SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Noise Cancellation Technologies, Inc.
(Name of Registrant as Specified in Its Charter)
---------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and state how it
was determined):
- -------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
- -------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 West Nursery Road Suite 120
Linthicum, Maryland 21090
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 20, 1998
---------------
To the Stockholders of NOISE CANCELLATION TECHNOLOGIES, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of Noise Cancellation Technologies, Inc., a Delaware corporation (the
"Company"), will be held at the Sheraton Stamford Hotel, 2701 Summer Street,
Stamford, Connecticut 06905 on Tuesday, October 20, 1998, at 3:00 P.M., for the
following purposes:
1.To elect six directors for the year following the Meeting or until their
successors are elected.
2.To approve the amendment of the Company's Restated Certificate of
Incorporation to change the name of the Company to "NCT Group, Inc."
3.To approve the amendment of the Company's Restated Certificate of
Incorporation to increase the number of shares of common stock authorized
thereunder from 185,000,000 shares to 255,000,000 shares.
4.To approve the adoption of an amendment of the Noise Cancellation
Technologies, Inc. Stock Incentive Plan (the "1992 Plan").
5.To approve a plan granting options to purchase common stock of the Company
to two non-employee directors.
6.To ratify the appointment of Richard A. Eisner & Company, LLP as the
Company's independent auditors for the fiscal year ending December 31,
1998.
7. To transact such other business as may properly come before the Meeting.
Only stockholders of record at the close of business on September 21, 1998
are entitled to notice of and to vote at the Meeting or at any adjournment
thereof.
JOHN B. HORTON
Secretary
Linthicum, Maryland
September 24, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY SIGN THE ACCOMPANYING PROXY, WHICH
IS SOLICITED BY THE COMPANY'S BOARD OF DIRECTORS, AND MAIL IT IN THE ENCLOSED
POSTAGE PAID ENVELOPE. ANY STOCKHOLDER MAY REVOKE HIS OR HER PROXY AT ANY TIME
BEFORE THE MEETING BY WRITTEN NOTICE TO SUCH EFFECT, BY SUBMITTING A
SUBSEQUENTLY DATED PROXY OR BY ATTENDING THE MEETING AND VOTING IN PERSON.
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 West Nursery Road Suite 120
Linthicum, Maryland 21090
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PROXY STATEMENT
---------------
SOLICITATION OF PROXY, REVOCABILITY AND VOTING
Solicitation
This Proxy Statement and form of Proxy are being mailed on or about September
24, 1998, to all stockholders of record at the close of business on September
21, 1998, in connection with the solicitation by the Board of Directors of
Proxies for the Annual Meeting of Stockholders (the "Meeting") to be held on
October 20, 1998. Proxies will be solicited by mail, and all expenses of
preparing and soliciting such proxies will be paid by the Company. All proxies
duly executed and received by the persons designated as proxy thereon will be
voted on all matters presented at the Meeting in accordance with the
instructions given thereon by the person executing such Proxy or, in the absence
of specific instructions, will be voted in favor of each of the proposals
indicated on such Proxy. Management does not know of any other matter that may
be brought before the Meeting, but, in the event that any other matter should
properly come before the Meeting, or any nominee should not be available for
election, the persons named as proxy will have authority to vote all proxies not
marked to the contrary in their discretion as they deem advisable.
Revocability
Any stockholder may revoke his or her Proxy at any time before the Meeting by
written notice to such effect received by the Company at the address shown
above, attention: Corporate Secretary, by delivery of a subsequently dated
Proxy, or by attending the Meeting and voting in person.
Voting
The total number of shares of common stock of the Company outstanding as of
September 21, 1998, was 151,866,940. The common stock is the only class of
securities of the Company entitled to vote, each share being entitled to one
noncumulative vote. Only stockholders of record as of the close of business on
September 21, 1998, will be entitled to vote. A majority of the shares
outstanding and entitled to vote, or 75,933,470 shares, must be present at the
Meeting in person or by proxy in order to constitute a quorum for the
transaction of business. The affirmative vote of a majority of all of the
outstanding shares of common stock of the Company is required to approve each of
the two amendments of the Company's Restated Certificate of Incorporation. The
affirmative vote of a plurality of the shares of common stock present and voting
in person or by proxy at the Meeting is required to elect directors and the
affirmative vote of a majority of the shares of common stock present and voting
in person or by proxy at the Meeting is required to approve the adoption of the
amendment of the 1992 Plan, to approve the plan granting options to purchase
common stock of the Company to two non-employee directors, to ratify the
appointment of the Company's independent auditors for the year ending December
31, 1998, and to transact such other business as may properly come before the
Meeting. With respect to abstentions, shares are considered present at the
Meeting for a particular proposal, but as they are not affirmative votes for the
proposal, they will have the same effect as votes against the proposal. With
respect to broker non-votes, shares are not considered present at the Meeting
for the particular proposal for which the broker withheld authority and,
accordingly, will have no effect on the proposals.
A list of stockholders entitled to vote at the Meeting will be available at the
Company's offices, 1025 West Nursery Road Suite 120 Linthicum, Maryland 21090,
for a period of ten (10) days prior to the Meeting for examination by
any stockholder, and at the Meeting itself.
<PAGE>
Election of Directors
Six directors are to be elected at the Annual Meeting of Stockholders to serve
until the next Annual Meeting of Stockholders of the Company and until their
successors are elected and qualified. Proxies not marked to the contrary will be
voted in favor of the election of each named nominee.
Information Concerning Nominees
The following table sets forth the positions and offices presently held with the
Company by each nominee, his age, and the year from which such nominee's service
on the Company's Board of Directors dates:
Positions and Offices Director
Name Age Presently Held with the Company Since
---- --- ------------------------------- --------
Jay M. Haft 62 Chairman of the Board and Director 1990
Michael J. Parrella 51 President, Chief Executive Officer 1986
and Director
John J. McCloy II 60 Director 1986
Sam Oolie 61 Director 1986
Stephan Carlquist 42 Director 1997
Morton Salkind 65 Director 1997
Jay M. Haft currently serves as Chairman of the Board of Directors of the
Company. He served as President of the Company from November 1994 to July 1995.
He is also a Director of the Company's subsidiary, NCT Audio Products, Inc.
("NCT Audio"), a position which he has held since August 25, 1997. Mr. Haft is a
strategic and financial consultant for growth stage companies. He is active in
international corporate finance, mergers and acquisitions, as well as in the
representation of emerging growth companies. He has actively participated in
strategic planning and fund raising for many high-tech companies, leading edge
medical technology companies and technical product, service and marketing
companies. He is a Managing General Partner of Gen Am "1" Venture Fund, an
international venture capital fund. Mr. Haft is also a Director of numerous
other public and private corporations, including Robotic Vision Systems, Inc.
(OTC), Extech, Inc. (OTC), Encore Medical Corporation (OTC), Viragen, Inc.
(OTC), PC Service Source, Inc. (OTC), DUSA Pharmaceuticals, Inc. (OTC), Oryx
Technology Corp. (OTC), Thrift Management, Inc. (OTC) and Conserver Corporation
of America (OTC). He serves as Chairman of the Board of Extech, Inc. He is
currently of counsel to Parker Duryee Rosoff & Haft, in New York. He was
previously a senior corporate partner of such firm (1989-1994), and prior to
that a founding partner of Wofsey, Certilman, Haft et al (1966-1988). He is a
member of the Florida Commission for Government Accountability to the People, a
National Vice-President of the Miami Ballet and a Director of the Concert
Association of Florida.
Michael J. Parrella currently serves as President and Chief Executive Officer
and as a Director of the Company. He was elected President and Chief Operating
Officer of the Company in February 1988 and served in that capacity until
November 1994. From November 1994 to July 1995 Mr. Parrella served as Executive
Vice President of the Company. He initially became a director in 1986 after
evaluating the application potential of the Company's noise cancellation
technology. At that time, he formed an investment group to acquire control of
the Board and to raise new capital to restructure the Company and its research
and development efforts. Mr. Parrella also serves as President and a Director of
NCT Audio, positions to which he was elected on September 4, 1997, and August
25, 1998, respectively. He was also Chairman of the Board of Environmental
Research Information, Inc., an environmental consulting firm, from December 1987
to March 1991.
John J. McCloy II currently serves as a Director of the Company. He served as
Chief Executive Officer of the Company from September 1987 to November 1994 and
as its Chairman of the Board from September 1986 to November 1994. Additionally,
he served as Chief Financial Officer from November 1990 to February 1993 and as
its Secretary-Treasurer from October 1986 to September 1987. Mr. McCloy was
appointed a Director of NCT Audio, on November 14, 1997, and currently serves as
a Director of that company. Since 1981, he has also been a private investor
concentrating on venture capital and early stage investment projects in a
variety of industries. Mr. McCloy is also a director of American University in
Cairo, the Sound Shore Fund, Inc., and the Atlantic Council.
<PAGE>
Sam Oolie currently serves as a Director of the Company. Mr. Oolie also serves
as a Director of NCT Audio, a position to which he was appointed on September 4,
1997. He is Chairman and Chief Executive Officer of NoFire Technologies, Inc., a
manufacturer of high performance fire retardant products, and has held that
position since August 1995. He is also Chairman of Oolie Enterprises, an
investment company, and has held that position since July 1985. Mr. Oolie
currently serves as a director of Avesis, Inc. and Comverse Technology, Inc. He
has also been a director of CFC Associates, a venture capital partnership, since
January 1984.
Stephan Carlquist was elected as a Director of the Company on July 14, 1997, and
currently serves as a Director of the Company. Mr. Carlquist also serves as a
Director of NCT Audio, a position to which he was appointed on November 14,
1997. He is President of ABB Financial Services, Inc. (USA), one of four
business segments in the ABB Group and has held that position since May 1993.
Mr. Carlquist is also President of ABB Treasury Center (USA), Inc. and has held
that position since June, 1990. From April, 1988 to 1990, he was the Executive
Vice President of ABB World Treasury Center, Zurich, and from April, 1986 to
April, 1988 he was the President of the Geneva branch of Asea Capital
Corporation. Mr. Carlquist joined Asea AB in September, 1983, as Manager,
International Cash Management and served in that capacity until April, 1986.
From February, 1981, to April, 1983, he was employed as a Foreign Exchange/Cash
Manager at Atlas Copco AB. Mr. Carlquist serves as a member of the following
Boards: ABB Financial Services, Inc., ABB Treasury Center USA, Inc., ABB
Treasury Center (Canada), ABB Treasury Center (Brazil), ABB Project & Trade
Finance, Inc., ABB Investment Management Corporation, ABB Credit, Inc., Sirius
Americas Corporation, ABB Industrial Systems, Inc., SUSA, Inc., and
Swedish-American Chamber of Commerce, New York.
Morton Salkind currently serves as a Director of the Company. Mr. Salkind was
elected as a Director of NCT Audio on September 4, 1997, and currently also
serves as a Director of that subsidiary. Formerly he served as a New Jersey
State Lottery Commissioner for five years. This followed previous elective
and appointive offices at the state, county and municipal levels. Mr.
Salkind is currently retired.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's officers and directors, and persons who own more
than 10% of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than 10% stockholders are required
by regulations of the Securities and Exchange Commission to furnish the Company
with copies of all such reports. Based solely on its review of the copies of
such reports received by it, or written representations from certain reporting
persons that no reports were required for those persons, the Company believes
that, during the period from January 1, 1997, to December 31, 1997, all filing
requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with, except that Morton Salkind and Stephan
Carlquist each filed a Form 3 late and Sam Oolie and Jay Haft each filed a Form
5 late.
Information Concerning the Board
The Board of Directors of the Company held thirteen meetings (not including six
actions by unanimous written consent) during the fiscal year ended December 31,
1997. Other than Messrs. McCloy, Carlquist and Salkind, no incumbent director
during such time was in attendance at fewer than 75% of the aggregate of: (i)
the total number of meetings of the Board of Directors held during the period of
his incumbency in such fiscal year; and (ii) the total number of meetings held
by all committees of the Board of Directors on which he served during such
period.
The Company has an Executive Committee, a Compensation Committee and an Audit
Committee. The Executive Committee was appointed by the Board of Directors on
July 17, 1996, and reappointed on June 19, 1997, and is composed of Messrs. Haft
and Parrella. The Executive Committee has the authority and responsibility of
acting in the place and stead and on behalf of a Chief Executive Officer of the
Company and of exercising all the powers of that office. During the fiscal year
ended December 31, 1997, the Executive Committee acted in the place and stead
and on behalf of a Chief Executive Officer until June 19, 1997, when Mr.
Parrella was elected Chief Executive Officer of the Company. During the fiscal
year ended December 31, 1997, the members of the Executive Committee conferred
with each other not less frequently than once each week.
The Compensation Committee, which was appointed by the Board of Directors on
April 10, 1997, reviews and determines the compensation policies, programs and
procedures of the Company as they relate to the Company's senior management and
is composed of Messrs. Haft, McCloy, and Oolie. During the period between
January 1, 1997, and April 10, 1997, the authority and responsibilities of the
Compensation Committee resided in the Board of Directors. Matters relating to
the grant or issuance of warrants or options to acquire shares of the Company's
common stock and other securities of the Company or rights to acquire other
derivative securities of the Company and in this regard to establish and provide
for the administration of plans under which any of the same may be granted or
issued are determined by the Board of Directors. During the period of its
existence in the fiscal year ended December 31, 1997, the Compensation Committee
held no meetings.
<PAGE>
The Audit Committee, which reviews the activities of the Company's independent
auditors and which is composed of Messrs. McCloy and Oolie held two meetings
during the fiscal year ended December 31, 1997.
The Company does not have a nominating committee. The functions of recommending
potential nominees for Board positions are performed by the Board as a whole.
The Board will consider stockholder recommendations for Board positions which
are made in writing to the Company's Chairman of the Board of Directors.
Directors' Fees, Restricted Stock and Stock Options
None of the Company's directors received any fees for his services as a director
during 1997, except as follows. Under the 1992 Plan, each non-employee director
of the Company is granted 5,000 restricted shares of the Company's common stock
each year for service as a director of the Company. Such restricted shares are
granted to each non-employee director upon his or her initial election to the
Board and upon each subsequent election. All of such restricted shares are made
subject to a restrictive period of three (3) years from the date of grant during
which such shares may not be transferred or encumbered. On July 19, 1997, 5,000
restricted shares were granted to each of Messrs. McCloy, and Oolie, pursuant to
the 1992 Plan. All new non-employee directors are granted stock options for
75,000 shares of the Company's common stock as an inducement to become members
of the Board of Directors. Such grants will be made upon a new director's
initial election to the Board of Directors at an exercise price equal to the
market value of the Company's common stock on the date of grant. Such options
will vest as to 25,000 shares on the date of initial election to the Board of
Directors and 25,000 shares on each of the first and second anniversaries of
such election. Upon their appointment to the Board of Directors on July 14,
1997, Messrs. Carlquist and Salkind were each granted such an option to purchase
75,000 shares of common stock together with 5,000 of such restricted shares of
common stock pursuant to the 1992 Plan. In addition, Messrs. McCloy and Oolie
were each granted options, subject to stockholder approval, to purchase 50,000
shares of common stock on May 2, 1997, pursuant to an informal plan included
within resolutions adopted by the Board of Directors. Stockholder approval of
such grants to Messrs. McCloy and Oolie will be sought at the Meeting as further
described below.
AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY
The Board of Directors has approved and declared advisable an amendment to the
Company's Restated Certificate of Incorporation to change the name of the
Company to "NCT Group, Inc." The Board believes such action to be in the best
interests of the Company in light of the Company's increased involvement with
technologies and products in fields other than active noise cancellation. The
Board also believes this change is consistent with the Company's organizational
structure comprised of four strategic business units, each of which is focused
on commercialization of certain of the Company's technologies within particular
fields of use and industries.
The affirmative vote of the holders of a majority of all the outstanding shares
of Common Stock of the Company is required for approval of this proposal. The
Board of Directors recommends a vote FOR such proposal.
<PAGE>
AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION TO INCREASE
AUTHORIZED CAPITALIZATION
The Board of Directors has approved and declared advisable an amendment to the
Company's Restated Certificate of Incorporation to increase the number of shares
of common stock, par value $.01 per share, which the Company shall be authorized
to issue, from 185,000,000 to 255,000,000. As of the record date, the Company
had outstanding 151,866,940 shares of common stock and had reserved an
additional 23,783,244 shares of common stock for issuance upon the conversion of
the Company's Series C Convertible Preferred Stock and the exercise of options
and warrants. The Board believes such action to be in the best interest of the
Company so as to make additional shares of common stock available for the
increase in the number of shares of common stock covered by the 1992 Plan
pursuant to the amendment of the 1992 Plan described below and for acquisitions,
public or private financings involving common stock or preferred stock or other
securities convertible into common stock, stock splits and dividends, present
and future employee benefit programs and other corporate purposes. Other than as
described below, the Company does not have any plans, arrangements or
understandings for the issuance of any of such additional shares.
The Company plans to reserve 1,250,000 shares of such additional shares for
issuance upon the exercise of certain options previously granted under the 1992
Plan whose shares of common stock reserved for issuance upon their exercise were
unreserved by the Company to make shares of common stock available for issuance
in a private placement as part of the consideration payable for the acquisition
by the Company of rights to certain intellectual property owned by another
company.
If the stockholders approve the amendment to the Company's Restated Certificate
of Incorporation (the "Amendment") increasing the authorized common stock from
185,000,000 shares of such stock to 255,000,000 shares, upon the requisite
filing of the Amendment with the Secretary of State of the State of Delaware
(the "Filing"), the Company will reserve 20,000,000 of such newly authorized
shares for issuance upon the grant of awards of restricted shares of common
stock and upon the exercise of options to purchase common stock granted under
the 1992 Plan.
The Company recently raised $6,000,000 by means of a private placement of 6,000
shares of a new series of convertible preferred stock of the Company (the "New
Preferred Stock"). The New Preferred Stock was issued at a discount of 5% of its
stated value and, if the stockholders approve the Amendment, will be convertible
into shares of the Company's common stock after the earliest of: (i) ninety (90)
days after issuance, (ii) five (5) days after the date on which a registration
statement covering such common stock achieves a "no-review" status from the
Securities and Exchange commission, or (iii) the date on which such registration
statement is declared effective by the Commission. The number of shares of the
Company's common stock to be issued upon conversion of the New Preferred Stock
will be based upon the length of time the New Preferred Stock is held prior to
conversion as well as the greater of 80% of (i) $0.625 or (ii) the five (5) day
average closing bid price of the Company's common stock immediately prior to the
conversion date. It is anticipated that the number of shares of common stock
issuable upon conversion of such 6,000 shares of the New Preferred Stock will
not exceed 12,500,000 shares of the Company's common stock. The proceeds from
the private placement of the New Preferred Stock will be used in connection with
the re-purchase by the Company of up to 10,000,000 shares of the Company's
issued and outstanding common stock and, to the extent not so used, for other
corporate purposes.
In partial consideration for services rendered by the placement agent for the
New Preferred Stock offering described in the preceding paragraph, the Company
agreed to grant such agent a warrant to purchase up to 300,000 shares of the
Company's common stock exercisable for a period of five (5) years from the date
the stockholders approve the Amendment at a price equal to the closing bid price
of the Company's common stock on the date of grant.
The Company's subsidiary, NCT Audio recently raised $6,000,000 by means of a
private placement of a series of convertible preferred stock (the "NCT Audio
Preferred Stock") the proceeds of which are to be used in connection with
acquisitions which NCT Audio intends to make. In the event the common stock of
NCT Audio into which the NCT Audio Preferred Stock is convertible is not
publicly traded by December 31, 1998, the holders of the NCT Audio Preferred
Stock will be given the right to exchange the NCT Audio Preferred Stock for an
equivalent stated value of the Company's New Preferred Stock. Under the terms of
the New Preferred Stock referred to above and provided the stockholders approve
the Amendment, up to 12,500,000 additional shares of the Company's common stock
will be issuable upon the conversion of the New Preferred Stock received in
exchange for the NCT Audio Preferred Stock.
The Company recently acquired approximately ninety percent (90%) of the issued
and outstanding common stock of Advancel Logic Corporation ("Advancel") pursuant
to a stock purchase agreement dated as of August 21, 1998 (the "Stock Purchase
Agreement") among the Company, Advancel and certain shareholders of Advancel
(the "Advancel Shareholders"). The consideration for the acquisition of the
Advancel common stock consisted of an initial payment of 1,786,991 shares of the
Company's authorized and unissued common stock together with future payments,
payable in cash or in common stock of the Company at the election of the
Advancel Shareholders (individually, an "earnout payment" and collectively, the
"earnout payments") based on Advancel's earnings before interest, taxes,
depreciation and amortization (as defined in the Stock Purchase Agreement) for
each of the calendar years 1999, 2000, 2001 and 2002 (individually, an "earnout
year" and collectively, the "earnout years"). While each earnout payment may not
be less than $250,000 in any earnout year, there is no maximum earnout payment
for any earnout year or for all earnout years in the aggregate. To determine the
number of shares of the Company's common stock issuable in connection with an
earnout payment, each earnout payment is to be calculated using the average of
the closing prices of the Company's common stock for each of the twenty (20)
business days following the 21st day after the release of Advancel's audited
year-end financials for an earnout year. At that time, Advancel Shareholders
will elect to receive payment in cash or common stock of the Company. At the
present time, it is not known whether the Advancel Shareholders will elect to
receive their earnout payments in cash or in common stock of the Company, and
the Company is not able to determine what the earnings of Advancel will be in
the earnout years. It is also not possible for the Company to predict what the
average closing price of the Company's common stock will be for the twenty (20)
business day period applicable with respect to calculations relating to any of
the earnout years. Therefore, the Company is not able to make a meaningful
estimate of the number of the additional shares of the Company's common stock
for which authorization is being sought, which would be needed to meet the
Company's obligations with respect to the earnout payments.
The Company is holding discussions with the five (5) institutional investors who
purchased the 6,000 shares of New Preferred Stock (the "Investors") concerning
the issuance by means of a private placement to the Investors of up to 7,625
additional shares of New Preferred Stock upon the Company's increase in the
total number of shares constituting the New Preferred Stock series. Of this
amount, 2,125 shares would be issued in exchange for 1,700 shares of the
Company's Series C Convertible Preferred Stock which under the terms of their
issuance are presently convertible into up to 3,400,000 shares of the Company's
common stock, all of which are registered for resale and are freely tradable.
1,500 of such 7,625 shares of the New Preferred Stock would be exchanged for
2,061,018 shares of the Company's common stock held by the Investors and
approximately $200,000 cash. The remaining 4,000 shares of such shares of the
New Preferred Stock would be issued for $4,000,000 cash (100% of stated value).
The proceeds from the private placement of these 4,000 shares of New Preferred
Stock may be used for the repurchase by the Company of up to 8,000,000 shares of
the Company's issued and outstanding common stock and, to the extent not so
used, for other corporate purposes. The number of shares of the Company's common
stock to be issued upon the conversion of these additional 7,625 shares of New
Preferred Stock will be determined in the same manner as described above. It is
anticipated that the number of shares of common stock issuable upon conversion
of such 7,625 shares of New Preferred Stock will not exceed 16,000,000 shares.
No agreement has been reached with the Investors, and it is possible that the
Investors may purchase fewer additional shares of New Preferred Stock than is
anticipated. The Company may also determine to use the proceeds from the private
placement for any or all additional shares of New Preferred Stock for general
working capital and other corporate purposes, and not for the repurchase of any
of its common stock or the Company's Series C Convertible Preferred Stock.
The additional shares of common stock to be authorized pursuant to the Amendment
may be issued from time to time as the Board of Directors my determine without
further action of the stockholders of the Company.
Stockholders of the Company do not currently possess, nor upon the adoption of
the Amendment will they acquire, preemptive rights which would entitle such
persons, as a matter of right, to subscribe for the purchase of any securities
of the Company.
The affirmative vote of the holders of a majority of all the outstanding shares
of Common Stock of the Company is required for approval of this proposal. The
Board of Directors recommends a vote FOR such proposal.
<PAGE>
ADOPTION OF AN AMENDMENT TO THE 1992 PLAN
On October 6, 1992, the Company adopted, subject to stockholder approval, the
1992 Plan, under which options to purchase shares of the Company's common stock
were granted to officers, employees and certain directors of the Company in
consideration and recognition of the rights those persons forfeited as a result
of the cancellation of the Company's stock appreciation rights program and the
forfeiture of stock options by certain officers and employees agreed to by such
persons in the furtherance of the Company's efforts to conclude a private
placement of shares of the Company's common stock with various institutional and
other qualified investors by the end of August 1992. On April 14, 1993, the
Option Committee of the Board of Directors amended the 1992 Plan, subject to
stockholder approval, to provide ongoing benefits to officers, employees and
non-employee directors of the Company in a manner which would enhance the
Company's ability to attract and retain the services of qualified executives,
employees and directors while providing an incentive for such persons to make a
maximum contribution to the Company's success and aligning their interests with
those of the Company's stockholders. On May 27, 1993, the stockholders approved
the 1992 Plan as adopted on October 6, 1992, and amended on April 14, 1993.
On November 8, 1995, the Option Committee amended the 1992 Plan, subject to
stockholder approval, to increase the aggregate number of shares of the
Company's common stock reserved for awards of restricted stock and for issuance
upon the exercise of stock options granted under the 1992 Plan from 6,000,000 to
10,000,000 shares and to add to those persons who are eligible to participate
under the 1992 Plan, active consultants to the Company. The purpose of the
amendment was to enable the Company to continue in the future to provide
benefits to officers, employees, non-employee directors and active consultants
of the Company in a manner that would enhance the Company's ability to attract
and retain the services of qualified executives, employees, directors and
consultants while providing an incentive for such persons to make a maximum
contribution to the Company's success and aligning their interests with those of
the Company's stockholders.
On January 15, 1998, the Board of Directors amended the 1992 Plan, subject to
stockholder approval, to (i) increase the aggregate number of shares of the
Company's common stock reserved for awards of restricted stock and for issuance
upon exercise of stock options granted under the 1992 Plan from 10,000,000
shares to 30,000,000 shares, (ii) provide that the 1992 Plan be administered by
the Board of Directors or a committee appointed by the Board of Directors
consisting of at least two (2) non-employee directors and designated as either
the Compensation Committee or the Option Committee of the Board of Directors,
(iii) provide that non-employee directors of the Company be eligible to be
participants under the 1992 Plan together with employees and active consultants
of the Company, (iv) provide that the provisions under the 1992 Plan providing
for grants of awards of restricted common stock and options to purchase common
stock to non-employee directors according to an automatic formula be deleted
from the 1992 Plan, and (v) provide for such other technical and administrative
amendments as may be deemed necessary or advisable by the Chief Financial
Officer or by the General Counsel of the Company. In order to effect the
increase in the aggregate number of shares of common stock reserved for issuance
under the 1992 Plan as described in clause (i) of the preceding sentence the
stockholders must have approved the amendment to the Company's Restated
Certificate of Incorporation described above. The purpose of the amendment to
the 1992 Plan was to enable the Company to continue in the future to provide
benefits to officers, employees, directors and active consultants of the Company
in a manner that would enhance the Company's ability to attract and retain the
services of qualified executives, employees, directors and consultants while
providing an incentive for such persons to make the maximum contribution towards
the Company's success and aligning their interests with those of the Company's
stockholders and to effect certain administrative and procedural changes deemed
appropriate in light of recent changes to Rule 16b-3 under the Exchange Act
eliminating the need for stock-based plans to provide grants to non-employee
directors only in accordance with a predetermined automatic formula set forth in
the plan.
The material ongoing features of the 1992 Plan, as amended, include the
following:
o The aggregate number of shares of the Company's common stock reserved for
grants of restricted stock and grants of options to purchase shares of the
Company's common stock is 30,000,000 shares. The amendment for which
stockholder approval is being sought increased the number of shares so
reserved from 10,000,000 shares to 30,000,000 shares.
o The 1992 Plan is administered by the Board of Directors or by a committee
approved by the Board of Directors consisting of at least two (2)
non-employee directors and designated as either the Compensation Committee or
the Option Committee (the "Administrator"). The amendment for which
stockholder approval is being sought added the requirement that the directors
appointed to such committee be non-employee directors.
o The 1992 Plan authorizes the granting of options which may be either
non-statutory options or "incentive stock options" (as defined in the
Internal Revenue Code of 1986, as amended) and restricted stock awards.
o The shares of common stock covered by the 1992 Plan may be either treasury
shares or authorized but unissued shares. If any option granted under the
1992 Plan expires or terminates without having been exercised in full or any
restricted stock award is forfeited, the shares covered by the unexercised
portion of the option or by the forfeited restricted stock award may be used
again for new grants under the 1992 Plan.
o There is no maximum number of shares that can be allowed to one participant
in any grant of non-statutory options or restricted stock awards, but the
aggregate fair market value of the shares, at the time of grant, with respect
to which options intended to be incentive stock options are exercisable for
the first time by a participant in any calendar year may not exceed one
hundred thousand ($100,000.00) dollars.
o The persons who are eligible to participate under the 1992 Plan
("Participants") include executive officers (currently 7 persons),
non-employee directors (currently 4 persons), non-executive officer
employees (currently 83 persons) and persons retained by the Company for
consulting services (currently 5 persons). The amendment for which
stockholder approval is being sought added non-employee directors as
persons who are eligible to participate under the 1992 Plan and eliminated
provisions mandating that non-employee directors were only eligible to
receive options and restricted stock awards in accordance with the
formulas set forth in the 1992 Plan.
o The exercise price for all of the options to be granted under the 1992 Plan
is to be not less than the market value of a share of the Company's common
stock on the date of the grant of the option.
o Any grant of an option or restricted stock award under the 1992 Plan must be
made no later than May 27, 2003, ten (10) years from the date the 1992 Plan
originally was approved by the stockholders.
o The 1992 Plan provides for adjustments in the number of shares subject to the
1992 Plan and other relevant provisions in the event of a stock split, merger
or similar occurrence.
o The Administrator, in its discretion, may determine the provisions of the
options granted under the 1992 Plan, including installment exercise terms
for an option under which the option may be exercised in a series of
cumulative installments; the form of consideration, including cash, shares
of common stock or any combination thereof, which may be accepted in
payment of the purchase price of shares purchased pursuant to the exercise
of an option; special rules regarding exercise in the case of retirement,
death, disability or other termination of employment; and other provisions
consistent with the terms of the 1992 Plan and applicable law.
o The Administrator may determine the term of each option granted but no option
may be exercised after the expiration of ten (10) years from the date it is
granted.
o Options may be granted under the 1992 Plan on such terms and conditions as
the Administrator considers appropriate which may differ from those
provided in the 1992 Plan where such options (substitute options) are
granted in substitution for stock options held by employees of other
companies who concurrently become employees of the Company or a subsidiary
of the Company as the result of a merger or consolidation of the other
company with, or the acquisition of the property or stock of the other
company by, the Company or a subsidiary of the Company.
o All new non-employee directors are granted stock options for 75,000 shares
of the Company's common stock upon a new director's initial election to
the Board of Directors at an exercise price equal to the market value of
the Company's common stock on the date of grant, such option to vest as to
25,000 shares on the date of initial election to the Board of Directors
and 25,000 shares on each of the first and second anniversaries of such
election. The amendment for which stockholder approval is being sought
eliminates this automatic grant to non-employee directors.
o Each non-employee director of the Company is granted 5,000 restricted
shares of the Company's common stock each year for service as a director
of the Company, such grants to be made upon a director's initial election
to the Board and upon each subsequent election with all such restricted
shares subject to a restrictive period of three (3) years from the date of
grant during which such shares may not be transferred or encumbered. The
amendment for which stockholder approval is being sought eliminates this
automatic grant to non-employee directors.
o The Administrator may grant restricted stock awards of shares of the
Company's common stock to any other Participant under the 1992 Plan. The
Administrator in its discretion may determine the provisions of grants of
restricted stock awards including the time at which such awards become
non-forfeitable and fully transferable, the terms of forfeiture, the
entitlement of grantees to vote the shares and receive dividends paid
thereon and any other provisions consistent with the terms of the 1992
Plan and applicable law.
o The Administrator may at any time or times amend the 1992 Plan provided
that, except as required by adjustments in the case of changes in
capitalization, no such amendment shall without the approval of the
stockholders of the Company: (i) increase the maximum number of shares of
common stock for which options or restricted stock awards may be granted
under the 1992 Plan; (ii) reduce the price at which options may be granted
below the price described above; (iii) reduce the exercise price of
outstanding options; (iv) extend the period during which options or
restricted stock awards may be granted; (v) extend the period during which
an outstanding option may be exercised beyond the maximum period provided
for under the 1992 Plan; (iv) materially increase in any other way the
benefits accruing to Participants; (vii) change the class of persons
eligible to be Participants, or (viii) disqualify an optionee or grantee
under the 1992 Plan that is a member of the Option Committee from being a
"disinterested administrator" (as defined for the purposes of Rule 16b-3
(or any successor rule) under the Exchange Act) of the 1992 Plan or of any
other stock-based employee benefit plan of the Company. The 1992 Plan
provides that the formula setting the amount of options and restricted
stock awards to which a non-employee director may be entitled may not be
amended more than once every six (6) months. The amendment for which
stockholder approval is being sought will eliminate the limitations
described in the preceding sentence and in clause (viii) because recent
amendments to Rule 16b-3 under the Exchange Act made them no longer
necessary. The following table sets forth certain additional details
concerning the 1992 Plan:
New Plan Benefits
As Added by Amendment for Which Approval is Sought
Added by Amendment Adopted
January 15, 1998 (1)
--------------------------
Number
Name Position(2) Value (3) of Units
---- ----------- --------- --------
Michael J. Parrella (4) President, Chief Executive $7,406,250 7,500,000
Officer and a Director
Jay M. Haft (4) Chairman of the Board of 635,960 700,000
Directors
Irene Lebovics Senior Vice President and 1,031,300 1,000,000
President, NCT Headset Division
Stephen J. Fogarty (5) Senior Vice President and
Chief Financial Officer
Cy E. Hammond (5) Senior Vice President and 309,388 325,000
Chief Financial Officer
John B. Horton Senior Vice President, 154,693 175,000
General Counsel and Secretary
Executive Group (6) 9,795,416 9,950,000
Non-Executive Director 637,500 600,000
Group (7)
Non-Executive Officer 1,103,491 1,070,000
Employee Group (8)
Active Consultant Group (9) 525,963 510,000
(1) The table includes grants under the 1992 Plan on October 6, 1997, January
15, 1998, and February 14, 1998, which become exercisable in the event the
adoption of the amendment of the 1992 Plan is approved by the stockholders
at the Meeting. Options granted to participants other than non-executive
directors are subject to incremental limitations on vesting and
exercisability for periods of up to five years from the date of grant.
(2) Named executive officers are those for the 1997 fiscal year.
(3) The value per unit in the case of options equals the exercise price of the
options, the fair market value on the date of grant. The fair market value
of the Company's common stock was $0.6875 on October 6, 1997, $1.0625 on
January 15, 1998, and $1.0313 on February 14, 1998.
(4) Mr. Haft was elected Chairman of the Board and relinquished the title of
Chief Executive Officer on July 17, 1996. Prior thereto, and from November
15, 1994, Mr. Haft served as Co-Chairman of the Board and Chief Executive
Officer. From July 17, 1996 to June 19, 1997, the authority and
responsibility of the Chief Executive Officer were delegated by the Board of
Directors to the Executive Committee consisting of Messrs. Haft and Parrella
with Mr. Haft serving as the Committee's Chairman. Mr Parrella was elected
Chief Executive Officer on June 19, 1997.
(5) Mr. Fogarty resigned as Senior Vice President and Chief Financial Officer on
April 24, 1997, and Mr. Hammond was elected to those offices on September 4,
1997.
(6) 7 persons on February 14, 1998.
(7) 4 persons on February 14, 1998.
(8) 72 persons on February 14, 1998.
(9) 5 persons on February 14, 1998.
Nonstatutory stock options without ascertainable fair market value at grant for
federal income tax purposes are not taxed to the participant until exercised or
otherwise disposed of. If the option is exercised, the participant realizes
compensation income equal to the fair market value of the stock at the time it
is transferred to him or her less the amount paid for it (the option or exercise
price). If the Company satisfies its tax withholding obligations arising from
the exercise of the options, it would receive a business expense deduction for
the amount that the participant must include in gross income as compensation
because of the exercise of a nonstatutory stock option. This deduction is taken
for the same year in which or within which that income is taxable to the
participant. If the participant later sells the stock, any further gain would be
capital gain.
With respect to incentive stock options, in general, no income to a participant
will result for federal tax purposes upon either the granting or the exercise of
an option under the 1992 Plan. If the participant later sells the acquired stock
at least two years after the date the option is granted and at least one year
after the transfer of the acquired stock to the participant, the participant
would realize capital gain equal to the difference between the option price and
the proceeds of the sale. If the participant's gain is taxed as capital gain,
the Company would not be allowed a business expense deduction. If the
participant disposes of the acquired stock before the end of the required
holding periods, the participant would realize ordinary income in the year of
disposition equal to the lesser of : (i) the difference between the option price
and the fair market value of the stock on the exercise date, or (ii) if the
disposition is a taxable sale or exchange, the amount of gain realized; the
Company would receive an equivalent deduction. If the participant later sells
the stock, any further gain would be capital gain.
With respect to restricted stock awards, the participant would generally realize
ordinary income in the year the shares of common stock covered by the award
become non-forfeitable or fully transferable, in an amount equal to the fair
market value of the shares on the date they become non-forfeitable or fully
transferable. The Company would be entitled to an equivalent deduction. If the
participant later sells the stock, any further gain would be capital gain.
Further, the participant may elect to treat the award as ordinary income in the
year of grant within thirty (30) days of the date of grant. If the participant
makes such an election, the Company would be entitled to an equivalent
deduction.
The Board of Directors recommends a vote FOR approval of the adoption of the
amendment of the 1992 Plan described above.
GRANT OF OPTIONS TO
NON-EMPLOYEE DIRECTORS
On May 2, 1997, the Board of Directors adopted resolutions implementing an
informal plan granting, subject to the approval of the stockholders of the
Company, each of the Company's two (2) non-employee directors an option to
purchase 50,000 shares of the common stock of the Company at $0.2656 per share,
the fair value of the Company's common stock on the date of grant, in
recognition of the efforts of those directors in connection with past services
to the Company including its successful conclusion of a recently completed
cross-license agreement. Certain members of the Company's senior management and
the Chairman of the Board of Directors had been granted options for similar
reasons under the 1992 Plan which, by its terms, prohibited the grant of options
to non-employee directors except under the specific formula set forth in the
Plan upon a new director's first election to the Board of Directors.
The material features of the foregoing plan include the following:
o The aggregate number of shares of the Company's common stock reserved for
grants of options to purchase shares of the Company's common stock is 100,000
shares.
o The plan is administered by the Board of Directors.
o The persons who are eligible to participate under the plan are limited to the
Company's then two (2) non-employee directors, Messrs. McCloy and Oolie.
o The exercise price of the options granted under the plan is the market value
of the shares of the Company's common stock on the date of grant of the
option.
o In order to comply with the rules of The Nasdaq Stock Market, Inc., the grant
of the options under the plan is subject to the approval of the Company's
stockholders.
<PAGE>
The following table sets forth certain additional details concerning the Plan.
New Plan Benefits
Implemented by Resolution
Adopted May 2, 1997 (1)
Number
Name (2) Position $ Value (3) of Units
-------- -------- ----------- --------
Michael J.Parrella (4) President, Chief Executive - -
Officer and a Director
Jay M. Haft (4) Chairman of the Board of - -
Directors
Irene Lebovics Senior Vice President and - -
President, NCT Headset
Division
Stephen J. Fogarty (5) Senior Vice President and - -
Chief Financial Officer
Cy E. Hammond (5) Senior Vice President and - -
Chief Financial Officer
John B. Horton Senior Vice President, - -
General Counsel and Secretary
Executive Group (6) - -
Non-Executive Director 26,560 100,000
Group (7)
Non-Executive Officer - -
Employee Group (8)
Active Consultant - -
Group (9)
(1) The table includes grants under the informal plan implemented by resolution
adopted by the Board of Directors on May 2, 1997, which grants were subject
to the approval of the stockholders at the Meeting.
(2) Named executive officers are those for the 1997 fiscal year.
(3) The value per unit equals the exercise price of the options, the fair value
on the date of grant. The fair market value of the Company's common stock
was $0.2656, on May 2, 1997, the date of grant.
(4) Mr. Haft was elected Chairman of the Board and relinquished the title of
Chief Executive Officer on July 17, 1996. Prior thereto, and from November
15, 1994, Mr. Haft served as Co-Chairman of the Board and Chief Executive
Officer. From July 17, 1996 to June 19, 1997, the authority and
responsibility of the Chief Executive Officer were delegated by the Board of
Directors to the Executive Committee consisting of Messrs. Haft and Parrella
with Mr. Haft serving as the Committee's Chairman. Mr Parrella was elected
Chief Executive Officer on June 19, 1997.
(5) Mr. Fogarty resigned as Senior Vice President and Chief Financial Officer on
April 24, 1997, and Mr. Hammond was elected to those offices on September 4,
1997.
(6) 0 persons on May 2, 1997.
(7) 2 persons on May 2, 1997.
(8) 0 persons on May 2, 1997.
(9) 0 persons on May 2, 1997.
The Federal Income Tax aspects of the options granted under the plan are as set
forth above under "Adoption of an Amendment to the 1992 Plan".
The Board of Directors recommends a vote FOR approval of the grant of the
options to Messrs. McCloy and Oolie described above.
INDEPENDENT AUDITORS
Independent Accountants for 1998
The Board of Directors, upon the recommendation of its Audit Committee, has
selected Richard A. Eisner & Company, LLP to audit the accounts of the Company
for the fiscal year ending December 31, 1998. Such firm has reported to the
Company that none of its members has any direct financial interest or material
indirect financial interest in the Company. The Company's Audit Committee is
composed of Messrs. McCloy and Oolie and has responsibility for recommending the
selection of auditors.
Richard A. Eisner & Company, LLP was appointed by the Board of Directors to
audit the accounts of the Company for the fiscal year ended December 31, 1997.
Representatives of Richard A. Eisner & Company, LLP are expected to be present
at the Annual Meeting of Stockholders. Such persons will have an opportunity to
make a statement if they desire to do so and will be available to respond to
appropriate questions.
The Board of Directors recommends a vote FOR the ratification of the appointment
of Richard A. Eisner & Company, LLP as independent auditors.
<PAGE>
EXECUTIVE COMPENSATION
Compensation Committee Report on Executive Compensation
As previously reported, at the conclusion of the Annual Meeting of Stockholders
on July 17, 1996, Mr. Haft resigned as Chief Executive Officer of the Company
and was appointed Chairman of the Board of Directors. The Board of Directors
designated an Executive Committee comprised of Messrs. Haft and Parrella with
Mr. Haft acting as the Chairman of the Committee. The Board of Directors granted
the Executive Committee the power and authority to act in the place of the Chief
Executive Officer during the existence of a vacancy in that office. At the
conclusion of the Annual Meeting of Stockholders on June 19, 1997, Mr. Parrella
was re-elected President and was elected Chief Executive Officer of the Company.
Mr. Parrella's salary for 1997 was continued at the rate of $120,000 per year.
As reported in last year's Compensation Committee Report, on May 8, 1995, the
Compensation Committee, in recognition of the efforts of Mr. Parrella under the
difficult conditions the Company was then facing and in recognition of the
importance of his continued services to the ongoing restructuring program,
awarded Mr. Parrella a cash bonus of 1% of the cash to be received by the
Company upon the establishment of certain significant business relationships.
Any such percentage bonus was made contingent upon the execution of relevant
documentation or other form of closing with regard to these relationships.
Effective January 1, 1996, the above noted percentage bonus arrangement was
extended indefinitely until modified or terminated by the Board of Directors.
Mr. Parrella was paid a bonus of $243,058 under this percentage bonus
arrangement during 1997. On January 22, 1997, the Board of Directors, subject to
the approval of the stockholders, extended the expiration dates of warrants held
by Mr. Parrella to purchase 862,500 shares of the Company's common stock , in
the aggregate, at the price of $.75 per share from December 31, 1997 to December
31, 1999 and extended the expiration dates of options to purchase 250,000 shares
of common stock at the price of $.50 per share from February 26, 1997 to
February 26, 1999. In conjunction with this action by the Board of Directors
(the "1/22/97 Extension Resolutions") the expiration dates of similar warrants
and options held by other officers and directors and non-officer employees of
the Company were also extended for two years. The fair value of the Company's
Common Stock on January 22, 1997 was $.50 per share. The Company's stockholders
approved the extension of such expiration dates at the Annual Meeting of
Stockholders held on June 19, 1997. On May 2, 1997, in recognition of Mr.
Parrella's efforts related to the cross licensing transaction with Verity Group,
plc and the Company's success in completing a profitable first quarter, the
Company granted Mr. Parrella under the Noise Cancellation Technologies, Inc.
Stock Incentive Plan (the "1992 Plan") an option to purchase 450,000 shares of
common stock at an exercise price of $0.2656 per share, the fair value of the
Company's common stock on the date of grant. On October 6, 1997, in recognition
of Mr. Parrella's efforts related to raising $4.0 million in equity capital for
the Company's subsidiary, NCT Audio Products, Inc., ("NCT Audio"), the Company
granted Mr. Parrella a bonus under the 1992 Plan consisting of an option to
purchase 1,500,000 shares of the Company's common stock at the price of $0.6875
per share, the fair value of the Company's Common Stock on the date of grant,
such option to expire on December 31, 1997 if a private placement of the
remaining $3.0 million of such $4.0 million of NCT Audio's common stock was not
completed by that date. Such private placement was completed prior to December
31, 1997. In addition, this option does not become exercisable until the date on
which the Company's stockholders approve an increase in the number of shares of
the Company's common stock covered by the 1992 Plan by an amount sufficient to
provide, within the 1992 Plan, shares of common stock to be issued upon the
exercise of such option. In addition, in 1997, Mr. Parrella received a $15,348
annual automobile allowance and the Company paid the $5,218.00 annual premium
for a $2.0 million personal life insurance policy on his behalf.
Mr. Haft's salary as Chairman of the Board of Directors was at the annual rate
of $52,638 for 1997. In addition, the expiration dates of options to purchase
218,500 shares of the Company's common stock at an exercise price of $.75 per
share were extended from December 31, 1997 to December 31, 1999 under the
1/22/97 Extension Resolutions described above. Mr. Haft was also granted an
option to purchase 75,000 shares of the Company's common stock at an exercise
price of $0.2656 per share in connection with the May 2, 1997 option grants
described above and was granted a further option to purchase 250,000 shares of
the Company's common stock at an exercise price of $0.6875 per share in
connection with the October 6, 1997 option grants also described above.
The base salary of Mr. Hammond who was promoted from the office of Vice
President, Finance to Senior Vice President, Chief Financial Officer on
September 4, 1997, was established at $94,000 which was the same as his salary
for 1996. In addition, in recognition of Mr. Hammond's increased
responsibilities, and his efforts in connection with the Company's private
placement of $13.25 million of convertible preferred stock, Mr. Hammond was
awarded a cash bonus of $65,939. In addition, the expiration dates of options to
purchase 25,000 shares of the Company's common stock held by Mr. Hammond were
extended from December 31, 1997 to December 31, 1999 under the 1/22/97 Extension
Resolutions. Mr. Hammond was granted an option to purchase 50,000 shares of the
Company's common stock at an exercise price of $0.2656 per share in connection
with the May 2, 1997 option grants described above and a further option to
purchase 75,000 shares of the Company's common stock at an exercise price of
$0.6875 per share in connection with the October 6, 1997 option grants, also
described above.
The base salary of Mr. Horton, as Senior Vice President, General Counsel and
Secretary of the Company was established at $105,000 in 1997, which was the same
as his salary rate for 1996. In addition, Mr. Horton was paid a bonus of $50,000
in recognition of his efforts relating to the convertible preferred stock
financing. The expiration dates of options to purchase 200,000 shares of the
Company's common stock held by Mr. Horton were extended from December 31, 1997
to December 31, 1999 under the 1/22/97 Extension Resolutions. Mr. Horton was
granted an option to purchase 50,000 shares of the Company's Common Stock at an
exercise price of $0.2656 per share in connection with the May 2, 1997 option
grants described above and a further option to purchase 75,000 shares of the
Company's Common Stock at an exercise price of $0.6875 per share in connection
with the October 6, 1997 option grants also described above.
The base salary of Ms. Lebovics, as Senior Vice President and President of NCT
Hearing Products, a division of the Company, was established at $105,000 for
1997, which was the same as her salary for 1996. In addition, the expiration
dates of options to purchase 201,250 shares of the Company's Common Stock held
by Ms. Lebovics were extended from December 31, 1997 to December 31, 1999 under
the 1/22/97 Extension Resolutions. Ms. Lebovics was granted an option to
purchase 100,000 shares of the Company's common stock at an exercise price of
$0.2656 per share in connection with the May 2, 1997 option grant described
above.
The base salary of Mr. Fogarty, as Senior Vice President the Chief Financial
Officer of the Company during 1997 until his resignation on April 24, 1997 was
established at the rate of $105,000 per year for 1997, which was substantially
the same as his rate of salary for 1996. Upon his resignation as Senior Vice
President and Chief Financial Officer of the Company, Mr. Fogarty was retained
as a consultant to the Company and paid a consulting fee for the remainder of
1997 at the same annual rate as his former salary. In addition, Mr. Fogarty was
paid a cash bonus of $16,653 and received other cash compensation of $15,986 for
a car allowance for 1996 and 1997. Mr. Fogarty was granted an option to purchase
30,000 shares of the Company's common stock at an exercise price of $0.2656 in
connection with the May 2, 1997 option grant described above.
Because of the Company's uncertain business prospects and limited cash
resources, in determining the appropriate levels of compensation for the Chief
Executive Officer and the Named Executive Officers (as defined below), the
Compensation Committee did not deem it relevant, useful or even feasible to
consider the compensation practices of other companies having more certain
prospects and greater cash resources. Rather, the Compensation Committee took
into consideration the contribution being made to the Company's development
efforts by these officers, the extent to which they had received previous
reductions in overall level of compensation in November of 1994 in connection
with the Company's restructuring, the absence, in many instances, of any
material increase in salary or other cash compensation for any of the past
several years, the importance of the Company continuing to receive their
services and the benefit of their knowledge of the Company's technologies, an
the Company's ability to provide them with adequate levels of remuneration
either in cash or in securities. Accordingly, it is the opinion of the Committee
that the above-described rates of compensation are reasonable in light of these
factors and the financial condition of the Company.
THE COMPENSATION COMMITTEE
By: /s/ JAY M. HAFT, Chairman
/s/ JOHN J. McCLOY II
/s/ SAM OOLIE
<PAGE>
Compensation
Set forth below is certain information for the three fiscal years ended December
31, 1997, 1996 and 1995 relating to compensation received by the Company's Chief
Executive Officer and all executive officers of the Company other than the Chief
Executive Officer (collectively the "Named Executive Officers") whose total
annual salary and bonus for the fiscal year ended December 31, 1997, exceeded
$100,000 for services rendered in all capacities.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Securities
Underlying
Name and Principal Other Annual Options/Warrants All Other
Position Year Salary($) Bonus($) Compensation($) SARs(#) Compensation
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Parrella 1997 $120,000 $243,058 $15,348 3,062,500 (2) $5,218 (3)
President and 1996 120,000 106,885 15,348 475,000 5,218 (3)
Chief Executive 1995 90,833 47,168 6,395 1,622,000 (4), (12) -
Officer (1)
Jay M. Haft 1997 52,638 - - 543,500 (2) -
Chairman (1) 1996 64,000 - - 200,000 -
1995 110,000 - - 937,000 (5), (12) -
Cy E. Hammond 1997 94,000 65,939 - 150,000 (2) -
Sr. Vice President, Chief 1996 94,000 - - - -
Financial Officer (6) 1995 92,500 - - 439,436 (7), (12) -
John B. Horton 1997 105,000 50,000 - 325,000 (2) -
Sr. Vice President, General 1996 116,932 (8) - - - -
Counsel and Secretary 1995 93,101 (8) - - 903,834 (9), (12) -
Irene Lebovics 1997 105,000 - - 301,250 (2) -
Sr. Vice President and 1996 105,000 - - - -
President of NCT Hearing 1995 88,000 - - 658,850 (10), (12) -
Products, a div. of
the Company
Stephen J. Fogarty 1997 105,000 16,653 15,986 30,000 -
Sr. Vice President, Chief 1996 105,833 - - - -
Financial Officer (6) 1995 104,434 10,083 - 391,400 (11), (12) -
</TABLE>
<PAGE>
(1) Mr. Haft was elected Chairman of the Board and relinquished the title of
Chief Executive Officer on July 17,1996. Prior thereto, and from November
15, 1994, Mr. Haft served as Co-Chairman of the Board and Chief Executive
Officer. From July 17, 1996 to June 19, 1997, the authority and
responsibility of the Chief Executive Officer were delegated by the Board
of Directors to the Executive Committee consisting of Messrs. Haft and
Parrella with Mr. Haft serving as the Committee's Chairman. Mr. Parrella
was elected Chief Executive Officer on June 19, 1997.
(2) Refer to "Options and Warrants Granted in 1997" table and the footnotes
thereto.
(3) Consists of annual premiums for $2.0 million personal life insurance policy
paid by the Company on behalf of Mr. Parrella.
(4) Excludes options and warrants to purchase 1,385,000 shares of the Company's
common stock forfeited under the "Exchange Program" described in footnote
(12) below, for a net new grant under the Exchange Program and the "1992
Plan", described in footnote (12) below, of 237,000 options and warrants
all of which were exercisable at December 31, 1997.
(5) Excludes options and warrants to purchase 585,000 shares of the Company's
common stock forfeited under the "Exchange Program" described in footnote
(12) below, for a net new grant under the Exchange Program and the
"Directors Plan", described in footnote (12) below, of 402,000 options and
warrants all of which were exercisable at December 31, 1997.
(6) Mr. Fogarty resigned as Senior Vice President and Chief Financial Officer
on April 24, 1997, and Mr. Hammond was elected to those offices on
September 4, 1997. Services were rendered by Mr. Fogarty as a consultant to
the Company for the period July 1, 1997 through December 31, 1997.
(7) Excludes options to purchase 389,436 shares of the Company's common stock
forfeited under the "Exchange Program" described in footnote (12) below,
for a net new grant under the Exchange Program and the "1992 Plan"
described in footnote (12) below of 50,000 options all of which were
exercisable at December 31, 1997..
(8) Mr. Horton was elected Senior Vice President, General Counsel and
Secretary of the Company on May 6, 1996. Services were rendered by Mr.
Horton as a consultant to the Company for the period January, 1995
through April, 1996.
(9) Excludes options to purchase 828,834 shares of the Company's common stock
forfeited under the "Exchange Program" described in footnote (12) below,
for a net new grant under the Exchange Program and the "1992 Plan"
described in footnote (12) below of 75,000 options all of which were
exercisable at December 31, 1997.
(10) Excludes options to purchase 507,600 shares of the Company's common stock
forfeited under the "Exchange Program" described in footnote (12) below,
for a net new grant under the Exchange Program and the "1992 Plan",
described in footnote (12) below, of 151,250 options all of which were
exercisable at December 31, 1997.
(11) Excludes options to purchase 316,400 shares of the Company's common stock
forfeited under the "Exchange Program" described in footnote (12) below,
for a net new grant under the Exchange Program and the "1992 Plan",
described in footnote (12) below, of 75,000 options all of which were
exercisable at December 31, 1997.
(12) On November 8, 1995, the Company received an offer from a Canadian
institutional investor to purchase 4,800,000 shares of the Company's
common stock at a price of $0.75 per share, the fair market value of such
shares on that date. At that time virtually all of the Company's
authorized capital of 100,000,000 shares of common stock was issued and
outstanding or reserved for issuance upon the exercise of outstanding
warrants and options to purchase common stock of the Company. Therefore,
in order to make sufficient shares available to effect the sale of
4,800,000 shares of common stock to such investor, the Company adopted a
program (the "Exchange Program"), to be partially implemented through the
Noise Cancellation Technologies, Inc. Stock Incentive Plan (the "1992
Plan") and the Company's Option Plan for Certain Directors (the "Directors
Plan") and partially outside such plans, under which all directors,
officers, certain active consultants (all of whom were former directors or
officers of the Company) and all current employees were given the right to
exchange presently owned warrants and options that had shares of common
stock reserved for issuance upon their exercise (respectively, "Old
Warrants" and "Old Options") for new warrants and options which initially,
and until the requisite corporate action was taken to increase the
authorized capital of the Company and reserve the required number of
shares of common stock for issuance upon their exercise, would not have
any shares of common stock reserved for issuance upon their exercise
(respectively, "New Warrants" and "New Options"). The exercise price of
the New Warrants and New Options was established at $0.75 per share, the
fair market value of the Company's common stock on November 8, 1995, the
date the Exchange Program was adopted, and exchanges were to be effected
starting with the Old Warrants and Old Options having the highest exercise
prices and proceeding in descending order of exercise prices until
sufficient shares of common stock became available for the Company to
implement the sale of common stock to the Canadian investor. If possible,
no exchanges were to be made which would involve Old Warrants or Old
Options having an exercise price below $0.75 per share, and, in fact, no
such exchanges were required. The exercise prices of the Old Warrants and
Old Options exchanged for New Warrants and New Options ranged from a high
of $5.09 per share to $0.75 per share.
The New Warrants and New Options became fully vested upon the surrender
and forfeiture of Old Warrants and Old Options to purchase a corresponding
number of shares (as adjusted in accordance with the foregoing formula in
the case of those having a $0.75 per share exercise price). However, the
New Warrants and New Options would not become exercisable until: (i)
approval by the Company's stockholders of an amendment to the Certificate
of Incorporation increasing the authorized capital by an amount of
additional shares of common stock at least sufficient to provide the
number of shares needed to be reserved to permit the exercise of all New
Warrants and New Options, and (ii) the completion of such further
corporate action including amendments to the 1992 Plan and the Directors
Plan that may be necessary or appropriate in connection with the
implementation of the Exchange Program. Such stockholder approval and
further corporate action were obtained and completed on July 17, 1996, and
August 14, 1996, respectively. The expiration dates of the New Warrants
and New Options are the same as the expiration dates of the Old Warrants
and Old Options exchanged except that if such expiration date occurred
prior to the date on which the New Warrants or New Options become
exercisable, the expiration date for such New Warrants or New Options
would be ninety (90) days following the date on which such New Warrants
and New Options become exercisable. In all other respects, the terms and
conditions of the New Warrants and New Options are the same as the terms
and conditions of the Old Warrants and Old Options exchanged.
Under the Exchange Program, 4,800,249 shares of the Company's common stock
were made available for issuance to the Canadian institutional investor
and it was necessary in order to make the New Warrants and New Options
fully exercisable for the Company to take the appropriate corporate action
to reserve 5,055,499 shares of the Company's common stock for issuance
upon their exercise which action was completed following the above
described increase in the Company's authorized capital.
<PAGE>
Stock Options and Warrants
The following tables summarize the Named Executive Officers' stock option and
warrant activity during 1997.
<TABLE>
<CAPTION>
Options and Warrants Granted in 1997
Percent
of Total Potential Realized Value
Shares Options at Assumed Annual
Underlying and Rates of Stock Price
Options Warrants Exercise Appreciation for Option
and Granted to Price and Warrant Term (4)
Warrants Employees Per Expiration ------------------------
Name Granted in 1997 Share Date 5% 10%
---- ---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Parrella 862,500 (1) 13.3% $0.7500 12/31/99 $ 99,814 $209,398
250,000 (1) 3.9% 0.5000 02/26/99 13,473 27,700
450,000 (2) 6.9% 0.2656 05/02/04 48,657 113,391
1,500,000 (3) 23.1% 0.6875 10/06/04 419,822 978,365
Jay M. Haft 218,500 (1) 3.4% 0.7500 12/31/99 25,286 53,047
75,000 (2) 1.2% 0.2656 05/02/04 8,109 18,898
250,000 (3) 3.9% 0.6875 10/06/04 69,970 163,061
Cy E. Hammond 25,000 (1) 0.4% 0.7500 12/31/99 2,893 6,070
50,000 (2) 0.8% 0.2656 05/02/04 5,406 12,599
75,000 (3) 1.2% 0.6875 10/06/04 20,991 48,918
John B. Horton 200,000 (1) 3.1% 0.7500 09/16/00 20,744 43,285
50,000 (2) 0.8% 0.2656 05/02/04 5,406 12,599
75,000 (3) 1.2% 0.6875 10/06/04 20,991 48,918
Irene Lebovics 201,250 (1) 3.1% 0.7500 12/31/99 23,290 48,860
100,000 (2) 1.5% 0.2656 05/02/04 10,813 25,198
Stephen J. Fogarty 30,000 (2) 0.5% 0.2656 05/02/04 3,244 7,559
</TABLE>
(1) Expiration dates of the warrants and options to purchase common stock of
the Company were extended for an additional two years from the original
date of expiration.
(2) Options to purchase these shares were granted pursuant to the 1992 Plan
and are currently exercisable.
(3) Options to purchase these shares were granted pursuant to the 1992 Plan
and are not exercisable until such time as the Company's stockholders
approve an increase in the number of shares of the Company's common stock
included in the 1992 Plan.
(4) The dollar amounts on these columns are the result of calculations at the
5% and 10% rates required by the SEC and, therefore, are not intended to
forecast possible future appreciation, if any, of the stock price.
<PAGE>
<TABLE>
<CAPTION>
1997 Aggregated Options and Warrant Exercises and
December 31, 1997 Option and Warrant Values
Number of Shares
Number Underlying Value of Unexercised
of Unexercised Options In-the-Money-Options
Shares and Warrants at and Warrants at
Acquired December 31, 1997 December 31, 1997
on Value --------------------------- ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Parrella 449,456 $389,035 2,737,000 1,500,000 $1,401,962 $656,250
Jay M. Haft - - 1,282,000 250,000 587,074 109,375
Cy E. Hammond - - 319,718 75,000 148,018 32,813
John B. Horton - - 539,417 75,000 233,528 32,813
Irene Lebovics - - 592,550 - 282,358 -
Stephen J. Fogarty 263,200 77,640 - - - -
</TABLE>
Compensation Arrangements with Certain Officers and Directors
On February 1, 1996, the Compensation Committee awarded Mr. Parrella an
incentive bonus equal to 1% of the cash received by the Company upon the
execution of the agreement or other documentation evidencing transactions with
unaffiliated parties (other than certain parties involved in transactions then
in negotiation) or otherwise received at the closing of said transactions which
occur subsequent to January 1, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, the following persons served as
members of the Compensation Committee of the Company's Board of Directors: Jay
M. Haft, John J. McCloy, II, and Sam Oolie. Mr. Haft, Chairman of the Committee,
during such fiscal year, was Chairman of the Board and an employee of the
Company, and was a manager of OnActive Technologies, LLC, a subsidiary of the
Company. Mr. Haft served as President of the Company from November, 1994, until
July, 1995, and served as its Chief Executive Officer from November, 1994, to
July 17, 1996. Mr. Haft has also served as a member of the Board of Directors of
the Company's subsidiary, NCT Audio, since August 25, 1997. Messrs. McCloy and
Oolie have also served as members of the Board of Directors of NCT Audio since
November 14, 1997, and September 4, 1997, respectively.
In October 1990, the Company's Board of Directors authorized the issuance of
warrants to acquire 420,000 shares of common stock to each of Messrs. McCloy,
Parrella and Oolie and Ms. Lebovics, exercisable through September 30, 1994, at
$.375 per share, being the market price of the Company's common stock on the
date of such authorization, based upon each such person's commitment to extend
his or her personal guarantee on a joint and several basis with the others in
support of the Company's attempt to secure bank or other institutional
financing, the amount of which to be covered by the guarantee would not exceed
$350,000. No firm commitment for any such financing has been secured by the
Company and at present no such financing is being sought. However, each of such
persons' commitment to furnish said guarantee continues in full force and
effect.
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Co-Chairman, and Chief
Executive Officer of the Company, shares investment control over an additional
24% of the outstanding capital of ERI. The Company believes that the respective
terms of both the establishment of the joint venture with ERI and its
termination were comparable to those that could have been negotiated with other
persons or entities. During the fiscal year ended December 31, 1997, the Company
was not required to make any such payments to ERI under these agreements.
<PAGE>
In 1993, the Company entered into three Marketing Agreements with Quiet Power
Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical Solutions,
Inc."), a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing Agreements, QSI has undertaken to use its best
efforts to seek research and development funding for the Company from electric
and natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will record a charge for the amount by which the market price of the Common
Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1994, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
Under the terms of the second of the three Marketing Agreements, QSI is granted
a non-exclusive right to market the Company's products that are or will be
designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the Company in the feeder
bowl area. The initial term of this Marketing Agreement is three years with
subsequent automatic one-year renewals unless a party elects not to renew.
Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with equipment used by electric and/or natural gas utilities for
retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products equal to 129% of QSI's
marketing expenses attributable to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues received by the Company from the sale of such products. QSI is
also entitled to receive a 5% commission on research and development funding
similar to that described above. QSI's exclusive rights continue for an
indefinite term provided it meets certain performance criteria relating to
marketing efforts during the first two years following product availability in
commercial quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights become non-exclusive, depending on the circumstances
causing such change, the initial term then becomes either three or five years
from the date of this Marketing Agreement, with subsequent one-year automatic
renewals in each instance unless either party elects not to renew. During the
fiscal year ended December 31, 1997, 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, 1997, the Company made no
payments to QSI for project management services.
In March 1995, the Company entered into a Master Agreement with QSI under which
QSI was granted an exclusive worldwide license under certain NCT patents and
technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances include
NCT's failure to develop the products or the failure of the parties to agree on
certain development matters. In consideration of the rights granted under the
Master Agreement, QSI is to pay the Company a royalty of 6% of the gross
revenues received from the sale of the products and 50% of the gross revenues
received from sublicensing the rights granted to QSI under the Master Agreement
after QSI has recouped 150% of the costs incurred by QSI in the development of
<PAGE>
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 June 30, 1998, QSI has paid all installments due and payable for the
exclusivity fee and owes the Company $150,000 which was due on January 1, 1998,
and is fully reserved. Other than as described above, QSI owes no other amounts
to the Company. The Company has been informed by QSI that QSI's failure to pay
such $150,000 is attributable to a shortage of cash and other liquid assets.
The Company believes that the terms of its agreements with QSI are comparable to
those that it could have negotiated with other persons or entities.
<PAGE>
PERFORMANCE GRAPH
Note: The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
Noise Cancellation Technologies, Inc.
Stock Performance (1)
[GRAPHIC OMITTED]
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
NCT $100 $ 78 $ 20 $ 17 $ 11 $ 30
NASDAQ Composite 100 115 112 159 196 240
Index
NASDAQ Electronic 100 137 152 251 435 456
Component Stock
Index (2)
(1)Assumes an investment of $100.00 in the Company's common stock and in each
index on December 31, 1992.
(2)The Company has selected the NASDAQ Electronic Components Stock Index
composed of companies in the electronics components industry listed on the
NASDAQ National Market System. Because the Company knows of no other publicly
owned company whose business consists solely or primarily of the development,
production and sale of systems for the cancellation or control of noise and
vibration by electronic means and other applications of Active Wave
Management(TM) technology, it is unable to identify a peer group or an
appropriate published industry or line of business index other than the
NASDAQ Electronics Components Stock Index.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of August 26, 1998, information concerning
the shares of common stock beneficially owned by each person who, to the
knowledge of the Company, is the holder of 5% or more of the common stock of the
Company, each Director, and each Named Executive Officer, and all executive
officers and Directors of the Company as a group. Except as otherwise noted,
each beneficial owner has sole investment and voting power with respect to the
listed shares.
Amount and
Nature of Approximate
Beneficial Percentage
Name of Beneficial Owner Ownership (1) of Class (1)
------------------------ ------------- ------------
Michael J. Parrella 2,750,333 (2) 1.74%
John J. McCloy 3,661,591 (3) 2.34%
Jay M. Haft 1,282,000 (4) 0.83%
Sam Oolie 565,000 (5) 0.36%
Morton Salkind 85,000 (6) 0.05%
Stephan Carlquist 160,000 (7) 0.10%
Irene Lebovics 1,388,067 (8) 0.89%
Cy E. Hammond 319,718 (9) 0.21%
John B. Horton 559,417 (10) 0.36%
Stephen J. Fogarty - -
All Executive Officers and Directors 11,596,126 (11) 7.09%
as a Group (11 persons)
Carole Salkind 9,542,143 (12) 6.05%
Her Majesty The Queen, 11,250,000 (13) 7.83%
Province of Alberta, Canada
(1) Assumes the exercise of currently exercisable outstanding options or
warrants to purchase shares of common stock. The percent of class
ownership is calculated separately for each person based on the
assumption that the person listed on the table has exercised all options
and warrants shown for that person, but that no other holder of options
or warrants has exercised such options or warrants. (Amounts and
percentages are as of August 26, 1998 and will be updated to a more
recent practicable date in the definitive proxy statement.)
(2) Includes 862,500 shares issuable upon the exercise of currently
exercisable warrants and 1,874,500 shares issuable upon the exercise of
currently exercisable options. Does not include 7,500,000 shares
issuable upon the exercise of options which become exercisable upon
stockholder approval of an amendment to the 1992 Plan increasing the
number of shares of common stock covered by the 1992 Plan (the "1992
Plan Amendment"). The options to purchase 4,000,000 of such shares are
subject to further limitations on vesting and exercisability which
expire on January 15, 2001.
(3) Includes 862,500 shares issuable upon the exercise of currently exercisable
warrants and 900,000 shares issuable upon the exercise of currently
exercisable options. Does not include 150,000 shares issuable upon the
exercise of options which become exercisable upon stockholder approval of
the 1992 Plan Amendment.
(4) Includes 218,500 shares issuable upon the exercise of currently
exercisable warrants, 10,000 restricted shares and 1,053,500 shares
issuable upon the exercise of currently exercisable options. Does not
include 700,000 shares issuable upon the exercise of options which
become exercisable upon stockholder approval of the 1992 Plan
Amendment. The options to purchase 360,000 of such shares are subject
to further limitations on vesting and exercisability which expire
sequentially as to equal increments on each of the first four
anniversaries of the date of grant, February 14, 1998.
(5) Includes 25,000 restricted shares and 290,000 shares issuable upon the
exercise of currently exercisable options. Does not include 150,000 shares
issuable upon the exercise of options which become exercisable upon
stockholder approval of the 1992 Plan Amendment.
(6) Includes 10,000 restricted shares and 50,000 shares issuable upon the
exercise of currently exercisable options and 25,000 shares issuable upon
the exercise of options which become exercisable on July 14, 1999. Does not
include 150,000 shares issuable upon the exercise of options which become
exercisable upon stockholder approval of the 1992 Plan Amendment.
(7) Includes 10,000 restricted shares and 150,000 shares issuable upon the
exercise of currently exercisable options. Does not include 150,000 shares
issuable upon the exercise of options which become exercisable upon
stockholder approval of the 1992 Plan Amendment.
(8) Includes 201,250 shares issuable upon the exercise of currently
exercisable warrants and 391,300 shares issuable upon the exercise of
currently exercisable options. Does not include 1,000,000 shares
issuable upon the exercise of options which become exercisable upon
stockholder approval of the 1992 Plan Amendment. The options to
purchase 800,000 of such shares are subject to further limitations on
vesting and exercisability which expire sequentially as to equal
increments on each of the first four anniversaries of the date of grant,
February 14, 1998.
(9) Includes 25,000 shares issuable upon the exercise of currently
exercisable warrants and 294,718 shares issuable upon the exercise of
currently exercisable options. Does not include 325,000 shares issuable
upon the exercise of options which become exercisable upon stockholder
approval of the 1992 Plan Amendment. The options to purchase 200,000 of
such shares are subject to further limitations on vesting and
exercisability which expire sequentially as to equal increments on each
of the first four anniversaries of the date of grant, February 14,
1998.
(10) Includes 20,000 shares issuable upon the exercise of currently exercisable
warrants and 539,417 shares issuable upon the exercise of currently
exercisable options. Does not include 175,000 shares issuable upon the
exercise of options which become exercisable upon stockholder approval of
the 1992 Plan Amendment. The options to purchase 80,000 of such shares are
subject to further limitations on vesting and exercisability which expire
sequentially as to equal increments on each of the first four anniversaries
of the date of grant, February 14, 1998.
(11) Includes 2,189,750 shares issuable to 6 executive officers and directors
of the Company upon the exercise of currently exercisable warrants,
5,853,435 shares issuable to 11 executive officers and directors of the
Company upon the exercise of currently exercisable options, 45,000
restricted shares issued to 4 directors of the Company and 50,000 shares
issuable to 1 director of the Company, 25,000 shares on July 14 in each
of the years 1998 and 1999, respectively. Does not include 10,550,000
shares issuable to 10 executive officers and directors of the Company
upon the exercise of options which become exercisable upon stockholder
approval of the 1992 Plan Amendment. See footnotes (2), (4), (8), (9)
and (10) above. Options to purchase an additional 200,000 of such
shares are subject to the same limitations described in footnote (4).
(12) Carole Salkind's address is 801 Harmon Cove Towers, Secaucus, New Jersey
07094.
(13) Her Majesty the Queen, Province of Alberta, Canada's address is Room 530,
Terrace Building, 9515 107th Street, Edmondton, Alberta T5K 2C3.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the Company's 1999 Annual
Meeting of Stockholders must be received by the Company by December 31, 1998,
for inclusion in the Company's proxy statement and form of proxy relating to
that meeting.
Linthicum, Maryland
September 24, 1998
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
1025 West Nursery Road, Suite 120
Linthicum, Maryland 21090
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Jay M. Haft, Michael J. Parrella and John B.
Horton as Proxies, each with the power to appoint his substitute, and hereby
authorizes them, and each of them, to represent and vote, as designated below,
all the shares of Common Stock of Noise Cancellation Technologies, Inc. held of
record by the undersigned on September 21, 1998, at the Annual Meeting of
Stockholders to be held on October 20, 1998, or any adjournment thereof.
1. ELECTION OF DIRECTORS
FOR all nominees listed below except as marked to the contrary) / /
WITHHOLD AUTHORITY to vote for all nominees listed below / /
Jay M. Haft, Michael J. Parrella, John J. McCloy II, Sam Oolie,
Stephan Carlquist, Morton Salkind
(to withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below.)
-------------------------------------------------------------------------
2. To approve the amendment of the Company's Restated Certificate of
Incorporation to change the name of the Company to "NCT Group, Inc."
FOR / / AGAINST / / ABSTAIN / /
3. To approve the amendment of the Company's Restated Certificate of
Incorporation to increase the number of shares of Common Stock authorized
thereunder from 185,000,000 shares to 255,000,000 shares.
FOR / / AGAINST / / ABSTAIN / /
4. To approve the adoption of an amendment to the Noise Cancellation
Technologies, Inc. Stock Incentive Plan.
FOR / / AGAINST / / ABSTAIN / /
5. To approve a plan granting options to purchase common stock of the Company to
two non-employee directors.
FOR / / AGAINST / / ABSTAIN / /
6. To ratify the selection of Richard A. Eisner & Company, LLP as independent
auditors for the fiscal year ending December 31, 1998.
FOR / / AGAINST / / ABSTAIN / /
7. At their discretion, the Proxies are authorized to vote upon such other
matters as may properly come before the meeting.
This proxy, when properly executed, will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted FOR
Proposals 1, 2, 3, 4, 5 and 6.
Dated: ________________________, 1998
--------------------------------------
--------------------------------------
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give title. If a corporation, please sign in full
corporate name by the president or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE
<PAGE>
NCT Logo
[GRAPHIC OMITTED]
NOISE CANCELLATION TECHNOLOGIES, INC.
----------------------------------------------------
1997 ANNUAL REPORT
<PAGE>
Company Profile
Noise Cancellation Technologies, Inc. ("NCT" or the "Company") is a leading
technology company dedicated to the development and commercialization of Active
Wave Management applications -- the electronic manipulation of sound and signal
waves to reduce noise, improve signal-to-noise ratios and enhance sound quality.
Formed in 1986 with a focus on noise reduction applications, the NCT of today
holds one of the most comprehensive patent portfolios in the industry with a
broad focus on products and technologies for growth markets.
The Company is organized into strategic business units ("SBU's"), each targeted
to the commercialization of their products in specific markets. NCT's SBU's
include its subsidiaries, NCT Audio Products, Inc. and NCT Hearing Products,
Inc.; and its divisions, NCT Communications and NCT Microphones. The Company's
branded products include: ClearSpeech(TM), a line of noise reduction systems for
hands-free cellular and two-way radio applications as well as software for
intranet communications; Gekko(TM), a unique line of flat speakers for home
audio and home theater; NoiseBuster(R), a line of active noise reduction ("ANR")
headsets for audio, cellular and telephone applications; ProActive(TM), a line
of ANR earmuffs and communications headsets for higher-noise industrial
applications; and silicon micromachined microphones providing superior
technology for communications and other applications.
NCT's corporate strategy is to separately capitalize each SBU as a subsidiary
through a private or public financing or a combination thereof, with NCT
maintaining a majority ownership, thereby providing NCT with multiple sources of
product, licensing, royalty and service revenues and delivering enhanced value
to NCT shareholders.
<PAGE>
Investor Information
Annual Meeting
The Annual Meeting of Noise Cancellation Technologies, Inc.
shareholders will convene at 3:00 PM on Tuesday, October 20, 1998, at
the Sheraton Stamford Hotel, 2701 Summer Street, Stamford, Connecticut
06905.
10-K Report
A copy of the Company's Annual Report for the fiscal year ended December 31,
1997 on Form 10-K as filed with the Securities and Exchange Commission for 1997
on Form 10K, with a list of Exhibits thereto, will be sent without charge to any
shareholder of record or beneficial owner of shares of the Company's common
stock upon receipt of written request addressed to:
Investor Relations
Noise Cancellation Technologies, Inc.
One Dock Street, Suite 300
Stamford, CT 06902
Any Exhibit will be provided upon payment of the reasonable costs of producing
such Exhibit.
Transfer Agent
Communications regarding stock transfers, lost certificates, and change of
address should be directed to American Stock Transfer & Trust Company, 40 Wall
Street, New York, NY 10005. (212) 936-5100.
Independent Accountants Corporate Offices
Richard A. Eisner & Company, LLP Noise Cancellation
Technologies Inc.
575 Madison Avenue, 7th Floor 1025 West Nursery Road, Suite 120
New York, NY 10022-2597 Linthicum, MD 21090-1203
(410) 636-8700
Certain statements in this Annual Report which are not historical facts are
forward-looking statements under provisions of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. Please refer to the "Forward-Looking Statements" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for important factors that, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause its actual results in fiscal 1998 and beyond to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company.
<PAGE>
Dear Fellow Shareholders:
1997 has been a pivotal year for NCT. Investments were made to ensure
successful product launches. Numerous technology licensing agreements were
completed with leading companies and the Company has initiated the execution of
a corporate strategy that will allow it to further commercialize its large
patent portfolio and increase shareholder value. Having laid this groundwork,
the Company looks forward to improved results in 1998 and beyond.
NCT now has one of the most comprehensive patent portfolios in the industry
- -- we were granted 50 new patents in 1997 and now hold the rights to over 256
inventions. To take advantage of this substantial portfolio, NCT is organized
into four SBU's, each focused on commercialization in specific markets. Our
intention is to capitalize these SBU's as discrete commercial entities and
separately finance each one through a private or public securities offering,
with NCT and its shareholders retaining a majority interest. We believe this
strategy will allow NCT and its shareholders to realize the maximum commercial
value from our patent portfolio.
Phase One of this program has already begun with the organization and initial
financing of NCT Audio Products, Inc ("NCT Audio") as a 73% owned subsidiary in
1997. It is anticipated that Phase One will continue with the acquisition by NCT
Audio of at least three audio companies with established distribution networks
to be financed by a public offering or private placement of NCT Audio's common
stock or other securities. While not yet complete, efforts to raise funding are
currently underway. On a proforma basis, the companies to be acquired, along
with the subsidiary's Gekko(TM) Flat Speaker product line, are expected to
report approximately $67 million in annual revenues and approximately $5 million
in pre-tax profits in calendar year 1998 if all of the proposed acquisitions are
consummated. It is our intention to apply this strategy to each of our other
SBU's as they mature.
NCT Audio launched the Gekko(TM) flat speaker line for home theater and home
audio at the 1998 Winter Consumer Electronics Show. The product was extremely
well received and won the Best of Showcase Honoree award in the home theater
category. The Gekko(TM) flat speaker was also chosen from over 4,000 nominees as
a finalist in the 1998 Discover Awards for Technological Innovation from
Discover Magazine. Home theater is the fastest growing segment of the home audio
equipment market. At the end of 1997, 14.8 million U.S. households were equipped
with a home theater system, up from 4 million in 1994.
NCT's headset and communications product offerings are well positioned to
capitalize on the exploding global market for telecommunications services and
equipment which is expected to exceed $1 trillion by the year 2000. The Company
successfully expanded its NoiseBuster(R) brand to include a line of active noise
reduction communications headsets. The NoiseBuster(R) headset was named a Best
of Computer Telephony Expo `98 product by Computer Telephony Magazine. NCT's
breakthrough ClearSpeech(TM) noise and echo cancellation algorithms improve the
clarity and intelligibility of hands-free cellular, two-way radio and PC
communications products, including intranet telephony.
NCT technologies have been licensed by market leaders and various
applications are currently under development. Upon market introduction, royalty
revenue will be generated for each product sold incorporating NCT technology.
ClearSpeech(TM) noise and echo cancellation algorithms were licensed to Intel
Corporation, Oki Electric Company, Westinghouse Wireless Solutions Company, VLSI
Technology, Inc., Interactive Products, Inc., and HM Electronics, Inc.
Additionally, NCT completed a royalty-generating, cross-licensing arrangement
with U.K.-based speaker manufacturer New Transducers Limited ("NXT"), a
wholly-owned subsidiary of Verity Group, plc ("Verity"). To date, NXT has signed
license agreements with 54 companies including NEC, Samsung Electronics, Acer
Computers, Fujitsu, LG Foster, Nippon Columbia and Harman International for the
development of products using the companies' flat speaker technology.
Anti-noise, always a core technology for NCT, has been licensed for
integration of noise canceling electronics into in-flight passenger
entertainment systems to enhance comfort and enjoyment of in-flight programming.
United Airlines is the first major commercial carrier to equip aircraft with
NCT's anti-noise system. NCT has completed a similar license agreement with
Pacific Systems, Inc., a leading integrator of corporate and other general
aviation aircraft.
<PAGE>
NCT obtained exclusive rights to certain patents relating to silicon
micromachined microphones ("SMM"), an advanced microphone chip, in 1993. Under
license from NCT, Siemens AG will develop, manufacture and market silicon
micromachined microphones beginning in 1999. The total worldwide market for
microphones is estimated to be nearly one-half billion units annually and thus
represents a significant opportunity for NCT.
We believe that our focus on growth markets, the caliber of our licensees and
our separately-financed SBU strategy will move NCT successfully forward. Using
NCT as the technology developer and the SBU's as the product and licensing
companies, NCT can create tremendous value and synergies. We are already
experiencing great success with NCT Audio and expect similar results with
additional separately financed subsidiaries in the future. With our planned
aggressive acquisition strategy, NCT should grow rapidly in the next several
years. We acknowledge the dedication and commitment of our employees and
appreciate the patience and loyalty of our shareholders. Our belief in NCT's
future success remains steadfast and optimistic.
On behalf of the Board of Directors,
/s/ JAY M. HAFT /s/ MICHAEL J. PARRELLA
--------------- -----------------------
Jay M. Haft Michael J. Parrella
Chairman of the Board of Directors President and Chief Executive Officer
<PAGE>
NCT TECHNOLOGIES AND PRODUCTS
NCT is a leading technology developer with an extensive portfolio of
proprietary algorithms and a wide variety of product offerings for consumer,
commercial and industrial applications. The Company specializes in the
utilization of sound and signal waves to reduce noise, improve signal-to-noise
ratios and enhance sound quality.
Anti-noise Technology
NCT's NoiseBuster(R) and ProActiveTM headset product lines incorporate a
technology called "anti-noise", or ANR. ANR is the electronic coupling of a
sound wave with its exact mirror image wave called anti-noise, resulting in a
significant reduction of the offensive noise before it reaches the user's ears.
This technology is particularly effective against low frequency noise, such as
noise generated by computer fans, heating, ventilating and air conditioning
("HVAC") systems and motor or engine-driven equipment. Reduction of this type of
noise is especially important for intelligible communications. A
scientifically-proven principle known as the upward spread of masking
demonstrates that as the intensity of low frequency sound increases, it is
accompanied by a disproportionate degradation in ability to perceive consonant
sounds that carry the meaning of speech.
The NoiseBuster(R) line of headsets for cellular and telephony applications
are the only communications headsets on the market to offer active noise
reduction for the highest level of intelligibility and clarity of received
communications. NoiseBuster(R) headsets also feature a noise canceling electret
boom microphone which filters background noise from transmitted speech.
The NoiseBuster Extreme!(TM) portable stereo headphone is digital-ready and
specifically designed to deliver peak acoustic performance from portable audio
devices, even when they are used in noisy settings. NoiseBuster Extreme!(TM) is
an excellent travel accessory because it dramatically reduces aircraft cabin
din, and bus and train engine noise, making traveling a more relaxing and
enjoyable experience.
ProActive(TM) is a line of ANR earmuffs and communications headsets for use
in higher-noise, commercial and industrial environments. Available in open-back
and closed back styles, the headsets are offered with a choice of
high-performance noise canceling microphones for clearer voice transmission.
ClearSpeech(TM) Digital Technology
NCT's ClearSpeech(TM) products incorporate algorithms which are specifically
designed to remove background noise and echo. These breakthrough technologies
dramatically improve communications clarity and comfort through devices such as
cellular phones and two-way radios. The ClearSpeech(TM) noise cancellation
algorithm removes up to 95% of stationary, or constant, noise from a signal
containing noise and speech. The ClearSpeech(TM) advanced echo cancellation
algorithm can be used on its own or in conjunction with noise reduction for
applications such as PC telephony and hands-free mobile communications.
ClearSpeech(TM)-Mic is the first digital noise reduction microphone system
for use with hands-free car kits. The product substantially reduces background
road, tire, wind, engine and traffic noise from hands-free calls, allowing the
person receiving the call to hear voice more clearly and with less frustration
and anxiety. ClearSpeech(TM)-Hands-Free is a digital no-install car kit for
cellular phones that provides both noise and echo cancellation.
ClearSpeech(TM)-Speaker cleans background noise from the incoming speech signal
over a two-way or mobile radio for the utmost in intelligibility. The system is
suitable for use with mobile radios, fleet communication systems, marine radios
and many other communication systems.
ClearSpeech(TM)-IPhone software for corporate intranets has generated
interest from global companies whose long distance telephone bills are
astoundingly high. Communications via intranets is the next wave in
telecommunications, however it is impeded by voice quality issues. NCT's
software solves these problems by eliminating much of the noise and echo that
plagues PC communications applications.
<PAGE>
Silicon Micromachined Microphone
NCT's SMM represents the next generation in microphone technology. The SMM's
superior price performance characteristics over conventional microphones, as
well as other important features, make it the ideal microphone for use in
telephony, speech recognition, multimedia and other communications applications.
The small chip dimensions of the SMM--only 3mm on each side--make it useful for
packaging into products with tight size constraints, such as noise canceling ear
plugs and hearing aids.
Flat Panel Transducer Technology
Flat Panel Transducers ("FPT(TM)") are thin sound conductive panels. NCT's
expertise in the optimization and equalization of sound waves enables the
FPT(TM) to produce high quality audio while solving many packaging issues such
as size, sound quality and shielding. FPT(TM) applications include home theater,
professional audio, multimedia and automotive original equipment ("OE") and
aftermarket.
Gekko(TM) flat speakers are unique in both sound quality and design. Unlike
standard stereo speakers that pinpoint ideal sound to one "sweet spot",
Gekko(TM) flat speakers employ FPT(TM) technology which evenly disperses
high-quality sound throughout the room for Sweet Space(TM). The breakthrough
packaging concept of the Gekko(TM) flat speaker features a unique thin cabinet
designed for wall mounting. The standard front speaker grille can be easily
replaced with a custom grille printed with any of over 400 images from the
ArtGekko(TM) catalog, making the speaker a piece of wall art. For home theater
applications which require as many as five speakers, the space-saving and
aesthetic advantages of this breakthrough product line are clear.
For more information on NCT products call 800-278-3526.
<PAGE>
Financial Table of Contents
Five Year Summary......................................................8
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................10
Consolidated Balance Sheets...........................................22
Consolidated Statements of Operations.................................23
Consolidated Statements of Stockholders' Equity.......................24
Consolidated Statements of Cash Flows.................................25
Notes to Consolidated Financial Statements............................26
Independent Auditors' Report..........................................53
Stock Market Information..............................................54
Corporate Information.................................................55
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY (1)
(In Thousands of Dollars and Shares)
Years Ended December 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
<S> <C> <C> <C> <C> <C>
Product Sales $ 1,728 $ 2,337 $ 1,589 $ 1,379 $ 1,720
Engineering and development services 3,598 4,335 2,297 547 368
Technology licensing fees and other 60 452 6,580 1,238 3,630
--------- --------- --------- --------- ---------
Total revenues $ 5,386 $ 7,124 $ 10,466 $ 3,164 $ 5,718
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales $ 1,309 $ 4,073 $ 1,579 $ 1,586 $ 2,271
Cost of engineering and
development services 2,803 4,193 2,340 250 316
Selling, general and administrative 7,231 9,281 5,416 4,890 5,217
Research and development 7,963 9,522 4,776 6,974 6,235
Interest (income) expense, net (311) (580) (49) 17 1,397 (4)
Equity in net (income) loss of
unconsolidated affiliates 3,582 (1) 1,824 (80) 80 --
Other expense, net -- 718 552 192 130
--------- --------- --------- --------- ---------
Total costs and expenses $ 22,577 $ 29,031 $ 14,534 $ 13,989 $ 15,566
--------- --------- --------- --------- ---------
Net loss $(17,191) (1) $(21,907) $ (4,068) $(10,825) $( 9,848)
Less:
Preferred stock dividend requirement - - - - 1,623
Accretion of difference between
carrying amount and redemption
amount of redeemable preferred stock - - - - 285
--------- --------- --------- --------- ---------
Net (loss) attributable to common
stockholders $(17,191) (1) $(21,907) $ (4,068) $(10,825) $(11,756)
========= ========= ========= ========= =========
Weighted average number
of common shares outstanding (2) -- basic
and diluted 70,416 82,906 87,921 101,191 124,101
========= ========= ========= ========= =========
Basic and Diluted Net loss
per share $ (0.24) (1) $ (0.26) $ (0.05) $ (0.11) $ (.09)
========= ======== ========= ========= =========
December 31,
---------------------------------------------------
1993 1994 1995 1996 1997
---------------------------------------------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total assets $29,541 $12,371 $9,583 $5,881 $17,361
Total liabilities 6,301 6,903 2,699 3,271 2,984
Long-term debt -- -- 105 -- --
Accumulated deficit (46,873) (68,780) (72,848) (83,673) (93,521)
Stockholders equity(3) 23,239 5,468 6,884 2,610 14,377
Working capital (deficiency) 19,990 923 1,734 (1,312) 11,696
</TABLE>
(1)In connection with the sale of Common Stock to Tenneco Automotive in
December 1993, the Company recognized its share of cumulative losses not
previously recorded with respect to its joint venture with Walker amounting
to approximately $3.6 million.
(2)Does not include shares issuable upon the exercise of outstanding stock
options, warrants and convertible Preferred Stock, since their effect would
be antidilutive.
(3)The Company has never declared nor paid cash dividends on its Common Stock.
(4)Includes interest expenses of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements in this Annual Report which are not historical facts are
forward-looking statements under provisions of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. The Company wishes to caution readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, the Company's actual results and could cause its actual results in
fiscal 1998 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems for Active Wave Management; produce a cost
effective product that will gain acceptance in relevant consumer and other
product markets; increase revenues from products; realize funding from
technology licensing fees, royalties, product sales, and engineering and
development revenues to sustain the Company's current level of operation; timely
introduce new products; continue its current level of operations to support the
fees associated with the Company's patent portfolio; maintain satisfactory
relations with its five customers that accounted for 71% of the Company's
revenues in 1997; attract and retain key personnel; prevent invalidation,
abandonment or expiration of patents owned or licensed by the Company and expand
its patent holdings to diminish reliance on core patents; have its products
utilized beyond noise attenuation and control; maintain and expand its strategic
alliances; and protect Company know-how, inventions and other secret or
unprotected intellectual property.
Overview
The Company is continuing the transition initiated in 1995 from a firm
focused principally on research and development of new technology to a firm
focused on the commercialization of its technology through technology licensing
fees, royalties and product sales. Prior to 1995, the Company derived the
majority of its revenues from engineering and development funding provided by
established companies willing to assist the Company in the development of its
active noise and vibration control technology, and from technology licensing
fees paid by such companies. The Company's strategy generally has been to obtain
technology licensing fees when initiating joint ventures and alliances with new
strategic partners. Revenues from product sales were limited to sales of
specialty products and prototypes. In 1997, the Company received approximately
6% of its operating revenues from engineering and development funding, compared
with 17% in 1996. Since 1991, revenues from product sales have generally been
increasing, although in 1996 product sales declined slightly due to delays in
production and reduced pricing of certain products. In 1997, revenues from
product sales resumed its year-to year increase. Management expects that
technology licensing fees, royalties and product sales will become the principal
source of the Company's revenue as the commercialization of its technology
proceeds.
As a result of the 1994 acquisition of certain Active Noise and Vibration
Technologies, Inc. ("ANVT") assets, the Company became the exclusive licensee of
ten seminal patents, the Chaplin Patents, through its wholly owned subsidiary,
Chaplin-Patents Holding Co., Inc. ("CPH"). The Company's ability to license the
Chaplin Patents directly to unaffiliated third parties provides the Company with
a greater ability to earn technology licensing fees and royalties from such
patents. Further, the Company believes that its intellectual property portfolio
prevents other competitors and potential competitors in the field of Active Wave
Management from participating in certain commercial areas without licenses from
the Company.
Note 1 to the accompanying Consolidated Financial Statements and the
"Liquidity and Capital Resources" section which follows describe the current
status of the Company's available cash balances.
As previously disclosed, the Company implemented changes in its organization
and focus in late 1994. Additionally, in late 1995 the Company redefined its
corporate mission to be the worldwide leader in the advancement and
commercialization of Active Wave Management technology. Active Wave Management
is the electronic and/or mechanical manipulation of sound or signal waves to
reduce noise, improve signal-to-noise ratio and/or enhance sound quality. This
redefinition is the result of the development of new technologies, such as
adaptive speech filter ("ASF"), top down surround sound ("TDSS"), FPT(TM), and
the SMM, which the Company believes can produce products for fields beyond noise
and vibration reduction and control. These technologies and products are
consistent with shifting the Company's focus to technology licensing and product
marketing in more innovative industries having greater potential for near term
revenue generation. The redefinition of corporate mission is reflected in the
revised business plan which the Company began to implement during the first
quarter of 1996 and has continued through 1997.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of the Company's
technologies build as anticipated by management, revenues from technology
licensing fees, royalties and product sales are forecasted to fund an increasing
share of the Company's requirements. The funding from these sources, if
realized, will reduce the Company's dependence on engineering and development
funding. The beginning of this process is shown in the shifting percentages of
operating revenue, discussed below.
Success in generating technology licensing fees, royalties and product sales
are significant and critical to the Company's success. The Company cannot
predict whether it will be successful in obtaining market acceptance of its new
products or in completing its current negotiations with respect to licenses and
royalty revenues.
From the Company's inception through December 31, 1997, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 23%
product sales, 46% engineering and development services and 31% technology
licensing fees.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the Company's technology into their products and into their
manufacturing operations. While the Company works with these firms on product
testing and integration, it is not always able to influence how quickly this
process can be completed.
The Company began shipping ProActive(TM) headsets in 1995 and continues to
sell NoiseBuster Extreme!(TM) consumer headsets. The Company is now selling
products through three of its alliances: Walker Electronic Silencing, Inc.
("Walker") is manufacturing and selling industrial silencers; Siemens Medical
Systems, Inc. ("Siemens") is buying and contracting with the Company to install
quieting headsets for patient use in Siemens' magnetic resonance imaging ("MRI")
machines; and in the fourth quarter of 1994 Ultra Electronics, Ltd. ("Ultra")
began installing production model aircraft cabin quieting systems in the SAAB
340 turboprop aircraft. Management believes these developments and those
previously disclosed help demonstrate the range of commercial potential for the
Company's technology and will contribute to the Company's transition from
engineering and development to technology licensing fees, royalties and product
sales.
The availability of high-quality, low-cost electronic components for
integration into the Company's products also is critical to the
commercialization of the Company's technology. The Company is working with its
strategic partners and other suppliers to reduce the size and cost of the
Company's systems, so that the Company will be able to offer low-cost
electronics and other components suitable for high-volume production.
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products. During
1994, the Company acquired a license to two patents in the field of
micro-machined microphones and concluded the acquisition of all of the patents,
know-how and intellectual property of a former competitor, ANVT. During 1995 the
Company acquired several U.S. patents dealing with ASF which is used in the
Company's ClearSpeech(TM) product line. In 1996 and 1997 the Company was granted
90 new patents for various applications in the field of Active Wave Management.
Management believes that the Company's investment in its technology has resulted
in the expansion of its intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
The Company has become certified under the International Standards
Organization product quality program known as "ISO 9000", and has successfully
undergone two quality audits. Since the third quarter of 1994, the Company has
reduced its worldwide work force by 51% from 173 to 85 current employees as of
February 28, 1998.
Results of Operations
Year ended December 31, 1997 compared with year ended December 31, 1996
Total revenues in 1997 increased by 81% to $5.7 million from $3.2 million in
1996. Total expenses during the same period increased by 11% or $1.6 million,
primarily reflecting the one-time $1.4 million non-cash interest charge
associated with the First Quarter 1997 Financing. See below and Note 6 - "Notes
to Consolidated Financial Statements."
Technology licensing fees and royalties increased by 193% or $2.4 million to
$3.6 million from $1.2 million in 1996. The 1996 amount was derived principally
from numerous technology license fees reflecting the Company's continuing
emphasis on expanding technology license fee revenue. The 1997 amount is
primarily due to the $3.0 million technology license fee from Verity and other
technology licensing fees aggregating $0.6 million. See Note 3 - "Notes to
Consolidated Financial Statements".
Product sales increased in 1997 by 25% to $1.7 million from $1.4 million in
1996 reflecting increases in NoiseBuster Extreme!(TM) and aviation headset
sales.
Engineering and development services decreased by 33% to $0.4 million from
$0.5 million in 1996, primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company.
Cost of product sales increased 44% to $2.3 million from $1.6 million in 1996
and the product margin decreased to (32)% from (15)% in 1996. The negative
margin of $0.6 million in 1997 was primarily due to reserves for inventory
movement and tooling obsolescence in the amount of $0.7 million related to the
industrial headset product lines. The negative margin in 1996 was primarily due
to a lower sales price of the NoiseBuster(R) and a reserve for tooling
obsolescence in the amount of $0.3 million.
Cost of engineering and development services increased 26% to $0.3 million
from $0.2 million in 1996 primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company as noted
above.
Selling, general and administrative expenses for the year increased by 7% or
$0.3 million to $5.2 million from $4.9 million for 1996 which was primarily due
to increased professional fees and related expenses.
Depreciation and amortization included in selling, general and administrative
expenses decreased from $0.5 million in 1996 to $0.4 million primarily due to an
increase in fully depreciated machinery and equipment.
Research and development expenditures for 1997 decreased by 11% to $6.2
million from $7.0 million in 1996, primarily due to limited cash resources
during most of 1997 to fund internal development projects.
In 1997, interest income increased to $0.1 million from near zero in 1996
reflecting the increase in late 1997 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1997, the Company was not required to fund any capital requirements of these
joint ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment.
The Company has net operating loss carryforwards of $76.9 million and
research and development credit carryforwards of $1.3 million for federal income
tax purposes at December 31, 1997. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
Year ended December 31, 1996 compared with year ended December 31, 1995
Total revenues in 1996 decreased by 70% to $3.2 million from $10.5 million in
1995. Total expenses during the same period decreased by 4% or $0.5 million,
reflecting the continuing results of cost reduction plans, and the refocus of
expenditures to more immediate markets.
Technology licensing fees decreased by 81% or $5.3 million to $1.2 million.
The 1995 amount was derived principally from a $2.6 million license fee from
Ultra, a $ 3.3 million license fee from Walker and other licenses aggregating
$0.7 million. The 1996 amount is derived from smaller, more numerous license
fees, reflecting the Company's continuing emphasis on expanding technology
licensing fee revenue and the shortfall in generation of such revenue referred
to above. See Note 3 - "Notes to Consolidated Financial Statements".
Product sales decreased by 13% to $1.4 million reflecting decreased aviation
headset sales, decreased NoiseBuster(R) sales at lower prices and a decrease in
industrial silencer sales in connection with the transfer of that business to
Walker.
Engineering and development services decreased by 76% to $0.5 million,
primarily due to a de-emphasis of engineering development funding as a primary
source of revenue, the elimination of funding from Ultra for aircraft cabin
quieting in connection with the transfer of that business to Ultra in the first
quarter of 1995, a decrease in the amount of muffler development funding from
Walker in connection with the transfer of that business to Walker in the fourth
quarter of 1995 and staff reductions.
Cost of product sales remained unchanged at $1.6 million and product margin
decreased to (15)% from 1% in 1995. The negative margin in 1996 was primarily
due to the lower sales price of the NoiseBuster(R) and a reserve for tooling
obsolescence in the amount of $0.3 million. In 1995, the low product margin was
primarily due to the lower sales price of the NoiseBuster(R).
Cost of engineering and development services decreased 89% to $0.3 million
primarily due to the changes noted above.
Selling, general and administrative expenses for the year decreased by 10% to
$4.9 million from $5.4 million for 1995. Of this decrease, $0.6 million was
directly attributable to reductions in salaries and related expenses.
Advertising and marketing expenses decreased by 32% to $0.5 million.
Professional fees increased by 6% to $1.8 million. Travel and entertainment
increased by 18% or $0.1 million.
Depreciation and amortization included in selling, general and administrative
expenses increased by $0.3 million or 143%, from $0.2 million to $0.5 million,
primarily due to increased amortization of patents allocated to selling, general
and administrative expenses from research and development.
Research and development expenditures for 1996 increased by 46% to $7.0
million from $4.8 million for 1995, primarily due to increases to internally
funded development projects.
In 1996, interest income decreased to near zero from $0.1 million in 1995
reflecting the decrease in 1996 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1997, the Company was not required to fund any capital requirements of these
joint ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment. As of December 31, 1995, the Company recognized
$80,000 of income relating to its 1995 profit in OnActive Technologies, L.L.C.
("OAT"). As of December 31, 1996, the Company reversed the $80,000 of income
which related to its share of the 1996 loss in OAT. See Note 3 - "Notes to
Consolidated Financial Statements."
<PAGE>
Liquidity and Capital Resources
The Company received $1.1 million from the exercise of stock purchase
warrants and options during 1997, $1.0 million in 1996 and $0.7 million in 1995.
In January 1996, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1997.
The Company did not meet the plan's revenue targets for 1996 or 1997 and as
noted below, found it necessary to raise additional capital to fund it's
operations for 1997 and beyond (refer to Notes 1 and 6 - "Notes to Consolidated
Financial Statements.").
Because the Company did not meet its revenue targets for 1997, it entered
into certain transactions, which provided additional funding as follows:
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S of
the Securities Act of 1933, as amended, (the "Securities Act") to five unrelated
investors (the "Investors") through multiple dealers (the "First Quarter 1997
Financing") from which the Company realized $3.2 million of net proceeds. The
Debentures were to mature between January 15, 2000 and March 25, 2000 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 Investors, at their discretion, had the right to convert the
principal due on the Debentures into the Company's common stock at any time
after the 45th day following the date of the sale of the Debentures to the
Investors. In the event of such a conversion, the conversion price was the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date of the Debentures' sale or between 75% to 60% (depending on the
Investor and other conditions) 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 reserved 15 million
shares of the Company's common stock for issuance upon such conversion. Subject
to certain conditions, the Company also had the right to require the Investors
to convert all or part of the Debentures under the above noted conversion price
conditions after February 15, 1998. As of June 6, 1997, the Investors had
converted all $3.4 million of the Debentures into 16.3 million shares of the
Company's common stock. At the Company's election, interest due through the
conversion dates of the Debentures was paid through the issuance of an
additional 0.2 million shares of the Company's common stock. In conjunction with
the Debentures, the Company granted a warrant to purchase 75,000 shares of
common stock to one investor. During the year ended December 31, 1997, the
Company valued this warrant, using the Black-Scholes pricing model, at which
$34,000 was expensed as debt discount. The Company has recorded $1.4 million of
non-cash interest expense attributable to the conversions of the Debentures in
the first and second quarter of 1997 as an adjustment during the fourth quarter
of 1997. If the shares were issued in lieu of debt at the respective issuance
dates of the debt, supplementary basic and diluted net loss per share for the
year ended December 31, 1997 would have been a loss of $0.08 per share.
On July 30, 1997 the Company sold 2.9 million shares, in the aggregate, of
its common stock at a price of $0.175 per share in the July 30, 1997 Private
Placement that provided net proceeds to the Company of $0.5 million.
On September 4, 1997, the Company transferred $5,000 cash and all of the
business and assets of its Audio Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated company, NCT Audio, in consideration for 5,867 shares of NCT
Audio common stock whereupon NCT Audio became a wholly owned subsidiary of the
Company. The Company also granted NCT Audio an exclusive worldwide license with
respect to all of the Company's relevant patented and unpatented technology
relating to FPTs(TM) and FPT(TM) based audio speaker products for all markets
for such products excluding (a) markets licensed to or reserved by Verity and
NXT under the Company's cross licensing agreements with Verity and NXT, (b) the
ground based vehicle market licensed to OAT, (c) all markets for hearing aids
and other hearing enhancing or assisting devices, and (d) all markets for
headsets, headphones and other products performing functions substantially the
same as those performed by such products in consideration for a license fee of
$3.0 million (eliminated on consolidation) to be paid when proceeds are
available from the sale of NCT Audio common stock and on-going future royalties
payable by NCT Audio to the Company as provided in such license agreement. In
addition, the Company agreed to transfer all of its rights and obligations under
its cross licensing agreements with Verity and NXT to NCT Audio and to transfer
the Company's interest in OAT to NCT Audio. Between October 10, 1997 and
December 4, 1997 NCT Audio issued 2,145 shares of its common stock (including
533 shares issued to Verity) for an aggregate purchase price of $4.0 million in
the NCT Audio Financing. NCT Audio has not met certain conditions regarding the
filing of a registration statement for NCT Audio common stock. As such, holders
of NCT Audio common stock have a right to convert their NCT Audio common stock
into a sufficient number of restricted shares of NCT common stock to equal their
original cash investment in NCT Audio, plus a 20% discount to market. As of
February 27, 1998, no NCT Audio shareholder has exercised their right to convert
NCT Audio common stock into NCT common stock under the terms noted above.
Between October 28, 1997 and December 11, 1997, the Company entered into a
series of subscription agreements (the "Subscription Agreements") to sell an
aggregate amount of $13.3 million of Series C Convertible Preferred Stock (the
"Preferred Stock") in a private placement, pursuant to Regulation D of the
Securities Act, to 32 unrelated accredited investors through two dealers (the
"1997 Preferred Stock Private Placement"). The total Preferred Stock offering
was completed on December 11, 1997. The aggregate net proceeds to the Company of
the 1997 Preferred Stock Private Placement were $11.9 million. Each share of the
Preferred Stock has a par value of $.10 per share and a stated value of one
thousand dollars ($1,000) with an accretion rate of four percent (4%) per annum
on the stated value. Each share of Preferred Stock is convertible into fully
paid and nonassessable shares of the Company's common stock subject to certain
limitations. Under the terms of the Subscription Agreements the Company was
required to exercise its best efforts to file a registration statement
("Registration Statement") covering the resale of all shares of common stock of
the Company issuable upon conversion of the Preferred Stock then outstanding
within sixty (60) days after the first Closing of the 1997 Preferred Stock
Private Placement. The Registration Statement was filed with the SEC on December
29, 1997. The shares of Preferred Stock become convertible into shares of common
stock at any time commencing after the earlier of (i) the effective date of the
Registration Statement; or (ii) ninety (90) days after the date of filing of the
Registration Statement. Each share of Preferred Stock is convertible into a
number of shares of common stock of the Company as determined in accordance with
the following formula (the "Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
Conversion Price
where
N = the number of days between (i) the Closing Date
of the Series C Convertible Preferred Stock
being converted, and (ii) the Conversion Date
thereof.
Conversion = the lesser of (x) 120% of the five (5) day
Price average Closing Bid Price of common stock
immediately prior to the Closing Date of the
Series C Convertible Preferred Stock being
converted or (y) 20% below the five (5) day
average Closing Bid Price of common stock
immediately prior to the Conversion Date
thereof.
Closing = the date of the Closing as set forth in the
Date subscription agreement pertaining to the Series C
Convertible Preferred Stock being converted.
The conversion terms of the Preferred Stock also provide that in no event
shall the average closing bid price referred to in the Conversion Formula be
less than $0.625 per share and in no event shall the Company be obligated to
issue more than 26.0 million shares of its common stock in the aggregate in
connection with the conversion of the Preferred Stock. Under the terms of the
Subscription Agreements the Company may be subject to a penalty if the
Registration Statement is not declared effective within one hundred twenty (120)
days after the first closing of any incremental portion of the offering of
Preferred Stock, such penalty to be in an amount equal to one and one half
percent (1.5%) per month of the aggregate amount of Preferred Stock sold in the
offering up to a maximum of ten percent (10%) of such aggregate amount. The
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Subscription Agreements and ending ninety (90) days after the
closing of the offering the Company will be prohibited from issuing any debt or
equity securities other than Preferred Stock, and that the Corporation will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner or in the event it fails to reserve sufficient
authorized but unissued common stock for issuance upon conversion of the
Preferred Stock.
Cash and cash equivalents amounted to $12.6 million at December 31, 1997.
Management believes that currently available funds may not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options, the funding derived from
technology licensing fees, royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditure alone
may not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties and
product sales, and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that 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 substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
The accompanying financing 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, 1997 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.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $93.5 million on a
cumulative basis through December 31, 1997. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the license fees and engineering and development funds provided to the venture
or the Company are recovered.
In January 1998, the Company adopted a plan that management believes should
generate sufficient additional funds for the Company to continue its operations
into 1999. Under this plan, the Company needs to generate approximately $31.5
million to fund its operations in 1998. Included in such amount is approximately
$23.3 million in sales of new products and approximately $8.1 million of
technology licensing fees and royalties. The Company believes that it can
generate these funds from 1998 operations, although there is no certainty that
the Company will achieve this goal. Success in generating technology licensing
fees, royalties and product sales are significant and critical to the Company's
ability to succeed. The Company cannot predict whether it will be successful in
obtaining market acceptance of its new products or in completing its current
negotiations with respect to licenses and royalty revenues. If, during the
course of 1998, management of the Company determines that it will be unable to
meet or exceed the plan discussed above, the Company will consider cost
reductions and/or additional financing alternatives. The Company will monitor
its performance against the plan on a monthly basis and, if necessary, reduce
its level of operations accordingly. The Company believes that the plan
discussed above constitutes a viable plan for the continuation of the Company's
business into 1999. See "Forward Looking Statements" above.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties, product sales, engineering and development
revenue or additional capital. In that event, the Company would have to cut back
its level of operations substantially in order to conserve cash. These
reductions could have an adverse effect on the Company's relations with its
strategic partners and customers. See Note 1 - "Notes to Consolidated Financial
Statements".
At December 31, 1997, cash and cash equivalents were $12.6 million. The
available resources were invested in interest bearing money market accounts and
commercial paper. The Company's investment objective is preservation of capital
while earning a moderate rate of return.
The Company's working capital increased from $(1.3) million at December 31,
1996, to $11.7 million as of December 31, 1997. This increase was due primarily
to the 1997 financings discussed above.
During 1997, the net cash used in operating activities was $7.4 million. This
utilization reflects the emphasis on the commercial development of its
technology into several product applications which were scheduled for
introduction in 1997 and 1998.
The Company's available cash balances at December 31, 1997 are higher than
projected at the end of 1996, primarily due to the 1997 financings noted above.
The net cash used in investing activities amounted to $0.2 million during the
year primarily for capital expenditures. The net cash provided by financing
activities amounted to $19.9 million primarily from the exercise of options and
warrants and the 1997 financings noted above.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
The Company believes that the level of financial resources available to it is
an essential competitive factor. The Company may elect to raise additional
capital, from time to time, through equity or debt financing in order to
capitalize on business opportunities and market conditions.
<PAGE>
Capital Expenditures
The Company intends to continue its business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies;
(ii) utilization of the manufacturing capacity of the Company's allies, enabling
the Company to integrate its active technology into products with limited
capital investment; and (iii) access to well-established channels of
distribution and marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of December
31, 1997, and no material commitments are anticipated in the near future.
Year 2000 Compliance
The Company believes the cost of administrating its Year 2000 Compliance
program will not have a material adverse impact on future earnings. However, the
potential costs and uncertainties associated with any Year 2000 Compliance
program will depend on a number of factors, including software, hardware and the
nature of the industry in which the Company, its subsidiaries, suppliers and
customers operate. In addition, companies must coordinate with other entities
with which they electronically interact, such as customers, suppliers, financial
institutions, etc.
Although the Company's evaluation of its systems is still in process, there
has been no indication that the Year 2000 Compliance issue, as it relates to
internal systems, will have a material impact on future earnings. While the
Company is not aware of any material Year 2000 Compliance issues at its
customers and suppliers, such potential problems remain a possibility and could
have a material adverse impact on the Company's future results.
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31,
--------------------
1996 1997
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 368 $ 12,604
Accounts receivable:
Trade:
Technology license fees and royalties 150 200
Joint Ventures and affiliates 2 -
Other 392 368
Unbilled 63 -
Allowance for doubtful accounts (123) (38)
-------- ---------
Total accounts receivable $ 484 $ 530
Inventories, net of reserves 900 1,333
Other current assets 207 213
-------- ---------
Total current assets $ 1,959 $ 14,680
Property and equipment, net 2,053 1,144
Patent rights and other intangibles, net 1,823 1,488
Other assets 46 49
-------- ---------
$ 5,881 $ 17,361
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,465 $ 1,324
Accrued expenses 1,187 1,392
Accrued payroll, taxes and related expenses 618 181
Customers' advances 1 87
--------- ---------
Total current liabilities $ 3,271 $ 2,984
---------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 10,000,000 shares
authorized, 13,250 Series C issued (redemption
amount $13.3 million) $ - $ 10,458
Common stock, $.01 par value, 140,000,000 and
185,000,000 shares, respectively, authorized;
issued and outstanding 111,614,405 and
133,160,212 shares, respectively 1,116 1,332
Additional paid-in-capital 85,025 96,379
Accumulated deficit (83,673) (93,521)
Cumulative translation adjustment 142 119
Common stock subscriptions receivable - (390)
---------- ---------
Total stockholders' equity $ 2,610 $ 14,377
---------- ---------
$ 5,881 17,361
========== =========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended December 31,
----------------------------------
1995 1996 1997
--------- --------- --------
REVENUES:
<S> <C> <C> <C>
Technology licensing fees $ 6,580 $ 1,238 $ 3,630
Product sales, net 1,589 1,379 1,720
Engineering and development services 2,297 547 368
--------- --------- ---------
Total revenues $ 10,466 $ 3,164 $ 5,718
--------- --------- ---------
COSTS AND EXPENSES:
Costs of sales $ 1,579 $ 1,586 $ 2,271
Costs of engineering and development services 2,340 250 316
Selling, general and administrative 5,416 4,890 5,217
Research and development 4,776 6,974 6,235
Equity in net loss (income) of unconsolidated
affiliates (80) 80 -
Provision for doubtful accounts 552 192 130
Interest expense (includes $1,420 of discounts
on beneficial conversion feature on convertible
debt in 1997) 4 45 1,514
Interest income (53) (28) (117)
--------- --------- ---------
Total costs and expenses $ 14,534 $ 13,989 $ 15,566
--------- --------- ---------
NET (LOSS) $ (4,068) $(10,825) $ (9,848)
Preferred stock beneficial conversion feature - - 1,623
Accretion of difference between carrying
amount and redemption amount of redeemable
preferred stock - - 285
--------- --------- ---------
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,068) $(10,825) $(11,756)
========= ========= =========
Weighted average number of common
shares outstanding - basic and diluted 87,921 101,191 124,101
========= ========= =========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.05) $ (0.11) $ (0.09)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
Series C Expenses
Convertible to be
Preferred Stock Common Stock Additional Cumulative Stock Paid With
--------------- -------------- Paid-In Accumulated Translation Subscription Common
Shares Amount Shares Amount Capital Deficit Adjustment Receivable Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 Directors' 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
Sale of common stock - - 2,857 29 471 - - - - 500
Shares issued upon exercise
of warrants & options - - 1,996 20 1,115 - - (64) - 1,071
Sale of Series C preferred
stock less expenses
of $551 13 11,863 - - - - - - - 11,863
Discount on beneficial
conversion price to
preferred shareholders - (3,313) - - 3,313 - - - - -
Amortization of discount
on beneficial conversion
price to preferred
shareholders - 1,908 - - (1,908) - - - - -
Sale of subsidiary common
stock, less expenses of $65 - - - - 3,573 - - (326) - 3,247
Common stock issued upon
conversion of convertible
debt, less expenses of $168 - - 16,683 167 4,714 - - - - 4,881
Net loss - - - - - (9,848) - - - (9,848)
Translation adjustment - - - - - - (23) - - (23)
Restricted shares issued
for Directors' compensation - - 10 - 2 - - - - 2
Warrant issued in
conjunction with
convertible debt - - - - 34 - - - - 34
Compensatory stock
options and warrants - - - - 40 - - - - 40
---------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 13 $10,458 133,161 $ 1,332 $ 96,379 $ (93,521) $ 119 $ (390) $ - $ 14,377
=========================================================================================================
See notes to 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,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (4,068) $ (10,825) $ (9,848)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 1,127 1,000 899
Common stock options and warrants issued as
consideration for:
Compensation 8 109 42
Rent and marketing expenses 355 - -
Interest on debentures - - 51
Convertible debt - - 34
Debt costs incurred related to convertible debt - - 211
Common stock retired in settlement of employee
account receivable - (5) -
Receipt of license fee in exchange for inventory
and release of obligation (3,266) - -
Discount on beneficial conversion feature on
convertible debt - - 1,420
Provision for tooling costs and write off 94 371 515
Provision for doubtful accounts 552 192 130
Equity in net (income) loss of unconsolidated affiliates (80) 80 -
Unrealized foreign currency (gain) loss 32 (45) 8
(Gain) Loss on disposition of fixed assets 107 83 (4)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 302 61 (127)
(Increase) in license fees receivable - (150) (50)
(Increase) decrease in inventories 212 813 (433)
(Increase) decrease in other assets 299 67 (12)
Increase (decrease) in accounts payable and
accrued expenses (190) 55 135
Increase (decrease) in other liabilities (482) 436 (414)
---------- ---------- ----------
Net cash (used in) operating activities $ (4,998) $ (7,758) $ (7,443)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures $ (80) $ (186) $ (244)
Acquisition of patent rights (210) - -
Sales of short term investments 18 - -
Sale of capital expenditures - - 67
---------- ---------- ----------
Net cash (used in) investing activities $ (272) $ (186) $ (177)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from:
Convertible debt (net) $ - $ - $ 3,199
Sale of common stock (net) 3,989 6,377 500
Sale of preferred stock (net) - - 11,863
Sale of subsidiary stock (net) - - 3,247
Exercise of stock purchase warrants and options 689 104 1,071
---------- ---------- ----------
Net cash provided by financing activities $ 4,678 $ 6,481 $ 19,880
---------- ---------- ----------
Effect of exchange rate changes on cash $ - $ - $ (24)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents $ (592) $ (1,463) $ 12,236
Cash and cash equivalents - beginning of period 2,423 1,831 368
---------- ---------- ----------
Cash and cash equivalents - end of period $ 1,831 $ 368 $ 12,604
========== ========== ==========
Cash paid for interest $ 4 $ 4 $ 8
========== ========== ==========
</TABLE>
See Notes 6 and 11 with respect to settlement of certain obligation by issuance
of securities.
See notes to consolidated financial statements.
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
NCT designs, develops, licenses, produces and distributes electronic systems
for Active Wave Management including systems that electronically reduce noise
and vibration. The Company's systems are designed for integration into a wide
range of products serving major markets in the transportation, manufacturing,
commercial, consumer products and communications industries. The Company has
begun commercial application of its technology through a number of product
lines, with 70 products currently being sold, including NoiseBuster(R)
communications headsets and NoiseBuster Extreme!(TM) consumer headsets,
Gekko(TM) flat speakers, flat panel transducers ("FPT(TM)"), ClearSpeech(TM),
microphones, speakers and other products, adaptive speech filters ("ASF"), the
ProActive(TM) line of industrial/commercial ANR headsets, an aviation headset
for pilots, an industrial muffler or "silencer" for use with large vacuums and
blowers, quieting headsets for patient use in magnetic resonance imaging ("MRI")
machines, and an aircraft cabin quieting system.
The technology supporting the Company's electronic systems was developed
using technology maintained under various patents (the "Chaplin Patents") held
by CPH as well as patented technology acquired or developed by the Company. CPH,
formerly a joint venture with 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 $93.5 million on a
cumulative basis through December 31, 1997 and has working capital of $11.7
million at December 31, 1997. These losses, which include the costs for
development of products for commercial use, have been funded primarily from the
sale of common stock and preferred 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 amounted to $12.6 million at December 31, 1997.
Management believes that currently available funds may not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options, the funding derived from
technology licensing fees, royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditure alone
may not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties and
product sales, and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained.
There is no assurance any such financing is or would become available.
There can be no assurance that 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 substantially cut back its level of
operations. 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 6 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, 1997 about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. Summary of Significant Accounting Policies
Consolidation
The financial statements include the accounts of the Company and its majority
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
Product Sales
Revenue is recognized as the product is shipped.
Engineering and Development Services
Revenue from engineering and development contracts is recognized and billed
as the services are performed. However, revenue from certain engineering and
development contracts are recognized as services are performed under the
percentage of completion method after 10% of the total estimated costs have been
incurred. Under the percentage of completion method, revenues and gross profit
are recognized as work is performed based on the relationship between actual
costs incurred and total estimated costs at completion.
Estimated losses are recorded when identified.
Revenues recorded under the percentage of completion method amounted to
$249,000, $9,000 and zero for the years ended December 31, 1995, 1996 and 1997,
respectively.
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. If any license fee is subject to
completion of any performance criteria specified within the agreement, then such
license fee is deferred until such performance criteria is met. See Note 3, with
respect to the license fee recorded by the Company in connection with Ultra in
1995 and NXT in 1997.
Advertising
Advertising costs are expensed as incurred. Expense for years ended
December 31, 1995, 1996 and 1997 was $0.6 million, $0.5 million and $0.5
million, respectively.
<PAGE>
Cash and cash equivalents
The Company considers all money market accounts and highly liquid investments
with original maturities of three months or less at the time of purchase
(principally comprise high quality investments in commercial paper) to be cash
equivalents.
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, and reviews the
movement of inventory on an item by item basis to determine the value of items
which are slow moving. After considering the potential for near term product
engineering changes and/or technological obsolescence and current realizability,
the Company determines the current need for inventory reserves. After applying
the above noted measurement criteria at December 31, 1996, and December 31,
1997, the Company determined that a reserve of $0.3 million and $0.5 million,
respectively, was adequate.
Property and Equipment
Property and equipment are stated at cost and depreciation is recorded on the
straight-line method over the estimated useful lives of the respective assets.
Leasehold improvements are amortized over the shorter of their useful lives or
the related lease term.
Patent Rights
Patent rights are stated at cost and are amortized on a straight line basis
over the remaining life of each patent (ranging from 1 to 15 years).
Amortization expense was $0.4 million, $0.4 million and $0.3 million for 1995,
1996 and 1997, respectively. Accumulated amortization was $1.5 million and $1.8
million at December 31, 1996 and 1997, respectively.
It is the Company's policy to review its individual patents when events have
occurred which could impair the valuation on 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 and have not been material.
<PAGE>
Loss Per Common Share
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in the year ended December 31, 1997 and has
retroactively applied the effects thereof for all periods presented.
Accordingly, the presentation of per share information includes calculations of
basic and dilutive loss per share. The impact on the per share amounts
previously reported (primary and fully diluted) was not significant. The effects
of potential common shares such as warrants, options, and convertible preferred
stock has not been included, as the effect would be antidilutive (see Notes 3, 6
and 7).
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents. 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. The Company primarily
holds its cash and cash equivalents in two banks and commercial paper. Deposits
in excess of federally insured limits were $12.4 million at December 31, 1997.
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 71% of revenues
during 1997 and 59% of accounts receivable at December 31, 1997. The Company
does not require collateral or other security to support customer receivables.
(in thousands of dollars)
As of December 31, 1997,
and for the year then ended
---------------------------------
Accounts
CUSTOMER Receivable Revenue
-------------------------------- ------------ --------------
Verity Group plc $--- $3,000
Telex Communications, Inc. --- 391
The Sharper Image 53 236
Brookstone 60 228
Siemens AG 200 200
All Other 217 1,663
------------ --------------
Total $530 $5,718
============ ==============
The Company regularly assesses the realizability of its accounts receivable
and performs a detailed analysis of its aged accounts receivable. When
quantifying the realizability of accounts receivable, the Company takes into
consideration the value of past due receivables and the collectibility of such
receivables, based on credit worthiness.
<PAGE>
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 employee stock option and
warrant incentive plans. Please refer to Note 7 for further information.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure", No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The Company has not
yet determined whether the above pronouncements will have a significant effect
on the information presented in the financial statements.
3. Joint Ventures and Other Strategic Alliances
The following is a summary of certain of the Company's joint ventures and
other strategic alliances as of December 31, 1997.
The Company and certain of its majority-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, 1997, 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, 1997. 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.
<PAGE>
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:
(in thousands of dollars)
Years ended December 31,
-------------------------------------
Joint Venture/Alliance 1995 1996 1997
- -------------------------------------- ----------- ----------- -----------
Walker Noise Cancellation $3,994 $ 90 $ 61
Technologies
Ultra Electronics, Ltd. 3,153 62 -
ELESA 424 28 -
Siemens Medical Systems, Inc. 260 319 172
Foster/NCT Supply, Ltd. 133 10 28
AB Electrolux 129 12 34
Hoover Universal, Inc. - 713 -
Verity Group plc - - 3,000
----------- ----------- -----------
Total $8,093 $1,234 $3,295
=========== =========== ===========
Outlined below is a summary of the nature and terms of selected ventures or
alliances:
<PAGE>
Joint Ventures
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
("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. During 1996 such services
were nominal. 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. In consideration for certain marketing services to be provided by the
Company and Oxford International, Ltd. (Oxford), an affiliate of AAR, OnActive
will pay the Company and Oxford two percent (2%) each of the revenues or thirty
percent (30%) each of the gross margin (whichever is less) received by OnActive
from the sale of Top Down Surround Sound(TM) ("TDSS") systems and the licensing
of TDSS technology to certain original equipment manufacturers.
Other Strategic Alliances
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.
New Transducers Ltd.("NXT"), a wholly owned subsidiary of Verity Group, plc
("Verity") and the Company executed a cross licensing agreement (the "Cross
License") on March 28, 1997. Under terms of the Cross License, the Company
licensed patents and patents pending which relate to FPT(TM) technology to NXT,
and NXT licensed patents and patents pending which relate to parallel technology
to the Company. In consideration of the license, during the first quarter 1997,
NCT recorded a $3.0 million license fee receivable from NXT as well as royalties
on future licensing and product revenue. The Company also executed a security
deed (the "Security Deed") in favor of NXT granting NXT a conditional assignment
in the patents and patents pending licensed to NXT under the Cross License in
the event a default in a certain payment to be made by the Company under the
Cross License continued beyond fifteen days. Concurrent with the Cross License,
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 (the "Verity Option"), 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 the Company executed
a registration rights agreement (the "Registration Rights Agreement") covering
such shares. Five 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. On April
15, 1997, Verity, NXT and the Company executed several agreements and other
documents (the "New Agreements") terminating the Cross License, the Security
Deed, the Verity Option and the Registration Rights Agreement and replacing them
with new agreements (respectively the "New Cross License", the "New Security
Deed", the "New Verity Option" and the "New Registration Rights Agreement"). The
material changes effected by the New Agreements were the inclusion of Verity as
a party along with its wholly owned subsidiary NXT; providing that the license
fee payable to NCT could be paid in ordinary shares of Verity stock; and
reducing the exercise price under the option granted to Verity to purchase
shares of the Company's common stock to $0.30 per share. The subject license fee
was paid to the Company in ordinary shares of Verity stock which were
subsequently sold by the Company. On September 27, 1997, Verity, NXT, NCT Audio
Products, Inc. ("NCT Audio") and the Company executed several agreements and
other documents, terminating the New Cross License and the New Security Deed and
replacing them with new agreements (respectively, the "Cross License Agreement
dated September 27, 1997" and the "Master License Agreement"). The material
changes effected by the most recent agreements were an expansion of the fields
of use applicable to the exclusive licenses granted to Verity and NXT, an
increase in the royalties payable on future licensing and product revenues,
cancellation of the New Security Deed covering the patents licensed by the
Company, and the acceleration of the date on which the parties can exercise
their respective stock purchase option to September 27, 1997.
<PAGE>
4. Inventories
Inventories comprise the following:
(in thousands of dollars)
December 31,
----------------------------
1996 1997
------------- ------------
Components $ 543 $ 514
Finished goods 619 1,291
------------- ------------
Gross inventory $ 1,162 $ 1,805
Reserve for obsolete & slow moving inventory (262) (472)
------------- ------------
Inventory, net of reserves $ 900 $ 1,333
============= ============
5. Property and Equipment
Property and equipment comprise the following:
(in thousands of dollars)
Estimated December 31,
Useful Life -------------------------
(Years) 1996 1997
------------- ------------ ------------
Machinery and equipment 3-5 $ 1,763 $ 1,801
Furniture and fixtures 3-5 749 869
Leasehold improvements 7-10 1,185 1,177
Tooling 1-3 1,062 670
Other 5-10 167 74
------------ ------------
Gross $ 4,926 $ 4,591
Less accumulated depreciation (2,873) (3,447)
------------ ------------
Net $ 2,053 $ 1,144
============ ============
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was $0.6 million, $ 0.5 million and $0.6 million, 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 (the "SEC")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 1.0 million 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 1.0 million shares subject to
certain adjustments.
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.
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S of
the Securities Act of 1933, as amended, (the "Securities Act") to five unrelated
investors (the "Investors") through multiple dealers (the "First Quarter 1997
Financing") from which the Company realized $3.2 million of net proceeds. The
Debentures were to mature between January 15, 2000 and March 25, 2000 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 Investors, at their discretion, had the right to convert the
principal due on the Debentures into the Company's common stock at any time
after the 45th day following the date of the sale of the Debentures to the
Investors. In the event of such a conversion, the conversion price was the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date of the Debentures' sale or between 75% to 60% (depending on the
Investor and other conditions) 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 reserved 15 million
shares of the Company's common stock for issuance upon such conversion. Subject
to certain conditions, the Company also had the right to require the Investors
to convert all or part of the Debentures under the above noted conversion price
conditions after February 15, 1998. As of June 6, 1997, the Investors had
converted all $3.4 million of the Debentures into 16.5 million shares of the
Company's common stock. At the Company's election, interest due through the
conversion dates of the Debentures was paid through the issuance of an
additional 0.2 million shares of the Company's common stock. In conjunction with
the Debentures, the Company granted a warrant to purchase 75,000 shares of
common stock to one investor. During the year ended December 31, 1997, the
Company valued this warrant, using the Black-Scholes pricing model at $34,000
which was expensed as debt discount. The Company has recorded a $1.4 million
non-cash interest expense attributable to the conversions of the Debentures in
the first and second quarters of 1997 as an adjustment during the fourth quarter
of 1997. If the shares were issued in lieu of debt at the respective issuance
dates of the debt, supplementary basic and diluted net loss per share for the
year ended December 31, 1997 would have been a loss of $0.08 per share.
On June 19, 1997 the stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock from 140 million shares to 185 million shares. The
Company has reserved 3.9 million shares of such additional shares for issuance
upon the exercise of the New Verity Option and 2.6 million shares of such
additional shares for issuance upon the exercise of options granted or to be
granted and future grants of restricted stock awards under the Noise
Cancellation Technologies, Inc. Stock Incentive Plan (the "1992 Plan").
On July 30, 1997 the Company sold 2.9 million shares, in the aggregate, of
its common stock at a price of $0.175 per share in the July 30, 1997 Private
Placement that provided net proceeds to the Company of $0.5 million.
On September 4, 1997, the Company transferred $5,000 cash and all of the
business and assets of its Audio Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated company, NCT Audio, in consideration for 5,867 shares of NCT
Audio common stock whereupon NCT Audio became a wholly owned subsidiary of the
Company. The Company also granted NCT Audio an exclusive worldwide license with
respect to all of the Company's relevant patented and unpatented technology
relating to FPT(TM) and FPT(TM) based audio speaker products for all markets for
such products excluding (a) markets licensed to or reserved by Verity and NXT
under the Company's cross licensing agreements with Verity and NXT, (b) the
ground based vehicle market licensed to OAT, (c) all markets for hearing aids
and other hearing enhancing or assisting devices, and (d) all markets for
headsets, headphones and other products performing functions substantially the
same as those performed by such products in consideration for a license fee of
$3.0 million (eliminated in consolidation) to be paid when proceeds are
available from the sale of NCT Audio common stock and ongoing future royalties
payable by NCT Audio to the Company as provided in such license agreement. In
addition, the Company agreed to transfer all of its rights and obligations under
its cross licensing agreements with Verity and NXT to NCT Audio and to transfer
the Company's interest in OAT to NCT Audio. Between October 10, 1997 and
December 4, 1997 NCT Audio issued 2,145 shares of its common stock (including
533 shares issued to Verity) for an aggregate purchase price of $4.0 million in
a private placement pursuant to Regulation D under the Securities Act (the "NCT
Audio Financing"). NCT Audio has not met certain conditions regarding the filing
of a registration statement for NCT Audio common stock. As such, holders of NCT
Audio common stock have a right to convert their NCT Audio common stock into a
sufficient number of restricted shares of NCT common stock to equal their
original cash investment in NCT Audio, plus a 20% discount to market. As of
February 27, 1998, no NCT Audio shareholder has exercised their right to convert
NCT Audio common stock into NCT common stock under the terms noted above.
<PAGE>
Between October 28, 1997 and December 11, 1997, the Company entered into a
series of subscription agreements (the "Subscription Agreements") to sell an
aggregate amount of $13.3 million of Series C Convertible Preferred Stock (the
"Preferred Stock") in a private placement, pursuant to Regulation D of the
Securities Act, to 32 unrelated accredited investors through two dealers (the
"1997 Preferred Stock Private Placement"). The total Preferred Stock Offering
was completed on December 11, 1997. The aggregate net proceeds to the Company of
the 1997 Preferred Stock Private Placement were $11.9 million. Each share of the
Preferred Stock has a par value of $.10 per share and a stated value of one
thousand dollars ($1,000) with an accretion rate of four percent (4%) per annum
on the stated value. Each share of Preferred Stock is convertible into fully
paid and nonassessable shares of the Company's common stock subject to certain
limitations. Under the terms of the Subscription Agreements the Company is
required to exercise its best efforts to file a registration statement
("Registration Statement") on Form S-3 covering the resale of all shares of
common stock of the Company issuable upon conversion of the Preferred Stock then
outstanding within sixty (60) days after the first Closing of the 1997 Preferred
Stock Private Placement. The shares of Preferred Stock become convertible into
shares of common stock at any time commencing after the earlier of (i) the
effective date of the Registration Statement; or (ii) ninety (90) days after the
date of filing of the Registration Statement. Each share of Preferred Stock is
convertible into a number of shares of common stock of the Company as determined
in accordance with the Conversion Formula as set forth in the agreement using a
conversion price equal to the lesser of (x) 120% of the five (5) day average
closing bid price of common stock immediately prior to the closing date of the
Preferred Stock being converted or (y) 20% below the five (5) day average
closing bid price of Common Stock immediately prior to the conversion date
thereof. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources" for a description of the
Conversion Formula.
The conversion terms of the Preferred Stock also provide that in no event
shall the average closing bid price referred to in the Conversion Formula be
less than $0.625 per share and in no event shall the Company be obligated to
issue more than 26.0 million shares of its common stock in the aggregate in
connection with the conversion of the Preferred Stock. Accordingly, 26.0 million
shares of common stock which could be issuable upon conversion of the Preferred
Stock are included in the offering to which the prospectus relates. Under the
terms of the Subscription Agreements the Company may be subject to a penalty if
the Registration Statement is not declared effective within one hundred twenty
(120) days after the first closing of any incremental portion of the offering of
Preferred Stock, such penalty to be in an amount equal to one and one half
percent (1.5%) per month of the aggregate amount of Preferred Stock sold in the
offering up to a maximum of ten percent (10%) of such aggregate amount. The
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Subscription Agreements and ending ninety (90) days after the
closing of the offering the Company will be prohibited from issuing any debt or
equity securities other than Preferred Stock, and that the Corporation will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner or in the event it fails to reserve sufficient
authorized but unissued common stock for issuance upon conversion of the
Preferred Stock.
The SEC has taken the position that when preferred stock is convertible to
common stock at a conversion rate that is the lower of a rate fixed at issuance
or a fixed discount from the common stock market price at the time of
conversion, the discounted amount is an assured incremental yield, the
"beneficial conversion feature", to the preferred shareholders and should be
accounted for as an embedded dividend to preferred shareholders. As such, this
dividend was recognized in the earnings per share calculation.
Stock Subscription Receivable
The $0.4 million stock subscription receivable at December 31, 1997
represents a receivable of $0.1 million due from a director which was paid in
1998, and a $0.3 million receivable from the escrow agent for the NCT Audio
financing which has not yet been paid.
Shares Reserved for Common Stock Options and Warrants
At December 31, 1997 aggregate shares reserved for issuance under common
stock option plans and warrants amounted to 17.7 million shares of which common
stock options and warrants for 18.6 million shares are outstanding (see Note 7)
and 16.2 million shares are exercisable.
<PAGE>
7. Common Stock Options and Warrants
The Company applies APB 25 in accounting for its various employee stock
option incentive plans and warrants and, accordingly, recognizes compensation
expense as the difference, if any, between the market price of the underlying
common stock and the exercise price of the option on the date of grant. The
effect of applying SFAS No. 123 on 1995, 1996 and 1997 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, $12.8 million and $15.8 million, or $(0.07), $(0.13) and $(0.14) per
share in 1995, 1996 and 1997, respectively. The fair value of the options and
warrants granted in 1995, 1996 and 1997 are estimated in the range of $0.44 to
$1.25, $0.48 to $0.58 and $0.16 to $4.07 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, 1.225 and 1.289 in 1995,
1996 and 1997, respectively, risk free interest rates in the range of 5.63% to
7.84%, 5.05% to 6.50% and 5.79% to 6.63% for 1995, 1996 and 1997, respectively,
and expected life of 3 years. The weighted average fair value of options granted
during 1995, 1996 and 1997 are estimated in the range of $0.37 to $0.66, $0.49,
and $0.13 to $0.58 per share, respectively also using the Black-Scholes
option-pricing model.
Stock Options
The Company's 1987 Stock Option Plan (the "1987 Plan") provides for the
granting of up to 4.0 million shares of common stock as either incentive stock
options or nonstatutory stock options. Options to purchase shares may be granted
under the 1987 Plan to persons who, in the case of incentive stock options, are
full-time employees (including officers and directors) of the Company; or, in
the case of nonstatutory stock options, are employees or non-employee directors
of the Company. The exercise price of all incentive stock options must be at
least equal to the fair market value of such shares on the date of the grant and
may be exercisable over a ten-year period. The exercise price and duration of
the nonstatutory stock options are to be determined by the Board of Directors.
Options granted under the 1987 Plan generally vest 20% upon grant and 20% per
annum thereafter as determined by the Board of Directors.
<PAGE>
Information with respect to 1987 Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1995 1996 1997
-------------------- ---------------------- - ------------------
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 1,790,472 $0.58 1,540,000 $0.56 1,500,000 $ 0.54
Options granted - - - - 1,350,000 $ 0.51
Options exercised (232,651) $0.66 - - - -
Options canceled,
expired or forfeited (17,821) $1.39 (40,000) $1.31 (1,500,000) $(0.54)
---------- ---------- -----------
Outstanding at end of 1,540,000 $0.56 1,500,000 $0.54 1,350,000 $ 0.51
year
========== ========== ===========
Options exercisable
at year-end 1,540,000 $0.56 1,500,000 $0.54 1,350,000 $ 0.51
========== ========== ===========
</TABLE>
As of December 31, 1997, options for the purchase of 217,821 shares were
available for future grant under the 1987 Plan.
The Company's non-plan options are granted from time to time at the
discretion of the Board of Directors. The exercise price of all non-plan options
generally must be at least equal to the fair market value of such shares on the
date of grant and generally are exercisable over a five to ten year period as
determined by the Board of Directors. Vesting of non-plan options varies from
(i) fully vested at the date of grant to (ii) multiple year apportionment of
vesting as determined by the Board of Directors.
Information with respect to non-plan stock option activity is summarized as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1995 1996 1997
--------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 1,641,995 $1.98 403,116 $1.04 372,449 $1.08
beginning of year
Options granted - - - - 7,844,449 $0.41
Options exercised (328,667) $0.51 (26,667) $0.50 - -
Options canceled,
expired or forfeited (910,212) $2.92 (4,000) $1.33 (3,897,449) $0.53
---------- -------- -----------
Outstanding at end of 403,116 $1.04 372,449 $1.08 4,319,449 $0.36
year
========== ======== ===========
Options exercisable 399,116 $1.02 370,449 $1.07 4,319,449 $0.36
at year-end
========== ======== ===========
</TABLE>
On October 6, 1992, the Company adopted a stock option plan as amended (the
"1992 Plan") for the granting of options to purchase up to 10,000,000 shares of
common stock to officers, employees, certain consultants and certain directors.
The exercise price of all 1992 Plan options must be at least equal to the fair
market value of such shares on the date of the grant and 1992 Plan options are
generally exercisable over a five to ten year period as determined by the Board
of Directors. Vesting of 1992 Plan options varies from (i) fully vested at the
date of grant to (ii) multiple year apportionment of vesting as determined by
the Board of Directors.
<PAGE>
Information with respect to 1992 Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1995 1996 1997
------------------ ------------------- -------------------
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 4,058,542 $2.75 4,004,248 $1.00 6,022,765 $ 0.86
Options granted 5,386,422 $1.04 2,156,500 $0.67 4,652,222 $ 0.55
Options exercised (161,423) $0.85 (33,533) $0.75 (1,141,795) $(0.64)
Options canceled, expired or
forfeited (5,279,293) $2.29 (104,450) $1.37 (503,256) $(0.99)
expired or forfeited
---------- --------- -----------
Outstanding at end of year 4,004,248 $1.00 6,022,765 $0.86 9,029,936 $ 0.72
========== ========= ===========
Options exercisable at year-end 1,534,335 $1.31 5,835,265 $0.86 6,592,436 $ 0.73
========== ========= ===========
</TABLE>
As of December 31, 1997, no shares were available for future grants of
restricted stock awards and for options to purchase common stock under the 1992
Plan.
As of December 31, 1997, 1.9 million options have been granted but are not
exercisable until such time as the Company's stockholders approve an increase in
the number of shares of the Company's Common Stock included in the 1992 Plan. At
the time of such stockholder approval, if the market value of the Company's
stock exceeds the exercise price of the subject options, the Company will incur
a non-cash charge to earnings equal to the spread between the exercise price of
the option and market price, times the number of options involved.
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. Options granted under the
Directors Plan are fully vested at the grant date.
Information with respect to Directors Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1995 1996 1997
------------------- --------------------- ---------------------
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 $0.73 746,000 $0.73
Options granted 1,076,000 $0.77 - - - -
Options exercised - - - - - -
Options canceled, expired or forfeited (495,000) $0.92 (75,000) $0.75 - -
---------- -------- -------
Outstanding at end of year 821,000 $0.73 746,000 $0.73 746,000 $0.73
========== ======== =======
Options exercisable at year-end 305,000 $0.70 746,000 $0.73 746,000 $0.73
========== ======== =======
</TABLE>
As of December 31, 1997, there were 75,000 options for the purchase of shares
available for future grants under the Directors Plan.
<PAGE>
The following information summarizes information about the Company's stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Plan Price Outstanding (In Years) Price Exercisable Price
---- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1987 Plan $0.50 to 1,350,000 1.18 $0.51 1,350,000 $0.51
$0.63
Non-Plan $0.27 to 4,319,449 4.14 $0.36 4,319,449 $0.36
$4.75
1992 Plan $0.27 to 9,029,936 4.89 $0.72 6,592,436 $0.73
$4.00
Director's Plan $0.66 to 746,000 1.88 $0.73 746,000 $0.73
$0.75
</TABLE>
Warrants
The Company's warrants are granted from time to time at the discretion of the
Board of Directors. The exercise price of all warrants generally must be at
least equal to the fair market value of such shares on the date of grant.
Warrants are generally exercisable over a five to ten year period as determined
by the Board of Directors. Warrants generally vest on the grant date.
The Company had shares of its common stock reserved at December 31, 1995,
December 31, 1996, and December 31, 1997, for warrants outstanding, all of which
are exercisable.
Information with respect to warrant activity is summarized as follows:
<TABLE>
<CAPTION>
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 4,829,896 $1.20 4,032,541 $0.71 3,888,539 $ 0.72
Warrants granted 2,418,750 $0.76 - - 2,846,923 $ 0.76
Warrants exercised (327,105) $0.76 (144,002) $0.45 (854,119) $(0.41)
Warrants canceled, expired or forfeited (2,889,000) $1.57 - - (2,734,423) $(0.75)
----------- ---------- -----------
Outstanding at end of year 4,032,541 $0.71 3,888,539 $0.72 3,146,920 $ 0.81
=========== ========== ===========
Warrants exercisable at year-end 4,032,541 $0.71 3,888,539 $0.72 3,146,920 $ 0.81
=========== ========== ==========
</TABLE>
The following table summarizes information about warrants outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants 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>
$0.69 to $4.00 3,146,920 2.06 $0.81 3,146,920 $0.81
</TABLE>
<PAGE>
8. Related Parties
Environmental Research Information, Inc.
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.
Quiet Power Systems, Inc.
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.
For the years ended December 31, 1995, 1996 and 1997 the Company was not
required to pay any commissions to QSI under any of these Marketing Agreements.
The Company has also entered into a Teaming Agreement with QSI under which
each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1995, 1996 and 1997 no
payments were required to be made 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
including NCT's failure to develop the products or the failure of the parties to
agree on certain development matters. In consideration of the rights granted
under the Master Agreement, QSI is to pay the Company a royalty of 6% of the
gross revenues received from the sale of the products and 50% of the gross
revenues received from sublicensing the rights granted to QSI under the Master
Agreement after QSI has recouped 150% of the costs incurred by QSI in the
development of the products in question. The Company is obligated to pay similar
royalties to QSI on its sale of the products and the licensing of rights covered
under the Master Agreement outside the utility industry and from sales and
licensing within the utility industry in the Far East. In addition to the
foregoing royalties, QSI is to pay an exclusivity fee to the Company of
$750,000; $250,000 of which QSI paid to the Company in June 1994. The balance is
payable in equal monthly installments of $16,667 beginning in April 1995. QSI's
exclusive rights become non-exclusive with respect to all products if it fails
to pay any installment of the exclusivity fee when due and QSI loses such rights
with respect to any given product in the event it fails to make any development
funding payment applicable to that product. The Master Agreement supersedes all
other agreements relating to the products covered under the Master Agreement,
including those agreements between the Company and QSI described above.
Immediately following the execution to the Master Agreement, the Company and
QSI entered into a letter agreement providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.
In April 1995, the Company and QSI entered into another letter agreement
under which QSI agreed to forfeit and surrender the five year warrant to
purchase 750,000 shares of the Company's common stock issued to QSI under the
first Marketing Agreement described above. In addition, the $500,000 balance of
the exclusivity fee provided for under the Master Agreement was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the indebtedness to be paid under the letter agreement described in the
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 February 27, 1998, QSI has paid all installments due and payable for
the exclusivity fee and owes the Company $150,000 which was due on January 1,
1998 and is fully reserved, and other than as described above, owes no other
amounts to the Company.
Other Parties
The President and Chief Executive Officer, who is also a stockholder of the
Company, receives an incentive bonus equal to 1% of the cash received by the
Company upon the execution of agreements or other documentation evidencing
transactions with unaffiliated parties. For the year ended December 31, 1997
approximately $243,000 was incurred in connection with this arrangement.
During 1995, 1996 and 1997 the Company purchased $0.5 million, $0.6 million
and $0.7 million, respectively, of products from its various manufacturing joint
venture entities.
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, 1997, the Company had available net operating loss
carryforwards of approximately $76.9 million and research and development credit
carryforwards of $1.3 million for federal income tax purposes which expire as
follows:
(in thousands of dollars)
----------------------------------
Research and
Net Operating Development
Year Losses Credits
---- ---------------- ----------------
1999 $ 151 $ --
2000 129 --
2001 787 --
2002 2,119 --
2003 1,974 --
2004 1,620 --
2005 3,870 141
2006 1,823 192
2007 6,866 118
2008 13,456 321
2009 16,293 413
2010 9,386 61
2011 8,980 67
2012 9,457 (1)
---------------- ----------------
Total $76,911 $1,313
================ ================
(1) Includes approximately $4.1 million net operating loss relating to NCT
Audio Products, Inc.
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 $1.4 million, $3.3 million and $3.0 million in 1995, 1996
and 1997, respectively.
<PAGE>
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, 1996 and 1997 were as follows:
(in thousands of dollars)
-------------------------
1996 1997
--------- ----------
Accounts receivable $ 281 $ 207
Inventory 108 191
Property and equipment 187 68
Accrued expenses 243 69
Stock compensation 2,684 2,698
Other 324 299
---------- ----------
Total temporary differences $ 3,827 $ 3,532
Federal net operating losses 22,903 26,149
Federal research and development credits 1,246 1,313
---------- ----------
$ 27,976 $ 30,994
Less: Valuation allowance (27,976) (30,994)
---------- ----------
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 Lire ($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
Lire ($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 reorganization of all proceedings pending
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.
On September 16, 1997, Ally Capital Corporation ("Ally") filed suit against
the Company, John J. McCloy II, Michael J. Parrella, Jay M. Haft and Alistair J.
Keith in the United States District Court for the District of Connecticut (the
"District Court"). The complaint was not served on the Company until January 16,
1998, and has yet to be served on the individual defendants. The individual
defendants are current and former officers and directors of the Company. The
complaint alleges three (3) causes of action arising out of an agreement (the
"Asset Purchase Agreement") which the Company entered into with another entity
known as Active Noise and Vibration Technologies, Inc. ("ANVT") whereby the
Company agreed to acquire ANVT's patented and unpatented intellectual property,
the rights and obligations under a defined list of agreements between ANVT and
twenty-one (21) other parties (the "Listed Parties") relating to existing or
potential joint ventures, licensing and other business relationships, and
certain items of office and laboratory equipment. For these assets, the Company
paid ANVT two hundred thousand ($200,000.00) dollars and issued ANVT two million
(2,000,000) shares of the Company's common stock. The Asset Purchase Agreement
also provided ANVT with the right to certain contingent payments, to the extent
the Company generated certain levels of revenue from joint venture, licensing or
other contractual relationships with any of the Listed Parties. Plaintiff Ally
is an unsecured creditor of ANVT and is not a party to the Asset Purchase
Agreement; however, Ally asserts an interest to part of the consideration paid
ANVT by virtue of an escrow agreement between ANVT and the escrow agent for the
benefit of ANVT's secured and unsecured creditors. Ally purports to allege
claims of fraud, negligent misrepresentation and a claim under the Connecticut
Unfair Trade Practice Act based upon purported representations made to ANVT, not
Ally. Thus, it is alleged that the Company misrepresented to ANVT the Company's
financial condition, the number of shares it could issue and the value of the
contingent payment rights under the Asset Purchase Agreement. In connection with
the claims, Ally seeks compensatory damages in excess of one million two hundred
thousand ($1,200,000.00) dollars, punitive damages and attorney fees. On March
4, 1998, the Company served its motion to dismiss the complaint pursuant to
Federal Rule of Civil Procedure 12. The basis for the motion include: that the
summons and complaint were not served for more than one hundred twenty (120)
days after the complaint was filed, in violation of Federal Rule of Civil
Procedure 4; that Ally lacks standing to bring its claims as they are based on
purported representations made by the Company to ANVT, not Ally; that the claims
are legally insufficient under Connecticut law; and that plaintiff has failed to
join necessary parties, ANVT and the escrow agent. As no discovery has taken
place, the Company is unable to assess the likelihood of an adverse result.
Management, however, believes it has meritorious defenses and intends a vigorous
defense of this lawsuit. However, in the event this 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, warehouse space and laboratory space,
expiring through April 2007 with various renewal options, as follows:
(in thousands
of dollars)
---------------------- ----------------
Year Ending
December 31, Amount
---------------------- ----------------
1998 $ 436
1999 437
2000 296
2001 77
2002 63
Thereafter 266
================
Total $1,575
================
Rent expense (net of sublease income) was $0.8 million, $0.6 million and $0.4
million for each of the three years ended December 31, 1995, 1996 and 1997,
respectively. During 1995, rent expense was paid, in part, through the issuance
of common stock (see Note 6).
In April, 1996, the Company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, certain
health care benefits to employees and directors of the Company's United States
operations. The Company administers this modified self insured Benefit Plan
through a commercial third party administrative health care provider. The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million while combined individual and family benefit exposure in
each Benefit Plan fiscal year is limited to $35,000. Benefit claims in excess of
the above mentioned individual or the maximum aggregate stop loss are covered by
a commercial third party insurance provider to which the Company pays a nominal
premium for the subject stop loss coverage. The Company records benefit claim
expense in the period in which the benefit claim is incurred. As of February 27,
1998, the Company was not aware of any material benefit claim liability.
On September 16, 1994, the Company acquired the patents, technology, other
intellectual property and certain related tangible assets of ANVT. 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. As of the period ended December 31,
1997, no such contingent earn-out or payments were due ANVT.
<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:
(in thousands of dollars)
December 31,
-----------------------------------------
1995 1996 1997
------------ ------------ ------------
Revenues
United States $6,095 $2,674 $2,089
Europe 4,065 480 3,270
Far East 306 10 359
------------ ------------ ------------
Total $10,466 $3,164 $5,718
============ ============ ============
Net (Income) Loss
United States $3,761 $9,752 $9,211
Europe (36) 912 411
Far East 343 161 226
------------ ------------ ------------
Total $4,068 $10,825 $9,848
============ ============ ============
Identifiable Assets
United States $8,997 $5,366 $17,060
Europe 586 515 301
------------ ------------ ------------
Total $9,583 $5,881 $17,361
============ ============ ============
<PAGE>
(Richard A. Eisner & Company, LLP Letterhead)
INDEPENDENT AUDITORS' REPORT
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, 1996 and
December 31, 1997, 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, 1997. 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
1995, 1996 and 1997 financial statements of the Company's two foreign
subsidiaries. These subsidiaries accounted for revenues of approximately
$1,200,000, $407,000 and $67,000 for the years ended December 31, 1995, 1996 and
1997, respectively, and assets of approximately $586,000, $515,000 and $301,000
at December 31, 1995, 1996 and 1997, respectively. These statements were audited
by other auditors whose reports have been furnished to us, one of which
contained a reference to its dependence on the parent for continued financial
support. 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements enumerated above present fairly, in all material
respects, the consolidated financial position of Noise Cancellation
Technologies, Inc. and subsidiaries as at December 31, 1996 and 1997 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 1997 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 not been able to generate
sufficient cash flow from operating activities to sustain its operations and
since it has incurred net losses since inception, it has been and continues to
be dependent on equity financing, joint venture arrangements to support its
business efforts. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
February 27, 1998
<PAGE>
Stock Market Information
The Company's common stock is currently traded on the NASDAQ National
Market System under the symbol "NCTI". High and low last sale information for
1997 and 1996 for the common stock for specified quarterly periods is set forth
below:
1997 1996
------------------------- -------------------------
HIGH LOW HIGH LOW
------------------------- -------------------------
1st Quarter 29/32 3/8 7/8 17/32
2nd Quarter 15/32 7/32 1 5/32 21/32
3rd Quarter 1 1/8 7/32 15/16 5/8
4th Quarter 2 1/32 9/16 11/16 11/32
<PAGE>
Corporate Information
Officers Directors
Jay M. Haft Jay M. Haft*
Chairman of the Board Chairman of the Board
Michael J. Parrella Michael J. Parrella
President and Chief Executive Officer President
Cy E. Hammond John J. McCloy II**
Senior Vice President and
Chief Financial Officer Sam Oolie
Irene Lebovics Morton Salkind
Senior Vice President
Stephan Carlquist
John B. Horton
Senior Vice President,
General Counsel and Secretary
Michael A. Hayes, Ph. D.
Senior Vice President and * Chairman, Compensation Committee
Chief Technical Officer ** Chairman, Audit Committee
