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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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Commission File Number: 0-18267
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Noise Cancellation Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1025 West Nursery Road, Linthicum, MD. 21090
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(Address of principal executive offices) (Zip Code)
(410) 636-8700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: Common stock,
$.01 par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant is $78.6 million as of April 10, 1996.
The number of shares outstanding of the Registrant's common stock is
95,857,074 as of April 10, 1996.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's proxy statement for the 1996 Annual Meeting of
Shareholders are incorporated by reference in Part III.
Items 11 & 12 are to be filed by amendment.
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PART I
ITEM 1. BUSINESS
A. GENERAL DEVELOPMENT OF BUSINESS
Noise Cancellation Technologies, Inc. ("NCT" or the "Company")
believes it is the industry leader in the design, development, licensing,
production and distribution of electronic systems for Active Wave
Management(TM) including systems that electronically reduce noise and
vibration. The Company's systems are designed for integration into a wide
range of products serving multi-billion dollar markets in the transportation,
manufacturing, commercial, consumer products and communications industries.
The Company began commercial application of its technology, with ten products
sold or currently being sold, including the NoiseBuster(TM) consumer headset,
the ProActive(TM) line of industrial/commercial active noise reduction ("ANR")
headsets, an aviation headset for pilots, an industrial muffler or "silencer"
for use with large vacuums and blowers, quieting headsets for patient use in
magnetic resonance imaging ("MRI") machines, an aircraft cabin quieting system
and quieting systems for heating, ventilation and air conditioning ("HVAC")
ducts (NoiseEater(TM)).
In 1995, the Company introduced industrial headsets and its Adaptive
Speech Filter(TM) ("ASF(TM)"), which the Company believes will have wide
application in the communications and automotive industries.
In keeping with the direction established in late 1994, during 1995
the Company began the active practice of marketing its technology through
licensing to third parties for fees and subsequent royalties. In April 1995,
as previously disclosed, the Company licensed its aircraft cabin quieting
technology exclusively to Ultra Electronics, Ltd. ("Ultra") for a license fee
and future royalties. In November 1995, the Company concluded its previously
disclosed negotiations with Walker Manufacturing Company ("Walker"), a division
of Tenneco Automotive, which resulted in the restructuring of the Walker/NCT
joint venture ("WNCT") and the licensing of certain additional automotive
related technology to Walker for a fee and future royalties. See G. "Strategic
Alliances" and Note 3. - "Notes to Consolidated Financial Statements.".
In 1996, the Company plans to introduce additional products for the
communications marketplace, a silicon micro-machined microphone ("SMM"), which
may be used independently or in conjunction with noise reduction, and
additional industrial headset products. The Company is also refining its
NoiseEater(TM) product for introduction into international markets. The
Company has entered into a joint venture with Applied Acoustic Research, L.L.C.
("AAR") called OnActive Technologies, L.L.C. ("OAT") which is developing Flat
Panel Transducers(TM) ("FPT(TM)") systems utilizing TopDown Surround
Sound(TM)(TDSS(TM)) for automotive applications. See C. "Technology."
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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 creates products that the
Company believes will be utilized in areas beyond noise attenuation and
control. These technologies and products are consistent with the shift of the
Company's focus to technology licensing fees, royalties and products that
represent near term revenue generation. The redefinition of corporate mission
is reflected in the revised business plan which the Company began to implement
during the first quarter of 1996.
As distribution channels are established and as product sales and
market acceptance and awareness of the commercial applications of Active Wave
Management(TM) build, revenues from technology licensing fees, royalties and
product sales are forecasted to fund an increasing share of the Company's
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 reflected in the changed revenue percentages discussed briefly
below and more fully in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Active Wave Management(TM) is an evolving industry. The proportion of
the Company's operating revenues, including technology licensing fees, derived
from engineering and development services, is reflective of this fact. From the
Company's inception through December 31, 1995, approximately 21% of its
operating revenues have come from the sale of products and 27% of its
operating revenues have come from licensing of the Company's technology, while
approximately 52% of its operating revenues have come from engineering and
development services.
Active noise control offers many advantages over traditional passive
methods of noise control such as conventional mufflers, ear protectors and
acoustical padding. Active noise control systems: (i) generally reduce only
unwanted noise and permit desired sounds such as the human voice, music or
warning tones to pass freely, (ii) are more successful in attenuating low
frequency noise, (iii) contribute to energy savings and provide other economic
benefits in various applications, and (iv) generally are smaller and lighter.
Active Wave Management(TM) is the utilization of active noise
attenuation technology and certain other technologies which results in the
electronic and mechanical manipulation of sound or signal waves to reduce
noise, improve signal-to-noise ratio and/or enhance sound quality.
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NCT believes that it has the leading position in Active Wave
Management(TM) technology, holding more patents and intellectual
property than any other firm in the field. The Company also has an exclusive
license to advanced technology for attenuating noise in a large space, such as
the interior of an aircraft or the passenger compartment of an automobile,
using multiple interactive sensors, such as microphones, and actuators, such as
speakers. Additionally the Company has expanded its portfolio by the
acquisition of various patents, including, in particular the purchase in 1994
of the intellectual property of Active Noise Vibration Technologies, Inc.
("ANVT").
The Company has entered into a number of strategic supply,
manufacturing and marketing alliances with leading global companies to
commercialize its technology. These strategic alliances historically have
funded a majority of the Company's research and development, and provided the
Company with reliable sources of components, manufacturing expertise and
capacity, as well as extensive marketing and distribution capabilities. In
exchange for this funding, the other party generally received a preference in
the distribution of cash and/or profits or royalties from these alliances until
such time as the support funding, plus an "interest" factor in some instances,
is recovered. Due to the restructuring of various alliances, as described in
G. "Strategic Alliances," there were no preferred distributions due to
strategic allies from future profits of the alliances at December 31, 1995. NCT
has established continuing relationships with Walker Manufacturing Company
("Walker") (a division of Tennessee Gas Pipeline Company, a wholly owned
subsidiary of Tenneco, Inc.), AB Electrolux ("Electrolux"), Foster Electric
Company, Ltd. ("Foster"), Analog Devices, Inc. ("ADI"), Ultra Electronics Ltd.
("Ultra"),Harris Corporation ("Harris"), The Charles Stark Draper Laboratory,
Inc. ("Draper"), Coherent Technologies, Inc. ("Coherent") and
Applied Acoustic Research, L.L.C. ("AAR"), among others, in order to
penetrate major markets more rapidly and efficiently, while minimizing the
Company's own capital expenditures. There have been substantial changes to the
terms governing certain of the foregoing relationships as described below and
in Note 3. - "Notes to the Consolidated Financial Statements".
In February 1995 the Company purchased from Foster Electric, Inc.
("Foster") the exclusive right to manufacture headsets in the Far East. Due to
the acquisition by the Company in 1994 of the sole ownership of Chaplin Patents
Holding Co., Inc. ("CPH"), neither the Company nor Foster believed there was
any necessity to continue their supply joint venture, Foster/NCT Supply Ltd.
("FNS"). The Company and Foster dissolved FNS. The Company and Foster remain
active in the Far East through the Foster/NCT Headsets International ("FNH")
and NCT Far East, Inc. ("NCTFE"), marketing and distribution alliances between
the Company and Foster. Foster produced six products for NCT in 1995.
In March 1995, the Company and Ultra amended their teaming agreement
and concluded a licensing and royalty agreement for $2.6 million and a future
royalty of 1 1/2% of sales commencing in 1998. Under the agreement, Ultra
acquired the Company's active aircraft quieting business based in Cambridge,
England, leased a portion of the Company's Cambridge facility and employed
certain of the Company's employees.
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On November 15, 1995, the Company and Walker executed a series of
related agreements (the "Restructuring Agreements") and concluded previously
noted negotiations with Tenneco Automotive and Walker regarding the Company's
commitment to help fund $4.0 million of product and technology development work
and the transfer of the Company's 50% interest in WNCT to Walker. The
Restructuring Agreements provided for the transfer of the Company's interest in
WNCT to Walker, the elimination of the Company's previously expensed obligation
to fund the remaining $2.4 million of product and technology development work,
the transfer to Walker of certain Company owned tangible assets related to the
business of WNCT, the expansion of certain existing technology licenses and the
Company's performance of certain research and development activities for Walker
at Walker's expense as to future activities.
An important factor for the Company's continuing development is its
ability to recruit and retain key personnel. As of March 18, 1996, the Company
had 73 employees, including 39 engineers and technical staff.
Among its engineering staff and consultants are several scientists and
inventors that the Company believes are preeminent in the active noise and
vibration control field worldwide. Consistent with the Company's revised
strategy to focus on near term product commercialization, technology licensing
fees and royalties during 1995, the Company significantly reduced its work
force and consolidated substantially all of its corporate function in Maryland.
The Company was incorporated in Nevada on May 24, 1983. In April
1985, the Company moved its corporate domicile to Florida and assumed its
present name, and in January 1987, following the assumption of control of the
Company by the present management, it changed its state of incorporation to
Delaware. NCT's executive offices, research and product development facility
are located at 1025 West Nursery Road, Linthicum, Maryland 21090; telephone
number (410) 636-8700. NCT maintains sales and marketing offices at 1 Dock
Street, Suite 300, Stamford, Connecticut 06902; telephone number (203)
961-0500. The Company's European operations are conducted through its product
development and marketing facility in Cambridge, England. NCT also maintains a
marketing facility in Tokyo, Japan.
B. BUSINESS STRATEGY
NCT's goal is to reinforce its position as the world's leader in the
design, development and sale of Active Wave Management(TM) technology and
products.
The Company revised its strategy and redefined its mission during 1994
and 1995. The acquisition of certain assets and all of the intellectual
property of ANVT broadened the Company's portfolio of intellectual property and
removed restrictions on the Company regarding licensing of the Chaplin Patents
to unaffiliated third parties. The Company can now license the Chaplin Patents
directly to unaffiliated third parties, which provides the Company with a
greater ability to earn technology licensing fees and royalties from such
patents. Thus, while the Company continues to focus on products which the
Company believes will generate near term revenue, it is increasing its emphasis
on technology licensing fees and royalties. Further, the Company is working
continuously to lower the cost of its products and improve their technological
performance.
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In late 1995, as previously noted, the Company redefined its corporate
mission to be the worldwide leader in the advancement and commercialization of
Active Wave 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. The
redefinition of corporate mission is reflected in the revised business plan
which the Company began to implement during the first quarter of 1996.
In the area of technology licensing fees and royalties, the Company
successfully concluded negotiations with Ultra in the first quarter of 1995,
which amended the teaming agreement and instituted a licensing and royalty
agreement. In November of 1995, the Company concluded similar negotiations
with Walker. During the course of 1995, the Company successfully concluded
certain other licensing agreements. The Company is pursuing other negotiations
and plans to expand this sector of the business during 1996.
NCT produces and sells MRI headsets and industrial headsets through
various distributors, and also licenses, produces and sells ASF(TM). The
Company is offering its NoiseBuster(TM) headset to consumer markets at a
suggested retail price of $79, and is selling the NoiseBuster(TM) through
various distribution channels, including specialty electronics retail stores,
specialty catalogs and direct sales by advertising a dedicated "800" telephone
number.
In 1996, the Company plans to introduce additional headset products,
the silicon micro-machined microphone, and additional communications systems
products that improve the intelligibility and quality of voice and data
transmission and recognition.
At the core of the Company's strategy is its leadership in Active Wave
Management(TM) technology. NCT secured its basic technology by acquiring its
interest in the Chaplin Patents and the exclusive ownership of 10 patents known
as the "NRDC Patents" described below under Item D. "NCT Proprietary Rights and
Protection". The Company further solidified its position regarding the
Chaplin Patents through the 1994 acquisition of the intellectual property of
ANVT, which also brought a number of other patents to NCT. In addition, the
Company has developed or acquired a number of patents, licenses and proprietary
inventions that improve and enhance the features and capabilities of its basic
technology. NCT's basic and enhanced technologies have enabled the Company to
develop and patent specific product applications in Active Wave Management(TM),
as well as enter new markets such as telecommunications and audio.
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The Company has implemented its business strategy in the past by
forming strategic supply, manufacturing and marketing alliances with leading
global companies in an effort to commercialize its technology. The strategic
alliances established by NCT have historically funded a majority of the
Company's research and development and currently provide reliable sources of
components, manufacturing expertise and capacity, as well as extensive
marketing and distribution capabilities. The Company continues this practice.
However, the acquisition of the intellectual property of ANVT, as previously
noted, allows the Company more flexibility in the type of alliances and license
agreements it concludes.
C. TECHNOLOGY
Active noise attenuation is not a new idea. Creating a mirror image
of an unwanted noise or sound wave and using it to cancel or reduce the
original sound wave dates back to the early part of this century. The first
systems used a simple "delay and invert" approach and showed some promise, but
the prohibitive cost of computing power and the inadequacy of acoustics and
related technologies limited their effectiveness.
In the mid-1970's, a major breakthrough took place with the
application of adaptive filters to generate anti-noise. These filters allowed
for the development of active control systems that could continuously adapt to
changes in noise output both in the external world and from control components.
A second breakthrough in the mid-1970's was made by Professor G.B.B. Chaplin.
He recognized that many noise sources, particularly machines, exhibit 'tonal'
or repetitive noise. Chaplin further recognized that the predictability of
repetitive noise allows for creation of an accurate anti-noise signal and,
therefore, more effective cancellation or attenuation.
Practical application of this technology was still not possible as the
electronic technology available at the time was insufficient for implementation
of active noise reduction systems. Since that time, digital computer
technology has evolved to the point where cost-effective microprocessors, known
as digital signal processors ("DSP") can perform the complex calculations
involved in noise cancellation and reduction. This advance has made it
feasible to apply active noise reduction to previously unsolveable problems
in low frequency noise at a reasonable cost.
ACTIVE NOISE REDUCTION . Active noise reduction systems are
particularly effective at reducing low frequency noise. As opposed to
a passive noise control system that is designed to mask a noise, active noise
removes a significant portion of the noise energy from the environment by
creating sound waves that are equal in frequency but opposite in phase. The
illustration below shows the relationship, in time, of a noise signal, an
anti-noise signal and the residual noise that results when they meet.
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ACTIVE NOISE REDUCTION
[CHART]
Active Wave Management(TM). Active Wave Management(TM) is the
combination of active noise reduction technology and certain other
technologies which results in the electronic and/or mechanical manipulation of
sound or signal waves to reduce noise, improve signal-to-noise ratio and/or
enhance sound quality.
Signal Enhancement. Active Wave Management(TM) technology also can be
used to attenuate unwanted signals that enter into a communications network, as
when background noise enters telecommunications or radio systems from a
telephone receiver, or microphone. The Company has developed patented
technology that will attenuate the background noise "in-wire", so that the
signals carried by the communications network include less of the unwanted
noise, allowing the speaker to be heard more clearly over the network or for
data transmissions to be communicated with fewer errors. An application of
this technology is in-wire attenuation of siren noise over two-way radio
communications between emergency vehicles and dispatchers at hospitals and
police or fire stations.
EarPeace(TM). NCT has been working to integrate its proprietary
active noise control technology into in-flight entertainment systems and
telephone handsets in particularly loud environments. To facilitate the
penetration of this cost-sensitive marketplace, NCT has developed a proprietary
acoustical design approach that minimizes the electronics costs needed to
effectively cancel noise. EarPeace(TM) technology is available today to meet
the low cost and small size requirements of previously inaccessible markets.
NCT is currently working with manufacturers of passenger control units (PCU),
airphones, pay telephones and industrial handsets to reduce the ambient
background noise and improve audio or communications intelligibility.
Silicon Micromachined Microphone (SMM). In 1994, NCT purchased the
exclusive rights to manufacture and commercialize a silicon micromachined
microphone. A small, compact, surface-mountable silicon actuator, the SMM
provides customers
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improved and adjustable sensitivity, a low noise floor and resistance
to environmental extremes. The ability to integrate additional circuitry onto
the SMM chip has also proven attractive to potential users. The SMM's low noise
floor and adjustable sensitivity improves voice recognition in high ambient
noise environments. NCT is working with voice processing computer hardware
companies to utilize the SMM to enhance the performance of their systems. In
addition, NCT is currently in negotiation with hearing aid manufacturers to
provide the SMM as a replacement for the more expensive electret microphones
currently employed in hearing aids.
Adaptive Speech Filter(TM) ("ASF(TM)"). The Adaptive Speech
Filter(TM) algorithm (ASF(TM)) removes background noise from voice and data
transmission and recognition. Available in real-time single and double
precision fixed-point digital signal processing ("DSP"), floating-point DSP,
and Windows 95/Windows NT ACM driver versions, ASF(TM) can be used as a
pre-processor for voice and data compression algorithms, and also contributes
to improved voice and data recognition. ASF(TM) parameters can be adjusted to
optimize performance for a particular noise, or can be set to provide noise
reduction across a wide range of noises. Additional uses include
teleconferencing systems, cellular and airphones, telephone switches, echo
cancellers, and communications systems in which background noise is
predominant. ASF(TM) is currently available for use on three hardware
platforms. The Company is in the process of adding an echo cancellation
algorithm to ASF(TM). This addition should be completed in 1996.
NCT Audio. Consistent with its expertise in Active Wave Management(TM)
and its experience in accurately reproducing acoustical patterns for the
purpose of noise attenuation, the Company has expanded its audio transducer
work to include audio systems for the reproduction of speech and music. The
Company is developing Top Down Surround Sound(TM) ("TDSS(TM)") for the
automobile audio market, in both original equipment manufacturer ("OEM") and
after-market versions. TDSS(TM) employs Flat Panel Transducers(TM) ("FPT(TM)")
to produce sound much closer to the listener's ear than conventional speakers.
This placement allows for a High Impact Sound(TM) listening experience. The
Company is also developing FPT(TM) for personal computers and
telecommunications. In these applications, the slim profile of the FPT(TM)
allows for placement where conventional speakers cannot be accommodated.
D. NCT PROPRIETARY RIGHTS AND PROTECTION
NCT believes it has the leading position in Active Wave
Management(TM), holding a large number of patents and patent applications.
The Company's strategy has been to build upon its base of core technology
patents with newer advanced technology patents developed by or exclusively
licensed to the Company. In many instances, the Company has incorporated the
technology embodied in its core patents into patents covering specific product
applications, including the products' design and packaging. The Company
believes this building-block approach provides greater protection to the
Company than relying solely on the original core patents. As its patent
holdings increase, the Company believes the importance of its core patents will
diminish from a competitive viewpoint.
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During 1994 the Company purchased certain assets of ANVT, which
included all of ANVT's intellectual property rights. See Note 14. - "Notes to
the Consolidated Financial Statements". Among the ANVT intellectual property
rights were ANVT's interest in the 10 basic Chaplin Patents which are now solely
owned by NCT as the sole shareholder of CPH. These patents cover inventions
made by Professor G.B.B. Chaplin in the late 1970s and early 1980s.
The Chaplin Patents form only one group of core patents upon which
NCT's technology is based. In March 1990, the Company acquired exclusive
ownership of 10 patents developed under the auspices of the National Research
Development Corporation ("NRDC"), an organization sponsored by the British
Government. Among other things, the NRDC Patents, of which the Swinbanks and
Ross patents are the most important, utilize the adaptive feed forward approach
to active noise control. The Swinbanks patent covers an improved method of
analyzing the incoming noise or vibration through the use of a "frequency
domain" adaptive filter which splits the incoming noise into different
frequency bands for analysis and recombines the data to generate the anti-noise
signal. The Ross patent covers the use of a "time domain" filter which uses
input and error signals to enhance a system's ability to compensate for
feedback from actuators to sensors. Without this filter, the system will
detect and begin canceling its own self-generated anti-noise.
The Company has built upon these core patents with a number of
advanced patents and patent applications. These include the Digital Virtual
Earth(TM) patent, which covers digital feedback control, and patents on
multi-channel noise control. The Company has also applied for patents on
combined feedforward and feedback control, control using harmonic filters,
filters for signal enhancement and speech filtering, control systems for noise
shaping and others.
As part of the purchase of certain ANVT assets, the Company acquired
all the rights to nine inventions previously belonging to the Topexpress Group
in the United Kingdom. The international patent coverage of these inventions
varies but eight have been granted patent protection with numerous counterpart
foreign applications still pending. Among the other intellectual property
acquired from ANVT are patents relating to active auto mufflers and noise
suppression headrests, several patent applications on advanced algorithms,
and active noise headsets, many related disclosures and various
disclosures in other areas of active attenuation of noise and vibration.
Additionally, the Company acquired the rights to three basic inventions known
as the Warnaka Patents.
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In 1994, the Company purchased the exclusive rights to the silicon
micromachined microphone technology developed by Draper in
Cambridge, Massachusetts. At that time, two patents describing the basic
technology had already been issued and two were pending. On September 19,
1995, one of the patents pending was issued.
In 1995 the Company also acquired several U.S. patents dealing with
adaptive speech filtering which it hopes to license to third parties.
The Company holds or has rights to 202 inventions as of December 31,
1995, including 69 United States patents and over 177 corresponding foreign
patents. The Company has pending over 190 US and foreign patent applications..
NCT's engineers have made 60 invention disclosures for which the Company is in
the process of preparing patent applications.
No assurance can be given as to the range or degree of protection any
patent issued to, or licensed by, the Company will afford or that such patents
or licenses will provide protection that has commercial significance or will
provide competitive advantages for the Company's products. No assurance can be
given that the Company's owned or licensed patents will afford protection
against competitors with similar technology, or that others will not obtain
patents claiming aspects similar to those covered by the Company's owned or
licensed patents or patent applications. No assurance exists that the
Company's owned or licensed patents will not be challenged by third parties,
invalidated, rendered unenforceable or designed around. Furthermore, there can
be no assurance that any pending patent applications or applications filed in
the future will result in the issuance of a patent. The invalidation,
abandonment or expiration of patents owned or licensed by the Company and
believed by the Company to be commercially significant could permit increased
competition, with potential adverse effects on the Company and its business
prospects.
Annuities and maintenance fees for the Company's extensive patent
portfolio are a significant portion of the Company's annual expenses. If, for
the reasons described in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- "Liquidity and Capital
Resources" below, it becomes necessary for the Company to reduce its level of
operations, the Company will not be able to continue to meet the extensive
monetary outlay for annuities and maintenance fees to keep all the patents and
applications from becoming abandoned and will have to prioritize its portfolio
accordingly.
The Company has conducted only limited patent searches and no
assurances can be given that patents do not exist or will not be issued in the
future that would have an adverse effect on the Company's ability to market its
products or maintain its competitive position with respect to its products.
Substantial resources may be required to obtain and defend patent and other
rights to protect present and future technology and other property of the
Company.
The Company's policy is to enter into confidentiality agreements with
all of its executive officers, key technical personnel and advisors, but no
assurances can be made that Company know-how, inventions and other secret or
unprotected intellectual property will not be disclosed to third parties by
such persons.
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E. EXISTING PRODUCTS
HEADSETS
MRI Headphones. Since 1991, the Company has been producing active
noise reduction headsets for use by patients undergoing MRI procedures. NCT's
MRI headphone reduces the noise generated by the gradient coils of the
superconducting MRI magnet. This noise is known to be disturbing to patients
and is a factor in a patient's ability to tolerate the scanning procedure. The
Company's product is an implementation of a patented technology owned by NCT
which permits the delivery of anti-noise signals and music directly to the
patient while the patient is in the bore of the MRI scanner. While undergoing
the MRI examination, a patient can be communicated with by the doctor or scan
operator through NCT's system. The Company is a supplier to Siemens, a leading
manufacturer of MRI machines in the U.S.
NoiseBuster(TM). NCT is currently marketing its NoiseBuster(TM)
personal active noise reduction headphone for consumers at a suggested retail
price of $79. This active headphone selectively reduces unwanted noise
generated by aircraft engines, lawnmowers, street traffic, household appliances
and other annoying noise sources, permitting the user to hear desired sounds,
such as human conversation, warning signals or music. The NoiseBuster(TM) is a
lightweight, portable headphone wired to a small controller that can be clipped
to the user's clothing or belt. The NoiseBuster(TM) contains a port where the
consumer can plug in personal audio devices such as a radio, tape player or
compact disc player so the user can enjoy music while in a noisy setting. The
product can also be used with an aircraft's in-flight entertainment system.
NoiseBuster(TM) is the largest selling consumer product of its kind.
NoiseBuster(TM) was awarded the 1994 Discover Magazine Technological Innovation
Award and the Electronics Industry Association's Innovation 95 Award.
The Company is marketing the NoiseBuster(TM) through distribution
channels, including electronics retail stores, specialty catalogues and
directly through a toll-free "800" number. Initial product shipments
were made in September 1993.
NB-AVC. In August 1994, the Company began shipping an active noise
reduction communications headset specifically designed for use by commercial
aviation pilots. The product is FAA-TSO certified and sold by Telex as the
Airman ANR(TM). At 6.9 oz, one-third the weight of other active noise
reduction headsets, the Airman ANR(TM) is the first ultra-lightweight,
open-back headset of its kind developed for the general aviation market. A
high-performance noise canceling electret microphone is connected to a flexible
boom. The controller pack accepts four AA batteries for a minimum of 40 hours
continuous operations and includes a belt clip.
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ProActive(TM) 1000/1500. In March 1995, the Company began shipping
its ProActive(TM) 1000 headphones and ProActive(TM) 1500 communications
headsets. These products are lightweight, openback in style and can provide up
to 20dB of active noise reduction between 30-1200Hz. When used in work settings
dominated by low-frequency noise, these products improve comfort, reduce
fatigue and improve concentration and productivity for the user. In the case
of the ProActive(TM) 1500 two-way and mobile communications version, the
clarity and intelligibility of communications is improved when the masking
effect of background noise is reduced. These products are powered by a
rechargeable NICAD battery designed for use during a 12-hour work day. The
battery fits into a small, lightweight belt-pack that can be clipped onto the
belt. The battery can be recharged overnight using NCT's personal charger
which is included with the product.
ProActive(TM) 3000/3500. In August 1995, the Company expanded its
industrial headset product line to include the ProActive(TM) 3000 series.
These products combine active noise reduction of low-frequency noise with a
closed-back passive ear muff, appropriate for general industrial use. This is
the first product of its kind in which the active electronics as well as the
power source have been totally integrated into the earmuff, providing the user
with mobility and safety. The electronics are powered by a NICAD rechargeable
battery specifically designed for use during a 12-hour work day. The battery
can be recharged overnight using NCT's personal charger. The ProActive(TM)
3000 active earmuff and ProActive(TM) 3500 active communications earmuff
address the hearing protection requirements of a variety of industries.
ProActive(TM) 3100/3600. In December 1995, the Company shipped a hard
hat version of its ProActive(TM) 3000 line. This will be the first
implementation of active noise reduction earmuffs in a hard hat style and will
address the needs of industries such as construction, utilities and others
requiring both hearing protection and hard hats for workers. Product shipment
is scheduled for mid 1996.
COMMUNICATIONS
Adaptive Speech Filter ("ASF(TM)"). ASF(TM) removes background noise
from voice and data transmission and recognition. Available in real-time
single and double precision fixed-point DSP, floating-point DSP, and Windows
95/Windows NT ACM driver versions, ASF(TM) can be used as a pre-processor for
voice and data compression algorithms, and also contributes to improved voice
and data recognition. Additional uses include teleconferencing systems,
cellular and airphones, telephone switches, echo cancellers and communications
systems in which background noise is predominant.
DUCT QUIETING SYSTEM-NOISEEATER(TM)
The Company has developed low-cost quieting systems for installation
into existing HVAC ducts. The Company is selling kits of its duct quieting
systems for integration into the most common duct sizes and the Company
believes these systems will be easy to install by HVAC workers in office
buildings and factories. The Company began offering this product line
commercially as the NoiseEater(TM) in January 1994 selling through
distributors, and is currently offering these systems for sale in the United
States. In 1995, the Company successfully concluded license and royalty
agreements with distributors in Europe and Japan.
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<PAGE> 14
PRODUCT REVENUES
The following table sets forth the percentage contribution of the
separate classes of the Company's products to the Company's product revenues
for the year ended December 31, 1995.
<TABLE>
<CAPTION>
As a %
Product Amount of Total
-------- ---------- --------
<S> <C> <C>
Headsets $1,561,000 98.2%
Mufflers 17,000 1.1
Other 11,000 .7
---------- ------
Total $1,589,000 100.0%
========== ======
</TABLE>
F. PRODUCTS UNDER DEVELOPMENT
HEADSETS
NB-PCU. The Company is working with a leading manufacturer and
supplier of aircraft cabin products on the integration of NCT's Ear Peace (TM)
active noise control technology into in-flight passenger entertainment systems.
As a component of the system, NCT is also developing a low-cost headset
specifically for in-flight use to be used in conjunction with the integrated
electronics. NCT's technology electronically reduces aircraft engine noise
while enhancing the audibility of desired sounds like speech, music and warning
signals. Lowering the engine drone can help alleviate the anxiety and fatigue
often associated with flying. While the system is in use, passengers inside an
aircraft cabin can carry on conversations at a comfortable level or hear
in-flight movies and music without over amplification and distortion.
Production systems should be available in the latter part of 1996.
Advanced Digital Electronic Headsets. NCT is working to develop
advanced headset models using its proprietary digital technology. Management
believes that there is a broad market for specialty industrial headsets that
will permit factory and assembly workers to operate close to loud machinery in
the marine, steel, textile, paper, construction, road building and metalworking
industries, among others. Conventional ear muffs and protectors are not as
effective as the Company's active headsets, which can selectively block
machinery noise while allowing the worker to listen to ordinary human
communications and, where appropriate, to hear warning signals, tones or bells.
The Company is working to develop headset models that will operate on a
lightweight, rechargeable battery pack, thus allowing the worker to move freely
about the factory.
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<PAGE> 15
COMMUNICATIONS
Active Noise Reduction for Telephone Handsets. NCT is currently
working to integrate its proprietary active noise control technology,
EarPeace(TM), into telephone handsets. The EarPeace(TM) is scheduled for
production in 1996. The most appropriate application for handsets
incorporating this technology is in environments where the loud ambient
background noise impedes communications intelligibility and interferes with the
comfort of the user. Examples of such environments include aircraft cabins,
noisy factory floors, large telemarketing environments and phones located on
street corners and highways.
Silicon Micromachined Microphone ("SMM"). In 1994, NCT purchased the
exclusive rights to manufacture and commercialize a silicon micromachined
microphone. A small, compact, surface-mountable silicon actuator, the SMM
provides customers with improved and adjustable sensitivity, a low noise floor
and resistance to environmental extremes. The ability to integrate additional
circuitry on the SMM chip has also proven attractive to potential users. The
SMM's low noise floor and adjustable sensitivity improve voice recognition in
high ambient noise environments. NCT is working with voice processing and
computer hardware companies to utilize the SMM to enhance the performance of
their systems. In 1995, the Company signed a memorandum of understanding with
a major semiconductor manufacturer to build the SMM. In the first quarter of
1996, the manufacturer released initial prototypes of the devices. This
manufacturer is currently refining the manufacturing process and identifying a
facility for production. Production of two general purpose SMMs is expected to
commence in the first quarter of 1997.
NCT AUDIO
Top Down Surround Sound(TM), TDSS(TM) is a novel automobile audio
speaker system developed by the Company. Initial demonstrations and listener
tests have indicated a high degree of enthusiasm for the High Impact Sound(TM)
which TDSS(TM) generates. The Company is in the process of developing teaming
agreements with major participants in the automobile audio speaker market and
is also exploring applications for High Impact Sound(TM) technology in the home
audio and home theater environments.
Flat Panel Transducers(TM), Using a similar FPT(TM) technology to that
employed in TDSS(TM), multi-media FPT(TM) targets such applications as notebook
computers and video telephones. In these applications the slim profile of the
FPT(TM) offers an audio transducer solution where room may be lacking to
implement a conventional speaker.
SMALL FANS
Household Appliances. NCT has developed fan quieting systems for
multiple applications, including a quiet kitchen hood fan and a quiet vacuum
cleaner. NCT's active fan systems are designed with higher efficiency than
conventional fans and have
15
<PAGE> 16
demonstrated up to a 30% reduction in energy usage. The cost sensitivity of the
consumer appliance marketplace has been a barrier to prior introduction of this
technology. As a result of relationships NCT enjoys with its component supply
joint venture partners, the Company believes that the price sensitivity issues
of consumer product markets can be addressed in the near-term as
miniaturization of the technology continues and the unit cost of NCT's
electronic components continues to decline. Management believes that NCT's
proprietary technology will be incorporated in a wide range of other products,
including air conditioners, dishwashers, clothes washers and dryers, hair
dryers and other types of fans. The Company expects to begin shipping kitchen
hood systems in the last half of 1996.
PANELS AND ENCLOSURES
Electric Utility Transformers. Electric power distribution by
utilities requires the use of large transformers, often placed in residential
and commercial neighborhoods, which emit a low frequency "hum" that irritates
people living and working nearby. Utilities try to mask this noise by passive
means, although usually not very successfully. The Company has developed
active enclosure and active panel systems which reduce the "hum" of transformer
noise by use of flat actuators that cause the enclosure or panels to vibrate in
a manner to reduce the noise. The Company can install its active panel system
directly to the metal sides or "skin" of an installed transformer, thus making
its systems available to retrofit markets as well as to OEMs. As an
alternative, an active enclosure can be built to house the transformer.
In March 1995, the Company entered into an agreement with QuietPower
Systems, Inc., ("QSI") (see Item 13. "Certain Relationships and Related
Transactions" and Note 8. - "Notes to the Consolidated Financial Statements") by
which QSI received the exclusive rights to market, sell and distribute
transformer quieting products and gas turbine quieting products in the utility
industry. Under the agreement QSI funds development of the systems. The
agreement generally provides that the Company manufactures the products and
receives a royalty of 6% from QSI on the sales of the products.
G. STRATEGIC ALLIANCES
The Company's strategy is to obtain technology licensing fees and
royalties, and, in certain areas, to produce, market and sell Active Wave
Management(TM) products.
The Company's transition from a concern primarily engaged in research
and development to one engaged in the licensing production, marketing and sale
of Active Wave Management(TM) systems is predicated upon the establishment of
strategic alliances with major domestic and international business concerns.
In exchange for the benefits to such concerns' own products offered by the
Company's technology, these alliances provide marketing, distribution and
manufacturing capabilities for the Company's products and enable the Company to
limit the expense of its own research and
16
<PAGE> 17
development activities. In order to ensure dependable sources of supply and to
maintain quality control and cost effectiveness for components and integrated
circuits incorporated in the Company's systems, an important element of the
Company's strategy has been to identify and enter into alliances with
integrated circuit manufacturers that will develop and produce custom-made
chips for NCT product applications, and with manufacturers of components that
will supply and integrate components for NCT systems. The following is a
summary of the Company's key alliances:
<TABLE>
<CAPTION>
DATE INITIAL
RELATIONSHIP
KEY STRATEGIC ALLIANCES ESTABLISHED APPLICATIONS
----------------------- ----------- ------------
<S> <C> <C>
Walker Manufacturing Company (a division of Tennessee Nov. 1989 Mufflers, Industrial
Gas Pipeline Company).............................. Silencers and Other
Vehicular Applications
AB Electrolux...................................... Oct. 1990 Consumer Appliances
Foster Electric Company, Ltd....................... Mar. 1991 Headsets and
Electronics
Ultra Electronics, Ltd............................. Jun. 1991 Aircraft Cabin
Quieting Systems
Analog Devices, Inc................................ Jun. 1992 Integrated Circuits
and Related Products
Harris Corporation................................. Sept. 1993 Integrated Circuits
and Electronic
Components
The Charles Stark Draper Laboratory, Inc. ......... July 1994 Microphones
Coherent Communications System Corporation......... June 1995 Telecommunications
Applied Acoustic Research, L.L.C. ................. August 1995 TDSS(TM)
</TABLE>
WALKER MANUFACTURING COMPANY (A DIVISION OF TENNESSEE GAS PIPELINE
COMPANY) (U.S.) WALKER ELECTRONIC MUFFLERS, INC. (A WHOLLY OWNED
SUBSIDIARY OF TENNESSEE GAS PIPELINE COMPANY) (U.S.)
In November 1989, NCT signed its strategic alliance with Walker, a
world-leading manufacturer of automotive parts and mufflers. The alliance
consisted of a Joint Venture and Partnership Agreement with ownership in the
resulting joint venture WNCT shared equally between NCT Muffler, Inc. and
Walker Electronic Mufflers, Inc. ("WEM"), a wholly owned subsidiary of
Tennessee Gas Pipeline Company). WNCT conducts research and develops,
manufactures, markets, sells and distributes electronic mufflers principally
for use on non-military, land-based vehicles on an exclusive basis, and for the
industrial (e.g., compressors, diesel generators and gas turbines), marine,
consumer and aerospace sectors on a non-exclusive basis. The agreement between
NCT and Walker was expanded and extended in 1991. WNCT is currently producing
and selling industrial silencers.
17
<PAGE> 18
In December 1993, Tenneco Automotive, another division of Tennessee
Gas Pipeline Company, and the Company entered into an agreement pursuant to
which Tenneco Automotive purchased 1,110,083 shares of the Company's common
stock for $3.0 million in cash. Pursuant to the agreement, the Company
contributed $1.0 million to the capital of the WNCT following which WNCT repaid
$1.0 million of the capital advances previously made to WNCT by WEM and
representatives of WEM and the Company agreed to restructure WNCT. Such
restructuring included giving WNCT worldwide rights for the manufacture and
sale of all muffler products except those manufactured and sold in the consumer
and defense markets. WNCT also was expanded to have, in addition to rights it
has with respect to vehicular mufflers, worldwide non exclusive rights to all
silencing and vibration applications (e.g., mufflers, cabin quieting, engine
mounts, fan quieting and engine block quieting) for all vehicles except trains,
aircraft and watercraft. The Company committed to help fund $4.0 million of
product and technology development work of the Company attributable to WNCT.
Also pursuant to the agreement with Tenneco Automotive, Walker's right to
acquire the Company's interest in WNCT upon the occurrence of certain events
was eliminated and Tenneco Automotive had the right to have a representative
serve on the Company's Board of Directors.
On November 15, 1995, the Company and Walker executed a series of
related agreements (the "Restructuring Agreements") and concluded previously
noted negotiations with Tenneco Automotive and Walker regarding the Company's
commitment to help fund $4.0 million of product and technology development work
and the transfer of the Company's 50% interest in WNCT to Walker. The
Restructuring Agreements provided for the transfer of the Company's interest in
WNCT to Walker, the elimination of the Company's previously expensed obligation
to fund the remaining $2.4 million of product and technology development work
noted above, the transfer to Walker of certain Company owned tangible assets
related to the business of WNCT, the expansion of certain existing technology
licenses and the Company's performance of certain research and development
activities for Walker at Walker's expense as to future activities (see
Note 3. - Notes to the Consolidated Financial Statements).
AB ELECTROLUX (SWEDEN)
The Company's relationship with Electrolux, one of the world's leading
producers of white goods, was initiated in October 1990. The Company signed
its current agreement with Electrolux, a Joint Development and Supply
Agreement, in June 1991. This agreement provides for NCT to design, develop
and supply active systems for quieting Electrolux products. Electrolux has
agreed to purchase the electronic components for its active noise control
products exclusively from NCT, provided the Company and its supply joint
ventures are price and quality competitive. To date, NCT has completed
development of two household appliance products for Electrolux. No date has
been established for product introduction.
18
<PAGE> 19
FOSTER ELECTRIC COMPANY, LTD. (JAPAN)
In March 1991, NCT and Foster, the largest original equipment
manufacturer of speakers in the world and a major producer of stereo headsets
and high-fidelity components for the consumer electronics and automotive
industries, established a joint venture, FNH, to develop, design, manufacture
and sell active noise attenuation headset systems. Foster is responsible for
production of the NoiseBuster(TM) consumer headset, the aviation headset and
the industrial headsets. Ownership was shared equally between Foster and NCT.
In addition to their headset joint venture, in April 1991, NCT and
Foster entered into a supply joint venture, FNS, (owned 30% by NCT) to build
and supply the customized components NCT requires to build its active systems,
including sensors, microphones, amplifiers, transducers and controllers. These
components were sold by FNS to NCT which distributes them to other NCT
production and distribution ventures and customers.
In December 1993, Foster and the Company entered into an agreement
pursuant to which Foster purchased 740,055 shares of the Company's common stock
for $2.0 million (the "Foster Shares"). Under the terms of the agreement,
Foster paid the purchase price by means of a cash payment of one cent ($.01)
per share (the par value of the common stock) and the delivery of a series of
promissory notes (the "Foster Notes") in aggregate principal amount equal to
the balance of the purchase price. The Foster Notes were full recourse notes
of Foster bearing interest at one percent above the rate of three-year United
States Treasury Notes and were to mature on April 17, 1997. The Foster Notes
were collateralized by the Foster Shares until paid or "earned out" as
described in the next paragraph. As of December 31, 1995, the Foster Notes
had been paid in full.
Foster and the Company also agreed that Foster would provide and the
Company would purchase $2.0 million of various product and market development
services deemed necessary by the Company for the commercialization of several
new headset and other products and the further development of the Company's
Japanese markets during the period from December 1993 to April 1997. The
Company would define each project or phase of this work and Foster would
provide related budgets and performance milestones. Upon completion of each
such project or phase, the agreed budgeted amount therefor would be billed to
the Company and will be paid, at the Company's election, either in cash or by
discharge of an equivalent amount of the Foster Notes, in which latter event an
appropriate number of the Foster Shares would be released from the
collateralization restrictions.
19
<PAGE> 20
In February 1995, the Company and Foster agreed to liquidate FNS.
Foster and the Company have agreed that the acquisition of certain assets of
ANVT by NCT (see Note 14, - Notes to the Consolidated Financial Statements)
removed the necessity for the continued existence of FNS. An orderly
liquidation of FNS was completed in April 1995. The agreement provided for the
Company's repurchase from Foster for $0.6 million of the exclusive headset
manufacturing rights in the Far East (see FNH note above) and an immediate
minimum 5% reduction in the price of headset products to be produced by Foster
for the Company. The Company accrued a $0.8 million charge in 1994 relating to
this agreement, of which $0.2 million was reflected as a current liability at
December 31, 1994.
On July 28, 1995, Foster Electric Co., Ltd. ("Foster"), Foster NCT
Headsets International ("FNH") and the Company executed a letter agreement
amending the 1991 agreement covering the headset joint venture company, FNH.
Pursuant to that agreement Foster acquired the Company's 50% interest in FNH
and a license to manufacture headsets for FNH and NCT with tooling currently
owned by NCT in consideration for Foster's assumption of FNH's outstanding
liabilities of $303,000. The agreement also grants FNH the right to sell
certain headsets on an exclusive basis in Japan and a non-exclusive basis
throughout the rest of the Far East, in consideration for a royalty on the sale
of such headsets.
The Company and Foster remain active in the Far East through NCTFE, a
sales and marketing joint venture between the Company and Foster. Foster
produced six products for NCT in 1995, primarily industrial headsets
The Company's Far East marketing and product showroom facility is
maintained at Foster's facilities in Tokyo, Japan.
ULTRA ELECTRONICS LTD. (U.K.)
Since 1991, NCT and Ultra and its predecessor, part of the Dowty
Group, have been designing and developing systems to enhance passenger comfort
by quieting aircraft passenger compartments in certain propeller driven
aircraft, which Ultra sells to the worldwide turbo-prop aircraft market. In
May 1993, Ultra and the Company signed a teaming agreement to produce and
install the NCT cabin quieting system on the SAAB 340 aircraft. Deliveries
under this agreement began in 1994. In March 1995, the Company and Ultra
amended the teaming agreement and concluded a licensing and royalty agreement
for $2.6 million. In addition, Ultra will pay the Company a royalty of 1 1/2%
of sales of products incorporating NCT technology beginning in 1998.
ANALOG DEVICES, INC. (U.S.)
In June 1992, NCT and ADI formed an equally owned joint venture to
design, develop, and manufacture computer chips to be incorporated in the
Company's active noise and vibration control systems. ADI is a leading
manufacturer of precision, high-performance integrated circuits used in analog
and digital signal processing applications. Under the terms of the agreement,
ADI, as a subcontractor to the joint venture, will complete the design and
development of specialized chips incorporating NCT's technology.
20
<PAGE> 21
] HARRIS CORPORATION (U.S.)
In September 1993, the Company and Harris entered into an agreement to
form an equally owned limited liability company to design, develop and
manufacture custom electronic components incorporating NCT patents and
technology for use in the Company's active noise and vibration control systems
and to sell such components to NCT and NCT's customers. Harris is a worldwide
designer and supplier of advanced electronic systems, semi-custom and custom
integrated circuits and semiconductors, communications systems and equipment
and electronic office products. Under the terms of the agreement, Harris, as a
subcontractor to the limited liability company, is working with the Company in
the design and development of custom and semi-custom electronic components and
will manufacture the specialized components incorporating the Company's
technology.
THE CHARLES STARK DRAPER LABORATORY, INC. (U.S.)
In July 1994, NCT and Draper Laboratory ("Draper") of Cambridge,
Massachusetts entered into an agreement whereby NCT became the exclusive
licensee to a new silicon micromachined microphone developed by Draper. Under
terms of the agreement and subsequent agreements, Draper will perform
engineering services for NCT to further develop the technology. The
microphone technology has application in a wide variety of applications within
the acoustic and communications fields.
COHERENT COMMUNICATIONS SYSTEMS CORPORATION (U.S.)
In June 1995, NCT and Coherent of Leesburg, Virginia entered into an
agreement whereby NCT granted a license to Coherent to sell and Coherent and
NCT will work together to develop and sell certain telecommunication products.
APPLIED ACOUSTIC RESEARCH, L.L.C. (U.S.)
In December, 1995, NCT and AAR of State College, Pennsylvania formed a
joint venture, OnActive Technologies, L.L.C. ("OAT"), to commercialize advanced
audio applications, such as FPT(TM) and TDSS(TM), into total audio systems and
solutions for the automotive OEM market. Both partners, who own equal shares of
the joint venture, have licensed their proprietary technology to the joint
venture.
21
<PAGE> 22
H. MARKETING AND SALES
In addition to marketing its Active Wave Management(TM) technology and
systems through its strategic alliances as described above, the Company also
uses an internal sales force of eight people, its executive officers and
directors, and four independent sales representatives. The independent sales
representatives may earn commissions of generally up to 6% of revenues
generated from sales of NCT products to customers introduced to NCT by them,
and up to 5% of research and development funding revenues provided by such
customers. The Company intends to continue to expand its internal sales force
on a limited basis as resources become available.
Revenues derived from the Company's contractual relationships with
Walker and Ultra (see Note 3. - "Notes to the Consolidated Financial
Statements") accounted for 38.2% and 30.1% respectively, of the Company's
revenues for the year ended December 31, 1995. No other customer accounted for
more than 10% of revenues during such fiscal period.
The Company's backlog at December 31, 1995, was $950,000 as contrasted
with $1,647,000 at December 31, 1994, and $1,450,000 at December 31, 1993,
respectively. In 1995 and 1994, the backlog was composed primarily of future
product shipments. In 1993 the backlog was composed primarily of engineering
and development service contracts. Since the Company's strategy is to focus on
technology licensing fees, royalties, product revenue and the introduction of
products which management believes have near term commercial potential, backlog
of engineering and development services is not a relevant measure for the
Company at this stage of its commercial development.
Note 12. - "Notes to the Consolidated Financial Statements" sets forth
financial information relating to foreign and domestic operations and sales for
the years ended December 31, 1995 and 1994.
The Company does not have a significant foreign exchange transaction
risk because the majority of its non-U.S. revenue is in U.S. dollars. The
remaining revenue is in British pounds sterling and the Company's underlying
cost is also in pounds sterling creating a natural foreign exchange protection.
I. COMPETITION
The Company is aware of a number of direct competitors in the field of
active noise and vibration attenuation. Indirect competition also exists in
the field of passive sound and vibration attenuation. The Company's principal
known competitors in active control systems are Andrea Electronics Corporation,
Bose Corporation, Digisonix (a division of Nelson Industries, Inc.), Hitachi,
Ltd., Group Lotus PLC and Lotus Cars Limited, Lord Corporation, Matsushita
Electric Industrial Co., Ltd., Sennheiser Electronic Corp., Sony Corporation
and Toshiba Corporation, among others. To the Company's knowledge, each of
such entities is pursuing its own technology in active
22
<PAGE> 23
control systems, either on its own or in collaboration with others, and has
recently commenced attempts to commercially exploit such technology. NCT also
believes that a number of other large companies, such as the major domestic and
foreign automobile and appliance manufacturers, and aircraft parts suppliers
and manufacturers, have research and development efforts underway in active
noise and vibration control. Many of these companies, as well as the Company's
potential competitors in the passive sound and vibration attenuation field and
other entities which could enter the active noise and vibration attenuation
field as the industry develops, are well established and have substantially
greater management, technical, financial, marketing and product development
resources than the Company.
J. GOVERNMENT CONTRACTS
The Company has acted as a government subcontractor in connection with
its performance of certain engineering and development services. Government
contracts provide for their cancellation at the government's sole discretion,
in which event the contractor or subcontractor may recover its actual costs up
to the date of cancellation, plus a specified profit percentage. Governmental
expenditures for defense are subject to the political process and to rapidly
changing world events, either or both of which may result in significant
reductions in such expenditures in the proximate future. Government contracts
are not viewed as a significant part of the Company's business.
K. RESEARCH AND DEVELOPMENT
Company-sponsored research and development expenses aggregated $4.8
million, $9.5 million and $8.0 million for the fiscal years ended
December 31, 1995, 1994 and 1993, respectively.
In addition, the Company's co-venturers and customers have funded
engineering and development expenditures to determine the feasibility of
applying the Company's technology to their requirements and to develop
functional prototypes for their potential applications. These expenditures are
estimated at $2.3 million, $4.2 million and $2.8 million for the fiscal years
ended December 31, 1995, 1994, and 1993, respectively.
L. ENVIRONMENTAL REGULATION COMPLIANCE
Compliance with Federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, does not have any material effect upon the
capital expenditures, earnings or competitive position of the Company.
Compliance by existing and potential customers of the Company with
Federal, state and local laws and regulations pertaining to maximum permissible
noise levels occurring from the operation of machinery or equipment or the
conduct of other activities could be beneficial to sellers of noise reduction
products and enhance demand for certain applications of the Company's
technology as well as products developed or to be developed by the Company.
However, at the present time it is too early to determine what quantitative
effect such laws and regulations will have on the sale of the Company's
products and technology.
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<PAGE> 24
M. EMPLOYEES
The Company had 73 employees on March 18, 1996. None of such
employees is represented by a labor union. The Company considers its
relationships with employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's executive office is located at the site of its research
and technical support laboratory in Linthicum, Maryland, where it leases
approximately 40,000 square feet of space under leases which expire in July
2000. The leases provide for current monthly rentals of approximately $35,000,
subject to annual inflationary adjustments
The Company's maintains a sales and marketing office in Stamford,
Connecticut where it leases approximately 2500 square feet of space under a
lease which expires in December 2001 and provides for a current monthly rental
of approximately $2,500.
The Company's United Kingdom operations are conducted in Cambridge,
England where it leases 12,500 square feet of space under a lease which expires
in March 1999, and provides for a current monthly rental of approximately
$14,000.
ITEM 3. LEGAL PROCEEDINGS
On or about June 15, 1995, Guido Valerio filed suit against the
Company in the Tribunal of Milan, Milan, Italy. The suit requests the Court to
award judgment in favor of Mr. Valerio as follows: (i) establish and declare
that a proposed independent sales representation agreement submitted to Mr.
Valerio by the Company and signed by Mr. Valerio but not executed by the
Company was made and entered into between Mr. Valerio and the Company on June
30, 1992; (ii) declare that the Company is guilty of breach of contract and
that the purported agreement was terminated by unilateral and illegitimate
withdrawal by the company; (iii) order the Company to pay Mr. Valerio $30,000
for certain amounts alleged to be owing to Mr. Valerio by the Company; (iv)
order the Company to pay commissions to which Mr. Valerio would have been
entitled if the Company had followed up on certain alleged contacts made by the
Valerio for an amount to be assessed by technicians and accountants from the
Court Advisory Service; (v) order the Company to pay damages for the harm and
losses sustained by Mr. Valerio in terms of loss of earnings and failure to
receive due payment in an amount such as shall be determined following
preliminary investigations and the assessment to be made by experts and
accountants from the Court Advisory Service and in any event no less than 3
billion Lira ($18.9 million); and (vi) order the Company to pay damages for
the harm done to Mr. Valerio's image for an amount such as the judge shall
deem equitable and in case for no less than 500 million Lira ($3.1 million).
The Company retained an Italian law firm as special litigation counsel to the
Company in its defense of this suit. On March 6, 1996, the Company, through its
Italian counsel, filed a brief of reply with the Tribunal of Milan setting
forth the Company's position that: (i) the Civil Tribunal of Milan is not the
proper venue for the suit, (ii) Mr. Valerio's claim is groundless since the
parties never entered into an agreement, and (iii) because Mr. Valerio is not
enrolled in the official Register of Agents, under applicable Italian law Mr.
Valerio is not entitled to any compensation for his alleged activities. A
hearing before the Tribunal of Milan is scheduled for May 30, 1996. 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.
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of stockholders of the Company was held on November
8, 1995. At the meeting, Jay M. Haft, John J. McCloy II, Michael J. Parrella,
Samuel A. Oolie and Alastair Keith were elected directors, each to serve until
the next annual meeting of stockholders and until their successors are elected
and qualified. The Stockholders also approved the adoption of the Noise
Cancellation Technologies, Inc. Option Plan for Certain Directors and ratified
the appointment of Richard A. Eisner & Company, LLP as the Company's
independent auditors for the year ending December 31, 1995. The vote taken at
such meeting was as follows:
(a) With respect to the election of the directors:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Jay M. Haft 65,307,071 1,489,958
John J. McCloy II 65,284,326 1,512,703
Michael J. Parrella 65,325,731 1,471,298
Samuel A. Oolie 65,342,531 1,454,498
Alastair Keith 65,346,531 1,450,498
</TABLE>
(b) With respect to the proposal to approve the adoption of the
Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors
<TABLE>
<CAPTION>
For Against Abstentions and Broker Non-votes
<S> <C> <C>
60,901,443 5,104,426 791,160
</TABLE>
(c) With respect to the proposal to ratify the selection of
Richard A. Eisner & Company, LLP independent auditors for the
Company's fiscal year ending December 31, 1995.
<TABLE>
<CAPTION>
For Against Abstentions and Broker Non-votes
<S> <C> <C>
65,650,780 768,478 377,771
</TABLE>
25
<PAGE> 26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) The Company's common stock is currently traded on the NASDAQ National
Market System under the symbol "NCTI". High and low last sale information for
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 $3 1/16 $1 13/16
2nd Quarter 13/16 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 1/2 7/16
</TABLE>
(b) At December 31 1995, there were approximately 4,104 record holders of
the Company's common stock.
(c) The Company has neither declared nor paid any dividends on its shares
of common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations.
26
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below are derived
from the historical financial statements of the Company. The data set forth
below is qualified in its entirety by and should be read in conjunction with
the Company's "Consolidated Financial Statements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that are
included elsewhere herein.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS AND SHARES)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS 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)(1) $ (17,191)(2) $ (21,907) $ (4,068)
Weighted average number of common
shares outstanding(3) 52,694 61,712 70,416 82,906 87,921
=========== ============ ========== ========== ==========
Net loss per share $ (0.04) $ (0.25)(1) $ (0.24)(2) $ (0.26) $ (0.05)
=========== ============ ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
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(4) 4,027 13,702 23,239 5,468 6,884
Working capital 1,971 11,038 19,990 923 1,734
</TABLE>
(1) Includes a one-time non-cash charge of $7,441,875 or $.12 per share for the
year ended December 31, 1992, related to the removal of the vesting
conditions to certain warrants. This charge removed any potential future
charge to earnings related to such warrants.
(2) In connection with the sale of Common Stock to Tenneco Automotive in
December 1993, the Company recognized its share of cumulative losses not
previously recorded with respect to its joint venture with Walker amounting
to $3,581,682.
(3) Does not include shares issuable upon the exercise of outstanding stock
options, warrants and, where applicable in 1991, outstanding shares of
Series A and Series B Convertible Preferred Stock, since their effect would
be antidilutive.
(4) The Company has never declared nor paid cash dividends on its Common Stock.
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL BUSINESS ENVIRONMENT
The Company is in transition from a firm focused principally on
research and development of new technology to a firm focused on the
commercialization of its technology through technology licensing fees,
royalties and product sales. 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.
28
<PAGE> 29
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 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.
29
<PAGE> 30
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 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.
30
<PAGE> 31
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).
31
<PAGE> 32
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.
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.
32
<PAGE> 33
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 QSI, a related party, (see Item 13. "Certain Relationships and Related
Transactions" and Note 3. - "Notes to the Consolidated Financial Statements")
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.
33
<PAGE> 34
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%.
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 had 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, 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
34
<PAGE> 35
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.
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
35
<PAGE> 36
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.)
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.
36
<PAGE> 37
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.
37
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS
The Reports of the Independent Accountants Richard A. Eisner &
Company, L.L.P. and Coopers & Lybrand L.L.P. and the financial statements and
accompanying notes are attached.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors and Accountants................................... F-1&2
Consolidated Balance Sheets, as of December 31, 1994, and 1995.................... F-3
Consolidated Statement of Operations, for the years ended
December 31, 1993, 1994 and 1995................................................ F-4
Consolidated Statements of Stockholders' Equity, for the years ended
December 31, 1993, 1994 and 1995................................................ F-5
Consolidated Statements of Cash Flows, for the years ended
December 31, 1993, 1994 and 1995................................................ F-6
Notes to the Consolidated Financial Statements.................................... F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Changes in independent accountants have been previously reported. See
the Company's Current Reports on Form 8-K filed on April 14, 1993 (as amended
on April 22, 1993), December 29, 1994 and January 6, 1995.
There have been no disagreements with independent accountants on
accounting and financial disclosure matters.
38
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The following table sets forth the names, ages, positions and the
offices held by each of the executive officers and directors of the Company as
of March 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
---- --- ---------------------
<S> <C> <C>
Jay M. Haft 60 Chief Executive Officer and Co-Chairman of the Board of
Directors
John J. McCloy II 58 Co-Chairman of the Board and Director
Michael J. Parrella 48 President and Director
Stephen J. Fogarty, CPA 46 Senior Vice President, Chief Financial Officer
Irene Lebovics 43 Senior Vice President, Marketing and Secretary
Jeffery Zeitlin 47 Senior Vice President, Operations
Cy E. Hammond 41 Vice President, Controller
Michael A. Hayes, Ph.D. 44 Vice President of Research
Samuel A. Oolie 59 Director
Alastair Keith 49 Director
</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 counsel to the law firm of Ruden,
Barnett, McClosky, Smith, Schuster & Russell, P.A. in Florida, 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. 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
39
<PAGE> 40
in 1986 after evaluating the application potential of the Company's noise
cancellation technology. At that time, he formed an investment group to acquire
control of the Board and to raise new capital to restructure the Company and
its research and development efforts. He was also Chairman of the Board of
Environmental Research Information, Inc., an environmental consulting firm,
from December 1987 to March 1991.
STEPHEN J. FOGARTY, CPA currently serves as Senior Vice President and
Chief Financial Officer of the Company. He joined the Company as Vice
President of Production in May 1990, was appointed a Senior Vice President in
January 1993 and subsequently appointed Chief Financial Officer on November
15, 1994. Between 1987 and 1990, he worked for Relay Communications, a
PC-to-PC and PC-to-mainframe communications software company, where he served
as Vice President and Chief Financial Officer and managed operations and
administration. Following that company's acquisition by Microcom Software in
1988, he served as Vice President of Operations. Prior to 1987, he spent over
12 years in public accounting, including 1976-1982 with Larsen Durgy & Fogarty
and 1982 - 1986 as a sole practitioner.
IRENE LEBOVICS currently serves as Senior Vice President, Marketing,
and President of NCT Headsets and as Secretary of the Company. She joined the
Company as Vice President of NCT and President of NCT Medical Systems (NCTM) in
July 1989. In March 1990 NCTM became part of NCT Personal Quieting and Ms.
Lebovics served as President. In January 1993 she was appointed Senior Vice
President of NCT. In November 1994, Ms. Lebovics became President of NCT
Headsets and on August 1, 1995, she became Secretary. Prior to joining NCT, Ms.
Lebovics worked for a software development company, Philon, Inc. where she
worked for six years and ultimately served as President. Prior to that time,
Ms. Lebovics held various positions in product marketing with Bristol-Myers, a
consumer products company, and in advertising with McCaffrey and McCall.
JEFFREY C. ZEITLIN currently serves as Senior Vice President of
Operations. He was initially a consultant to the Company in October 1995 and
became an employee in January 1996. Prior to joining the Company he was an
independent consultant for X-Ray Optical Systems, Inc., a high technology
start-up company, Ambase Corporation, a financial services holding
organization, and Liner Technology, Inc., a start-up manufacturing
organization. He has also served as Vice President and Chief Financial Officer
of CBI Holding Company, Inc., a drug wholesaler representing all major drug
manufacturers. From 1981 to 1992 Mr. Zeitlin served in several accounting and
treasury positions at Hoechst Celanese Corporation, the most recent of which
was Vice President of Venture Funds and Financial Projects. He is a Director
of Integrated Liner Technologies, Inc. of Watervliet, New York.
CY E. HAMMOND currently serves as Vice President and Controller of the
Company. He joined the Company as Controller in January 1990 and was appointed
a Vice President in February 1994. During 1989, he was Treasurer and Director
of Finance
40
<PAGE> 41
for Alcolac, Inc., a multinational specialty chemical producer. Prior to 1989
and from 1973, Mr. Hammond served in several senior finance positions at the
Research Division of W.R. Grace & Co., the last of which included management of
the division's worldwide financial operations.
MICHAEL A. HAYES, PH.D. currently serves as Vice President of Research
after joining the Company in 1996. During 1995 and 1994 Dr. Hayes served as
Deputy Project Director of Research support for Antarctic Support Associates as
their representative in Alaska. From 1991 to 1994 he served as Deputy Program
Manager of Special Payloads for Martin Marietta (formerly a division of General
Electric) while directly managing critical spacecraft sub-system and instrument
development for Goddard Space Flight Center. Prior to 1991 Dr. Hayes served in
several Senior Research positions at Texas Instruments and Georgia Institute of
Technology. Dr. Hayes received his Ph.D. in Plasma Physics from the
University of California, Davis in 1981. He received a M.S. in Applied Science
from the University of California, Davis in 1978 and a B.S. in Physics form the
University of California, San Diego in 1974.
SAMUEL A. OOLIE currently serves as a Director of the Company. He is
Chairman and Chief Executive Officer of NoFire Technologies, Inc., a
manufacturer of high performance fire retardant products, and has held 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 and Chairman of New Thermal Corp., an extruder of plastic
profiles for the window industry, since January 1991.
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
41
<PAGE> 42
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.
ITEM 11. EXECUTIVE COMPENSATION
THE EXCHANGE PROGRAM
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 Company's Stock Incentive Plan (the
"Incentive Plan") and the Company's Option Plan for Certain Directors (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 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
42
<PAGE> 43
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
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 5,055,499 shares of the Company's common stock for issuance upon their
exercise.
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 $100,000 for services rendered in all capacities.
43
<PAGE> 44
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------------
------------------------------------------------------- RESTRICTED OPTIONS
OTHER ANNUAL STOCK WARRANTS ALL OTHER
NAME AND POSITION YEAR SALARY ($) BONUS($) COMPENSATION ($) AWARDS SARS (#) COMPENSATION
- ------------------------------------- ------------------------------------------------------------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jay M. Haft 1995 $110,000(1) $ --- $ --- $ --- 1,187,000(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 1994 195,000 --- 9,458 --- 75,000 3,858
Vice 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 1994 110,000 --- --- --- --- ---
and 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. 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 1,000,000 shares of the
Company's common stock forfeited under the "Exchange Program" and
other activity for a net new grant of 387,000 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.
44
<PAGE> 45
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>
PERCENT OF
SHARES TOTAL OPTIONS POTENTIAL REALIZED VALUE AT
UNDERLYING AND WARRANTS ASSUMED ANNUAL RATES OF
OPTIONS GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
GRANTED(#) EMPLOYEES IN PRICE EXPIRATION OPTION AND WARRANT TERM(6)
(1) 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
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 exerciseable 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
"The Exchange Program."
(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. 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.
(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.
45
<PAGE> 46
1995 AGGREGATED OPTIONS AND WARRANT EXERCISES AND
DECEMBER 31, 1995 OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-
SHARES UNEXERCISED OPTIONS AND MONEY OPTIONS AND WARRANTS AT
ACQUIRED ON VALUE WARRANTS AT DECEMBER 31, 1995 DECEMBER 31, 1995
NAME 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>
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
46
<PAGE> 47
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 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
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<PAGE> 48
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 "The Exchange Program" above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
See "Item 13," which is incorporated by reference herein.
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<PAGE> 49
ITEM 12. SECURITY OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 20, 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>
Amount and Nature Approximate
Name of Beneficial Owner of Beneficial Ownership(1)(2) Percentage
of Class(1)(2)
- -------------------------------------------------------- ------------------------------------ -----------------------------
<S> <C> <C>
John J. McCloy II 1,985,717 (3) 2.05
Michael J. Parrella 2,605,565 (4) 2.65
Sam Oolie 1,204,562 (5) 1.25
Jay M. Haft 474,891 (6) 0.49
Alastair Keith 25,000 (7) 0.08
Stephen J. Fogarty 0 (8) 0
James W. Hiney 59,554 (9) 0.06
All executive officers & Directors as a
group (12 persons) 7,726,794 (10) 7.96
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.
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<PAGE> 50
(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 or options
subject to a Director's Standstill Agreement which will not become
exercisable until the action described above under "The Exchange Program"
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 and 810,000 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.
(5) Includes 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, 258,500 shares issuable upon the exercise
of New Options and 430,000 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.
(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 which
will not 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.
(10) Includes 915,781 shares issuable to 4 executive officers and Directors
of the Company upon the exercise of currently exercisable warrants,
309,554 shares issuable to 3 executive officers and directors of the
Company upon the exercise of currently exercisable options and 40,000
restricted shares issued to 3 directors of the Company. Excludes
2,184,750 shares issuable to 4 officers and directors of the Company
upon the exercise of New Warrants, 891,218 shares issuable to 5 officers
and directors of the Company upon the exercise of New Options and
2,390,000 shares issuable to 5 directors of the Company upon the exercise
of options subject to Directors' Standstill Agreements 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.
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<PAGE> 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1990, the Company's Board of Directors authorized the
issuance of warrants to acquire 420,000 shares of common stock to each of
Messrs. McCloy, Parrella and Oolie and Ms. Lebovics, exercisable through
September 30, 1994, at $.375 per share, being the market price of the Company's
common stock on the date of such authorization, based upon each such person's
commitment to extend his or her personal guarantee on a joint and several basis
with the others in support of the Company's attempt to secure bank or other
institutional financing, the amount of which to be covered by the guarantee
would not exceed $350,000. No firm commitment for any such financing has been
secured by the Company and at present no such financing is being sought.
However, each of such persons' commitment to furnish said guarantee continues
in full force and effect.
In 1989, the Company established a joint venture with Environmental
Research Information, Inc., ("ERI") to jointly develop, manufacture and sell
(i) products intended for use solely in the process of electric power
generation, transmission and distribution and which reduce noise and/or
vibration resulting from such process, (ii) personal quieting products sold
directly to the electric utility industry and (iii) products that reduce noise
and/or vibration emanating from fans and fan systems (collectively, "Power and
Fan Products"). In 1991, in connection with the termination of this joint
venture, the Company agreed, among other things, during the period ending
February 1996, to make payments to ERI equal to (i) 4.5% of the Company's sales
of Power and Fan Products and (ii) 23.75% of fees derived by the Company from
its license of Power and Fan Products technology, subject to an overall maximum
of $4,500,000. Michael J. Parrella, President of the Company, was Chairman of
ERI at the time of both the establishment and termination of the joint venture
and owns approximately 12% of the outstanding capital of ERI. In addition,
Jay M. Haft, Co-Chairman, and Chief Executive Officer of the Company, shares
investment control over an additional 24% of the outstanding capital of ERI.
The Company believes that the respective terms of both the establishment of
the joint venture with ERI and its termination were comparable to those that
could have been negotiated with other persons or entities. During the fiscal
year ended December 31, 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
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<PAGE> 52
company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the terms of
one of these Marketing Agreements, QSI has undertaken to use its best efforts
to seek research and development funding for the Company from electric and
natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System
on May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the
Company will record a charge for the amount by which the market price of the
Common Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1994, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for
non-retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products for which QSI is a
procuring cause in obtaining the first order from such customer. In the case
of sales to utility company customers, the commission is 6% of the revenues
received by the Company. On sales to original equipment manufacturers for
utilities, the commission is 6% on the gross revenue NCT receives on such sales
from the customer in the first year, 4% in the second year, 2% in the third
year and 1% in the fourth year, and .5% in any future years after the fourth
year. QSI is also entitled to receive a 5% commission on any research and
development funding it obtains for NCT, and on any license fees it obtains for
the Company from the license of the Company's technology. The initial term of
this Agreement is three years renewable automatically thereafter on a
year-to-year basis unless a party elects not to renew.
Under the terms of the second of the three Marketing Agreements, QSI
is granted a non-exclusive right to market the Company's products that are or
will be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is
entitled to receive commissions similar to those payable to end user and
original equipment manufacturer customers described above. QSI is also
entitled to receive the same 5% commission described above on research and
development funding and technology licenses which it obtains for the Company in
the feeder bowl area. The initial term of this Marketing Agreement is three
years with subsequent automatic one-year renewals unless a party elects not to
renew.
Under the terms of the third Marketing Agreement, QSI is granted an
exclusive right to market the Company's products that are or will be designed
and sold for use in or with equipment used by electric and/or natural gas
utilities for retrofit applications in North America. QSI is entitled to
receive a sales commission on any sales to a customer of such products equal to
129% of QSI's marketing expenses attributable to the marketing
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<PAGE> 53
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 for project management services.
In March 1995, the Company entered into an agreement with QSI (see
Note 8, - "Notes to the Consolidated Financial Statements") 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, - "Notes to the Consolidated
Financial Statements").
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 (Non-retrofit 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.
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<PAGE> 54
The Company believes that the terms of its agreements with QSI are
comparable to those that it could have negotiated with other persons or
entities.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) FINANCIAL STATEMENTS.
Reports of Independent Auditors and Accountants.
Consolidated Balance Sheets, as of December 31, 1994, and 1995
Consolidated Statements of Operations, for the years ended December 31, 1993,
1994 and 1995.
Consolidated Statements of Stockholders' Equity, for the years ended December
31, 1993, 1994 and 1995.
Consolidated Statements of Cash Flows, for the years ended December 31, 1993,
1994 and 1995.
Notes to the Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES.
Report of Independent Auditors and Accountants with Respect to Schedule.
Schedule:
II. Valuation and Qualifying Accounts.
Other financial statement schedules are omitted because the conditions
requiring their filing do not exist or the information required thereby is
included in the financial statements filed, including the notes thereto.
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<PAGE> 55
(3) EXHIBITS.
Exhibit Number Description of Exhibit
- -------------- ----------------------
3(a) Certificate of Incorporation, as amended, of
the Company, incorporated herein by reference to Exhibit 3(a) to Amendment No.
1 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
3(b) By-laws of the Company, incorporated herein
by reference to Exhibit 3(b) to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
4(a) Warrant to purchase 125,000 shares of Common
Stock of the Company at a purchase price of $.20 per share issued to John J.
McCloy II, incorporated herein by reference to Exhibit 4(a) to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of
Common Stock of the Company at a purchase price of $.75 per share issued to
John J. McCloy II.
4(c) Warrant #BW-2-R to purchase 862,500 shares of
Common Stock of the Company at a purchase price of $.75 per share issued to
Michael J. Parrella.
4(d) Warrant #BW-4-R to purchase 201,250 shares of
Common Stock of the Company at a purchase price of $.75 per share issued to
Irene Lebovics.
4(e) Warrant #BW-9-R and #BW-46-R to purchase
218,500 shares of Common Stock of the Company at a purchase price of
$.75 per share issued to Jay M. Haft.
4(f) Warrant Agreement, dated as of January 20,
1988, between the Company and American Stock Transfer Company, as Warrant
Agent, relating to certain warrants to purchase Common Stock of the Company at
a price of $.40 per share issued to Sam Oolie, Oolie Enterprises, John J.
McCloy II, and Michael J. Parrella, incorporated herein by reference to Exhibit
4(gg) to Amendment No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
*10(a) 1987 Incentive Stock Option Plan,
incorporated herein by reference to Exhibit 10(b) to Amendment No. 1 on Form
S-1 to the Company's Registration Statement on Form S-18 (Registration No.
33-19926).
*10(b) Stock Option Agreement, dated as of February
26, 1987, between the Company and John J. McCloy II, incorporated herein by
reference to Exhibit 10(b) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
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<PAGE> 56
*10(c) Stock Option Agreement, dated as of February
26, 1987, between the Company and Michael J. Parrella, incorporated herein by
reference to Exhibit 10(c) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
*10(d) Stock Option Agreement, dated as of February
26, 1987, between the Company and Sam Oolie, incorporated herein by reference
to Exhibit 10(d) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
*10(e) Stock Option Agreement, dated as of June 17,
1987, between the Company and John J. McCloy II, incorporated herein by
reference to Exhibit 10(f) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
*10(f) Stock Option Agreement, dated as of March 29,
1990, between the Company and Jay M. Haft, incorporated herein by reference to
Exhibit 10(m) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10(g) Lease, dated December 20, 1991, between West
Nursery Land Holding Limited Partnership ("West Nursery") and the Company, as
amended by a letter amendment, dated December 20, 1991, between West Nursery
and the Company, incorporated herein by reference to Exhibit 10(u) to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(h) Lease, dated February 26, 1991, between West
Nursery and the Company, as amended by a letter amendment, dated February 26,
1991, between West Nursery and the Company, incorporated herein by reference to
Exhibit 10(v) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10(i) Lease (undated), between West Nursery and the
Company, as amended by a letter amendment, dated April 23, 1990, between West
Nursery and the Company, incorporated herein by reference to Exhibit 10(w) to
Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10(j) Agreement, dated March 4, 1991, between West
Nursery and the Company as amended by the First Amendment of Agreement, dated
December 20, 1991, between West Nursery and the Company, incorporated herein by
reference to Exhibit 10(x) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
10(k) Patent Assignment Agreement, dated as of June
21, 1989, among George B.B. Chaplin, Sound Alternators Limited, the Company,
Active Noise and
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<PAGE> 57
Vibration Technologies, Inc. and Chaplin Patents Holding Co., Inc.,
incorporated herein by reference to Exhibit 10(aa) to Amendment No. 2 on Form
S-1 to the Company's Registration Statement on Form S-18 (Registration No.
33-19926).
10(l) Joint Venture and Partnership Agreement,
dated as of November 8, 1989, among the Company, Walker Manufacturing Company,
a division of Tenneco, Walker Electronic Mufflers, Inc. and NCT Muffler, Inc.,
incorporated herein by reference to Exhibit (c)(1) to the Company's Current
Report on Form 8-K, dated November 8, 1989, as amended on Form 8, dated January
24, 1990.
10(l)(1) Letter Agreement between Tenneco Automotive,
a division of Tennessee Gas Pipeline Company, and the Company dated November
22, 1993, incorporated herein by reference to Exhibit 10(a) to the Company's
Current Report on Form 8-K dated November 22, 1993.
10(l)(2) Stock Purchase Agreement between Tenneco
Automotive, a division of Tennessee Gas Pipeline Company, and the Company dated
December 14, 1993, incorporated herein by reference to Exhibit 10(b) to the
Company's Current Report on Form 8-K dated November 24, 1993.
10(l)(3) Transfer Agreement among Walker Manufacturing
Company a division of Tennessee Gas Pipeline Company, Walker Electronic
Mufflers, Inc., the Company, NCT Muffler, Inc., Chaplin Patents Holding Co.,
Inc. and Walker Noise Cancellation Technologies dated November 15, 1995. **
10(l)(4) License Agreement between Chaplin Patents
Holding Co., Inc. and Walker Electronic Mufflers, Inc. dated November 15,
1995. **
10(l)(5) License Agreement between the Company and
Walker Electronic Mufflers, Inc. dated November 15, 1995. **
10(l)(6) Support, Research and Development Agreement
among Walker Electronic Mufflers, Inc., the Company, NCT Muffler, Inc. and
Chaplin Patents Holding Co., Inc. dated November 15, 1995. **
10(l)(7) Mutual Limited Release by (i) the Company,
NCT Muffler, Inc. and Chaplin Patent Holding Co., Inc. and (ii) Tennessee Gas
Pipeline Company and Walker Electronic Mufflers, Inc. dated November 15, 1995.
10(m) Technical Assistance and License Agreement,
dated March 25, 1991, among the Company, Foster Electric Co., Ltd. and
Foster/NCT Headsets International Ltd., incorporated herein by reference to
Exhibit 10(nn) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.**
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<PAGE> 58
10(m)(1) Amendment, dated April 16, 1991, to Technical
Assistance and License Agreement, dated March 25, 1991, among the Company,
Foster Electric Co., Ltd. and Foster/NCT Headsets International Ltd.,
incorporated herein by reference to Exhibit 10(nn)(1) to Amendment No. 5 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10(m)(2) Letter Agreement between Foster Electric Co.,
Ltd. and the Company dated November 22, 1993, incorporated herein by reference
to Exhibit 10(b) to the Company's Current Report on Form 8-K dated November
22,1993.
10(m)(3) Letter agreement among Foster Electric Co.,
Ltd., Foster NCT Headsets International, Ltd. and the Company dated July 28,
1995, incorporated herein by reference to Exhibit 10(a) of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
10(n) Joint Development Cooperation Agreement,
dated June 28, 1991, between AB Electrolux and the Company, incorporated herein
by reference to Exhibit 10(oo) to Amendment No. 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.**
10(n)(1) Amendments to the Joint Development
Cooperation Agreement, dated June 28, 1991, between AB Electrolux and the
Company as set forth in the First Amendment to Joint Development Cooperation
Agreement, dated September 1, 1993, between AB Electrolux and the Company,
incorporated herein by reference to Exhibit 10(z)(1) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.**
10(n)(2) Second Amendment to Joint Development
Cooperation Agreement, dated January, 1994 between AB Electrolux and the
Company, incorporated herein by reference to the Exhibit 10(z)(2) to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
10(o) Letter Agreement, dated March 19, 1992,
between Siemens Medical Systems, Inc. and NCT Medical Systems, Inc.,
incorporated herein by reference to Exhibit 10(pp) to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10(o)(1) OEM Agreement between the Company and Siemens
AG dated November 24, 1993, incorporated herein by reference to Exhibit 10(a)
to the Company's Current Report on Form 8-K dated November 24, 1993.
*10(p) Stock Incentive Plan, as adopted on October
6, 1992, amended on April 14, 1993, and approved at the Annual Meeting of
Stockholders May 27, 1993, incorporated herein by reference to Exhibit 10(rr)
to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
58
<PAGE> 59
10(q) Marketing Agreement, dated January 4, 1993,
between Active Acoustical Solutions, Inc. and the Company, incorporated herein
by reference to Exhibit 10(ee) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
10(q)(1) Marketing Agreement (Non-retrofit Utility
Products), dated May 15, 1993, between Active Acoustical Solutions, Inc. and
the Company, incorporated herein by reference to Exhibit 10(ff) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
10(q)(2) Marketing, Engineering Services and
Distribution Agreement (Retrofit Transformer Products), dated May 15, 1993,
between Active Acoustical Solutions, Inc. and the Company, incorporated herein
by reference to Exhibit 10(gg) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
10(q)(3) Marketing Agreement (Feeder Bowls), dated May
15, 1993, between Active Acoustical Solutions, Inc. and the Company,
incorporated herein by reference to Exhibit 10(hh) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
10(q)(4) Teaming Agreement, dated September 29, 1993,
between Active Acoustical Solutions, Inc. and the Company, incorporated herein
by reference to Exhibit 10(ii) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
10(q)(5) Master Agreement between Noise Cancellation
Technologies, Inc. and Quiet Power Systems, Inc. dated March 27, 1995,
incorporated herein by reference to Exhibit 10(a) of the Company's Current
Report on Form 8-K filed with the Securities and Exchange commission on August
4, 1995.
10(q)(6) Letter Agreement between Noise Cancellation
Technologies, Inc. and Quiet Power Systems, Inc. dated April 21, 1995,
incorporated herein by reference to Exhibit 10(b) of the Company's Current
Report on Form 8-K filed August 4, 1995.
10(r) Asset Purchase Agreement, dated September 16,
1994, between Active Noise and Vibration Technologies, Inc. and the Company,
incorporated herein by reference to Exhibit 2 to the Company's Current Report
on Form 8-K filed September 19, 1994.
*10(s) Noise Cancellation Technologies, Inc. Option
Plan for Certain Directors, incorporated herein by reference to Exhibit 10 to
Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994.
59
<PAGE> 60
10(t) Variation of Teaming Agreement between Noise
Cancellation Technologies, Inc. and Ultra Electronics Limited dated April 6,
1995, incorporated herein by reference to Exhibit 10(c) of the Company's
Current Report on Form 8-K filed August 4, 1995.)
10(t)(1) Agreement for Sale and Purchase of
Part of the Business and Certain Assets among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra Electronics
Limited dated April 6, 1995, incorporated herein by reference to Exhibit 10(d)
of the Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(2) Patent License Agreement among Noise
Cancellation Technologies, Inc., Noise Cancellation Technologies (UK) Limited
and Ultra Electronics Limited dated April 6, 1995, incorporated herein by
reference to Exhibit 10(e) of the Company's Current Report on Form 8-K filed
August 4, 1995)
10(t)(3) License Agreement between Chaplin
Patents Holding Co., Inc. and Ultra Electronics Limited dated April 6, 1995,
incorporated herein by reference to Exhibit 10(f) of the Company's Current
Report on Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among
Noise Cancellation Technologies, Inc., Noise Cancellation Technologies (UK)
Limited and Ultra Electronics Limited dated May 15, 1995, incorporated herein
by reference to Exhibit 10(g) of the Company's Current Report on Form 8-K filed
August 4, 1995.
*10(u) Agreement among Noise Cancellation
Technologies, Inc., Noise Cancellation Technologies (UK) Limited, Dr. Andrew
John Langley, Dr. Graham Paul Eatwell and Dr. Colin Fraser Ross dated April 6,
1995, incorporated herein by reference to Exhibit 10(h) of the Company's
Current Report on Form 8-K filed August 4, 1995.)
11 Computation of net (loss) per share.
21 Subsidiaries.
23(a) Consent of Richard A. Eisner & Company, L.L.P.
23(b) Consent of Coopers & Lybrand L.L.P.
60
<PAGE> 61
27 Financial Data Schedule.
99(a) Letter from Coopers & Lybrand, Chartered Accountants, to
Richard A. Eisner & Company regarding audited financial
statements of the Company's U.K. subsidiaries and reports of
Coopers & Lybrand, Chartered Accountants, on their audits of
such financial statements, incorporated herein by reference
to Exhibit 99 to the Company's Annual Report on 10-K for the
fiscal year ended December 31, 1994.
99(b) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Richard A. Eisner & Company regarding audited financial
statements of the Company's U.K. subsidiaries and reports of
Peters Elworthy & Moore, Chartered Accountants, on their
audits of such financial statements.
- -----------
* Pertains to a management contract or compensation plan or
arrangement.
** Confidential treatment requested for portions of this document.
(b) The following report on Form 8-K was filed during the last quarter of
the period covered by this Report.
A report on Form 8-K was filed on December 19, 1995 reporting (i) the
sale of 4.8 million shares of the Common Stock of the Company in a private
placement on November 14, 1995, (ii) the execution of a series of related
agreements with Walker Manufacturing Company "Walker" on November 15, 1995
providing for the transfer of the Company's 50% interest in Walker Noise
Cancellation Technologies ("WNCT") to Walker, the elimination of the Company's
obligation to fund certain development work, the transfer to Walker of certain
tangible assets of the Company related to the business of WNCT, the expansion
of certain existing technology licenses from the Company and an affiliate of
the Company, and other related matters, and (iii) condensed consolidated
balance sheets (unaudited) of the Company and its subsidiaries as of September
30, 1995 and as of November 30, 1995, reflecting the transactions noted in the
foregoing clauses (i) and (ii).
61
<PAGE> 62
NOISE CANCELLATION TECHNOLOGIES (UK) LIMITED
AUDITORS REPORT TO THE MEMBERS
We have audited the financial statements on pages 6 to 17 which have been
prepared under the historical cost convention.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 3 the Company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgements made
by the directors in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the Company's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether cause by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Fundamental Uncertainty
In forming our opinion we have considered the adequacy of the disclosures made
in the financial statements concerning the basis of preparation. The financial
statements have been prepared on a going concern basis and the validity of this
depends on the Company's ability to meet its liabilities as they fall due. The
financial statements do not include any adjustments that would result from a
failure to continue to meet its liabilities. Details of the circumstances
relating to this fundamental uncertainty are described in note 1. Our opinion
is not qualified in this respect.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the Company's affairs at 31 December 1995 and of its profit and cashflows
for the year then ended and have been properly prepared in accordance with the
Companies Act 1985.
/s/ PETERS ELWORTHY & MOORE
Chartered Accountants and
Registered Auditor
CAMBRIDGE
7 March 1996
62
<PAGE> 63
Exhibit 21
NOISE CANCELLATION TECHNOLOGIES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION
- ---- OF INCORPORATION
OWNERSHIP OR ORGANIZATION EQUITY
- --------- --------------- ------
<S> <C> <C>
NCT Muffler, Inc. Delaware 100%
NCT Far East, Inc. Delaware 100%
NCT Medical Systems, Inc. Delaware 90%
Noise Cancellation Technologies, (UK) Limited UK 100%
2020 Science Limited UK 100%
Analog/NCT Supply Ltd. Delaware 50%
Chaplin Patents Holding Co., Inc. Delaware 100%
Harris NCT Supply L.L.C. Delaware 50%
OnActive Technologies, L.L.C. Delaware 50%
</TABLE>
63
<PAGE> 64
Exhibit 99(b)
[PETERS ELWORTHY & MOORE LETTERHEAD]
YOUR REF OUR REF PRC/J/5799 DATE 7 March 1996
Mr R Soreff
Richard A Eisner & Company
575 Madison Avenue
New York
NY10022 -2597
Dear Sirs
We enclose the audited financial statements for Noise Cancellation Technologies
(UK) Limited for the year ended 31 December 1995.
These statements have been prepared in accordance with applicable Accounting
Standards in the United Kingdom and audited in accordance with Auditing
Standards issued by the Auditing Practices Board.
As a result of our review of the financial statements we are not aware of any
significant deviations from United States generally accepted accounting
principles.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
- ---------------------------
64
<PAGE> 65
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration
statements of Noise Cancellation Technologies, Inc. on Form S-3 (File Nos.
33-47611, 33-51468, 33-74442 and 33-84694), on Form S-1 (File Nos. 33-19926,
33-38584 and 33-44790) and on Form S-8 (File No. 33-64792) of our report dated
March 8, 1996 (with respect to Note 15, April 10, 1996), on our audits of the
financial statements and financial statements and schedules of the Company as
of December 31, 1995 and December 31, 1994 and for the years ended December
31, 1995 and December 31, 1994 which report is included in this Annual Report
on Form 10-K.
/s/ Richard A. Eisner & Company, L.L.P.
- ---------------------------------------
Richard A. Eisner & Company, L.L.P.
New York, New York
April 10, 1996
65
<PAGE> 66
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Noise Cancellation Technologies, Inc. (the "Company") on Form S-3 (File Nos.
33-47611, 33-51468, 33-74442 and 33-84694), on Form S-1 (File Nos. 33-19926,
33-38584 and 33-44790) and on Form S-8 (File No. 33-64792) of our report dated
March 24, 1994, except as to the third paragraph therein related to certain
subsequent uncertainties for which the date is December 19, 1994, on our audit
of the financial statements and financial statement schedule of the Company for
the year ended December 31, 1993, which report is included in this Annual
Report on Form 10-K.
Such report contains a paragraph which emphasizes certain uncertainties
(unaudited) arising subsequent to the date of our original report that indicate
that at December 19, 1994 the Company may be unable to continue as a going
concern through 1995.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
April 11, 1996
66
<PAGE> 67
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ Jay M. Haft Date: April 15, 1996
------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- -----
<S> <C> <C>
/s/ John J. McCloy II Co-Chairman of the Board of Directors April 15, 1996
- ---------------------
John J. McCloy II
/s/ Michael J. Parrella President and Director April 15, 1996
- -----------------------
Michael J. Parrella
/s/ Stephen J. Fogarty Senior Vice President and
- ---------------------- Chief Financial Officer April 15, 1996
Stephen J. Fogarty (Principal Financial and
Accounting Officer)
/s/ Samuel A. Oolie Director April 15, 1996
- -------------------
Samuel A. Oolie
/s/ Jay M. Haft Chief Executive Officer, and Co-Chairman of
- ---------------- the Board of Directors April 15, 1996
Jay M. Haft (Principal Executive Officer)
/s/Alastair Keith Director April 15, 1996
- -----------------
Alastair Keith
</TABLE>
67
<PAGE> 68
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 & CO., LLP
- -----------------------------------
Richard A. Eisner & Co., LLP
New York, New York
March 8, 1996
With respect to Note 15
April 10, 1996
F-1
<PAGE> 69
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
F-2
<PAGE> 70
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands of dollars)
December 31,
-------------------------------------------
ASSETS 1994 1995
------------------- ------------------
<S> <C> <C>
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.
F-3
<PAGE> 71
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
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.
F-4
<PAGE> 72
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands of dollars and shares)
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>
(In thousands of dollars and shares)
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.
F-5
<PAGE> 73
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.
F-6
<PAGE> 74
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
F - 7
<PAGE> 75
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
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.
F - 8
<PAGE> 76
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.
F - 9
<PAGE> 77
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.
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
F - 10
<PAGE> 78
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.
F - 11
<PAGE> 79
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 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.
F - 12
<PAGE> 80
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
F - 13
<PAGE> 81
from CPH. The joint venture agreement related to the Chaplin Patents required
that the Company may only license or share the related technology with entities
who are affiliates of the Company. As a result, the Company has established
several joint ventures and formed other strategic alliances to further develop
the technology and electronic systems and components based on the Chaplin
Patents, to develop such technology into commercial applications, to integrate
the electronic systems into existing products and to distribute such systems
and products into various industrial, commercial and consumer markets. Initial
capital contributions by the Company and ANVT of $150,000 each to CPH were used
to acquire certain rights owned by the third party. Pursuant to the patent
license agreement, and until September 16, 1994 the Company and ANVT
contributed cash equally to CPH to fund administrative costs and provide for
maintenance and protection of the related patents. After September 16, 1994,
the Company, as sole shareholder of CPH, was responsible for 100% of CPH's
funding requirements. 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.
F - 14
<PAGE> 82
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 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
F - 15
<PAGE> 83
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
F - 16
<PAGE> 84
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.
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.
F - 17
<PAGE> 85
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 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
F - 18
<PAGE> 86
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.
F - 19
<PAGE> 87
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 collaterlization restrictions and the
Common Stock subscription receivable was reduced. During 1995, $1.3 million of
such services and assets were purchased by the Company and, at the Company's
election was satisfied through the discharge of an equivalent amount of the
Foster Notes. As of December 31, 1995, the Foster Notes have been
paid-in-full.
Foster and the Company's wholly owned subsidiary, NCT Far East
("NCTFE") entered into a marketing agreement in November 1991 under which
Foster agreed to fund up to $500,000 for the establishment of a marketing
office in Tokyo. This funding was reimbursed through the issuance of 150,000
shares of common stock of the Company to Foster in 1992 and future payments to
Foster by NCTFE equal to 25% of NCTFE pretax profits, as defined, until Foster
has recovered 100% of funding in excess of $300,000. The market value of the
Company's common stock issued to Foster ($300,000) was charged to operations in
1992. Through December 31, 1995, $185,200 has been funded by Foster under the
marketing agreement. Further, commissions payable by NCTFE to Foster under
this agreement are based upon sales by customer and 5% of any engineering and
development or working capital funding acquired through Foster's efforts.
F - 20
<PAGE> 88
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
F - 21
<PAGE> 89
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.
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>
F - 22
<PAGE> 90
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.
F - 23
<PAGE> 91
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 SUBSCRIPTIONS 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 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.
F - 24
<PAGE> 92
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.
F - 25
<PAGE> 93
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. 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.
F - 26
<PAGE> 94
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>
F - 27
<PAGE> 95
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>
DECEMBER 31,
EXERCISE PRICE ------------------------------
PER SHARE EXPIRATION DATE 1994 1995
- ------------------- ------------------ --------------- ------------
<S> <C> <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 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
F - 28
<PAGE> 96
(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.
F - 29
<PAGE> 97
Under the terms of the second of the three Marketing Agreements, QSI
is granted a non-exclusive right to market the Company's products that are or
will be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is
entitled to receive commissions similar to those payable to end user and
original equipment manufacturer customers described above. QSI is also
entitled to receive the same 5% commission described above on research and
development funding and technology licenses which it obtains for the Company in
the feeder bowl area. The initial term of this Marketing Agreement is three
years with subsequent automatic one-year renewals unless a party elects not to
renew.
Under the terms of the third Marketing Agreement, QSI is granted an
exclusive right to market the Company's products that are or will be designed
and sold for use in or with equipment used by electric and/or natural gas
utilities for retrofit applications in North America. QSI is entitled to
receive a sales commission on any sales to a customer of such products equal to
129% of QSI's marketing expenses attributable to the marketing of the products
in question, which expenses are to be deemed to be the lesser of QSI's actual
expenses or 35% of the revenues received by the Company from the sale of such
products. QSI is also entitled to receive a 5% commission on research and
development funding similar to that described above. QSI's exclusive rights
continue for an indefinite term provided it meets certain performance criteria
relating to marketing efforts during the first two years following product
availability in commercial quantity and minimum levels of product sales in
subsequent years. In the event QSI's rights become non-exclusive, depending on
the circumstances causing such change, the initial term then becomes either
three or five years from the date of this Marketing Agreement, with subsequent
one-year automatic renewals in each instance unless either party elects not to
renew. During the fiscal year ended December 31, 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).
F - 30
<PAGE> 98
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 (Non-retrofit 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 determines that it is more
likely than not that a deferred tax asset will not be realized. The Company's
temporary differences primarily result from depreciation related to machinery
and equipment, compensation expense related to warrants, reserves and equity in
losses of unconsolidated affiliates. The adoption of the aforementioned
accounting standard had no effect on previously reported results of operations.
F-31
<PAGE> 99
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:
F - 32
<PAGE> 100
<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, 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.
F - 33
<PAGE> 101
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.
F - 34
<PAGE> 102
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).
F - 35
<PAGE> 103
12. INFORMATION ON BUSINESS SEGMENTS:
The Company operates in only one business segment, specifically
engaged in the design, development, production and distribution of electronic
systems that actively reduce noise and vibration. The Company's worldwide
activities consist of operations in the United States, Europe and Japan.
Revenue, (income) loss and identifiable assets by geographic area are as
follows:
<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>
F - 36
<PAGE> 104
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>
F - 37
<PAGE> 105
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
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.)
F - 38
<PAGE> 106
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
Board of Directors and Stockholders
Noise Cancellation Technologies, Inc.
The audits referred to in our report dated March 8, 1996, included Schedule
II for the years ended December 31, 1995 and December 31, 1994. In our
opinion, such schedule presents fairly the information set forth therein in
compliance with the applicable accounting regulation of the Securities and
Exchange Commission.
/s/Richard A. Eisner & Company, L.L.P.
- --------------------------------------
Richard A. Eisner & Compnay, L.L.P.
New York, New York
March 8, 1996
S-1
<PAGE> 107
SCHEDULE II
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------------
(1) (2)
-----------------------------------
Balance at Charged to Charged to
beginning of costs and other accounts - Deductions Balance at
Description Period expenses describe describe end of period
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Allowance for doubtful accounts $ $ 30,000 $ 153,727 $ 183,727
----------- ---------- ---------------- ----------- ----------
Year ended December 31, 1994:
Allowance for doubtful accounts $ 183,727 $ 871,395 $ 153,727 $ 901,395
----------- ---------- ---------------- ----------- ----------
Year ended December 31, 1995:
Allowance for doubtful accounts $ 901,395 $ 551,812 1,333,827(2) $ 119,380
----------- ---------- ---------------- ----------- ----------
Year ended December 31, 1993:
Allowance for inventory obsolence $ $ 170,000 $ 170,000
=========== ========== ================ =========== ==========
Year ended December 31, 1994:
Allowance for inventory obsolence $ 170,000 $1,855,289 $2,025,289
----------- ---------- ---------------- ----------- ----------
Year ended December 31, 1995:
Allowance for inventory obsolence $ 2,025,289 $ 452,004 $2,122,293(1) $ 355,000
----------- ---------- ---------------- ----------- ----------
</TABLE>
Attention is directed to the foregoing accountant's report's and to the
accompanying notes to the consolidated financial statements S-2
(1) To write off reserves applied to December 31, 1994 inventory.
(2) To write off fully reserved accounts receivable deemed uncollectible at
December 31, 1995.
<PAGE> 1
EXHIBIT 11
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
COMPUTATION OF NET (LOSS) PER SHARE
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Year Ended December 31,
---------------------------------------------
1993 1994 1995
------------ ------------ -------------
PRIMARY
<S> <C> <C> <C>
Net (loss) ($17,191) ($21,907) ($4,068)
Less: reduction of interest expense
or interest earned attributable to
utilization of assumed proceeds
from exercise of options and
warrants in excess of amounts
required to repurchase 20% of
the outstanding common stock at
average market price
------------ ------------ -------------
ADJUSTED NET (LOSS) ($17,191) ($21,907) ($4,068)
============ ============ =============
Weighted average number of shares outstanding 70,416 82,906 87,921
Add: common equivalent shares (determined
using the "Treasury Stock" method) representing
shares issuable upon assumed exercise of
options and warrants in excess of average
market price 9,221 5,488 4,428
Shares issuable upon conversion of Series B
preferred shares -- -- --
------------ ------------ -------------
SHARES USED FOR COMPUTATION 79,637 88,394 92,349
============ ============ =============
PRIMARY NET (LOSS) PER SHARE ($0.22) ($0.25) ($0.04)
============ ============ =============
FULLY DILUTED
Net (loss) ($17,191) ($21,907) ($4,068)
Less: reduction of interest expense
or interest earned attributable to
utilization of assumed proceeds
from exercise of options and
warrants in excess of amounts
required to repurchase 20% of
the outstanding common stock at
year-end market price if greater
than average market price
------------ ------------ -------------
ADJUSTED NET (LOSS) ($17,191) ($21,907) ($4,068)
============ ============ =============
Weighted average number of shares outstanding 70,416 82,906 87,921
Add: common equivalent shares (determined
using the "Treasury Stock" method) representing
shares issuable upon assumed exercise of
options and warrants in excess of year-end
market price if greater than average
market price 9,221 5,488 4,428
Shares issuable upon conversion of Series B
preferred shares -- -- --
------------ ------------ -------------
SHARES USED FOR COMPUTATION 79,637 88,394 92,349
============ ============ =============
FULLY DILUTED NET (LOSS) PER SHARE ($0.22) ($0.25) ($0.04)
============ ============ =============
</TABLE>
The above per share data are not reported on the statement of operations because
such data is anti-dilutive.
