SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/X / Definitive Proxy Statement
/X / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Noise Cancellation Technologies, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2)Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3)Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4)Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5)Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
One Dock Street, Suite 300
Stamford, Connecticut 06902
Tel: 203-961-0500, Extension 388
Fax: 203-348-4106
May 15, 1997
Securities and Exchange Commission
Washington, DC 20549
Ladies and Gentlemen:
Filed herewith are the Definitive Proxy Statement and Definitive Additional
Materials relating to the 1997 Annual Meeting of Stockholders of Noise
Cancellation Technologies, Inc. consisting of the following items:
1) Schedule 14-A
2) Notice of Annual Meeting of Stockholders
3) Proxy Statement
4) Proxy Card
5) 1996 Annual Report to Stockholders
Sincerely,
/s/ JOHN B. HORTON
- -----------------------
John B. Horton
General Counsel
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 West Nursery Road Suite 120
Linthicum, Maryland 21090
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 19, 1997
---------------
To the Stockholders of NOISE CANCELLATION TECHNOLOGIES, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Noise
Cancellation Technologies, Inc., a Delaware corporation (the "Company"), will be
held at the Stamford Marriott Hotel, The Stamford Forum, Stamford, Connecticut
06901 on Thursday, June 19, 1997, at 2:00 P.M., for the following purposes:
1.To elect four directors for the year following the Annual Meeting or until
their successors are elected.
2.To approve the amendment of the Company's Certificate of Incorporation to
increase the number of shares of Common Stock authorized thereunder from
140,000,000 shares to 185,000,000 shares.
3.To approve the extension of certain warrants owned by certain officers and
directors of the Company.
4.To ratify the appointment of Richard A. Eisner & Company, LLP as the
Company's independent auditors for the fiscal year ending December 31,
1997.
5.To transact such other business as may properly come before the Meeting.
Only stockholders of record at the close of business on April 21, 1997, are
entitled to notice of and to vote at the Meeting or at any adjournment thereof.
JOHN B. HORTON
Secretary
Linthicum, Maryland
May 14, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY SIGN THE ACCOMPANYING PROXY, WHICH
IS SOLICITED BY THE COMPANY'S BOARD OF DIRECTORS, AND MAIL IT IN THE ENCLOSED
POSTAGE PAID ENVELOPE. ANY STOCKHOLDER MAY REVOKE HIS OR HER PROXY AT ANY TIME
BEFORE THE MEETING BY WRITTEN NOTICE TO SUCH EFFECT, BY SUBMITTING A
SUBSEQUENTLY DATED PROXY OR BY ATTENDING THE MEETING AND VOTING IN PERSON.
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 West Nursery Road Suite 120
Linthicum, Maryland 21090
-------------------------
PROXY STATEMENT
-------------------------
SOLICITATION OF PROXY, REVOCABILITY AND VOTING
Solicitation
This Proxy Statement is being mailed on or about May 14, 1997, to all
stockholders of record at the close of business on April 21, 1997, in connection
with the solicitation by the Board of Directors of Proxies for the Annual
Meeting of Stockholders to be held on June 19, 1997. Proxies will be solicited
by mail, and all expenses of preparing and soliciting such proxies will be paid
by the Company. All proxies duly executed and received by the persons designated
as proxy thereon will be voted on all matters presented at the Meeting in
accordance with the instructions given thereon by the person executing such
Proxy or, in the absence of specific instructions, will be voted in favor of
each of the proposals indicated on such Proxy. Management does not know of any
other matter that may be brought before the Meeting, but, in the event that any
other matter should properly come before the Meeting, or any nominee should not
be available for election, the persons named as proxy will have authority to
vote all proxies not marked to the contrary in their discretion as they deem
advisable.
Revocability
Any stockholder may revoke his or her Proxy at any time before the Meeting by
written notice to such effect received by the Company at the address shown
above, attention: Corporate Secretary, by delivery of a subsequently dated
Proxy, or by attending the Meeting and voting in person.
Voting
The total number of shares of common stock of the Company outstanding as of
April 21, 1997, was 119,028,933. The common stock is the only class of
securities of the Company entitled to vote, each share being entitled to one
noncumulative vote. Only stockholders of record as of the close of business on
April 21, 1997, will be entitled to vote. A majority of the shares outstanding
and entitled to vote, or 59,514,467 shares, must be present at the Meeting in
person or by proxy in order to constitute a quorum for the transaction of
business. The affirmative vote of a majority of all of the outstanding shares of
common stock of the Company is required to approve the amendment of the
Company's Certificate of Incorporation. The affirmative vote of a plurality of
the shares of common stock present and voting in person or by proxy at the
Meeting is required to elect directors and the affirmative vote of a majority of
the shares of common stock present and voting in person or by proxy at the
Meeting is required to approve the extension of certain warrants owned by
certain officers and directors of the Company, to ratify the appointment of the
Company's independent auditors for the year ending December 31, 1997, and to
transact such other business as may properly come before the Meeting. With
respect to abstentions, shares are considered present at the Meeting for a
particular proposal, but as they are not affirmative votes for the proposal,
they will have the same effect as votes against the proposal. With respect to
broker non-votes, shares are not considered present at the Meeting for the
particular proposal for which the broker withheld authority and, accordingly,
will have the same effect as votes against approval of the amendment of the
Company's Certificate of Incorporation and will have no effect on the other
proposals.
A list of stockholders entitled to vote at the Meeting will be available at
the Company's offices, 1025 West Nursery Road Suite 120 Linthicum, Maryland
21090, for a period of ten (10) days prior to the Meeting for examination by any
stockholder, and at the Meeting itself.
ELECTION OF DIRECTORS
Four directors are to be elected at the Annual Meeting of Stockholders to
serve until the next Annual Meeting of Stockholders of the Company and until
their successors are elected and qualified. Proxies not marked to the contrary
will be voted in favor of the election of each named nominee.
<PAGE>
Information Concerning Nominees
The following table sets forth the positions and offices presently held with
the Company by each nominee, his age, and the year from which such nominee's
service on the Company's Board of Directors dates:
Positions and Offices Director
Name Age Presently Held with the Since
Company
- ----------------- ----- ---------------------------- --------
Jay M. Haft 61 Chairman of the Board and 1990
Director
Michael J. 49 President and Director 1986
Parrella
John J. McCloy II 59 Director 1986
Sam Oolie 60 Director 1986
Jay M. Haft currently serves as Chairman of the Board of Directors of the
Company. He served as President of the Company from November 1994 to July 1995
and as Co-Chairman of the Board of Directors from November 1994 to July 1996. He
is a strategic and financial consultant for growth stage companies. He is active
in international corporate finance, mergers and acquisitions, as well as in the
representation of emerging growth companies. He has actively participated in
strategic planning and fund raising for many high-tech companies, leading edge
medical technology companies and technical product, service and marketing
companies. He is a Managing General Partner of Venture Capital Associates, Ltd.
and of Gen Am "1" Venture Fund, a domestic and an international venture capital
fund, respectively. Mr. Haft is also a Director of numerous other public and
private corporations, including Robotic Vision Systems, Inc. (OTC), Extech Inc.
(OTC), Encore Medical Corp. (OTC), Viragen, Inc. (OTC), PC Service Source, INC.
(OTC), DUSA Pharmaceuticals, Inc. (OTC), Oryx Technology Corp. (OTC) and Jenna
Lane, Inc. (OTC). He serves as Chairman of the Board of Extech, Inc. and Jenna
Lane, Inc. He is currently of counsel to Parker Duryee Rosoff & Haft, in New
York. He was previously a senior corporate partner of such firm (1989-1994), and
prior to that a founding partner of Wolfsey, Certilman, Haft, et. al.
(1966-1988). He is a member of the Florida Commission for Government
Accountability to the People, a Vice President of the Miami Ballet and a
Director of the Concert Association of Florida. He is a graduate of Yale College
and Yale Law School.
Michael J. Parrella currently serves as President and Director of the
Company. He was elected President and Chief Operating Officer of the Company in
February 1988 and served in that capacity until November 1994. From November
1994 to July 1995 Mr. Parrella served as Executive Vice President of the
Company. He initially became a director in 1986 after evaluating the application
potential of the Company's noise cancellation technology. At that time, he
formed an investment group to acquire control of the Board and to raise new
capital to restructure the Company and its research and development efforts. He
was also Chairman of the Board of Environmental Research Information, Inc., an
environmental consulting firm, from December 1987 to March 1991.
John J. McCloy II currently serves as a Director of the Company. He served
as Co-Chairman of the Board of Directors from November 1994 to July 1996. Mr.
McCloy 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.
Sam Oolie currently serves as a Director of the Company. He is Chairman and
Chief Executive Officer of NoFire Technologies, Inc., a manufacturer of high
performance fire retardant products, and has held that position since August
1995. He is also Chairman of Oolie Enterprises, an investment company, and has
held that position since July 1985. Mr. Oolie currently serves as a director of
Avesis, Inc. and Comverse Technology, Inc. He has also been a director of CFC
Associates, a venture capital partnership, since January 1984.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish the
Company with copies of all such reports. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no reports were required for those persons, the Company
believes that, during the period from January 1, 1996, to December 31, 1996, all
filing requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with.
<PAGE>
Information Concerning the Board
The Board of Directors of the Company held twelve meetings (not including
three actions by unanimous written consent) during the fiscal year ended
December 31, 1996. Other than Mr. McCloy, no incumbent director during such time
was in attendance at fewer than 75% of the aggregate of: (i) the total number of
meetings of the Board of Directors held during the period; and (ii) the total
number of meetings held by all committees of the Board of Directors on which he
served.
The Company has an Executive Committee, a Compensation Committee and an Audit
Committee. The Executive Committee was appointed by the Board of Directors on
July 17, 1996, and is composed of Messrs. Haft and Parrella. The Executive
Committee has the authority and responsibility of acting in the place and stead
and on behalf of a Chief Executive Officer of the Company and of exercising all
the powers of that office. During the fiscal year ended December 31, 1996, the
members of the Executive Committee conferred with each other not less frequently
than once each week.
The Company had an Option Committee until August 26, 1996, at which time its
authority and responsibilities were assumed by the Board of Directors until
April 10, 1997, when they were assumed by the Compensation Committee appointed
by the Board of Directors on that date. During the period between August 26,
1996, and April 10, 1997, the authority and responsibilities of the Compensation
Committee were assumed by the Board of Directors. The Compensation Committee,
which reviews and determines the compensation of the Company's senior management
and now performs the duties of the former Option Committee hereinafter
described, is composed of Messrs. Haft, McCloy, and Oolie. The Option Committee
reviewed and took action with respect to matters relating to the grant or
issuance of warrants or options to acquire shares of the Company's common stock
and other securities of the Company or rights to acquire other derivative
securities of the Company and in this regard to establish and provide for the
administration of plans under which any of the same may be granted or issued.
The Option Committee was composed of Messrs. McCloy and Oolie, each of whom was
a "disinterested person" as defined under Rule 16b-3 promulgated under the
Exchange Act. During the fiscal year ended December 31, 1996, the Compensation
Committee held 1 meeting, and the Option Committee took all of its action by
unanimous written consent on three occasions.
The Audit Committee, which reviews the activities of the Company's
independent auditors and which is composed of Messrs. McCloy and Oolie held one
meeting during the fiscal year ended December 31, 1996.
The Company does not have a nominating committee. The functions of
recommending potential nominees for Board positions are performed by the Board
as a whole. The Board will consider stockholder recommendations for Board
positions which are made in writing to the Company's Chairman of the Board of
Directors.
Directors' Fees, Restricted Stock and Stock Options
None of the Company's directors received any fees for his services as a
director during 1996, except that under the Noise Cancellation Technologies,
Inc. Stock Incentive Plan (the "Incentive Plan"), each non-employee director of
the Company is granted 5,000 restricted shares of the Company's common stock
each year for service as a director of the Company. Such restricted shares are
granted to each non-employee director upon his or her initial election to the
Board and upon each subsequent election. All of such restricted shares are made
subject to a restriction period of three (3) years from the date of grant during
which such shares may not be transferred or encumbered. On July 17, 1996, 5,000
restricted shares were granted to each of Messrs. Keith, and Oolie, pursuant to
the Incentive Plan. In addition, all new non-employee directors will be granted
stock options for 75,000 shares of the Company's common stock as an inducement
to become members of the Board of Directors. Such grants will be made upon a new
director's initial election to the Board of Directors at an exercise price equal
to the market value of the Company's common stock on the date of grant. Such
options will vest as to 25,000 shares on the date of initial election to the
Board of Directors and 25,000 shares on each of the first and second
anniversaries of such election.
<PAGE>
AMENDMENT OF CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED CAPITALIZATION
The Board of Directors has approved and declared advisable an amendment to
the Company's Certificate of Incorporation to increase the number of shares of
common stock, par value $.01 per share, which the Company shall be authorized to
issue, from 140,000,000 to 185,000,000. As of the record date, the Company had
outstanding 119,028,933 shares of common stock and had reserved an additional
19,615,220 shares of common stock for issuance upon the conversion of
convertible debentures and the exercise of options and warrants. The Board
believes such action to be in the best interest of the Company so as to make
additional shares of common stock available for obligations undertaken by the
Company in connection with the "Verity Transaction" described below,
acquisitions, public or private financings, stock splits and dividends, present
and future employee benefit programs and other corporate purposes. Except as
noted in the next sentence, the Company does not have any plans, arrangements or
understandings for the issuance of any of such additional shares. For the
reasons set forth in the immediately succeeding paragraphs describing the
"Verity Transaction" and the sale by the Company of certain convertible
debentures, the Company plans to reserve: (i) 3,850,000 shares of such
additional shares for issuance upon the exercise of the option granted to Verity
Group PLC in the Verity Transaction; and (ii) 2,596,132 shares of such
additional shares for issuance upon the exercise of options granted or to be
granted and future grants of restricted stock awards under the Incentive Plan.
In March and April 1997, the Company, Verity Group PLC, a leading
audio-speaker manufacturer headquartered in London, ("Verity") and New
Transducers Limited, a wholly owned subsidiary of Verity ("NTL") entered into a
technology cross licensing agreement and certain other related agreements (the
"Verity Transaction"). Under terms of the agreements included in the Verity
Transaction, the Company has licensed patents and patents pending which relate
to Flat Panel Transducer(TM) technology to NTL, and NTL has licensed patents and
patents pending which relate to parallel technology to the Company. In
consideration of the license granted to Verity and NTL, the Company received
3,350,000 ordinary shares of Verity as well as royalties on future licensing and
product revenue. At the time the agreements were signed, the price of an
ordinary share of Verity as traded on the London Stock Exchange was
approximately $0.90. The Company and Verity also executed agreements granting
each an option for a four year period commencing on March 28, 1998, to acquire a
specified amount of the common stock of the other subject to certain conditions
and restrictions. With respect to the Company's option to Verity (the "Verity
Option"), 3,850,000 shares of common stock (approximately 3.4% of the then
issued and outstanding common stock) of the Company are covered by such option.
5,000,000 ordinary shares (approximately 2.0% of the then issued and outstanding
ordinary shares) of Verity are covered by the option granted by Verity to the
Company. The exercise price under each option is the fair value of a share of
the applicable stock on the date negotiations concerning the applicable
agreements were concluded which, with respect to the Company's common stock, was
$0.30 per share. If the Company does not obtain stockholder approval of an
amendment to its Certificate of Incorporation increasing its authorized common
stock by an amount sufficient to provide shares of the Company's common stock
for issuance upon the full exercise of the option granted to Verity by September
30, 1997, both options expire.
If the stockholders approve the amendment to the Company's Certificate of
Incorporation (the "Amendment") increasing the authorized common stock from
140,000,000 shares of such stock to 185,000,000 shares, upon the requisite
filing of the Amendment with the Secretary of State of the State of Delaware
(the "Filing"), the Company will reserve up to 3,850,000 of such newly
authorized shares for issuance upon the exercise of the Verity Option.
During the first quarter of 1997, in order to obtain additional working
capital, the Company sold $3,175,000 aggregate principal amount of 8% non-voting
subordinated convertible debentures ("Debentures") to five offshore investors
pursuant to Regulation S under the Securities Act of 1933, as amended (the
"Securities Act"). One such investor has subscribed to purchase an additional
$500,000 aggregate principal value of Debentures once it has converted one-half
of the Debentures which it had purchased initially. In order to make sufficient
shares of common stock available for issuance upon the conversion of the
Debentures by such investors, the Company un-reserved 2,596,132 shares of its
common stock previously reserved for issuance under the Incentive Plan and
reserved such shares for issuance upon conversion of the Debentures. If the
stockholders approve the Amendment as described above, then upon the Filing, the
Company will reserve 2,596,132 of the newly authorized shares covered by the
Amendment for issuance under the Incentive Plan.
The additional shares of common stock to be authorized pursuant to the
Amendment may be issued from time to time as the Board of Directors may
determine without further action of the stockholders of the Company.
Stockholders of the Company do not currently possess, nor upon the adoption
of the Amendment will they acquire, preemptive rights which would entitle such
persons, as a matter of right, to subscribe for the purchase of any securities
of the Company.
The affirmative vote of the holders of a majority of all the outstanding
shares of Common Stock of the Company is required for approval of this proposal.
The Board of Directors recommends a vote FOR such proposal.
<PAGE>
EXTENSION OF WARRANTS
On January 22, 1997, the Board of Directors extended for two years the
expiration dates of warrants to purchase 2,734,423 shares of the Company's
common stock at the price of $0.75 per share held by seventeen persons. Such
extension with respect to the warrants owned by the five directors and officers
of the Company was made subject to the approval of the Company's stockholders.
The closing price of the Company's common stock as traded on The Nasdaq Stock
Market National Market System was $0.50 per share. The original expiration date
of these warrants was December 31, 1997, and the new expiration date is December
31, 1999. If, prior to December 31, 1999, all of these warrants are exercised,
the Company would receive $2,050,817 in consideration for the issuance of
2,734,423 shares of common stock. Five of the persons who own these warrants are
directors or officers of the Company and the others are current non-officer
employees or former directors, officers or non-officer employees of the Company.
The following table sets forth the names of the present directors and officers
of the Company who own the subject warrants and the number of shares of common
stock of the Company issuable to them upon exercise:
Shares Issuable
Name Upon Exercise
Jay M. Haft 218,500
Michael J. Parrella 862,500
John J. McCloy II 862,500
Irene Lebovics 201,250
Cy E. Hammond 25,000
The rules of The Nasdaq Stock Market require the approval of the Company's
stockholders with respect to the grant of warrants by the Company to its
directors and officers. The extension of a warrant may be considered a new grant
for certain purposes and accordingly the approval of the Company's stockholders
is being sought for the two-year extension of the warrants held by the directors
and officers of the Company described above. If such approval of the Company's
stockholders is not obtained, the expiration date of the foregoing warrants
owned by the listed directors and officers of the Company will revert to
December 31, 1997, the original expiration date.
The Board of Directors recommends a vote FOR approval of the extension of the
warrants held by the directors and officers of the Company as described above.
INDEPENDENT AUDITORS
Independent Accountants for 1997
The Board of Directors, upon the recommendation of its Audit Committee, has
selected Richard A. Eisner & Company, LLP to audit the accounts of the Company
for the fiscal year ending December 31, 1997. Such firm has reported to the
Company that none of its members has any direct financial interest or material
indirect financial interest in the Company. The Company's Audit Committee is
composed of Messrs. McCloy and Oolie and has responsibility for recommending the
selection of auditors.
Richard A. Eisner & Company, LLP was appointed by the Board of Directors to
audit the accounts of the Company for the fiscal year ended December 31, 1996.
Representatives of Richard A. Eisner & Company, LLP are expected to be
present at the Annual Meeting of Stockholders. Such persons will have an
opportunity to make a statement if they desire to do so and will be available to
respond to appropriate questions.
The Board of Directors recommends a vote FOR the ratification of the
appointment of Richard A. Eisner & Company, LLP as independent auditors.
<PAGE>
EXECUTIVE COMPENSATION
Compensation Committee Report on Executive Compensation
As reported in the Compensation Committee Report for the fiscal year ended
December 31, 1995, contained in the 1996 Proxy Statement, on July 6, 1995, Mr.
Haft resigned as President and, with the approval of the Board of Directors
retained, for an indefinite term, the titles and responsibilities of Chief
Executive Officer and Co-Chairman of the Board of Directors. Also, at this time,
Mr. Parrella was elected President of the Company. Effective August 16, 1995,
and in recognition of the changes in their respective responsibilities, Mr.
Haft's compensation was reduced by $4,000 per month to $72,000 annually and Mr.
Parrella's salary was increased by approximately the same amount to $120,000
annually. The annual rates of salary for Messrs. Haft and Parrella remained
unchanged for 1996 except as noted in the last sentence of this paragraph. At
the conclusion of the Annual Meeting of the Stockholders on July 17, 1996, Mr.
Haft resigned as Chief Executive Officer of the Company and was appointed
Chairman of the Board of Directors. The Board of Directors designated an
Executive Committee comprised of Messrs. Haft and Parrella with Mr. Haft acting
as the Chairman of the Committee. The Board of Directors granted the Executive
Committee the power and authority to act in the place of the Chief Executive
Officer. Effective September 1, 1996, Mr. Haft's compensation was further
reduced to $48,000 annually in recognition of this change in his duties.
As noted above, Mr. Parrella's salary for 1996 was continued at the rate of
$120,000 per year. As also reported in last year's Compensation Committee
Report, on May 8, 1995, the Compensation Committee, in recognition of the
efforts of Mr. Parrella under the difficult conditions the Company was then
facing and in recognition of the importance of his continued services to the
ongoing restructuring program, awarded Mr. Parrella a cash bonus of 1% of the
cash to be received by the Company upon the establishment of certain significant
business relationships. Any such percentage bonus was made contingent upon the
execution of relevant documentation or other form of closing with regard to
these relationships. Effective January 1, 1996, the above noted percentage bonus
arrangement was extended until modified or terminated by the Board of Directors.
Mr. Parrella was paid a bonus of $106,885 under this percentage bonus
arrangement during 1996. On July 11, 1995, in order to enable the Company to
obtain 1,100,000 authorized but unissued shares of common stock to sell to an
investor in a private placement to raise additional working capital, Mr.
Parrella forfeited options to purchase 500,000 shares of the Company's common
stock. In recognition of the ongoing efforts of Mr. Parrella on behalf of the
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 the Company's common stock under the Incentive Plan. Of this amount, options
to purchase 250,000 shares of common stock would become vested and exercisable
immediately.. The options to purchase the remaining 250,000 shares would become
vested and exercisable either on December 31, 1996 if Mr. Parrella was employed
by the Company on that date, or on such earlier date when 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
the Company's 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. In addition, Mr. Parrella
received a $15,348 annual 1996 automobile allowance.
The base salary of Mr. Fogarty, a Senior Vice President and the Chief
Financial Officer of the Company, was established at $105,833 for 1996 which was
substantially the same as his salary for 1995. The 1996 base salaries of Ms.
Lebovics and Mr. Zeitlin, both also Senior Vice Presidents, were established at
$105,000 and $110,000, respectively. Mr. Zeitlin's salary, while continued at
the rate applicable for 1995 was higher than the salaries for other Senior Vice
Presidents due to the results of the negotiations relating to his joining the
Company in 1995.
<PAGE>
Because of the Company's uncertain business prospects and limited cash
resources, in determining the appropriate levels of compensation for the Chief
Executive Officer and the Named Executive Officers (as defined below), the
Compensation Committee did not deem it relevant, useful or even feasible to
consider the compensation practices of other companies having more certain
prospects and greater cash resources. Rather, the Compensation Committee took
into consideration the contribution being made to the Company's turn-around by
these officers, the extent to which they had received previous reductions in
their overall level of compensation in November of 1994 in connection with the
Company's restructuring, the importance of the Company continuing to receive
their services and the benefit of their knowledge of the Company's technologies,
and the Company's ability to provide them with adequate levels of remuneration
either in cash or in securities. Accordingly it is the opinion of the Committee
that the above described rates of compensation are reasonable in light of these
factors and the financial condition of the Company.
THE COMPENSATION COMMITTEE
By: Jay M. Haft, Chairman
John J. McCloy II
Sam Oolie
<PAGE>
Compensation
Set forth below is certain information for the three fiscal years ended
December 31, 1996, 1995 and 1994 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, 1996, exceeded $100,000 for services rendered in all capacities.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Other Restricted Options
Annual Stock Warrants All Other
Name and Position Year Salary($) Bonus($) Compensation Awards SARS(#) Compensation
----------------- ---- -------- -------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jay M. Haft 1996 $ 64,000 (1) $ - $ - $ - 200,000 $ -
Chairman (1) 1995 110,000 - - - 937,000 (2)(8) -
1994 30,000 - - 8,750 (3) 165,000 -
Michael J. Parrella 1996 120,000 106,885 15,348 - 475,000 5,218 (5)
President (1) 1995 90,833 47,168 6,395 - 1,622,000 (4)(8) -
1994 195,000 - 9,458 - 75,000 3,858 (5)
Stephen J. Fogarty 1996 105,833 - - - - -
Senior Vice President; 1995 104,434 10,083 - - 391,400 (6)(8) -
Chief Financial Officer 1994 110,000 - - - - -
Irene Lebovics 1996 105,000 - - - - -
Senior Vice President; 1995 88,000 - - - 533,850 (7)(8) -
President, NCT Hearing Products 1994 107,250 - - - - -
Jeffrey Zeitlin 1996 110,000 - - - 275,000 -
Senior Vice President, 1995 - - - - - -
Operations 1994 - - - - - -
- ----------------
</TABLE>
(1) Mr. Haft was elected Chairman of the Board and relinquished the title of
Chief Executive Officer on July 17, 1996. Prior thereto, and from November
15, 1994, Mr. Haft served as Co-Chairman of the Board and Chief Executive
Officer. Mr. Haft also served as President from November 15, 1994, to July
6, 1995, when Mr. Parrella, who had served as Executive Vice President from
November 15, 1994, to July 6, 1995, was elected President. Mr. Parrella
also had served as President until November 15, 1994.
(2) Excludes options and warrants to purchase 585,000 shares of the Company's
common stock forfeited under the "Exchange Program" described in footnote
(8) below, and other activity for a net new grant of 402,000 options and
warrants all of which were exercisable at December 31, 1996.
(3) 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
(the "Incentive Plan") valued at $1.75 per share, the market price of the
common stock on that date. As of December 31, 1996, Mr. Haft held 10,000
restricted shares of common stock which were worth $4,060 based on the
market price of the common stock on that date.
(4) Excludes options and warrants to purchase 1,385,000 shares of the Company's
common stock forfeited under the "Exchange Program" described in footnote
(8) below, and other activity for a net new grant of 237,000 options and
warrants all of which were exercisable at December 31, 1996.
(5) Consists of the annual premiums for a $2 million personal life insurance
policy paid by the Company on behalf of Mr. Parrella.
(6) Excludes options to purchase 316,400 shares of the Company's common stock
forfeited under the "Exchange Program" described in footnote (8) below, and
other activity for a net new grant of 75,000 all of which are exercisable
at December 31, 1996.
(7) Excludes options and warrants to purchase 507,600 shares of the Company's
common stock forfeited under the "Exchange Program" described in footnote
(8) below, and other activity for a net new grant of 26,250 all of which
are exercisable at December 31, 1996.
(8) On November 8, 1995, the Company received an offer from a Canadian
institutional investor to purchase 4,800,000 shares of the Company's common
stock at a price of $0.75 per share, the fair market value of such shares
on that date. At that time virtually all of the Company's authorized
capital of 100,000,000 shares of common stock was issued and outstanding or
reserved for issuance upon the exercise of outstanding warrants and options
to purchase common stock of the Company. Therefore, in order to make
sufficient shares available to effect the sale of 4,800,000 shares of
common stock to such investor, the Company adopted a program (the "Exchange
Program"), to be partially implemented through the Incentive Plan and the
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 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 would 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. Such stockholder approval and further corporate action
were obtained and completed on July 17, 1996, and August 14, 1996,
respectively. 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 occurred prior to the date on
which the New Warrants or New Options become exercisable, the expiration
date for such New Warrants or New Options would 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 was 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 which action was completed following the above
described increase in the Company's authorized capital.
<PAGE>
Stock Options and Warrants
The following tables summarize the Named Executive Officers' stock option
and warrant activity during 1996.
<TABLE>
<CAPTION>
Options and Warrants Granted in 1996
Percent Potential Realized Value
of Total at Assumed Annual
Options and Rates of Stock Price
Shares Warrants Appreciation for
Underlying Granted to Exercise Option and Warrant Term (4)
Options Employees Price Expiration ---------------------------
Name Granted in 1996 Per Share Date 5% 10%
---- ------- ----------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Haft(1) 200,000 11.7% $0.6563 1/22/03 $ 53,436 $ 124,529
Michael J.Parrella(2) 475,000 27.8% 0.6563 1/22/03 126,911 295,755
Jeffrey Zeitlin(3) 275,000 16.1% 0.6563 1/23/03 73,475 171,227
- --------------
</TABLE>
(1) Options to purchase 200,000 shares granted to Mr. Haft were granted
pursuant to the Incentive Plan and are fully vested.
(2) Options to purchase 475,000 shares granted to Mr. Parrella were granted
pursuant to the Incentive Plan and are fully vested.
(3) Options to purchase 275,000 shares granted to Mr. Zeitlin were granted
pursuant to the Incentive Plan and are fully vested.
(4) 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.
<TABLE>
<CAPTION>
1996 Aggregated Options and Warrant Exercises and
December 31, 1996 Option and Warrant Values
Number of Shares
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Number of and Warrants at and Warrants at
Shares December 31,1996 December 31, 1996
Acquired Value --------------------------- ---------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Haft - $ - 1,207,000 - $ - $ -
Michael J. Parrella - - 2,736,456 - 2,697 -
Stephen J. Fogarty - - 233,200 - - -
Irene Lebovics - - 492,550 - - -
Jeffrey Zeitlin - - 275,000 - - -
</TABLE>
Compensation Arrangements with Certain Officers and Directors
On February 1, 1996, the Compensation Committee awarded Mr. Parrella an
incentive bonus equal to 1% of the cash received by the Company upon the
execution of the agreement or other documentation evidencing transactions with
unaffiliated parties (other than certain parties involved in transactions then
in negotiation) or otherwise received at the closing of said transactions which
occur subsequent to January 1, 1996.
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In October 1990, the Company's Board of Directors authorized the issuance of
warrants to acquire 420,000 shares of common stock to each of Messrs. McCloy,
Parrella and Oolie and Ms. Lebovics, exercisable through September 30, 1994, at
$.375 per share, being the market price of the Company's common stock on the
date of such authorization, based upon each such person's commitment to extend
his or her personal guarantee on a joint and several basis with the others in
support of the Company's attempt to secure bank or other institutional
financing, the amount of which to be covered by the guarantee would not exceed
$350,000. No firm commitment for any such financing has been secured by the
Company and at present no such financing is being sought. However, each of such
persons' commitment to furnish said guarantee continues in full force and
effect.
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Co-Chairman, and Chief
Executive Officer of the Company, shares investment control over an additional
24% of the outstanding capital of ERI. The Company believes that the respective
terms of both the establishment of the joint venture with ERI and its
termination were comparable to those that could have been negotiated with other
persons or entities. During the fiscal year ended December 31, 1996, the Company
was not required to make any such payments to ERI under these agreements.
In 1993, the Company entered into three Marketing Agreements with QuietPower
Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical Solutions,
Inc."), a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing Agreements, QSI has undertaken to use its best
efforts to seek research and development funding for the Company from electric
and natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will record a charge for the amount by which the market price of the Common
Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1994, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
Under the terms of the second of the three Marketing Agreements, QSI is
granted a non-exclusive right to market the Company's products that are or will
be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the Company in the feeder
bowl area. The initial term of this Marketing Agreement is three years with
subsequent automatic one-year renewals unless a party elects not to renew.
Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with equipment used by electric and/or natural gas utilities for
retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products equal to 129% of QSI's
marketing expenses attributable to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues received by the Company from the sale of such products. QSI is
also entitled to receive a 5% commission on research and development funding
similar to that described above. QSI's exclusive rights continue for an
indefinite term provided it meets certain performance criteria relating to
marketing efforts during the first two years following product availability in
commercial quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights become non-exclusive, depending on the circumstances
causing such change, the initial term then becomes either three or five years
from the date of this Marketing Agreement, with subsequent one-year automatic
renewals in each instance unless either party elects not to renew. During the
fiscal year ended December 31, 1996, the Company was not required to pay any
commissions to QSI under any of these Marketing Agreements.
The Company has also entered into a Teaming Agreement with QSI under which
each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1996, the Company made
no payments to QSI for project management services.
In March 1995, the Company entered into a Master Agreement with QSI under
which QSI was granted an exclusive worldwide license under certain NCT patents
and technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances include
NCT's failure to develop the products or the failure of the parties to agree on
certain development matters. In consideration of the rights granted under the
Master Agreement, QSI is to pay the Company a royalty of 6% of the gross
revenues received from the sale of the products and 50% of the gross revenues
received from sublicensing the rights granted to QSI under the Master Agreement
after QSI has recouped 150% of the costs incurred by QSI in the development of
the products in question. The Company is obligated to pay similar royalties to
QSI on its sale of the products and the licensing of rights covered under the
Master Agreement outside the utility industry and from sales and licensing
within the utility industry in the Far East. In addition to the foregoing
royalties, QSI is to pay an exclusivity fee to the Company of $750,000; $250,000
of which QSI paid to the Company in June 1994. The balance is payable in equal
monthly installments of $16,667 beginning in April 1995. QSI's exclusive rights
become non-exclusive with respect to all products if it fails to pay any
installment of the exclusivity fee when due and QSI loses such rights with
respect to any given product in the event it fails to make any development
funding payment applicable to that product. The Master Agreement supersedes all
other agreements relating to the products covered under the Master Agreement,
including those agreements between the Company and QSI described above.
Immediately following the execution to the Master Agreement, the Company and
QSI entered into a letter agreement providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.
In April 1995, the Company and QSI entered into another letter agreement
under which QSI agreed to forfeit and surrender the five year warrant to
purchase 750,000 shares of the Company's common stock issued to QSI under the
first Marketing Agreement described above. In addition, the $500,000 balance of
the exclusivity fee provided for under the Master Agreement was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the indebtedness to be paid under the letter agreement described in the
preceding paragraph was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million, whichever
first occurs. Such indebtedness is to be evidenced by a promissory note, non
payment of which is to constitute an event of termination under the Master
Agreement.
On May 21, 1996, the Company and QSI entered into another letter agreement
extending the time by which the payments from QSI to the Company under the April
1995 letter agreement described above were to be made. Under the letter the
payment of certain arrearages in the payment of the exclusivity fee was to be
made not later than June 15, 1996, with the balance continuing to be payable by
monthly payments of $8,333 and as provided in the May 1995 letter agreement. In
addition the payment of the other indebtedness owed by QSI to the Company was to
be paid by a payment of $25,000 at the time QSI obtained certain anticipated
financing with the balance paid by monthly payments of $15,000 each. Default in
QSI's timely payment of any of the amounts specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.
On April 9, 1997, the Company and QSI entered into another letter agreement
revising the payment schedule set forth in the May 21, 1996 letter agreement
applicable to the payment of the indebtedness owed to the Company by QSI other
than the unpaid portion of the exclusivity fee. Under the revised schedule, the
full amount of such indebtedness is to be paid by an initial payment of $125,000
on or before April 21, 1997, and a second payment of $200,000 upon the closing
of a proposed financing in June 1997 or on January 1, 1998, whichever first
occurs. The Company is also entitled to receive 15% of any other financing
obtained by QSI in the interim as well as interest at the rate of 10% per annum
on the unpaid amount of such indebtedness from July 1, 1997. The letter
agreement also provides for the continuation of QSI's payment of the exclusivity
fee in accordance with the earlier letter agreements as well as the payment of
$11,108 by April 21, 1997, for headset products sold by the Company to QSI in
1996. In the event of a default in QSI's timely payment of any of the amounts
specified in the April 9, 1997 letter agreement, the Company has the right to
cause the termination of the Master Agreement and all rights granted by QSI
thereunder upon 10 days notice of termination to QSI.
As of April 30, 1997, QSI has paid all installments due and payable for the
exclusivity fee and, other than as described above, owes no other amounts to the
Company.
The Company believes that the terms of its agreements with QSI are comparable
to those that it could have negotiated with other persons or entities.
<PAGE>
PERFORMANCE GRAPH
Note:The stock price performance shown on the graph below is not necessarily
indicative of future price performance.
Noise Cancellation Technologies, Inc.
Stock Performance (1)
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NCT $100 $76 $59 $15 $13 $8
NASDAQ Composite 100 116 134 131 185 227
Index
NASDAQ Electronic 100 156 215 237 393 679
Component Stock
Index (2)
</TABLE>
(1) Assumes an investment of $100.00 in the Company's common stock and in each
index on December 31, 1991.
(2) The Company has selected the NASDAQ Electronic Components Stock Index
composed of companies in the electronics components industry listed on the
NASDAQ National Market System. Because the Company knows of no other
publicly owned company whose business consists solely or primarily of the
development, production and sale of systems for the cancellation or control
of noise and vibration by electronic means and other applications of Active
Wave Management(TM) technology, it is unable to identify a peer group or an
appropriate published industry or line of business index other than the
NASDAQ Electronics Components Stock Index.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of March 31, 1997, 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.
Amount and Nature Approximate
of Beneficial Percentage of
Name of Beneficial Owner Ownership (1) Class (1)
- ------------------------ ----------------- -------------
John J. Mccloy 3,651,591 ( 2) 3.18%
Michael J. Parrella 2,749,789 ( 3) 2.38%
Jay M. Haft 1,251,891 ( 4) 1.10%
Sam Oolie 925,194 ( 5) 0.82%
Irene Lebovics 1,288,067 ( 6) 1.14%
Stephen J. Fogarty 233,200 ( 7) 0.21%
Jeffrey C. Zeitlin 275,000 ( 8) 0.24%
All Executive Officers
and Directors as a
Group (10 persons) 11,213,867 ( 9) 9.28%
Carole Salkind 5,285,000 (10) 4.63%
Her Majesty The Queen,
Province of Alberta,
Canada 11,250,000 (11) 9.43%
Kingdon Capital
Management Corporation 13,660,930 (12) 12.11%
- ----------
(1) Assumes the exercise of currently exercisable outstanding options or
warrants to purchase shares of common stock. 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.
(2) Includes 1,085,325 shares issuable upon the exercise of currently
exercisable warrants and 850,000 shares issuable upon the exercise of
currently exercisable options.
(3) Includes 1,311,956 shares issuable upon the exercise of currently
exercisable warrants and 1,424,500 shares issuable upon the exercise of
currently exercisable options.
(4) Includes 218,500 shares issuable upon the exercise of currently exercisable
warrants, 10,000 restricted shares and 988,500 shares issuable upon the
exercise of currently exercisable options.
(5) Includes 25,000 restricted shares and 48,913 shares issuable upon the
exercise of currently exercisable warrants and 250,000 shares issuable upon
the exercise of currently exercisable options.
(6) Includes 291,300 shares issuable upon the exercise of currently exercisable
options and 201,250 shares issuable upon the exercise of currently
exercisable warrants.
(7) Consists of 233,200 shares issuable upon the exercise of currently
exercisable options.
(8) Consists of 275,000 shares issuable upon the exercise of currently
exercisable options.
(9) Includes 2,910,944 shares issuable to 3 executive officers and Directors of
the Company upon the exercise of currently exercisable warrants, 5,096,635
shares issuable to 6 executive officers and Directors of the Company upon
the exercise of currently exercisable options and 35,000 restricted shares
issued to 2 Directors of the Company.
(10) Carole Salkind's address is 801 Harmon Cove Towers, Secaucus, New Jersey
07094.
(11) Her Majesty The Queen, Province of Alberta, Canada's address is Room 530,
Terrace Building, 9515 107th Street, Edmondton, Alberta T5K 2C3, Canada.
(12) Kingdon Capital Management Corporation's address is 152 West 57th Street,
New York, New York 10019.
<PAGE>
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the Company's 1998 Annual
Meeting of Stockholders must be received by the Company by December 31, 1997,
for inclusion in the Company's proxy statement and form of proxy relating to
that meeting.
Linthicum, Maryland
May 14, 1997
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 West Nursery Road, Suite 120
Linthicum, Maryland 21090
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Jay M. Haft, Michael J. Parrella and Jeffrey C.
Zeitlin, as Proxies, each with the power to appoint his substitute, and hereby
authorizes them, and each of them, to represent and vote, as designated below,
all the shares of Common Stock of Noise Cancellation Technologies, Inc. held of
record by the undersigned on April 21, 1997, at the Annual Meeting of
Stockholders to be held on June 19, 1997, or any adjournment thereof.
1. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary) / /
WITHHOLD AUTHORITY to vote for all nominees listed below / /
Jay M. Haft, Michael J. Parrella, John J. McCloy II, Sam Oolie
(To withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below.)
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2. To approve the amendment of the Company's Certificate of Incorporation to
increase the number of shares of Common Stock authorized thereunder from
140,000,000 shares to 185,000,000 shares.
FOR / / AGAINST / / ABSTAIN / /
3. To approve the extension of certain warrants owned by certain officers and
directors of the Company.
FOR / / AGAINST / / ABSTAIN / /
4. To ratify the selection of Richard A. Eisner & Company, LLP as
independent auditors for the fiscal year ending December 31, 1997.
FOR / / AGAINST / / ABSTAIN / /
5. At their discretion, the Proxies are authorized to vote upon such
other matter as may properly come before the meeting.
(continued on reverse side)
<PAGE>
This proxy, when properly executed, will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted FOR
Proposals 1, 2, 3 and 4.
Dated: _______________________________________, 1997
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Signature
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Signature if held jointly
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give title. If a corporation, please sign in full
corporate name by the president or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
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NOISE CANCELLATION TECHNOLOGIES, INC.
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1996 ANNUAL REPORT
<PAGE>
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Corporate Profile
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Noise Cancellation Technologies, Inc. is the industry leader in the design,
development, production and distribution of Active Wave ManagementTM systems,
including systems that electronically reduce noise and vibration. Active Wave
ManagementTM is the electronic and mechanical manipulation of sound or signal
waves to reduce noise, improve signal-to-noise ratio and/or enhance sound
quality.
The company has executive offices in Linthicum, Maryland, research and
product development facilities in Linthicum, Maryland and Cambridge, England;
and marketing and technical support offices in Stamford, Connecticut, Cambridge,
England and Tokyo, Japan.
The company has a number of strategic supply, manufacturing and marketing
alliances with world-class corporations to facilitate commercialization of
the technology.
The applications for the company's systems cover a wide range of
multi-billion dollar markets, including those served by the transportation,
manufacturing, commercial, consumer products and communications industries.
Major product areas include hearing products, fans, communications, microphones
and mufflers.
Contents
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Financial Highlights 1
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Letter To Our Shareholders 2
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Management's Discussion and Analysis 5
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Five Year Summary Financial Data 14
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Report of Independent Auditors 15
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The Financial Statements 16
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Notes to the Financial Statements 20
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Corporate Information 40
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Investor Information 41
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<PAGE>
[GRAPHIC OMITTED]
Financial Highlights
Years Ended December 31 1996 1995
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(Thousands of dollars, except per share and employee data)
Technology licensing fees $1,238 $6,580
Product sales, net 1,379 1,589
Engineering and development services 547 2,297
Total Revenues 3,164 10,466
Company Funded R & D 6,974 4,776
Net Loss (10,825) (4,068)
Net Loss Per Share (.11) (.05)
Total Assets 5,881 9,583
Working Capital (1,312) 1,734
Stockholders' Equity 2,610 6,884
Employees 75 73
<PAGE>
Dear Fellow Shareholders:
As predicted, 1996 was a year of important investment by NCT in the
expansion of its capabilities and technical expertise beyond its traditional
focus on industrial active noise and vibration control into markets management
believes represent more significant and near-term business potential such as
audio and communications. This challenging transition has yielded several
breakthrough proprietary technologies and new licensing partnerships and has
initiated the launch of several new product lines. We are proud to share with
you the meaningful progress we have made in a relatively short period of time.
FPT(TM) opens doors to major alliances in automotive and consumer audio markets
NCT's patented Flat Panel TransducerTM (FPTTM) is a revolutionary
alternative to conventional speaker technology. These thin sound-conductive
panels can be used to provide superior audio quality while supplying additional
advantages in size, reliability, packaging, placement and cost.
The FPT technology is being commercialized through two separate alliances
as well as by NCT directly. Top Down Surround SoundTM (TDSSTM), is a
headliner-integrated flat speaker system designed for the automotive original
equipment market. The unique design of TDSS gives automobile makers design
flexibility, cost savings and audio performance that they did not have
before--creating a whole new paradigm for automotive interior design.
TDSS(TM) is being commercialized by Johnson Controls, Inc., a partner in
the OnActive Technologies, LLC joint venture. Johnson Controls is the world's
largest supplier of automotive seating and headliners. In 1995, Johnson
Controls' worldwide operations produced seats for more than 8.4 million vehicles
and its Automotive Systems Group achieved $3.8 billion in sales for the 1995
fiscal year.
In addition to the original equipment market, NCT intends to enter the
automotive aftermarket through the formation of additional licensing
relationships and the distribution of NCT developed products.
Home audio, professional audio and multimedia markets are being
commercialized through a royalty-generating cross-licensing arrangement with
U.K.-based speaker manufacturer New Transducers Limited (NXT), a wholly owned
subsidiary of the Verity Group, PLC. Verity is the pre-eminent loudspeaker
manufacturer in Europe with 1996 sales of $76 million. The Verity Group's
leading loudspeaker brands include Quad, Mission and Wharfedale. NXT has
recently signed agreements with two leaders in consumer electronics, NEC and
Samsung, who will develop products utilizing flat panel transducer technology.
NCT expects to receive royalties from NXT from these contracts in late 1997.
Additionally, NCT is planning to package and distribute its own line of speaker
products incorporating FPT technology in 1998.
ClearSpeech(TM) improves communications with expanding product line
The global market for telecommunications services and equipment is expected
to exceed $1 trillion by the year 2000. NCT's ClearSpeech(TM) product line,
based on its patented Adaptive Speech FilterTM (ASFTM) algorithm, has
significant application within this market. In a wide variety of noisy
situations, whether the result of poor equipment, transmission signal
interference, ambient noise or even old lines in a local loop, ClearSpeech
products will reduce noise, improve the signal-to-noise ratio and deliver more
intelligible speech and increased listening comfort. Applications for this
technology include portable cellular phones, car phones, air phones, public
telephones, teleconferencing systems, line cards, switches and PBX's.
The first product in the ClearSpeech line, ClearSpeech-Mic(TM), was
introduced at the 1997 Winter Consumer Electronics Show. This product cleans the
background noise from the send side of hands-free cellular phone conversations.
Shortly, the product line will be extended to include ClearSpeech-Speaker(TM) ,
a stand-alone speaker that can be used to remove background noise from the
receive side of any two-way radio communication. Target markets include car and
truck fleets, emergency vehicles, marine and ham radio and consumer markets such
as pleasure craft.
Additional ClearSpeech products are planned for 1997 introduction. Also,
private label and integrated products incorporating this technology will be
distributed by various two-way radio manufacturers, intercom system
manufacturers and other communication system providers.
The ClearSpeech product line also includes software for integration by
developers to attenuate noise in PC-based applications such as voice
recognition, video conferencing, teleconferencing, voice compression, voice
verification and Internet telephony. A free trial copy of ClearSpeech PC/COM
software is available on the NCT web site, www.nct-active.com. The trial version
enables software developers to test the program and gain an appreciation for the
power of the technology.
<PAGE>
Headset business goes Extreme!(TM) with a new line of NoiseBuster(TM) products
A new version of the NoiseBuster(TM) active noise reduction headphone,
called the NoiseBuster Extreme!(TM) was recently introduced. The original
NoiseBuster was the first active headphone introduced to consumers and the best
selling by far in the market. It has received many prestigious awards including
the Discover Award for Technological Innovation and the Innovations '95 award
from the Electronic Industries Association.
The new NoiseBuster Extreme! product, an Innovations '96 award winner,
offers many improvements over the original version including smaller size,
longer battery life, NCT's patent pending VariActive(TM) feature, and a
considerably lower list price of $69. Initial demand for the NoiseBuster
Extreme!(TM) already significantly exceeds that of the original NoiseBuster.
This product is a real winner.
The NoiseBuster Extreme!(TM) line will be expanded to include
communications headsets for cellular, multimedia and telephony markets in the
second half of 1997, with products ranging in price from $89 to $129. For the
first time telephony headset users will experience the superior intelligibility
of received signal, reduced fatigue, improved comfort and productivity that is
possible with active noise reduction technology.
The ProActive(TM) line of industrial hearing protection and communications
headsets was the first line of active products to be marketed to industrial
workers. These products offer significant protection from noise as well as
improved intelligibility of both face-to-face and radio communications. The
communications versions of the ProActive product line has been expanded to
include over the head or behind the head styles and various boom microphone
options, and will soon offer one-earcup styles for those who must maintain
constant face-to-face or radio contact.
Marketplace awareness for ProActive(TM) products continues to grow and has
been aided by a comprehensive advertising program and public relations efforts
which have resulted in many cover articles in leading trade publications
including Occupational Health and Safety, Safe Workplace and Radio Resource.
Search for tools reveals considerable new business
NCT has historically sought out various tools and components required to
enable the commercialization of active technology. It was through this search
that NCT found the Silicon Micromachined Microphone(TM) (SMMTM), an advanced
microphone chip that offers many advantages in cost, size, performance, heat and
humidity tolerance, electro-magnetic interference, labor, component variability
and functionality. NCT obtained a license for exclusive rights to commercialize
this technology in 1993 and is in the process of setting up fabrication for the
microphone.
The SMM(TM) represents a significant opportunity for NCT. The total,
worldwide market for microphones is estimated to be nearly one half billion
units annually. However we believe that particular segments hold the most
initial promise for the SMM(TM). These include hearing aids, automobile
hands-free cellular microphones, multimedia computers, cellular phones and
high-end electronic toys.
NCT core markets poised to yield long term benefits
In 1995, we concluded the restructuring of our joint venture agreements
with Walker for electronic mufflers and Ultra Electronics for aircraft cabin
quieting. These agreements are now licensing arrangements that will begin to
yield royalty revenue in 1998. Walker Electronic Silencing is planning to
release an aftermarket electronic exhaust system for a major American sports car
by late 1997. Ultra Electronics continues to sell cabin quieting systems and
current customers include Saab and DeHavilland. Additionally, Quiet Power, our
licensee of transformer quieting technology, has forged relationships to develop
quiet transformers with Asea Brown Boveri and General Electric. Quiet Power is
expected to start delivering product in 1997 and NCT will be earn royalties from
each unit sold.
Prolific inventing continues to strengthen NCT's intellectual property assets
NCT's patent portfolio is among the most comprehensive in the industry.
The Company has been granted 22 new patents in the first four months of 1997
which cover a wide array of applications including active noise reduction,
active vibration reduction, active mufflers, active headsets and multimedia
audio. This demonstrates NCT's high level of expertise in technological
innovation as well as our serious commitment to enhancing the value of this key
corporate asset. As of May 1, 1997, NCT holds rights to 281 inventions.
<PAGE>
Looking optimistically toward the future
We believe that the expansion of our corporate focus to such growth
markets as audio and communications is the proper strategy for successfully
moving forward into the future. NCT technology leadership is evidenced by the
caliber of the companies who have chosen to enter into joint ventures, licenses
and other relationships with NCT and the initial consumer reaction to the new
products released. We acknowledge the dedication and commitment of our employees
who have made outstanding contributions in developing technology and products
that will be sought by the new target markets. We are appreciative of the
patience and loyalty displayed by our stockholders.
Our belief in NCT remains steadfast and optimistic.
On behalf of the Board of Directors,
/s/ JAY M. HAFT /s/ MICHAEL J. PARRELLA
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Jay M. Haft Michael J. Parrella
Chairman of the Board President
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General Business Environment
The Company is in transition from a firm focused principally on research and
development of new technology to a firm focused on the commercialization of its
technology through technology licensing fees, royalties and product sales. Prior
to 1995, the Company derived the majority of its revenues from engineering and
development funding provided by established companies willing to assist the
Company in the development of its active noise and vibration control technology,
and from technology licensing fees paid by such companies. The Company's
strategy generally has been to obtain technology licensing fees when initiating
joint ventures and alliances with new strategic partners. Revenues from product
sales were limited to sales of specialty products and prototypes. In 1996, the
Company received approximately 17% of its operating revenues from engineering
and development funding, compared with 22% in 1995. Since 1991, revenues from
product sales have generally been increasing, although in 1996 product sales
declined due to delays in production and reduced pricing of certain products.
Management expects that technology licensing fees, royalties and product sales
will become the principal source of the Company's revenue as the
commercialization of its technology proceeds.
As a result of the 1994 acquisition of certain Active Noise and Vibration
Technologies, Inc. ("ANVT") assets, the Company became the exclusive licensee of
ten seminal patents, the Chaplin Patents, through its wholly owned subsidiary,
Chaplin Patents Holding Co., Inc. ("CPH"). The Company's ability to license the
Chaplin Patents directly to unaffiliated third parties provides the Company with
a greater ability to earn technology licensing fees and royalties from such
patents. Further, the Company believes that its intellectual property portfolio
prevents other competitors and potential competitors in the field of Active Wave
ManagementTM from participating in certain commercial areas without licenses
from the Company.
Notes 1. and 15. to the accompanying Consolidated Financial Statements and
the liquidity and capital resources section which follows describe the current
status of the Company's available cash balances and the uncertainties which
exist that raise substantial doubt as to the Company's ability to continue as a
going concern.
As previously disclosed, the Company implemented changes in its organization
and focus in late 1994. Additionally, in late 1995 the Company redefined its
corporate mission to be the worldwide leader in the advancement and
commercialization of Active Wave ManagementTM technology. Active Wave
ManagementTM is the electronic and/or mechanical manipulation of sound or signal
waves to reduce noise, improve signal-to-noise ratio and/or enhance sound
quality. This redefinition is the result of the development of new technologies,
as previously noted, such as Adaptive Speech Filter(TM) ("ASFTM"), Top Down
Surround Sound(TM) ("TDSSTM"), Flat Panel Transducer(TM) ("FPTTM"), and the
Silicon Micromachined Microphone(TM) ("SMM(TM)"), which create products that the
Company believes will be utilized in areas beyond noise and vibration reduction
and control. These technologies and products are consistent with shifting the
Company's focus to technology licensing fees, royalties and products that
represent near term revenue generation. The redefinition of corporate mission is
reflected in the revised business plan which the Company began to implement in
the first quarter of 1996.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of Active Wave
ManagementTM build as anticipated by management, revenues from technology
licensing fees, royalties and product sales are forecasted to fund an increasing
share of the Company's requirements. The funding from these sources, if
realized, will reduce the Company's dependence on engineering and development
funding. The beginning of this process is shown in the shifting percentages of
operating revenue, discussed below.
In January 1996, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1997.
Under this plan, as amended, the Company needed to generate approximately $17
million to fund its operations for 1996. The Company believed that it could
generate these funds from operations in 1996, and the additional cash funding
obtained from sales of common stock (refer to Notes 1. and 6. - "Notes to the
Consolidated Financial Statements."). The Company did not meet its revenue
targets for 1996.
Success in generating technology licensing fees, royalties and product sales
are significant and critical to the Company's ability to overcome its present
financial difficulties. The Company cannot predict whether it will be successful
in obtaining market acceptance of its new products or in completing its current
negotiations with respect to licenses and royalty revenues.
<PAGE>
From the Company's inception through December 31, 1996, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 22%
product sales, 51% engineering and development services and 27% technology
licensing fees.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and into their manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed.
The Company began shipping ProActiveTM headsets in 1995 and continues to sell
NoiseBuster(TM) consumer headsets. The Company is now selling products through
three of its alliances: Walker Manufacturing Company ("Walker"), a division of
Tennessee Gas Pipeline Company, a wholly owned subsidiary of Tenneco, Inc., is
manufacturing and selling industrial silencers; Siemens Medical Systems, Inc.
("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 Electronics Ltd. ("Ultra") began installing production model aircraft
cabin quieting systems in the SAAB 340 turboprop aircraft. Management believes
these developments and those previously disclosed help demonstrate the range of
commercial potential for the Company's technology and will contribute to the
Company's transition from engineering and development to technology licensing
fees, royalties and product sales.
The availability of high-quality, low-cost electronic components for
integration into the Company's products also is critical to the
commercialization of the Company's technology. The Company is working with its
strategic partners and other suppliers to reduce the size and cost of the
Company's systems, so that the Company will be able to offer low-cost
electronics and other components suitable for high-volume production.
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products. During
1994, the Company acquired a license to two patents in the field of
micro-machined microphones and concluded the acquisition of all of the patents,
know-how and intellectual property of a former competitor, ANVT. Management
believes that the Company's investment in its technology has resulted in the
expansion of its intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
The Company has become certified under the International Standards
Organization product quality program known as "ISO 9000", and has successfully
undergone two quality audits. Since the third quarter of 1994, the Company has
reduced its worldwide work force by 59% from 173 to 71 current employees as of
March 25, 1997.
Because the Company did not met its revenue targets for 1996, it entered into
certain transactions, which provided additional funding as follows:
On March 28, 1996, the Company sold 2,000,000 shares of its common stock in a
private placement that provided net proceeds to the Company of $0.7 million. The
purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation D of the Securities Act of 1933,
as amended. The stock purchase agreement relating to this sale of common stock
required the Company to file a registration statement with the Securities and
Exchange Commission ("SEC") covering the registration of the shares for resale
by the purchaser. Such a registration statement was declared effective by the
SEC on September 3, 1996.
On April 10, 1996, the Company sold 1,000,000 shares, in the aggregate, of
its common stock to three institutional investors in a private placement that
provided net proceeds to the Company of $0.3 million. Contemporaneously, the
Company sold secured convertible term notes in the aggregate principal amount of
$1.2 million to those institutional investors and granted them each an option to
purchase an aggregate of $3.45 million of additional shares of the Company's
common stock. The per share conversion price under the notes and the exercise
price under the options were to be equal to the price received by the Company
for the sale of the 1,000,000 shares subject to certain adjustments. The
conversion of the notes and the exercise of the options were both subject to
stockholder approval of an appropriate amendment to the Company's Certificate of
Incorporation increasing its authorized capital to provide for the requisite
shares. On July 17, 1996, the Company's stockholders authorized an increase in
the Company's authorized common stock capital to 140,000,000 shares of common
stock.
On August 13, 1996, the three institutional investors converted their
secured, convertible term notes and exercised their options in full. As a
result, the Company issued 13,403,130 shares, in the aggregate, of its common
stock to such investors, received $3.45 million in cash, and effected by
conversion to its common stock the payment of the notes together with the
accrued interest thereon.
<PAGE>
In conjunction with the foregoing sale of common stock and convertible term
notes, the Company also agreed to file a registration statement with the SEC
covering the applicable shares and to use its best efforts to have such
registration statement declared effective by the SEC as soon as practicable. The
relevant agreements provide for significant monetary penalties in the event such
registration statement is not declared effective on or before November 14, 1996,
and in the event its effectiveness is suspended for other than brief permissible
periods. However, the registration statement was declared effective by the SEC
on September 3, 1996.
On August 29, 1996, the Company sold 1.8 million shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common stock in November, 1995. The Company received $0.9 million of net
proceeds. The purchaser is subject to certain resale and transfer restrictions
with respect to these shares.
On November 19, 1996, the Company entered into an agreement to sell an
aggregate amount of $3.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before November 27, 1996. The Debentures, to be issued pursuant to Regulation S
promulgated under the Securities Act of 1933 ("the November 1996 Financing")
were to be due December 31, 1999 and earn 8% interest per annum, payable
quarterly in either cash or the Company's common stock at the Company's sole
option. Subject to certain common stock resale restrictions, the Investor, at
its discretion, would be able to convert the principal and interest due on the
Debentures into the Company's common stock at any time on or after January 20,
1997. In the event of such a conversion, the conversion price would be the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date or 70% of the average closing bid price for the five trading days
immediately preceding the conversion. To provide for the above noted conversion
and interest payment options, the Company would, at closing, reserve and
subsequently cause to be deposited with an escrow agent 15 million shares of the
Company's common stock. Subject to certain conditions, the Company also had the
right to require the Investor to convert all or part of the Debentures under the
above noted conversion price conditions after February 15, 1998. Subsequent to
the closing date of the above financing, the Company was to use its best efforts
to carry out the necessary actions to effect at least a 10:1 reverse split of
the Company's common stock.
The November 1996 financing was not completed as described above. The
Company increased the aggregate amount of debentures offered to $4.0 million and
obtained subscriptions for $3.9 million of such amount, of which $3.4 million
was completed with five investors that are different than the Investor described
above, between January 15, 1997 and March 25, 1997, which resulted in net
proceeds to the Company of $3.2 million. An additional $0.5 million of
debentures has been subscribed for by one investor and is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
debentures into common stock of the Company. The terms of the debentures are
similar to those described above, but the conversion price, if the average bid
price of the stock for the five days preceding conversion is used as the basis
for computing conversion, ranges from 75% to 60% of that price and there is no
requirement that the Company use its best efforts to carry out the necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.
Management believes that the funding provided by increased product sales,
technology licensing fees, royalties, and cost savings, if realized, coupled
with the additional capital referred to above, should enable the Company to
continue operations into 1998. If the Company is not able to realize such
increased technology licensing fees, royalties and product sales, or generate
additional capital, it will have to further cut its level of operations
substantially in order to conserve cash. (Refer to "Liquidity and Capital
Resources" below and to Note 1. - "Notes to the Consolidated Financial
Statements" for a further discussion relating to continuity of operations.)
Results of Operations
Year ended December 31, 1996 compared with year ended December 31, 1995.
Total revenues in 1996 decreased by 70% to $3,164,000 from $10,466,000 in
1995. Total expenses during the same period decreased by 4% or $545,000,
reflecting the continuing results of cost reduction plans, and the refocus of
expenditures to more immediate markets.
Technology licensing fees decreased by 81% or $5,342,000 to $1,238,000. The
1995 amount was derived principally from a $2.6 million license fee from Ultra,
a $ 3.3 million license fee from Walker and other licenses aggregating $0.7
million. The 1996 amount is derived from smaller, more numerous license fees,
reflecting the Company's continuing emphasis on expanding technology licensing
fee revenue and the shortfall in generation of such revenue referred to above.
See Note 3. - "Notes to the Consolidated Financial Statements".
Product sales decreased by 13% to $1,379,000 reflecting decreased aviation
headset sales, decreased NoiseBuster(TM) sales at lower prices and a decrease in
industrial silencer sales in connection with the transfer of that business to
Walker.
<PAGE>
Engineering and development services decreased by 76% to $ 547,000, primarily
due to a deemphasis of engineering development funding as a primary source of
revenue, the elimination of funding from Ultra for aircraft cabin quieting in
connection with the transfer of that business to Ultra in the first quarter of
1995, a decrease in the amount of muffler development funding from Walker in
connection with the transfer of that business to Walker in the fourth quarter of
1995 and staff reductions.
Cost of product sales increased 0.4% to $1,586,000 from $1,579,000 and the
product margin decreased to (15)% from 1% in 1995. The negative margin in 1996
was primarily due to the lower sales price of the NoiseBuster(TM) and a reserve
for tooling obsolescence in the amount of $300,000. In 1995, the low product
margin was primarily due to the lower sales price of the NoiseBuster(TM).
Cost of engineering and development services decreased 89% to $250,000
primarily due to the changes noted above.
Selling, general and administrative expenses for the year decreased by 10% to
$4,890,000 from $5,416,000 for 1995. Of this decrease, $616,000 was directly
attributable to reductions in salaries and related expenses. Advertising and
marketing expenses decreased by 32% to $463,000. Office and occupancy expenses
decreased by 6% or $19,000. Professional fees increased by 6% to $1,818,000.
Travel and entertainment increased by 18% or $71,000.
Depreciation and amortization included in selling, general and administrative
expenses increased by $285,000 or 143%, from $199,000 to $484,000, primarily due
to increased amortization of patents allocated to selling, general and
administrative expenses from research and development.
Research and development expenditures for 1996 increased by 46% to $6,974,000
from $4,776,000 for 1995, primarily due to increases to internally funded
development projects.
In 1996, interest income decreased to $28,000 from $53,000 in 1995 reflecting
the decrease in 1996 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1996, the Company is not required to fund any capital requirements of these
joint ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment. As of December 31, 1995, the Company recognized
$80,000 of income relating to its 1995 profit in OnActive Technologies, L.L.C.
("OAT"). As of December 31, 1996, the Company reversed the $80,000 of income
which related to its share of the 1996 loss in OAT.
The Company has net operating loss carryforwards of $67.4 million and
research and development credit carryforwards of $1.2 million for federal income
tax purposes at December 31, 1996. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
Year ended December 31, 1995 compared with year ended December 31, 1994.
Total revenues in 1995 increased by 47% to $10,466,000 from $7,124,000 in
1994. Total expenses during the same period decreased by 50% or $14,497,000,
reflecting the continuing results of cost reduction plans.
Technology licensing fees increased by 1,356% or $6,128,000 to $6,580,000,
reflecting the Company's continuing emphasis on expanding technology licensing
fee revenue. The 1995 amount is principally derived from a $2.6 million license
fee from Ultra, a $ 3.3 million license fee from Walker and other licenses
aggregating $0.7 million. In 1994, technology license fees amounted to $0.5
million. See Note 3. - "Notes to the Consolidated Financial Statements".
Product sales decreased by 32% to $1,589,000 reflecting a reduction in orders
for MRI headsets from Siemens, decreased revenue from NoiseBusterTM sales due to
reductions in average price and units sold, and a decrease in industrial
silencer sales in connection with the transfer of that business to Walker.
Engineering and development services decreased by 47% to $ 2,297,000,
primarily due to the elimination of funding from Ultra for aircraft cabin
quieting in connection with the transfer of that business to Ultra in the first
quarter of 1995, a decrease in the amount of muffler development funding from
Walker in connection with the transfer of that business to Walker in the fourth
quarter of 1995 and staff reductions.
<PAGE>
Cost of product sales decreased 61% to $1,579,000 from $4,073,000 and the
product margin increased to 1% from (74%) in 1994. The negative margin in 1994
was primarily due to a reserve for slow moving and obsolete inventory in the
amount of $1,855,300. In 1995, the low product margin was primarily due to the
lower sales price of the NoiseBusterTM.
Cost of engineering and development services decreased 44% to $2,340,000
primarily due to the changes in the Ultra and Walker relationships, as noted
above.
Selling, general and administrative expenses for the year decreased by 42% to
$5,416,000 from $9,281,000 for 1994. Of this decrease, $1,202,000 was directly
attributable to reductions in salaries and related expenses. Advertising and
marketing expenses decreased by 65% to $677,000. Office and occupancy expenses
decreased by 73% or $537,000. Professional fees increased by 55% to $1,933,000
primarily due to legal fees related to litigation and patent prosecution and
maintenance. Travel and entertainment decreased by 58% or $533,000.
Depreciation and amortization included in selling, general and administrative
expenses decreased by $22,000 or 10%, from $221,000 to $199,000.
Research and development expenditures for 1995 decreased by 50% to $4,776,000
from $9,522,000 for 1994, primarily due to realizations from the cost savings
plans and staff reductions.
In 1995, interest income decreased to $53,000 from $587,000 in 1994
reflecting the decrease in 1995 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1995, the Company is not required to fund any capital requirements of these
joint ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment. The agreement with Tenneco Automotive, another
division of Tennessee Gas Pipeline Company, 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.
Liquidity and Capital Resources
The Company received $0.1 million from the exercise of stock purchase
warrants and options during 1996, $0.7 million in 1995 and $1.0 million in 1994.
In January 1996, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1997.
Under this plan, the Company needed to generate approximately $19 million to
fund its operations for 1996. The Company believed that it could generate these
funds from operations in 1996, although there was no certainty that the Company
would achieve this goal. Included in such amount was approximately $8.9 million
in sales of new products and approximately $9.0 million of technology licensing
fees and royalties. During 1996, the Company generated $1.2 million in licensing
fees and $1.4 million in product sales.
Because the Company did not meet its revenue targets for 1996, it entered
into the following transactions:
On March 28, 1996, the Company sold 2,000,000 shares of its common stock in
a private placement that provided net proceeds to the Company of $0.7 million.
The purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation D of the Securities Act of 1933,
as amended. The stock purchase agreement relating to this sale of common stock
required the Company to file a registration statement with the SEC covering the
registration of the shares for resale by the purchaser. Such a registration
statement was declared effective by the SEC on September 3, 1996.
<PAGE>
On April 10, 1996, the Company sold 1,000,000 shares, in the aggregate, of
its common stock to three institutional investors in a private placement that
provided net proceeds to the Company of $0.3 million. Contemporaneously, the
Company sold secured convertible term notes in the aggregate principal amount of
$1.2 million to those institutional investors and granted them each an option to
purchase an aggregate of $3.45 million of additional shares of the Company's
common stock. The per share conversion price under the notes and the exercise
price under the options were to be equal to the price received by the Company
for the sale of the 1,000,000 shares subject to certain adjustments. The
conversion of the notes and the exercise of the options were both subject to
stockholder approval of an appropriate amendment to the Company's Certificate of
Incorporation increasing its authorized capital to provide for the requisite
shares. On July 17, 1996, the Company's stockholders authorized an increase in
the Company's authorized common stock capital to 140,000,000 shares of common
stock.
On August 13, 1996, the three institutional investors converted their
secured, convertible term notes and exercised their options in full. As a
result, the Company issued 13,403,130 shares, in the aggregate, of its common
stock to such investors, received $3.45 million in cash, and effected by
conversion to its common stock the payment of the notes together with the
accrued interest thereon.
On August 29, 1996, the Company sold 1.8 million shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common stock in November, 1995. The Company received $0.9 million of net
proceeds. The purchaser is subject to certain resale and transfer restrictions
with respect to these shares.
In conjunction with the foregoing sale of common stock and convertible term
notes, the Company also agreed to file a registration statement with the SEC
covering the applicable shares and to use its best efforts to have such
registration statement declared effective by the SEC as soon as practicable. The
relevant agreements provide for significant monetary penalties in the event such
registration statement is not declared effective on or before November 14, 1996,
and in the event its effectiveness is suspended for other than brief permissible
periods. However, the registration statement was declared effective by the SEC
on September 3, 1996.
On November 19, 1996, the Company entered into an agreement to sell an
aggregate amount of $3.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before November 27, 1996. The Debentures, to be issued pursuant to Regulation S
promulgated under the Securities Act of 1933 ("the November 1996 Financing")
were to be due December 31, 1999 and earn 8% interest per annum, payable
quarterly in either cash or the Company's common stock at the Company's sole
option. Subject to certain common stock resale restrictions, the Investor, at
its discretion, would be able to convert the principal and interest due on the
Debentures into the Company's common stock at any time on or after January 20,
1997. In the event of such a conversion, the conversion price would be the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date or 70% of the average closing bid price for the five trading days
immediately preceding the conversion. To provide for the above noted conversion
and interest payment options, the Company would, at closing, reserve and
subsequently cause to be deposited with an escrow agent 15 million shares of the
Company's common stock. Subject to certain conditions, the Company also had the
right to require the Investor to convert all or part of the Debentures under the
above noted conversion price conditions after February 15, 1998. Subsequent to
the closing date of the above financing, the Company was to use its best efforts
to carry out the necessary actions to effect at least a 10:1 reverse split of
the Company's common stock.
The November 1996 financing was not completed as described above. The
Company increased the aggregate amount of debentures offered to $4.0 million and
obtained subscriptions for $3.9 million of such amount, of which $3.4 million
was completed with five investors that are different than the Investor described
above, between January 15, 1997 and March 25, 1997, which resulted in net
proceeds to the Company of $3.2 million. An additional $0.5 million of
debentures has been subscribed for by one investor which is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
debentures into common stock of the Company. The terms of the debentures are
similar to those described above, but the conversion price, if the average bid
price of the stock for the five days preceding conversion is used as the basis
for computing conversion, ranges from 75% to 60% of that price and there is no
requirement that the Company use its best efforts to carry out the necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $83.7 million on a
cumulative basis through December 31, 1996. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the license fees and engineering and development funds provided to the venture
or the Company are recovered.
In January 1997, the Company adopted a plan that management believes should
generate sufficient funds for the Company to continue its operations into 1998.
Under this plan, the Company needs to generate approximately $21 million to fund
its operations in 1997. Included in such amount is approximately $8.9 million in
sales of new products and approximately $9.0 million of technology licensing
fees and royalties. The Company believes that it can generate these funds from
1997 operations and the sale of the debentures referred to above, although there
is no certainty that the Company will achieve this goal. While the Company has
exceeded its expectations to date in 1997 regarding technology licensing fees,
production delays have slowed new product sales. Success in generating
technology licensing fees, royalties and product sales are significant and
critical to the Company's ability to overcome its present financial
difficulties. The Company cannot predict whether it will be successful in
obtaining market acceptance of its new products or in completing its current
negotiations with respect to licenses and royalty revenues. If, during the
course of 1997, management of the Company determines that it will be unable to
meet or exceed the plan discussed above, the Company will consider additional
financing alternatives. The Company's ability to raise additional capital
through sales of common stock will be severely limited until the Company's
stockholders approve an amendment to the Company's Certificate of Incorporation
authorizing an increase in its authorized capital stock. The Company will
monitor its performance against the plan on a monthly basis and, if necessary,
reduce its level of operations accordingly. The Company believes that the plan
discussed above constitutes a viable plan for the continuation of the Company's
business into 1998.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties, product sales, engineering and development
revenue or additional capital. In that event, the Company would have to further
cut back its level of operations substantially in order to conserve cash. These
reductions could have an adverse effect on the Company's relations with its
strategic partners and customers. The uncertainty with respect to the adequacy
of current funds to support the Company's activities until positive cash flow
from operations can be achieved, and with respect to the availability of
financing from other sources to fund any cash deficiencies, raises substantial
doubt about the Company's ability to continue as a going concern. Further
discussion of these uncertainties is presented in Notes 1. and 15. - "Notes to
the Consolidated Financial Statements".
At December 31, 1996, cash and short-term investments were $368,000. The
available resources were invested in interest bearing money market accounts. The
Company's investment objective is preservation of capital while earning a
moderate rate of return.
The Company's working capital decreased from $1,734,000 at December 31, 1995,
to $(1,312,000) as of December 31, 1996. This decrease was due primarily to the
1996 revenue shortfall discussed above.
During 1996, the net cash used in operating activities was $7.8 million. This
utilization reflects the emphasis on the commercial development of its
technology into several product applications which were scheduled for
introduction in 1996 and 1997.
Net inventory declined during 1995 by $801,000, primarily reflecting sales of
the original NoiseBusterTM product.
During the year ended December 31, 1996, accounts receivable reserves were
increased by $4,000 as the Company wrote off certain accounts and added certain
amounts to its reserves.
The Company's available cash balances at December 31, 1996 are lower than
projected at the end of 1995, primarily due to the revenue shortfall noted
above.
The net cash used in investing activities amounted to $186,000 during the
year primarily for capital expenditures. The net cash provided by financing
activities amounted to $6,481,000 primarily from the exercise of options and
warrants and the private placements noted above.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
The Company believes that the level of financial resources available to it is
an essential competitive factor. The Company may elect to raise additional
capital, from time to time, through equity or debt financing in order to
capitalize on business opportunities and market conditions although the
Company's ability to raise additional capital through sales of common stock will
be severely limited until the Company's stockholders approve an amendment to the
Company's Certificate of Incorporation authorizing additional capital stock.
<PAGE>
Capital Expenditures
The Company intends to continue its business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies;
(ii) utilization of the manufacturing capacity of the Company's allies, enabling
the Company to integrate its active technology into products with limited
capital investment; and (iii) access to well-established channels of
distribution and marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of December
31, 1996, and no material commitments are anticipated in the near future.
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY (1)
(In Thousands of Dollars and Shares)
Years Ended December 31,
------------------------------------------------------
1992 1993 1994 1995 1996
------------------------------------------------------
STATEMENTS OF OPERATIONS
DATA:
REVENUES
<S> <C> <C> <C> <C> <C>
Product Sales $740 $1,728 $2,337 $1,589 $1,379
Engineering and 3,779 3,598 4,335 2,297 547
development services
Technology licensing fees
and other 62 60 452 6,580 1,238
------ ------ ------ ------- ------
Total revenues $4,581 $5,386 $7,124 $10,466 $3,164
------ ------ ------ ------- ------
COSTS AND EXPENSES:
Cost of sales $608 $1,309 $4,073 $1,579 $1,586
Cost of engineering and 2,748 2,803 4,193 2,340 250
development services
Selling, general and 5,151 7,231 9,281 5,416 4,890
administrative
Research and development 4,214 7,963 9,522 4,776 6,974
Interest (income) expense, (169) (311) (580) (49) 17
net
Compensation
expense-removal of vesting 7,442 --- --- --- ---
condition
Equity in net (income)
loss of unconsolidated 117 3,582(3) 1,824 (80) 80
affiliates
Other expense, net
89 --- 718 552 192
------- ------- ------- ------- -------
Total costs and expenses $20,200 $22,577 $29,031 $14,534 $13,989
------- ------- ------- ------- -------
Net loss $(15,619)(2)$(17,191)(3)$(21,907) $(4,068) $(10,825)
Weighted average number of
common shares outstanding(4) 61,712 70,416 82,906 87,921 101,191
======== ======= ======= ======= =======
Net loss per share $(0.25)(2) $(0.24)(3) $(0.26) $(0.05) $(0.11)
======== ======= ======= ======= =======
December 31,
------------------------------------------------------
1992 1993 1994 1995 1996
------------------------------------------------------
BALANCE SHEET DATA:
Total assets $15,771 $29,541 $12,371 $9,583 $5,881
Total liabilities 2,069 6,301 6,903 2,699 3,271
Long-term debt --- --- --- 105 --
Accumulated deficit (29,682) (46,873) (68,780) (72,848) ($83,673)
Stockholders equity(5) 13,702 23,239 5,468 6,884 2,610
Working capital 11,038 19,990 923 1,734 (1,312)
(deficiency)
</TABLE>
<PAGE>
(1)The selected consolidated financial data set forth above are derived from
the historical financial statements of the Company. The data set forth above
is qualified in its entirety and should be read in conjunction with the
Company's "Consolidated Financial Statements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
that are included elsewhere herein.
(2)Includes a one-time non-cash charge of $7,441,875 or $.12 per share for the
year ended December 31, 1992, related to the removal of the vesting
conditions to certain warrants. This charge removed any potential future
charge to earnings related to such warrants.
(3)In connection with the sale of Common Stock to Tenneco Automotive in
December 1993, the Company recognized its share of cumulative losses not
previously recorded with respect to its joint venture with Walker amounting
to $3,581,682.
(4)Does not include shares issuable upon the exercise of outstanding stock
options and warrants, since their effect would be antidilutive.
(5) The Company has never declared nor paid cash dividends on its Common Stock.
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders of
NOISE CANCELLATION TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheets of Noise
Cancellation Technologies, Inc. and subsidiaries as at December 31, 1995 and
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
1994, 1995 and 1996 financial statements of the Company's two foreign
subsidiaries. These subsidiaries accounted for revenues of approximately
$1,800,000, $1,200,000 and $407,000 for the years ended December 31, 1994,
December 31, 1995 and December 31, 1996, respectively, and assets of
approximately $586,000 and $515,000 at December 31, 1995 and December 31, 1996,
respectively. These statements were audited by other auditors whose reports have
been furnished to us, one of which contained a reference to the uncertainty
relating to the Company's ability to continue as a going concern. Our opinion,
insofar as it relates to the amounts included for these entities, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1995 and December 31,
1996 and the results of their operations and cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has incurred recurring operating
losses, has a working capital deficiency at December 31, 1996 and will require
additional financing. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ RICHARD A. EISNER & COMPANY, L.L.P.
New York, New York
February 28, 1997
With respect to Note 15
March 28, 1997
With respect to Note 8
April 10, 1997
With respect to Note 7
April 18, 1997
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
-----------------------
ASSETS 1995 1996
<S> <C> <C>
Current assets: --------- ---------
Cash and cash equivalents (Notes 1 and 2) $ 1,831 $ 368
Accounts receivable (Notes 2 and 3)
Trade:
Technology licensing fees - 150
Joint venture and affiliates 241 2
Other 189 392
Unbilled: 260 63
Allowance for doubtful accounts (119) (123)
--------- ---------
Total accounts receivable $ 571 $ 484
Inventories, net of reserves (Notes 2 and 4) 1,701 900
Other current assets 225 207
--------- ---------
Total current assets $ 4,328 $ 1,959
Property and equipment, net (Notes 2 and 5) 2,897 2,053
Patent rights and other intangibles, net (Notes 2 and 14) 2,194 1,823
Other assets 164 46
--------- ---------
$ 9,583 $ 5,881
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,836 $ 1,465
Accrued expenses 571 1,187
Accrued payroll, taxes and related expenses 144 618
Customers' advances 43 1
--------- ---------
Total current liabilities $ 2,594 $ 3,271
--------- ---------
Long term obligations $ 105 $ -
--------- ---------
Total other liabilities $ 105 $ -
--------- ---------
Commitments and contingencies (Notes 3, 10 and 11)
STOCKHOLDERS' EQUITY (Notes 6 and 7)
Preferred stock, $.10 par value, 10,000,000 shares
authorized, none issued
Common stock, $.01 par value, 140,000,000 shares
authorized; issued and outstanding 92,828,407 and
111,614,405 shares, respectively $ 928 $ 1,116
Additional paid-in-capital 78,667 85,025
Accumulated deficit (72,848) (83,673)
Cumulative translation adjustment 150 142
Common stock subscriptions receivable (13) -
--------- ---------
Total stockholders' equity $ 6,884 $ 2,610
--------- ---------
$ 9,583 $ 5,881
========= =========
Attention is directed to the foregoing accountant's reports
and to the accompanying notes to the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
-------------------------------------
1994 1995 1996
-------- --------- --------
<S> <C> <C> <C>
REVENUES:
Technology licensing fees (Notes 2 and 3) $ 452 $ 6,580 $ 1,238
Product sales, net 2,337 1,589 1,379
Engineering and development services 4,335 2,297 547
-------- --------- --------
Total revenues $ 7,124 $ 10,466 $ 3,164
-------- --------- --------
COSTS AND EXPENSES:
Costs of sales $ 4,073 $ 1,579 $ 1,586
Costs of engineering and development services 4,193 2,340 250
Selling, general and administrative 9,281 5,416 4,890
Research and development (including $500,000 of
purchased research and development in 1994) 9,522 4,776 6,974
Equity in net loss (income) of unconsolidated affiliates 1,824 (80) 80
Provision for doubtful accounts 718 552 192
Interest expense 7 4 45
Interest income (587) (53) (28)
-------- --------- --------
Total costs and expenses $ 29,031 $ 14,534 $ 13,989
-------- --------- --------
NET (LOSS) $(21,907) $ (4,068) $(10,825)
======== ========= ========
Weighted average number of common
shares outstanding 82,906 87,921 101,191
======== ========= ========
NET LOSS PER COMMON SHARE $ (.26) $ (.05) $ (.11)
======== ========= ========
Attention is directed to the foregoing accountant's reports
and to the accompanying notes to the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
Expenses
to be
Common Stock Additional Accumu- Cumulative Stock Paid With
--------------- Paid-In lated Translation Subscription Common
Shares Amount Capital Deficit Adjustment Receivable Stock Total
------ ------ ---------- ------- ----------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 81,251 $ 813 $ 71,244 $(46,873) $ 94 $ (1,993) $ (46) $23,239
Shares issued for acquisition of
certain assets 2,025 20 2,206 - - - - 2,226
Consulting expense attributable to warrants - - 10 - - - - 10
Shares issued upon exercise of warrants &
options 2,208 22 944 - - - - 966
Receipt of services in payment of stock
subscriptions - - - - - 797 - 797
Settlement of obligations 560 6 694 - - - (700) -
Net loss - - - (21,907) - - - (21,907)
Translation adjustment - - - - 58 - - 58
Restricted shares issued for Director's
compensation 45 - 99 - - - - 99
Expenses related to prior sale of
common stock - - (20) - - - - (20)
------ ------ ------- ------- --------- ---------- ------- ------
Balance at December 31, 1994 86,089 $ 861 $ 75,177 $(68,780) $ 152 $ (1,196) $ (746) $ 5,468
Sale of common stock, less expenses of $271 6,800 68 3,921 - - - - 3,989
Consulting expense attributable to warrants - - 8 - - - - 8
Shares issued upon exercise of warrants &
options 1,050 10 692 - - (13) - 689
Receipt of services in payment of stock
subscription - - - - - 1,196 - 1,196
Settlement of obligations - - (344) - - - 746 402
Net loss - - - (4,068) - - - (4,068)
Translation adjustment - - - - (2) - - (2)
Retirement of shares attributable to
license revenue (Note 3) (1,110) (11) (787) - - - - (798)
------ ------ ------- -------- ---------- ----------- -------- --------
Balance at December 31, 1995 92,829 $ 928 $ 78,667 $(72,848) $ 150 $ (13) $ - $ 6,884
Sale of common stock, less expenses of $245 18,595 186 6,178 - - 13 - 6,377
Shares issued upon exercise of
warrants & options 204 2 102 - - - - 104
Net loss - - - (10,825) - - - (10,825)
Translation adjustment - - - - (8) - - (8)
Restricted shares issued for Director's
compensation 20 - 13 - - - - 13
Consulting expense attributable to options - - 96 - - - - 96
Retirement of shares related to patent
acquisition (25) - (26) - - - - (26)
Retirement of shares in settlement of
employee receivable (8) - (5) - - - - (5)
------- ------ -------- ------- ---------- ----------- --------- -------
Balance at December 31, 1996 111,615 $1,116 $ 85,025 $(83,673) $ 142 $ - $ - $ 2,610
======= ====== ======== ======= ========== =========== ========= =======
Attention is directed to the foregoing accountant's
reports and to the accompanying notes to the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31
-----------------------------------------
1994 1995 1996
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (21,907) $ (4,068) $ (10,825)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 994 1,127 1,000
Common stock and warrants issued as consideration for:
Compensation 109 8 109
Rent and marketing expense - 355 -
Research and development 500 - -
Common stock retired in settlement of employee account receivable - - (5)
Receipt of license fee in exchange for inventory and release
of obligation - (3,266) -
Receipt of services in payment of stock subscription 165 - -
Provision for slow moving and obsolete inventory 2,032 - -
Provision for tooling costs and write-off 100 94 371
Provision for doubtful accounts 718 522 192
Realized loss on sale of short-term investments 375 - -
Equity in net loss (income) of unconsolidated affiliates 1,824 (80) 80
Unrealized foreign currency (gain) loss 16 32 (45)
Loss on disposition of fixed assets - 107 83
Disposition of short-term investments 18,527 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (921) 302 61
(Increase) decrease in license fees receivable 180 - (150)
(Increase) decrease in inventories (1,518) 212 813
(Increase) decrease in other assets (283) 299 67
Increase (decrease) in accounts payable and accrued expenses 283 (190) 55
Increase (decrease) in other liabilities (1,324) (482) 436
---------- ---------- ----------
Net cash used in operating activities $ (130) $ (4,998) $ (7,758)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures $ (1,286) $ (80) $ (186)
Acquisition of patent rights (70) (210) -
Investment in joint ventures (191) - -
Sales of short term investments - 18 -
---------- ---------- ----------
Net cash used in investing activities $ (1,547) $ (272) $ (186)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from:
Sale of common stock $ - $ 3,989 $ 6,377
Expenses related to prior sale of common stock (20) - -
Exercise of stock purchase warrants and options 966 689 104
---------- ---------- ----------
Net cash provided by financing activities $ 946 $ 4,678 $ 6,481
---------- ---------- ----------
Net decrease in cash and cash equivalents $ (731) $ (592) $ (1,463)
Cash and cash equivalents - beginning of period 3,154 2,423 1,831
---------- ---------- ----------
Cash and cash equivalents - end of period $ 2,423 $ 1,831 $ 368
========== ========== ==========
Cash paid for interest $ 7 $ 4 $ 4
========== ========== ==========
Non-cash investing and financing activity:
Issuance of common stock in exchange for certain assets of ANVT $ 2,200 $ - $ -
========== ========== ==========
See notes 6, 8 and 11 with respect to settlement of certain obligations by issuance of securities and see Note 3 with respect to
issuance of common stock in exchange for notes receivable.
Attention is directed to the foregoing accountant's reports and to the accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. Background:
Noise Cancellation Technologies, Inc. ("NCT" or the "Company") is engaged in
the design, development, licensing, production and distribution of electronic
systems for Active Wave ManagementTM including systems that electronically
reduce noise and vibration, principally through joint ventures and other forms
of strategic alliances. The Company's systems are designed for integration into
a wide range of products serving markets in the transportation, manufacturing,
commercial, consumer products and communications industries. The Company's
activities to date have principally involved the developing of its electronic
systems for commercial use and providing engineering and development services
under contracts with strategic partners and third parties.
The technology supporting the Company's electronic systems was developed
using technology maintained under various patents (the "Chaplin Patents") held
by Chaplin-Patents Holding Co., Inc. ("CPH") as well as patented technology
acquired or developed by the Company. CPH, formerly a joint venture with Active
Noise Vibration Technologies, Inc. ("ANVT") was established to maintain and
defend these patent rights. The former joint venture agreement relating to the
Chaplin Patents required that the Company only license or share the related
technology with entities who are affiliates of the Company. As a result, the
Company established various joint ventures and formed other strategic alliances
(see Note 3.) to further develop the technology and electronic systems and
components based on the Chaplin Patents, to develop such technology into
commercial applications, to integrate the electronic systems into existing
products and to distribute such systems and products into various industrial,
commercial and consumer markets.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $83.7 million on a
cumulative basis through December 31, 1996 and has a working capital deficiency
of $1.3 million at December 31, 1996. These losses, which include the costs for
development of products for commercial use, have been funded primarily from the
sale of common stock, including the exercise of warrants or options to purchase
common stock, and by technology licensing fees and engineering and development
funds received from joint venture and other strategic partners. As discussed in
Note 3., agreements with joint venture and other strategic partners generally
require that a portion of the initial cash flows, if any, generated by the
ventures or the alliances be paid on a preferential basis to the Company's
co-venturers until the technology licensing fees and engineering and development
funds provided to the venture or the Company are recovered.
Cash and cash equivalents amount to $0.4 million at December 31, 1996,
decreasing from $1.8 million at December 31, 1995. Management does not believe
that available funds at December 31, 1996 are sufficient to sustain the Company
for the next twelve months. Management believes that cash and the cash
anticipated from the exercise of warrants and options, the funding derived from
forecasted technology license fees, royalties, and product sales, and
engineering and development revenue, the operating cost savings from the
reduction in employees, reduced capital expenditures, and the sale of the
debentures referred to below (see Notes 6. and 7.) should be sufficient to
sustain the Company's anticipated future level of operations into 1998. However,
the period during 1998 through which it can be sustained is dependent upon the
level of realization of funding from technology license fees, royalties and
product sales, and engineering and development revenue and the achievement of
the operating cost savings from the events described above, all of which are
presently uncertain.
There can be no assurance that additional funding will be provided by
technology license fees, royalties and product sales and engineering and
development revenue. In that event, the Company would have to further and
substantially cut back its level of operations in order to conserve cash. These
reductions could have an adverse effect on the Company's relations with its
strategic partners and customers. Uncertainty exists with respect to the
adequacy of current funds to support the Company's activities until positive
cash flow from operations can be achieved, and with respect to the availability
of financing from other sources to fund any cash deficiencies (see Note 15. with
respect to recent financing).
<PAGE>
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 1996, about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. Summary of Significant Accounting Policies:
Consolidation:
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material inter-company transactions and account balances
have been eliminated in consolidation.
Unconsolidated affiliates include joint ventures and other entities not
controlled by the Company, but over which the Company maintains significant
influence and in which the Company's ownership interest is 50% or less. The
Company's investments in these entities are accounted for on the equity method.
When the Company's equity in cumulative losses exceeds its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method (see Note 3.). The Company will not
be able to record any equity in income with respect to an entity until its share
of future profits is sufficient to recover any cumulative losses that have not
previously been recorded.
Revenue Recognition:
Products Sales:
Revenue is recognized as the product is shipped.
Engineering and development services:
Revenue from engineering and development contracts is recognized and billed
as the services are performed. However, revenue from certain engineering and
development contracts are recognized as services are performed under the
percentage of completion method after 10% of the total estimated costs have been
incurred. Under the percentage of completion method, revenues and gross profit
are recognized as work is performed based on the relationship between actual
costs incurred and total estimated costs at completion.
Estimated losses are recorded when identified.
Revenues recorded under the percentage of completion method amounted to
$249,700, $249,000 and $9,000 for the years ended December 31, 1994, 1995 and
1996, respectively. Retainage balances were $8,200 at December 31, 1996 and
1995. The 1996 balance is expected to be collected within one year.
Technology Licensing Fees:
Technology licensing fees paid by joint venturers, co-venturers, strategic
partners or other licensees which are nonrefundable, are recognized in income
upon execution of the license agreement or upon completion of any performance
criteria specified within the agreement. See Note 3 with respect to the license
fee recorded by the Company in connection with the Walker Noise Cancellation
Technologies and Ultra Electronics, Ltd. Transactions in 1995.
<PAGE>
Cash equivalents and short-term investments:
The Company considers all money market accounts and investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
Short-term investments principally comprise high quality investments in
fixed-income securities funds and mid-term, high quality bond funds.
Inventories:
Inventories are stated at the lower of cost (first in, first out) or market.
With regard to the Company's assessment of the realizability of inventory,
the Company periodically conducts a complete physical inventory; currently this
is done on a quarterly basis. At the same time, the Company reviews the movement
of inventory on an item by item basis to determine the value of items which are
either slow moving or have become obsolete since the last quarterly review.
After applying the above noted measurement criteria, as well as looking forward
to assess the potential for near term product engineering changes and/or
technological obsolescence, the Company determines the current need for
inventory reserves. After applying the above noted measurement criteria at
December 31, 1996, and December 31, 1995, the Company determined that a reserve
of $262,000 and $355,000, respectively, was adequate.
Property and Equipment:
Property and equipment are stated at cost and depreciation is recorded on the
straight-line method over the estimated useful lives of the respective assets.
Leasehold improvements are amortized over the shorter of their useful lives or
the related lease term.
Patent Rights:
Patent rights are stated at cost and are amortized on a straight line basis
over the remaining average life of the patents (ranging from 1 to 15 years).
Amortization expense was $166,700, $398,100 and $403,500 for 1994, 1995 and
1996, respectively. Accumulated amortization was $1,074,800 and $1,478,300 at
December 31, 1995 and 1996, respectively.
It is the Company's policy to review its individual patents on a regular
basis to determine whether any event has occurred which could impair the
valuation of any such patent.
Foreign currency translation:
The financial statements for the United Kingdom operations are translated
into U.S. dollars at year-end exchange rates for assets and liabilities and
weighted average exchange rates for revenues and expenses. The effects of
foreign currency translation adjustments are included as a component of
stockholders' equity and gains and losses resulting from foreign currency
transactions are included in income.
Loss per common share:
The net loss per common share has been determined on the basis of the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents (including stock options and warrants) have not been
considered since their effect would be antidilutive.
<PAGE>
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, short-term
investments and trade receivables. The Company primarily holds its cash and cash
equivalents in two banks. Deposits in excess of federally insured limits were
$0.2 million at December 31, 1996. The Company had no short-term investments at
December 31, 1996. The Company sells its products and services to original
equipment manufacturers, distributors and end users in various industries
worldwide. As shown below, the Company's five largest customers accounted for
approximately 58% of revenues during 1996 and 45% of gross accounts receivable
at December 31, 1996. The Company does not require collateral or other security
to support customer receivables.
As of December 31,
1996,
and for the Year
then Ended
----------------------
Accounts
Customer Receivable Revenue
----------------------- ---------- -----------
Johnson Controls, Inc. $4,500 $712,500
Rockwell International 150,000 500,000
Telex Communications, Inc. 73,600 168,800
Siemens Medical 3,500 319,100
Systems, Inc.
Brookstone 42,600 145,600
All Other 209,600 1,317,600
---------- -----------
Total $483,800 $3,163,600
========== ===========
The Company regularly assesses the realizability of its accounts receivable
and performs a detailed analysis of its aged accounts receivable on no less than
a quarterly basis. When quantifying the realizability of accounts receivable,
the Company takes into consideration the value of receivables in the 90+ day
category, the nature of disputes, if any, and the progression of conversations
and/or correspondence between the Company and customers regarding the underlying
cause for the age of such receivables. After applying the above noted
measurement criteria as of December 31, 1996 and December 31, 1995, the Company
determined that a reserve of $123,000 and $119,000, respectively, was adequate.
Reclassifications:
Certain reclassifications have been made to the 1994 financial statements
to conform with the 1995 and 1996 presentation.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation:
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). The
provisions of SFAS No. 123 allow the Company to either expense the estimated
fair value of stock options and warrants or to continue to follow the intrinsic
value method set forth in APB Opinion 25, "Accounting for Stock Issued to
Employees" (APB 25) but disclose the pro forma effects on net income (loss) had
the fair value of the options or warrants been expensed. The Company has elected
to continue to apply APB 25 in accounting for its stock option and warrant
incentive plans. Please refer to Note 7. for further information.
3. Joint Ventures and Other Strategic Alliances:
The following is a summary of the Company's joint ventures and other
strategic alliances as of December 31, 1996.
The Company and certain of its wholly-owned subsidiaries have entered into
agreements to establish joint ventures and other strategic alliances related to
the design, development, manufacture, marketing and distribution of its
electronic systems and products containing such systems. These agreements
generally provide that the Company license technology and contribute a nominal
amount of initial capital and that the other parties provide substantially all
of the funding to support the venture or alliance. This support funding
generally includes amounts paid or services rendered for engineering and
development. In exchange for this funding, the other party generally receives a
preference in the distribution of cash and/or profits from the joint ventures or
royalties from these alliances until such time that the support funding (plus an
"interest" factor in some instances) is recovered. At December 31, 1996, there
were no preferred distributions due to joint venture partners from future
profits of the joint ventures.
Technology licensing fees and engineering and development fees paid by joint
ventures to the Company are recorded as income since there is no recourse to the
Company for these amounts or any commitment by the Company to fund the
obligations of the venture.
When the Company's share of cumulative losses equals its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method. The aggregate amount of the
Company's share of losses in these joint ventures in excess of the Company's
investments which has not been recorded was zero at December 31, 1996. The
Company will not be able to record any equity in income with respect to an
entity until its share of future profits is sufficient to recover any cumulative
losses that have not previously been recorded.
Certain of the joint ventures will be suppliers to the Company and to other
of the joint ventures and will transfer products to the related entities based
upon pricing formulas established in the agreements. The formula is generally
based upon fully burdened cost, as defined in the agreements, plus a nominal
profit.
Total revenues recorded by the Company relating to the joint ventures and
alliances, or their principals, for technology licensing fees, engineering and
development services and product sales were as follows:
Years Ended December 31,
-----------------------------------
Joint Venture/Alliance 1994 1995 1996
- ---------------------- ---------- ---------- ---------
Walker Noise Cancellation Technologies $1,701,700 $3,993,500 $ 90,100
Ultra Electronics, Ltd. 1,072,400 3,153,400 61,700
ELESA --- 424,000 28,300
Siemens Medical Systems, Inc. 533,000 259,900 319,100
Foster/NCT Supply, Ltd. 144,700 133,200 9,700
AB Electrolux 162,500 129,000 12,000
Interkeller AG 105,600 --- ---
Johnson Controls, Inc. --- --- 712,500
---------- ---------- ----------
Total $3,719,900 $8,093,000 $1,233,400
========== ========== ==========
Outlined below is a summary of the nature and terms of these ventures or
alliances:
<PAGE>
Joint Ventures
Chaplin Patents Holding Company ("CPH") was co-owned on a 50/50 basis by the
Company and ANVT, a former competitor. On September 16, 1994, the Company
acquired the patents, technology, other intellectual property and certain
related tangible assets of ANVT. The Company also acquired all rights under
certain joint venture and customer agreements subject to the consent of the
other parties to those agreements. Included in the acquisition was ANVT's 50%
interest in CPH at which time the Company became the sole shareholder of CPH.
CPH acquired certain patent rights relating to the reduction and elimination of
noise and vibration from the Company, ANVT and a third party. The Company and
ANVT had licensed co-exclusive rights to the Chaplin Patents from CPH. The joint
venture agreement related to the Chaplin Patents required that the Company may
only license or share the related technology with entities who are affiliates of
the Company. As a result, the Company has established several joint ventures and
formed other strategic alliances to further develop the technology and
electronic systems and components based on the Chaplin Patents, to develop such
technology into commercial applications, to integrate the electronic systems
into existing products and to distribute such systems and products into various
industrial, commercial and consumer markets. Initial capital contributions by
the Company and ANVT of $150,000 each to CPH were used to acquire certain rights
owned by the third party. Pursuant to the patent license agreement, and until
September 16, 1994 the Company and ANVT contributed cash equally to CPH to fund
administrative costs and provide for maintenance and protection of the related
patents. After September 16, 1994, the Company, as sole shareholder of CPH, was
responsible for 100% of CPH's funding requirements.
Walker Noise Cancellation Technologies ("WNCT") was a 50/50 general
partnership between NCT Muffler, Inc., a wholly-owned subsidiary of the Company
and Walker Electronic Mufflers, Inc. ("WEM"), a wholly-owned subsidiary of
Tennessee Gas Pipeline Company. On November 15, 1995, the Company and Walker
executed a series of related agreements (the "Restructuring Agreements") and
concluded previously noted negotiations with Tenneco Automotive and Walker
regarding the Company's commitment to help fund $4.0 million of product and
technology development work and the transfer of the Company's 50% interest in
WNCT to Walker. The Restructuring Agreements provided for the transfer of the
Company's interest in WNCT to Walker, the elimination of the Company's
previously expensed obligation to fund the remaining $2.4 million of product and
technology development work noted above, the transfer to Walker of certain
Company owned tangible assets related to the business of WNCT, the expansion of
certain existing technology licenses and the Company's performance of certain
research and development activities for Walker at Walker's expense as to future
activities. In consideration for the above, Walker paid the Company $0.3
million, delivered to the Company 1,110,083 shares of the Company's common stock
which Tenneco Automotive had purchased from the Company in December 1993 and has
undertaken to pay the Company certain royalties from the exploitation of the
intellectual property rights granted to Walker under the expansion of existing
technology licenses. The shares delivered to the Company were retired on
November 16, 1995. Accordingly, the Company recorded $3.6 million as a
technology licensing fee relating to the net effect of the above noted
Restructuring Agreements in the fourth quarter of 1995.
WNCT was established in 1989 to develop, manufacture and distribute active
mufflers for use in automobiles and other vehicles and other industrial
applications. The agreement between NCT and Walker was expanded and extended in
1991.
Initial capital contributions by the Company and WEM were $750,000 each, and
such amounts were paid by WNCT to the Company as a license fee in 1989. The
joint venture agreement provided that WEM will make preferred contributions to
WNCT for the purpose of funding engineering and development performed by the
Company and engineering performed by WEM. Aggregate preferred contributions made
by WEM to WNCT (net of return of capital advances to WEM) through December 31,
1994, amounted to $7.6 million, of which $4.2 million was paid to the Company
and $3.4 million was credited by WNCT to WEM's capital account for the cost of
engineering services performed. Interest on the engineering preferred
contributions and certain portions of the engineering and development
contributions was compounded monthly at 1% less than the bank prime rate until
repaid through preferred distributions. WEM's obligation to fund engineering and
development expired at the end of the first quarter of 1994.
The Company recorded income of $750,000 from the license fee in 1989. The
Company has also recorded as income its engineering and development payments
from WNCT, amounting to $1.1 million, $1.1 million and $0.7 million for each of
the years in the three year period ended December 31, 1995, respectively. The
Company recorded no such payments from WNCT in 1996. There is no recourse to the
Company for these payments. Other than certain future Walker funded research and
development activities noted above, the Company has no current plans, obligation
or intention to provide additional funding to WNCT.
In December, 1993, Tenneco Automotive, a division of Tennessee Gas Pipeline
Company, purchased shares of common stock of the Company for $3.0 million in
cash, at a price per share of approximately $2.70, which was equal to 94% of the
price to the public of the shares of the Company's common stock then offered.
Immediately thereafter, the Company contributed $1.0 million to the capital of
WNCT, following which WNCT repaid $1.0 million of the capital advances made to
WNCT by WEM and representatives of WEM. The Company agreed to restructure WNCT.
Such restructuring would include giving WNCT worldwide rights for the
manufacture and sale of all muffler products except those manufactured and sold
in the consumer and defense markets. WNCT also would be expanded to have, in
addition to rights it has with respect to vehicular mufflers, worldwide rights
to all silencing and vibration applications (e.g., mufflers, cabin quieting,
engine mounts, fan quieting and engine block quieting) for all vehicles except
trains, aircraft and watercraft. In addition, the Company committed to help fund
$4.0 million of product and technology development work of the Company
attributable to WNCT. Also pursuant to the agreement with Tenneco Automotive,
Walker's right to acquire the Company's interest in WNCT upon the occurrence of
certain events was eliminated and Tenneco Automotive had the right to have a
representative serve on the Company's Board of Directors. The agreement with
Tenneco Automotive and the Company's related funding commitment resulted in 1993
recognition of $3.6 million of previously unrecognized losses and 1994
recognition of $1.4 million of current year losses with respect to the joint
venture with WEM. Such losses exceeding the Company's remaining investment in
WNCT amounted to $2.9 million at December 31, 1994. Of the $2.9 million, $1.5
million recorded as a current liability. The balance of $1.4 million was
classified as a long term liability. The above noted November 15, 1995
Restructuring Agreements significantly altered the foregoing terms of the
December 1993 agreement.
Prior to December 31, 1994, the Company's share of cumulative losses equaled
its investment and commitment to the joint venture. The Company had no further
obligation or intention to fund any additional losses therefore, the Company
suspended applying the equity method.
Foster/NCT Headsets International, Ltd. ("FNH") was a 50/50 joint venture
between Foster Electric Company, Ltd. ("Foster") and the Company. FNH was
established as a limited liability company in Japan in March 1991 to develop,
design, manufacture and sell active noise cancellation headset systems. FNH had
exclusive manufacturing rights for the headsets in the Far East and
non-exclusive marketing rights worldwide. Additionally, another joint venture
with Foster/NCT Supply, Ltd., ("FNS" as described below) served as a supply
joint venture for FNH.
On July 28, 1995, Foster Electric Co., Ltd. ("Foster"), Foster NCT Headsets
International ("FNH") and the Company executed a letter agreement amending the
1991 agreement covering the headset joint venture company, FNH. Pursuant to that
agreement Foster acquired the Company's 50% interest in FNH and a license to
manufacture headsets for FNH and NCT with tooling currently owned by NCT in
consideration for Foster's assumption of FNH's outstanding liabilities of
$303,000. The agreement also grants FNH the right to sell certain headsets on an
exclusive basis in Japan and a non-exclusive basis throughout the rest of the
Far East, in consideration for a royalty on the sale of such headsets.
Initial capital contributions made by the Company and Foster under the FNH
joint venture agreement were 6.5 million yen (historical cost of approximately
$47,000) each. In March, 1994 the Company and Foster agreed to jointly and
equally increase the capitalization of FNH to a total of 52 million yen
resulting in the Company's additional investment of $191,000. The increase in
capitalization enabled FNH to launch an expanded marketing effort in the
Company's products in the Far East.
Under related agreements, Foster paid a license fee to the Company of $1
million, which was recognized as income in 1991, and agreed to pay an additional
$700,000 to the Company at a rate of two percent of sales after cumulative sales
by FNH reach $50 million and the accumulated deficit in FNH is reduced to zero.
The license fees paid to date in the amount of $1.0 million are not subject to
repayment.
As part of the February 10, 1995 agreement to dissolve the FNS joint venture,
(see FNS Note below) NCT has repurchased the exclusive manufacturing rights for
headsets in the Far East from Foster. The Company recorded a charge of $780,000
in 1994 relating to these transactions.
In return for technical and management assistance provided by Foster, FNH has
agreed to pay Foster up to an aggregate amount of $1.4 million based on three
percent of sales; the first $700,000 of which are to be paid without restriction
based upon sales amount, the remaining $700,000 begin to be paid to Foster when
the FNH accumulated deficit is reduced to zero. Through December 31, 1994, the
accumulated deficit of FNH was $543,000.
The Company's above noted incremental investment resulted in the recognition
of $42,000 of previously unrecognized losses and $149,000 of current losses with
respect to the FNH joint venture in 1994.
The Company has purchased certain tooling for use by FNH which it has
recorded on its books. The tooling will be amortized against products sold by
NCT.
Analog/NCT Supply Ltd. ("ADI/NCT") is a 50/50 joint venture between Analog
Devices, Inc. ("ADI") and the Company which was established in June 1992.
ADI/NCT was formed to design, develop and manufacture computer chips to be
incorporated into the Company's electronic systems. Initial capital
contributions by the Company and ADI were nominal. The joint venture and related
agreements provide that each party will bear their respective cost of design and
development of the computer chips. ADI will manufacture and sell the computer
chips to ADI/NCT, based on orders provided to ADI/NCT by the Company, at prices
to be agreed upon by the Company and ADI. Administrative services required by
ADI/NCT will be provided by ADI, the costs of which will be funded by the joint
venture. No such services have been charged to or incurred by the joint venture
as of December 31, 1996.
Harris/NCT Supply, L.L.C. ("HARNCT") is a 50/50 limited liability company
owned equally by Harris Corporation ("Harris") and the Company under a Limited
Liability Company Agreement concluded in September, 1993 (the "LLC Agreement").
HARNCT will develop and manufacture silicon chips to be incorporated into the
Company's electronic systems. Initial capital contributions by the Company and
Harris were nominal. The LLC Agreement provides that each party will bear their
respective cost of design and development of the silicon chips. Harris will
manufacture and sell the silicon chips to HARNCT, based on orders provided to
HARNCT by the Company, at prices to be agreed upon by the Company and Harris.
Administrative services required by HARNCT will be provided by Harris, the costs
of which will be funded by HARNCT. No such services have been charged to or
incurred by HARNCT as of December 31, 1996.
OnActive Technologies, L.L.C. ("OAT") is a limited liability company
currently owned 42.5% by Applied Acoustic Research, L.L.C. ("AAR"), 42.5% by the
Company and 15.0% by Hoover Universal, Inc., a wholly owned subsidiary of
Johnson Controls, Inc.("JCI") (collectively, the "Members") under an Operating
Agreement concluded in December, 1995 and amended in May, 1996. OAT will design,
develop, manufacture, market, distribute and sell Flat Panel Transducers(TM)
("FPT(TM)") and related components for use in audio applications and audio
systems installed in ground based vehicles. Initial capital contributions by the
Company and AAR were nominal and no Member is required to make any additional
contribution to OAT. In May, 1996, JCI acquired a $1.5 million, 15% equity
interest in OAT and acquired exclusive rights in the automotive OEM market to
certain of the Company's and AAR's related patents for a total of $1.5 million,
which was paid 50/50 to the Company and AAR. In connection therewith, the
Company recorded a license fee of $750,000 during the year ended December 31,
1996. The Operating Agreement provides that services and subcontracts provided
to OAT by the Members are to be compensated by OAT at 115% of the Members fully
burdened cost. However, during 1996, administrative services required by OAT
were provided by the Company and not charged to OAT. As of December 31, 1995 the
Company recognized $80,000 of income relating to its share of 1995 profit in
OAT. As of December 31, 1996 the Company reversed the $80,000 of income which
related to its share of the 1996 loss in OAT.
Foster/NCT Supply, Ltd., ("FNS") was a 30/70 joint venture between the
Company and Foster which was established in June 1991 to serve as a supply joint
venture for the Company's worldwide activities.
In late 1994, Foster and the Company agreed that the acquisition of certain
assets of ANVT by NCT (see Note 14.) removed the necessity for the continued
existence of FNS. An orderly liquidation of FNS was completed in April 1995. The
agreement provided for the Company's repurchase from Foster for $0.6 million of
the exclusive headset manufacturing rights in the Far East (see FNH note above)
and an immediate minimum 5% reduction in the price of headset products to be
produced by Foster for the Company. The Company accrued a $0.8 million charge in
1994 relating to this agreement, of which $0.2 million was reflected as a
current liability at December 31, 1994.
Capital contributions required under the joint venture agreement were 3
million yen from the Company and 7 million yen from Foster (approximately
$22,000 and $51,000, respectively). Foster was also required to provide
assistance to FNS for research and development activities amounting to $50,000
per month up to an aggregate of $1.2 million, which FNS was to repay to Foster
at the rate of one percent of the amount of each month's sales. There was no
recourse to the Company should FNS not record sufficient sales for Foster to
recover such research and development costs.
Boet Systeme Actif S.A. ("BSA") was a 49/51 joint venture between NCT
Muffler, Inc., a wholly-owned subsidiary of the Company, and S.A. Andre Boet
("Boet"), respectively. BSA was established in 1991 to develop, manufacture in
France, and sell worldwide NCT electronic silencers for use on non-automotive
internal combustion engines. BSA was responsible for the customization,
marketing and sales of the silencers. The Company was to assist BSA with product
development and employee training. All supplies were to be purchased by BSA from
either Boet or NCT Muffler. Initial capital contributions by NCT Muffler and
Boet were not significant.
As a result of the April, 1994 transfer to WNCT of the rights to market the
Company's industrial silencer products and anticipation of the Company's
November 15, 1995 agreement with Tenneco Automotive and Walker (see WNCT Note
above), in October, 1995 Boet assumed all liabilities of BSA and the Board of
Directors of BSA approved the dissolution of the joint venture.
BSA funded the Company's cost of research and engineering, at a predetermined
rate, and reimbursed materials, equipment, tools, supplies and out-of-pocket
expenses to Boet and the Company. The joint venture agreement provided that Boet
would advance funding for the development, operation and working capital needs
of BSA. BSA was to repay Boet through preferential distributions from its excess
cash in amounts not to exceed 20% of BSA's net income in each year. Boet
contributed an aggregate of approximately $496,000 to BSA through December 31,
1994, none of which was repaid.
Payments from BSA to the Company for research and engineering aggregated
approximately $120,000 through December 31, 1994. License fees from BSA to NCT
Muffler aggregated $240,000 through December 31, 1994. The above amounts were
recognized as income by the Company since there was no commitment or intention
for NCT Muffler to fund any obligations of BSA, nor was there any recourse to
NCT Muffler for these payments.
<PAGE>
Other Strategic Alliances:
Foster and the Company entered into an agreement in December 1993, pursuant
to which Foster purchased shares of common stock at a value of $2.0 million (the
"Foster Shares"), at a price per share of approximately $2.70 equal to 94% of
the price to the public of the shares of common stock in the December 1993
offering. Foster paid the purchase price by means of a cash payment of one cent
($.01) per share (the par value of the common stock) and the delivery of a
series of promissory notes (the "Foster Notes") in an aggregate principal amount
equal to the balance of the purchase price. The Foster Notes were full recourse
notes of Foster bearing interest at one percent above the rate of three-year
United States Treasury Notes and were to mature on April 17, 1997. The Foster
Notes were secured by the Foster Shares until paid or "earned out" as described
in the next paragraph. The Foster Notes were recorded as a Common Stock
subscription receivable by the Company.
Foster and the Company entered into an agreement under which Foster provided
and the Company purchased $2.0 million of various product and market development
services deemed necessary by the Company for commercialization of several new
headset and other products and the further development of the Company's Japanese
markets. Upon completion of each such project or phase, the agreed budgeted
amount therefore was billed to the Company and paid, at the Company's election,
either in cash or by discharge of an equivalent amount of the Foster Notes, in
which an appropriate number of the Foster Shares were released from the
collateralization restrictions and the Common Stock subscription receivable was
reduced. During 1995, $1.3 million of such services and assets were purchased by
the Company and, at the Company's election was satisfied through the discharge
of an equivalent amount of the Foster Notes. As of December 31, 1995, the Foster
Notes have been paid-in-full.
Foster and the Company's wholly owned subsidiary, NCT Far East ("NCTFE")
entered into a marketing agreement in November 1991 under which Foster agreed to
fund up to $500,000 for the establishment of a marketing office in Tokyo. This
funding was reimbursed through the issuance of 150,000 shares of common stock of
the Company to Foster in 1992 and future payments to Foster by NCTFE equal to
25% of NCTFE pretax profits, as defined, until Foster has recovered 100% of
funding in excess of $300,000. The market value of the Company's common stock
issued to Foster ($300,000) was charged to operations in 1992. Through December
31, 1995, $185,200 has been funded by Foster under the marketing agreement.
Further, commissions payable by NCTFE to Foster under this agreement are based
upon sales by customer and 5% of any engineering and development or working
capital funding acquired through Foster's efforts.
Interkeller AG ("Interkeller"), a member of Rieter Holding Limited, and the
Company entered into a strategic alliance in June 1992 to improve the noise
reduction in vehicles through the combination of NCT's active cabin quieting
system ("ACQS") and Interkeller technology. Under the agreement, Interkeller
performed acoustic studies in the field of electronic cabin quieting in
vehicles, and the Company sold Interkeller a prototype ACQS and licensed
Interkeller the right to use related software in connection with acoustic
studies under the agreement, for which Interkeller has paid a license fee and
contributed $240,000 to the Company over a two year period, ending June 1994. As
of December 31, 1994, the Company has recognized cumulative license fee income
of $180,000 and $97,000 for consultation and development under the June 1992
agreement. The contract has not been renewed.
AB Electrolux ("Electrolux") and the Company entered into a Joint Development
Cooperation Agreement in June 1991 which provides for the Company to design,
develop and supply active systems for quieting certain Electrolux products.
Electrolux agreed to pay the Company $65,000 per month for two years, which the
Company has recorded as engineering and development income. These development
costs may be recovered by Electrolux through royalties on net sales to other
manufacturers of competing products up to 250% of the engineering and
development costs funded by Electrolux. Electrolux agreed to purchase components
for the manufacture of related systems for its products from the Company. If
Electrolux purchases such components from other sources, a royalty of 6% of the
net invoice price will be due to the Company.
Further, the Company granted Electrolux a worldwide non-exclusive license to
utilize related proprietary technology for the life of such patents for a fee of
$500,000 payable in monthly installments of $20,000, and agreed to limit the
Company's licensing of such technology to five white goods manufacturers for a
period of five years. In January 1994 such limitations on the Company's
technology licensing were terminated by an amendment to the original agreement.
The $500,000 license fee was recognized as income in 1991, all of which was paid
as of December 31, 1993.
<PAGE>
Ultra Electronics Ltd. (formerly Dowty Maritime Limited) ("Ultra") and the
Company entered into a teaming agreement in May 1993 to collaborate on the
design, manufacture and installation of products to reduce noise in the cabins
of various types of aircraft. In accordance with the agreement, the Company
provided informational and technical assistance relating to the aircraft
quieting system and Ultra reimbursed the Company for expenses incurred in
connection with such assistance. Ultra was responsible for the marketing and
sales of the products. The Company was to supply Ultra with electronic
components required for the aircraft quieting system, at a defined cost, to be
paid by Ultra.
In March 1995, the Company and Ultra amended the teaming agreement and
concluded a licensing and royalty agreement for $2.6 million and a future
royalty of 1-1/2 % of sales commencing in 1998. Under the agreement, Ultra has
also acquired the Company's active aircraft quieting business based in
Cambridge, England, leased a portion of the Cambridge facility and has employed
certain of the Company's employees.
Accordingly, the Company recorded $2.6 million as a technology licensing fee
relating to the net amount received from above noted amended teaming agreement
and the licensing and royalty agreement in the first quarter of 1995.
Siemens Medical Systems, Inc. ("Siemens") and NCT Medical Systems, Inc.
("NCTM"), a 90%-owned subsidiary of the Company, entered into an agreement in
March 1992 to supply Siemens with NCTM/MRI systems, a noise cancellation and
audio system for Magnetic Resonance Imaging systems ("MRI"), on an exclusive
basis at specified quantities over two years. In return, Siemens agreed to
utilize only NCTM/MRI systems in their MRI's during the two year period. During
1994, 1995 and 1996 NCTM has sold 48, 26 and 35 units, respectively, to Siemens.
In late November 1993, the Company and Siemens signed a new agreement,
superseding the 1992 agreement, which provides for the purchase by Siemens from
the Company of European and U.S. versions of the Company's MRI headsets suitable
for use with Siemens' MRI machines.
4. Inventories:
Inventories comprise the following:
December 31,
1995 1996
---------- ----------
Components $ 716,200 $ 542,700
Finished goods 1,339,900 619,600
---------- ----------
Gross inventory $2,056,100 1,162,300
Reserve for obsolete &
slow moving inventory (355,000) (262,100)
---------- ----------
Inventory, net of reserves $1,701,100 $ 900,200
========== ==========
5. Property and Equipment:
Property and equipment comprise the following:
Estimated
Useful December 31,
Life -----------------------
(Years) 1995 1996
----------- ----------- -----------
Machinery and equipment 5 $1,852,800 $1,763,000
Furniture and fixtures 5 777,600 749,200
Leasehold improvements 7-10 1,155,600 1,185,400
Tooling 1-3 1,430,300 1,061,900
Other 5-10 118,400 166,600
----------- -----------
Gross $5,334,700 $4,926,100
Less, accumulated depreciation (2,437,600) (2,873,600)
Net $2,897,100 $2,052,500
=========== ===========
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
was $531,000, $588,000 and $518,000, respectively.
<PAGE>
6. Common Stock:
Private Placements:
On November 8, 1995 the Company entered into a stock purchase agreement for
the sale of 4.8 million shares of its common stock in a private placement to a
foreign investor in consideration for $3.3 million in net proceeds to the
Company. The closing of the transaction occurred on November 14, 1995. The
purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation S of the United States Securities
Act of 1933, as amended.
The Company completed a private placement of 2.0 million shares of its common
stock on August 4, 1995 receiving approximately $0.7 million in net proceeds.
The purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation D of the Securities Act of 1933,
as amended. As provided for in the Stock Purchase Agreement, within nine months
of the closing date, the Company was obligated to file a registration statement
with the Securities and Exchange Commission covering the registration of the
shares for resale by the purchaser.
On March 28, 1996, the Company sold 2.0 million shares of its common stock in
a second private placement with the investor in the private placement described
in the preceding paragraph that provided net proceeds to the Company of $0.7
million under terms and conditions substantially the same as those of the
earlier private placement. A registration statement covering the 4.0 million
shares of the Company's common stock issued in connection with this private
placement and the one described in the preceding paragraph was declared
effective by the Commission on September 3, 1996.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in the
aggregate, of its common stock in a private placement with three institutional
investors that provided net proceeds to the Company of $0.3 million.
Contemporaneously, the Company sold secured convertible term notes in the
aggregate principal amount of $1.2 million to those institutional investors and
granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion price
under the notes and the exercise price under the options are equal to the price
received by the Company for the sale of such 1,000,000 shares subject to certain
adjustments.
On July 17, 1996, the Company's stockholders authorized an increase in the
Company's authorized capital to 140,000,000 shares.
On August 13, 1996, the three institutional investors converted their
secured, convertible term notes and exercised their options in full. As a
result, the Company issued 13,403,130 shares, in the aggregate, of its common
stock to such investors, received $3.45 million in cash, and effected by
conversion to its common stock the payment of the notes together with the
accrued interest thereon.
On August 29, 1996, the Company sold 1.8 million shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common stock in November, 1995. The Company received $0.9 million of net
proceeds. The purchaser is subject to certain resale and transfer restrictions
with respect to these shares.
See Note 15. "Subsequent Events" with respect to private placements of the
Company's common stock subsequent to December 31, 1996.
Expenses paid with common stock:
During 1994, the Company entered into agreements with third parties to issue
common stock in satisfaction of certain obligations which amounted to $700,000.
Stock subscription receivable:
The $13,000 stock subscription receivable at December 31, 1995 was due from a
former director and was paid in 1996.
In December 1993, Foster and the Company entered into a definitive agreement
pursuant to which Foster purchased shares of common stock for a cash payment of
one cent ($.01) per share (the par value of the common stock) and the delivery
of a series of promissory notes (the "Foster Notes") in an aggregate principal
amount equal to the balance of the purchase price. The Foster Notes were full
recourse notes of Foster bearing interest at one percent above the rate of
three-year United States Treasury Notes and were to mature on April 17, 1997.
The Foster Notes were collateralized by the Foster Shares until paid or "earned
out" (see Note 3). No shares could be sold by Foster, irrespective of the
payment of any of the Foster Notes, until June 23, 1994. As of December 31, 1995
the Foster Notes have been paid-in-full.
Shares reserved for common stock options and warrants:
At December 31, 1996, aggregate shares reserved for issuance under common
stock option plans and warrants amounted to 15.7 million shares of which common
stock options and warrants for 12.5 million shares are outstanding (see Note 7.)
and 12.3 million shares are exercisable.
7. Common Stock Options and Warrants:
Stock Options:
The Company applies APB 25 in accounting for its various stock option
incentive plans and warrants and, accordingly, recognizes compensation expense
as the difference, if any, between the fair value of the underlying common stock
and the grant price of the option on the date of grant. The effect of applying
SFAS No. 123 on 1995 and 1996 pro forma net loss as stated above is not
necessarily representative of the effects on reported net loss for future
periods due to, among other factors, (I) the vesting period of the stock options
and (ii) the fair value of additional stock option grants in future periods. If
compensation expense for the Company's stock option plans and warrants had been
determined based on the fair value of the options or warrants at the grant date
for awards under the plans in accordance with the methodology prescribed under
SFAS No. 123, the Company's net loss would have been $5.8 million and $12.8
million, or $(.07) per share and $(.13) per share in 1995 and 1996,
respectively. The fair value of the options and warrants granted in 1995 and
1996 are estimated in the range of $0.44 to $1.25 and $0.48 to $0.58 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
utilizing the following assumptions: dividend yield 0%, volatility of 1.040 and
1.225 in 1995 and 1996, respectively, risk free interest rates in the range of
5.63% to 7.84% and 5.05% to 6.50% for 1995 and 1996, respectively, and expected
life of 3 years.
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.
<PAGE>
Additional information with respect to 1987 Plan activity is summarized as
follows:
Years Ended December 31,
-------------------------------------------------------
1994 1995 1996
---------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- -------- --------- -------- --------
Outstanding at 2,089,741 $0.57 1,790,472 $0.58 1,540,000 $0.56
beginning of year
Options granted - - - - - -
Options exercised (289,269) 0.49 (232,651) 0.66 - -
Options canceled, (10,000) 1.49 (17,821) 1.39 (40,000) 1.31
expired or forfeited
--------- --------- ---------
Outstanding at end 1,790,472 $0.58 1,540,000 $0.56 1,500,000 $0.54
of year ========= ========= =========
Options exercisable 1,790,472 $0.58 1,540,000 $0.56 1,500,000 $0.54
at year-end ========= ========= =========
The following table summarizes information about 1987 Plan stock options
outstanding at December 31, 1996:
Options Outstanding
----------------------------------
Weighted Options
Average Exercisable
Remaining -----------------------
Contractual Weighted Weighted
Life Average Average
Range of Exercise Number (In Exercise Number Exercise
Price Outstanding Years) Price Exercisable Price
- ----------------- ----------- ----------- -------- ----------- --------
$0.50 to $0.78 1,500,000 0.17 $0.54 1,500,000 $0.54
As of December 31, 1996, options for the purchase of 67,821 shares were
available for future grant under the 1987 Plan.
<PAGE>
Additional information with respect to non-plan stock option activity is
summarized as follows:
Years Ended December 31,
-------------------------------------------------------
1994 1995 1996
------------------ ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------ ------- -------- ------- --------
Outstanding at 1,948,791 $2.05 1,641,995 $1.98 403,116 $1.04
beginning of year
Options granted - - - - - -
Options exercised (113,000) 0.55 (328,667) 0.51 (26,667) 0.50
Options canceled, (193,796) 3.55 (910,212) 2.92 (4,000) 1.33
expired or forfeited
--------- --------- --------
Outstanding at end 1,641,995 $1.98 403,116 $1.04 372,449 $1.08
of year
========= ========= ========
Options exercisable 1,458,495 $1.82 399,116 $1.02 370,449 $1.07
at year-end
========= ========= ========
The following table summarizes information about non-plan stock options
outstanding at December 31, 1996:
Options Outstanding
----------------------------------
Weighted Options
Average Exercisable
Remaining ---------------------
Contractual Weighted Weighted
Life Average Average
Range of Exercise Number (In Exercise Number Exercise
Price Outstanding Years) Price Exercisable Price
- ------------------- ----------- ----------- -------- ----------- --------
$0.50 to $5.36 372,449 3.17 $1.08 370,449 $1.07
<PAGE>
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 1992 Plan. On April 14, 1993,
the Company amended the 1992 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 1992 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 1992 Plan and
the grants received stockholder approval at the 1993 Annual Meeting of
Stockholders. On November 8, 1995, in connection with the Company's action
undertaken to make shares of the Company's common stock available for issuance
in private placements to raise additional working capital for the Company, the
Company again amended the 1992 Plan to provide for the granting of options and
restricted stock awards to officers, employees and non-employee directors
covering a total of 10,000,000 shares of common stock. On July 17, 1996, the
amendment to the 1992 Plan received stockholder approval at the 1996 Annual
Meeting of Stockholders. At December 31, 1996, options for 6,022,765 shares are
outstanding, of which 5,835,265 are exercisable under this plan at prices
ranging from $.656 to $4.00.
Additional information with respect to 1992 Plan activity is summarized as
follows:
Years Ended December 31,
-------------------------------------------------------
1994 1995 1996
--------------- ---------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ------- -------- ------- --------
Outstanding at 2,664,927 $3.07 4,058,542 $2.75 4,004,248 $1.00
beginning of year
Options granted 1,718,004 2.24 5,386,422 1.04 2,156,500 0.67
Options exercised (6,210) 2.38 (161,423) 0.85 (33,533) 0.75
Options canceled, (318,179) 2.74 (5,279,293) 2.29 (104,450) 1.37
expired or forfeited
========= ========= =========
Outstanding at end of 4,058,542 $2.75 4,004,248 1.00 6,022,765 $0.86
year
========= ========= =========
Options exercisable 3,851,042 $2.84 1,534,335 $1.31 5,835,265 $0.86
at year-end
========= ========= =========
The following table summarizes information about 1992 Plan stock options
outstanding at December 31, 1996:
Options Outstanding
-----------------------------------
Weighted Options
Average Exercisable
Remaining ---------------------
Contractual Weighted Weighted
Life Average Average
Range of Exercise Number (In Exercise Number Exercise
Price Outstanding Years) Price Exercisable Price
- ----------------- ----------- ----------- -------- ----------- --------
$0.66 to $4.00 6,022,765 4.20 $0.86 5,835,265 $0.86
<PAGE>
On November 15, 1994 the Board of Directors adopted the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors (the "Directors Plan"), as
amended. Under the Directors Plan 821,000 shares have been approved by the Board
of Directors for issuance. The options granted under the Directors Plan have
exercise prices equal to the fair market value of the Common Stock on the grant
dates, and expire five years from date of grant. On November 8, 1995, in
connection with the Company's action undertaken to make shares of the Company's
common stock available for issuance in private placements to raise additional
working capital for the Company, the Company amended the Directors Plan. This
amendment included an increase in the number of shares of common stock of the
Company covered by the Directors' Plan from 725,000 to 821,000. On July 17,
1996, the amendment to the Directors Plan received stockholder approval at the
1996 Annual Meeting of Stockholders.
As of December 31, 1996, 2,457,311 shares were available for future grants of
restricted stock awards and for options to purchase common stock under the 1992
Plan.
Additional information with respect to Director's Plan activity is summarized
as follows:
Years Ended December 31,
--------------------------------------------------
1994 1995 1996
-------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----- -------- --------- -------- ------ --------
Outstanding at - $ - 240,000 $0.97 821,000 $0.73
beginning of year
Options granted 240,000 0.97 1,076,000 0.77 - -
Options exercised - - - - - -
Options canceled, - - (495,000) 0.92 (75,000) 0.75
expired or forfeited ------- --------- -------
Outstanding at end 240,000 $0.97 821,000 $0.73 746,000 $0.73
of year
======= ========= =======
Options exercisable - - 305,000 $0.70 746,000 $0.73
at year-end
======= ========= =======
The following table summarizes information about Director's Plan stock
options outstanding at December 31, 1996:
Options Outstanding
-------------------------------------
Weighted Options
Average Exercisable
Remaining --------------------
Contractual Weighted Weighted
Number Life Average Average
Range of Exercise Outstanding (In Exercise Number Exercise
Price Years) Price Exercisable Price
- ------------------- ----------- ----------- -------- ----------- --------
$0.66 to $0.75 746,000 2.88 $0.73 746,000 $0.73
As of December 31, 1996, options for the purchase of 75,000 shares were
available for future grants under the Director's Plan.
<PAGE>
Warrants:
The Company had shares of its common stock reserved at December 31,
1994,December 31, 1995, and December 31, 1996, for warrants outstanding, all of
which are exercisable.
Additional information with respect to warrant activity is summarized as
follows:
Years Ended December 31,
-----------------------------------------------------
1994 1995 1996
---------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ------ -------- ------ --------
Outstanding at 6,540,388 $0.99 4,829,896 $1.20 4,032,541 $0.71
beginning of year
Options granted 89,000 1.03 2,418,750 0.76 - -
Options exercised (1,799,492) 0.42 (327,105) 0.76 (144,002) 0.45
Options canceled, - - (2,889,000) 1.57 - -
expired or forfeited
========= ========= =========
Outstanding at end 4,829,896 $1.20 4,032,541 $0.71 3,888,539 $0.72
of year
========= ========= =========
Options exercisable 4,829,896 $1.20 4,032,541 $0.71 3,888,539 $0.72
at year-end
========= ========= =========
The following table summarizes information about warrants outstanding at
December 31, 1996:
Warrants Outstanding
----------------------------------
Weighted Warrants
Average Exercisable
Remaining ---------------------
Contractual Weighted Weighted
Life Average Average
Range of Exercise Number In Exercise Number Exercise
Price Outstanding Years) Price Exercisable Price
- ----------------- ----------- ----------- -------- ----------- --------
$0.20 to $4.00 3,888,539 1.48 $0.72 3,888,539 $0.72
In 1995, the Company issued 2,144,750 at market value then 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 at-the-money replacement warrants 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 then 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. At the Annual Meeting of Stockholders held
on July 17, 1996, the stockholders approved an amendment to the Company's
Certificate of Incorporation to increase the number shares of Common Stock
authorized thereunder from 100,000,000 shares to 140,000,000 shares thereby
providing a sufficient quantity of shares of common stock to cover the exercise
of the above noted warrants.
<PAGE>
8. Related Parties:
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Chairman of the Board
of Directors of the Company, shares investment control over an additional 24% of
the outstanding capital of ERI. During the fiscal year ended December 31, 1996,
the Company was not required to make any such payments to ERI under these
agreements.
In 1993, the Company entered into three Marketing Agreements with QuietPower
Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical Solutions,
Inc."), a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing Agreements, QSI has undertaken to use its best
efforts to seek research and development funding for the Company from electric
and natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will record a charge for the amount by which the market price of the Common
Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1993, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
Under the terms of the second of the three Marketing Agreements, QSI is
granted a non-exclusive right to market the Company's products that are or will
be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the Company in the feeder
bowl area. The initial term of this Marketing Agreement is three years with
subsequent automatic one-year renewals unless a party elects not to renew.
Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with equipment used by electric and/or natural gas utilities for
retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products equal to 129% of QSI's
marketing expenses attributable to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues received by the Company from the sale of such products. QSI is
also entitled to receive a 5% commission on research and development funding
similar to that described above. QSI's exclusive rights continue for an
indefinite term provided it meets certain performance criteria relating to
marketing efforts during the first two years following product availability in
commercial quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights become non-exclusive, depending on the circumstances
causing such change, the initial term then becomes either three or five years
from the date of this Marketing Agreement, with subsequent one-year automatic
renewals in each instance unless either party elects not to renew. During the
fiscal year ended December 31, 1996, the Company was not required to pay any
commissions to QSI under any of these Marketing Agreements.
<PAGE>
The Company has also entered into a Teaming Agreement with QSI under which
each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1996, the Company made
no payments to QSI.
In March 1995, the Company entered into a Master Agreement with QSI under
which QSI was granted an exclusive worldwide license under certain NCT patents
and technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances include
NCT's failure to develop the products or the failure of the parties to agree on
certain development matters. In consideration of the rights granted under the
Master Agreement, QSI is to pay the Company a royalty of 6% of the gross
revenues received from the sale of the products and 50% of the gross revenues
received from sublicensing the rights granted to QSI under the Master Agreement
after QSI has recouped 150% of the costs incurred by QSI in the development of
the products in question. The Company is obligated to pay similar royalties to
QSI on its sale of the products and the licensing of rights covered under the
Master Agreement outside the utility industry and from sales and licensing
within the utility industry in the Far East. In addition to the foregoing
royalties, QSI is to pay an exclusivity fee to the Company of $750,000; $250,000
of which QSI paid to the Company in June 1994. The balance is payable in equal
monthly installments of $16,667 beginning in April 1995. QSI's exclusive rights
become non-exclusive with respect to all products if it fails to pay any
installment of the exclusivity fee when due and QSI loses such rights with
respect to any given product in the event it fails to make any development
funding payment applicable to that product. The Master Agreement supersedes all
other agreements relating to the products covered under the Master Agreement,
including those agreements between the Company and QSI described above.
Immediately following the execution to the Master Agreement, the Company and
QSI entered into a letter agreement providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.
In April 1995, the Company and QSI entered into another letter agreement
under which QSI agreed to forfeit and surrender the five year warrant to
purchase 750,000 shares of the Company's common stock issued to QSI under the
first Marketing Agreement described above. In addition, the $500,000 balance of
the exclusivity fee provided for under the Master Agreement was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the indebtedness to be paid under the letter agreement described in the
preceding paragraph was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million, whichever
first occurs. Such indebtedness is to be evidenced by a promissory note, non
payment of which is to constitute an event of termination under the Master
Agreement.
On May 21, 1996, the Company and QSI entered into another letter agreement
extending the time by which the payments from QSI to the Company under the April
1995 letter agreement described above were to be made. Under the letter the
payment of certain arrearages in the payment of the exclusivity fee was to be
made not later than June 15, 1996, with the balance continuing to be payable by
monthly payments of $8,333 and as provided in the May 1995 letter agreement. In
addition the payment of the other indebtedness owed by QSI to the Company was to
be paid by a payment of $25,000 at the time QSI obtained certain anticipated
financing with the balance paid by monthly payments of $15,000 each. Default in
QSI's timely payment of any of the amounts specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.
On April 9, 1997, the Company and QSI entered into another letter agreement
revising the payment schedule set forth in the May 21, 1996 letter agreement
applicable to the payment of the indebtedness owed to the Company by QSI other
than the unpaid portion of the exclusivity fee. Under the revised schedule, the
full amount of such indebtedness is to be paid by an initial payment of $125,000
on or before April 21, 1997, and a second payment of $200,000 upon the closing
of a proposed financing in June 1997 or on January 1, 1998, whichever first
occurs. The Company is also entitled to receive 15% of any other financing
obtained by QSI in the interim as well as interest at the rate of 10% per annum
on the unpaid amount of such indebtedness from July 1, 1997. The letter
agreement also provides for the continuation of QSI's payment of the exclusivity
fee in accordance with the earlier letter agreements as well as the payment of
$11,108 by April 21, 1997, for headset products sold by the Company to QSI in
1996. In the event of a default in QSI's timely payment of any of the amounts
specified in the April 9, 1997 letter agreement, the Company has the right to
cause the termination of the Master Agreement and all rights granted by QSI
thereunder upon 10 days notice of termination to QSI.
<PAGE>
As of April 10, 1997, QSI has paid all installments due and payable for
the exclusivity fee and, other than as described above, owes no other amounts to
the Company.
During 1994, 1995 and 1996 the Company purchased $2.2 million, $0.5 million
and $0.6 million respectively, of products from its various manufacturing joint
venture entities of which $0.3 million was included in accounts payable at
December 31, 1995. There were no accounts payable related to manufacturing joint
venture entities at December 31, 1996 reflecting the termination or transfer of
ownership of the subject ventures in 1995 (see Note 3.).
As discussed in Note 6., the Company had stock subscription receivables from
a joint venture partner in 1994 and a former director in 1995, which were paid
in 1996.
9. Income Taxes:
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
Accordingly, deferred tax assets and liabilities are established for temporary
differences between tax and financial reporting bases of assets and liabilities.
A valuation allowance is established when the Company determines that it is more
likely than not that a deferred tax asset will not be realized. The Company's
temporary differences primarily result from depreciation related to machinery
and equipment, compensation expense related to warrants, options and reserves.
The adoption of the aforementioned accounting standard had no effect on
previously reported results of operations.
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $67.4 million and research and development credit
carryforwards of $1.2 million for federal income tax purposes which expire as
follows:
Net Research
and
Operating Development
Year Losses Credits
------------ ------------
1999 $151,500 --
2000 129,300 --
2001 787,200 --
2002 2,119,000 --
2003 1,974,000 --
2004 1,620,500 --
2005 3,869,900 $141,000
2006 1,822,500 191,900
2007 6,865,800 117,800
2008 13,455,500 320,500
2009 16,292,500 413,200
2010 9,385,900 61,400
2011 8,887,400 --
Total $67,361,000 $1,245,800
============ ============
The Company's ability to utilize its net operating loss carryforwards may be
subject to an annual limitation. The difference between the statutory tax rate
of 34% and the Company's effective tax rate of 0% is due to the increase in the
valuation allowance of $5,883,600, $1,395,000 and $3,251,100 in 1994, 1995 and
1996, respectively.
The types of temporary differences that give rise to significant portions of
the deferred tax assets and the federal and state tax effect of those
differences as well as federal net operating loss and research and development
credit at December 31, 1995, and 1996 were as follows:
1995 1996
------------ ------------
Accounts receivable $ 280,900 $ 280,700
Inventory 155,700 107,800
Property and equipment 102,000 187,300
Accrued expenses 36,600 243,300
Stock compensation 2,651,400 2,684,000
Other 349,100 324,100
---------- -----------
Total temporary $ 3,575,700 $ 3,827,100
differences
Federal net operating 19,964,500 22,902,800
losses
Federal research and 1,184,400 1,245,800
development credits
----------- -----------
$24,724,600 $27,975,700
Less: Valuation (24,724,600) (27,975,700)
allowance
----------- -----------
Deferred taxes $ -- $ --
=========== ===========
<PAGE>
10. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira ($18.9 million); and (vi) order the
Company to pay damages for the harm done to Mr. Valerio's image for an amount
such as the judge shall deem equitable and in case for no less than 500 million
Lira ($3.1 million). The Company retained an Italian law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the Company, through its Italian counsel, filed a brief of reply with the
Tribunal of Milan setting forth the Company's position that: (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is groundless since the parties never entered into an agreement, and (iii)
because Mr. Valerio is not enrolled in the official Register of Agents, under
applicable Italian law Mr. Valerio is not entitled to any compensation for his
alleged activities. A preliminary hearing before the Tribunal was held on May
30, 1996, certain pretrial discovery has been completed and a hearing before a
Discovery Judge was held on October 17, 1996. Submissions of the parties final
pleadings were to be made in connection with the next hearing which was
scheduled for April 3, 1997. On April 3, 1997, the Discovery Judge postponed
this hearing to May 19, 1998, due to a reorganization of all proceedings before
the Tribunal of Milan. Management is of the opinion that the lawsuit is without
merit and will contest it vigorously. In the opinion of management, after
consultation with outside counsel, resolution of this suit should not have a
material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a severe material effect
on quarterly or annual operating results.
11. Commitments and Contingencies:
The Company is obligated for minimum annual rentals (net of sublease income)
under operating leases for offices and laboratory space, expiring through
December 2001 with various renewal options, as follows:
Year Ending
December 31, Amount
------------- ----------
1997 $ 539,500
1998 541,800
1999 482,400
2000 270,300
2001 12,600
==========
Total $1,846,600
==========
Rent expense was $760,400, $794,200 and $573,000 for each of the three years
ended December 31, 1994, 1995 and 1996, respectively. During 1995, rent expense
was paid, in part, through the issuance of common stock (see Note 6.).
In April, 1996, the Company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, certain
health care benefits to employees and directors of the Company's United States
operations. The Company administers this modified self insured Benefit Plan
through a commercial third party administrative health care provider. The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million while combined individual and family benefit exposure in
each Benefit Plan fiscal year is limited to $35,000. Benefit claims in excess of
the above mentioned individual or the maximum aggregate stop loss are covered by
a commercial third party insurance provider to which the Company pays a nominal
premium for the subject stop loss coverage. The Company records benefit claim
expense in the period in which the benefit claim is incurred. As of March 25,
1997, the Company was not aware of any material benefit claim liability.
<PAGE>
12. Information on Business Segments:
The Company operates in only one business segment, specifically engaged in
the design, development, production and distribution of electronic systems that
actively reduce noise and vibration. The Company's worldwide activities consist
of operations in the United States, Europe and Japan. Revenue, (income) loss and
identifiable assets by geographic area are as follows:
Twelve Months Ended
December 31,
----------------------------------------
1994 1995 1996
------------ ------------ -----------
Revenues
United States $4,610,600 $ 6,095,300 $ 2,673,500
Europe 2,130,900 4,065,200 480,400
Far East 382,400 305,800 9,700
---------- ---------- ----------
Total $7,123,900 $10,466,300 $ 3,163,600
========== =========== ==========
Net (Income) Loss
United States $21,446,600 $3,761,100 $ 9,752,000
Europe (12,100) (36,000) 911,500
Far East 472,200 343,400 160,800
----------- ---------- ----------
Total $21,906,700 $4,068,500 $10,824,300
=========== ========== ===========
Identifiable Assets
United States $10,493,900 $8,997,400 $ 5,366,000
Europe 1,877,500 586,000 515,200
----------- ---------- -----------
Total $12,371,400 $9,583,400 $ 5,881,200
=========== ========== ===========
13. Accounting for Certain Investments in Debt and Equity Securities:
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, (SFAS No. 115) "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 prescribes the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. The Company has classified its
investments, consisting of a portfolio of short term U.S. Treasury Bills and
related investments, as trading securities which are reported at fair market
value. The cumulative effect of adoption of the new standard as of January 1,
1994, is not material. During the twelve month period ended December 31, 1994,
the Company recorded charges totaling $375,200 relating to realized and
unrealized losses in its investments. No such charge was incurred in 1995 or
1996. Interest income from investments was $587,000, $53,000 and $28,000 for the
twelve months ended December 31, 1994, 1995 and 1996 respectively.
<PAGE>
14. Acquisition of Certain ANVT Assets:
On September 16, 1994, the Company acquired the patents, technology, other
intellectual property and certain related tangible assets of ANVT. The Company
also acquired all rights under certain joint venture and customer agreements
subject to the consent of the other parties to those agreements.
Under the acquisition agreement, the Company paid $200,000 plus 2,000,000
shares of its common stock resulting in a total purchase price of $2,400,000. In
addition, ANVT is entitled to a future contingent earn-out based on revenues
generated by the ANVT contracts assigned to the Company as well as certain types
of agreements to be entered into by the Company with parties previously having a
business relationship with ANVT. Future contingent payments, if any, will be
charged against the associated revenues. Companies that were parties to
agreements with ANVT on the closing date include Fiat CIEI S.p.A. (a
Fiat/Gilardini affiliate), Alpine Electronics, Inc., Applied Acoustic Research,
Inc., GEC-Marconi Avionics Limited and Arvin Industries, Inc. As of the period
ended December 31, 1996, no such contingent earn-out or payments were due ANVT.
The shares of common stock issued to ANVT were valued at the average of the
published price (less a discount to reflect the time required to register the
subject shares) of the Company's common stock during the period commencing with
the announcement of the transaction and ending on September 16, 1994. The
purchase price has been allocated to the following assets, under the purchase
method of accounting, based upon their estimated fair value at the date of
acquisition as follows:
Patents and Other Intangibles $1,700,000
Research and Development In-Process 500,000
Property and Equipment 200,000
----------
Total $2,400,000
==========
The Company allocated $500,000 to in-process research and development
projects, resulting in a corresponding charge to the Company's operations in
1994.
The patents are being amortized over their respective remaining lives, which
at the time of acquisition ranged from one to seventeen years.
15. Subsequent Events:
On November 19, 1996, the Company entered into an agreement to sell an
aggregate amount of $3.0 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before November 27, 1996. The Debentures, issued pursuant to Regulation S of the
Securities Act of 1933 ("the November 1996 Financing") were to be due December
31, 1999 and earn 8% interest per annum, payable quarterly in either cash or the
Company's common stock at the Company's sole option. Subject to certain common
stock resale restrictions, the Investor, at its discretion, would have been able
to convert the principal and interest due on the Debentures into the Company's
common stock at any time on or after January 20, 1997. In the event of such a
conversion, the conversion price would be the lessor of 85% of the closing bid
price of the Company's common stock on the closing date or 70% of the average
closing bid price for the five trading days immediately preceding the
conversion. To provide for the above noted conversion and interest payment
options, the Company would, at closing, reserve and subsequently cause to be
deposited with an escrow agent 15 million shares of the Company's common stock.
Subject to certain conditions, the Company also had the right to require the
Investor to convert all or part of the Debentures under the above noted
conversion price conditions after February 15, 1998. Subsequent to the closing
date of the above financing, the Company was to use its best efforts to carry
out the necessary actions to effect at least a 10:1 reverse split of the
Company's common stock.
The November 1996 financing was not completed as described above. The
Company increased the aggregate amount of debentures offered to $4.0 million and
obtained subscriptions for $3.9 million of such amount, of which $3.4 million
was completed with five investors that are different than the Investor described
above, between January 15, 1997 and March 25, 1997, which resulted in net
proceeds to the Company of $3.2 million. An additional $0.5 million of
debentures has been subscribed for by one investor which is to close after that
investor converts $0.75 million of its current holdings of $1.5 million of
debentures into common stock of the Company. The terms of the debentures are
similar to those described above, but the conversion price, if the average bid
price of the stock for the five days preceding conversion is used as the basis
for computing conversion, ranges from 75% to 60%% of that price and there is no
requirement that the Company use its best efforts to carry out the necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.
<PAGE>
On March 28, 1997, the Company and New Transducers Ltd. ("NXT"), a wholly
owned subsidiary of Verity Group PLC ("Verity") executed a cross licensing
agreement. Under terms of the agreement, the Company will license patents and
patents pending which relate to FPT(TM) technology to NXT, and NXT will license
patents and patents pending which relate to parallel technology to the Company.
In consideration of the license, NCT recorded a $3.0 million license fee
receivable from NXT as well as royalties on future licensing and product
revenue. Concurrently with the cross licensing agreement, the Company and Verity
executed agreements granting each an option for a four year period commencing on
March 28, 1998, to acquire a specified amount of the common stock of the other
subject to certain conditions and restrictions. With respect to the Company's
option to Verity, 3.8 million shares of common stock (approximately 3.4% of the
then issued and outstanding common stock) of the Company are covered by such
option, and 5.0 million ordinary shares (approximately 2.0% of the then issued
and outstanding ordinary shares) of Verity are covered by the option granted by
Verity to the Company. The exercise price under each option is the fair value of
a share of the applicable stock on March 28, 1997, the date of grant. If the
Company does not obtain stockholder approval of an amendment to its Certificate
of Incorporation increasing its common stock capital by an amount sufficient to
provide shares of the Company's common stock issuable upon the full exercise of
the option granted to Verity by September 30, 1997, both options expire.
<PAGE>
Corporate Information
- --------------------------------------------------------------------------
Officers
Jay M. Haft Irene Lebovics
Chairman of the Board Senior Vice President, and
President of NCT Headsets, a
Michael J. Parrella division of the Company
President
John B. Horton
Jeffrey C. Zeitlin Senior Vice President, General
Senior Vice President, Counsel and Secretary
Operations, and
Chief Financial Officer Cy E. Hammond
Vice President, Finance
Michael A. Hayes, Ph.D.
Vice President, Research
- --------------------------------------------------------------------------
Directors
Jay M. Haft *
Chairman of the Board
Michael J. Parrella
President
John J. McCloy, II **
Sam Oolie
Chairman, Oolie Enterprises and
Chairman and Chief Executive Officer,
NoFire Technologies, Inc.
* Chairman, Compensation Committee
** Chairman, Audit Committee
<PAGE>
Investor Information
- --------------------------------------------------------------------------
Annual Meeting
The Annual Meeting of Noise Cancellation Technologies, Inc. shareholders will
convene at 2:00 PM on Thursday, June 19, 1997, at the Stamford Marriott Hotel,
The Stamford Forum, Stamford, Connecticut 06901
10-K Report
A copy of the Company's Annual Report for the fiscal year ended December 31,
1996 on Form 10-K as filed with the Securities and Exchange Commission for 1996
on Form 10K, with a list of Exhibits thereto, will be sent without charge to any
shareholder of record or beneficial owner of shares of the Company's common
stock upon receipt of written request addressed to:
Investor Relations
Noise Cancellation Technologies, Inc.
One Dock Street
Stamford, CT 06902
Any Exhibit will be provided upon payment of the reasonable costs of producing
such Exhibit.
Transfer Agent
Communications regarding stock transfers, lost certificates, and change of
address should be directed to American Stock Transfer & Trust Company, 40 Wall
Street, New York, NY 10005. (212) 936-5100.
Stock Market Information
The Company's common stock is currently traded on the NASDAQ National
Market System under the symbol "NCTI". High and low last sale information for
1996 and 1995 for the common stock for specified quarterly periods is set forth
below:
1996 1995
---------------- -----------------
HIGH LOW HIGH LOW
------ ----- ------ ------
1st Quarter 7/8 17/32 1 3/16 9/16
2nd Quarter 1 5/32 21/32 1 3/16 9/16
3rd Quarter 15/16 5/8 1 9/16 1/2
4th Quarter 11/16 11/32 1 1/16 9/16
Independent Accountants Corporate Offices
Richard A. Eisner & Company, LLP Noise Cancellation Technologies, Inc.
575 Madison Avenue 1025 West Nursery Road, Suite 120
7th Floor Linthicum, MD 21090-1203
New York, NY 10022-2597 (410) 636-8700
