<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number: 0-18267
Noise Cancellation Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware
59-2501025
(State or other jurisdiction of incorporation (I.R.S. Employer
organization) Identification No.)
1025 West Nursery Road, Linthicum, MD. 21090
(Address of principal executiveoffices) (Zip Code)
(410) 636-8700
(Registrant's telephone number, including area code)
<PAGE>
F-3
(Richard A. Eisner & Company, L.L.P. Letterhead)
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 $1,900,000, $586,000 and $515,000 at December 31, 1994, 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 report, included in the annual report on Form 10-K filed with the
Securities and Exchange Commission on April 15, 1997 we referred to the omission
by the Company of information required by Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). As
described in Note 7, the Company has now provided the information required by
SFAS No. 123.
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>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands of dollars)
December 31,
---------------------------------
ASSETS 1995 1996
---------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents (Notes 1 and 2) $ 1,831 $ 368
Accounts receivable (Notes 2 and 3):
Trade :
Technology licensing fees -- 150
Joint ventures 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>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------------
1994 1995 1996
------------------------------------------
REVENUES:
<S> <C> <C> <C> <C>
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>
- ------------------------------------------------------------------------------
F-4
- ------------------------------------------------------------------------------
<TABLE>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
(In thousands of dollars and shares)
Expenses
Common Stock Additional Cumulative Stock to be
-------------------- Paid-In Accumulated Translation Subscription Paid With
Shares Amount Capital eficit Adjustment Receivable Common 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 subscription - - - - - 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 STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years
Ended December 31,
--------------------------------------------------------------
1994 1995 1996
------------------- -------------------- --------------------
Cash flows from operating activities:
<S> <C> <C> <C>
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 expenses - 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 718 552 192
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
acompanying notes to the consolidated financial statements.
F-38
</TABLE>
[GRAPHIC OMITTED]
<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).
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
Loss per common share:
The net loss per common share has been determined on the basis of the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents (including stock options and warrants) have not been
considered since their effect would be antidilutive.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, short-term
investments and trade receivables. The Company primarily holds its cash and cash
equivalents in two banks. Deposits in excess of federally insured limits were
$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 Systems, Inc. 3,500 319,100
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.
<PAGE>
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 $1,701,700 $3,993,500 $90,100
Technologies
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
========== ========== ==========
<PAGE>
Outlined below is a summary of the nature and terms of these ventures or
alliances:
Joint Ventures
Chaplin Patents Holding Company ("CPH") was co-owned on a 50/50 basis by the
Company and ANVT, a former competitor. On September 16, 1994, the Company
acquired the patents, technology, other intellectual property and certain
related tangible assets of ANVT. The Company also acquired all rights under
certain joint venture and customer agreements subject to the consent of the
other parties to those agreements. Included in the acquisition was ANVT's 50%
interest in CPH at which time the Company became the sole shareholder of CPH.
CPH acquired certain patent rights relating to the reduction and elimination of
noise and vibration from the Company, ANVT and a third party. The Company and
ANVT had licensed co-exclusive rights to the Chaplin Patents from CPH. The joint
venture agreement related to the Chaplin Patents required that the Company may
only license or share the related technology with 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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 (355,000) (262,100)
inventory
------------- -------------
Inventory, net of reserves $1,701,100 $900,200
============= =============
5. Property and Equipment:
Property and equipment comprise the following:
Estimated
Useful Life December 31,
(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.
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.
<PAGE>
7. Common Stock Options and Warrants:
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.
Stock Options:
The Company's 1987 Stock Option Plan (the "1987 Plan") provides for the
granting of up to 4,000,000 shares of common stock as eith er 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
lease 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.
<TABLE>
Additional information with respect to 1987 Plan activity is summarized as
follows:
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1994 1995 1996
------------------- ----------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,089,741 $ 0.57 1,790,472 $ 0.58 1,540,000 $ 0.56
Options granted
- - - - - -
Options exercised (289,269) 0.49 (232,651) 0.66 - -
Options cancelled, expired
or forfeited (10,000) 1.49 (17,821) 1.39 (40,000) 1.31
========== ========== ==========
Outstanding at end of year 1,790,472 $ 0.58 1,540,000 $ 0.56 1,500,000 $ 0.54
========== ========== ==========
Options exercisable at
year-end 1,790,472 $ 0.58 1,540,000 $ 0.56 1,500,000 $ 0.54
========== ========== ==========
The following table summarizes information about 1987 Plan stock options
outstanding at December 31, 1996:
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------------- ------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Price Outstanding (In Years) Price Exercisable Price
<C> <C> <C> <C> <C>
$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.
</TABLE>
<PAGE>
(C)
<TABLE>
Additional information with respect to non-plan stock option activity is
summarized as follows:
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1994 1995 1996
------------------- ----------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,948,791 $ 2.05 1,641,995 $ 1.98 403,116 $ 1.04
Options granted - - - - - -
Options exercised (113,000) 0.55 (328,667) 0.51 (26,667) 0.50
Options cancelled, expired
or forfeited (193,796) 3.55 (910,212) 2.92 (4,000) 1.33
--------- --------- ---------
Outstanding at end of year 1,641,995 $ 1.98 403,116 $ 1.04 372,449 $ 1.08
========= ========= =========
Options exercisable at 1,458,495 $ 1.82 399,116 $ 1.02 370,449 $ 1.07
year-end ========= ========= =========
The following table summarizes information about non-plan stock options
outstanding at December 31, 1996:
<CAPTION>
Options
Options Outstanding Exercisable
----------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Price Outstanding (In Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$0.50 to $5.36 372,449 3.17 $ 1.08 370,449 $ 1.07
</TABLE>
On October 6, 1992, the Company adopted a stock option plan (the "1992
Plan") for the granting of options to purchase up to 1,639,865 shares of common
stock to officers, employees and certain directors and on that date granted
options on 1,357,989 shares at a price of $2.375 under the 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.
<PAGE>
<TABLE>
(D)
Additional information with respect to 1992 Plan activity is summarized as
follows:
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1994 1995 1996
------------------- ----------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,664,927 $ 3.07 4,058,542 $ 2.75 4,004,248 $ 1.00
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 cancelled, expired
or forfeited (318,179) 2.74 (5,279,293) 2.29 (104,450) 1.37
--------- --------- ---------
Outstanding at end of year 4,058,542 $ 2.75 4,004,248 1.00 6,022,765 $ 0.86
========= ========= =========
Options exercisable at
year-end 3,851,042 $ 2.84 1,534,335 $ 1.31 5,835,265 $ 0.86
========= ========= =========
The following table summarizes information about 1992 Plan stock options
outstanding at December 31, 1996:
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------------ --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Price Outstanding (In Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$0.66 to $4.00 6,022,765 4.20 $ 0.86 5,835,265 $ 0.86
</TABLE>
On November 15, 1994 the Board of Directors adopted the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors (the "Directors Plan"), as
amended. Under the Directors Plan 821,000 shares have been approved by the Board
of Directors for issuance. 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.
<PAGE>
<TABLE>
(E)
Additional information with respect to Director's Plan activity is summarized
as follows:
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1994 1995 1996
-------------------- --------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year - $ - 240,000 $ 0.97 821,000 $ 0.73
Options granted 240,000 0.97 1,076,000 0.77 - -
Options exercised - - - - - -
Options cancelled, expired
or forfeited - - (495,000) 0.92 (75,000) 0.75
--------- --------- ---------
Outstanding at end of year 240,000 $ 0.97 821,000 $ 0.73 746,000 $ 0.73
========= ========= =========
Options exercisable at
year-end - - 305,000 $ 0.70 746,000 $ 0.73
========= ========= =========
<CAPTION>
The following table summarizes information about Director's Plan stock
options outstanding at December 31, 1996:
Options
Options Outstanding Exercisable
------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Price Outstanding (In Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$0.66 to $0.75 746,000 2.88 $ 0.73 746,000 $ 0.73
</TABLE>
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.
<TABLE>
(F)
Additional information with respect to warrant activity is summarized as
follows:
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- --- ---------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 6,540,388 $ 0.99 4,829,896 $ 1.20 4,032,541 $ 0.71
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 cancelled, expired
or forfeited - - (2,889,000) 1.57 - -
--------- --------- ---------
Outstanding at end of year 4,829,896 $ 1.20 4,032,541 $ 0.71 3,888,539 $ 0.72
========= ========= =========
Options exercisable at
year-end 4,829,896 $ 1.20 4,032,541 $ 0.71 3,888,539 $ 0.72
========= ========= =========
<CAPTION>
The following table summarizes information about warrants outstanding at
December 31, 1996:
Options
Options Outstanding Exercisable
------------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Price Outstanding (In Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$0.20 to $4.00 3,888,539 1.48 $ 0.72 3,888,539 $ 0.72
</TABLE>
<PAGE>
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.
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.
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, 1994 and December 31, 1995. There were no accounts payable related
to manufacturing joint venture entities at December 31, 1995 and 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.
<PAGE>
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:
Research and
Net 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 differences $3,575,700 3,827,100
Federal net operating losses 19,964,500 22,902,800
Federal research and development
credits 1,184,400 1,245,800
--------------- ------------
$24,724,600 $27,975,700
Less: Valuation allowance (24,724,600) (27,975,700
Deferred taxes $ --- $ ---
================ ============
10. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion 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 $440,000
1998 443,000
1999 383,000
2000 221,000
2001 13,000
==========
Total $1,500,000
==========
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.
<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
=========== =========== ===========
<PAGE>
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.
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 500,000
In-Process
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.
<PAGE>
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.
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>
(Richard A. Eisner & Company, L.L.P. Letterhead)
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
Board of Directors and Stockholders
Noise Cancellation Technologies, Inc.
The audits referred to in our report, dated February 28, 1997 (with respect
to Note 15, March 28, 1997 and Note 8, April 10, 1997), included Schedule II for
the years ended December 31, 1996, December 31, 1995 and December 31, 1994. In
our opinion, such schedule presents fairly the information set forth therein in
compliance with the applicable accounting regulation of the Securities and
Exchange Commission.
/s/ RICHARD A. EISNER & COMPANY, L.L.P.
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>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
<CAPTION>
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------------------
Additions
---------------------------------
(1) (2)
---------------------------------
Balance at Charged to Charged to
beginning of costs and other accounts - Deductions Balance at
Description Period expenses describe describe end of period
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 184 $ 871 $ - $ 154 $ 901
=============== =============== ================= ================== ==============
Year ended December 31, 1995:
Allowance for doubtful accounts $ 901 $ 552 $ - $ 1,334 (2) $ 119
=============== =============== ================= ================== ==============
Year ended December 31, 1996:
Allowance for doubtful accounts $ 119 $ 192 $ - $ 188 (2) $ 123
=============== =============== ================= ================== ==============
Year ended December 31, 1994:
Allowance for inventory obsolence $ 170 $ 1,855 $ - $ - $ 2,025
=============== =============== ================= ================== ==============
Year ended December 31, 1995:
Allowance for inventory obsolence $ 2,025 $ 452 $ - $ 2,122 (1) $ 355
=============== =============== ================= ================== ==============
Year ended December 31, 1996:
Allowance for inventory obsolence $ 355 $ - $ - $ 93 (1) $ 262
=============== =============== ================= ================== ==============
Attention is directed to the foregoing accountant's report's and to the
accompanying notes to the consolidated financial statements. (1) To write off
reserves applied to December 31, 1994 inventory. (2) To write off fully reserved
accounts receivable deemed uncollectible at December 31, 1995 and 1996.
</TABLE>
<PAGE>
<TABLE>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES EXHIBIT 11
Computation of Net (Loss) Per Share
<CAPTION>
(In thousands, except per share amounts)
Year Ended December 31,
--------- --------- ---------
PRIMARY 1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net (loss) ($ 21,907) ($ 4,068) ($ 10,825)
Less: reduction of interest expense or interest
earned attributable to utilization of assumed
proceeds from exercise of options and warrants
in excess of amounts required to repurchase
20% of the outstanding common stock at average
market price
========= ========= =========
ADJUSTED NET (LOSS) ($ 21,907) ($ 4,068) ($ 10,825)
========= ========= =========
Weighted average number of shares outstanding 82,906 87,921 101,191
Add: common equivalent shares (determined using
the "Treasury Stock" method) representing shares
issuable upon assumed exercise of options and
warrants in excess of average market price 5,488 4,428 3,904
Shares issuable upon conversion of Series B
preferred shares -- -- --
========= ========= =========
SHARES USED FOR COMPUTATION 88,394 92,349 105,095
========= ========= =========
PRIMARY NET (LOSS) PER SHARE ($ 0.25) ($ 0.04) ($ 0.10)
========= ========= =========
FULLY DILUTED
Net (loss) ($ 21,907) ($ 4,068) ($ 10,825)
Less: reduction of interest expense or interest earned attributable to
utilization of assumed proceeds from exercise of options and warrants in
excess of amounts required to repurchase 20% of the outstanding common stock
at year-end market price if greater than average market price
========= ========= =========
ADJUSTED NET (LOSS) ($ 21,907) ($ 4,068) ($ 10,825)
========= ========= =========
Weighted average number of shares outstanding 82,906 87,921 101,191
Add: common equivalent shares (determined using
the "Treasury Stock" method) representing shares
issuable upon assumed exercise of options and
warrants in excess of year-end market price
if greater than average market price 5,488 4,428 3,904
Shares issuable upon conversion of Series B
preferred shares -- -- --
========= ========= =========
SHARES USED FOR COMPUTATION 88,394 92,349 105,095
========= ========= =========
FULLY DILUTED NET (LOSS) PER SHARE ($ 0.25) ($ 0.04) ($ 0.10)
========= ========= =========
The above per share data are not reported on the statement of operations
because such data is anti-dilutive
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ STEPHEN J. FOGARTY
--------------------------------
Stephen J. Fogarty
Senior Vice President and
Chief Financial Officer
April 21, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements
of Noise Cancellation Technologies, Inc. on Form S-3 (File Nos. 33-47611,
33-51468, 33-74442, 33-84694 and 333-10545), on Form S-1 (File Nos. 33-19926,
33-38584 and 33-44790) and on Form S-8 (File Nos. 33-64792, 333-11209 and
333-11213) of our report, which includes an explanatory paragraph about the
Company's ability to continue as a going concern, dated February 28, 1997 (with
respect to Note 15, March 28, 1997, Note 8, April 10, 1997, and Note 7, April
18, 1997, respectively), on our audits of the consolidated financial statements
and schedules of the Company as of December 31, 1996, December 31, 1995 and for
the years ended December 31, 1996, December 31, 1995 and December 31, 1994 which
report is included in this Annual Report on Form 10-K.
/s/ Richard A. Eisner & Company, LLP
New York, New York
April 18, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1996, FILED ON
APRIL 15, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 368
<SECURITIES> 0
<RECEIVABLES> 607
<ALLOWANCES> 123
<INVENTORY> 900
<CURRENT-ASSETS> 1959
<PP&E> 4926
<DEPRECIATION> 2873
<TOTAL-ASSETS> 5881
<CURRENT-LIABILITIES> 3271
<BONDS> 0
0
0
<COMMON> 1116
<OTHER-SE> 1494
<TOTAL-LIABILITY-AND-EQUITY> 5881
<SALES> 1379
<TOTAL-REVENUES> 3164
<CGS> 1586
<TOTAL-COSTS> 1816
<OTHER-EXPENSES> 12173
<LOSS-PROVISION> 192
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> (10825)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10825)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10825)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
