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 June 30, 1998
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COMMISSION FILE NUMBER: 0-18267
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Noise Cancellation Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware
59-2501025
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
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(410) 636-8700
(Registrant's telephone number, including area code)
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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.
153,416,943 shares outstanding as of August 5, 1998
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(In thousands except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1997 1998 1997 1998
-------- -------- -------- --------
(Note 11) (Note 11)
REVENUES:
<S> <C> <C> <C> <C>
Technology licensing fees and royalties $ 210 $ 36 $ 3,210 $ 346
Product sales, net 348 664 581 1,065
Engineering and development services 132 128 213 149
---------- --------- ---------- ----------
Total revenues $ 690 $ 828 $ 4,004 $ 1,560
---------- --------- ---------- ----------
COSTS AND EXPENSES:
Costs of sales $ 306 $ 567 $ 505 $ 869
Costs of engineering and development
services 110 106 200 128
Selling, general and administrative 1,417 1,735 2,251 4,454
Research and development 1,420 1,833 3,012 3,297
Other (income)/expense (Note 1) - (3,339) - (3,382)
Interest (income)/expense (Note 11) 1,288 (91) 1,467 (212)
---------- --------- ---------- ---------
Total costs and expenses $ 4,541 $ 811 $ 7,435 $ 5,154
---------- --------- ---------- ---------
NET INCOME/(LOSS) $ (3,851) $ 17 $ (3,431) $ (3,594)
========== ========= ========== =========
Preferred stock dividend requirement $ - $ - $ - $ 1,690
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock - $ 98 - $ 483
---------- --------- ---------- ---------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (3,851) $ (81) $ (3,431) $ (5,767)
========== ========= ========== =========
Basic and diluted loss per share $ (0.03) $ 0.00 $ (0.03) $ (0.04)
========== ========= ========== =========
Weighted average common shares
outstanding - basic and diluted 121,566 138,073 117,332 135,968
========== ======== ========== =========
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- --------------------
1997 1998 1997 1998
NET INCOME/(LOSS) $ (3,851) $ 17 $ (3,431) $ (3,594)
Other comprehensive income/(loss)
Currency translation adjustment 6 (10) (4) (13)
---------- --------- ---------- ----------
COMPREHENSIVE INCOME/(LOSS) $ (3,845) $ 7 $ (3,435) $ (3,607)
========== ========= ========= ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands of dollars)
December 31, June 30,
1997 1998
------------ ------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 12,604 $ 5,184
Accounts receivable:
Trade:
Technology license fees and royalties 200 42
Other 368 774
Unbilled - 17
Allowance for doubtful accounts (38) (57)
------------ ------------
Total accounts receivable $ 530 $ 776
Inventories, net of reserves (Note 2) 1,333 2,867
Other current assets 213 267
------------ ------------
Total current assets $ 14,680 $ 9,094
Property and equipment, net 1,144 1,109
Patent rights and other intangibles, net (Note 4) 1,488 2,571
Other assets (Note 5) 49 2,002
------------ ------------
$ 17,361 $ 14,776
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,324 $ 1,332
Accrued expenses 1,392 932
Accrued payroll, taxes and related expenses 181 84
Customers' advances 87 34
------------ ------------
Total current liabilities $ 2,984 $ 2,382
------------ ------------
Other Liabilities (Note 4) $ - $ 280
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, $.10 par value, 10,000,000 shares
authorized; issued and outstanding 13,250 and 5,158
shares, respectively (redemption amount
$13,314,399 and $5,282,422, respectively) $ 10,458 $ 4,367
Common stock, $.01 par value, 185,000,000 shares
authorized; issued and outstanding 133,160,212
and 149,668,875 shares, respectively 1,332 1,497
Additional paid-in-capital 96,379 103,368
Unearned portion of compensatory warrants - (109)
Accumulated deficit (93,521) (97,115)
Cumulative translation adjustment 119 106
Common stock subscriptions receivable (390) -
------------ ------------
Total stockholders' equity $ 14,377 $ 12,114
------------ ------------
$ 17,361 $ 14,776
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited) (in thousands of dollars)
Six months ended June 30,
-------------------------
1997 1998
----------- -----------
(Note 11)
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $ (3,431) $ (3,594)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 443 480
Common stock options and warrants issued as consideration for:
Compensation - 184
Interest on debentures 52 -
Discount on beneficial conversion feature on convertible debt 1,420 -
Provision for tooling costs - 33
Provision for doubtful accounts 209 24
Loss on disposition of fixed assets 63 32
Changes in operating assets and liabilities:
(Increase) in accounts receivable (378) (471)
Decrease in license fees receivable - 200
(Increase) in inventories (344) (1,535)
(Increase) decrease in other assets 184 (2,007)
(Decrease) in accounts payable and accrued expenses (672) (458)
(Decrease) in other liabilities (77) (145)
----------- -----------
Net cash (used in) operating activities $ (2,531) $ (7,257)
----------- -----------
Cash flows from investing activities:
Capital expenditures $ (115) $ (390)
Acquisition of patent rights - (150)
Sale of fixed assets - 46
----------- -----------
Net cash (used in) investing activities $ (115) $ (494)
----------- -----------
Cash flows from financing activities:
Proceeds from:
Convertible debt (net) $ 3,408 $ -
Sale of preferred stock (net) - (32)
Sale of subsidiary stock (net) - (17)
Stock subscription receivable - 390
----------- -----------
Net cash provided by financing activities $ 3,408 $ 341
----------- -----------
Effect of exchange rate changes on cash $ (8) $ (10)
----------- -----------
Net increase (decrease) in cash and cash equivalents $ 754 $ (7,420)
Cash and cash equivalents - beginning of period 368 12,604
----------- -----------
Cash and cash equivalents - end of period $ 1,122 $ 5,184
=========== ===========
Cash paid for interest $ 2 $ 1
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, 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 June 30, 1998 and the six months
ended June 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
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 $97.1 million on a
cumulative basis through June 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 $5.2 million
at June 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, the sale
of shares of stock of Verity Group plc ("Verity"), discussed below, and the
Company's Series D Convertible Preferred Stock Private Placement ("1998 Series D
Preferred Stock Private Placement") and the Series A Convertible Preferred Stock
Private Placement of the Company's majority owned subsidiary, NCT Audio
Products, Inc. ("NCT Audio" and the "1998 NCT Audio Series A Preferred Stock
Private Placement", respectively), also discussed below, should be sufficient to
sustain the Company's anticipated future level of operations into 1999. (Please
refer to Note 12. Subsequent Events for a discussion relating to the two recent
1998 Preferred Stock Private Placements.) 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 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 three months ended
June 30, 1998 and the six months ended June 30, 1998.
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 June 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.
<PAGE>
2. INVENTORIES:
Inventories comprise the following:
(thousands of dollars)
December 31, June 30,
1997 1998
------------ ------------
Components $ 514 $ 838
Finished Goods 1,291 2,153
------------ ------------
Gross Inventory $ 1,805 $ 2,991
Reserve for Obsolete &
Slow Moving Inventory (472) (124)
------------ ------------
Inventory, Net of Reserves $ 1,333 $ 2,867
============ ============
The reserve for obsolete and slow moving inventory at June 30, 1998 has
decreased to $124,000 due to the application of reserves to slow moving
inventory during the first six months of 1998.
3. STOCKHOLDERS' EQUITY:
<TABLE>
<CAPTION>
The changes in stockholders' equity during the six months ended June 30, 1998, were as follows:
Balance at Conversion Net Sale of Stock Compensatory Balance at
December 31, of Preferred Common Subscription Options/ Accumulated Translation June 30,
1997 Stock Stock Receivable Warrants (Deficit) Adjustment 1998
------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------
Preferred Stock:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares 13 (8) - - - - - 5
Amount 10,458 (6,091) - - - - - 4,367
Common Stock:
Shares 133,162 15,132 1,375 - - - - 149,669
Amount 1,332 151 14 - - - - 1,497
Additional
Paid-in
Capital 96,379 5,911 883 - 195 - - 103,368
Accumulated
Surplus (Deficit) (93,521) - - - - (3,594) - (97,115)
Cumulative
Translation
Adjustment 119 - - - - - (13) 106
Stock Subscription
Receivable (390) - - 390 - - - -
Unearned
Compensatory Stock
Options/Warrants - - - - (109) - - (109)
</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. The Company has recorded a liability of
$280,000 at June 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. 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.
5. Other Assets
On April 20, 1998, NCT Audio signed a letter of intent to acquire
substantially all of the business assets of a supplier of custom automotive
audio systems (the "Second Acquisition Company"). In consideration for the
assets to be acquired, the Second Acquisition Company 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. In
addition to the above, on June 17, 1998, NCT Audio provided a working capital
loan to the Second Acquisition Company of $500,000 which is evidenced by a
demand promissory note. The unpaid principal balance of this note bears interest
at a rate equal to the prime lending rate plus one percent (1.00%).
On June 8, 1998, NCT Audio signed a letter of intent to acquire
substantially all of the business assets of a tier one automotive original
equipment audio system supplier (the "First Acquisition Company"). 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 purchase price is $10,000,000 in cash 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 the First Acquisition Company's parent company. On July 31,1998,
NCT Audio paid the parent of the First Acquisition Company $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 the
First Acquisition Company, until such time as the First Acquisition Company's
parent company stockholders approve the sale of the business assets of the First
Acquisition Company.
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 this suit. There were no material developments
in this suit during the period covered by this report.
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
($25,000.00) dollars in settlement of the suit which was dismissed on behalf of
all defendants with prejudice and without costs on July 16, 1998.
<PAGE>
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. The summons and complaint in the suit were served on the Company and
Mr. Parrella on June 24, 1998. The complaint alleges the Company breached, and
Mr. Parrella interfered with, a purported contract entered into "in 1996"
between the Company and SCI under which SCI was to be paid commissions by the
Company when the Company received capital from investors who purchased
debentures or convertible preferred stock of the Company during a period
presumably commencing on the date of the alleged contract and allegedly
extending at least to May 1, 1998. In this regard, the complaint alleges that
SCI, by virtue of a purported right of first refusal that the Company did not
honor, is entitled to commissions totaling $1,500,000 in connection with the
Company's sale of $13,300,000 of preferred stock and a subsidiary of the
Company's sale of $4,000,000 of stock convertible into common stock of the
Company. In the complaint SCI demands judgment against the Company for
compensatory damages of $1,673,000, punitive damages of $50,000 and attorneys'
fees of $50,000 and demands judgment against Mr. Parrella for compensatory
damages of $150,000, punitive damages of $500,000 and attorneys' fees of $50,000
as well as unspecified other appropriate relief. Because the Company has only
recently been served in the suit and no discovery has taken place, the Company
is unable to assess the likelihood of an adverse result. Management, however,
believes it has meritorious defenses and intends a vigorous defense of this
suit. However, in the event this suit does result in a substantial final
judgment against the Company, said judgment could have a severe material effect
on quarterly or annual operating results.
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. The Company has recognized $78,000 of expense in connection with the
issuance of shares to this employee as of June 30, 1998.
Between April 30, 1998 and June 30,1998, the Company issued 15,132,101
shares of the Company's common stock in connection with conversions of shares of
Series C Convertible Preferred Stock issued in a private placement pursuant to
Regulation D of the Securities Act of 1933, as amended (the "Securities Act") in
the fourth quarter of 1997.
At June 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 18.4 million shares, and the aggregate number of shares required to
be reserved for issuance upon conversion of issued and outstanding shares of
Series C Convertible Preferred Stock was 6.6 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 June 30, 1998, the number of shares available for the exercise of options and
warrants was 19.3 million and of the outstanding options and warrants, options
and warrants to purchase 17.2 million shares were currently exercisable.
See Note 4 for other stock issuances.
8. Common Stock Options
On January 15, 1998, the Board of Directors amended the Noise Cancellation
Technologies, Inc. Stock Incentive Plan (the "1992 Plan"), subject to
stockholder approval, to increase the aggregate number of shares of the
Company's common stock reserved for awards of restricted stock and for issuance
upon the exercise of stock options granted under the 1992 Plan from 10,000,000
shares to 30,000,000 shares and to amend certain administrative provisions of
the 1992 Plan (the "1992 Plan Amendment"). The Company plans to seek stockholder
approval of the 1992 Plan Amendment at the next annual meeting of stockholders
of the Company scheduled for September 10, 1998.
On October 6, 1997, the Board of Directors had also 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. While none of the options to purchase such
6.6 million shares of the Company's common stock become vested or exercisable
until 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. While none of the options to purchase said 3.6 million
shares of the Company's common stock become vested or exercisable until
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.
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, and $1.0313 on February 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 of such stockholder approval, if the market value of the
Company's stock exceeds the exercise price of the subject options noted above,
the Company will incur a non-cash charge to earnings equal to the spread between
the exercise price of the option and market price, times the number of options
involved.
On 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. The exercise price
under this option is $0.7813 per share, the fair value of the Company's common
stock on April 20, 1998, as determined from the last sale price reported by the
NASDAQ National Market System on that date.
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 not yet determined whether the above
pronouncement will 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, if the effect would be antidilutive.
<PAGE>
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 Six Months Ended Nine Months
Ended Ended Ended
March 31, 1997 June 30, 1997 September 30, 1997
--------------------- -------------------- --------------------
As As As
(in thousands, except Reported Adjusted Reported Adjusted Reported Adjusted
per share amounts) -------- -------- -------- -------- -------- --------
<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 June 30,
1997, and the six months ended June 30, 1997, have been retroactively adjusted
to reflect the above transaction in the correct periods.
12. Subsequent Events
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.
On July 29, 1998, the Company filed on Form 8-K, its plan to repurchase
from time to time up to 10,000,000 shares of the Company's common stock in the
open market pursuant to Rule 10b-18 under the Securities Exchange Act of 1934 or
through block trades.
<PAGE>
Between July 27, 1998 and August 4, 1998, the Company entered into a
series of 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, 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. 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.
<PAGE>
Between July 27, 1998 and August 4, 1998, NCT Audio entered into a series
of 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"). NCT Audio Subscription Agreements for the purchase of
60 shares of NCT Audio Series A Preferred Stock have been received and accepted
by NCT Audio through August 4, 1998. Of the total 60 share NCT Audio Series A
Preferred Stock offering, sales of 44 shares of NCT Audio Series A Preferred
Stock having an aggregate $4.4 million stated value were completed as of August
13, 1998. The sale of the remaining 16 shares of NCT Audio Series A Preferred
Stock are scheduled to be completed by August 17, 1998. $3.8 million net
proceeds have been received by NCT Audio from the 1998 Series A Preferred Stock
Private Placement. Assuming completion of the sale of the remaining 16 shares
covered by the NCT Audio Subscription Agreements, NCT Audio should receive
additional net proceeds of $1.4 million. 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 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
FORWARD LOOKING STATEMENTS
Statements in this filing 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 half of 1998 the Company has introduced and is currently selling
twenty-five new products and accessories in commercial quantities in various
markets during 1998. During the first half of 1998 the Company received 68% of
its revenue from product sales, 22% from license fees and royalties and only 10%
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.
<PAGE>
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 June 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 six months ended June 30, 1997 and 1998 were:
<TABLE>
<CAPTION>
PRODUCT REVENUES
(thousands of dollars)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- -------------------------------
Amount As a % of Total Amount As a % of Total
------------- --------------- ------------- ---------------
Product 1997 1998 1997 1998 1997 1998 1997 1998
- ------------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Headsets $333 $528 95.7% 79.5% $ 549 $ 761 94.5% 71.4%
Communications 6 63 1.7% 9.5% 11 213 1.9% 20.0%
Audio - 73 0.0% 11.0% - 85 0.0% 8.0%
Other 9 - 2.6% 0.0% 21 6 3.6% 0.6%
------ ------ ------ ------ ------ ------ ------ ------
Total $348 $664 100.0% 100.0% $ 581 $1,065 100.0% 100.0%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
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
three months ended June 30, 1998 and the six months ended June 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, the sale of Verity shares and the 1998 Series D Convertible Preferred
Stock Private Placement and NCT Audio 1998 Series A Convertible Preferred Stock
Private Placement, 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 six months of 1998 were $1.6 million compared
to $4.0 million for the same period in 1997, a decrease of $2.4 million or 60%.
The first half 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 first half 1998 license fee 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 $1.1 million for the first six months of
1998 versus $0.6 million for the same period in 1997, an increase of $0.5
million or 83% primarily reflecting increased NoiseBuster(R) sales and
ClearSpeech(TM) sales and the introduction 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 decreased to $0.1 million for the
first six months of 1998 from $0.2 million for the same period in 1997, a
decrease of 30%.
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 six months of
1998 were $0.3 million versus $3.2 million for the same period in 1997, a
decrease of $2.9 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, for the first time
the Company realized royalties from 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 increased to $0.9 million for the first six months
of 1998 versus $0.5 million for the same period in 1997, an increase of $0.4
million or 72% primarily reflecting the above noted increase in product sales.
Product margin increased to 18% for the first six months of 1998 from 13% during
the same period in 1997 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. Cost of engineering and development services decreased to
$0.1 million for the first six months of 1998 versus $0.2 million for the same
period in 1997, due to a reduction in contract revenue. The gross margin on
engineering and development services increased to 14% for the first six months
of 1998 from 6% during the same period in 1997 due to more profitable contracts
in 1998.
<PAGE>
Selling, general and administrative expenses for the first six months of
1998 were $4.5 million versus $2.3 million for the same period in 1997, an
increase of $2.2 million or 98% primarily due to a substantial increase in the
number of sales and marketing personnel and a substantial 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 six months of 1998
were $3.3 million versus $3.0 million for the same period in 1997, an increase
of $0.3 million or 9% 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.
The Company believes the cost of administering its Year 2000 Compliance
program will not have a material adverse impact on future earnings. However, the
potential costs and uncertainties associated with any Year 2000 Compliance
program will depend on a number of factors, including software, hardware and the
nature of the industry in which the Company, its subsidiaries, suppliers and
customers operate. In addition, companies must coordinate with other entities
with which they electronically interact, such as customers, suppliers, financial
institutions, etc.
Although the Company's evaluation of its systems is still in progress,
there has been no indication that the Year 2000 Compliance issue, as it relates
to internal systems, will have a material impact on future earnings. While the
Company is not aware or any material Year 2000 Compliance issues at its
customers and suppliers, such potential problems remain a possibility and could
have a material adverse impact on the Company's future results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $97.1 million on a
cumulative basis through June 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.
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, the sale of the Verity shares (see "General Business Environment") and
the 1998 Series D Convertible Preferred Stock Private Placement and NCT Audio
1998 Series A Convertible Preferred Stock Private Placement, 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 June 30, 1998, about the
Company's ability to continue as a going concern.
At June 30, 1998, cash and short-term investments were $5.2 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.
In addition, the Company's current common stock price of less than $1.00
presents a substantial risk that the Company's common stock may no longer be
listed on the NASDAQ National Market System for trading by mid-September 1998.
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 $6.7 million at June 30, 1998,
from $11.7 million at December 31, 1997. This decrease of $5.0 million was
primarily due to increasing efforts to develop and introduce new product lines
and to fund operations for the period.
<PAGE>
During the first six months of 1998, the net cash used in operating
activities was $7.3 million, compared to $2.5 million used in operating
activities during the same period of 1997.
Net inventory increased during the first six months of 1998 by $1.5
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.
There were no material commitments for capital expenditures as of June 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 6. EXHIBITS
(a) Exhibits
Exhibit 27-1 Financial Data Schedule
Exhibit 27-2 Restated Financial Data Schedule
(2nd Qtr Ended June 30, 1997)
Exhibit 99 Employment Agreement by and between the
Company and Paul D. Siomkos, dated
February 26, 1998
(b) The following reports on Form 8-K were filed during the quarter ended
June 30, 1998:
(i) A report on Form 8-K was filed on June 3, 1998, reporting 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 June 10, 1998, reporting the
Company's June 9, 1998 press release announcing acquisition and
financing plans of the Company's subsidiary, NCT Audio
Products, Inc. and the appointment of a new President of that
subsidiary.
<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.
NOISE CANCELLATION TECHNOLOGIES, 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: August 14, 1998
EMPLOYMENT AGREEMENT
For Paul D. Siomkos
THIS EMPLOYMENT AGREEMENT ( the "Agreement") is made as of the 26th day of
February, 1998, by and between Paul D. Siomkos, an individual residing at 108
Ridgecrest Road, Stamford, Connecticut 06903 ("Employee"), and Noise
Cancellation Technologies, Inc., a Delaware corporation (the "Company"), with
executive offices at One Dock Street, Stamford, Connecticut, 06902.
WHEREAS, the Company is engaged in the business of making, using, selling
and developing technology and products related to active wave management and the
reduction and elimination of noise and/or vibration; and
WHEREAS, Employee has a significant degree of expertise in the
Company's business; and
WHEREAS, the Company wishes to employ Employee, and Employee wishes to
work for the Company, in the capacity of Senior Vice President Operations.
NOW THEREFORE, in consideration of the promises and the mutual covenants
and agreements herein contained, the parties hereby agree as follows:
1. TERM OF AGREEMENT.
This Agreement shall be effective from the date first above written
("Effective Date") and its initial term shall continue in effect through the
fourth anniversary of the Effective Date (such four year period being the
"Initial Term"). The Company agrees that the Employee may be required to give
four weeks notice of termination to his current employer and may not start until
April 20, 1998. The Employee agrees that his base salary compensation will begin
on April 20, 1998. This Agreement shall automatically be renewed for a
successive four-year periods ("Renewal Term") unless at least sixty (60) days
prior to the end of each term either party hereto gives written notice to the
other party of its intention not to renew this Agreement. This Agreement may be
terminated at any time during its Initial Term or during the Renewal Term solely
in accordance with the terms and conditions of Section 6 hereof.
2. EMPLOYMENT.
Section 2.1 Position.
(a) The Company hereby employs Employee in a professional capacity with
the title of Senior Vice President Operations, and Employee hereby accepts such
employment and undertakes and agrees to serve in such capacity.
(b) Employee shall work exclusively with the Company in providing
management of product engineering, product production, product distribution and
operations.
Section 2.2 Scope of Service.
During the Initial Term and any renewal term of this Agreement, Employee
shall devote his exclusive working time and attention during normal business
hours to the business and affairs of the Company. Employee agrees that he will
at all times faithfully, industriously, and to the best of his ability,
experience, and talents perform all of the duties that may be required of and
from him as Senior Vice President Operations as determined from time to time by
the Company's President and Board of Directors and pursuant to the express and
implicit terms of this Agreement, to the reasonable satisfaction of the Company.
Employee shall not accept employment from any third party as an employee or
consultant, serve on the board of directors or similar governing body of any
third party, or otherwise assume outside responsibilities that would impair his
ability to devote his exclusive working time and attention to the Company's
business and affairs without the written consent of the Company. Employee shall
inform the Company in writing thirty (30) days prior to undertaking any such
position or responsibilities.
Section 2.3 Communication to Employer.
From the Effective Date of this Agreement until termination, Employee
shall communicate and channel to the Company all knowledge, business, and
customer contacts and any other matters or information that concerns or is in
any way beneficial or detrimental to the business of the Company, including any
inventions or ideas that may be useful to the Company in its research and
development efforts, or in the manufacture, use or sale of its products or the
licensing of its technologies, whether acquired by Employee before or during the
term of this Agreement; provided, however, that nothing under this Agreement
shall be construed as requiring such communications where the information is
lawfully protected from disclosure as a legitimate trade secret of a third
party. Any such information communicated to the Company as stated above shall be
and remain the property of the Company, notwithstanding subsequent termination
of this Agreement.
<PAGE>
Section 2.4 Location.
(a) Employee shall render services under this Agreement at the Company's
facilities located in the environs of Stamford, Connecticut. Employee agrees to
assist in the relocation of the company's operations from Linthicum, Maryland to
Connecticut.
(b) Employee agrees to make business trips at such times and to such
locations as may be reasonable and necessary in performance of his services
under this Agreement.
3. COMPENSATION.
Section 3.1
(a) In consideration of the services rendered hereunder, the Company shall
pay Employee during the Initial Term of this Agreement a base salary at the rate
of one hundred fifty thousand Dollars ($150,000) per annum ("Base Salary").
Employee and the Company may agree on a higher Base Salary during the Initial
Term or for any renewal term of this Agreement but if they do not agree by the
beginning of a renewal term, Employee's Base Salary shall be the Base Salary he
received in the year immediately prior to the renewal term.
(b) The Base Salary shall be payable by the Company to Employee in equal
semi-monthly installments no later than the first and fifteenth business day of
each month.
(c) The Company shall reimburse Employee for all reasonable and necessary
expenses (including travel expenses) incurred by him in the performance of his
duties under this Agreement. Such reimbursements shall be timely made by the
Company upon submission by Employee of vouchers itemizing such expenses, in form
and substance reasonably satisfactory to the Company.
Section 3.2 Incentive Bonus.
To further the attainment of the Company's objectives, the Company may
from time to time pay Employee an incentive bonus. The time and amount of such
incentive bonus shall be in the sole discretion of the Company. The Company
agrees to set up a mutually agreed upon bonus program each year.
Section 3.3 Fringe Benefits.
In addition to the compensation provided for above, so long as Employee is
employed by the Company under this Agreement, Employee shall be entitled to
receive from the Company all other vacation and fringe benefits including major
medical and life and disability insurance coverage, as are from time to time
generally provided by the Company to its officers and other employees attached
as Exhibit C Standard Benefits.
Section 3.4 Equity Participation.
In further consideration of the services rendered hereunder, the Company
agrees to grant to Employee the equity participation rights in the Company set
forth in Exhibit A & D attached hereto.
Section 3.5 Car Allowance.
The company will pay the employee a monthly car allowance of $1,000.
4. CONFIDENTIALITY, INVENTIONS, NON-COMPETITION, AND NON-SOLICITATION
AGREEMENT.
Section 4.1 Agreement.
As a condition to his employment hereunder, Employee shall execute and
deliver the Company's standard form of "Employee's Confidentiality,
Non-Competition and Invention Agreement" in substantially the form attached
hereto as Exhibit B (the "NCT Standard Agreement"). Upon execution and delivery
thereof, the terms and conditions of the NCT Standard Agreement shall be
incorporated into and made a part of this Agreement and shall be enforceable in
conjunction herewith, provided that the NCT Standard Agreement shall survive any
termination of this Agreement, and shall remain enforceable and in full force
and effect in accordance with its terms at all times irrespective of any reason
for termination of this Agreement.
Section 4.2 Breach of Contract.
Employee represents and warrants that his performance of all the terms of
this Agreement, and of the NCT Standard Agreement, does not and will not breach
any agreement not to compete, any agreement to keep in confidence proprietary
information, knowledge or data acquired or received by him in confidence or in
trust, or any other agreement to which Employee is a party. Employee agrees not
to enter into any agreement or undertaking, either written or oral, which would
be in conflict with this Agreement or the NCT Standard Agreement. The
representations and covenants by Employee under this Section 4.2 shall survive
any termination of this Agreement.
<PAGE>
5. SPECIFIC PERFORMANCE.
The parties hereby declare that the rights of the Company under Section 4
of this Agreement and under the NCT Standard Agreement are of a unique nature,
the loss of which may cause irreparable harm, and that it may be impossible to
measure in money the damages which will accrue to the Company by reason of the
loss of such rights or a failure by Employee to perform or adhere to any of the
obligations under Section 4 of this Agreement or under the NCT Standard
Agreement. Employee expressly acknowledges that remedies at law alone will be
inadequate to compensate the Company for any breach or violation of any of the
provisions of Section 4 of this Agreement or the NCT Standard Agreement and that
the Company, in addition to all other remedies hereunder or thereunder, shall be
entitled, as a matter of right, to temporary and permanent injunctive relief,
including specific performance, with respect to any such breach or violation, in
any court of competent jurisdiction.
6. TERMINATION.
Section 6.1 Termination by the Company for Cause.
The Company may terminate this Agreement and Employee's employment
hereunder for "Cause" which shall be limited to any one of the following:
(a) Repeated and documented refusal or inability by Employee to perform
substantially the duties and obligations of his employment and upon thirty (30)
days written notice to Employee of the Company's finding of such refusal or
inability to perform substantially the duties and obligations of his employment;
(b) Commission by Employee in the performance of his duties: of willful
misconduct, actionable negligence, fraudulent acts or acts of dishonesty,
disloyalty or breach of trust against the Company, including breach or violation
of any provision of the NCT Standard Agreement, or other illegal acts or
omissions, and upon reasonably prompt written notice to Employee of the
Company's finding of any such misconduct, act or omission;
(c) Employee's permanent disability (for the purposes of this Agreement,
permanent disability shall mean Employee's inability, whether mental or
physical, to perform the regular duties of his employment on a full-time basis
for six (6) consecutive months); or
(d) Employee's death (for which no notice is required).
Section 6.2 Termination by the Company Without Cause.
The Company may terminate this Agreement and Employee's employment
hereunder without Cause, upon thirty (30) days prior written notice.
Section 6.3 Termination by Employee.
Employee may terminate this Agreement and his employment hereunder:
(a) voluntarily, upon sixty (60) day written notice to the Company; or
(b) at any time, upon immediate written notice to the Company due to any
material breach of this Agreement by the Company; or,
(c) upon five (5) day written notice to the Company in the event of
a substantial change in control of the Company. For the purposes
of this Agreement, a substantial change in control shall mean: 1)
a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934 as in
effect on the date of this Agreement; provided that such a change
in control shall be deemed to have occurred only if and when any
"person" (as the term is used in Section 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934) becomes a beneficial owner
directly or indirectly of securities of the Company representing
more than fifty percent (50%) of the combined voting power of the
Company's then outstanding securities or 2) a liquidation or
dissolution of the company or 3) an agreement for the sale or
other disposition of all or substantially all of the assets of
the company.
Section 6.4 Return of Property Upon Termination.
Upon termination of this Agreement for any reason, or whenever requested
by the Company, Employee shall immediately return to the Company all of the
Company's property including, but not limited to items specified in the NCT
Standard Agreement, and all books, notes, equipment, prototypes, documentation
and other things used or prepared by Employee's possession or under his control.
<PAGE>
Section 6.5 Severance.
If this Agreement is terminated pursuant to Section 6.1 or to clause (a)
of Section 6.3 above, during the Initial Term or during any Renewal Term, or by
Employee's electing not to renew this Agreement at the end of the Initial Term
or any Renewal Term, Employee shall have no right to severance pay or any other
cash or other consideration or employer provided benefits from the Company other
than Base Salary payments and vacation accrued but unpaid as of the termination
date and vested stock options exercisable in accordance with the stock option
plan attached as Exhibit D.
If this Agreement is terminated pursuant to Section 6.2 or clause (b) or
(c) of Section 6.3, the Company shall pay Employee a severance amount as
follows:
(a) If terminated during the Initial Term, the Employee's Base Salary in
accordance with Section 3.1 to the end of the Initial Term or for a
period eighteen (18) months from the date of notice of termination,
whichever shall last occur.
(b) If terminated during a Renewal Term, the Employee's Base Salary in
accordance with Section 3.1 for a period of eighteen (18) months
from the date of notice of termination.
(c) If terminated by the Company electing not to renew this Agreement at
the end of the Initial Term or at the end of any Renewal Term, the
Employee's Base Salary in accordance with Section 3.1 for a period
of twelve (12) months from the end of the Initial Term or twelve
(12) months from the end of a Renewal Term, as the case may be.
(d) During the any of the above defined severance periods employee
fringe benefits, car allowance and outplacement services will be
provided until the employee becomes employed by another company or
to the end of the severance period whichever is sooner.
7. MISCELLANEOUS.
Section 7.1 Assignment.
This Agreement and the rights of Employee hereunder are personal to
Employee, and neither this Agreement nor any right or interest herein or arising
hereunder shall be subject to voluntary or involuntary alienation, assignment or
transfer by Employee nor may Employee, his estate or designated beneficiary use
this Agreement or any right of payment hereunder as a pledge or collateral; for
any loan; provided, however, that this Agreement shall be binding upon and shall
inure to the benefit of Employee and his heirs, legatees, estate or legal
representatives. All rights and obligations of the Company under this Agreement
shall be binding upon and shall inure to the benefit of the successors and
assigns of the Company.
Section 7.2 Governing Law.
This Agreement shall be governed by, and shall be construed and
interpreted in accordance with, the laws of the State of Connecticut (without
giving effect to the doctrine of conflict of laws) and of the United States of
America.
Section 7.3 Notices.
Any notice which the Company is required or may desire to give Employee
hereunder shall be given by personal delivery or by registered or certified mail
or by private courier service, with postage prepaid, addressed to Employee at
his address of record with the Company, or at such other place as Employee may
from time to time designate to the Company in writing. Any notice which Employee
is required or may desire to give the Company hereunder shall be given by
personal delivery or by registered or certified mail or by private courier
service, with postage prepaid, addressed to the Company at its principal office,
or at such other office as the Company may from time to time designate to
Employee in writing. Such notice shall be deemed given when delivered personally
or, if mailed, given two (2) days after the date of mailing.
Section 7.4 Waiver.
If either party should waive any breach of any provision of this
Agreement, such party shall not thereby be deemed to have waived any preceding
or succeeding breach of the same or any other provision of this Agreement.
<PAGE>
Section 7.5 Entire Agreement; Modification; Severability.
This Agreement constitutes the entire agreement of these parties with
respect to the subject matter thereof, and all other prior or contemporaneous
agreements of the parties with respect to such subject matter, whether oral or
written, are hereby merged into this Agreement. This Agreement shall not be
changed, modified or amended other than by a further written agreement signed
(i) by a duly authorized officer of the Company and (ii) by Employee.
Section 7.6 Headings.
The titles to the Sections of this Agreement are solely for the
convenience of the parties and shall not be used to explain, modify, simplify,
or aid in the interpretation of the provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement with legal and binding effect as of the day and year first above
written.
/s/ PAUL D. SIOMKOS
--------------------------------------
Paul D. Siomkos ("Employee")
NOISE CANCELLATION TECHNOLOGIES, INC.,
a Delaware corporation (the "Company")
/s/ MICHAEL J. PARRELLA
--------------------------------------
By: Michael J. Parrella
President
Exhibit A Schedule for Equity Participation Rights
Exhibit B NCT Standard Employee's Confidentiality, Non-Competition
and Invention Agreement
Exhibit C NCT Standard Benefits
Exhibit D Employee stock Option Plan
<PAGE>
Exhibit A
Schedule For Equity Participation Rights
NCT will grant 100,000 shares to the employee upon employee's first day of
employment.
NCT will grant 500,000 options to purchase NCT shares at the price as of the
date of employment that will vest as follows:
25% upon employee's first day of employment 25% at the end of the
first year of employment 25% at the end of the second year of
employment 25% at the end of the third year of employment
If the Employee is terminated pursuant to Section 6.2 or clause (b) or (c) of
Section 6.3 all options will become immediately vested.
Accepted and Agreed to:
/s/ MICHAEL J. PARRELLA
- -----------------------
The Company, by:
/s/ PAUL D. SIOMKOS
- -----------------------
Employee
<PAGE>
Exhibit C
NCT Standard Benefits
1. Annual vacation is three weeks
2. Life Insurance of at least $250,000
3. Income Protection from Disability of at least 60% of base salary
4. All other benefits offered senior management
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