SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 2 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission File Number: 0-18267
Noise Cancellation Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 59-2501025
(State or other jurisdiction of (IRS Employer
incorporation organization) Identification No.)
1025 West Nursery Road, Linthicum, MD 21090
(Address of principal executive office) (Zip Code)
(410) 636-8700
(Registrant's telephone number, including area code)
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below are derived from the
historical financial statements of the Company. The data set forth below is
qualified in its entirety by and should be read in conjunction with the
Company's "Consolidated Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that are included
elsewhere herein.
<TABLE>
<CAPTION>
(In Thousands of Dollars and Shares)
Years Ended December 31,
------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------
STATEMENTS OF OPERATIONS
DATA:
REVENUES
<S> <C> <C> <C> <C> <C>
Product Sales $1,728 $2,337 $1,589 $1,379 $1,720
Engineering and 3,598 4,335 2,297 547 368
development services
Technology licensing
fees and other 60 452 6,580 1,238 3,630
------ ------ ------ ------ ------
Total revenues $5,386 $7,124 $10,466 $3,164 $5,718
------ ------ ------- ------ ------
COSTS AND EXPENSES:
Cost of sales $1,309 $4,073 $1,579 $1,586 $2,271
Cost of engineering and 2,803 4,193 2,340 250 316
development services
Selling, general and 7,231 9,281 5,416 4,890 5,217
administrative
Research and development 7,963 9,522 4,776 6,974 6,235
Interest (income)
expense, net (311) (580) (49) 17 1,397 (4)
Equity in net (income)
loss of unconsolidated
affiliates 3,582(1) 1,824 (80) 80 -
Other expense, net - 718 552 192 130
------- ------- ------- ------- -------
Total costs and
expenses $22,577 $29,031 $14,534 $13,989 $15,566
------- ------- ------- ------- -------
Net loss $(17,191)(1) $(21,907) $(4,068) $(10,825) $(9,848)
Preferred stock - - - - 1,623
dividend requirement
Accretion of difference
between carrying
amount and redemption
amount of
redeemable preferred
stock - - - - 285
-------- -------- ------- -------- --------
Net (loss) attributable
to common stockholders $(17,191)(1) $(21,907) $(4,068) $(10,825) $(11,756)
======== ======== ======= ======== ========
Weighted average number
of common shares
outstanding(2)--basic
and diluted 70,416 82,906 87,921 101,191 124,101
======== ======== ======= ======== ========
Basic and Diluted Net
loss per share $ (0.24)(1) $ (0.26) $ (0.05) $ (0.11) $ (0.09)
======== ======== ======= ======== ========
December 31,
------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------
BALANCE SHEET DATA:
Total assets $29,541 $12,371 $9,583 $5,881 $17,361
Total liabilities 6,301 6,903 2,699 3,271 2,984
Long-term debt --- --- 105 -- --
Accumulated deficit (46,873) (68,780) (72,848) (83,673) (93,520)
Stockholders' equity(3) 23,239 5,468 6,884 2,610 14,377
Working capital 19,990 923 1,734 (1,312) 11,696
(deficiency)
</TABLE>
<PAGE>
(1)In connection with the sale of Common Stock to Tenneco Automotive in
December 1993, the Company recognized its share of cumulative losses not
previously recorded with respect to its joint venture with Walker amounting
to approximately $3.6 million.
(2)Does not include shares issuable upon the exercise of outstanding stock
options, warrants and convertible Preferred Stock, since their effect would
be antidilutive.
(3) The Company has never declared nor paid cash dividends on its Common Stock.
(4)Includes interest expenses of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
ITEM 8. FINANCIAL STATEMENTS
The Reports of the Independent Auditors Richard A. Eisner & Company, L.L.P.
and the financial statements and accompanying notes are attached.
Page
Independent Auditors Report F-1
Consolidated Balance Sheets, as of December 31, 1996, and F-2
1997
Consolidated Statements of Operations, for the years ended F-3
December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity, for the F-4
years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows, for the years ended
December 31, 1995, 1996 and 1997 F-5
Notes to the Consolidated Financial Statements F-6
<PAGE>
F-1
(Richard A. Eisner & Company, L.L.P. Letterhead)
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
Noise Cancellation Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Noise
Cancellation Technologies, Inc. and subsidiaries as at December 31, 1996 and
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
1995, 1996 and 1997 financial statements of the Company's two foreign
subsidiaries. These subsidiaries accounted for revenues of approximately
$1,200,000, $407,000 and $67,000 for the years ended December 31, 1995, 1996 and
1997, respectively, and assets of approximately $586,000, $515,000 and $301,000
at December 31, 1995, 1996 and 1997, respectively. These statements were audited
by other auditors whose reports have been furnished to us, one of which
contained a reference to its dependence on the parent for continued financial
support. Our opinion, insofar as it relates to the amounts included for these
entities, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements enumerated above present fairly, in all material
respects, the consolidated financial position of Noise Cancellation
Technologies, Inc. and subsidiaries as at December 31, 1996 and 1997 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has not been able to generate
sufficient cash flow from operating activities to sustain its operations and
since it has incurred net losses since inception, it has been and continues to
be dependent on equity financing, joint venture arrangements to support its
business efforts. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ RICHARD A. EISNER & COMPANY, L.L.P.
New York, New York
February 27, 1998
<PAGE>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
F-2 (in thousands of
dollars)
December 31,
--------------------
1996 1997
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 368 $ 12,604
Accounts receivable:
Trade:
Technology license fees and royalties 150 200
Joint Ventures and affiliates 2 -
Other 392 368
Unbilled 63 -
Allowance for doubtful accounts (123) (38)
---------- ---------
Total accounts receivable $ 484 $ 530
Inventories, net of reserves 900 1,333
Other current assets 207 213
---------- ---------
Total current assets $ 1,959 $ 14,680
Property and equipment, net 2,053 1,144
Patent rights and other intangibles, net 1,823 1,488
Other assets 46 49
--------- ---------
$ 5,881 $ 17,361
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,465 $ 1,324
Accrued expenses 1,187 1,392
Accrued payroll, taxes and related expenses 618 181
Customers' advances 1 87
---------- ---------
Total current liabilities $ 3,271 $ 2,984
---------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 10,000,000 shares
authorized,
13,250 Series C issued (redemption amount
$13,314,399) $ - $ 10,458
Common stock, $.01 par value, 140,000,000 and
185,000,000 shares,
respectively, authorized; issued and outstanding
111,614,405 and
133,160,212 shares, respectively 1,116 1,332
Additional paid-in-capital 85,025 96,379
Accumulated deficit (83,673) (93,521)
Cumulative translation adjustment 142 119
Common stock subscriptions receivable - (390)
---------- ---------
Total stockholders' equity $ 2,610 $ 14,377
---------- ---------
$ 5,881 $ 17,361
========== =========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
F-3
(in thousands, except per
share amounts)
Years ended December 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Technology licensing fees $ 6,580 $ 1,238 $ 3,630
Product sales, net 1,589 1,379 1,720
Engineering and development services 2,297 547 368
---------- ---------- ----------
Total revenues $ 10,466 $ 3,164 $ 5,718
---------- ---------- ----------
COSTS AND EXPENSES:
Costs of sales $ 1,579 $ 1,586 $ 2,271
Costs of engineering and development services 2,340 250 316
Selling, general and administrative 5,416 4,890 5,217
Research and development 4,776 6,974 6,235
Equity in net loss (income) of unconsolidated
affiliates (80) 80 -
Provision for doubtful accounts 552 192 130
Interest expense (includes $1,420 of discounts
on beneficial conversion feature on
convertible debt in 1997) 4 45 1,514
Interest income (53) (28) (117)
---------- ---------- ----------
Total costs and expenses $ 14,534 $ 13,989 $ 15,566
---------- ---------- ----------
NET (LOSS) $ (4,068) $(10,825) $ (9,848)
Preferred stock beneficial conversion feature - - 1,623
Accretion of difference between carrying
amount and redemption amount of redeemable
preferred stock - - 285
---------- ---------- ----------
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,068) $ (10,825) $ (11,756)
========== ========== ==========
Weighted average number of common
shares outstanding - basic and diluted
87,921 101,191 124,101
========== ========== ==========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.05) $ (0.11) $ (0.09)
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands of dollars and shares)
F-4
Cumul- Expenses
Series C ative Stock to be
Convertible Trans- Subscrip- Paid
Preferred Stock Common Stock Additional Accumu- lation tion With
----------------- ---------------- Paid-In lated Adjust- Receiv- Common
Shares Amount Shares Amount Capital Deficit ment able Stock Total
------- ------ ------ ------ ---------- ------- ------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - $ - 86,089 $ 861 $ 75,177 $(68,780) $ 152 $ (1,196) $ (746) $ 5,468
Sale of common stock,
less expenses of $271 - - 6,800 68 3,921 - - - - 3,989
Consulting expense
attributable to warrants - - - - 8 - - - - 8
Shares issued upon
exercise of warrants &
options - - 1,050 10 692 - - (13) - 689
Receipt of services in
payment of stock
subscription - - - - - - - 1,196 - 1,196
Settlement of obligations - - - - (344) - - - 746 402
Net loss - - - - - (4,068) - - - (4,068)
Translation adjustment - - - - - - (2) - - (2)
Retirement of shares
attributable to license
revenue (Note 3) - - (1,110) (11) (787) - - - - (798)
----- ------- ------- -------- --------- --------- -------- --------- ------- ---------
Balance at December 31, 1995 - $ - 92,829 $ 928 $ 78,667 $(72,848) $ 150 $ (13) $ - $ 6,884
Sale of common stock,
less expenses of $245 - - 18,595 186 6,178 - - 13 - 6,377
Shares issued upon exercise
of warrants & options - - 204 2 102 - - - - 104
Net loss - - - - - (10,825) - - - (10,825)
Translation adjustment - - - - - - (8) - - (8)
Restricted shares issued
for Directors' compensation - - 20 - 13 - - - - 13
Consulting expense
attributable to options - - - - 96 - - - - 96
Retirement of shares related
to patent acquisition - - (25) - (26) - - - - (26)
Retirement of shares in
settlement of employee
receivable - - (8) - (5) - - - - (5)
----- ------- -------- -------- --------- --------- --------- -------- ------- ---------
Balance at December 31, 1996 - $ - 111,615 $ 1,116 $ 85,025 $(83,673) $ 142 - - $ 2,610
Sale of common stock - - 2,857 29 471 - - - - 500
Shares issued upon exercise
of warrants and options - - 1,996 20 1,115 - - (64) - 1,071
Sale of Series C preferred
stock less expenses
of $551 13 11,863 - - - - - - - 11,863
Discount on beneficial
conversion price to
preferred shareholders - (3,313) - - 3,313 - - - - -
Amortization of discount
on beneficial conversion
price to preferred
shareholders - 1,908 - - (1,908) - - - - -
Sale of subsidiary common
stock, less expenses
of $65 - - - - 3,573 - - (326) - 3,247
Common stock issued upon
conversion of convertible
debt, less expense of $168 - - 16,683 167 4,714 - - - - 4,881
Net loss - - - - - (9,848) - - - (9,848)
Translation adjustment - - - - - - (23) - - (23)
Restricted shares issued
for Directors' compensation - - 10 - 2 - - - - 2
Warrant issued in
conjunction with
convertible debt - - - - 34 - - - - 34
Compensatory stock
options and warrants - - - - 40 - - - - 40
----- -------- --------- -------- ------- --------- ------- ------- -------- ---------
Balance at
December 31, 1997 13 $ 10,458 133,161 $ 1,332 $96,379 $(93,521) $ 119 $(390) $ - $ 14,377
===== ======== ========= ========= ======= ========= ======= ======= ======== =========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
F-5
(in thousands of dollars)
Years Ended December 31,
1995 1996 1997
--------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,068) $(10,825) $(9,848)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization 1,127 1,000 899
Common stock and warrants issued as consideration for:
Compensation 8 109 42
Rent and marketing expenses 355 - -
Interest on debentures - - 51
Convertible debt - - 34
Debt cost incurred related to convertible debt - - 211
Common stock retired in settlement of employee
account receivable - (5) -
Receipt of license fee in exchange for inventory
and release of obligation (3,266) - -
Discount on beneficial conversion price to
convertible debt - - 1,420
Provision for tooling costs and write off 94 371 515
Provision for doubtful accounts 552 192 130
Equity in net (income) loss of unconsolidated
affiliates (80) 80 -
Unrealized foreign currency (gain) loss 32 (45) 8
(Gain) Loss on disposition of fixed assets 107 83 (4)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 302 61 (127)
(Increase) in license fees receivable - (150) (50)
(Increase) decrease in inventories 212 813 (433)
(Increase) decrease in other assets 299 67 (12)
Increase (decrease) in accounts payable and
accrued expenses (190) 55 135
Increase (decrease) in other liabilities (482) 436 (414)
--------- -------- --------
Net cash (used in) operating activities $(4,998) $(7,758) $(7,443)
--------- -------- --------
Cash flows from investing activities:
Capital expenditures $ (80) $ (186) $ (244)
Acquisition of patent rights (210) - -
Sales of short term investments 18 - -
Sale of capital expenditures - - 67
--------- -------- --------
Net cash (used in) investing activities $ (272) $ (186) $ (177)
--------- -------- --------
Cash flows from financing activities:
Proceeds from:
Convertible debt (net) $ - $ - $ 3,199
Sale of common stock (net) 3,989 6,377 500
Sale of preferred stock (net) - - 11,863
Sale of subsidiary stock (net) - - 3,247
Exercise of stock purchase warrants and options 689 104 1,071
--------- -------- --------
Net cash provided by financing activities $ 4,678 $ 6,481 $19,880
--------- -------- --------
Effect of exchange rate changes on cash $ - $ - $ (24)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents $ (592) $(1,463) $12,236
Cash and cash equivalents - beginning of period 2,423 1,831 368
-------- -------- --------
Cash and cash equivalents - end of period $ 1,831 $ 368 $12,604
======== ======== ========
Cash paid for interest $ 4 $ 4 $ 8
======== ======== ========
</TABLE>
See Notes 6 and 11 with respect to settlement of certain obligation by
issuance of securities.
See notes to consolidated financial statements.
<PAGE>
F-6
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. Background:
Noise Cancellation Technologies, Inc. ("NCT" or the "Company") designs,
develops, licenses, produces and distributes electronic systems for Active Wave
Management including systems that electronically reduce noise and vibration. The
Company's systems are designed for integration into a wide range of products
serving major markets in the transportation, manufacturing, commercial, consumer
products and communications industries. The Company has begun commercial
application of its technology through a number of product lines, with 70
products currently being sold, including NoiseBuster(R) communications headsets
and NoiseBuster Extreme!(TM) consumer headsets, Gekko(TM) flat speakers, flat
panel transducers ("FPT(TM)"), ClearSpeech(TM), microphones, speakers and other
products, adaptive speech filters ("ASF"), the ProActive(TM) line of
industrial/commercial active noise reduction ("ANR") headsets, an aviation
headset for pilots, an industrial muffler or "silencer" for use with large
vacuums and blowers, quieting headsets for patient use in magnetic resonance
imaging ("MRI") machines, and an aircraft cabin quieting system.
The technology supporting the Company's electronic systems was developed
using technology maintained under various patents (the "Chaplin Patents") held
by Chaplin-Patents Holding Co., Inc. ("CPH") as well as patented technology
acquired or developed by the Company. CPH, formerly a joint venture with Active
Noise Vibration Technologies, Inc. ("ANVT"), was established to maintain and
defend these patent rights. The former joint venture agreement relating to the
Chaplin Patents required that the Company only license or share the related
technology with entities who are affiliates of the Company. As a result, the
Company established various joint ventures and formed other strategic alliances
(see Note 3) to further develop the technology and electronic systems and
components based on the Chaplin Patents, to develop such technology into
commercial applications, to integrate the electronic systems into existing
products and to distribute such systems and products into various industrial,
commercial and consumer markets.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $93.5 million on a
cumulative basis through December 31, 1997 and has working capital of $11.7
million at December 31, 1997. These losses, which include the costs for
development of products for commercial use, have been funded primarily from the
sale of common stock and preferred stock, including the exercise of warrants or
options to purchase common stock, and by technology licensing fees and
engineering and development funds received from joint venture and other
strategic partners. As discussed in Note 3, agreements with joint venture and
other strategic partners generally require that a portion of the initial cash
flows, if any, generated by the ventures or the alliances be paid on a
preferential basis to the Company's co-venturers until the technology licensing
fees and engineering and development funds provided to the venture or the
Company are recovered.
Cash and cash equivalents amounted to $12.6 million at December 31, 1997.
Management believes that currently available funds may not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options, the funding derived from
technology licensing fees, royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditure alone
may not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties and
product sales, and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained.
There is no assurance any such financing is or would become available.
There can be no assurance that additional funding will be provided by
technology license fees, royalties and product sales and engineering and
development revenue. In that event, the Company would have to substantially cut
back its level of operations. These reductions could have an adverse effect on
the Company's relations with its strategic partners and customers. Uncertainty
exists with respect to the adequacy of current funds to support the Company's
activities until positive cash flow from operations can be achieved, and with
respect to the availability of financing from other sources to fund any cash
deficiencies (see Note 6 with respect to recent financing).
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 1997 about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. Summary of Significant Accounting Policies:
Consolidation:
The financial statements include the accounts of the Company and its majority
owned subsidiaries. All material inter-company transactions and account balances
have been eliminated in consolidation.
Unconsolidated affiliates include joint ventures and other entities not
controlled by the Company, but over which the Company maintains significant
influence and in which the Company's ownership interest is 50% or less. The
Company's investments in these entities are accounted for on the equity method.
When the Company's equity in cumulative losses exceeds its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method (see Note 3). The Company will not
be able to record any equity in income with respect to an entity until its share
of future profits is sufficient to recover any cumulative losses that have not
previously been recorded.
Revenue Recognition:
Product Sales:
Revenue is recognized as the product is shipped.
Engineering and development services:
Revenue from engineering and development contracts is recognized and billed
as the services are performed. However, revenue from certain engineering and
development contracts are recognized as services are performed under the
percentage of completion method after 10% of the total estimated costs have been
incurred. Under the percentage of completion method, revenues and gross profit
are recognized as work is performed based on the relationship between actual
costs incurred and total estimated costs at completion.
Estimated losses are recorded when identified.
Revenues recorded under the percentage of completion method amounted to
$249,000, $9,000 and zero for the years ended December 31, 1995, 1996 and 1997,
respectively.
Technology Licensing Fees:
Technology licensing fees paid by joint venturers, co-venturers, strategic
partners or other licensees which are nonrefundable, are recognized in income
upon execution of the license agreement. If any license fee is subject to
completion of any performance criteria specified within the agreement, then such
license fee is deferred until such performance criteria is met. See Note 3, with
respect to the license fees recorded by the Company in connection with Ultra
Electronics, Ltd. in 1995 and New Transducers, Ltd. in 1997.
Advertising:
Advertising costs are expensed as incurred. Expense for years ended
December 31, 1995, 1996 and 1997 was $0.6 million, $0.5 million and $0.5
million, respectively.
Cash and cash equivalents:
The Company considers all money market accounts and highly liquid investments
with original maturities of three months or less at the time of purchase
(principally comprise high quality investments in commercial paper) to be cash
equivalents.
Inventories:
Inventories are stated at the lower of cost (first in, first out) or market.
With regard to the Company's assessment of the realizability of inventory,
the Company periodically conducts a complete physical inventory, and reviews the
movement of inventory on an item by item basis to determine the value of items
which are slow moving. After considering potential for near term product
engineering changes and/or technological obsolescence and current realizability,
the Company determines the current need for inventory reserves. After applying
the above noted measurement criteria at December 31, 1996, and December 31,
1997, the Company determined that a reserve of $0.3 million and $0.5 million,
respectively, was adequate.
Property and Equipment:
Property and equipment are stated at cost and depreciation is recorded on the
straight-line method over the estimated useful lives of the respective assets.
Leasehold improvements are amortized over the shorter of their useful lives or
the related lease term.
Patent Rights:
Patent rights are stated at cost and are amortized on a straight line basis
over the remaining life of each patent (ranging from 1 to 15 years).
Amortization expense was $0.4 million, $0.4 million and $0.3 million for 1995,
1996 and 1997, respectively. Accumulated amortization was $1.5 million and $1.8
million at December 31, 1996 and 1997, respectively.
It is the Company's policy to review its individual patents when events have
occurred which could impair the valuation on any such patent.
Foreign currency translation:
The financial statements for the United Kingdom operations are translated
into U.S. dollars at year-end exchange rates for assets and liabilities and
weighted average exchange rates for revenues and expenses. The effects of
foreign currency translation adjustments are included as a component of
stockholders' equity and gains and losses resulting from foreign currency
transactions are included in income and have not been material.
Loss per common share:
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in the year ended December 31, 1997 and has
retroactively applied the effects thereof for all periods presented.
Accordingly, the presentation of per share information includes calculations of
basic and dilutive loss per share. The impact on the per share amounts
previously reported (primary and fully diluted) was not significant. The effects
of potential common shares such as warrants, options, and convertible preferred
stock has not been included, as the effect would be antidilutive (see Notes 3, 6
and 7).
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents. The Company considers all
money market accounts and investments with original maturities of three months
or less at the time of purchase to be cash equivalents. The Company primarily
holds its cash and cash equivalents in two banks and commercial paper. Deposits
in excess of federally insured limits were $12.4 million at December 31, 1997.
The Company sells its products and services to original equipment manufacturers,
distributors and end users in various industries worldwide. As shown below, the
Company's five largest customers accounted for approximately 71% of revenues
during 1997 and 59% of accounts receivable at December 31, 1997. The Company
does not require collateral or other security to support customer receivables.
(in thousands of dollars)
As of December 31, 1997,
and for the year then ended
---------------------------------
Accounts
CUSTOMER Receivable Revenue
-------------------------------- ------------ --------------
Verity Group.plc $--- $3,000
Telex Communications, Inc. --- 391
The Sharper Image 53 236
Brookstone 60 228
Siemens AG 200 200
All Other 217 1,663
------------ --------------
Total $530 $5,718
============ ==============
The Company regularly assesses the realizability of its accounts receivable
and performs a detailed analysis of its aged accounts receivable. When
quantifying the realizability of accounts receivable, the Company takes into
consideration the value of past due receivables and the collectibility of such
receivables, based on credit worthiness.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation:
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). The
provisions of SFAS No. 123 allow the Company to either expense the estimated
fair value of stock options and warrants or to continue to follow the intrinsic
value method set forth in APB Opinion 25, "Accounting for Stock Issued to
Employees" (APB 25) but disclose the pro forma effects on net income (loss) had
the fair value of the options or warrants been expensed. The Company has elected
to continue to apply APB 25 in accounting for its employee stock option and
warrant incentive plans. Please refer to Note 7 for further information.
Recently issued accounting pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure", No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The Company has not
yet determined whether the above pronouncements will have a significant effect
on the information presented in the financial statements.
3. Joint Ventures and Other Strategic Alliances:
The following is a summary of certain of the Company's joint ventures and
other strategic alliances as of December 31, 1997.
The Company and certain of its majority-owned subsidiaries have entered into
agreements to establish joint ventures and other strategic alliances related to
the design, development, manufacture, marketing and distribution of its
electronic systems and products containing such systems. These agreements
generally provide that the Company license technology and contribute a nominal
amount of initial capital and that the other parties provide substantially all
of the funding to support the venture or alliance. This support funding
generally includes amounts paid or services rendered for engineering and
development. In exchange for this funding, the other party generally receives a
preference in the distribution of cash and/or profits from the joint ventures or
royalties from these alliances until such time that the support funding (plus an
"interest" factor in some instances) is recovered. At December 31, 1997, there
were no preferred distributions due to joint venture partners from future
profits of the joint ventures.
Technology licensing fees and engineering and development fees paid by joint
ventures to the Company are recorded as income since there is no recourse to the
Company for these amounts or any commitment by the Company to fund the
obligations of the venture.
When the Company's share of cumulative losses equals its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method. The aggregate amount of the
Company's share of losses in these joint ventures in excess of the Company's
investments which has not been recorded was zero at December 31, 1997. The
Company will not be able to record any equity in income with respect to an
entity until its share of future profits is sufficient to recover any cumulative
losses that have not previously been recorded.
Certain of the joint ventures will be suppliers to the Company and to other
of the joint ventures and will transfer products to the related entities based
upon pricing formulas established in the agreements. The formula is generally
based upon fully burdened cost, as defined in the agreements, plus a nominal
profit.
Total revenues recorded by the Company relating to the joint ventures and
alliances, or their principals, for technology licensing fees, engineering and
development services and product sales were as follows:
(in thousands of dollars)
Years ended December 31,
-------------------------------------
Joint Venture/Alliance 1995 1996 1997
- -------------------------------------- ----------- ----------- -----------
Walker Noise Cancellation
Technologies $3,994 $90 $61
Ultra Electronics, Ltd. 3,153 62 ---
ELESA 424 28 ---
Siemens Medical Systems, Inc. 260 319 172
Foster/NCT Supply, Ltd. 133 10 28
AB Electrolux 129 12 34
Hoover Universal, Inc. --- 713 ---
Verity Group plc --- --- 3,000
----------- ----------- -----------
Total $8,093 $1,234 $3,295
=========== =========== ===========
Outlined below is a summary of the nature and terms of selected ventures or
alliances:
<PAGE>
Joint Ventures
OnActive Technologies, L.L.C. ("OAT") is a limited liability company
currently owned 42.5% by Applied Acoustic Research, L.L.C. ("AAR"), 42.5% by the
Company and 15.0% by Hoover Universal, Inc., a wholly owned subsidiary of
Johnson Controls, Inc.("JCI") (collectively, the "Members") under an Operating
Agreement concluded in December, 1995 and amended in May, 1996. OAT will design,
develop, manufacture, market, distribute and sell flat panel transducers
("FPT(TM)) and related components for use in audio applications and audio
systems installed in ground based vehicles. Initial capital contributions by the
Company and AAR were nominal and no Member is required to make any additional
contribution to OAT. In May, 1996, JCI acquired a $1.5 million, 15% equity
interest in OAT and acquired exclusive rights in the automotive OEM market to
certain of the Company's and AAR's related patents for a total of $1.5 million,
which was paid 50/50 to the Company and AAR. In connection therewith, the
Company recorded a license fee of $750,000 during the year ended December 31,
1996. The Operating Agreement provides that services and subcontracts provided
to OAT by the Members are to be compensated by OAT at 115% of the Members fully
burdened cost. However, during 1996, administrative services required by OAT
were provided by the Company and not charged to OAT. During 1996 such services
were nominal. As of December 31, 1995 the Company recognized $80,000 of income
relating to its share of 1995 profit in OAT. As of December 31, 1996 the Company
reversed the $80,000 of income which related to its share of the 1996 loss in
OAT. In consideration for certain marketing services to be provided by the
Company and Oxford International, Ltd. (Oxford), an affiliate of AAR, OnActive
will pay the Company and Oxford two percent (2%) each of the revenues or thirty
percent (30%) each of the gross margin (whichever is less) received by OnActive
from the sale of Top Down Surround Sound(TM) ("TDSS") systems and the licensing
of TDSS technology to certain original equipment manufacturers.
Other Strategic Alliances:
Ultra Electronics Ltd. (formerly Dowty Maritime Limited) ("Ultra") and the
Company entered into a teaming agreement in May 1993 to collaborate on the
design, manufacture and installation of products to reduce noise in the cabins
of various types of aircraft. In accordance with the agreement, the Company
provided informational and technical assistance relating to the aircraft
quieting system and Ultra reimbursed the Company for expenses incurred in
connection with such assistance. Ultra was responsible for the marketing and
sales of the products. The Company was to supply Ultra with electronic
components required for the aircraft quieting system, at a defined cost, to be
paid by Ultra.
In March 1995, the Company and Ultra amended the teaming agreement and
concluded a licensing and royalty agreement for $2.6 million and a future
royalty of 1-1/2 % of sales commencing in 1998. Under the agreement, Ultra has
also acquired the Company's active aircraft quieting business based in
Cambridge, England, leased a portion of the Cambridge facility and has employed
certain of the Company's employees.
Accordingly, the Company recorded $2.6 million as a technology licensing fee
relating to the net amount received from above noted amended teaming agreement
and the licensing and royalty agreement in the first quarter of 1995.
New Transducers Ltd.(NXT), a wholly owned subsidiary of Verity Group PLC
("Verity") and the Company executed a cross licensing agreement (the "Cross
License") on March 28, 1997. Under terms of the Cross License, the Company
licensed patents and patents pending which relate to FPT(TM) technology to NXT,
and NXT licensed patents and patents pending which relate to parallel technology
to the Company. In consideration of the license, during the first quarter 1997,
NCT recorded a $3.0 million license fee receivable from NXT as well as royalties
on future licensing and product revenue. The Company also executed a security
deed (the "Security Deed") in favor of NXT granting NXT a conditional assignment
in the patents and patents pending licensed to NXT under the Cross License in
the event a default in a certain payment to be made by the Company under the
Cross License continued beyond fifteen days. Concurrent with the Cross License,
the Company and Verity executed agreements granting each an option for a four
year period commencing on March 28, 1998, to acquire a specified amount of the
common stock of the other subject to certain conditions and restrictions. With
respect to the Company's option to Verity (the "Verity Option"), 3.8 million
shares of common stock (approximately 3.4% of the then issued and outstanding
common stock) of the Company are covered by such option and the Company executed
a registration rights agreement (the "Registration Rights Agreement") covering
such shares. Five million ordinary shares (approximately 2.0% of the then issued
and outstanding ordinary shares) of Verity are covered by the option granted by
Verity to the Company. The exercise price under each option is the fair value of
a share of the applicable stock on March 28, 1997, the date of grant. On April
15, 1997, Verity, NXT and the Company executed several agreements and other
documents (the "New Agreements") terminating the Cross License, the Security
Deed, the Verity Option and the Registration Rights Agreement and replacing them
with new agreements (respectively the "New Cross License", the "New Security
Deed", the "New Verity Option" and the "New Registration Rights Agreement"). The
material changes effected by the New Agreements were the inclusion of Verity as
a party along with its wholly owned subsidiary NXT; providing that the license
fee payable to NCT could be paid in ordinary shares of Verity stock; and
reducing the exercise price under the option granted to Verity to purchase
shares of the Company's common stock to $0.30 per share. The subject license fee
was paid to the Company in ordinary shares of Verity stock which were
subsequently sold by the Company. On September 27, 1997, Verity, NXT, NCT Audio
Products, Inc. ("NCT Audio") and the Company executed several agreements and
other documents, terminating the New Cross License and the New Security Deed and
replacing them with new agreements (respectively, the "Cross License Agreement
dated September 27, 1997" and the "Master License Agreement"). The material
changes effected by the most recent agreements were an expansion of the fields
of use applicable to the exclusive licenses granted to Verity and NXT, an
increase in the royalties payable on future licensing and product revenues,
cancellation of the New Security Deed covering the patents licensed by the
Company, and the acceleration of the date on which the parties can exercise
their respective stock purchase option to September 27, 1997.
4. Inventories:
Inventories comprise the following:
(in thousands of dollars)
December 31,
----------------------------
1996 1997
------------- ------------
Components $ 543 $ 514
Finished goods 619 1,291
------------- ------------
Gross inventory $ 1,162 $ 1,805
Reserve for obsolete & slow moving inventory (262) (472)
------------- ------------
Inventory, net of reserves $ 900 $ 1,333
============= ============
5. Property and Equipment:
Property and equipment comprise the following:
(in thousands of dollars)
Estimated December 31,
Useful Life -------------------------
(Years) 1996 1997
------------- ------------ ------------
Machinery and equipment 3-5 $ 1,763 $ 1,801
Furniture and fixtures 3-5 749 869
Leasehold improvements 7-10 1,185 1,177
Tooling 1-3 1,062 670
Other 5-10 167 74
------------ ------------
Gross $ 4,926 $ 4,591
Less accumulated depreciation (2,873) (3,447)
------------ ------------
Net $ 2,053 $ 1,144
============ ============
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was $0.6 million, $ 0.5 million and $0.6 million, respectively.
6. Common Stock:
Private Placements:
On November 8, 1995 the Company entered into a stock purchase agreement for
the sale of 4.8 million shares of its common stock in a private placement to a
foreign investor in consideration for $3.3 million in net proceeds to the
Company. The closing of the transaction occurred on November 14, 1995. The
purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation S of the United States Securities
Act of 1933, as amended.
The Company completed a private placement of 2.0 million shares of its common
stock on August 4, 1995 receiving approximately $0.7 million in net proceeds.
The purchaser of the common stock was subject to certain resale and transfer
restrictions including those under Regulation D of the Securities Act of 1933,
as amended. As provided for in the Stock Purchase Agreement, within nine months
of the closing date, the Company was obligated to file a registration statement
with the Securities and Exchange Commission covering the registration of the
shares for resale by the purchaser.
On March 28, 1996, the Company sold 2.0 million shares of its common stock in
a second private placement with the investor in the private placement described
in the preceding paragraph that provided net proceeds to the Company of $0.7
million under terms and conditions substantially the same as those of the
earlier private placement. A registration statement covering the 4.0 million
shares of the Company's common stock issued in connection with this private
placement and the one described in the preceding paragraph was declared
effective by the Commission on September 3, 1996.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in the
aggregate, of its common stock in a private placement with three institutional
investors that provided net proceeds to the Company of $0.3 million.
Contemporaneously, the Company sold secured convertible term notes in the
aggregate principal amount of $1.2 million to those institutional investors and
granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion price
under the notes and the exercise price under the options are equal to the price
received by the Company for the sale of such 1,000,000 shares subject to certain
adjustments.
On August 13, 1996, the three institutional investors converted their
secured, convertible term notes and exercised their options in full. As a
result, the Company issued 13,403,130 shares, in the aggregate, of its common
stock to such investors, received $3.45 million in cash, and effected by
conversion to its common stock the payment of the notes together with the
accrued interest thereon.
On August 29, 1996, the Company sold 1.8 million shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common stock in November, 1995. The Company received $0.9 million of net
proceeds. The purchaser is subject to certain resale and transfer restrictions
with respect to these shares.
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S of
the Securities Act of 1933, as amended, (the "Securities Act") to five unrelated
investors (the "Investors") through multiple dealers (the "First Quarter 1997
Financing") from which the Company realized $3.2 million of net proceeds. The
Debentures were to mature between January 15, 2000 and March 25, 2000 and earn
8% interest per annum, payable quarterly in either cash or the Company's common
stock at the Company's sole option. Subject to certain common stock resale
restrictions, the Investors, at their discretion, had the right to convert the
principal due on the Debentures into the Company's common stock at any time
after the 45th day following the date of the sale of the Debentures to the
Investors. In the event of such a conversion, the conversion price was the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date of the Debentures' sale or between 75% to 60% (depending on the
Investor and other conditions) of the average closing bid price for the five
trading days immediately preceding the conversion. To provide for the above
noted conversion and interest payment options, the Company reserved 15 million
shares of the Company's common stock for issuance upon such conversion. Subject
to certain conditions, the Company also had the right to require the Investors
to convert all or part of the Debentures under the above noted conversion price
conditions after February 15, 1998. As of June 6, 1997, the Investors had
converted all $3.4 million of the Debentures into 16.5 million shares of the
Company's common stock. At the Company's election, interest due through the
conversion dates of the Debentures was paid through the issuance of an
additional 0.2 million shares of the Company's common stock. In conjunction with
the Debentures, the Company granted a warrant to purchase 75,000 shares of
common stock to one investor. During the year ended December 31, 1997, the
Company valued this warrant, using the Black-Scholes pricing model at $34,000
which was expensed as debt discount. The Company has recorded a $1.4 million
non-cash interest expense attributable to the conversions of the Debentures in
the first and second quarters of 1997 as an adjustment during the fourth quarter
of 1997. If the shares were issued in lieu of debt at the respective issuance
dates of the debt, supplementary basic and diluted net loss per share for the
year ended December 31, 1997 would have been a loss of $0.08 per share.
On June 19, 1997 the stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock from 140 million shares to 185 million shares. The
Company has reserved 3.9 million shares of such additional shares for issuance
upon the exercise of the New Verity Option and 2.6 million shares of such
additional shares for issuance upon the exercise of options granted or to be
granted and future grants of restricted stock awards under the Noise
Cancellation Technologies, Inc. Stock Incentive Plan (the "1992 Plan").
On July 30, 1997 the Company sold 2.9 million shares, in the aggregate, of
its common stock at a price of $0.175 per share in the July 30, 1997 Private
Placement that provided net proceeds to the Company of $0.5 million.
On September 4, 1997, the Company transferred $5,000 cash and all of the
business and assets of its Audio Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated company, NCT Audio, in consideration for 5,867 shares of NCT
Audio common stock whereupon NCT Audio became a wholly owned subsidiary of the
Company. The Company also granted NCT Audio an exclusive worldwide license with
respect to all of the Company's relevant patented and unpatented technology
relating to FPT(TM) and FPT(TM) based audio speaker products for all markets for
such products excluding (a) markets licensed to or reserved by Verity and NXT
under the Company's cross licensing agreements with Verity and NXT, (b) the
ground based vehicle market licensed to OAT, (c) all markets for hearing aids
and other hearing enhancing or assisting devices, and (d) all markets for
headsets, headphones and other products performing functions substantially the
same as those performed by such products in consideration for a license fee of
$3.0 million (eliminated in consolidation) to be paid when proceeds are
available from the sale of NCT Audio common stock and on-going future royalties
payable by NCT Audio to the Company as provided in such license agreement. In
addition, the Company agreed to transfer all of its rights and obligations under
its cross licensing agreements with Verity and NXT to NCT Audio and to transfer
the Company's interest in OAT to NCT Audio. Between October 10, 1997 and
December 4, 1997 NCT Audio issued 2,145 shares of its common stock (including
533 shares issued to Verity) for an aggregate purchase price of $4.0 million in
a private placement pursuant to Regulation D under the Securities Act (the "NCT
Audio Financing"). NCT Audio has not met certain conditions regarding the filing
of a registration statement for NCT Audio common stock. As such, holders of NCT
Audio common stock have a right to convert their NCT Audio common stock into a
sufficient number of restricted shares of NCT common stock to equal their
original cash investment in NCT Audio, plus a 20% discount to market. As of
February 27, 1998, no NCT Audio shareholder has exercised their right to convert
NCT Audio common stock into NCT common stock under the terms noted above.
Between October 28, 1997 and December 11, 1997, the Company entered into a
series of subscription agreements (the "Subscription Agreements") to sell an
aggregate amount of $13.3 million of Series C Convertible Preferred Stock (the
"Preferred Stock") in a private placement, pursuant to Regulation D of the
Securities Act, to 32 unrelated accredited investors through two dealers (the
"1997 Preferred Stock Private Placement"). The total Preferred Stock Offering
was completed on December 11, 1997. The aggregate net proceeds to the Company of
the 1997 Preferred Stock Private Placement were $11.9 million. Each share of the
Preferred Stock has a par value of $.10 per share and a stated value of one
thousand dollars ($1,000) with an accretion rate of four percent (4%) per annum
on the stated value. Each share of Preferred Stock is convertible into fully
paid and nonassessable shares of the Company's Common Stock subject to certain
limitations. Under the terms of the Subscription Agreements the Company is
required to exercise its best efforts to file a registration statement
("Registration Statement") on Form S-3 covering the resale of all shares of
Common Stock of the Company issuable upon conversion of the Preferred Stock then
outstanding within sixty (60) days after the first Closing of the 1997 Preferred
Stock Private Placement. The shares of Preferred Stock become convertible into
shares of Common Stock at any time commencing after the earlier of (i) the
effective date of the Registration Statement; or (ii) ninety (90) days after the
date of filing of the Registration Statement. Each share of Preferred Stock is
convertible into a number of shares of Common Stock of the Company as determined
in accordance with the Conversion Formula as set forth in the agreement using a
conversion price equal to the lesser of (x) 120% of the five (5) day average
closing bid price of Common Stock immediately prior to the closing date of the
Preferred Stock being converted or (y) 20% below the five (5) day average
closing bid price of Common Stock immediately prior to the conversion date
thereof. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" for a description of the
Conversion Formula.
The conversion terms of the Preferred Stock also provide that in no event
shall the average closing bid price referred to in the Conversion Formula be
less than $0.625 per share and in no event shall the Company be obligated to
issue more than 26.0 million shares of its Common Stock in the aggregate in
connection with the conversion of the Preferred Stock. Accordingly, 26.0 million
shares of Common Stock which could be issuable upon conversion of the Preferred
Stock are included in the offering to which the prospectus relates. Under the
terms of the Subscription Agreements the Company may be subject to a penalty if
the Registration Statement is not declared effective within one hundred twenty
(120) days after the first closing of any incremental portion of the offering of
Preferred Stock, such penalty to be in an amount equal to one and one half
percent (1.5%) per month of the aggregate amount of Preferred Stock sold in the
offering up to a maximum of ten percent (10%) of such aggregate amount. The
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Subscription Agreements and ending ninety (90) days after the
closing of the offering the Company will be prohibited from issuing any debt or
equity securities other than Preferred Stock, and that the Corporation will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner or in the event it fails to reserve sufficient
authorized but unissued Common Stock for issuance upon conversion of the
Preferred Stock.
The Securities and Exchange Commission (the "SEC") has taken the position
that when preferred stock is convertible to common stock at a conversion rate
that is the lower of a rate fixed at issuance or a fixed discount from the
common stock market price at the time of conversion, the discounted amount is an
assured incremental yield, the "beneficial conversion feature", to the preferred
shareholders and should be accounted for as an embedded dividend to preferred
shareholders. As such, this dividend was recognized in the earnings per share
calculation.
Stock subscription receivable:
The $0.4 million stock subscription receivable at December 31, 1997
represents a receivable of $0.1 million due from a director which was paid in
1998, and a $0.3 million receivable from the escrow agent for the NCT Audio
financing which has not yet been paid.
Shares reserved for common stock options and warrants:
At December 31, 1997 aggregate shares reserved for issuance under common
stock option plans and warrants amounted to 17.7 million shares of which common
stock options and warrants for 18.6 million shares are outstanding (see Note 7)
and 16.2 million shares are exercisable.
7. Common Stock Options and Warrants:
The Company applies APB 25 in accounting for its various employee stock
option incentive plans and warrants and, accordingly, recognizes compensation
expense as the difference, if any, between the market price of the underlying
common stock and the exercise price of the option on the date of grant. The
effect of applying SFAS No. 123 on 1995, 1996 and 1997 pro forma net loss as
stated above is not necessarily representative of the effects on reported net
loss for future periods due to, among other factors, (i) the vesting period of
the stock options and (ii) the fair value of additional stock option grants in
future periods. If compensation expense for the Company's stock option plans and
warrants had been determined based on the fair value of the options or warrants
at the grant date for awards under the plans in accordance with the methodology
prescribed under SFAS No. 123, the Company's net loss would have been $5.8
million, $12.8 million and $15.8 million, or $(0.07), $(0.13) and $(0.14) per
share in 1995, 1996 and 1997, respectively. The fair value of the options and
warrants granted in 1995, 1996 and 1997 are estimated in the range of $0.44 to
$1.25, $0.48 to $0.58 and $0.16 to $4.07 per share, respectively, on the date of
grant using the Black-Scholes option-pricing model utilizing the following
assumptions: dividend yield 0%, volatility of 1.040, 1.225 and 1.289 in 1995,
1996 and 1997, respectively, risk free interest rates in the range of 5.63% to
7.84%, 5.05% to 6.50% and 5.79% to 6.63% for 1995, 1996 and 1997, respectively,
and expected life of 3 years. The weighted average fair value of options granted
during 1995, 1996 and 1997 are estimated in the range of $0.37 to $0.66, $0.49,
and $0.13 to $0.58 per share, respectively also using the Black-Scholes
option-pricing model.
Stock Options:
The Company's 1987 Stock Option Plan (the "1987 Plan") provides for the
granting of up to 4,000,000 shares of common stock as either incentive stock
options or nonstatutory stock options. Options to purchase shares may be granted
under the 1987 Plan to persons who, in the case of incentive stock options, are
full-time employees (including officers and directors) of the Company; or, in
the case of nonstatutory stock options, are employees or non-employee directors
of the Company. The exercise price of all incentive stock options must be at
least equal to the fair market value of such shares on the date of the grant and
may be exercisable over a ten-year period. The exercise price and duration of
the nonstatutory stock options are to be determined by the Board of Directors.
Options granted under the 1987 Plan generally vest 20% upon grant and 20% per
annum thereafter as determined by the Board of Directors.
<PAGE>
<TABLE>
<CAPTION>
Information with respect to 1987 Plan activity is summarized as follows:
Years Ended December 31,
-------------------------------------------------------------------------
1995 1996 1997
--------------------- -------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 1,790,472 $0.58 1,540,000 $0.56 1,500,000 $ 0.54
beginning of year
Options granted - - - - 1,350,000 0.51
Options exercised (232,651) 0.66 - - - -
Options canceled,
expired or forfeited (17,821) 1.39 (40,000) 1.31 (1,500,000) (0.54)
--------- --------- ---------
Outstanding at end of
year 1,540,000 $0.56 1,500,000 $0.54 1,350,000 $ 0.51
========= ========= =========
Options exercisable 1,540,000 $0.56 1,500,000 $0.54 1,350,000 $ 0.51
at year-end ========= ========= =========
</TABLE>
As of December 31, 1997, options for the purchase of 217,821 shares were
available for future grant under the 1987 Plan.
The Company's non-plan options are granted from time to time at the
discretion of the Board of Directors. The exercise price of all non-plan options
generally must be at least equal to the fair market value of such shares on the
date of grant and generally are exercisable over a five to ten year period
as determined by the Board of Directors. Vesting of non-plan options varies from
(i) fully vested at the date of grant to (ii) multiple year apportionment of
vesting as determined by the Board of Directors.
Information with respect to non-plan stock option activity is summarized as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1995 1996 1997
---------------- ----------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,641,995 $1.98 403,116 $1.04 372,449 $1.08
Options granted - - - - 7,844,449 0.41
Options exercised (328,667) 0.51 (26,667) 0.50 - -
Options canceled,
expired or forfeited (910,212) 2.92 (4,000) 1.33 (3,897,449) 0.53
======== ======= =========
Outstanding at end
of year 403,116 $1.04 372,449 $1.08 4,319,449 $0.36
======== ======= =========
Options exercisable
at year-end 399,116 $1.02 370,449 $1.07 4,319,449 $0.36
======== ======= =========
</TABLE>
On October 6, 1992, the Company adopted a stock option plan as amended (the
"1992 Plan") for the granting of options to purchase up to 10,000,000 shares of
common stock to officers, employees, certain consultants and certain directors.
The exercise price of all 1992 Plan options must be at least equal to the fair
market value of such shares on the date of the grant and 1992 Plan options are
generally exercisable over a five to ten year period as determined by the Board
of Directors. Vesting of 1992 Plan options varies from (i) fully vested at the
date of grant to (ii) multiple year apportionment of vesting as determined by
the Board of Directors.
<TABLE>
<CAPTION>
<PAGE>
Information with respect to 1992 Plan activity is summarized as follows:
Years Ended December 31,
---------------------------------------------------------
1995 1996 1997
------------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 4,058,542 $2.75 4,004,248 $1.00 6,022,765 $0.86
Options granted 5,386,422 1.04 2,156,500 0.67 4,652,222 0.55
Options exercised (161,423) 0.85 (33,533) 0.75 (1,141,795 (0.64)
Options canceled,
expired or forfeited (5,279,293) 2.29 (104,450) 1.37 (503,256) (0.99)
========= ========= =========
Outstanding at end
of year 4,004,248 1.00 6,022,765 $0.86 9,029,936 $0.72
========= ========= =========
Options exercisable
at year-end 1,534,335 $1.31 5,835,265 $0.86 6,592,436 $0.73
========= ========= =========
</TABLE>
As of December 31, 1997, no shares were available for future grants of
restricted stock awards and for options to purchase common stock under the 1992
Plan.
As of December 31, 1997, 1.9 million options have been granted but are not
exercisable until such time as the Company's stockholders approve an increase in
the number of shares of the Company's Common Stock included in the 1992 Plan. At
the time of such stockholder approval, if the market value of the Company's
stock exceeds the exercise price of the subject options, the Company will incur
a non-cash charge to earnings equal to the spread between the exercise price of
the option and market price, times the number of options involved.
On November 15, 1994, the Board of Directors adopted the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors (the "Directors Plan"), as
amended. Under the Directors Plan 821,000 shares have been approved by the Board
of Directors for issuance. The options granted under the Directors Plan have
exercise prices equal to the fair market value of the Common Stock on the grant
dates, and expire five years from date of grant. Options granted under the
Directors Plan generally vest at the date of grant.
<TABLE>
<CAPTION>
Information with respect to Directors Plan activity is summarized as follows:
Years Ended December 31,
----------------------------------------------------------
1995 1996 1997
------------------- ---------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 240,000 $0.97 821,000 $0.73 746,000 $0.73
Options granted 1,076,000 0.77 - - - -
Options exercised - - - - - -
Options canceled,
expired or
forfeited (495,000) 0.92 (75,000) 0.75 - -
======= ======= ========
Outstanding at end
of year 821,000 $0.73 746,000 $0.73 746,000 $0.73
======= ======= ========
Options exercisable
at year-end 305,000 $0.70 746,000 $0.73 746,000 $0.73
======= ======= ========
</TABLE>
As of December 31, 1997, there were 75,000 options for the purchase of shares
available for future grants under the Directors Plan.
<TABLE>
<CAPTION>
<PAGE>
The following information summarizes information about the Company's stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
---------------------- -------------------------
Weighted
Average
Remaining
Contrac- Weighted Weighted
Number tual Life Average Number Average
Range of Out- (In Exercise Exer- Exercise
Plan Exercise Price standing Years) Price cisable Price
- -------------- -------------- --------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1987 Plan $0.50 to $0.63 1,350,000 1.18 $0.51 1,350,000 $0.51
Non-Plan $0.27 to $4.75 4,319,449 4.14 $0.36 4,319,449 $0.36
1992 Plan $0.27 to $4.00 9,029,936 4.89 $0.72 6,592,436 $0.73
Director's Plan $0.66 to $0.75 746,000 1.88 $0.73 746,000 $0.73
</TABLE>
Warrants:
The Company's warrants are granted from time to time at the discretion of the
Board of Directors. The exercise price of all warrants generally must be at
least equal to the fair market value of such shares on the date of grant.
Warrants are generally exercisable over a five to ten year period as determined
by the Board of Directors. Warrants generally vest on the grant date.
The Company had shares of its common stock reserved at December 31, 1995,
December 31, 1996, and December 31, 1997, for warrants outstanding, all of which
are exercisable.
<TABLE>
<CAPTION>
Information with respect to warrant activity is summarized as follows:
Years Ended December 31,
--------------------------------------------------------
1995 1996 1997
---------------- ----------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 4,829,896 $1.20 4,032,541 $0.71 3,888,539 $0.72
Warrants granted 2,418,750 0.76 - - 2,846,923 0.76
Warrants exercised (327,105) 0.76 (144,002) 0.45 (854,119) (0.41)
Warrants canceled,
expired or
forfeited (2,889,000) 1.57 - (2,734,423) (0.75)
========= ========= =========
Outstanding at
end of year 4,032,541 $0.71 3,888,539 $0.72 3,146,920 $0.81
========= ========= =========
Warrants
exercisable
at year end 4,032,541 $0.71 3,888,539 $0.72 3,146,920 $0.81
========= ========= =========
</TABLE>
The following table summarizes information about warrants outstanding at
December 31, 1997:
Warrants Outstanding Warrants Exercisable
----------------------------------- ---------------------
Weighted
Average
Remaining
Contractual Weighted Weighted
Life Average Average
Number (In Exercise Number Exercise
Range of Exercise Outstanding Years) Price Exercisable Price
- ----------------- ----------- ------------ -------- ----------- --------
$0.69 to $4.00 3,146,920 2.06 $0.81 3,146,920 $0.81
<PAGE>
8. Related Parties:
Environmental Research Information, Inc.
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Chairman of the Board
of Directors of the Company, shares investment control over an additional 24% of
the outstanding capital of ERI. During the fiscal year ended December 31, 1996,
the Company was not required to make any such payments to ERI under these
agreements.
Quiet Power Systems, Inc.
In 1993, the Company entered into three Marketing Agreements with QuietPower
Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical Solutions,
Inc."), a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing Agreements, QSI has undertaken to use its best
efforts to seek research and development funding for the Company from electric
and natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will record a charge for the amount by which the market price of the Common
Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1993, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
Under the terms of the second of the three Marketing Agreements, QSI is
granted a non-exclusive right to market the Company's products that are or will
be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the Company in the feeder
bowl area. The initial term of this Marketing Agreement is three years with
subsequent automatic one-year renewals unless a party elects not to renew.
Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with equipment used by electric and/or natural gas utilities for
retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products equal to 129% of QSI's
marketing expenses attributable to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues received by the Company from the sale of such products. QSI is
also entitled to receive a 5% commission on research and development funding
similar to that described above. QSI's exclusive rights continue for an
indefinite term provided it meets certain performance criteria relating to
marketing efforts during the first two years following product availability in
commercial quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights become non-exclusive, depending on the circumstances
causing such change, the initial term then becomes either three or five years
from the date of this Marketing Agreement, with subsequent one-year automatic
renewals in each instance unless either party elects not to renew.
For the years ended December 31, 1995, 1996 and 1997 the Company was not
required to pay any commissions to QSI under any of these Marketing Agreements.
The Company has also entered into a Teaming Agreement with QSI under which
each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1995, 1996 and 1997 no
payments were required to be made to QSI.
In March 1995, the Company entered into a Master Agreement with QSI under
which QSI was granted an exclusive worldwide license under certain NCT patents
and technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances
including NCT's failure to develop the products or the failure of the parties to
agree on certain development matters. In consideration of the rights granted
under the Master Agreement, QSI is to pay the Company a royalty of 6% of the
gross revenues received from the sale of the products and 50% of the gross
revenues received from sublicensing the rights granted to QSI under the Master
Agreement after QSI has recouped 150% of the costs incurred by QSI in the
development of the products in question. The Company is obligated to pay similar
royalties to QSI on its sale of the products and the licensing of rights covered
under the Master Agreement outside the utility industry and from sales and
licensing within the utility industry in the Far East. In addition to the
foregoing royalties, QSI is to pay an exclusivity fee to the Company of
$750,000; $250,000 of which QSI paid to the Company in June 1994. The balance is
payable in equal monthly installments of $16,667 beginning in April 1995. QSI's
exclusive rights become non-exclusive with respect to all products if it fails
to pay any installment of the exclusivity fee when due and QSI loses such rights
with respect to any given product in the event it fails to make any development
funding payment applicable to that product. The Master Agreement supersedes all
other agreements relating to the products covered under the Master Agreement,
including those agreements between the Company and QSI described above.
Immediately following the execution to the Master Agreement, the Company and
QSI entered into a letter agreement providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.
In April 1995, the Company and QSI entered into another letter agreement
under which QSI agreed to forfeit and surrender the five year warrant to
purchase 750,000 shares of the Company's common stock issued to QSI under the
first Marketing Agreement described above. In addition, the $500,000 balance of
the exclusivity fee provided for under the Master Agreement was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the indebtedness to be paid under the letter agreement described in the
preceding paragraph was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million, whichever
first occurs. Such indebtedness is to be evidenced by a promissory note, non
payment of which is to constitute an event of termination under the Master
Agreement.
On May 21, 1996, the Company and QSI entered into another letter agreement
extending the time by which the payments from QSI to the Company under the April
1995 letter agreement described above were to be made. Under the letter the
payment of certain arrearages in the payment of the exclusivity fee was to be
made not later than June 15, 1996, with the balance continuing to be payable by
monthly payments of $8,333 and as provided in the May 1995 letter agreement. In
addition the payment of the other indebtedness owed by QSI to the Company was to
be paid by a payment of $25,000 at the time QSI obtained certain anticipated
financing with the balance paid by monthly payments of $15,000 each. Default in
QSI's timely payment of any of the amounts specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.
On April 9, 1997, the Company and QSI entered into another letter agreement
revising the payment schedule set forth in the May 21, 1996 letter agreement
applicable to the payment of the indebtedness owed to the Company by QSI other
than the unpaid portion of the exclusivity fee. Under the revised schedule, the
full amount of such indebtedness is to be paid by an initial payment of $125,000
on or before April 21, 1997, and a second payment of $200,000 upon the closing
of a proposed financing in June 1997 or on January 1, 1998, whichever first
occurs. The Company is also entitled to receive 15% of any other financing
obtained by QSI in the interim as well as interest at the rate of 10% per annum
on the unpaid amount of such indebtedness from July 1, 1997. The letter
agreement also provides for the continuation of QSI's payment of the exclusivity
fee in accordance with the earlier letter agreements as well as the payment of
$11,108 by April 21, 1997, for headset products sold by the Company to QSI in
1996. In the event of a default in QSI's timely payment of any of the amounts
specified in the April 9, 1997 letter agreement, the Company has the right to
cause the termination of the Master Agreement and all rights granted by QSI
thereunder upon 10 days notice of termination to QSI.
As of February 27, 1998, QSI has paid all installments due and payable for
the exclusivity fee and owes the Company $150,000 which was due on January 1,
1998 and is fully reserved, and other than as described above, owes no other
amounts to the Company.
<PAGE>
Other Parties
The President and Chief Executive Officer, who is also a stockholder of the
Company, receives an incentive bonus equal to 1% of the cash received by the
Company upon the execution of agreements or other documentation evidencing
transactions with unaffiliated parties. For the year ended December 31, 1997
approximately $243,000 was incurred in connection with this arrangement.
During 1995, 1996 and 1997 the Company purchased $0.5 million, $0.6 million
and $0.7 million respectively, of products from its various manufacturing joint
venture entities.
9. Income Taxes:
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Accordingly, deferred tax assets and liabilities are established for temporary
differences between tax and financial reporting bases of assets and liabilities.
A valuation allowance is established when the Company determines that it is more
likely than not that a deferred tax asset will not be realized. The Company's
temporary differences primarily result from depreciation related to machinery
and equipment, compensation expense related to warrants, options and reserves.
The adoption of the aforementioned accounting standard had no effect on
previously reported results of operations.
At December 31, 1997, the Company had available net operating loss
carryforwards of approximately $76.9 million and research and development credit
carryforwards of $1.3 million for federal income tax purposes which expire as
follows:
(in thousands of dollars)
Research and
Net Operating Development
Year Losses Credits
---------------- ----------------
1999 $151 $ --
2000 129 --
2001 787 --
2002 2,119 --
2003 1,974 --
2004 1,620 --
2005 3,870 141
2006 1,823 192
2007 6,866 118
2008 13,456 321
2009 16,293 413
2010 9,386 61
2011 8,980 67
2012 9,457 (1)
---------------- ----------------
Total $76,911 $1,313
================ ================
(1) Includes approximately $4.1 million net operating loss relating to NCT
Audio Products, Inc.
The Company's ability to utilize its net operating loss carryforwards may be
subject to an annual limitation. The difference between the statutory tax rate
of 34% and the Company's effective tax rate of 0% is due to the increase in the
valuation allowance of $1.4 million, $3.3 million and $3.0 million in 1995, 1996
and 1997, respectively.
<PAGE>
The types of temporary differences that give rise to significant portions of
the deferred tax assets and the federal and state tax effect of those
differences as well as federal net operating loss and research and development
credit at December 31, 1996 and 1997 were as follows:
(in thousands of
dollars)
------------------------
1996 1997
--------- ----------
Accounts receivable $ 281 $ 207
Inventory 108 191
Property and equipment 187 68
Accrued expenses 243 69
Stock compensation 2,684 2,698
Other 324 299
--------- ----------
Total temporary differences $ 3,827 3,532
Federal net operating losses 22,903 26,149
Federal research and development 1,246 1,313
credits
--------- ----------
$ 27,976 $ 30,994
Less: Valuation allowance (27,976) (30,994)
--------- ----------
Deferred taxes $ - $ -
========= ==========
10. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lire ($18.9 million); and (vi) order the
Company to pay damages for the harm done to Mr. Valerio's image for an amount
such as the judge shall deem equitable and in case for no less than 500 million
Lire ($3.1 million). The Company retained an Italian law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the Company, through its Italian counsel, filed a brief of reply with the
Tribunal of Milan setting forth the Company's position that: (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is groundless since the parties never entered into an agreement, and (iii)
because Mr. Valerio is not enrolled in the official Register of Agents, under
applicable Italian law Mr. Valerio is not entitled to any compensation for his
alleged activities. A preliminary hearing before the Tribunal was held on May
30, 1996, certain pretrial discovery has been completed and a hearing before a
Discovery Judge was held on October 17, 1996. Submissions of the parties final
pleadings were to be made in connection with the next hearing which was
scheduled for April 3, 1997. On April 3, 1997, the Discovery Judge postponed
this hearing to May 19, 1998, due to reorganization of all proceedings pending
before the Tribunal of Milan. Management is of the opinion that the lawsuit is
without merit and will contest it vigorously. In the opinion of management,
after consultation with outside counsel, resolution of this suit should not have
a material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a severe material effect
on quarterly or annual operating results.
On September 16, 1997, Ally Capital Corporation ("Ally") filed suit against
the Company, John J. McCloy II, Michael J. Parrella, Jay M. Haft and Alistair J.
Keith in the United States District Court for the District of Connecticut (the
"District Court"). The complaint was not served on the Company until January 16,
1998, and has yet to be served on the individual defendants. The individual
defendants are current and former officers and directors of the Company. The
complaint alleges three (3) causes of action arising out of an agreement (the
"Asset Purchase Agreement") which the Company entered into with another entity
known as Active Noise and Vibration Technologies, Inc. ("ANVT") whereby the
Company agreed to acquire ANVT's patented and unpatented intellectual property,
the rights and obligations under a defined list of agreements between ANVT and
twenty-one (21) other parties (the "Listed Parties") relating to existing or
potential joint ventures, licensing and other business relationships, and
certain items of office and laboratory equipment. For these assets, the Company
paid ANVT two hundred thousand ($200,000.00) dollars and issued ANVT two million
(2,000,000) shares of the Company's common stock. The Asset Purchase Agreement
also provided ANVT with the right to certain contingent payments, to the extent
the Company generated certain levels of revenue from joint venture, licensing or
other contractual relationships with any of the Listed Parties. Plaintiff Ally
is an unsecured creditor of ANVT and is not a party to the Asset Purchase
Agreement; however, Ally asserts an interest to part of the consideration paid
ANVT by virtue of an escrow agreement between ANVT and the escrow agent for the
benefit of ANVT's secured and unsecured creditors. Ally purports to allege
claims of fraud, negligent misrepresentation and a claim under the Connecticut
Unfair Trade Practice Act based upon purported representations made to ANVT, not
Ally. Thus, it is alleged that the Company misrepresented to ANVT the Company's
financial condition, the number of shares it could issue and the value of the
contingent payment rights under the Asset Purchase Agreement. In connection with
the claims, Ally seeks compensatory damages in excess of one million two hundred
thousand ($1,200,000.00) dollars, punitive damages and attorney fees. On March
4, 1998, the Company served its motion to dismiss the complaint pursuant to
Federal Rule of Civil Procedure 12. The basis for the motion include: that the
summons and complaint were not served for more than one hundred twenty (120)
days after the complaint was filed, in violation of Federal Rule of Civil
Procedure 4; that Ally lacks standing to bring its claims as they are based on
purported representations made by the Company to ANVT, not Ally; that the claims
are legally insufficient under Connecticut law; and that plaintiff has failed to
join necessary parties, ANVT and the escrow agent. As no discovery has taken
place, the Company is unable to assess the likelihood of an adverse result.
Management, however, believes it has meritorious defenses and intends a vigorous
defense of this lawsuit. However, in the event this lawsuit does result in a
substantial final judgment against the Company, said judgment could have a
severe material effect on quarterly or annual operating results.
11. Commitments and Contingencies:
The Company is obligated for minimum annual rentals (net of sublease income)
under operating leases for offices, warehouse space and laboratory space,
expiring through April 2007 with various renewal options, as follows:
(in thousands
of dollars)
---------------------- ----------------
Year Ending
December 31, Amount
---------------------- ----------------
1998 $ 436
1999 437
2000 296
2001 77
2002 63
Thereafter 266
================
Total $1,575
================
Rent expense (net of sublease income) was $0.8 million, $0.6 million and $0.4
million for each of the three years ended December 31, 1995, 1996 and 1997,
respectively. During 1995, rent expense was paid, in part, through the issuance
of common stock (see Note 6).
In April, 1996, the Company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, certain
health care benefits to employees and directors of the Company's United States
operations. The Company administers this modified self insured Benefit Plan
through a commercial third party administrative health care provider. The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million while combined individual and family benefit exposure in
each Benefit Plan fiscal year is limited to $35,000. Benefit claims in excess of
the above mentioned individual or the maximum aggregate stop loss are covered by
a commercial third party insurance provider to which the Company pays a nominal
premium for the subject stop loss coverage. The Company records benefit claim
expense in the period in which the benefit claim is incurred. As of February 27,
1998, the Company was not aware of any material benefit claim liability.
On September 16, 1994, the Company acquired the patents, technology, other
intellectual property and certain related tangible assets of ANVT. In addition,
ANVT is entitled to a future contingent earn-out based on revenues generated by
the ANVT contracts assigned to the Company as well as certain types of
agreements to be entered into by the Company with parties previously having a
business relationship with ANVT. Future contingent payments, if any, will be
charged against the associated revenues. As of the period ended December 31,
1997, no such contingent earn-out or payments were due ANVT.
<PAGE>
12. Information on Business Segments:
The Company operates in only one business segment, specifically engaged in
the design, development, production and distribution of electronic systems that
actively reduce noise and vibration. The Company's worldwide activities consist
of operations in the United States, Europe and Japan. Revenue, (income) loss and
identifiable assets by geographic area are as follows:
(in thousands of dollars)
December 31,
-----------------------------------------
1995 1996 1997
------------ ------------ ------------
Revenues
United States $6,095 $2,674 $2,089
Europe 4,065 480 3,270
Far East 306 10 359
------------ ------------ ------------
Total $10,466 $3,164 $5,718
============ ============ ============
Net (Income) Loss
United States $3,761 $9,752 $9,211
Europe (36) 912 411
Far East 343 161 226
------------ ------------ ------------
Total $4,068 $10,825 $9,848
============ ============ ============
Identifiable Assets
United States $8,997 $5,366 $17,060
Europe 586 515 301
------------ ------------ ------------
Total $9,583 $5,881 $17,361
============ ============ ============
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ CY E. HAMMOND
-------------------------------
Cy E. Hammond
Senior Vice President and
Chief Financial Officer
May 1, 1998
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements of
Noise Cancellation Technologies, Inc. on Form S-3 (File Nos. 33-47611, 33-51468,
33-74442, 33-84694 and 33-10545), on Form S-1 (File Nos. 33-19926, 33-38584 and
33-44790) and on Form S-8 (File Nos. 33-64792, 333-11209 and 333-11213) of our
report, which includes an explanatory paragraph about the Company's ability to
continue as a going concern, dated February 27, 1998, on our audits of the
consolidated financial statements and schedule of the Company as of December 31,
1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 which
report is included in this Annual Report on Form 10-K/A as amended by Amendment
No. 2.
/s/ RICHARD A. EISNER & COMPANY, LLP
Richard A. Eisner & Company, LLP
New York, New York
April 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1997,
FILED ON MARCH 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12604
<SECURITIES> 0
<RECEIVABLES> 568
<ALLOWANCES> 38
<INVENTORY> 1333
<CURRENT-ASSETS> 14680
<PP&E> 9316
<DEPRECIATION> 6684
<TOTAL-ASSETS> 17361
<CURRENT-LIABILITIES> 2984
<BONDS> 0
0
10458
<COMMON> 1332
<OTHER-SE> 2587
<TOTAL-LIABILITY-AND-EQUITY> 17361
<SALES> 1720
<TOTAL-REVENUES> 5718
<CGS> 2271
<TOTAL-COSTS> 2587
<OTHER-EXPENSES> 12979
<LOSS-PROVISION> 130
<INTEREST-EXPENSE> 1514
<INCOME-PRETAX> (9848)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9848)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
