active Wave Management(TM)"
which encompasses active noise reduction as well as advanced audio and speech
filtering technologies.
We define Active Wave Management as the electronic and mechanical manipulation
of sound or signal waves to reduce noise, improve signal-to-noise ratio and
enhance sound quality. NCT's corporate mission has been revised accordingly and
is now to be the leader in the advancement and commercialization of Active Wave
Management technology.
NEW OFFERINGS FOR MAJOR INDUSTRIES
NCT's expanded focus opens doors into many multi-billion dollar industries. For
example, the Adaptive Speech Filter(TM) (ASF), introduced this year, is a
proprietary algorithm which is specifically designed to remove background noise
from wire and wireless transmissions. Whether from poor equipment, transmission
signal interference, ambient noise or even old lines in a local loop, ASF will
reduce the noise and improve the voice signal-to-noise ratio. This is a major
telecommunications breakthrough which can be used in portable cellular phones,
car phones, air phones, public telephones, teleconferencing systems, line cards,
switches and PBX's. The global market for telecommunications services and
equipment totaled $460 billion in 1993 and is expected to exceed $1 trillion by
the year 2000. The cellular segment is expected to be one of the fastest growing
in the telecommunications industry.
Aside from telecommunications, other ASF applications include speech recognition
programs, two-way radios, microcassette recorders, dictation devices, hearing
aids, home audio and stereo products, and speech-activated "smart" consumer
products.
NCT has initiated entry into the vast audio market with the development and
application of Flat Panel Transducers(TM) (FPT), a revolutionary alternative to
conventional speaker technology. FPTs are extremely thin sound conductive panels
that can be used to provide improved audio quality for specific applications
while supplying additional advantages in size, reliability, packaging, placement
and cost.
FPTs are being commercialized through two separate product lines. One is
targeted for multimedia computing, videoconferencing, teleconferencing, consumer
audio and home theater applications. The second, Top Down Surround Sound(TM)
(TDSS), is for automotive and other transportation applications including air,
rail, bus and marine.
TDSS is being commercialized by OnActive Technologies, LLC, a joint venture
between NCT and Applied Acoustic Research (an affiliate of Oxford International
Ltd. which is a leading speaker supplier to Ford and Chrysler). OnActive
developed and perfected FPT designs for the ground-based vehicle market. The
TDSS audio system provides a headliner-integrated flat panel speaker system
designed for the automotive OE market and aftermarket. This unique design gives
automakers and aftermarket speaker suppliers design flexibility that they did
not have before--creating a whole new paradigm for automotive interior design.
2
<PAGE> 43
SEARCH FOR TOOLS REVEALS CONSIDERABLE NEW BUSINESS
NCT has historically sought out various tools and components required to enable
the commercialization of active technology. It was through this search that NCT
found the Silicon Micromachined Microphone(TM) (SMM), an advanced microphone
chip that offers many advantages in cost, size, performance, heat and humidity
tolerance, electro-magnetic interference, labor, component variability and
functionality. NCT licensed exclusive rights to commercialize this technology in
1993 and plans to introduce a line of SMM products beginning in 1997.
The SMM represents a significant opportunity for NCT. The total, worldwide
market for microphones is estimated to be nearly one half billion units
annually. However we believe that particular segments hold the most initial
promise for the SMM. These include hearing aids, automobile hands-free cellular
microphones, multimedia computers, cellular phones and high-end electronic toys.
HEADSET BUSINESS CONTINUES TO EXPAND
NCT's headset division introduced the ProActive(TM) line of active industrial
hearing protection and communications headsets. Acceptance of these products
continues to build and the customer list currently includes major corporations
including Hewlett Packard, Chevron, Conrail, U.S. Air Force, Chaparral Steel,
Ford and Georgia Pacific. A new generation of the NoiseBuster(TM) consumer
headphone is also in the works.
NCT MAINTAINS INTELLECTUAL PROPERTY LEADERSHIP POSITION
NCT holds the leading patent and proprietary portfolio in Active Wave
Management. The Company holds or has rights to 202 inventions as of December 31,
1995, including 69 United States patents and over 177 corresponding foreign
patents. We have 190 U.S. and foreign patents pending, and NCT engineers have
made 60 invention disclosures for which the Company is in the process of
preparing patent applications.
MOVING FORWARD TO ACHIEVE LONG TERM GOALS
We believe that the expansion to Active Wave Management will provide NCT with
the market opportunity we need to successfully drive the Company into the next
century. The industries that we are entering are growth industries and our
products and technologies provide considerable benefits. We acknowledge the
dedication and commitment of our employees and the patience and loyalty of our
stockholders. Our belief in this technology and this company remains steadfast
and optimistic.
On behalf of the Board of Directors,
/s/ JAY M HAFT /s/ MICHAEL J. PARRELLA
- ----------------------- ---------------------------
Jay M. Haft Michael J. Parrella
Chief Executive Officer President
May 22, 1996
3
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL BUSINESS ENVIRONMENT
The Company is in transition from a firm focused principally on research and
development of new technology to a firm focused on the commercialization of its
technology through technology licensing fees, royalties and product sales. In
prior years, the Company derived the majority of its revenues from engineering
and development funding provided by established companies willing to assist the
Company in the development of its active noise and vibration control technology,
and from technology licensing fees paid by such companies. The Company's
strategy generally has been to obtain technology licensing fees when initiating
joint ventures and alliances with new strategic partners. Revenues from product
sales were limited to sales of specialty products and prototypes. In 1995, the
Company received approximately 22% of its operating revenues from engineering
and development funding, compared with 61% in 1994. Since 1991, revenues from
product sales have been increasing and management expects that technology
licensing fees, royalties and product sales will become the principal source of
the Company's revenue as the commercialization of its technology proceeds.
As a result of the 1994 acquisition of certain ANVT assets, the Company is now
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(TM) from participating in certain commercial areas without licenses
from the Company.
Notes 1. and 15. to the accompanying Consolidated Financial Statements and the
liquidity and capital resources section which follows describe the current
status of the Company's available cash balances and the uncertainties which
exist that raise substantial doubt as to the Company's ability to continue as a
going concern.
At a Board of Directors Meeting on July 6, 1995, the following executive changes
were implemented: The Company's former Executive Vice-President was appointed
President and the then Co-Chairman of the Board, Chief Executive Officer and
President retained the positions of Co-Chairman of the Board and Chief Executive
Officer.
As previously disclosed, the Company has implemented changes in its organization
and focus, beginning 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(TM) technology. Active Wave
Management(TM) 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(TM), TDSS(TM), FPT(TM), and the SMM, which
create products that the Company believes will be utilized in areas beyond noise
and vibration reduction and control. These technologies and products are
consistent with shifting the Company's focus to technology licensing fees,
royalties and products that represent near term revenue generation. The
redefinition of corporate mission is reflected in the revised business plan
which the Company began to implement in the first quarter of 1996.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of Active Wave
Management(TM) build, revenues from technology licensing fees, royalties and
product sales are forecasted to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding. The beginning of
this process is shown in the shifting percentages of operating revenue,
discussed below.
In December 1994, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1996.
During 1995, the Company generated $6.6 million in license fees and $1.6 million
in product sales. While the Company has exceeded its expectations through
December 1995 regarding technology licensing fees, production delays and market
acceptance have slowed new product sales. Operating expenses have been reduced
throughout 1995 and were less than projected in the plan adopted in December
1994. Success in generating technology licensing fees, royalties and product
sales are significant and critical to the Company's ability to overcome its
present financial difficulties. The Company
4
<PAGE> 45
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, 1995, its operating revenues,
including technology licensing fees and royalties, product sales and engineering
and development services, have consisted of approximately 21% product sales, 52%
engineering and development services and 27% technology licensing fees.
The Company has entered into a number of alliances and strategic relationships
with established firms for the integration of its technology into products. The
speed with which the Company can achieve the commercialization of its technology
depends in large part upon the time taken by these firms and their customers for
product testing, and their assessment of how best to integrate the technology
into their products and into their manufacturing operations. While the Company
works with these firms on product testing and integration, it is not always able
to influence how quickly this process can be completed.
The Company began shipping ProActive(TM) headsets in 1995. The Company is now
selling products through three of its alliances: Walker is manufacturing and
selling industrial silencers; Siemens is buying and contracting with the Company
to install quieting headsets for patient use in Siemens' MRI machines; and in
the fourth quarter of 1994 Ultra began installing production model aircraft
cabin quieting systems in the SAAB 340 turboprop aircraft. Management believes
these developments and those previously disclosed help demonstrate the range of
commercial potential for the Company's technology and will contribute to the
Company's transition from engineering and development to technology licensing
fees, royalties and product sales.
The availability of high-quality, low-cost electronic components for integration
into the Company's products also is critical to the commercialization of the
Company's technology. The Company is working with its strategic partners and
other suppliers to reduce the size and cost of the Company's systems, so that
the Company will be able to offer low-cost electronics and other components
suitable for high-volume production.
The Company has continued to make substantial investments in its technology and
intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products. During
1994, the Company acquired a license to two patents in the field of
micro-machined microphones and concluded the acquisition of all of the patents,
know-how and intellectual property of a former competitor, ANVT. Management
believes that the Company's investment in its technology has resulted in the
expansion of its intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
The Company has become certified under the International Standards Organization
product quality program known as "ISO 9000", and has successfully undergone two
quality audits. Since the third quarter of 1994, the Company has reduced its
worldwide work force by 58% from 173 to 73 current employees as of March 18,
1996.
Because the Company will not meet its revenue targets for the first quarter of
1996, it has entered into two recent transactions, which provide additional
funding as follows:
On March 28, 1996, the Company sold 2,000,000 shares of its common stock in a
private placement that provided net proceeds to the Company of $0.7 million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in the
aggregate, of its common stock in a private placement with three institutional
investors that provided net proceeds to the Company of $0.35 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 $35 per
share subject to certain adjustments. The conversion of the notes and the
exercise of the options are both subject to stockholder approval of an
appropriate amendment to the Company's Certificate of Incorporation increasing
its authorized capital to provide for the requisite shares. In conjunction with
the foregoing sale of common stock and convertible term notes, the Company also
agreed to file a registration statement with the Securities and Exchange
Commission ("SEC") covering the applicable shares and to use its best efforts to
have such
5
<PAGE> 46
registration statement declared effective by the SEC as soon as practicable. The
relevant agreements provide for significant monetary penalties in the event such
registration statement is not declared effective within 90 days of the filing
date and in the event its effectiveness is suspended for other than brief
permissible periods. The agreements also prohibit the Company from concluding
any further financing arrangements which involve the sale of equity or an equity
feature without the investors' consent for a period of one year.
The total cash received to date by the Company from the above two transactions
amounts to $2.2 million. (Refer to Notes 1. and 15.--"Notes to the Consolidated
Financial Statements.")
Management believes that the funding provided by increased product sales,
technology licensing fees, royalties, and cost savings, if realized, coupled
with the additional capital referred to above, some of which is dependent upon
shareholder approval of an amendment to the Company's Certificate of
Incorporation, should enable the Company to continue operations into 1997. If
the Company is not able to increase technology licensing fees, royalties and
product sales, or generate additional capital, it will have to further cut its
level of operations substantially in order to conserve cash. (Refer to
"Liquidity and Capital Resources" below and to Note 1.--"Notes to the
Consolidated Financial Statements" for a further discussion relating to
continuity of operations.)
RESULTS OF OPERATIONS
Year ended December 31, 1995 compared with year ended December 31, 1994.
Total revenues in 1995 increased by 47% to $10,466,000 from $7,124,000 in 1994.
Total expenses during the same period decreased by 50% or $14,497,000,
reflecting the continuing results of cost reduction plans.
Technology licensing fees increased by 1,356% or $6,128,000 to $6,580,000,
reflecting the Company's continuing emphasis on expanding technology licensing
fee revenue. The 1995 amount is principally derived from a $2.6 million license
fee from Ultra, a $ 3.3 million license fee from Walker and other licenses
aggregating $0.7 million. In 1994, technology license fees amounted to $0.5
million. See Note 3.--"Notes to the Consolidated Financial Statements".
Product sales decreased by 32% to $1,589,000 reflecting a reduction in orders
for MRI headsets from Siemens, decreased revenue from NoiseBuster(TM) sales due
to reductions in average price and units sold, and a decrease in industrial
silencer sales in connection with the transfer of that business to Walker.
Engineering and development services decreased by 47% to $2,297,000, primarily
due to the elimination of funding from Ultra for aircraft cabin quieting in
connection with the transfer of that business to Ultra in the first quarter of
1995, a decrease in the amount of muffler development funding from Walker in
connection with the transfer of that business to Walker in the fourth quarter of
1995 and staff reductions.
Cost of product sales decreased 61% to $1,579,000 from $4,073,000 and the
product margin increased to 1% from (74%) in 1994. The negative margin in 1994
was primarily due to a reserve for slow moving and obsolete inventory in the
amount of $1,855,300. In 1995, the low product margin was primarily due to the
lower sales price of the NoiseBuster(TM).
Cost of engineering and development services decreased 44% to $2,340,000
primarily due to the changes in the Ultra and Walker relationships, as noted
above.
Selling, general and administrative expenses for the year decreased by 42% to
$5,416,000 from $9,281,000 for 1994. Of this decrease, $1,202,000 was directly
attributable to salaries and related expenses. Advertising and marketing
expenses decreased by 65% to $677,000. Office and occupancy expenses decreased
by 73% or $537,000. Professional fees increased by 55% to $1,933,000 primarily
due to legal fees related to litigation and patent prosecution and maintenance.
Travel and entertainment decreased by 58% or $533,000.
Depreciation and amortization included in selling, general and administrative
expenses decreased by $22,000 or 10%, from $221,000 to $199,000.
Research and development expenditures for 1995 decreased by 50% to $4,776,000
from $9,522,000 for 1994, primarily due to realizations from the cost savings
plans and staff reductions.
6
<PAGE> 47
In 1995, interest income decreased to $53,000 from $587,000 in 1994 reflecting
the decrease in 1995 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of 1995,
the Company is not required to fund any capital requirements of these joint
ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment. The agreement with Tenneco Automotive entered
into in December 1993 resulted in the recognition of 1994 losses with respect to
the joint venture with Walker in the amount of $1,453,200. The aggregate amount
of the Company's share of losses in all of its joint ventures in excess of the
Company's investments which has not been recorded was approximately $0.9 million
at December 31, 1994. Due to the Company's sale and transfer of its interest in
various of its joint ventures in 1995, there was no such unrecorded losses as of
December 31, 1995.
The Company has net operating loss carryforwards of $58.7 million and research
and development credit carryforwards of $1.2 million for federal income tax
purposes at December 31, 1995. 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, 1994 compared with year ended December 31, 1993
Total revenues for 1994 increased by 32% to $7,124,000 from $5,385,900 in 1993.
Product sales advanced 35% to $2,337,000 reflecting sales of the NoiseBuster(TM)
consumer headset into several distribution channels, shipments of MRI headsets
to Siemens and industrial headsets to Telex. Engineering and development
services increased by 20% to $4,336,000 primarily due to the additional project
funding from Ultra for aircraft cabin quieting and from WNCT for vehicle
mufflers.
Licensing fees in 1994 were comprised of a $141,000 net license fee from Mitsuya
for limited NoiseEater(TM) rights in Japan, a $250,000 license fee from
QuietPower Systems, Inc. ("QSI") a related party, for rights in the electric
utility transformer retro-fit market, and a $60,000 fee from Unikeller Group,
Switzerland. During 1993, the only license fee recorded was a $60,000 fee from a
development agreement with Unikeller Group for sound attenuation in passenger
vehicle cabins.
Cost of product sales increased 211% to $4,073,123 and the product margin
decreased to (74%) from 24% in 1993, primarily due to a reserve for slow moving
and obsolete inventory in the amount of $2,032,000. Cost of engineering and
development services increased 50% to $4,192,000 due to increased contracts,
primarily Ultra.
Selling, general and administrative expenses for the year increased by 28% to
$9,281,117 from $7,231,000 for 1992. Of this increase $600,000 was due to the
purchase of the manufacturing rights in the Far East from Foster (see Note
3--"Notes to the Consolidated Financial Statements"). In 1994, the Company
recorded $375,000 of realized and unrealized losses in its investments, versus a
$258,000 realized gain in its investments in 1993.
Advertising and marketing expenses increased by $671,000 or 52%, from $1,286,000
to $1,957,000, primarily due to increased expenditures to open distribution
channels for the NoiseBuster(TM), and office and occupancy expenses increased by
$105,000 or 17%, from $626,000 to $731,000, primarily to support the advertising
and marketing efforts above.
Depreciation and amortization included in selling, general and administrative
expenses increased by $67,000 or 44%, from $154,000 to $221,000, reflecting the
increased amortization of intellectual property acquired from ANVT (see Note
14--"Notes to the Consolidated Financial Statements"). Research and development
expenditures for 1994 increased by 20% to $9,522,000 from $7,962,900 for 1993.
In 1994, interest income increased to $587,510 from $313,200 for 1993. This
increase was due primarily to the income from the investment of the unexpended
proceeds from the 1993 public offering of common stock, which were invested,
along with the Company's other available cash, in U.S. Treasury bills and high
quality bond funds. The Company's net yield on its investments during 1994
averaged 5.7%.
7
<PAGE> 48
Under most of the Company's joint venture agreements, the Company is not
required to fund any capital requirements of these joint ventures beyond its
initial capital contribution. In accordance with U.S. generally accepted
accounting principles, when the Company's share of cumulative losses equals its
investment and the Company has no obligation or intention to fund such
additional losses, the Company suspends applying the equity method of accounting
for its investment. The agreement with Tenneco Automotive entered into in
December 1993 resulted in the recognition of 1994 losses with respect to the
joint venture with Walker in the amount of $1,453,200. The aggregate amount of
the Company's share of losses in all of its joint ventures in excess of the
Company's investments which has not been recorded was approximately $0.9 million
at December 31, 1994. 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.
The Company has net operating loss carryforwards of $50.1 million and research
and development credit carryforwards of $0.8 million for federal income tax
purposes at December 31, 1994. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
LIQUIDITY AND CAPITAL RESOURCES
The Company received $0.7 million from the exercise of stock purchase warrants
and options during 1995, $1.0 million in 1994 and $2.1 million in 1993.
On August 4, 1995, the Company sold 2,000,000 shares of its common stock in a
private placement that resulted in $0.7 million net proceeds to the Company.
Additionally, on November 14, 1995, the Company sold 4,800,000 shares of its
common stock in a private placement that resulted in $3.3 million net proceeds
to the Company.
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.
On November 15, 1995, the Company and Walker executed a series of related
agreements which 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.
The Company has incurred substantial losses from operations since its inception,
which have been recurring and amounted to $72.8 million on a cumulative basis
through December 31, 1995. These losses, which include the costs for development
of products for commercial use, have been funded primarily from the sale of
common stock, including the exercise of warrants or options to purchase common
stock, and by technology licensing 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 December 1994, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1996.
During 1995, the Company generated $6.6 million in license fees and $1.6 million
in product sales. While the Company has exceeded its expectations to date
regarding technology licensing fees, production delays have slowed new product
sales. Operating expenses have been reduced throughout 1995 and were less than
projected in the plan adopted in December of 1994. Success in generating
technology licensing fees, royalties and product sales are significant and
critical to the Company's ability to overcome its present financial
difficulties. 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.
8
<PAGE> 49
In January 1996, the Company adopted a plan that management believes should
generate sufficient funds for the Company to continue its operations into 1997.
Under this plan, the Company needs to generate approximately $19 million to fund
its operations for 1996. The Company believes that it can generate these funds
from operations in 1996, although there is no certainty that the Company will
achieve this goal. Included in such amount is approximately $8.9 million in
sales of new products and approximately $9.0 million of technology licensing
fees and royalties. Success in generating technology licensing fees, royalties
and product sales are significant and critical to the Company's ability to
overcome its present financial difficulties. The Company cannot predict whether
it will be successful in obtaining market acceptance of its new products or in
completing its current negotiations with respect to licenses and royalty
revenues. If, during the course of 1996, management of the Company determines
that it will be unable to meet or exceed the plan discussed 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 Company's stockholders approve an amendment to the Company's Certificate of
Incorporation authorizing additional capital stock and 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 described above. 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
licensing fees, royalties, product sales, engineering and development revenue or
additional capital. In that event, the Company would have to further cut back
its level of operations substantially in order to conserve cash. These
reductions could have an adverse effect on the Company's relations with its
strategic partners and customers. The uncertainty with respect to the adequacy
of current funds to support the Company's activities until positive cash flow
from operations can be achieved, and with respect to the availability of
financing from other sources to fund any cash deficiencies, raises substantial
doubt about the Company's ability to continue as a going concern. Further
discussion of these uncertainties is presented in Notes 1. and 15.--"Notes to
the Consolidated Financial Statements".
Because the Company will not meet its revenue targets for the first quarter of
1996, it has entered into two recent transactions, which provide additional
funding as follows:
On March 28, 1996, the Company sold 2,000,000 shares of its common stock in a
private placement that provided net proceeds to the Company of $0.7 million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in the
aggregate, of its common stock in a private placement with three institutional
investors that provided net proceeds to the Company of $0.3 million.
Contemporaneously, the Company sold secured convertible term notes in the
aggregate principal amount of $1.2 million to those institutional investors and
granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion price
under the notes and the exercise price under the options are equal to the price
received by the Company for the sale of such 1,000,000 shares subject to certain
adjustments. The conversion of the notes and the exercise of the options are
both subject to stockholder approval of an appropriate amendment to the
Company's certificate of incorporation increasing its authorized capital to
provide for the requisite shares.
In conjunction with the foregoing sale of common stock and convertible term
notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and to
use its best efforts to have such registration statement declared effective by
the SEC as soon as practicable. The relevant agreements provide for significant
monetary penalties in the event such registration statement is not declared
effective within 90 days of the filing date and in the event its effectiveness
is suspended for other than brief permissible periods. The agreements also
prohibit the Company from concluding any further financing arrangements which
involve the sale of equity or an equity feature without the investors' consent
for a period of one year.
The total cash received to date by the Company from the above two transactions
amounts to $2.2 million. (Refer to "Liquidity and Capital Resources" above and
Notes 1. and 15.--"Notes to the Consolidated Financial Statements" below.)
9
<PAGE> 50
At December 31, 1995, cash and short-term investments were $1,831,000. The
available resources were invested in interest bearing money market accounts. The
Company's investment objective is preservation of capital while earning a
moderate rate of return.
The Company's working capital increased from $923,000 at December 31, 1994, to
$1,734,000 as of December 31, 1995. This increase was due primarily to the 1995
private placements noted above reduced by the net loss for the year and the
reduction in the Walker liability (See Note 3.--"Notes to the Consolidated
Financial Statements.")
During 1995, the net cash used in operating activities was $5.0 million. This
utilization reflects the emphasis on the commercial development of its
technology into several product applications which were scheduled for
introduction in 1995 and 1996.
Net inventory declined during 1995 by $423,000, primarily reflecting sales of
the NoiseBuster(TM) product.
During the year ended December 31, 1995, accounts receivable reserves were
decreased by $782,000 as the Company wrote off certain accounts (see Note
8.--"Notes to the Consolidated Financial Statements").
The Company's available cash balances at December 31, 1995 are as projected at
the end of 1994, primarily due to cost savings and the private placements noted
above.
The net cash used in investing activities amounted to $272,000 during the year
primarily for acquisition of patent rights. The net cash provided by financing
activities amounted to $4,678,000 primarily from the exercise of options and
warrants and the private placements noted above.
The Company has no lines of credit with banks or other lending institutions and
therefore has no unused borrowing capacity.
The Company believes that the level of financial resources available to it is an
essential competitive factor. The Company may elect to raise additional capital,
from time to time, through equity or debt financing in order to capitalize on
business opportunities and market conditions although the Company's ability to
raise additional capital through sales of common stock will be severely limited
until the Company's stockholders approve an amendment to the Company's
Certificate of Incorporation authorizing additional capital stock and 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 described above.
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,
1995, and no material commitments are anticipated in the near future.
10
<PAGE> 51
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY(1)
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS AND SHARES)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1991 1992 1993 1994 1995
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Product Sales................................ $ 610 $ 740 $ 1,728 $ 2,337 $ 1,589
Engineering and development services......... 3,513 3,779 3,598 4,335 2,297
Technology licensing fees and other.......... 1,742 62 60 452 6,580
------- -------- -------- -------- --------
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 5,151 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
conditions................................. -- 7,442 (1) -- --
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 $ 20,200 $ 22,577 $ 29,031 14,534
------- -------- -------- -------- --------
Loss before income taxes..................... $(1,893) $(15,619) $(17,191) $(21,907) (4,068)
------- -------- -------- -------- --------
Income taxes................................. 100 -- -- -- --
------- -------- -------- -------- --------
Net loss......................................... $(1,993) $(15,619)(2) $(17,191)(3) $(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)(2) $ (0.24)(3) $ (0.26) $ (0.05)
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1991 1992 1993 1994 1995
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets................................. $ 5,484 $ 15,771 $ 29,541 $ 12,371 $ 9,583
Total liabilities............................ 1,457 2,069 6,301 6,903 2,699
Long-term debt............................... 3 -- -- -- 105
Accumulated deficit.......................... (14,065) (29,682) (46,873) (68,780) (72,848)
Stockholders equity(5)....................... 4,027 13,702 23,239 5,468 6,884
Working capital.............................. 1,971 11,038 19,990 923 1,734
</TABLE>
- ------------
(1) 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 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.
(2) 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.
(3) 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.
(4) 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.
(5) The Company has never declared nor paid cash dividends on its Common Stock.
11
<PAGE> 52
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
NOISE CANCELLATION TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheets of Noise
Cancellation Technologies, Inc. and subsidiaries as at December 31, 1994 and
December 31, 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1994 and 1995 financial statements of the
Company's two foreign subsidiaries. These subsidiaries accounted for revenues of
approximately $1,800,000 and $1,200,000 for the years ended December 31, 1994
and December 31, 1995, respectively, and assets of approximately $1,900,000 and
$586,000 at December 31, 1994 and December 31, 1995, respectively. These
statements were audited by other auditors whose reports have been furnished to
us, one of which contained a reference to the uncertainty relating to the
Company's ability to continue as a going concern. Our opinion, insofar as it
relates to the amounts included for these entities, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
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, 1994 and December 31,
1995 and the results of their operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has incurred recurring operating
losses and will require additional financing. These factors raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 8, 1996
With respect to Note 15
April 10, 1996
12
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Noise Cancellation Technologies, Inc. and Subsidiaries
for the year ended December 31, 1993, and the related financial statement
schedule for the year ended December 31, 1993, listed in the index on page 38 of
this Form 10-K. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statements and financial
statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
The aforementioned consolidated financial statements and financial
statement schedule have been prepared assuming that the Company would continue
as a going concern. Our report on our audit of such consolidated financial
statements and financial statement schedule was issued originally under date of
March 24, 1994. Such report was based upon the facts and circumstances as the
existed at that time, including that substantial doubt did not exist as to the
Company's ability to continue as a going concern through December 31, 1994.
Subsequent to the date of issuance of our original report, certain uncertainties
have arisen as described in "Risk Factors -- Current Financial Condition; Cash
Position" appearing in the Company's Current Report on Form 8-K, Item 5, filed
on December 19, 1994. Such subsequent uncertainties with respect to the
availability of funds to sustain the Company's activities indicate at December
19, 1994, that the Company may be unable to continue as a going concern through
1995.
In our opinion, the financial statements of Noise Cancellation
Technologies, Inc. and Subsidiaries referred to above present fairly, in all
material respects, the consolidated results of their operations and their cash
flows for the year ended December 31, 1993, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
March 24, 1994, except as to the
third paragraph above for which
the date is December 19, 1994.
13
<PAGE> 54
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS OF
DOLLARS)
DECEMBER 31,
-----------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 1, 2 and 3) $ 2,423 $ 1,831
Short-term investments (Notes 2 and 13) 18 --
Accounts receivable:
Trade (Note 2):
Technology licensing fees 105 --
Joint ventures and affiliates 1,123 241
Other 874 189
Unbilled 333 260
Allowance for doubtful accounts (901) (119)
-------- --------
Total accounts receivable $ 1,534 $ 571
Inventories, net of reserves (Note 4) 2,124 1,701
Other current assets 314 225
-------- --------
Total current assets $ 6,413 $ 4,328
Property and equipment, net (Note 5) 3,331 2,897
Patent rights and other intangibles, net (Notes 2 and 14) 2,336 2,194
Other assets 291 164
-------- --------
$ 12,371 $ 9,583
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,490 $ 1,836
Accrued expenses 672 571
Losses in excess of investment in joint ventures (Note 3) 1,680 --
Accrued payroll, taxes and related expenses 602 144
Customers' advances 46 43
-------- --------
Total current liabilities $ 5,490 $ 2,594
-------- --------
Losses in excess of investment in joint ventures (Note 3) $ 1,413 $ --
Long term obligations -- 105
-------- --------
Total other liabilities $ 1,413 $ 105
-------- --------
Commitments and contingencies (Notes 3, 10 and 11)
STOCKHOLDERS' EQUITY (NOTE 6)
Common stock, $.01 par value, 100,000,000 shares authorized; issued
and outstanding 86,088,644 and 92,828,407 shares, respectively $ 861 $ 928
Additional paid-in-capital 75,177 78,667
Accumulated deficit (68,780) (72,848)
Cumulative translation adjustment 152 150
Common stock subscriptions receivable (1,196) (13)
Expenses to be paid with common stock (746) --
-------- --------
Total stockholders' equity $ 5,468 $ 6,884
-------- --------
$ 12,371 $ 9,583
======== ========
</TABLE>
Attention is directed to the foregoing accountant's reports and
to the accompanying notes to the consolidated financial statements.
14
<PAGE> 55
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Technology licensing fees (Notes 2 & 3) $ 60 $ 452 $ 6,580
Product sales, net 1,728 2,337 1,589
Engineering and development services 3,598 4,335 2,297
-------- -------- -------
Total revenues $ 5,386 $ 7,124 $10,466
-------- -------- -------
Costs and Expenses:
Costs of sales $ 1,309 $ 4,073 $ 1,579
Costs of engineering and development services 2,803 4,193 2,340
Selling, general and administrative 7,231 9,281 5,416
Research and development (including $500,000 of
purchased research and development in 1994) 7,963 9,522 4,776
Equity in net loss (income) of unconsolidated
affiliates 3,582 1,824 (80)
Provision for doubtful accounts -- 718 552
Interest expense 2 7 4
Interest (income) (313) (587) (53)
-------- -------- -------
Total costs and expenses $ 22,577 $ 29,031 $14,534
-------- -------- -------
Net (loss) $(17,191) $(21,907) $(4,068)
======== ======== =======
Weighted average number of common shares outstanding 70,416 82,906 87,921
======== ======== =======
Net loss per common share $(.24) $(.26) $(.05)
======== ======== =======
</TABLE>
Attention is directed to the foregoing accountant's reports and
to the accompanying notes to the consolidated financial statements.
15
<PAGE> 56
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLAR AND SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 68,165 $682 $ 42,980 $ (29,682)
Sale of common stock, less expenses of $1,959 9,900 99 26,085 --
Marketing expenses attributable to warrants -- -- 120 --
Shares issued upon exercise of warrants & options 3,186 32 2,079 --
Proceeds from payment of subscription receivable -- -- -- --
Net loss -- -- -- (17,191)
Translation adjustment -- -- -- --
Expenses paid with common stock -- -- 36 --
Expenses related to prior sale of common stock -- -- (56) --
------ ------ ---------- -----------
Balance at December 31, 1993 81,251 $813 $ 71,244 $ (46,873)
Shares issued for acquisition of certain assets 2,025 20 2,206 --
Consulting expense attributable to warrants -- -- 10 --
Shares issued upon exercise of warrants & options 2,208 22 944 --
Receipt of services in payment of stock subscription -- -- -- --
Settlement of obligations 560 6 694 --
Net loss -- -- -- (21,907)
Translation adjustment -- -- -- --
Restricted shares issued for Director's compensation 45 -- 99 --
Expenses related to prior sale of common stock -- -- (20) --
------ ------ ---------- -----------
Balance at December 31, 1994 86,089 $861 $ 75,177 $ (68,780)
Sale of common stock, less expenses of $271 6,800 68 3,921 --
Consulting expense attributable to warrants -- -- 8 --
Shares issued upon exercise of warrants & options 1,050 10 692 --
Receipt of services in payment of stock subscription -- -- -- --
Settlement of obligations -- -- (344) --
Net loss -- -- -- (4,068)
Translation adjustment -- -- -- --
Retirement of shares attributable to license revenue (Note 3) (1,110) (11) (787) --
------ ------ ---------- -----------
Balance at December 31, 1995 92,829 $928 $ 78,667 $ (72,848)
====== ====== ======== ==========
<CAPTION>
EXPENSES
CUMULATIVE STOCK TO BE
TRANSLATION SUBSCRIPTION PAID WITH
ADJUSTMENT RECEIVABLE COMMON STOCK TOTAL
----------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $ 117 $ (117) $ (277) $ 13,703
Sale of common stock, less expenses of $1,959 -- (1,993) -- 24,191
Marketing expenses attributable to warrants -- -- -- 120
Shares issued upon exercise of warrants & options -- -- -- 2,111
Proceeds from payment of subscription receivable -- 117 -- 117
Net loss -- -- -- (17,191)
Translation adjustment (23) -- -- (23)
Expenses paid with common stock -- -- 231 267
Expenses related to prior sale of common stock -- -- -- (56)
----- ------------ ------ --------
Balance at December 31, 1993 94 $ (1,993) $ (46) $ 23,239
Shares issued for acquisition of certain assets -- -- -- 2,226
Consulting expense attributable to warrants -- -- -- 10
Shares issued upon exercise of warrants & options -- -- -- 966
Receipt of services in payment of stock subscription -- 797 -- 797
Settlement of obligations -- -- (700) --
Net loss -- -- -- (21,907)
Translation adjustment 58 -- -- 58
Restricted shares issued for Director's compensation -- -- -- 99
Expenses related to prior sale of common stock -- -- -- (20)
----- ------------ ------ --------
Balance at December 31, 1994 $ 152 $ (1,196) $ (746) $ 5,468
Sale of common stock, less expenses of $271 -- -- -- 3,989
Consulting expense attributable to warrants -- -- -- 8
Shares issued upon exercise of warrants & options -- (13) -- 689
Receipt of services in payment of stock subscription -- 1,196 -- 1,196
Settlement of obligations -- -- 746 402
Net loss -- -- -- (4,068)
Translation adjustment (2) -- -- (2)
Retirement of shares attributable to license revenue (Note 3) -- -- -- (798)
----- ------------ ------ --------
Balance at December 31, 1995 $ 150 $ (13) $ -- $ 6,884
========= ========== ============ ========
</TABLE>
Attention is directed to the foregoing accountant's reports and to the
accompanying notes to the consolidated financial statements.
16
<PAGE> 57
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
YEARS
ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(17,191) $(21,907) $(4,068)
Adjustments to reconcile net loss to net cash (used in) operating
activities:
Depreciation and amortization 566 994 1,127
Common stock and warrants issued as consideration for:
Compensation -- 109 8
Rent and marketing expenses 523 -- 355
Research and development -- 500 --
Receipt of license fee in exchange for inventory and release
of obligation -- -- (3,266)
Receipt of services in payment of stock subscription -- 165 --
Provision for slow moving and obsolete inventory -- 2,032 --
Provision for tooling costs and write-off -- 100 94
Provision for doubtful accounts 190 718 552
Realized loss on sale of short-term investments -- 375 --
Equity in net loss (income) of unconsolidated affiliates 3,582 1,824 (80)
Unrealized foreign currency loss (13) 16 32
Loss on disposition of fixed assets -- -- 107
Disposition of short-term investments -- 18,527 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (819) (921) 302
(Increase) in license fees receivable 185 180 --
(Increase) decrease in inventories (1,584) (1,518) 212
(Increase) decrease in other assets (390) (283) 299
Increase (decrease) in accounts payable and accrued
expenses 787 283 (190)
Increase (decrease) in other liabilities 866 (1,324) (482)
-------- -------- -------
Net cash used in operating activities $(13,298) $ (130) $(4,998)
-------- -------- -------
Cash flows from investing activities:
Capital expenditures $ (858) $ (1,286) $ (80)
Acquisition of patent rights -- (70) (210)
Investment in joint ventures (1,000) (191) --
Purchases of short-term investments (20,713) -- --
Sales of short term investments 6,293 -- 18
-------- -------- -------
Net cash used in investing activities $(16,278) $ (1,547) $ (272)
-------- -------- -------
Cash flows from financing activities:
Proceeds from:
Sale of common stock $ 24,192 $ -- $ 3,989
Expenses related to prior sale of common stock (56) (20) --
Exercise of stock purchase warrants and options 2,111 966 689
Subscriptions receivable 117 -- --
Repayments for patent rights (3) -- --
-------- -------- -------
Net cash provided by financing activities $ 26,361 $ 946 $ 4,678
-------- -------- -------
Net decrease in cash and cash equivalents $ (3,215) $ (731) $ (592)
Cash and cash equivalents--beginning of period 6,369 3,154 2,423
-------- -------- -------
Cash and cash equivalents--end of period $ 3,154 $ 2,423 $ 1,831
========= ========= ========
Cash paid for interest $ 1 $ 7 $ 4
========= ========= ========
Non-cash investing and financing activity:
Issuance of common stock in exchange for certain assets of ANVT $ -- $ 2,200 $ --
========= ========= ========
</TABLE>
See Notes 6, 8 and 11 with respect to settlement of certain obligations by
issuance of securities and see Note 3 with respect to issuance of common stock
in exchange for notes receivable.
Attention is directed to the foregoing accountant's reports and
to the accompanying notes to the consolidated financial statements.
17
<PAGE> 58
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BACKGROUND:
Noise Cancellation Technologies, Inc. (the "Company") is engaged in the design,
development, licensing, production and distribution of electronic systems that
actively reduce noise and vibration, principally through joint ventures and
other forms of strategic alliances. The Company's activities to date have
principally involved the developing of its electronic systems for commercial use
and providing engineering and development services under contracts with
strategic partners and third parties.
The technology supporting the Company's electronic systems was developed using
technology maintained under various patents (the "Chaplin Patents") held by
Chaplin-Patents Holding Co., Inc. ("CPH") as well as patented technology
acquired or developed by the Company. CPH, formerly a joint venture with Active
Noise Vibration Technologies, Inc. ("ANVT") was established to maintain and
defend these patent rights. The former joint venture agreement relating to the
Chaplin Patents required that the Company only license or share the related
technology with entities who are affiliates of the Company. As a result, the
Company established various joint ventures and formed other strategic alliances
(see Note 3) to further develop the technology and electronic systems and
components based on the Chaplin Patents, to develop such technology into
commercial applications, to integrate the electronic systems into existing
products and to distribute such systems and products into various industrial,
commercial and consumer markets.
The Company has incurred substantial losses from operations since its inception,
which have been recurring and amounted to $72.8 million on a cumulative basis
through December 31, 1995. These losses, which include the costs for development
of products for commercial use, have been funded primarily from the sale of
common stock, including the exercise of warrants or options to purchase common
stock, and by technology licensing fees and engineering and development funds
received from joint venture and other strategic partners. 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, cash equivalents and short-term investments amount to $1.8 million at
December 31, 1995, decreasing from $2.4 million at December 31, 1994. Management
does not believe that available funds at December 31, 1995 are sufficient to
sustain the Company for the next twelve months. Management believes that cash
and the cash anticipated from the exercise of warrants and options, the funding
derived from forecasted technology license fees, royalties, and product sales,
and engineering and development revenue, the operating cost savings from the
reduction in employees and reduced capital expenditures should be sufficient to
sustain the Company's anticipated future level of operations into 1997. However,
the period during 1997 through which it can be sustained is dependent upon the
level of realization of funding from technology license fees, royalties and
product sales, and engineering and development revenue and the achievement of
the operating cost savings from the events described above, all of which are
presently uncertain.
There can be no assurance that additional funding will be provided by technology
license fees, royalties and product sales and engineering and development
revenue. In that event, the Company would have to further and substantially cut
back its level of operations in order to conserve cash. These reductions could
have an adverse effect on the Company's relations with its strategic partners
and customers. Uncertainty exists with respect to the adequacy of current funds
to support the Company's activities until positive cash flow from operations can
be achieved, and with respect to the availability of financing from other
sources to fund any cash deficiencies (see Note 15 with respect to recent
financing).
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
18
<PAGE> 59
December 31, 1995, about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION:
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material inter-company transactions and account balances
have been eliminated in consolidation.
Unconsolidated affiliates include joint ventures and other entities not
controlled by the Company, but over which the Company maintains significant
influence and in which the Company's ownership interest is 50% or less. The
Company's investments in these entities are accounted for on the equity method.
When the Company's equity in cumulative losses exceeds its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method (see Note 3). The Company will not
be able to record any equity in income with respect to an entity until its share
of future profits is sufficient to recover any cumulative losses that have not
previously been recorded.
REVENUE RECOGNITION:
Products Sales:
Revenue is recognized as the product is shipped.
Engineering and development services:
Revenue from engineering and development contracts is recognized and billed as
the services are performed. However, revenue from certain engineering and
development contracts are recognized as services are performed under the
percentage of completion method after 10% of the total estimated costs have been
incurred. Under the percentage of completion method, revenues and gross profit
are recognized as work is performed based on the relationship between actual
costs incurred and total estimated costs at completion. Estimated losses are
recorded when identified.
Revenues recorded under the percentage of completion method amounted to
$249,000, $249,700 and $605,500 for the years ended December 31, 1995, 1994 and
1993, respectively. Retainage balances were $8,200 at December 31, 1995 and
1994. The 1995 balance is expected to be collected within one year.
Technology Licensing Fees:
Technology licensing fees paid by joint venturers, co-venturers, strategic
partners or other licensees which are nonrefundable, are recognized in income
upon execution of the license agreement or upon completion of any performance
criteria specified within the agreement. See Note 3, with respect to the license
fee recorded by the Company in connection with the Walker Noise Cancellation
Technologies and Ultra Electronics, Ltd. transactions.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers all money market accounts and investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
Short-term investments principally comprise high quality investments in
fixed-income securities funds and mid-term, high quality bond funds.
INVENTORIES:
Inventories are stated at the lower of cost (first in, first out) or market.
With regard to the Company's assessment of the realizability of inventory, the
Company periodically conducts a complete physical inventory; currently this is
done on a quarterly basis. At the same time, the Company reviews the movement of
inventory on an item by item basis to determine the value of items which are
either slow moving or have become obsolete since the last quarterly review.
After applying the above noted measurement criteria, as well as looking forward
to assess the potential for near term product engineering changes and/or
technological obsolescence, the Company determines the current need for
inventory reserves. After applying the above noted measurement criteria at
December 31, 1995, the Company determined that a reserve of $355,000 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.
19
<PAGE> 60
PATENT RIGHTS:
Patent rights are stated at cost and are amortized on a straight line basis over
the remaining average life of the patents (ranging from 1 to 15 years).
Amortization expense was $96,900, $166,700 and $398,100 for 1993, 1994 and 1995,
respectively. Accumulated amortization was $676,700 and $1,074,800 at December
31, 1994 and 1995, respectively.
It is the Company's policy to review its individual patents on a regular basis
to determine whether any event has occurred which could impair the valuation of
any such patent.
FOREIGN CURRENCY TRANSLATION:
The financial statements for the United Kingdom operations are translated into
U.S. dollars at year-end exchange rates for assets and liabilities and weighted
average exchange rates for revenues and expenses. The effects of foreign
currency translation adjustments are included as a component of stockholders'
equity and gains and losses resulting from foreign currency transactions are
included in income.
LOSS PER COMMON SHARE:
The net loss per common share has been determined on the basis of the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents (including stock options and warrants) have not been
considered since their effect would be antidilutive.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents, short-term
investments and trade receivables. The Company primarily holds its cash and cash
equivalents in two banks. Deposits in excess of federally insured limits were
$1.6 million at December 31, 1995. Short-term investments are primarily held in
liquid fixed income funds which are invested principally in high quality
government securities. 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 82.4% of revenues during 1995 and 50.8% of gross accounts
receivable at December 31, 1995. The Company does not require collateral or
other security to support customer receivables.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
AND FOR THE YEAR
THEN ENDED
-------------------------
ACCOUNTS
CUSTOMER RECEIVABLE REVENUE
- ------------------------------- ---------- -----------
<S> <C> <C>
Walker Noise Cancellation
Technologies $ 2,700 $ 3,993,500
Ultra Electronics, Ltd. 122,100 3,153,400
Telex Communications, Inc. -- 531,000
Coherent Communications 124,500 524,500
ELESA 100,900 424,000
All Other 339,300 1,839,900
-------- -----------
Total $ 689,500 $10,466,300
======== ===========
</TABLE>
The Company regularly assesses the realizability of its accounts receivable and
performs a detailed analysis of its aged accounts receivable on no less than a
quarterly basis. When quantifying the realizability of accounts receivable, the
Company takes into consideration the value of receivables in the 90+ day
category, the nature of disputes, if any, and the progression of conversations
and/or correspondence between the Company and customers regarding the underlying
cause for the age of such receivables. After applying the above noted
measurement criteria as of December 31, 1995, the Company determined that a
reserve of $119,000 was adequate.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform with the 1995 presentation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENT PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" which is effective for the Company's
1996 financial statements. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of APB
20
<PAGE> 61
No. 25, but requires pro forma disclosure in the footnotes to the financial
statements as if the measurement provisions of SFAS No. 123 had been adopted. At
this time, the Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB No. 25. As such, the
adoption of SFAS No. 123 will not impact the financial position or results of
operations of the Company.
3. JOINT VENTURES AND OTHER STRATEGIC ALLIANCES:
The following is a summary of the Company's joint ventures and other strategic
alliances as of December 31, 1995.
The Company and certain of its wholly-owned subsidiaries have entered into
agreements to establish joint ventures and other strategic alliances related to
the design, development, manufacture, marketing and distribution of its
electronic systems and products containing such systems. These agreements
generally provide that the Company license technology and contribute a nominal
amount of initial capital and that the other parties provide substantially all
of the funding to support the venture or alliance. This support funding
generally includes amounts paid or services rendered for engineering and
development. In exchange for this funding, the other party generally receives a
preference in the distribution of cash and/or profits from the joint ventures or
royalties from these alliances until such time that the support funding (plus an
"interest" factor in some instances) is recovered. At December 31, 1995, 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, 1995. 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
JOINT --------------------------------------
VENTURE/ALLIANCE 1993 1994 1995
- ------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Walker Noise
Cancellation
Technologies $1,069,200 $1,701,700 $3,993,500
Ultra Electronics,
Ltd. 683,500 1,072,400 3,153,400
ELESA -- -- 424,000
Siemens Medical
Systems, Inc. 1,140,000 533,000 259,900
Foster/NCT Supply,
Ltd. 51,100 144,700 133,200
AB Electrolux 503,600 162,500 129,000
Interkeller AG 107,700 105,600 --
Bosch-Siemens
Hausgerate GmbH 260,000 -- --
Philips NCT Noise
Cancellation
N.V. 150,000 -- --
Boet Systeme Actif
S.A. 14,000 -- --
---------- ---------- ----------
Total $3,979,100 $3,719,900 $8,093,000
========== ========== ==========
</TABLE>
Outlined below is a summary of the nature and terms of these ventures or
alliances:
JOINT VENTURES
Chaplin Patents Holding Company ("CPH") was co-owned on a 50/50 basis by the
Company and ANVT, a former competitor. On September 16, 1994, the Company
acquired the patents, technology, other intellectual property and certain
related tangible assets of ANVT. The Company also acquired all rights under
certain joint venture and customer agreements subject to the consent of the
other parties to those agreements. Included in the acquisition was ANVT's 50%
interest in CPH at which time the Company became the sole shareholder of CPH.
CPH acquired certain patent rights relating to the reduction and elimination of
noise and vibration from the Company, ANVT and a third party. The Company and
ANVT had licensed co-exclusive rights to the Chaplin Patents from CPH. The joint
venture agreement related to the Chaplin Patents required that the Company may
only license or share the related technology with
21
<PAGE> 62
entities who are affiliates of the Company. As a result, the Company has
established several joint ventures and formed other strategic alliances to
further develop the technology and electronic systems and components based on
the Chaplin Patents, to develop such technology into commercial applications, to
integrate the electronic systems into existing products and to distribute such
systems and products into various industrial, commercial and consumer markets.
Initial capital contributions by the Company and ANVT of $150,000 each to CPH
were used to acquire certain rights owned by the third party. Pursuant to the
patent license agreement, and until September 16, 1994 the Company and ANVT
contributed cash equally to CPH to fund administrative costs and provide for
maintenance and protection of the related patents. After September 16, 1994, the
Company, as sole shareholder of CPH, was responsible for 100% of CPH's funding
requirements. This funding charged to operations by the Company was $244,000,
$345,000 and $596,000 for each of the years in the three year period ended
December 31, 1995, respectively, and is included in general and administrative
expenses in the accompanying Statements of Operations.
Walker Noise Cancellation Technologies ("WNCT") was a 50/50 general partnership
between NCT Muffler, Inc., a wholly-owned subsidiary of the Company and Walker
Electronic Mufflers, Inc. ("WEM"), a wholly-owned subsidiary of Tennessee Gas
Pipeline Company. On November 15, 1995, the Company and Walker executed a series
of related agreements (the "Restructuring Agreements") and concluded previously
noted negotiations with Tenneco Automotive and Walker regarding the Company's
commitment to help fund $4.0 million of product and technology development work
and the transfer of the Company's 50% interest in WNCT to Walker. The
Restructuring Agreements provided for the transfer of the Company's interest in
WNCT to Walker, the elimination of the Company's previously expensed obligation
to fund the remaining $2.4 million of product and technology development work
noted above, the transfer to Walker of certain Company owned tangible assets
related to the business of WNCT, the expansion of certain existing technology
licenses and the Company's performance of certain research and development
activities for Walker at Walker's expense as to future activities. In
consideration for the above, Walker paid the Company $0.3 million, delivered to
the Company 1,110,083 shares of the Company's common stock which Tenneco
Automotive had purchased from the Company in December 1993 and has undertaken to
pay the Company certain royalties from the exploitation of the intellectual
property rights granted to Walker under the expansion of existing technology
licenses. The shares delivered to the Company were retired on November 16, 1995.
Accordingly, the Company recorded $3.6 million as a technology licensing fee
relating to the net effect of the above noted Restructuring Agreements in the
fourth quarter of 1995.
WNCT was established in 1989 to develop, manufacture and distribute active
mufflers for use in automobiles and other vehicles and other industrial
applications. The agreement between NCT and Walker was expanded and extended in
1991.
Initial capital contributions by the Company and WEM were $750,000 each, and
such amounts were paid by WNCT to the Company as a license fee in 1989. The
joint venture agreement provided that WEM will make preferred contributions to
WNCT for the purpose of funding engineering and development performed by the
Company and engineering performed by WEM. Aggregate preferred contributions made
by WEM to WNCT (net of return of capital advances to WEM) through December 31,
1994, amounted to $7.6 million, of which $4.2 million was paid to the Company
and $3.4 million was credited by WNCT to WEM's capital account for the cost of
engineering services performed. Interest on the engineering preferred
contributions and certain portions of the engineering and development
contributions was compounded monthly at 1% less than the bank prime rate until
repaid through preferred distributions. WEM's obligation to fund engineering and
development expired at the end of the first quarter of 1994.
The Company recorded income of $750,000 from the license fee in 1989. The
Company has also recorded as income its engineering and development payments
from WNCT, amounting to $1.1 million, $1.1 million and $0.7 million for each of
the years in the three year period ended December 31, 1995, respectively. There
is no recourse to the Company for these payments. Other than certain future
Walker funded research and development activities noted above, the Company has
no current plans, obligation or intention to provide additional funding to WNCT.
In December, 1993, Tenneco Automotive, a division of Tennessee Gas Pipeline
Company, purchased shares of common stock of the Company for $3.0 million in
cash, at a price per share of approximately $2.70, which was equal to 94% of the
price
22
<PAGE> 63
to the public of the shares of the Company's common stock then offered.
Immediately thereafter, the Company contributed $1.0 million to the capital of
WNCT, following which WNCT repaid $1.0 million of the capital advances made to
WNCT by WEM and representatives of WEM. The Company agreed to restructure WNCT.
Such restructuring would include giving WNCT worldwide rights for the
manufacture and sale of all muffler products except those manufactured and sold
in the consumer and defense markets. WNCT also would be expanded to have, in
addition to rights it has with respect to vehicular mufflers, worldwide rights
to all silencing and vibration applications (e.g., mufflers, cabin quieting,
engine mounts, fan quieting and engine block quieting) for all vehicles except
trains, aircraft and watercraft. In addition, the Company committed to help fund
$4.0 million of product and technology development work of the Company
attributable to WNCT. Also pursuant to the agreement with Tenneco Automotive,
Walker's right to acquire the Company's interest in WNCT upon the occurrence of
certain events was eliminated and Tenneco Automotive had the right to have a
representative serve on the Company's Board of Directors. The agreement with
Tenneco Automotive and the Company's related funding commitment resulted in 1993
recognition of $3.6 million of previously unrecognized losses and 1994
recognition of $1.4 million of current year losses with respect to the joint
venture with WEM. Such losses exceeding the Company's remaining investment in
WNCT amounted to $2.9 million at December 31, 1994. Of the $2.9 million, $1.5
million recorded as a current liability. The balance of $1.4 million was
classified as a long term liability. The above noted November 15, 1995
Restructuring Agreements significantly altered the foregoing terms of the
December 1993 agreement.
Prior to December 31, 1994, the Company's share of cumulative losses equaled its
investment and commitment to the joint venture. The Company had no further
obligation or intention to fund any additional losses therefore, the Company
suspended applying the equity method.
Foster/NCT Headsets International, Ltd. ("FNH") was a 50/50 joint venture
between Foster Electric Company, Ltd. ("Foster") and the Company. FNH was
established as a limited liability company in Japan in March 1991 to develop,
design, manufacture and sell active noise cancellation headset systems. FNH had
exclusive manufacturing rights for the headsets in the Far East and
non-exclusive marketing rights worldwide. Additionally, another joint venture
with Foster/NCT Supply, Ltd., ("FNS" as described below) served as a supply
joint venture for FNH.
On July 28, 1995, Foster Electric Co., Ltd. ("Foster"), Foster NCT Headsets
International ("FNH") and the Company executed a letter agreement amending the
1991 agreement covering the headset joint venture company, FNH. Pursuant to that
agreement Foster acquired the Company's 50% interest in FNH and a license to
manufacture headsets for FNH and NCT with tooling currently owned by NCT in
consideration for Foster's assumption of FNH's outstanding liabilities of
$303,000. The agreement also grants FNH the right to sell certain headsets on an
exclusive basis in Japan and a non-exclusive basis throughout the rest of the
Far East, in consideration for a royalty on the sale of such headsets.
Initial capital contributions made by the Company and Foster under the FNH joint
venture agreement were 6.5 million yen (historical cost of approximately
$47,000) each. In March, 1994 the Company and Foster agreed to jointly and
equally increase the capitalization of FNH to a total of 52 million yen
resulting in the Company's additional investment of $191,000. The increase in
capitalization enabled FNH to launch an expanded marketing effort in the
Company's products in the Far East.
Under related agreements, Foster paid a license fee to the Company of $1
million, which was recognized as income in 1991, and agreed to pay an additional
$700,000 to the Company at a rate of two percent of sales after cumulative sales
by FNH reach $50 million and the accumulated deficit in FNH is reduced to zero.
The license fees paid to date in the amount of $1.0 million are not subject to
repayment.
As part of the February 10, 1995 agreement to desolve the FNS joint venture,
(see FNS Note below) NCT has repurchased the exclusive manufacturing rights for
headsets in the Far East from Foster. The Company recorded a charge of $780,000
in 1994 relating to these transactions.
In return for technical and management assistance provided by Foster, FNH has
agreed to pay Foster up to an aggregate amount of $1.4 million based on three
percent of sales; the first $700,000 of which are to be paid without restriction
based upon sales amount, the remaining $700,000 begin to be paid to Foster when
the FNH accumulated deficit is reduced to zero. Through December 31, 1994, the
accumulated deficit of FNH was $543,000.
23
<PAGE> 64
The Company's above noted incremental investment resulted in the recognition of
$42,000 of previously unrecognized losses and $149,000 of current losses with
respect to the FNH joint venture in 1994.
The Company has purchased certain tooling for use by FNH which it has recorded
on its books. The tooling will be amortized against products sold by NCT.
Analog/NCT Supply Ltd. ("ADI/NCT") is a 50/50 joint venture between Analog
Devices, Inc. ("ADI") and the Company which was established in June 1992.
ADI/NCT was formed to design, develop and manufacture computer chips to be
incorporated into the Company's electronic systems. Initial capital
contributions by the Company and ADI were nominal. The joint venture and related
agreements provide that each party will bear their respective cost of design and
development of the computer chips. ADI will manufacture and sell the computer
chips to ADI/NCT, based on orders provided to ADI/NCT by the Company, at prices
to be agreed upon by the Company and ADI. Administrative services required by
ADI/NCT will be provided by ADI, the costs of which will be funded by the joint
venture. No such services have been charged to or incurred by the joint venture
as of December 31, 1995.
Harris/NCT Supply, L.L.C. ("HARNCT") is a 50/50 limited liability company owned
equally by Harris Corporation ("Harris") and the Company under a Limited
Liability Company Agreement concluded in September, 1993 (the "LLC Agreement").
HARNCT will develop and manufacture silicon chips to be incorporated into the
Company's electronic systems. Initial capital contributions by the Company and
Harris were nominal. The LLC Agreement provides that each party will bear their
respective cost of design and development of the silicon chips. Harris will
manufacture and sell the silicon chips to HARNCT, based on orders provided to
HARNCT by the Company, at prices to be agreed upon by the Company and Harris.
Administrative services required by HARNCT will be provided by Harris, the costs
of which will be funded by HARNCT. No such services have been charged to or
incurred by HARNCT as of December 31, 1995.
OnActive Technologies, L.L.C. ("OAT") is a 50/50 limited liability company owned
equally by Applied Acoustic Research, L.L.C. ("AAR") and the Company ("Members")
under an Operating Agreement concluded in December, 1995. OAT will design,
develop, manufacture, market, distribute and sell flat panel transducers 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 neither Member is required to make any additional contribution to
OAT. 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. Administrative services required by OAT will be provided by the
Company, the costs of which will be funded by OAT. Such services for the period
ended December 31, 1995 were nominal and not charged to OAT. As of December 31,
1995 the Company recognized $80,000 of income relating to its share of 1995
profit in OAT.
Foster/NCT Supply, Ltd., ("FNS") was a 30/70 joint venture between the Company
and Foster which was established in June 1991 to serve as a supply joint venture
for the Company's worldwide activities.
Foster and the Company have agreed that the acquisition of certain assets of
ANVT by NCT (see Note 14) has removed the necessity for the continued existence
of FNS. An orderly liquidation of FNS was completed in April 1995. The agreement
provided for the Company's repurchase from Foster for $0.6 million of the
exclusive headset manufacturing rights in the Far East (see FNH note above) and
an immediate minimum 5% reduction in the price of headset products to be
produced by Foster for the Company. The Company accrued a $0.8 million charge in
1994 relating to this agreement, of which $0.2 million was reflected as a
current liability at December 31, 1994.
Capital contributions required under the joint venture agreement were 3 million
yen from the Company and 7 million yen from Foster (approximately $22,000 and
$51,000, respectively). Foster was also required to provide assistance to FNS
for research and development activities amounting to $50,000 per month up to an
aggregate of $1.2 million, which FNS was to repay to Foster at the rate of one
percent of the amount of each month's sales. There was no recourse to the
Company should FNS not record sufficient sales for Foster to recover such
research and development costs.
Boet Systeme Actif S.A. ("BSA") was a 49/51 joint venture between NCT Muffler,
Inc., a wholly-owned subsidiary of the Company, and S.A. Andre Boet ("Boet"),
respectively. BSA was established in 1991 to develop, manufacture in France, and
sell
24
<PAGE> 65
worldwide NCT electronic silencers for use on non-automotive internal combustion
engines. BSA was responsible for the customization, marketing and sales of the
silencers. The Company was to assist BSA with product development and employee
training. All supplies were to be purchased by BSA from either Boet or NCT
Muffler. Initial capital contributions by NCT Muffler and Boet were not
significant.
As a result of the April 1994 transfer to WNCT of the rights to market the
Company's industrial silencer products and anticipation of the Company's
November 15, 1995 agreement with Tenneco Automotive and Walker (see WNCT Note
above), in October, 1995 Boet assumed all liabilities of BSA and the Board of
Directors of BSA approved the dissolution of the joint venture.
BSA funded the Company's cost of research and engineering, at a predetermined
rate, and reimbursed materials, equipment, tools, supplies and out-of-pocket
expenses to Boet and the Company. The joint venture agreement provided that Boet
would advance funding for the development, operation and working capital needs
of BSA. BSA was to repay Boet through preferential distributions from its excess
cash in amounts not to exceed 20% of BSA's net income in each year. Boet
contributed an aggregate of approximately $496,000 to BSA through December 31,
1994, none of which was repaid.
Payments from BSA to the Company for research and engineering aggregated
approximately $120,000 through December 31, 1994. License fees from BSA to NCT
Muffler aggregated $240,000 through December 31, 1994. The above amounts were
recognized as income by the Company since there was no commitment or intention
for NCT Muffler to fund any obligations of BSA, nor was there any recourse to
NCT Muffler for these payments.
Philips NCT Noise Cancellation N.V. ("PNNC") was established in August, 1992 to
develop and manufacture components for active noise and vibration control
systems and sell such components to the Company or the Company's customers. In
July 1993, the Company and its co-venturer, Philips Industrial Activities N.V.
("PIA") decided to suspend business operations of the joint venture until such
time as the nature, specifications and volume of components required by the
Company from PNNC become more clearly defined. Subsequently, in December 1993,
the Company sold its entire interest in PNNC to PIA for a nominal fee, and PIA
assumed all obligations of PNNC. The Company and PIA continue to pursue mutual
business interests.
OTHER STRATEGIC ALLIANCES:
Foster and the Company entered into an agreement in December 1993, pursuant to
which Foster purchased shares of common stock at a value of $2.0 million (the
"Foster Shares"), at a price per share of approximately $2.70 equal to 94% of
the price to the public of the shares of common stock in the December 1993
offering. Foster paid the purchase price by means of a cash payment of one cent
($.01) per share (the par value of the common stock) and the delivery of a
series of promissory notes (the "Foster Notes") in an aggregate principal amount
equal to the balance of the purchase price. The Foster Notes were full recourse
notes of Foster bearing interest at one percent above the rate of three-year
United States Treasury Notes and were to mature on April 17, 1997. The Foster
Notes were secured by the Foster Shares until paid or "earned out" as described
in the next paragraph. The Foster Notes were recorded as a Common Stock
subscription receivable by the Company.
Foster and the Company entered into an agreement under which Foster provided and
the Company will purchased $2.0 million of various product and market
development services deemed necessary by the Company for commercialization of
several new headset and other products and the further development of the
Company's Japanese markets. Upon completion of each such project or phase, the
agreed budgeted amount therefore was billed to the Company and paid, at the
Company's election, either in cash or by discharge of an equivalent amount of
the Foster Notes, in which an appropriate number of the Foster Shares were
released from the collateralizing restrictions and the Common Stock subscription
receivable was reduced. During 1995, $1.3 million of such services and assets
were purchased by the Company and, at the Company's election was satisfied
through the discharge of an equivalent amount of the Foster Notes. As of
December 31, 1995, the Foster Notes have been paid-in-full.
Foster and the Company's wholly owned subsidiary, NCT Far East ("NCTFE") entered
into a marketing agreement in November 1991 under which Foster agreed to fund up
to $500,000 for the establishment of a marketing office in Tokyo. This funding
was reimbursed through the issuance of 150,000 shares of common stock of the
Company to Foster in 1992 and future payments to Foster by
25
<PAGE> 66
NCTFE equal to 25% of NCTFE pretax profits, as defined, until Foster has
recovered 100% of funding in excess of $300,000. The market value of the
Company's common stock issued to Foster ($300,000) was charged to operations in
1992. Through December 31, 1995, $185,200 has been funded by Foster under the
marketing agreement. Further, commissions payable by NCTFE to Foster under this
agreement are based upon sales by customer and 5% of any engineering and
development or working capital funding acquired through Foster's efforts.
Interkeller AG ("Interkeller"), a member of Rieter Holding Limited, and the
Company entered into a strategic alliance in June 1992 to improve the noise
reduction in vehicles through the combination of NCT's active cabin quieting
system ("ACQS") and Interkeller technology. Under the agreement, Interkeller
performed acoustic studies in the field of electronic cabin quieting in
vehicles, and the Company sold Interkeller a prototype ACQS and licensed
Interkeller the right to use related software in connection with acoustic
studies under the agreement, for which Interkeller has paid a license fee and
contributed $240,000 to the Company over a two year period, ending June 1994. As
of December 31, 1994, the Company has recognized cumulative license fee income
of $180,000 and $97,000 for consultation and development under the June 1992
agreement. The contract has not been renewed.
AB Electrolux ("Electrolux") and the Company entered into a Joint Development
Cooperation Agreement in June 1991 which provides for the Company to design,
develop and supply active systems for quieting certain Electrolux products.
Electrolux agreed to pay the Company $65,000 per month for two years, which the
Company has recorded as engineering and development income. These development
costs may be recovered by Electrolux through royalties on net sales to other
manufacturers of competing products up to 250% of the engineering and
development costs funded by Electrolux. Electrolux agreed to purchase components
for the manufacture of related systems for its products from the Company. If
Electrolux purchases such components from other sources, a royalty of 6% of the
net invoice price will be due to the Company.
Further, the Company granted Electrolux a worldwide non-exclusive license to
utilize related proprietary technology for the life of such patents for a fee of
$500,000 payable in monthly installments of $20,000, and agreed to limit the
Company's licensing of such technology to five white goods manufacturers for a
period of five years. In January 1994 such limitations on the Company's
technology licensing were terminated by an amendment to the original agreement.
The $500,000 license fee was recognized as income in 1991, all of which was paid
as of December 31, 1993.
Ultra Electronics Ltd. (formerly Dowty Maritime Limited) ("Ultra") and the
Company entered into a teaming agreement in May 1993 to collaborate on the
design, manufacture and installation of products to reduce noise in the cabins
of various types of aircraft. In accordance with the agreement, the Company
provided informational and technical assistance relating to the aircraft
quieting system and Ultra reimbursed the Company for expenses incurred in
connection with such assistance. Ultra was responsible for the marketing and
sales of the products. The Company was to supply Ultra with electronic
components required for the aircraft quieting system, at a defined cost, to be
paid by Ultra.
In March 1995, the Company and Ultra amended the teaming agreement and concluded
a licensing and royalty agreement for $2.6 million and a future royalty of
1 1/2% of sales commencing in 1998. Under the agreement, Ultra has also acquired
the Company's active aircraft quieting business based in Cambridge, England,
leased a portion of the Cambridge facility and has employed certain of the
Company's employees.
Accordingly, the Company recorded $2.6 million as a technology licensing fee
relating to the net amount received from above noted amended teaming agreement
and the licensing and royalty agreement in the first quarter of 1995.
Siemens Medical Systems, Inc. ("Siemens") and NCT Medical Systems, Inc.
("NCTM"), a 90%-owned subsidiary of the Company, entered into an agreement in
March 1992 to supply Siemens with NCTM/MRI systems, a noise cancellation and
audio system for Magnetic Resonance Imaging systems ("MRI"), on an exclusive
basis at specified quantities over two years. In return, Siemens has agreed to
utilize only NCTM/MRI systems in their MRI's during the two year period. During
1993, 1994 and 1995 NCTM has sold 118, 48 and 26 units, respectively, to
Siemens. In late November 1993, the Company and Siemens signed a new agreement,
superseding the 1992 agreement, which provides for the purchase by Siemens from
the Company of European and U.S. versions of the Company's MRI headsets suitable
for use with Siemens' MRI machines.
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<PAGE> 67
Bosch-Siemens Hausgerate GmbH ("BSHG") and the Company entered into a one year
agreement in April 1992 for the Company to perform research and development work
to enhance BSHG products with NCT technology. As of December 31, 1993, the
Company had completed the required work. In accordance with the agreement, BSHG
has paid a total of $780,000, of which $260,000 was recorded as income in 1993.
4. INVENTORIES:
Inventories comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
----------- ----------
<S> <C> <C>
Components $ 2,452,000 $ 716,200
Finished goods 1,696,900 1,339,900
----------- ----------
Gross inventory $ 4,148,900 $2,056,100
Reserve for obsolete &
slow moving inventory (2,025,300) (355,000)
----------- ----------
Inventory, net of reserves $ 2,123,600 $1,701,100
=========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment comprise the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE --------------------------
(YEARS) 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Machinery and
equipment 5 $ 2,373,900 $ 1,852,800
Furniture and
fixtures 5 761,600 777,600
Leasehold
improvements 7-10 1,178,500 1,155,600
Tooling 1-3 994,900 1,430,300
Other 5-10 57,000 118,400
----------- -----------
Gross $ 5,365,900 $ 5,334,700
Less, accumulated
depreciation (2,035,200) (2,437,600)
----------- -----------
Net $ 3,330,700 $ 2,897,100
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and 1995 was
$449,000, $531,000 and $588,000, respectively.
6. COMMON STOCK:
In December 1993, the Company completed a public offering of 8,050,000 shares of
common stock. In contemporaneous transactions, the Company sold an additional
1,850,138 shares to two of its strategic partners, Tenneco Automotive and Foster
Electric Co., Ltd. These transactions generated net cash proceeds of $24.2
million. The shares issued to Tenneco Automotive and Foster were registered on
January 31, 1994.
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 is 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 is subject to certain resale and transfer
restrictions including those under Regulation D of the United States Securities
Act of 1933, as amended. As provided for in the Stock Purchase Agreement, within
nine months of the closing date, the Company is obligated to file a registration
statement with the Securities and Exchange Commission covering the registration
of the shares for resale by the purchaser.
Please see Note 15. "Subsequent Events" with respect to two private placements
of the Company's common stock subsequent to December 31, 1995.
EXPENSES PAID WITH COMMON STOCK:
During 1994, the Company entered into agreements with third parties to issue
common stock in satisfaction of certain obligations which amounted to $700,000.
STOCK SUBSCRIPTION RECEIVABLE:
Stock subscriptions receivable due from an officer and a director were paid in
full during 1993. The $13,000 stock subscription receivable at December 31, 1995
is due from a former director and has been subsequently paid.
In December 1993, Foster and the Company entered into a definitive agreement
pursuant to which Foster purchased shares of common stock for a cash payment of
one cent ($.01) per share (the par value of the common stock) and the delivery
of a series of promissory notes (the "Foster Notes") in an aggregate principal
amount equal to the balance of the purchase price. The Foster Notes were full
recourse notes of Foster bearing interest at one percent above the rate of
three-year United States Treasury Notes and were to mature on April 17, 1997.
The Foster Notes were collateralized by the Foster Shares until
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<PAGE> 68
paid or "earned out" (see Note 3). No shares could be sold by Foster,
irrespective of the payment of any of the Foster Notes, until June 23, 1994. As
of December 31, 1995 the Foster Notes have been paid-in-full.
SHARES RESERVED FOR COMMON STOCK OPTIONS AND WARRANTS:
At December 31, 1995, aggregate shares reserved for issuance under common stock
option plans and warrants amounted to 12.8 million shares of which common stock
options and warrants for 10.8 million shares are outstanding (See Note 7) and
5.5 million shares are exercisable.
7. COMMON STOCK OPTIONS AND WARRANTS:
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.
Transactions in the 1987 Plan related to incentive Stock Options were as
follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF OPTION PRICE OF SHARES
SHARES PER SHARE EXERCISABLE
--------- -------------- -----------
<S> <C> <C> <C>
Outstanding at
December 31, 1992 2,785,627 $.28125-$2.97 2,780,627
=========
Exercised (695,886) $.28125-$1.595
---------
Outstanding at
December 31, 1993 2,089,741 $.28125-$2.97 2,087,241
=========
Exercised (289,269) $.28125-$.75
Forfeited (10,000) $1.49
---------
Outstanding at
December 31, 1994 1,790,472 $.28125-$2.97 1,790,472
=========
Exercised (232,651) $.28125-$.75
Forfeited (17,821) $.78-$2.97
---------
Outstanding at
December 31, 1995 1,540,000 $.50-$1.4375 1,540,000
========= =========
</TABLE>
As of December 31, 1995, options for the purchase of 27,821 shares were
available for future grant under the 1987 Plan.
Transactions in nonstatutory stock options were as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF OPTION PRICE OF SHARES
SHARES PER SHARE EXERCISABLE
---------- ------------ -----------
<S> <C> <C> <C>
Outstanding at
December 31, 1992 2,392,089 $.50-$5.36 2,147,423
=========
Granted 544,500 $2.82-$3.82
Exercised (546,167) $.50-$2.97
Cancelled (441,631) $4.91-$5.09
----------
Outstanding at
December 31, 1993 1,948,791 $.50-$5.36 1,527,625
=========
Exercised (113,000) $.50-$.59
Cancelled (6,000) $3.69
Forfeited (187,796) $2.88-$5.36
----------
Outstanding at
December 31, 1994 1,641,995 $.50-$5.36 1,458,495
=========
Granted 1,245,490 $.75-$1.50
Exercised (369,787) $.50-$1.00
Forfeited (1,270,360) $1.00-$5.09
----------
Outstanding at
December 31, 1995 1,247,338 $.50-$5.36 625,838
========== =========
</TABLE>
On October 6, 1992, the Company adopted a stock option plan (the "1992 Plan")
for the granting of options to purchase up to 1,639,865 shares of common stock
to officers, employees and certain directors and on that date granted options on
1,357,989 shares at a price of $2.375 under the plan.
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<PAGE> 69
On April 14, 1993, the Company amended the plan to provide for the granting of
options and restricted stock awards covering up to an additional 4,360,135
shares of common stock to officers, employees and non-employee directors. The
exercise price of all options granted under the plan may not be less than the
market value of a share of common stock on the date of grant. On May 27, 1993,
the plan and the grants received stockholder approval at the 1993 Annual Meeting
of Stockholders. At December 31, 1995, options for 3,235,026 shares are
outstanding, of which 1,534,355 are exercisable under this plan at prices
ranging from $.656 to $4.00.
Transactions in the 1992 Plan were as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF OPTION PRICE OF SHARES
SHARES PER SHARE EXERCISABLE
---------- ------------ -----------
<S> <C> <C> <C>
Outstanding at
December 31, 1992 1,357,989 $2.38 --
=========
Granted 1,379,369 $2.375-$4.00
Exercised (67,881) $2.38
Cancelled (4,550) $4.00
----------
Outstanding at
December 31, 1993 2,664,927 $2.375-$4.00 2,664,927
=========
Granted 1,718,004 $.75-$2.875
Exercised (6,210) $2.38
Cancelled (40,000) $2.875-$4.00
Forfeited (278,179) $2.375-$4.00
----------
Outstanding at
December 31, 1994 4,058,542 $.75-$4.00 3,851,042
=========
Granted 4,140,932 $.656-$1.85
Exercised (120,303) $.6875-$1.00
Cancelled (1,300,000) $1.00-$4.00
Forfeited (3,544,145) $.75-$4.00
----------
Outstanding at
December 31, 1995 3,235,026 $.656-$4.00 1,534,335
========== =========
</TABLE>
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 of which 96,000 are subject to stockholder approval.
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.
Transactions in the Directors Plan for 1994 were as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF OPTION PRICE OF SHARES
SHARES PER SHARE EXERCISABLE
--------- -------------- -----------
<S> <C> <C> <C>
Granted 240,000 $.75-$1.06
---------
Outstanding at
December 31, 1994 240,000 $.75-$1.06 --
=======
Granted 1,001,000 $.6562-$1.2187
Forfeited (495,000) $.75-$1.2187
---------
Outstanding at
December 31, 1995 746,000 $.6562-$.75 230,000
========= =======
</TABLE>
WARRANTS:
The Company had shares of its common stock reserved at December 31, 1994, and
December 31, 1995, for warrants outstanding, all of which are exercisable at
prices as follows:
<TABLE>
<CAPTION>
EXERCISE DECEMBER 31,
PRICE ---------------------
PER SHARE EXPIRATION DATE 1994 1995
- --------- ------------------------- --------- ---------
<C> <S> <C> <C>
$0.2000 December 1997 125,000 125,000
0.4000 December 1997 750,293 750,293
0.6875 December 2001 40,000 40,000
0.7500 December 1997 2,803,103 2,755,748
0.7500 August 1999 -- 24,000
0.7500 September 2000 -- 250,000
1.3125 August 1999 49,000 25,000
3.0000 September 1999 800,000 50,000
3.3750 September 2000 250,000 --
4.0000 February 1998 12,500 12,500
--------- ---------
Total Warrants 4,829,896 4,032,541
========= =========
</TABLE>
In 1993, the Company issued warrants to purchase 750,000 of the Company's common
stock to a company as part of a marketing agreement (see Note 8) and 250,000
warrants to an outside consultant as part of a consulting agreement. In 1994,
the Company issued warrants to purchase 89,000 shares of the Company's common
stock to outside consultants as part of their consulting agreements.
In 1995, the Company issued 2,144,750 at market value currently unexercisable
warrants to certain directors and officers. These new unexercisable warrants
were equal to 115% of 1,865,000 warrants forfeited to enable the Company to
assemble sufficient shares of common stock to complete the 1995 private
placements (see Note 6). The 15% increase in the number of replacement vs.
forfeited warrants was in consideration for the unexercisability of the
in-the-money replacement shares until such time there are a sufficient quantity
of shares available to cover the exercise of the subject warrants. Also in
29
<PAGE> 70
1995, the Company similarly issued 274,000 at market value currently
unexercisable warrants to purchase shares of the Company's common stock to two
outside consultants who forfeited an equivalent number of out-of-the money
warrants for the purpose noted above.
8. RELATED PARTIES:
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, 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, 1995, the Company
was not required to make any such payments to ERI under these agreements.
In 1993, the Company entered into three Marketing Agreements with QuietPower
Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical Solutions,
Inc."), a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing Agreements, QSI has undertaken to use its best
efforts to seek research and development funding for the Company from electric
and natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will record a charge for the amount by which the market price of the Common
Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1993, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
Under the terms of the second of the three Marketing Agreements, QSI is granted
a non-exclusive right to market the Company's products that are or will be
designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the
30
<PAGE> 71
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, 1995, 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, the Company made no
payments to QSI.
In March, 1995, the Company entered into an agreement with QSI by which QSI
received the exclusive right 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 agreements generally provide
that the Company manufactures the products and receives a royalty of 6% from QSI
on the sales of the product. For the exclusive rights under the agreement, QSI
is to pay a license fee to NCT of $750,000, $250,000 of which QSI paid to NCT in
June of 1994, and the balance of which is payable in equal monthly installments
of $16,667, beginning in April of 1995. The agreement supersedes any other
agreements related to the product above. The agreement is contingent upon full
payment by QSI to NCT of trade receivables, which at December 31, 1994 amounted
to $492,100. All amounts due from QSI were fully reserved at December 31, 1995
(See Note 2).
In April, 1995, the Company amended the March, 1995 agreement with QSI as
follows. QSI forfeited warrants to purchase 750,000 shares of the Company's
common stock which had been issued pursuant to the May 15, 1993 Marketing
Agreement (Nonretrofit Utility Products) and the $500,000 balance due the
Company for the exclusivity fee was reduced to $250,000. In addition, accounts
receivable due the Company from QSI were converted to a note receivable from
QSI, bearing annual interest at 6% due May 15, 1996 or earlier contingent upon
the occurrence of certain events. The note receivable from QSI was fully
reserved at December 31, 1995.
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.
During 1993, 1994 and 1995, the Company purchased $2.1 million, $2.2 million and
$0.5 million respectively, of products from its various manufacturing joint
venture entities of which $0.3 million was included in accounts payable at
December 31, 1994. There were no accounts payable related to manufacturing joint
venture entities at December 31, 1995 reflecting the termination or transfer of
ownership of the subject ventures in 1995 (see Note 3).
As discussed in Note 6, the Company had stock subscription receivables from an
officer and a director in 1993, a joint venture partner in 1993 and 1994 and a
former director in 1995.
9. INCOME TAXES:
On January 1, 1993, the Company adopted 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 deter-
31
<PAGE> 72
mines 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,
reserves and equity in losses of unconsolidated affiliates. The adoption of the
aforementioned accounting standard had no effect on previously reported results
of operations.
At December 31, 1995, the Company had available net operating loss carryforwards
of approximately $58.7 million and research and development credit carryforwards
of $1.2 million for federal income tax purposes which expire as follows:
<TABLE>
<CAPTION>
NET RESEARCH AND
OPERATING DEVELOPMENT
YEAR LOSSES CREDITS
- ----------------------------- ----------- ------------
<S> <C> <C>
1999......................... $ 151,500 $ --
2000......................... 129,300 --
2001......................... 787,200 --
2002......................... 2,119,000 --
2003......................... 1,974,100 --
2004......................... 1,620,500 --
2005......................... 3,869,900 141,000
2006......................... 1,822,500 191,900
2007......................... 6,865,800 117,800
2008......................... 13,455,500 320,500
2009......................... 16,667,700 413,200
2010......................... 9,256,100 --
----------- ----------
Total.................... $58,719,100 $ 1,184,400
=========== ==========
</TABLE>
The Company's ability to utilize its net operating loss carryforwards may be
subject to an annual limitation. The difference between the statutory tax rate
of 34% and the Company's effective tax rate of 0% is due to the increase in the
valuation allowance of $5,883,600 and $1,395,000 in 1994 and 1995, 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, 1994, and 1995 were as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Accounts receivable $ 306,400 $ 280,900
Inventory 735,100 155,700
Property and equipment 153,900 102,000
Accrued expenses 265,100 36,600
Investments in joint
ventures 1,051,600 --
Stock compensation 2,651,400 2,651,400
Other 374,000 349,100
------------ ------------
Total temporary
differences $ 5,537,500 $ 3,575,700
Federal net operating losses 17,020,900 19,964,500
Federal research and
development credits 771,200 1,184,400
------------ ------------
$ 23,329,600 $ 24,724,600
Less: Valuation allowance (23,329,600) (24,724,600)
------------ ------------
Deferred taxes $ -- $ --
============ ============
</TABLE>
10. LITIGATION:
On September 17, 1992, Harris Landgarten, a former officer and director of the
Company filed suit against the Company in the United States District Court for
the Southern District of New York claiming that the Company breached contractual
promises with him and that the Company fraudulently deprived him of certain
securities. The operative amended complaint demanded actual damages of
approximately $3 million and punitive damages of $5 million. At the conclusion
of the trial on May 1, 1995, the jury returned a verdict in favor of the Company
with respect to two claims, for fraud and breach of contract, for which
Landgarten sought the most damages. On a claim of non-payment of a consulting
fee, the jury awarded Landgarten $104,000. The jury also rendered an advisory
verdict in favor of Landgarten for $35,000 on a claim of unjust enrichment. On
July 26, 1995, the Company and Landgarten executed a settlement agreement
pursuant to which the company paid Landgarten $125,000 and the suit was
dismissed with prejudice.
As previously disclosed, Chaplin Patents Holding Company, Inc. ("CPH"), a wholly
owned subsidiary of the Company, had sued Lotus Cars Limited and Group Lotus
Limited (collectively "Lotus") in Patents County Court in the United Kingdom for
infringement of certain of the Chaplin Patents. On July 13, 1995, CPH, the
Company and Lotus executed a settlement agreement pursuant to which the action
against Lotus and the counterclaims against CPH and the Company were withdrawn
and not to be re-commenced, Lotus was granted a non-exclusive license for
various applications in the land and water based vehicular field, subject to
prior rights,
32
<PAGE> 73
with respect to the three Chaplin Patents that were the subject of the suit, and
CPH paid pound sterling 125,000 (approximately $190,000) to Lotus, which amount
had previously been transferred to the Court and was being held as security for
costs.
On June 22, 1995, Wilhelm & Dauster, a German law firm, commenced a suit against
the Company in the United States District Court for the District of Maryland,
Southern Division, to recover $125,000 claimed to be owed by the Company to that
firm for legal services, disbursements and costs rendered to and incurred on
behalf of the Company with respect to intellectual property matters in Europe.
On December 13, 1995, all amounts due Wilhelm & Dauster relating to the $125,000
claim were paid in full and the suit was subsequently withdrawn.
On or about June 15, 1995, Guido Valerio filed suit against the Company in the
Tribunal of Milan, Milan, Italy. The suit requests the Court to award judgment
in favor of Mr. Valerio as follows: (i) establish and declare that a proposed
independent sales representation agreement submitted to Mr. Valerio by the
Company and signed by Mr. Valerio but not executed by the Company was made and
entered into between Mr. Valerio and the Company on June 30, 1992; (ii) declare
that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira ($18.9 million); and (vi) order the
Company to pay damages for the harm done to Mr. Valerio's image for an amount
such as the judge shall deem equitable and in case for no less than 500 million
Lira ($3.1 million). The Company retained an Italian law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the Company, through its Italian counsel, filed a brief of reply with the
Tribunal of Milan setting forth the Company's position that: (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is groundless since the parties never entered into an agreement, and (iii)
because Mr. Valerio is not enrolled in the official Register of Agents, under
applicable Italian law Mr. Valerio is not entitled to any compensation for his
alleged activities. 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
judgement against the Company, said judgement could have a severe material
effect on quarterly or annual operating results.
11. COMMITMENTS:
The Company is obligated for minimum annual rentals (net of sublease income)
under operating leases for offices and laboratory space, expiring through
December 2000 with various renewal options, as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------ ----------
<S> <C>
1996...................................... $ 446,000
1997...................................... 448,000
1998...................................... 451,000
1999...................................... 360,000
2000...................................... 178,000
----------
Total................................. $1,883,000
==========
</TABLE>
Rent expense was $701,200, $760,400 and 794,200 for each of the three years
ended December 31, 1993, 1994 and 1995, respectively. During 1993 and 1995, rent
expense was paid, in part, through the issuance of common stock (see Note 6).
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.
33
<PAGE> 74
Revenue, (income) loss and identifiable assets by geographic area are as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
United
States...... $ 3,236,000 $ 4,610,600 $ 6,095,300
Europe........ 2,099,000 2,130,900 4,065,200
Far East...... 51,000 382,400 305,800
---------- ----------- ---------
Total..... $ 5,386,000 $ 7,123,900 $10,466,300
========== =========== =========
Net (Income) Loss
United
States...... $16,692,000 $21,446,600 $ 3,761,100
Europe........ 36,000 (12,100) (36,000)
Far East...... 463,000 472,200 343,400
---------- ----------- ---------
Total..... $17,191,000 $21,906,700 $ 4,068,500
========== =========== =========
Identifiable
Assets
United
States...... $28,856,000 $10,493,900 $ 8,997,400
Europe........ 685,000 1,877,500 586,000
---------- ----------- ---------
Total..... $29,541,000 $12,371,400 $ 9,583,400
========== =========== =========
</TABLE>
13. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES:
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, (SFAS No. 115) "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 prescribes the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. The Company has classified its
investments, consisting of a portfolio of short term U.S. Treasury Bills and
related investments, as trading securities which are reported at fair market
value. The cumulative effect of adoption of the new standard as of January 1,
1994, is not material. During the twelve month period ended December 31, 1994,
the Company recorded charges totaling $375,200 relating to realized and
unrealized losses in its investments. No such charge was incurred in 1995.
Interest income from investments was $587,500 and $53,000 for the twelve months
ended December 31, 1994 and 1995 respectively.
14. ACQUISITION OF CERTAIN ANVT ASSETS:
On September 16, 1994, the Company acquired the patents, technology, other
intellectual property and certain related tangible assets of ANVT. The Company
also acquired all rights under certain joint venture and customer agreements
subject to the consent of the other parties to those agreements.
Under the acquisition agreement, the Company paid $200,000 plus 2,000,000 shares
of its common stock resulting in a total purchase price of $2,400,000. In
addition, ANVT is entitled to a future contingent earn-out based on revenues
generated by the ANVT contracts assigned to the Company as well as certain types
of agreements to be entered into by the Company with parties previously having a
business relationship with ANVT. Future contingent payments, if any, will be
charged against the associated revenues. Companies that were parties to
agreements with ANVT on the closing date include Fiat CIEI S.p.A. (a
Fiat/Gilardini affiliate), Alpine Electronics, Inc., Applied Acoustic Research,
Inc., GEC-Marconi Avionics Limited and Arvin Industries, Inc. As of the period
ended December 31, 1995, no such contingent earn-out or payments were due ANVT.
The shares of common stock issued to ANVT were valued at the average of the
published price (less a discount to reflect the time required to register the
subject shares) of the Company's common stock during the period commencing with
the announcement of the transaction and ending on September 16, 1994. The
purchase price has been allocated to the following assets, under the purchase
method of accounting, based upon their estimated fair value at the date of
acquisition as follows:
<TABLE>
<S> <C>
Patents and Other Intangibles $1,700,000
Research and Development In-Process 500,000
Property and Equipment 200,000
----------
Total $2,400,000
==========
</TABLE>
The Company allocated $500,000 to in-process research and development projects,
resulting in a corresponding charge to the Company's operations in 1994.
The patents are being amortized over their respective remaining lives, which at
the time of acquisition ranged from one to seventeen years.
15. SUBSEQUENT EVENTS:
On March 28, 1996, the Company sold 2,000,000 shares of its common stock in a
private placement that provided net proceeds to the Company of $0.7 million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in the
aggregate, of its common stock in a private placement with three institutional
investors that provided net proceeds to the Company of $0.3 million.
Contemporaneously, the Company sold secured convertible term notes in the
aggregate principal amount of $1.2 million to those institutional investors and
granted them each an option to purchase an aggregate of $3.45 million of
34
<PAGE> 75
additional shares of the Company's common stock. The per share conversion price
under the notes and the exercise price under the options are equal to the price
received by the Company for the sale of such 1,000,000 shares subject to certain
adjustments. The conversion of the notes and the exercise of the options are
both subject to stockholder approval of an appropriate amendment to the
Company's certificate of incorporation increasing its authorized capital to
provide for the requisite shares.
In conjunction with the foregoing sale of common stock and convertible term
notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and to
use its best efforts to have such registration statement declared effective by
the SEC as soon as practicable. The relevant agreements provide for significant
monetary penalties in the event such registration statement is not declared
effective within 90 days of the filing date and in the event its effectiveness
is suspended for other than brief permissible periods. The agreements also
prohibit the Company from concluding any further financing arrangements which
involve the sale of equity or an equity feature without the investors' consent
for a period of one year.
The total cash received to date by the Company from the above two transactions
amounts to $2.2 million. (Refer to "Liquidity of Capital Resources" above and
Notes 1. and 15.--"Notes to the Consolidated Financial Statements" below.)
35
<PAGE> 76
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
OFFICERS
JAY M. HAFT
Co-Chairman and Chief Executive Officer
MICHAEL J. PARRELLA
President
JEFFREY C. ZEITLIN
Senior Vice President, Operations
STEPHEN J. FOGARTY
Senior Vice President and
Chief Financial Officer
IRENE LEBOVICS
Senior Vice President, and President of
NCT Headsets, a division of the Company
JOHN B. HORTON
Senior Vice President, General Counsel
and Secretary
MALCOLM MCDONALD
Senior Vice President, Director of
Business Development Europe
CY E. HAMMOND
Vice President, Controller
MICHAEL A. HAYES, PH.D.
Vice President, Research
- --------------------------------------------------------------------------------
DIRECTORS
JAY M. HAFT
Co-Chairman and Chief Executive Officer
ALASTAIR KEITH*
General Partner, CA Partners
JOHN J. MCCLOY, II
Co-Chairman
MICHAEL J. PARRELLA
President
SAMUEL A. OOLIE
Chairman, Oolie Enterprises and
Chairman and Chief Executive Officer,
NoFire Technologies, Inc.
* Chairman, Compensation Committee
and Chairman, Audit Committee
36
<PAGE> 77
INVESTOR INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Noise Cancellation Technologies, Inc. shareholders will
convene at 2:00 PM on Wednesday, July 17, 1996 at the International Plaza Hotel,
700 Main Street, Stamford, CT.
10-K REPORT
A COPY OF THE COMPANY'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31,
1995 ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WITH A
LIST OF EXHIBITS THERETO, WILL BE SENT WITHOUT CHARGE TO ANY SHAREHOLDER OF
RECORD OR BENEFICIAL OWNER OF SHARES OF THE COMPANY'S COMMON STOCK UPON RECEIPT
OF WRITTEN REQUEST ADDRESSED TO:
INVESTOR RELATIONS
NOISE CANCELLATION TECHNOLOGIES, INC.
ONE DOCK STREET
SUITE 300
STAMFORD, CT 06902
ANY EXHIBIT WILL BE PROVIDED UPON PAYMENT OF THE REASONABLE COSTS OF PRODUCING
SUCH EXHIBIT.
TRANSFER AGENT
Communications regarding stock transfers, lost certificates, and change of
address should be directed to American Stock Transfer & Trust Company, 40 Wall
Street, New York, NY 10005. (212) 936-5100.
STOCK MARKET INFORMATION
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 1995 and
1994 for the common stock for specified quarterly periods is set forth below:
<TABLE>
<CAPTION>
1995 1994
------------ -------------
HIGH LOW HIGH LOW
---- ---- ---- -----
<S> <C> <C> <C> <C>
1st Quarter $1 3/16 $ 9/16 $3 1/16 $1 13/16
2nd Quarter 1 3/16 9/16 2 1 5/16
3rd Quarter 1 9/16 1/2 2 1/8 1 3/32
4th Quarter 1 1/16 9/16 1 1/8 7/16
</TABLE>
<TABLE>
<S> <C>
INDEPENDENT ACCOUNTANTS CORPORATE OFFICES
Richard A. Eisner & Company, LLP Noise Cancellation Technologies Inc.
575 Madison Avenue 1025 West Nursery Road
7th Floor Linthicum, MD 21090-1203
New York, NY 10022-2597 (410) 636-8700
</TABLE>
37
