UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1998
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COMMISSION FILE NUMBER: 0-18267
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NCT Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
(410) 636-8700
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(Registrant's telephone number, including area code)
Noise Cancellation Technologies, Inc.
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
152,494,382 shares outstanding as of October 30, 1998
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands except per share amounts)
--------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------------------
1997 1998 1997 1998
------------------- -------------------
(Note 11)
REVENUES:
<S> <C> <C> <C> <C>
Technology licensing fees and royalties $ 220 $ 29 $ 3,430 $ 375
Product sales, net 488 548 1,069 1,613
Engineering and development services 128 138 341 287
--------- --------- ---------- ---------
Total revenues $ 836 $ 715 $ 4,840 $ 2,275
--------- --------- ---------- ---------
COSTS AND EXPENSES:
Costs of sales $ 896 $ 383 $ 1,401 $ 1,252
Costs of engineering and development
services 96 65 295 193
Selling, general and administrative 1,483 3,159 3,734 7,613
Research and development 1,501 1,430 4,513 4,727
Other (income)/expense (Note 1) - 38 - (3,344)
Interest (income)/expense (Note 11) 28 (114) 1,495 (326)
--------- --------- ---------- ---------
Total costs and expenses $ 4,004 $ 4,961 $ 11,438 $ 10,115
--------- --------- ---------- ---------
NET(LOSS) $ (3,168) $ (4,246) $ (6,598) $ (7,840)
========== ========== =========== ==========
Preferred stock dividend requirement $ - $ 723 $ - $ 2,413
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock - 699 - 1,183
---------- ---------- ----------- ----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (3,168) $ (5,668) $ (6,598) $ (11,436)
========== ========== =========== ==========
Basic and diluted loss per share $ (0.02) $ (0.04) $ (0.05) $ (0.08)
========== ========== =========== ==========
Weighted average common shares outstanding -
basic and diluted 130,467 151,740 121,490 140,906
========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1998 1997 1998
------------------- -------------------
<S> <C> <C> <C> <C>
NET (LOSS) $ (3,168) $ (4,246) $ (6,598) $ (7,840)
Other comprehensive income/(loss)
Currency translation adjustment (21) (65) (25) (78)
--------- --------- --------- ---------
COMPREHENSIVE (LOSS) $ (3,189) $ (4,311) $ (6,623) $ (7,918)
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
<TABLE>
<CAPTION>
(in thousands of dollars)
December 31, September 30,
1997 1998
------------ -------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents (Note 1) $ 12,604 $ 5,549
Accounts receivable:
Trade:
Technology license fees and royalties 200 60
Other 368 653
Allowance for doubtful accounts (38) (100)
------------ -------------
Total accounts receivable $ 530 $ 613
Inventories, net of reserves (Note 2) 1,333 3,923
Other current assets 213 356
------------ -------------
Total current assets $ 14,680 $ 10,441
Property and equipment, net 1,144 1,470
Goodwill (Note 7) - 598
Patent rights and other intangibles, net (Note 4) 1,488 2,404
Other assets (Note 5) 49 5,479
------------ -------------
$ 17,361 $ 20,392
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,324 $ 2,777
Accrued expenses 1,392 1,280
Accrued payroll, taxes and related expenses 181 151
Current maturities of LTD - 446
Customers' advances 87 38
------------ -------------
Total current liabilities $ 2,984 $ 4,692
------------ -------------
Commitments and contingencies
Minority interest in consolidated subsidiary
Preferred stock in subsidiary, $.10 par value, 1,000
shares authorized, 60 issued and outstanding
(redemption amount $6,041,616) $ - $ 6,042
------------ -------------
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, $.10 par value, 10,000,000 shares
authorized
Series C issued and outstanding 13,250 and
2,400 shares, respectively (redemption amount
$13,314,399 and $2,480,789, respectively) $ 10,458 $ 1,954
Series D Preferred stock, 6,000 shares issued and
outstanding (redemption amount $6,041,616) - 5,576
Common stock, $.01 par value, 185,000,000 shares,
authorized; issued and outstanding 133,160,212 and
155,337,316 shares, respectively 1,332 1,553
Additional paid-in-capital 96,379 104,065
Unearned portion of compensatory warrants and stock - (220)
Accumulated deficit (93,521) (101,361)
Cumulative translation adjustment 119 41
Common stock subscriptions receivable (390) -
Treasury stock (3,354,109 shares) - (1,950)
------------- -------------
Total stockholders' equity $ 14,377 $ 9,658
------------- -------------
$ 17,361 $ 20,392
============= =============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
(in thousands of dollars)
Nine months ended September 30,
-------------------------------
1997 1998
-------------------------------
(Note 11)
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $ (6,598) $ (7,840)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 877 805
Common stock options and warrants issued as
consideration for:
Compensation 3 213
Interest on debentures 52 -
Patent rights - 446
Discount on beneficial conversion feature on
convertible debt 1,420 -
Provision for tooling costs - 39
Provision for doubtful accounts 148 62
Loss on disposition of fixed assets 63 35
Changes in operating assets and liabilities:
(Increase) in accounts receivable (412) (195)
Decrease in license fees receivable - 200
(Increase) in inventories (450) (2,583)
(Increase) decrease in other assets 167 (524)
Increase in accounts payable and accrued expenses 780 843
(Decrease) in other liabilities (48) (514)
---------- ----------
Net cash (used in) operating activities $ (3,998) $ (9,013)
---------- ----------
Cash flows from investing activities:
Capital expenditures $ (127) $ (462)
Acquisition of patent rights - (200)
Acquisition of subsidiaries (Note 5) - (4,900)
Sale of fixed assets - 44
---------- ----------
Net cash (used in) investing activities $ (127) $ (5,518)
---------- ----------
Cash flows from financing activities:
Proceeds from:
Convertible debt (net) $ 3,795 $ -
Sale of Series C preferred stock (net) - (36)
Sale of Series D preferred stock (net) - 5,164
Sale of subsidiary Series A preferred stock (net) - 5,164
Sale of common stock (net) 8 352
Sale of subsidiary common stock (net) 1,000 -
Treasury stock - (3,078)
---------- ----------
Net cash provided by financing activities $ 4,803 $ 7,566
---------- ----------
Effect of exchange rate changes on cash $ (8) $ (90)
---------- ----------
Net increase (decrease) in cash and cash equivalents $ 670 $ (7,055)
Cash and cash equivalents - beginning of period 368 12,604
---------- ----------
Cash and cash equivalents - end of period $ 1,038 $ 5,549
========== ==========
Cash paid for interest $ 2 $ 1
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and certain adjustments to reserves and
allowances) considered necessary for a fair presentation have been included.
Operating results for the three months ended September 30, 1998 and the nine
months ended September 30, 1998, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the NCT Group, Inc. (formerly "Noise Cancellation
Technologies, Inc.") (the "Company" or "NCT") Annual Report on Form 10-K, for
the year ended December 31, 1997 as amended by Amendment No. 1 thereto filed on
April 30, 1998 and Amendment No. 2 thereto filed on May 4, 1998.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $101.4 million on a
cumulative basis through September 30, 1998. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing fees and engineering and
development funds received from joint venture and other strategic partners.
Cash, cash equivalents and short-term investments amounted to $5.5 million
at September 30, 1998, decreasing from $12.6 million at December 31, 1997.
Management believes that available cash and cash anticipated from the exercise
of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue, should be sufficient to sustain the Company's anticipated future level
of operations into 1999. However, the period during 1999 through which it can be
sustained 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.
Management believes that the funding provided by the sources referred to
above including the anticipated increased product sales, technology licensing
fees and royalties, if realized, should enable the Company to continue
operations into 1999. If the Company is not able to increase technology
licensing fees, royalties and product sales, or generate additional capital, it
will have to cut its level of operations substantially in order to conserve
cash. (Refer to "Liquidity and Capital Resources" below for a further discussion
relating to continuity of operations.)
On April 30, 1998, the Company completed the sale of 5.0 million ordinary
shares of Verity Group plc ("Verity") acquired upon the Company's exercise on
April 7, 1998 of the option it held to purchase such shares at a price of 50
pence per share. This option was acquired by the Company in connection with the
cross license agreement entered into by the Company, Verity and New Transducers
Ltd. ("NXT"), a wholly owned subsidiary of Verity. The Company realized a $3.2
million gain from the exercise of such option and the sale of the Verity
ordinary shares received therefrom, which is included in other income for the
nine months ended September 30, 1998.
On July 15, 1998 the Company transferred $5,000 and all of the business and
assets of its Hearing Products Division as then conducted by the Company and as
reflected on the business books and records of the Company to a newly
incorporated subsidiary company, NCT Hearing Products, Inc. ("NCT Hearing") in
consideration for 6,400 shares of NCT Hearing common stock whereupon NCT Hearing
became a wholly owned subsidiary of the Company. The Company also granted NCT
Hearing an exclusive worldwide license with respect to all of the Company's
relevant patented and unpatented technology relating to Hearing Products in
consideration for a license fee of $3,000,000 to be paid when proceeds are
available from the sale of NCT Hearing common stock and running royalties
payable with respect to NCT Hearing's sales of products incorporating the
licensed technology and its sublicensing of such technology. It is anticipated
that NCT Hearing will issue additional shares of its common stock in
transactions exempt from registration in order to raise additional working
capital.
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 above raise substantial doubt at September 30, 1998,
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. INVENTORIES:
Inventories comprise the following:
(thousands of dollars)
December 31, September 30,
1997 1998
------------ -------------
Components $ 514 $ 787
Finished Goods 1,291 3,299
------------ -------------
Gross Inventory $ 1,805 $ 4,086
Reserve for Obsolete & Slow Moving
Inventory (472) (163)
------------ -------------
Inventory, Net of Reserves $ 1,333 $ 3,923
============ =============
The reserve for obsolete and slow moving inventory at September 30, 1998
has decreased to $163,000 due to the application of reserves to slow moving
inventory during the first nine months of 1998.
<PAGE>
3. STOCKHOLDERS' EQUITY:
The changes in stockholders' equity during the nine months ended September
30, 1998, were as follows:
<TABLE>
<CAPTION>
Net Net Net Net
Sale of Sale of Sale of Sale Compen- Transla-
Balance Preferred Series C Series D of Stock satory Accumu- tion Balance
at Stock in Preferred Preferred Common Treasury Subscription Options/ lated Adjust- at
12/31/97 Subsidiary Stock Stock Stock Stock Receivable Warrants (Deficit) ment 9/30/98
-------- ---------- --------- --------- ------ -------- ------------ -------- --------- ------ -------
PREFERRED STOCK
IN SUBSIDIARY:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHARES - - - - - - - - - - -
AMOUNT - 6,042 - - - - - - - - 6,042
PREFERRED STOCK:
SHARES 13 - (11) 6 - - - - - - 8
AMOUNT 10,458 - (8,504) 5,576 - - - - - - 7,530
COMMON STOCK:
SHARES 133,162 - 20,665 - 3,298 (1,787) - - - - 155,338
AMOUNT 1,332 - 206 - 15 - - - - - 1,553
TREASURY STOCK:
SHARES - - - - - 3,354 - - - - 3,354
AMOUNT - - - - - (1,950) - - - - (1,950)
ADDITIONAL
PAID-IN
CAPITAL 96,379 (878) 8,268 (412) 1,623 (1,110) - 195 - - 104,065
ACCUMULATED
SURPLUS
(DEFICIT) (93,521) - - - - - - - (7,840) - (101,361)
CUMULATIVE
TRANSLATION
ADJUSTMENT 119 - - - - - - - - (78) 41
STOCK
SUBSCRIPTION
RECEIVABLE (390) - - - - - 390 - - - -
UNEARNED
COMPENSATORY
STOCK OPTION - - - - - - - (220) - - (220)
</TABLE>
<PAGE>
4. Other Liabilities
On June 5, 1998, Interactive Products, Inc. ("IPI") entered into an
agreement with the Company granting the Company a license to, and an option to
purchase a joint ownership interest in, patents and patents pending which relate
to IPI's speech recognition technologies, speech compression technologies and
speech identification and verification technology. The aggregate value of the
patented technology is $1,250,000, which was paid by a $150,000 cash payment and
delivery of 1,250,000 shares of the Company's common stock valued at $0.65625
per share on June 5, 1998. At such time as IPI sells any of such shares, the
proceeds thereof will be allocated towards a fully paid-up license fee for the
technology rights noted above. In the event that the proceeds from the sale of
shares are less than the $1,100,000, the Company will record a liability
representing the cash payment due. On July 5, 1998 the Company paid IPI $50,000,
which was held in escrow as security for the fulfillment of the Company's
obligations, towards the liability. The Company has recorded a liability of
$446,000 at September 30, 1998 representing the difference between the market
value of the shares issued on June 5, 1998 and the balance due on the license
fee.
5. Other Assets
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
business assets of Top Source Automotive, Inc. ("TSA"), a tier one automotive
original equipment audio system supplier. On June 11, 1998, NCT Audio paid a
non-refundable deposit of $1,450,000 towards the purchase price, which is
recorded as an investment in unconsolidated subsidiaries. The total cash
purchase price is $10,000,000, and up to $6,000,000 in possible future
contingent payments to be paid in either NCT Audio common stock or cash, at the
seller's election. The transaction is subject to approval of the shareholders of
Top Source Technologies, Inc. ("TST"), TSA's parent company. On July 31,1998,
NCT Audio paid TST $2,050,000, to be held in escrow with securities and
documentation necessary to represent beneficial ownership of 35% of the total
equity rights and interests in TSA, until such time as TST's stockholders
approve the sale of the business assets of TSA. Upon such TST stockholder
approval, such $2,050,000 will be delivered to TSA and such securities and
documentation will be delivered to NCT Audio. If such approval is not obtained,
the $2,050,000 will be returned to NCT Audio and the securities and
documentation will be returned to TSA. TST's next stockholder meeting is
scheduled for December 15, 1998.
On August 17, 1998, NCT Audio agreed to acquire all of the members' interest
in Phase Audio LLC dba Precision Power, Inc. ("PPI"), a supplier of custom
automotive audio systems. In consideration, the members of PPI shall receive
registered shares of NCT Audio's common stock having an aggregate value of
$2,000,000 as calculated using the offering price of such stock in an initial
public offering being considered by NCT Audio as a means of raising acquisition
funding. NCT Audio also agreed to retire $8.5 million of PPI debt. This
acquisition is subject to NCT Audio's receipt of the necessary financing to
close the transaction. In addition to the above, on June 17, 1998, NCT Audio
provided a working capital loan in the amount of $500,000 to PPI, which is
evidenced by a demand promissory note. On August 18,1998, NCT Audio provided an
additional working capital loan in the amount of $1,000,000 to PPI, which is
also evidenced by a demand promissory note. The unpaid principal balance of
these notes bear interest at a rate equal to the prime lending rate plus one
percent (1.00%).
Both of the above noted acquisitions are subject to obtaining adequate
financing for each of the acquisitions.
6. Litigation
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. Reference is made to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, as amended, and
the Company's Quarterly report on Form 10-Q for the period ended March 31,1998,
as amended, for a discussion of the suit.In addition, at a hearing on May 19,
1998, the Discovery Judge established dates for the parties to submit final
pleadings and set September 22, 1998 as the date for the case to be presented
before the Tribunal of Milan sitting in full bench. As of November 4, 1998 the
Company had not been informed of any decision by the Tribunal. The Company's
Italian counsel anticipates a decision to be handed down by the Tribunal before
the end of 1998.
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, current and former directors of the Company, in the United
States District Court for the District of Connecticut (the "District Court").
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, as amended, and the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1998, as amended, for a discussion of
this suit. On July 15, 1998 the Company paid plaintiff, Ally, twenty-five
thousand ($25,000) dollars in settlement of the suit which was dismissed on
behalf of all defendants with prejudice and without costs on July 16, 1998.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. Reference is made to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998, for a discussion of this suit. There were no
material developments in this suit during the period covered by this report.
7. Common Stock
On February 14, 1998, the Board of Directors authorized the issuance of
100,000 shares of the Company's common stock to a prospective employee in
connection with an offer of employment. The Company issued these shares to the
employee on April 20,1998, the date on which employment with the Company
commenced. In the second quarter of 1998, the Company recognized $78,000 of
expense in connection with the issuance of shares to this employee.
On July 27, 1998, the Company distributed subscription agreements (the
"Subscription Agreements") to sell 6,000 shares of the Company's Series D
Convertible Preferred Stock ("Series D Preferred Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act of 1933, as amended (respectively "Regulation D" and the
"Securities Act"), to six unrelated accredited investors through one dealer (the
"1998 Series D Preferred Stock Private Placement). The sale of 6,000 shares of
Series D Preferred Stock having an aggregate $6.0 million stated value was
completed on August 6, 1998. $5.2 million net proceeds were received by the
Company from the 1998 Series D Preferred Stock Private Placement. Each share of
the Series D 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 Series D 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 file a registration statement ("the
Registration Statement") covering the resale of all shares of common stock of
the Company issuable upon conversion of the Series D Preferred Stock then
outstanding within sixty (60) days after the completion of the 1998 Series D
Preferred Stock Private Placement (respectively, the "Filing Date" and the
"Closing Date"). The shares of Series D Preferred Stock become convertible into
shares of common stock at any time commencing after the earlier of (i) ninety
(90) days after the Closing Date; (ii) five (5) days after the Company receives
a "no review" status from the Securities and Exchange Commission ("SEC") in
connection with the Registration Statement; or (iii) the effective date of the
Registration Statement. The Registration Statement became effective on October
30, 1998, and shares of Series D Preferred Stock became convertible on that
date. Each share of Series D 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, and
(ii) the conversion date.
Conversion
Price = the greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by an
additional 2% for every 30 days that the Registration
Statement has not been filed by the Filing Date) in
effect as of the conversion date times the average
market price for the Company's common stock for the (5)
consecutive trading days immediately preceding such
date; or (ii) $0.50.
The conversion terms of the Series D Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 12,000,000 shares of
its common stock in the aggregate in connection with the conversion of the 6,000
shares of Series D Preferred Stock issued under the 1998 Series D Preferred
Stock Private Placement. The Subscription Agreements also provide that the
Company will be required to make certain payments in the event of its failure to
effect conversion in a timely manner.
On July 27, 1998, NCT Audio distributed subscription agreements (the "NCT
Audio Subscription Agreements") to sell 60 shares of NCT Audio's Series A
Convertible Preferred Stock ("NCT Audio Series A Preferred Stock") having an
aggregate state value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 NCT Audio Series A Preferred Stock Private
Placement"). The sale of 60 shares of Series A Preferred Stock having an
aggregate $6.0 million stated value was completed on August 17, 1998. NCT Audio
received net proceeds of $5.2 million from the 1998 Series A Preferred Stock
Private Placement. Each share of the NCT Audio Series A Preferred Stock has a
par value of $.10 per share and a stated value of one hundred thousand dollars
($100,000) with an accretion rate of four percent (4%) per annum on the stated
value. Each share of NCT Audio Series A Preferred Stock is convertible into
fully paid and nonassessable shares of NCT Audio's common stock subject to
certain limitations. Under the terms of the NCT Audio Subscription Agreements
NCT Audio is required to file a registration statement ("NCT Audio Registration
Statement") covering the resale of all shares of common stock of NCT Audio
issuable upon conversion of the NCT Audio Series A Preferred Stock then
outstanding by a date (the "Filing Deadline") which is not later than thirty
(30) days after the Company becomes a "reporting company" under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The shares of NCT Audio
Series A Preferred Stock become convertible into shares of NCT Audio common
stock at any time after the date the Company becomes a "reporting company" under
the Exchange Act. Each share of NCT Audio Series A Preferred Stock is
convertible into a number of shares of common stock of NCT Audio as determined
in accordance with the following formula (the "NCT Audio Conversion Formula"):
[(.04) x (N/365) x (100,000)] + 100,000
Conversion Price
where
N = the number of days between (i) the date of completion
of the sale of the 60 shares of NCT Audio Series A
Preferred Stock being offered; and (ii) the conversion
date.
Conversion
Price = the greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by
an additional 2% for every 30 days that the NCT Audio
Registration Statement has not been filed by the
Filing Deadline) in effect as of such date times the
average market price for NCT Audio's common stock
for the (5) consecutive trading days immediately
preceding such date; or (ii) the "Floor Price" which
means the lowest number per share that will not cause
the total number of shares of NCT Audio common stock
issuable upon the conversion of 60 shares of NCT Audio
Series A Preferred Stock to equal or exceed twenty
percent (20%) of the issued and outstanding shares of
common stock of NCT Audio on the date of issuance
of the NCT Audio Series A Preferred Stock as long
as the common stock of NCT Audio is listed on the NASDAQ
National Market or the NASDAQ Small Cap Market
(there is no "Floor Price" if such listing is not so
maintained by NCT Audio).
The conversion terms of the NCT Audio Series A Preferred Stock also
provide that in the event that NCT Audio has not become a "reporting company"
under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") by
December 31, 1998, or the NCT Audio Registration Statement has not been declared
effective by the SEC by December 31, 1998, the holder shall be entitled to
exchange each share of NCT Audio Series A Preferred Stock for 100 shares of the
Company's Series D Convertible Preferred Stock and thereafter shall be entitled
to all rights and privileges of a holder of the Company's Series D Preferred
Stock.
On July 29, 1998, the Company initiated a plan to repurchase from time to
time up to 10 million shares of the Company's common stock in the open market
pursuant to Rule 10b-18 under the Exchange Act or through block trades. As of
September 30, 1998, the Company had repurchased 5,141,100 shares of the
Company's common stock at per share prices ranging from $0.5313 to $0.6563.
On September 4, 1998, the Company acquired the issued and outstanding
common stock of Advancel Logic Corporation ("Advancel"), a Silicon Valley-based
developer of chips that execute Sun Microsystems' Java(TM) code. The acquisition
was 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 $1.0 million
payable by the delivery 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. In the
event that the Company is unable to maintain the registration statement covering
the resale of 1,786,991 shares effective for at least thirty (30) days, each
Advancel Shareholder shall have the right, until April 15, 1999, to have the
Company redeem up to one-third of the initial payment shares acquired by such
Advancel Shareholder by paying in cash therefor a sum calculated by using the
formula used to determine the number of shares of the Company's common stock to
be delivered in payment of the initial payment of $1.0 million. The cost of the
acquisition has been allocated to the assets acquired and liabilities assumed
based on their fair values as follows:
Assets acquired and liabilities assumed:
Current assets $ 285,109
Property, plant and equipment 450,237
Goodwill 749,694
Current liabilities (485,040)
-----------
$1,000,000
===========
The acquisition has been accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the accounts of Advancel
from the date of acquisition.
On September 23, 1998, the Company exchanged 135,542 shares of its common
stock for 30 shares of the common stock of NCT Audio with the holder thereof.
This exchange was made in response to the exercise of certain exchange rights
granted to purchasers of NCT Audio common stock under the subscription
agreements pertaining to the fourth quarter 1997 private placement of 2,145
shares of NCT Audio common stock exempt from registration pursuant to Regulation
D of the Securities Act (the "1997 NCT Audio Financing").
Between April 30, 1998 and September 30, 1998, the Company issued
20,665,000 shares of the Company's common stock in connection with the
conversion of 10,850 shares of the Company's Series C Convertible Preferred
Stock ("Series C Preferred Stock") issued in a private placement in the fourth
quarter of 1997 exempt from registration pursuant to Regulation D of the
Securities Act.
At September 30, 1998, the aggregate number of shares of common stock
required to be reserved for issuance upon the exercise of all outstanding
options and warrants was 30.6 million shares, and the aggregate number of shares
of common stock required to be reserved for issuance upon conversion of issued
and outstanding shares of Series C Convertible Preferred Stock was 5.3 million
shares. The Company has also reserved 6.2 million shares of common stock for
issuance to certain holders of NCT Audio common stock upon their exercise of
certain rights to exchange their shares of NCT Audio common stock for shares of
the Company's common stock. At September 30, 1998, the number of shares
available for the exercise of options and warrants was 39.3 million and of the
outstanding options and warrants, options and warrants to purchase 23.0 million
shares were currently exercisable.
At the Annual Meeting of Stockholders held on October 20, 1998, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock from
185 million to 255 million shares. Such action was deemed by the Board of
Directors to be in the best interest of the Company to make additional shares of
the Company's common stock available for an increase in the number of shares of
common stock covered by the Company's Stock Incentive Plan (the "1992 Plan")
pursuant to an amendment of the 1992 Plan approved by the stockholders at such
Annual Meeting, and for acquisitions, public or private financings involving
common stock or preferred stock or other securities convertible to common stock,
stock splits and dividends, present and future employee benefit programs and
other corporate purposes. The Company has reserved 30.6 million shares for
issuance upon the exercise of all outstanding options and warrants, 5.3 million
for the conversion of Series C Preferred Stock, 25.0 million for the conversion
of Series D Preferred Stock, and 9.3 million for the conversion of NCT Audio
common stock.
See Note 4 for other stock issuances.
8. Common Stock Options
On January 15, 1998, the Board of Directors amended the 1992 Plan, subject
to the approval of the Company's stockholders, 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 10,000,000 shares to 30,000,000 shares and to amend certain administrative
provisions of the 1992 Plan (the "1992 Plan Amendment").
On October 6, 1997, the Board of Directors had granted options to purchase
1.9 million shares of the Company's common stock to four officers of the Company
subject to the approval by the Company's stockholders of an increase in the
number of shares covered by the 1992 Plan.
On January 15, 1998, the Board of Directors granted options to purchase
6.6 million shares of the Company's common stock, in the aggregate, to the
Company's President and its four non-employee directors, subject to stockholder
approval of the 1992 Plan Amendment. Options to purchase 4.0 million of such
shares will not become vested and exercisable thereafter until the satisfaction
of additional vesting requirements.
On February 14, 1998, the Board of Directors granted options to purchase
3.6 million shares of the Company's common stock to certain officers, other
employees and consultants of the Company subject to stockholder approval of the
1992 Plan Amendment. Options to purchase 2.1 million of such shares will not
become vested or exercisable thereafter until the satisfaction of additional
vesting requirements based on the passage of time.
At the Company's Annual Meeting of Stockholders held on October 20, 1998,
the stockholders approved the 1992 Plan Amendment.
On February 14, 1998, the Board of Directors authorized the grant of an
option to purchase 500,000 shares of the Company's common stock under the 1992
Plan in connection with an offer of employment. Such option was granted on April
20, 1998, the date on which the optionee's employment with the Company
commenced, and became vested and exercisable on that date with respect to
125,000 shares and with respect to an additional 125,000 shares on each of the
first, second, and third anniversaries of the date of grant.
On June 3, 1998, the Company granted two options under the 1992 Plan to
purchase 4,000 shares in the aggregate of the Company's common stock in
connection with offers of employment. Such options vest and become exercisable
on December 3, 1998.
On July 15, 1998, the Company granted an option under the 1992 Plan to
purchase 150,000 shares of the Company's common stock to an employee of the
Company. The option was granted in connection with a promotion of the employee
and as a bonus.
On August 14, 1998, the Company granted three options under the 1992 Plan
to purchase 160,000 shares in the aggregate of the Company's common stock in
connection with offers of employment.
All of the foregoing options were granted with exercise prices equal to
the fair value of the Company's common stock on the date of grant. The fair
value of the Company's common stock was $0.6875 on October 6, 1997, $1.0625 on
January 15, 1998, $1.0313 on February 14, 1998, $0.7813 on April 20, 1998,
$0.6406 on June 3, 1998, $0.5625 on July 15, 1998 and $0.5625 on August 14, 1998
as determined from the last sale price of the Company's common stock as reported
by the NASDAQ National Market System on those dates.
At the time the Company received stockholder approval of the 1992 Plan
Amendment, the market value of the Company's stock did not exceed the exercise
price of the subject options noted above, therefore the Company did not incur a
non-cash charge to earnings on any options pending shareholder approval.
9. Recently Issued Accounting Pronouncements
The Company will be required to implement the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information", in the
fourth quarter of 1998. The Company has determined that the above
pronouncements may have a significant effect on the information presented in
the financial statements.
10. Net Income (Loss) Per Share of Common Stock
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Dilutive earnings per
share is very similar to the previously reported fully diluted earnings per
share. The Company adopted Statement No. 128 and has retroactively applied the
effects thereof for all periods presented. The impact on the per share amounts
previously reported 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.
11. Restatement of Prior Year Quarterly Statements of Operations
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 in a private placement pursuant to Regulation S of the Securities
Act. In connection with these convertible debentures, the Company recognized a
$1.4 million non-cash charge in the fourth quarter of 1997. Had the non-cash
charge been allocated and recorded during each quarter of 1997 instead of
allocated and recorded entirely in the fourth quarter, the 1997 quarterly
results would have been reported as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Nine Months Ended
March 31, 1997 June 30, 1997 September 30, 1997
------------------- ------------------- -------------------
As As As
(in thousands, except per share amounts Reported Adjusted Reported Adjusted Reported Adjusted
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest (income) expense $ - $ 179 $ 47 $ 1,467 $ 75 $ 1,495
Net Income (Loss) $ 599 $ 420 $ (2,011) $ (3,431) $ (5,178) $ (6,598)
Weighted average number of common
shares outstanding 111,978 111,978 117,332 117,332 121,490 121,490
Net Income (Loss) Per Common Share $ 0.01 $ 0.00 $ (0.02) $ (0.03) $ (0.04) $ (0.05)
</TABLE>
The accompanying Statement of Operations for the three months ended September
30, 1997, and the nine months ended September 30, 1997, have been retroactively
adjusted to reflect the above transaction in the correct periods.
12. Subsequent Events
On October 12, 1998, the Company exchanged 1,000,000 shares of its Common
Stock for 266 shares of the common stock of NCT Audio with the holder thereof in
an exchange exempt from registration under the Securities Act pursuant to
Section 4(2) thereof (the "October 1998 NCT Audio Common Stock Exchange"). The
October 1998 NCT Audio Common Stock Exchange was made in response to the
exercise of certain exchange rights granted to purchasers of NCT Audio common
stock in the 1997 NCT Audio Financing.
At the Annual Meeting of Stockholders of the Company held on October 20, 1998,
the stockholders approved an amendment to the Company's Restated Certificate of
Incorporation changing the name of the Company to "NCT Group, Inc." and
increasing the number of shares of common stock which the Company is authorized
to issue to 255,000,000 shares. Such amendment became effective on October 21,
1998, when the Company filed a Certificate of Amendment to its Restated
Certificate of Incorporation in the Office of the Secretary of the State of
Delaware pursuant to the requirements of the General Corporation Law of the
State of Delaware.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Forward Looking Statements
Statements in this 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.
GENERAL BUSINESS ENVIRONMENT
The Company is focused on the commercialization of its technology through
technology licensing fees, royalties and product sales. In prior years, the
Company derived the majority of its revenues from engineering and development
funding provided by established companies willing to assist the Company in the
development of its active noise and vibration control technology, and from
technology licensing fees paid by such companies. The Company's strategy
generally has been to obtain technology licensing fees when initiating joint
ventures and alliances with new strategic partners. With the exception of sales
of the Company's NoiseBuster(R) headsets, historically revenues from product
sales were limited to sales of specialty products and prototypes. During the
first nine months of 1998, the Company has introduced and is currently selling
over twenty-five new products and accessories in commercial quantities in
various markets. During the first nine months of 1998, the Company received 71%
of its revenue from product sales, 16% from license fees and royalties and only
13% from engineering and development services. Since 1991, excluding quarter to
quarter variations, revenues from product sales have been increasing and
management expects that technology licensing fees, royalties and product sales
will become the principal source of the Company's revenue as the
commercialization of its technology proceeds.
Note 1. to the accompanying Condensed 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 ratios and/or enhance sound
quality. This redefinition is the result of the development of new technologies,
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.
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.
From the Company's inception through September 30, 1998, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 25% in
product sales, 44% in engineering and development services and 31% in technology
licensing fees.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and into their manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed.
The Company continues to sell and ship ProActive(TM) and NoiseBuster(R)
headsets in 1998. 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' MRI machines; and Ultra Electronics, Limited ("Ultra") is
installing production model aircraft cabin quieting systems in turboprop
aircraft. The Company is entitled to receive royalties from Walker on its sales
of industrial silencers and from Ultra on its sales of aircraft cabin quieting
systems. The Company also is entitled to receive direct product sales revenue
from Siemens' purchase of headsets. In addition, the Company is entitled to
royalties from NXT on its sale of certain audio products and from suppliers to
United Airlines and another major carrier for integrated noise cancellation
active-ready passenger headsets.
Product revenues for the nine months ended September 30, 1997 and 1998
were:
PRODUCT REVENUES
(thousands of dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
As a % of As a % of
Amount Total Amount Total
------------ ------------- --------------- --------------
Product 1997 1998 1997 1998 1997 1998 1997 1998
------- ---- ---- ----- ----- ------ ------ ----- -----
Headsets $482 $216 98.8% 39.4% $1,032 $ 977 96.5% 60.6%
Communications 5 215 1.0% 39.4% 16 428 1.5% 26.5%
Audio - 101 0.0% 18.4% - 186 0.0% 11.5%
Other 1 16 0.2% 2.8% 21 22 2.0% 1.4%
---- ---- ----- ----- ------ ------ ----- -----
Total $488 $548 100.0% 100.0% $1,069 $1,613 100.0% 100.0%
==== ==== ===== ===== ====== ====== ===== =====
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. 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.
On April 30, 1998, the Company completed the sale of 5.0 million ordinary
shares of Verity acquired upon the Company's exercise on April 7, 1998 of the
option it held to purchase such shares at a price of 50 pence per share. This
option was acquired by the Company in connection with the cross license
agreement entered into by the Company, Verity and NXT. The Company realized a
$3.2 million gain from the exercise of such option and the sale of the Verity
ordinary shares received therefrom, which is included in other income for the
nine months ended September 30, 1998.
Management believes that available cash and cash anticipated from the
exercise of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue should be sufficient to sustain the Company's anticipated future level
of operations into 1999. However, the period during 1999 through which it can be
sustained 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. If the Company is not able to
increase technology licensing fees, royalties and product sales, or generate
additional capital, it will have to cut its level of operations substantially in
order to conserve cash. (Refer to "Liquidity and Capital Resources" below and to
Note 1. - "Notes to the Condensed Consolidated Financial Statements" above for a
further discussion relating to continuity of operations.)
RESULTS OF OPERATIONS
Total revenues for the first nine months of 1998 were $2.3 million
compared to $4.8 million for the same period in 1997, a decrease of $2.5 million
or 52%. The first nine months of 1997 revenue included a one-time $3.0 million
cross license fee from Verity. The timing and relative value of license fee
revenue can and has created significant variability in the Company's
period-to-period revenue comparisons. The absence of a license fee in the first
nine months of 1998 similar to the 1997 Verity cross license fee caused such
variability in the Company's period-to-period revenue performance. Such
variability is not uncommon given the high value and low frequency of receipt of
such sizable license fees.
Consistent with the Company's objectives, product sales have generally
been increasing on a quarter-to-quarter basis, accompanied by increasing
margins. Product sales are accounting for a greater share of the Company's total
revenues. Product sales increased to $1.6 million for the first nine months of
1998 versus $1.1 million for the same period in 1997, an increase of $0.5
million or 51% primarily reflecting increased NoiseBuster(R) sales and
ClearSpeech(TM) sales and the introduction by NCT Audio of Gekko(TM) flat
speakers. While product sales have been generally increasing, engineering and
development services, having little or no margins, have been decreasing on a
quarter-to-quarter basis and are accounting for a much lower share of the
Company's total revenues, reaching an insignificant level in the current
quarter. Engineering and development services remained flat at $0.3 million for
the first nine months of 1998 and 1997.
As discussed above, the timing of realization of technology license fees
often creates significant variability in the Company's period-to-period revenue
comparisons. Technology licensing fees and royalties in the first nine months of
1998 were $0.4 million versus $3.4 million for the same period in 1997, a
decrease of $3.0 million or 89% primarily due to the receipt in 1997 of the $3.0
million Verity license fee. While overall revenue in this category declined
significantly owing to the Verity cross license fee in 1997, the Company
continues to realize royalties from other existing licensees including Ultra
Electronics, Ltd. and United Airlines. Royalties from these and other licensees
are expected to account for a greater share of the Company's revenue in future
quarters.
Cost of product sales was $1.3 million for the first nine months
of 1998 versus $1.4 million for the same period in 1997, a decrease of $0.1
million or 11% primarily reflecting additional reserves taken in 1997 for price
reductions on certain headset products. Product margin was 22% for the
first nine months of 1998 versus (31%) during the same period in 1997 due to the
above noted reserves taken in 1997 and due to an increase in the margin on
NoiseBuster Extreme!(TM) sales and the introduction of ClearSpeech(TM) sales and
Gekko(TM) flat speaker sales by NCT Audio in 1998. Cost of engineering and
development services decreased to $0.2 million for the first nine months of 1998
versus $0.3 million for the same period in 1997, due to a reduction in contract
revenue. The gross margin on engineering and development services increased to
33% for the first nine months of 1998 from 13% during the same period in 1997
due to more profitable contracts in 1998.
Selling, general and administrative expenses for the first nine months of
1998 were $7.6 million versus $3.7 million for the same period in 1997, an
increase of $3.9 million or 104% primarily due to an 80% increase in the number
of sales and marketing professionals and an associated increase in sales and
marketing efforts, including advertising, to support the introduction of several
new product lines in 1998.
Research and development expenditures for the first nine months of 1998
were $4.7 million versus $4.5 million for the same period in 1997, an increase
of $0.2 million or 5% primarily due to continued efforts to focus on near-term
product sales and technology licensing fees. The Company continues to focus on
products utilizing its hearing products, audio, communications and microphone
technologies, products which have been developed within a short time period and
are targeted for rapidly emerging markets.
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. The Company estimates that potential costs will not exceed
$0.1 million.
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. After a survey
of its suppliers, the Company has determined that there are no material Year
2000 Compliance supplier issues. The Company is currently conducting a survey of
its customers to determine if material Year 2000 Compliance issues exist.
Although unlikely, such potential problems remain a possibility and could have a
material adverse impact on the Company's future results. The Company estimates
completion of the evaluation process by June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $101.4 million on a
cumulative basis through September 30, 1998. 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 the sale of preferred stock convertible into common
stock, and by technology licensing fees and engineering and development funds
received from joint venture and other strategic partners.
Management believes that available cash and cash anticipated from the
exercise of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue, should be sufficient to sustain the Company's anticipated future level
of operations into 1999. However, the period during 1999 through which it can be
sustained 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.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, 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.
These uncertainties raise substantial doubt at September 30, 1998, about the
Company's ability to continue as a going concern.
At September 30, 1998, cash and short-term investments were $5.5 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.
On June 16, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") notified the
Company that the Company's Common Stock had failed to maintain a closing bid
price of $1.00 or more for the previous thirty (30) consecutive trade dates in
accordance with Nasdaq's Marketplace Rule 4450(a)(5). Nasdaq also notified the
Company that no delisting action would be initiated at that time and that the
Company would be provided ninety (90) calendar days in which to regain
compliance with Marketplace Rule 4450(a)(5) which would be achieved if the
closing bid price of the shares of the Company's Common Stock equaled or
exceeded $1.00 for ten (10) consecutive days before the end of trading on
September 14, 1998. In this regard, Nasdaq advised the Company that in the event
the Company was unable to achieve compliance, it may seek further procedural
remedies. The Company was unable to achieve compliance by September 14, 1998,
and on that date delivered its request for a hearing on the matter together with
the requested fee to Nasdaq's Hearings Department. Such a hearing is presently
scheduled for November 5, 1998. Under Nasdaq's procedures delisting is stayed
pending the outcome of the hearing. While a delisting of the Company's common
stock is not anticipated to have an immediate effect on the Company's
operations, it may make it more difficult for the Company to raise additional
capital to fund future operations.
The Company's working capital decreased to $5.7 million at September 30,
1998, from $11.7 million at December 31, 1997. This decrease of $6.0 million was
primarily due to increasing efforts to develop and introduce new product lines
and to fund operations for the period.
During the first nine months of 1998, the net cash used in operating
activities was $9.0 million, compared to $4.0 million used in operating
activities during the same period of 1997. The increase of $5.0 million was
primarily due to a $2.6 million increase in inventory and a $1.2 million
increase in the net loss versus the same period last year.
Net inventory increased during the first nine months of 1998 by $2.6
million primarily due to stocking for anticipated sales of the NoiseBuster(R)
line of headsets and the Gekko(TM) flat speaker.
The Company has no lines of credit with banks or other lending
institutions and therefore has no unused borrowing capacity.
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
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company to
integrate its active technology into products with limited capital investment in
production facilities and manufacturing personnel; and (iii) access to
well-established channels of distribution and marketing capability of leaders in
several market segments.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
Other than as noted in Note 5 - "Notes to the Condensed Consolidated
Financial Statements", there were no material commitments for capital
expenditures as of September 30, 1998, and no material commitments are
anticipated in the near future.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 6 - "Notes to the Condensed
Consolidated Financial Statements" which is incorporated by reference herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
(a) Securities Sold. On July 27, 1998, the Company issued and sold 4,000
shares of Series D Preferred Stock having an aggregate stated value of
$4,000,000, and on August 4, 1998, the Company issued and sold 2,000
shares of Series D Preferred Stock having an aggregate stated value of
$2,000,000.
(b) Purchasers. The purchasers of the 6,000 shares of Series D Preferred
Stock were:
Sovereign Partners, LLP
Dominion Capital Fund, Ltd.
Atlantis Capital Fund, Ltd.
Canadian Advantage, Limited Partnership
Advantage Bermuda Fund, Ltd.
The Endeavor Capital Fund, S.A.
The placement agent for the transaction was J.P. Carey, Inc.
(c) Consideration. The aggregate offering price for 6,000 shares of Series
D Preferred Stock having an aggregate stated value of $6,000,000 was
$5,700,000.
(d) Exemption from Registration Claimed. Exemption from registration is
claimed under Regulation D promulgated under the Securities Act. To the
best of the Company's knowledge and belief and in accordance with
representations and warranties made by the purchasers of Series D
Preferred Stock, each of the six purchasers is an "accredited investor" as
defined under Regulation D.
(e) Terms of Conversion. The shares of Series D Preferred Stock became
convertible into shares of common stock of the Company on October 30,
1998. Each share of Series D Convertible 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, and
(ii) the conversion date.
Conversion
Price = the greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by an
additional 2% for every 30 days that the Registration
Statement has not been filed by the Filing Date) in
effect as of the conversion date times the average
market price for the Company's common stock for the (5)
consecutive trading days immediately preceding such
date; or (ii) $0.50.
The "Registration Statement" referred to in the foregoing formula was
filed prior to the "Filing Date" as those terms are defined in the
conversion terms of the Series D Preferred Stock.
The conversion terms of the Series D Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 12,000,000
shares of its Common Stock in the aggregate in connection with the
conversion of such 6,000 shares of Series D Preferred Stock.
<PAGE>
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 2 Stock Purchase Agreement dated August 21, 1998, among
Noise Cancellation Technologies, Inc., Advancel Logic
Corporation and the Holders of the Outstanding Capital
Stock of Advancel Logic Corporation incorporated by
reference to Exhibit 2 of the Company's Registration
Statement on Form S-3 (Registration No. 333-64967)
filed on September 30, 1998, as amended by Amendment
No. 1 thereto filed on October 30, 1998
Exhibit 4 Certificate of Designations, Preferences and Rights
of Series D Convertible Preferred Stock of Noise
Cancellation Technologies, Inc. filed on July 24, 1998
in the Office of the Secretary of State of the State
of Delaware incorporated by reference to Exhibit 4 of
the Company's Registration Statement on Form S-3
(Registration No. 333-64967) filed on September 30,
1998, as amended by Amendment No. 1 thereto filed on
October 30, 1998
Exhibit 10 License Agreement dated July 15, 1998, between Noise
Cancellation Technologies, Inc. and NCT Hearing
Products, Inc.
Exhibit 27-1 Financial Data Schedule
Exhibit 27-2 Restated Financial Data Schedule
(Third Quarter Ended September 30, 1997)
(b) The following reports on Form 8-K were filed during the quarter
ended September 30, 1998:
(i) A report on Form 8-K was filed on July 16, 1998,
reporting a change in the date for the next Annual
Meeting of Stockholders of the Company and the record
date relating to the Meeting.
(ii) A report on Form 8-K was filed on July 29, 1998,
reporting the Company's July 29, 1998 press release
announcing the Company's plan to repurchase up to 10.0
million shares of its common stock.
(iii) A report on Form 8-K was filed on August 21, 1998,
reporting a change in the date for the next Annual
Meeting of Stockholders of the Company and the record
date relating to the Meeting.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella
President
By: /s/ CY E. HAMMOND
-----------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: November 5, 1998
Exhibit 10
LICENSE AGREEMENT
License Agreement made this 15th day of July, 1998 by and between NCT Hearing
Products, Inc., a Delaware corporation with offices at 1025 West Nursery Road,
Linthicum, Maryland 21090, USA, hereinafter referred to as ("Licensee") and
Noise Cancellation Technologies, Inc., a Delaware corporation with offices at
1025 West Nursery Road, Linthicum, Maryland 21090, USA, ("NCT").
WHEREAS Licensee is engaged in the design, development, manufacture and
marketing of headset, headphone and other hearing products for various markets
around the world; and
WHEREAS NCT is engaged in the development of Active Wave Management and related
technologies that have been applied to various fields and industries, and is the
owner of certain United States and foreign patents covering various aspects of
such technologies, which both parties believe can be applied to hearing
products; and
WHEREAS Licensee is desirous of obtaining an exclusive license from NCT to
develop, make, use, and sell hearing products incorporating NCT technology;
NOW THEREFORE, in consideration of the mutual covenants contained herein, as
well as other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
ARTICLE 1. DEFINITIONS
As used herein, the terms described below have the following meanings.
1.1 "Affiliate" shall mean any legal entity which directly or indirectly, is
controlled by, is in control of, or under common control with the legal
entity with reference to which the term "Affiliate" is used.
1.2 "Confidential Information" shall mean the information described in Article
5 below and shall include any and all samples, models, prototypes,
drawings, specifications, formulas, algorithms, software, operating
techniques, processes, data, technical and other information, including
any information relating to the status of research or other investigations
being conducted, whether given in writing, orally, or in magnetic or other
electronic processing form to the extent that such information is not in
the public domain through other than a breach of this Agreement.
1.3 "Improvement" shall mean any improvement, further invention, enhancement,
derivative product, technology, software, firmware, mask work, trade
secret, know-how, patent, patent application or other intellectual
property making use of, extending, based upon or relating to: (a) the
Licensed Patents or other NCT patents, the Licensed Technology or other
NCT technology or any combination thereof (hereinafter "NCT Improvements")
or (b) Licensee Technology (hereinafter "Licensee Improvements") provided
however, that no Sponsor Technology shall be deemed an Improvement.
1.4 The uncapitalized term "know-how", in general, shall have its usual and
accepted meaning, that is, inter alia, all factual knowledge and
information not capable of precise, separate description but which, in an
accumulated form, after being acquired as the result of trial and error,
gives to the one acquiring it an ability to produce and market something
which one otherwise would not have known how to produce and market with
the same accuracy or precision necessary for commercial success.
1.5 "Licensed Patents" shall mean all those patents and patent applications
owned by or licensed to NCT described in Exhibit A hereto and licensed to
Licensee under Article 2 below including any continuations,
continuations-in-part, divisions, extensions, reissues, re-examinations or
renewals of any of the foregoing.
1.6 "Licensed Product" shall mean a specific hearing product embodying,
employing, based on or derived from all or part of the Licensed Patents
and/or the Licensed Technology.
1.7 "Licensed Technology" shall mean that unpatented technology owned by or
licensed to NCT described in Exhibit B hereto and licensed to Licensee
under Article 2 below.
1.8 "Licensee Technology" shall mean any and all existing and future
technology, now or hereinafter owned or licensed by or to Licensee and/or
its Affiliates (other than Licensed Patents and Licensed Technology),
including without limitation all know-how, trade secrets, methods,
operating techniques, processes, software, materials, technical data,
engineering information, formulas, specifications, drawings, machinery and
apparatus, patents, patent applications, copyrights and other intellectual
property relating thereto.
1.9 "Market" shall mean the worldwide market for hearing products but
excluding those markets, if any, licensed to others on an exclusive basis
by NCT prior to the date hereof.
1.10 "NCT Technology License" shall mean the license to the Licensed Patents
and the Licensed Technology granted by NCT to Licensee under Article 2 of
this Agreement.
1.11 "Net Revenues" means the actual revenues received by Licensee from its
sale, lease or distribution of Licensed Products minus allowances for
commissions and trade discounts.
1.12 "Sponsor Technology" shall mean with respect to a party hereto (i) all
existing and future technology owned or licensed by or to a party and/or
its Affiliates which, by virtue of contract restrictions binding on such
party, cannot be disclosed or transferred to the other party hereto on the
same terms and conditions as Licensed Technology or Licensee Technology,
as the case may be; and (ii) all existing and future technology which
results from the combination of a party's technology and a third party's
technology, and which by virtue of contract restrictions binding on the
party in question, cannot be disclosed or transferred to the other party
hereto on the same terms and conditions as Licensed Technology or Licensee
Technology, as the case may be.
1.13 "Technical Information" shall mean technical, design, engineering, and
manufacturing information and data pertaining to the design, manufacture,
commercial production and distribution of Licensed Products and components
and parts thereof in the form of designs, prints, plans, material lists,
drawings, specifications, instructions, reports, records, manuals, other
written materials, computer programs and software and other forms or media
relating thereto.
1.14 The uncapitalized term "technology", in general, shall have its usual and
accepted meaning and shall include without limitation all know-how, trade
secrets, methods, operating techniques, processes, software, materials,
technical data, engineering information, formulas, specifications,
drawings, machinery and apparatus, patents, patent applications,
copyrights and other intellectual property relating thereto.
1.15 "Third Party Rights" shall mean rights in, to or under the Licensed
Patents and the Licensed Technology heretofore granted by NCT to third
parties and the rights thereto of their respective permitted sublicensees,
assigns and successors.
ARTICLE 2. The NCT Technology LICENSE
2.1 License to NCT Patents and NCT Technology. Subject to the terms and
conditions of this Agreement, NCT hereby grants to Licensee a license to
make, have made, use, sell and/or have sold Licensed Products which
incorporate or embody, or are covered or claimed by, or are based on one
or more of the Licensed Patents and/or Licensed Technology.
2.2 Limitations. The NCT Technology License shall be exclusive as against all
others for the manufacture, use and sale of Licensed Products in the
Market throughout the World subject to the Third Party Rights. Said
License is limited to: (a) the manufacture, use and sale of Licensed
Products and (b) the Market and NCT retains the unrestricted right to
manufacture, use and sell Licensed Products and to license others to do so
provided, that neither NCT nor any such licensee shall have any right to
sell Licensed Products in the Market. NCT also retains the right to
manufacture, use and sell products other than Licensed Products in the
Market and to license others to do so.
2.3 Sublicensing. The rights and licenses granted hereunder may be
sublicensed, by Licensee to any third party provided any such sublicense
prohibits further sublicensing without NCT's prior written consent in each
instance. Licensee also shall have the right to have Licensed Products
manufactured for it by others but only under nondisclosure agreements
implemented in accordance with the provisions of Articles 4 and 5 hereof.
2.4 Acceptance. Licensee hereby (i) accepts the rights under the NCT
Technology License granted to it by NCT under this Article 2, and (ii)
acknowledges that the rights that NCT has granted to Licensee hereunder
are limited to the manufacture, use and sale of Licensed Products in the
Market and are subject to the further limitations that may be described
elsewhere in this Agreement.
2.5 Patent and Copyright Notices. Licensee shall mark each Licensed Product
sold, leased, distributed or otherwise transferred and shall cause all
licenses, contracts and agreements with other parties for the sale, lease,
distribution, use or other disposition of Licensed Products to contain a
provision requiring, if feasible, such other parties to mark each Licensed
Product with a suitable legend identifying the Licensed Patents and
Licensed Technology with the appropriate patent or copyright notice, as
the case may be. If the Licensed Product is too small to have a legend
placed on it, Licensee will use all reasonable efforts to have a legend
placed on the software and/or packaging.
2.6 Product Marking. Licensee shall prominently mark each Licensed Product
sold, leased, distributed or otherwise transferred and shall cause all
licenses, contracts and agreements with other parties for the sale, lease,
distribution, use or other disposition of Licensed Products to contain a
provision requiring, if feasible, such other parties to prominently mark
each Licensed Product with a suitable legend identifying the Licensed
Product as being a product which incorporates NCT's flat panel transducer
technology and including such words and logos as NCT may reasonably
request. If the Licensed Product is too small to have such a legend placed
on it, Licensee will use all reasonable efforts to have such a legend
placed on the software and/or packaging.
ARTICLE 3. LICENSE FEE AND ROYALTIES
3.1 License Fee. Upon the execution of this Agreement, Licensee shall pay NCT
$3,000,000 as a non-refundable license fee in partial consideration of the
rights granted hereunder.
3.2 Unit Royalties. Licensee shall pay NCT the royalties listed on Schedule C
with respect to Licensee's sale, lease, distribution or other transfer of
Licensed Products.
3.3 Sublicensing Royalties. Licensee shall pay NCT the royalties listed on
Schedule C with respect to sublicenses granted by Licensee for the
manufacture, use, sale, lease or other disposition or distribution of
Licensed Products.
3.4 Payment. Royalties payable under Sections 3.2 and 3.3 above shall be paid
to NCT within forty-five (45) days from the end of the quarter of each
calendar year as provided in Article 7. Licensee agrees that NCT may
inspect its royalty/revenue records once a year upon thirty (30) days
notice, at NCT's own expense.
ARTICLE 4. DISCLOSURE OF INFORMATION, DATA AND KNOW-HOW
4.1 Disclosure. The parties shall disclose to each other such appropriate
Technical Information as may be reasonably required to accomplish the
purposes of this Agreement. It is agreed, however, that neither party
shall be obligated to disclose information, the disclosure of which has
been restricted by a third party, provided, however, if such information
is required in order to achieve the purposes of this Agreement, the party
which holds such information shall inform the other and use its best
efforts to obtain permission, which may consist of a license, from the
applicable third party to use such information for such purposes.
4.2 Treatment. All disclosed Technical Information which is Confidential
Information (as defined in Article 5 below) shall be kept confidential by
the receiving party in accordance with the further provisions of Article 5
below and will remain the property of the disclosing party.
ARTICLE 5. CONFIDENTIALITY
5.1 Definitions. Each party possesses and will continue to possess
confidential information relating to its business and technology which it
believes has substantial commercial and scientific value in the business
in which it is engaged ("Confidential Information"). Subject to Section
5.4, Confidential Information includes, but is not limited to, Technical
Information, trade secrets, processes, formulas, data, know-how,
discoveries, developments, designs, improvements, inventions, techniques,
marketing plans, strategies, forecasts, new products, software
documentation, unpublished financial statements, budgets, projections,
licenses, prices, costs, customer lists, supplier lists and any other
material regarded by the party possessing it to be confidential,
proprietary or a trade secret. In order to be afforded protection under
this Article 5 tangible forms of Confidential Information must be
identified as such at the time of disclosure and marked "Confidential
Information", "Proprietary Information" or in some other reasonable manner
to indicate it is confidential. Any Confidential Information disclosed
between the parties hereto orally or visually, in order to be subject to
this Agreement, shall be so identified to the receiving party at the time
of disclosure and confirmed in a written summary appropriately marked as
herein provided within ten (10) days after such oral or visual disclosure.
5.2 Treatment. Each party shall during the term of this Agreement and for a
period of five (5) years thereafter, hold in confidence and not disclose
to third parties except as specifically permitted under this Section 5.2
and Section 5.4 below any and all Confidential Information of the other
party disclosed directly or indirectly to it by the other party.
Each party shall take the following minimum safeguards with respect to the
Confidential Information of the other party:
(a) only those of its employees who need to receive the other party's
Confidential Information in order to carry out the purposes of this
Agreement shall have access to such information and such access
shall be limited to only so much of such information as is necessary
for the particular employee to properly perform his or her
functions;
(b) all documents, drawings, writings and other embodiments which
contain Confidential Information of the other party shall be
maintained in a prudent manner in a secure fashion separate and
apart from other information in its possession and shall be removed
therefrom only as needed to carry out the purposes of this
Agreement;
(c) all documents, drawings, writings and other embodiments of
information the security or safekeeping of which are subject to
governmental regulations shall be kept in accordance with those
regulations;
(d) in no event shall a party receiving Confidential Information of the
other party disassemble, reverse engineer, re-engineer, redesign,
modify or alter any Confidential Information which it has received
from the other party or attempt any of the foregoing without first
obtaining the written consent of such other party in each instance.
(e) all employees and contractors who shall have access to Confidential
Information of the other party shall be under written obligation to
it; (i) to hold in confidence and not disclose all Confidential
Information made available to them in the course of their
employment in a manner equivalent to that set forth herein;
(ii) to use such Confidential Information only in the course of
performing their employment duties; and (iii) to assign to their
employer or the party retaining them all inventions or improvements
relating to their employer's business and conceived while in their
employer's employ unless such assignment is prohibited by
applicable law.
Notwithstanding the foregoing, a party receiving Confidential Information
of the other party may disclose to its subcontractors and material and
component suppliers so much of such Confidential Information as is
necessary to enable such party to perform its duties and obligations
related to the accomplishment of the purposes of this Agreement provided
that such subcontractors and suppliers are obligated to such party in
writing; (i) to hold in confidence and not disclose such information in a
manner equivalent to that set forth herein; and (ii) not to use such
information except as authorized by such party.
In no event shall the party receiving Confidential Information of the
other party disassemble, reverse engineer, re-engineer, redesign, decrypt,
decipher, reconstruct, re-orient, modify or alter any Confidential
Information of the disclosing party or any circuit design, algorithm,
logic or program code in any of the disclosing party's products, models or
prototypes which contain Confidential Information or attempt any of the
foregoing without first obtaining written consent of the disclosing party
in each instance.
5.3 Return. All documents, drawings, writings and other embodiments of a
party's Confidential Information, as well as those produced, created or
derived from the disclosing party's Confidential Information which
incorporate the disclosing party's Confidential Information and all copies
thereof shall be returned promptly to it by the other party upon the
termination of this Agreement provided that the parties shall continue to
be bound by the provisions of Section 5.2 above.
5.4 Exclusions. Confidential Information shall not include information that;
(a) was at the time of disclosure in the public domain through no fault
of the party receiving it;
(b) becomes part of the public domain after disclosure to the party
receiving it through no fault of such party;
(c) was in the possession of the party receiving it (as evidenced by
written records) at the time of disclosure and was not acquired
directly or indirectly from the other party, or a third party, as
the case may be, under a continuing obligation of confidence of
which the party receiving it was aware;
(d) was received by the party receiving it (as evidenced by written
records) after the time of disclosure hereunder from a third party
who did not require it to be held in confidence and who did not
acquire it directly or indirectly from the other party under a
continuing obligation of confidence of which the party receiving it
was aware;
(e) required by law or the rules of any relevant securities exchange to
be disclosed, but only to the extent of such required disclosure;
provided, that a party required to so disclose Confidential
Information shall use best efforts to notify the other party of such
potential disclosure so that such party may seek a protective order
or other remedies to maintain in confidence any such Confidential
Information; or
(f) was developed independently by the receiving party and without the
use of any Confidential Information received from the disclosing
party under this Agreement.
(g) is Confidential Information of the disclosing party which the
disclosing party has disclosed to third parties without restrictions
on use and disclosure comparable to those contained in this Article
5.
ARTICLE 6. IMPROVEMENTS
6.1 NCT Improvements. In the event that Licensee individually or together with
NCT discovers, develops or creates any NCT Improvements during the term of
this Agreement, Licensee promptly shall grant and assign, on a quitclaim
basis, all of its rights of ownership in such NCT Improvements to NCT,
whether such NCT Improvements are patentable or non-patentable under the
laws of any country, subject to any governmental approvals that may be
required for such grant back and assignment, it being understood that any
such NCT Improvements that are not made the subject of a patent shall
constitute part of the Licensed Technology licensed to Licensee hereunder
and that any such NCT Improvements that are made the subject of a patent
shall constitute one of the Licensed Patents licensed to Licensee
hereunder.
In the event that NCT individually discovers, develops or creates any NCT
Improvements during the term of this Agreement which make use of, extend,
are based upon or relate to the Licensed Patents or the Licensed
Technology, then any such NCT Improvement that is not made subject of a
patent shall constitute part of the Licensed Technology licensed hereunder
and any such NCT Improvement that is made the subject of a patent shall
constitute a Licensed Patent licensed hereunder.
6.2 Licensee Improvements. In the event that NCT individually or together with
Licensee discovers, develops or creates any Licensee Improvements during
the term of this Agreement, NCT promptly shall grant and assign, on a
quitclaim basis, all of its rights of ownership in such Licensee
Improvements to Licensee, whether such Licensee Improvements are
patentable or non-patentable under the laws of any country, subject to any
governmental approvals that may be required for such grant back and
assignment.
6.3 Joint Discoveries. In the event that Licensee and NCT jointly discover,
develop or create any intellectual property whether patentable or
non-patentable that is not an Improvement or is an Improvement not covered
by either Section 6.1 or 6.2 above, all rights and interest in and to such
intellectual property shall be owned equally by Licensee and NCT and each
party hereby grants to the other a royalty free, perpetual, irrevocable
license to use and exploit any such intellectual property.
6.4 Dual Improvements. In the event Licensee and NCT jointly discover, develop
or create any intellectual property whether patentable or non-patentable
that is or could be an Improvement under both Sections 6.1 and 6.2 above,
all rights and interest in and to such intellectual property shall be
owned equally by Licensee and NCT and each party hereby grants to the
other a royalty free, perpetual, irrevocable license to use and exploit
any such intellectual property.
6.4 Individual Discoveries. In the event that either Licensee or NCT
individually discover, develop or create any intellectual property whether
patentable or non-patentable, that is not an Improvement or is an
Improvement not covered by either Section 6.1 or 6.2 above, all rights and
interest in and to such intellectual property shall be owned by the party
discovering, developing or creating the same.
6.5 Further Assurances. The parties shall take all action legally permitted
that may be necessary or appropriate to assure full compliance with the
provisions of this Article 6 notwithstanding the fact that intellectual
property covered by this Article 6 may be discovered, developed or created
by an employee of one of the parties hereto.
ARTICLE 7. PAYMENTS, REPORTS AND RECORDS
Royalties shall be due and payable in U.S. dollars in immediately available New
York, New York funds within forty-five (45) days after the last business day of
each March, June, September and December of each calendar year during the term
of this Agreement. If requested by NCT, Licensee shall direct its independent
certified public accountants at Licensee's expense to provide NCT with a
certified written royalty report (the "Royalty Report") for each calendar year
of this Agreement within sixty (60) days of the end of each calendar year of
this Agreement. Such Royalty Reports shall be prepared in accordance with the
standard reporting procedures of such independent certified public accountants
applied in a consistent manner. A similar Royalty Report shall be rendered and
royalty payment shall be made within sixty (60) days after termination of this
Agreement.
ARTICLE 8. TERM
The term of this Agreement shall begin on the date hereof and, unless extended
or earlier terminated by the written agreement of the parties or the provisions
of Article 9 below, shall expire immediately upon either: (i) with respect to
rights granted under any patent hereunder, the expiration of that patent under
applicable law; or (ii) with respect to the other rights granted hereunder, upon
the expiration of the last to expire of the patents licensed hereunder.
ARTICLE 9. TERMINATION
9.1 General. This Agreement may be terminated prior to the end of the term
provided in Article 8 above under any of the following provisions of this
Article.
9.2 Breach. In the event of a material breach of this Agreement, if the
defaulting party fails to cure the breach within thirty (30) days, in the
case of a breach involving non-payment of amounts to be paid hereunder, or
sixty (60) days, in the case of any other kind of breach following its
receipt of written notice from the non-defaulting party specifying the
nature of the breach and the corrective action to be taken, then the
non-defaulting party may terminate this Agreement forthwith by delivering
its written declaration to the defaulting party that this Agreement is
terminated; provided any payment default will require the defaulting party
to pay interest in order to cover the default at the rate of the then
current prime rate at The Chase Manhattan Bank N.A.
9.3 Insolvency. If one of the parties becomes bankrupt or insolvent, or files
a petition therefor, or makes a general assignment for the benefit of
creditors, or otherwise seeks protection under any bankruptcy or
insolvency law, or upon the appointment of a receiver of the assets of a
party ("defaulting party") then the other party shall have the right to
immediately terminate this Agreement upon written notice to the defaulting
party provided, in any such instance, that said right of termination shall
be postponed for as long as the defaulting party continues to conduct its
business in the ordinary course.
9.4 Survival. Notwithstanding the termination of this Agreement under any of
the provisions of this Article 9, the terms and conditions of Articles 4
and 5, and those pertaining to the ownership of rights acquired under
Article 6 shall survive termination of this Agreement and shall continue
to be applicable and govern the parties with respect to the subject matter
thereof.
9.5 Document Return. Each party shall return to the other party within thirty
(30) days of the date of termination under either Article 8 or this
Article 9 all of the Technical Information and other Confidential
Information, received pursuant to this Agreement together with all other
tangible property received for the implementation of this Agreement.
ARTICLE 10. FORCE MAJEURE
In the event of enforced delay in the performance by either party of obligations
under this Agreement due to unforeseeable causes beyond its reasonable control
and without its fault or negligence, including, but not limited to, acts of God,
acts of the government, acts of the other party, fires, floods, strikes, freight
embargoes, unusually severe weather, or delays of subcontractors due to such
causes (an "Event of Force Majeure"), the time for performance of such
obligations shall be extended for the period of the enforced delay; provided
that the party seeking the benefit of the provisions of this paragraph shall,
within ten (10) days after the beginning of any such enforced delay, have first
notified the other party in writing of the causes and requested an extension for
the period of the enforced delay and shall use all reasonable endeavors to
minimize the effects of any Event of Force Majeure.
ARTICLE 11. APPLICABLE LAW
The terms and conditions of this Agreement and the performance thereof shall be
interpreted in accordance with and governed by the laws of the State of Delaware
and the United States of America.
ARTICLE 12. DISPUTE RESOLUTION
The parties agree to attempt in good faith to resolve any dispute arising out of
or in connection with the performance, operation or interpretation of this
Agreement promptly by negotiation between the authorized contacts of the
parties.
If a dispute should arise, the authorized contacts will meet at least once and
will attempt to resolve the matter. Either authorized contact may request the
other to meet within fourteen (14) days, at a mutually agreed time and place. If
the matter has not been resolved within thirty (30) days of a request being made
for such a meeting, the authorized contacts shall refer the matter to the
representatives of the parties who are responsible for matters at the policy or
strategic level who shall meet within fourteen (14) days of the end of the
thirty (30) day period referred to above, at a mutually agreed time and place.
If the matter has not been resolved within thirty (30) days of a request being
made for this meeting, the parties shall proceed as follows:
(a) Any action, suit or proceeding where the amount in controversy as to at
least one party, exclusive of the interest and costs, exceeds one million
dollars (a "Summary Proceeding"), arising out of or relating to this
Agreement or the breach, termination or validity thereof, shall be
litigated exclusively in the Superior Court of the State of Delaware (the
"Delaware Superior Court") as a summary proceeding pursuant to Rules
124-131 of the Delaware Superior Court, or any successor rules (the
"Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably
and unconditionally (i) submits to the jurisdiction of the Delaware
Superior Court for any Summary Proceeding, (ii) agrees not to commence any
Summary Proceeding except in the Delaware Superior Court, (iii) waives, and
agrees not to plead or to make, any objection to the venue of any Summary
Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to
plead or to make, any claim that any Summary Proceeding brought in the
Delaware Superior Court has been brought in an improper or otherwise
inconvenient forum, (v) waives, and agrees not to plead or to make, any
claim that the Delaware Superior Court lacks personal jurisdiction over it,
(vi) waives its right to remove any Summary Proceeding to the federal
courts except where such courts are vested with sole and exclusive
jurisdiction by statute and (vii) understands and agrees that it shall not
seek a jury trial or punitive damages in any Summary Proceeding based upon
or arising out of or otherwise related to this Agreement and waives any and
all rights to any such jury trial or to seek punitive damages.
(b) In the event any action, suit or proceeding where the amount in controversy
as to at least one party, exclusive of interest and costs, does not exceed
One Million Dollars (a "Proceeding"), arising out of or relating to this
Agreement or the breach, termination or validity thereof is brought, the
parties to such Proceeding agree to make application to the Delaware
Superior Court to proceed under the Summary Proceeding Rules. Until such
time as such application is rejected, such Proceeding shall be treated as a
Summary Proceeding and all of the foregoing provisions of this Section
relating to Summary Proceedings shall apply to such Proceeding.
(c) In the event a Summary Proceeding is not available to resolve any dispute
hereunder, the controversy or claim shall be settled by arbitration
conducted on a confidential basis, under the U.S. Arbitration Act, if
applicable, and the then current Commercial Arbitration Rules of the
American Arbitration Association ("Association") strictly in accordance
with the terms of this Agreement and the substantive law of the State of
Delaware. The arbitration shall be conducted at the Association's regional
office located closest to Licensee's principal place of business by three
arbitrators, at least one of whom shall be knowledgeable in Active
Technology and one of whom shall be an attorney. Judgment upon the
arbitrators' award may be entered and enforced in any court of competent
jurisdiction. Neither party shall institute a proceeding hereunder unless
at least sixty (60) days prior thereto such party shall have given written
notice to the other party of its intent to do so. Neither party shall be
precluded hereby from securing equitable remedies in courts of any
jurisdiction, including, but not limited to, temporary restraining orders
and preliminary injunctions to protect its rights and interests but such
shall not be sought as a means to avoid or stay arbitration. (d) Licensee
hereby designates and appoints The Corporation Trust Company with offices
on the date hereof at 1209 Orange Street, Wilmington, DE 19801, as its
agent to receive service of process in any Proceeding or Summary
Proceeding. NCT hereby designates and appoints Corporation Service Company
with offices on the date hereof at 1013 Centre Road, Wilmington, DE 19805,
as its agent to receive such service. Each of the parties hereto further
covenants and agrees that, so long as this Agreement shall be in effect,
each such party shall maintain a duly appointed agent for the service of
summonses and other legal processes in the State of Delaware and will
notify the other parties hereto of the name and address of such agent if it
is no longer the entity identified in this article.
ARTICLE 13. ANNOUNCEMENTS AND PUBLICITY; INDEPENDENT CONTRACTORS
Except for any disclosure which may be required by law, including appropriate
filings with the Securities Exchange Commission, neither party may use the
other's name or disclose the terms of this Agreement without the consent of the
other, which consent shall not be unreasonably withheld.
Each party to this Agreement is an independent contractor and neither shall be
considered the partner, employer, agent or representative of the other.
ARTICLE 14. SEVERABILITY
If any part of this Agreement for any reason shall be declared invalid or
unenforceable, such decision shall not affect the validity or enforceability of
any remaining portion, which shall remain in full force and effect; provided,
however, that in the event a part of this Agreement is declared invalid and the
invalidity or enforceability of such part has the effect of materially altering
the obligations of any party under this Agreement, the parties agree, promptly
upon such declaration being made, to negotiate in good faith to amend this
Agreement so as to put such party in a position substantially similar to the
position such party was in prior to such declaration.
ARTICLE 15. RIGHTS OF ASSIGNMENT; SUCCESSORS AND ASSIGNS
Neither NCT nor Licensee shall have any right to assign this Agreement or any of
their respective rights or obligations under this Agreement to any third party
except by operation of law or with the prior written consent of the other party.
In the event Licensee wishes to assign any of its rights or obligations under
this Agreement to an Affiliate of Licensee, NCT's consent will not be
unreasonably withheld. In the event NCT wishes to assign any of its rights or
obligations under this Agreement to an Affiliate of NCT, Licensee's consent will
not be unreasonably withheld. The provisions of this Agreement shall inure to
the benefit of, or be binding upon, the successors and assigns of each party
hereto.
ARTICLE 16. NOTICES
Any notices under this Agreement shall be in writing and shall be deemed
delivered if delivered by personal service, or sent by telecopy or by first
class registered or certified mail, or same day or overnight courier service
with postage or charges prepaid. Unless subsequently notified in writing in
accordance with this Section by the other party, any notice or communication
hereunder shall be addressed to NCT as follows:
Noise Cancellation Technologies, Inc.
1025 West Nursery Road
Linthicum, Maryland 21090
Attention: President
Telecopy No: (410) 636-5989
to Licensee as follows:
NCT Hearing Products, Inc.
1025 West Nursery Road
Linthicum, Maryland 21090
Attn: President
Telecopy no. (410) 636-5989
ARTICLE 17. TAXES
Licensee shall be solely responsible for any sales, use, occupational or
privilege taxes, duties, fees or other similar charges imposed by any
governmental authority in connection with the manufacture, sale, lease,
distribution, use or other disposition by Licensee of Licensed Products or the
Licenses granted hereunder. Any other taxes, including income taxes based on
royalties and other payments to NCT, shall be the responsibility of NCT.
ARTICLE 18. INDEMNIFICATION
Each of NCT and Licensee agrees to indemnify, defend, and hold harmless the
other party and each of its officers, directors, employees, agents, successors
and assigns (hereinafter referred to in the aggregate in this section as "the
Indemnified Party") against any and all losses, claims, damages, liabilities,
costs and expenses (including without limitation, reasonable attorneys' fees and
other costs of defense of every kind whatsoever and the aggregate amount of
reasonable settlement of any suit, claim or proceeding) which the Indemnified
Party may incur or for which the Indemnified Party may become liable on account
of any suit, claim or proceeding purporting to be based upon a failure to
perform obligations under this Agreement to be performed by the other party
(hereafter the "Indemnifying Party") and its employees or agents. The
Indemnified Party shall promptly advise the Indemnifying Party of any such suit,
claim or proceeding and shall cooperate with the Indemnifying Party in the
defense or settlement of such suit, claim or proceedings providing no settlement
shall be made without the consent of the Indemnified Party, which consent shall
not be unreasonably withheld. In any event, the Indemnified Party shall furnish
to the Indemnifying Party such information relating to such suit, claim or
proceeding as the Indemnifying Party shall reasonably request for use in
defending the same.
ARTICLE 19. MAINTENANCE AND DEFENSE OF LICENSED PATENTS
Throughout the term of this Agreement, NCT shall maintain in force the Licensed
Patents. In this connection, NCT shall promptly pay all costs of any and all
continuations, continuations-in-part, divisions, extensions, reissues,
re-examinations, or renewals of the Licensed Patents, including, without
limitation, the costs and expenses of any and all attorneys, experts or other
professionals engaged in connection with any of the foregoing. In addition, NCT
shall actively protect the Licensed Patents and shall institute all such suits,
actions or proceedings for infringement of any of the Licensed Patents as may be
necessary in this regard and shall defend and save harmless Licensee against any
suit, damage claim or demand, and any loss, cost or expense suffered as a result
thereof (including reasonable attorneys fees), based on actual or alleged
infringement of any patent or trademark or any unfair trade practice resulting
from the exercise or use of any right or license granted under this Agreement.
Unless NCT shall have received the advice of counsel that success on the merits
is reasonably certain, NCT shall be excused from its duty to commence and/or may
withdraw from any enforcement action under the Licensed Patents and Licensee
shall then be free to pursue enforcement of the Licensed Patents in its own name
and at its sole expense and risk, but only to the extent such infringement
occurs in the Market. In the event NCT fails to protect the Licensed Patents as
aforesaid after notice of possible infringement from Licensee, Licensee shall be
entitled by itself to take proceedings in the name of and with the cooperation
of NCT to restrain any such infringement at Licensee's expense and for
Licensee's benefit. In the event NCT fails to defend and save harmless Licensee
as herein provided, Licensee shall be entitled by itself to take all action
necessary or advisable for its defense and shall be entitled to deduct all costs
and expenses incurred in such defense from the amount of any royalties payable
under this Agreement to the extent the same have not been covered by any amounts
awarded to Licensee under a settlement of or judgment rendered in such
proceeding. NCT shall take all such action as may be reasonably requested by
Licensee to assist Licensee in the proper prosecution of its defense. Where
Licensee proceeds alone and achieves an award from the official enforcement
forum in such an action brought by it, Licensee shall be entitled to retain such
award. However, any compromise of such enforcement action or concession of
invalidity or priority of invention of any patent whether in connection with an
enforcement action or any other proceeding shall require NCT's participation and
express prior written approval. If NCT has elected to participate in and share
in the expense of any such enforcement action, any award shall be shared equally
by NCT and Licensee.
Notwithstanding the foregoing, NCT shall have no liability to defend or pay
damages or costs to Licensee with respect to any claim of infringement which is
based on an implementation not designed by NCT or that is modified by others, or
used or combined in a manner not contemplated by the transfer of NCT Technology.
ARTICLE 20. WARRANTIES
NCT represents and warrants that it has the right, power and authority to enter
into this Agreement and to grant the licenses and other rights contained herein
to Licensee as herein provided and that none of the same will breach or be in
violation of any agreement, license, or grant made with or to any other party by
NCT and that to the best of NCT's knowledge and belief the Licensed Patents are
valid and do not infringe any other patent issued prior to the date hereof.
ARTICLE 21. DISCLAIMER
EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, NCT HEREBY DISCLAIMS ANY
EXPRESS OR IMPLIED WARRANTY OF THE ACCURACY, RELIABILITY, TITLE, TECHNOLOGICAL
OR COMMERCIAL VALUE, COMPREHENSIVENESS OR MERCHANTABILITY OF THE LICENSED
PATENTS, THE LICENSED TECHNOLOGY, OR THE LICENSED PRODUCTS, OR THEIR SUITABILITY
OR FITNESS FOR ANY PURPOSE WHATSOEVER. NCT DISCLAIMS ALL OTHER WARRANTIES OR
WHATEVER NATURE, EXPRESS OR IMPLIED. NCT DISCLAIMS ALL LIABILITY FOR ANY LOSS OR
DAMAGE RESULTING, DIRECTLY OR INDIRECTLY, FROM THE USE OF THE LICENSED PATENTS,
THE LICENSED TECHNOLOGY, OR THE LICENSED PRODUCTS, OTHER THAN THOSE ARISING FROM
CLAIMS OF INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES; WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, THIS DISCLAIMER EMBRACES CONSEQUENTIAL
DAMAGES, LOSS OF PROFITS OR GOOD WILL, EXPENSES FOR DOWNTIME OR FOR MAKING UP
DOWNTIME, DAMAGES FOR WHICH LICENSEE MAY BE LIABLE TO OTHER PERSONS, DAMAGES TO
PROPERTY, AND INJURY TO OR DEATH OF ANY PERSONS.
ARTICLE 22. SCOPE OF THE AGREEMENT
This Agreement constitutes the entire agreement between the parties with respect
to the subject matter hereof and supersedes all prior oral or written agreements
or understandings of the parties with regard to the subject matter hereof. No
interpretation, change, termination or waiver of any provision hereof shall be
binding upon a party unless in writing and executed by the other party. No
modification, waiver, termination, recession, discharge or cancellation of any
right or claim under this Agreement shall affect the right of any party hereto
to enforce any other claim or right hereunder.
IN WITNESS THEREOF, Licensee and NCT have executed this Agreement effective as
of the date first written above.
NCT HEARING PRODUCTS, INC.
By: /s/ IRENE LEBOVICS
------------------
Irene Lebovics
Title: President
Date: July 15, 1998
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella
Title: President
Date: July 15, 1998
<PAGE>
Exhibit A
NCT Patents
Licensed Patents
Patents
HEADSETS
Generics That Apply
US 4,783,818 Issued November 8, 1988, entitled "Method of and
Means for Adaptively Filtering Screeching Noise Caused by
Acoustic Feedback". Provides an identification circuit for
dynamically identifying parameters associated only with
acoustic feedback, and a correction circuit. For use in
communication systems such as hearing aids.
US 4,862,506 Issued August, 1989, entitled "Monitoring, Testing
and Operator Controlling of Active Noise and Vibration
Cancellation Systems". It describes a flexible user interface
for maintenance and operation of the electronics for noise
cancellation. It is in use in the MRI headset product for
testing and maintenance.2
US 5,105,377 Issued April 14, 1992, entitled "Digital Virtual
Earth"(DVE). A digital adaptive feedback control system.
Instability is prevented by use of a fixed internal model of
the physical system. This approach has been used noise
canceling headsets industrial mufflers.3
US 5,418,857 Issued May 23, 1995, entitled "Active Control System
for Noise Shaping". The use of an active control system to
control the quality of a sound rather than just try to cancel
it. Has applications for sound quality control in
automobiles.4
US 5,440,642 Issued August 8, 1995, entitled "Analog Noise
Cancellation System Using Digital Optimization of Variable
Parameters". A digital control system is used to adjust the
response of an analog noise cancellation system and to control
tonal components of the noise. Has application to active ear
defenders.5
US 5,481,615 Issued Jan 2, 1996, entitled "Improved Audio
Reproduction System". The use of a combination of active noise
control and adaptive equalization to improve an audio system.
This has particular use in headsets for hi-fi and for
telecommunications.6
US 5,652,799 Issued July 29, 1997, entitled "Noise Reducing
System". A control system for selectively reducing tonal noise
without the use of reference signal or tachometer signal. Has
application to active headsets where speech or other signals
must not be canceled.7
HEADSETS
Application Specific
US 4,654,871 Issued March 31, 1987, entitled "Method and
Apparatus for Reducing Repetitive Noise Entering the Ear". It
provides for open-backed headsets wherein a repetitive noise
signal detected by a microphone at the headset is nulled by
the headphone diaphragm in an adaptive manner. A similar
approach to provide a noise-free zone at a seat is described.8
US 4,701,952 Issued May 26, 1987, entitled "Frequency Attenuation
Compensated Pneumatic Headphone and Liquid Tube Audio System
for Medical Use". Describes a system for delivering music into
a passive headset for MRI patients.
Reissued April 27, 1993 as Re. 34,236.
GB 2,172,769 Issued July 6, 1988, entitled "Improvements in
Acoustic Attenuation". An analog active headset utilizing
feedforward control.
GB 2,160,070 Issued December 11, 1985, Entitled "Sound
Reproduction System". An analog active headset with a
communications input. The communication signal is equalized
and mixed with the input and/or output of the feedback control
loop. Used in current communications headsets.
GB 2,172,470 Issued January 11, 1989, entitled "Improvements
Relating to Noise Reduction Arrangements". An analog active
headset in which a second microphone is used to adjust the
feedback gain automatically so as to prevent instability.9
EP 0,212,840 Issued October 23, 1991, entitled "Noise Reduction
Device". An analog active headset in which the feedback gain
is automatically adjusted. The adjustment may performed by a
digital controller.10
EP 0,232,096 Entitled "Acoustic Transducer". A closed-back
headset in which the ear cup is vented to improve low
frequency performance. 11
EP 0,192,379 Entitled "Improvements Relating to Noise Reduction
Arrangements". A closed-back active headset which uses an
additional loudspeaker connected to the headset by a tube. The
tube acts as an acoustic low pass filter which prevents noise
caused by any non-linear distortions of the loudspeaker from
reaching the ear.12
US 4,953,217 Issued August 28, 1990, entitled "Noise Reduction
System". An analog active headset which includes a device to
reduce the effect of low frequency sound buffeting.13
US 5,452,361 Issued September 19, 1995, entitled "Reduced VLF
Overload Susceptibility Active Noise Cancellation Headset". In
an analog feedback headset, an extra microphone is used to
detect very low frequency (VLF) sound and subtract it from the
feedback signal. This removes the VLF component without the
need for extra high pass filtering - which would introduce
delay and therefore reduce performance.14
US 5,313,945 Issued May 24, 1994, entitled "Active Attenuation
System for Medical Patients". Active ear defender for MRI
patients in which the sound in the headset is monitored
through hollow plastic tubes and anti-noise is supplied to the
headset through hollow plastic tubes. Used in the MRI headset
product.15
US 5,375,174 Issued December 20, 1993, entitled "Remote Siren
Headset". An active headset for use in emergency vehicles in
which the control system is separated from the headset and
communicates remotely. This allows the headset to be more
portable, have longer battery life, and allows a single
controller to control several headsets.
US 5,604,813 Issued February 18, 1997, entitled "Industrial
Headset". A communications headset which provides active noise
cancellation without interruption of normal communication. A
bridge circuit is used to by-pass the ANC circuit as required,
and the communications signal is boosted when the ANC system
is in operation.16
US 5,699,436 Issued December 16, 1997, entitled "Hands Free Noise
Canceling Headset". The use of the residual microphones in an
active noise canceling headset system to pick up the speech of
the wearer for use with communication systems.17
US 5,815,582 Issued September 29, 1998, entitled "Active Plus
Selective Headset". The use of an open back headset and a
feedforward noise cancellation system to provide comfort and
enhanced communications for the user.18
Patents Pending Under Filed Applications
Patents Pending
(268) Headset: Filed September 7, 1995. The use of a dome to cover
the front of a loudspeaker in an active headset, thereby
obtaining a more consistent acoustic response. This enables
higher feedback gain to be used and results in improved
cancellation performance.
(271) Active Headset: Filed April 30, 1997. Active headset canceling
external noise in both the higher and lower frequency ranges
while reducing the subjective pressure felt within the ears by
the user. A bridge amplifier circuit is used which is user
adjustable without reducing the breadth of the given frequency
range over which noise reduction is effective.
(272) Noise Cancellation System for Active Headsets: Filed August
18, 1997. This invention relates generally to a noise
cancellation system for active headsets, and more particularly
to an active headset capable of compatibility with existing
socket configurations of an external device and capable of
powering active noise cancellation circuitry whether or not
resident in the active headset.
(373) Variable Gain Active Noise Cancellation System with Improved
Residual Noise Sensing: Filed June 23, 1993. In an active
headset, the error microphone is displaced radially with
respect to the loudspeaker so as to measure a sound more
closely related to that at the ear. Additional features, such
as side perforations, are used to obtain improved and more
robust performance.
(617) Cushioned Earphones: Filed March 18, 1998. Use of auxetic foam
in headset ear cushions which more readily moulds around
irregularities in the shape of the ear and so reduces air
leaks.
(618) Headset for Aircraft: Filed March 18, 1998. An active noise
reduction headset for use by aircraft passengers. Each
earphone comprises at least two parts, one carried by the
headband, the other part connecting both mechanically and
electrically to the first part. Components requiring frequent
replacement are carried by one part and the other part is
available for re-use.
Disclosures for Which Patent Applications may be Filed
A Non-Adaptive Variable Response Active Headset Hearing Aid Occlusion Effect
Elimination Active Safety Plugs and Hearing Aids Piezoelectric Transducers for
Hearing Aid Applications Filled Cavity Hearing Aid Hearing Aid with
Piezoelectric Inserts
<PAGE>
Exhibit B
Licensed Technology
[Should be limited to that NCT technology to be used in "Licensed Products"]
<PAGE>
Exhibit C
Royalties
Unit Royalties (Article 3.2) shall be at the rate of 6.0%. Sublicensing
Royalties (Article 3.3) shall be at the rate of 50%.
- --------
1 If other than to the record holder of the Series D Preferred Shares, any
applicable transfer tax must be paid by the undersigned.
2 Issued in Canada
3 Issued in Australia, Canada, Korea
Pending in Europe, Japan
4 Pending in Canada, Europe and Japan
5 Pending in Canada, Europe and Japan
6 Pending in Canada, Europe
7 Issued in Australia, Canada, Europe (France, Germany, Italy, Netherlands,
Sweden, UK)
Pending in Japan
8 Issued in Australia, Austria, France, Germany, Netherlands, Norway, S. Africa,
Sweden, Switzerland, UK
9 Issued in Austria, Belgium, Switzerland, Germany, France, Italy,
Netherlands, Sweden, Luxembourg
10 Issued in Austria, Belgium, Switzerland, Germany, France, Italy,
Luxembourg, Netherlands, Sweden, UK
11 Issued in Austria, Belgium, Switzerland, Germany, Spain France, Greece,
Italy, Luxembourg, Netherlands, Sweden, UK
12 Issued in Austria, Belgium, France, Germany, Italy, Luxembourg, Netherlands,
Sweden, Switzerland, UK
13 Issued in Australia, Austria, Belgium, Canada, France, Germany, Italy,
Luxembourg, Netherlands, Sweden, Switzerland, UK
14 Pending in Europe
15 Issued in Canada and Korea
16 Pending in Europe, Canada, Japan
17 Pending in Canada and Europe
18 Pending in Canada, Europe
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APRIL 30, 1998 (AMENDMENT NO. 1) AND MAY 4, 1998 (AMENDMENT NO. 2).
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