UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: September 30, 1997
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COMMISSION FILE NUMBER: 0-18267
Noise Cancellation Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
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(Registrant's telephone number, including area code) (410- 636-8700
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
132,739,795 shares outstanding as of November 4, 1997
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(In thousands, except per share amounts)
Three Nine
Months Months
Ended September 30, Ended September 30,
---------------------------------------
1996 1997 1996 1997
------------------ ------------------
REVENUES:
Technology licensing fees and $160 $220 $1,229 $3,430
royalties
Product sales, net 358 488 1,049 1,069
Engineering and development 1 128 225 341
services
------------------ ------------------
Total revenues $519 $836 $2,503 $4,840
------------------ ------------------
COSTS AND EXPENSES:
Costs of sales $276 $896 $850 $1,401
Costs of engineering and 8 96 175 295
development services
Selling, general and administrative 1,779 1,483 4,105 3,734
Research and development 2,029 1,501 4,790 4,513
Equity in net loss of 80
unconsolidated affiliates - - -
Interest expense 2 28 26 75
------------------ ------------------
Total costs and expenses $4,094 $4,004 $10,026 $10,018
------------------ ------------------
NET (LOSS) $(3,575) $(3,168) $(7,523) $(5,178)
================== ==================
Weighted average number of common
shares outstanding 103,840 130,467 98,060 121,490
================== ==================
NET (LOSS) PER COMMON SHARE $ (.03) $ (.02) $ (.08) $ (.04)
================== ==================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands
of dollars)
December September
31, 30,
ASSETS 1996 1997
---------- ----------
Current assets: (Unaudited)
Cash and cash equivalents (Note 1)
$ $
368 1,038
Accounts receivable:
Trade :
Technology license fees and
royalties $ 150 210
Joint ventures and affiliates 2 21
Other 392 630
Unbilled 63 7
Allowance for doubtful accounts (123) (124)
---------- ----------
Total accounts receivable $ 484 $ 744
Inventories, net of reserves (Note 2) 900 1,350
Other current assets 207 35
---------- ----------
Total current assets 1,959 3,167
Property and equipment, net 2,053 1,466
Patent rights and other intangibles, net 1,823 1,572
Other assets 46 49
---------- ----------
$ 5,881 $ 6,254
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,465 2,383
Accrued expenses 1,187 981
Accrued payroll, taxes and related expenses 618 427
Customers' advances 1 87
---------- ----------
Total current liabilities $ 3,271 $ 3,878
---------- ----------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, $.10 par value, 10,000,000 shares
authorized, none issued
Common stock, $.01 par value, 140,000,000 and
185,000,000 shares, respectively, authorized;
issued and outstanding 111,614,405 and
131,214,081 shares, respectively $ 1,116 $ 1,312
Additional paid-in-capital 85,025 89,804
Accumulated deficit (83,673) (88,851)
Cumulative translation adjustment 142 116
Common stock subscriptions receivable - (5)
----------------------
Total stockholders' equity $ 2,610 2,376
$ 5,881 6,254
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
(Thousands of dollars)
Nine Months
Ended September 30,
------------------
1996 1997
--------- --------
Cash flows from operating activities:
Net (loss) $ (7,523) $ (5,178)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization 706 877
Common stock issued as consideration for:
Compensation 13 3
Interest - 52
Common stock retired as consideration for:
Employee expenses (5) -
Provision for doubtful accounts 74 148
Equity in net loss of unconsolidated
affiliates 80 -
Unrealized foreign currency (gain) 168 (8)
Loss on disposition of fixed assets - 63
Changes in operating assets and liabilities:
(Increase) in accounts receivable (65) (412)
(Increase) decrease in inventories 682 (450)
Decrease in other assets 152 167
Increase (decrease) in accounts payable
and accrued expenses (354) 780
Increase (decrease) in other liabilities 161 (48)
--------- --------
Net cash (used in) operating activities $(5,911) $(4,006)
--------- --------
Cash flows from investing activities:
Capital expenditures $ (179) (127)
Proceeds of sales of short-term investments
(net) - -
--------- --------
Net cash (used in) investing activities $ (179) (127)
--------- --------
Cash flows from financing activities:
Proceeds from:
Notes (net) $ - $ 3,795
Sale of common stock 6,377 -
Investment by minority shareholder in
subsidiary - 1,000
Exercise of stock purchase warrants and
options 104 8
--------- --------
Net cash provided by financing activities $6,481 $ 4,803
--------- --------
Net increase (decrease) in cash and cash
equivalents $ 391 670
Cash and cash equivalents - beginning of period 1,831 368
--------- --------
Cash and cash equivalents - end of period $ 2,222 $ 1,038
========= ========
Cash paid for interest $ 5 $ 2
========= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and certain adjustments to reserves and allowances)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Noise Cancellation Technologies, Inc. (the
"Company" or "NCT") Annual Report on Form 10-K, as amended, for the year ended
December 31, 1996.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $88.9 million on a
cumulative basis through September 30, 1997. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing fees and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the technology licensing fees and engineering and development funds provided to
the venture or the Company are recovered.
Cash, cash equivalents and short-term investments amount to $1.0 million at
September 30, 1997, increasing from $0.4 million at December 31, 1996.
Management believes that available cash and cash anticipated from the exercise
of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales and engineering and development
revenue along with reduced operating expenses and capital expenditures and the
"First Quarter 1997 Financing", the "July 30, 1997 Private Placement", the "1997
Preferred Stock Private Placement" and the "NCT Audio Financing" discussed below
should be sufficient to sustain the Company's anticipated future level of
operations into 1999. However, the period during 1999 through which it can be
sustained, is dependent upon the level of realization of funding from technology
licensing fees and royalties and product sales and engineering and development
revenue, all of which are presently uncertain.
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 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, have 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 is 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 has the right to require the Investors to convert
all or part of the Debentures under the above noted conversion price conditions
after February 15, 1998. As of June 6, 1997, the Investors had converted all
$3.4 million of the Debentures into 16.3 million shares of the Company's common
stock. At the Company's election, interest due through the conversion dates of
the Debentures was paid through the issuance of an additional 0.2 million shares
of the Company's common stock.
On March 28, 1997, the Company and New Transducers Ltd. ("NXT"), a wholly
owned subsidiary of Verity Group PLC ("Verity") executed a cross licensing
agreement (the "Cross License"). Under terms of the Cross License, the Company
licensed patents and patents pending which relate to Flat Panel Transducer(TM)
("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, 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. If the Company did not obtain stockholder approval of an
amendment to its Restated Certificate of Incorporation increasing its common
stock capital by an amount sufficient to provide shares of the Company's common
stock issuable upon the full exercise of the option granted to Verity by
September 30, 1997, both options would have expired. 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. At the June 19, 1997 Annual Meeting, 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, and such amendment became effective
when it was filed in the office of the Secretary of State of Delaware on June
20, 1997. On September 27, 1997, Verity, NXT, NCT Audio Products, Inc. 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.
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 a private placement exempt
from the registration requirements of the Securities Act under Section 4(2)
thereof that provided net proceeds to the Company of $0.5 million (the "July 30,
1997 Private Placement").
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 Products, Inc. ("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 flat panel transducers
and flat panel transducer 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 OnActive Technologies, LLC ("OnActive"), (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 $3,000,000 to be paid when proceeds are
available from the sale of NCT Audio common stock and on-going 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 OnActive to NCT Audio. On September 27, 1997, Verity
agreed to purchase 533 shares of NCT Audio common stock for an aggregate
purchase price of $1.0 million. The issuance and purchase of such shares closed
on October 10, 1997. It is anticipated that NCT Audio will issue additional
shares of its common stock in transactions exempt from registration in order to
raise additional working capital.
Please refer to Note 6. Subsequent Events for a discussion relating to the
recent 1997 Preferred Stock Private Placement.
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.
2. INVENTORIES
Inventories comprise the following:
(Thousands of dollars) December 31, September 30,
1996 1997
------------ -------------
Components $ 543 $ 426
Finished Goods 619 1,365
------------ -------------
Gross Inventory $ 1,162 $ 1,791
Reserve for Obsolete & Slow Moving
Inventory (262) (441)
Inventory, Net of Reserves $ 900 $ 1,350
============ =============
3. STOCKHOLDERS EQUITY
The changes in stockholders' equity during the nine months ended September
30, 1997, were as follows:
(In thousands)
Net
Balance at Sale of Exercise Stock Net Loss Balance at
December 31, Common of Warrants Subscription for the Translation September 30,
1996 Stock And Options Receivable Period Adjustment 1997
------------ ------- ----------- ------------ -------- ----------- -------------
Common Stock:
Shares 111,614 19,550 50 -- -- -- 131,214
Amount $ 1,116 $ 196 $ -- $ -- $ -- $ -- $ 1,312
Additional 85,025 4,766 13 -- -- -- 89,804
Paid-in Capital 89,804
Accumulated (83,673) -- -- -- (5,178) -- (88,851)
Deficit
Cumulative 142 -- -- -- -- (26) 116
Translation
Adjustment
Stock Subscription -- -- -- (5) -- -- (5)
Receivable
4. LITIGATION
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira ($18.9 million); and (vi) order the
Company to pay damages for the harm done to Mr. Valerio's image for an amount
such as the judge shall deem equitable and in case for no less than 500 million
Lira ($3.1 million). The Company retained an Italian law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the Company, through its Italian counsel, filed a brief of reply with the
Tribunal of Milan setting forth the Company's position that: (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is groundless since the parties never entered into an agreement, and (iii)
because Mr. Valerio is not enrolled in the official Register of Agents, under
applicable Italian law Mr. Valerio is not entitled to any compensation for his
alleged activities. A preliminary hearing before the Tribunal was held on May
30, 1996, certain pretrial discovery has been completed and a hearing before a
Discovery Judge was held on October 17, 1996. Submissions of the parties final
pleadings were to be made in connection with the next hearing which was
scheduled for April 3, 1997. On April 3, 1997, the Discovery Judge postponed
this hearing to May 19, 1998, due to a reorganization of all proceedings before
the Tribunal of Milan. Management is of the opinion that the lawsuit is without
merit and will contest it vigorously. In the opinion of management, after
consultation with outside counsel, resolution of this suit should not have a
material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a severe material effect
on quarterly or annual operating results.
5. COMMON STOCK
As discussed above in Note 1., between January 15, 1997 and March 25, 1997,
the Company entered into a series of subscription agreements to sell an
aggregate amount of $3.4 million of Debentures. As of June 30, 1997, the
Investors had converted $3.4 million of the Debentures into 16.3 million shares
of the Company's common stock. At the Company's election, interest due through
the conversion dates of the Debentures was paid through the issuance of an
additional 0.2 million shares of the Company's common stock.
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. Such
action was deemed by the Board of Directors to be in the best interest of the
Company to make additional shares of the Company's common stock available for
obligations undertaken by the Company in connection with the New Agreements with
Verity and NXT described in Note 1., public or private financings, present and
future employee benefit programs and other corporate purposes. 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 7, 1997 the Company granted 5,000 shares of restricted stock under
the 1992 Plan to each non-employee director (2 recipients) as compensation for
1997 services. The fair market value of the Company's common stock on July 7,
1997 was $0.25 per share, the closing price of the Company's common stock on the
NASDAQ Stock Market.
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.
Please refer to Subsequent Events below for a discussion of the 1997
Preferred Stock Private Placement and the NCT Audio Financing.
6. SUBSEQUENT EVENTS
On September 27, 1997, Verity agreed to purchase 533 shares of NCT Audio
common stock for an aggregate purchase price of $1.0 million. The issuance and
purchase of such shares closed on October 10, 1997. It is anticipated that NCT
Audio will issue additional shares of its common stock in transactions exempt
from registration in order to raise additional working capital.
Between October 28, 1997 and November 13, 1997, the Company entered into a
series of subscription agreements (the "Subscription Agreements") to sell an
aggregate amount of $13.3 million of the Company's 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"). Subscription
Agreements totalling $11.3 million have been received and accepted by the
Company through November 13, 1997. Of the total Preferred Stock Offering, sales
of Preferred Stock in the aggregate amount of $6.1 million were completed as of
November 13, 1997, with the balance of the sales in the aggregate amount of $7.2
million scheduled to be completed by November 18, 1997. Assuming such
completion, the aggregate net proceeds to the Company of the 1997 Preferred
Stock Private Placement are estimated at $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 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 following
formula (the "Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
Conversion Price
where
N = the number of days between (i) the closing date of the
Preferred Stock being converted, and (ii) the conversion
date thereof.
Conversion
Price = 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.
Closing
Date = the date of the closing as set forth in the
subscription agreement pertaining to the Preferred
Stock being converted.
The conversion terms of the Preferred Stock also provide that in no event
shall the average closing bid price referred to in the Conversion Formula be
less than $0.625 per share and in no event shall the Company be obligated to
issue more than 26,000,000 shares of its common stock in the aggregate in
connection with the conversion of the Preferred Stock. Under the terms of the
Subscription Agreements the Company may be subject to a penalty if the
Registration Statement is not declared effective within one hundred twenty (120)
days after the first closing of any incremental portion of the offering of
Preferred Stock, such penalty to be in an amount equal to one and one half
percent (1.5%) per month of the aggregate amount of Preferred Stock sold in the
offering up to a maximum of ten percent (10%) of such aggregate amount. The
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Subscription Agreements and ending ninety (90) days after the
closing of the offering the Company will be prohibited from issuing any debt or
equity securities other than Preferred Stock, and that the Corporation will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner or in the event it fails to reserve sufficient
authorized but unissued common stock for issuance upon conversion of the
Preferred Stock.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share".
This new standard requires dual presentation of basic and diluted earnings per
share ("EPS") on the face of the statements of income and requires
reconciliation of the numerators and the denominators of the basic and diluted
EPS calculations. This statement will be effective for the Company's 1997 year
end. The Company has not yet quantified what effect the adoption of SFAS 128
will have on its loss/earnings per share of common stock.
The Financial Accounting Standards Board has recently 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 does not
believe the above pronouncements will not have a significant effect on the
information presented in the financial statements.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
GENERAL BUSINESS ENVIRONMENT
The Company is focused on the commercialization of its technology through
technology licensing fees, royalties and product sales. In prior years, the
Company derived the majority of its revenues from engineering and development
funding provided by established companies willing to assist the Company in the
development of its active noise and vibration control technology, and from
technology licensing fees paid by such companies. The Company's strategy
generally has been to obtain technology licensing fees when initiating joint
ventures and alliances with new strategic partners. Revenues from product sales
were limited to sales of specialty products and prototypes. During the first
nine months of 1997, the Company received approximately 7% of its operating
revenues from engineering and development funding. Since 1991, excluding quarter
to quarter variations, revenues from product sales have been increasing and
management expects that technology licensing fees, royalties and product sales
will become the principal source of the Company's revenue as the
commercialization of its technology proceeds.
The Company has shifted its focus to technology licensing fees, royalties and
products that represent near term revenue generation. This is reflected in the
fact that 70.9% of the Company's total revenue in the first nine months of 1997
represents technology licensing fees. There can be no assurance that additional
technology licensing fees will continue at that level.
Note 1. to the accompanying Condensed Consolidated Financial Statements and
the liquidity and capital resources section which follows describe the current
status of the Company's available and projected cash balances.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of active noise and
vibration control build, revenues from technology licensing fees, royalties and
product sales are forecast to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's former dependence on engineering and development funding and equity
financing.
From the Company's inception through September 30, 1997, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 22%
product sales, 47% engineering and development services and 31% technology
licensing fees.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and into their manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed.
The Company continues to sell and ship ProActive(TM) and NoiseBuster(TM)
headsets in 1997. The Company is now selling products through three of its
alliances: Walker is manufacturing and selling industrial silencers; Siemens is
buying and contracting with the Company to install quieting headsets for patient
use in Siemens' MRI machines; and Ultra is installing production model aircraft
cabin quieting systems in turboprop aircraft. The Company is entitled to receive
royalties from Walker on its sales of industrial silencers, direct product sales
revenue from Siemens' purchase of headsets, and commencing in 1998, royalties
from Ultra on its sale of aircraft cabin quieting systems and royalties from NXT
on its sale of certain audio products. Management believes these activities help
demonstrate the range of commercial potential for the Company's technology and
will contribute to the Company's transition from engineering and development to
technology licensing fees, royalties and product sales.
Product revenues for the nine months ended September 30, 1996 and 1997
were:
PRODUCT REVENUES
Three Months Ended Nine Months Ended September
September 30, 30,
---------------------------- ------------------------------
Amount As a % of Total Amount As a % of Total
----------- ---------------- ------------- ---------------
Product 1996 1997 1996 1997 1996 1997 1996 1997
- ------------- ----- ----- ------- -------- ------ ------ ------ -------
Headsets $355 $482 99.4% 98.8% $1,022 $1,032 97.4% 96.5%
Fan Quieting - - 0.0% 0.0% - 13 0.0% 1.2%
Communications - 5 0.0% 1.0% - 16 0.0% 1.5%
Other 2 1 0.6% 0.2% 27 8 2.6% 0.8%
----- ----- ------- -------- ------ ------ ------ -------
Total $357 $488 100.0% 100.0% $1,049 $1,069 100.0% 100.0%
===== ===== ======= ======== ====== ====== ====== =======
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products.
Management believes that the Company's investment in its technology has resulted
in the expansion of its intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of the Debentures in First Quarter 1997
Financing from which the Company realized $3.2 million of net proceeds. The
Debentures 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, have 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 is 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 has the right to require the Investors to convert
all or part of the Debentures under the above noted conversion price conditions
after February 15, 1998. As of June 6, 1997, the Investors had converted all
$3.4 million of the Debentures into 16.3 million shares of the Company's common
stock. At the Company's election, interest due through the conversion dates of
the Debentures was paid through the issuance of an additional 0.2 million shares
of the Company's common stock.
On March 28, 1997, the Company and NXT executed the Cross License. Under
terms of the Cross License, the Company licensed patents and patents pending
which relate to Flat Panel Transducer(TM) ("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, 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 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 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 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. If the Company did not obtain stockholder
approval of an amendment to its Restated Certificate of Incorporation increasing
its common stock capital by an amount sufficient to provide shares of the
Company's common stock issuable upon the full exercise of the option granted to
Verity by September 30, 1997, both options would have expired. On April 15,
1997, Verity, NXT and the Company executed the New Agreements terminating the
Cross License, the Security Deed, the Verity Option and the Registration Rights
Agreement and replacing them with 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. At the June 19, 1997 Annual Meeting,
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, and such amendment became effective
when it was filed in the office of the Secretary of State of Delaware on June
20, 1997. On September 27, 1997, Verity, NXT, NCT Audio Products, Inc. and the
Company executed several agreements and other documents, terminating the New
Cross License and the New Security Deed, and replacing them with the Cross
License Agreement dated September 27, 1997 and the Master License Agreement. The
material changes effected by the new agreements were an expansion of the fields
of use applicable to the exclusive licenses granted to Verity and NXT and 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.
On September 27, 1997, Verity agreed to purchase 533 shares of NCT Audio
common stock for an aggregate purchase price of $1.0 million. The issuance and
purchase of such shares closed on October 10, 1997. It is anticipated that NCT
Audio will issue additional shares of its common stock in transactions exempt
from registration in order to raise additional working capital.
Between October 28, 1997 and November 13, 1997, the Company entered into
the Subscription Agreements to sell an aggregate amount of $13.3 million of the
Preferred Stock in the 1997 Preferred Stock Private Placement. Subscription
Agreements totalling $11.3 million have been received and accepted by the
Company through November 13, 1997. Of the total Preferred Stock Offering, sales
of Preferred Stock in the aggregate amount of $6.1 million were completed as of
November 13, 1997, with the balance of the sales in the aggregate amount of $7.2
million scheduled to be completed by November 18, 1997. Assuming such
completion, the aggregate net proceeds to the Company of the 1997 Preferred
Stock Private Placement are estimated at $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 file the 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 described in
Note 6 to the Condensed Consolidated Financial Statement.
Under the terms of the Subscription Agreement 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..
Management believes that available cash and cash anticipated from the
exercise of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue, along with reduced operating expenses and capital expenditures and the
First Quarter 1997 Financing, the July 30, 1997 Private Placement, the 1997
Preferred Stock Private Placement and the NCT Audio Financing should be
sufficient to sustain the Company's anticipated future level of operations into
1999. However, the period during 1999 through which it can be sustained is
dependent upon the level of realization of funding from technology licensing
fees and royalties and product sales and engineering and development revenue and
the achievement of the operating cost savings from the events described above,
all of which are presently uncertain.
Management believes that the funding provided by the additional capital
referred to above coupled with anticipated increased product sales, technology
licensing fees, royalties, and cost savings, if realized, should enable the
Company to continue operations into 1999.
RESULTS OF OPERATIONS
Total revenues for the first nine months of 1997 were $4.8 million compared
to $2.5 million for the same period in 1996, an increase of $2.3 million or 92%.
Product sales increased to $1.1 million versus $1.0 million in 1996, an
increase of $0.1 million or 10% primarily reflecting increased hearing product
sales of the NoiseBuster Extreme(TM). Engineering and development services
increased to $0.3 million versus $0.2 million in 1996, an increase of $0.1
million primarily due to communications related engineering contracts.
Technology licensing fees in the first nine months of 1997 were $3.4 million
versus $1.2 million in 1996, an increase of $2.2 million or 183% primarily due
to the $3.0 million in Verity license fees described above.
Cost of product sales increased to $1.4 million versus $0.9 million in 1996,
an increase of $0.5 million or 56% primarily due to additional reserves recorded
reflecting price reductions on certain headset products. Product margin
decreased to (31)% percent from 19% during the same period in 1996 reflecting
the above noted reserves. Cost of engineering and development services increased
to $0.3 million versus $0.2 million in 1996 due to the above noted efforts in
communications engineering contracts. The gross margin on engineering and
development services decreased to 13% from 22% during the same period in 1996,
primarily due to more profitable contracts in 1996.
Selling, general and administrative expenses decreased to $3.7 million versus
$4.1 million in 1996, a decrease of $0.4 million or 10% primarily due to limited
working capital to fund marketing efforts during the first nine months of 1997.
Research and development expenditures for the first nine months of 1997 were
$4.5 million versus $4.8 million in 1996, a decrease of $0.3 million or 6%
primarily due to the timing of spending on the Company's key near-term
engineering programs. The Company continues to be focused on products utilizing
its hearing products, audio, communications and microphone technologies,
products which have been developed within a short time period and are targeted
for rapidly emerging markets.
Under most of the Company's joint venture agreements, the Company is not
required to fund any capital requirements of these joint ventures beyond its
initial capital contribution. In accordance with U.S. generally accepted
accounting principles, when the Company's share of cumulative losses equals its
investment and the Company has no obligation or intention to fund such
additional losses, the Company suspends applying the equity method of accounting
for its investment. The Company 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. During the
first nine months of 1996, the Company recognized a $0.1 million charge related
to its share of losses in OnActive Technologies, L.L.C., which brought the
Company's equity in the joint venture to zero. There was no such charge in the
first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $88.9 million on a
cumulative basis through September 30, 1997. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing fees and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the license fees and engineering and development funds provided to the venture
or the Company are recovered.
In January 1996, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1997.
The Company did not meet the plan's revenue targets for 1996 and is not expected
to meet its revenue target for 1997 and as noted below, found it necessary to
raise additional capital to fund it's operations for 1997 and beyond.
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of the Debentures in First Quarter 1997
Financing from which the Company realized $3.2 million of net proceeds. The
Debentures 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, have 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 is 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 has the right to require the Investors to convert
all or part of the Debentures under the above noted conversion price conditions
after February 15, 1998. As of June 6, 1997, the Investors had converted all
$3.4 million of the Debentures into 16.3 million shares of the Company's common
stock. At the Company's election, interest due through the conversion dates of
the Debentures was paid through the issuance of an additional 0.2 million shares
of the Company's common stock.
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 27, 1997, Verity agreed to purchase 533 shares of NCT Audio
common stock for an aggregate purchase price of $1.0 million. The issuance and
purchase of such shares closed on October 10, 1997. It is anticipated that NCT
Audio will issue additional shares of its common stock in transactions exempt
from registration in order to raise additional working capital.
Between October 28, 1997 and November 13, 1997, the Company entered into
the Subscription Agreements to sell an aggregate amount of $13.3 million of the
Preferred Stock in the 1997 Preferred Stock Private Placement. Subscription
Agreements totalling $11.3 million have been received and accepted by the
Company through November 13, 1997. Of the total Preferred Stock Offering, sales
of Preferred Stock in the aggregate amount of $6.1 million were completed as of
November 13, 1997, with the balance of the sales in the aggregate amount of $7.2
million scheduled to be completed by November 18, 1997. Assuming such
completion, the aggregate net proceeds to the Company of the 1997 Preferred
Stock Private Placement are estimated at $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 file the 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 described above.
Under the terms of the Subscription Agreement 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.
Management believes that available cash and cash anticipated from the
exercise of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue, the operating cost savings from the reduction in employees, and reduced
capital expenditures and the First Quarter 1997 Financing, July 22, 1997 Private
Placement, the 1997 Preferred Stock Private Placement and the NCT Audio
Financing should be sufficient to sustain the Company's anticipated future level
of operations into 1999. However, the period during 1999 through which it can be
sustained, is dependent upon the level of realization of funding from technology
licensing fees and royalties and product sales and engineering and development
revenue and the achievement of the operating cost savings from the events
described above, all of which are presently uncertain.
The Company believes that the financing plan discussed above constitutes a
viable plan for the continuation of the Company's business into 1999.
At September 30, 1997, cash and short-term investments were $1.0 million. The
available resources were invested in interest bearing money market accounts. The
Company's investment objective is preservation of capital while earning a
moderate rate of return.
The Company's working capital increased to $(0.7) million at September 30,
1997, from $(1.3) million at December 31, 1996. This increase of $0.6 million
was funded primarily by the revenue and equity transactions described above and
used primarily to fund operations for the period.
During the first nine months of 1997, the net cash used in operating
activities was $4.0 million, compared to $5.9 million used in operating
activities during the same period of 1996.
Net inventory increased during the first nine months of 1997 by $0.5 million
due primarily to initial stocking of the Company's new communications products.
Cash provided by financing activities amounted to $4.8 million reflecting the
above noted financings and the Verity investment in NCT Audio Products, Inc.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company to
integrate its active technology into products with limited capital investment in
production facilities and manufacturing personnel; and (iii) access to
well-established channels of distribution and marketing capability of leaders in
several market segments.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
There were no material commitments for capital expenditures as of September
30, 1997, and no material commitments are anticipated in the near future.
FORWARD LOOKING STATEMENTS
Filings with the SEC and other information provided to the public contain
certain forward-looking statements regarding, among other items, the Company's
ability to sustain its anticipated future level of operations. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, future product sales, market
penetration and customer acceptance of the Company's products and future
business decisions by parties with whom the Company has alliances, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that its assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this document will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 4 - "Notes to the Condensed
Consolidated Financial Statements" which is incorporated by reference herein.
ITEM 2 - CHANGES IN SECURITIES
(a) Recent Sales of Unregistered Securities
(i) July 30, 1997 - 2,857,143 shares of Common Stock
(ii) Carole Salkind, purchaser
(iii) $500,000.00 cash
(iv) Section 4(2) of the Securities Act of 1933, as amended
ITEM 5 - OTHER INFORMATION
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 Products, Inc. ("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 flat panel transducers
and flat panel transducer 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 OnActive Technologies, LLC ("OnActive"), (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 $3,000,000 to be paid when proceeds are
available from the sale of NCT Audio common stock and on-going 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 OnActive to NCT Audio. On September 27, 1997, Verity
agreed to purchase 533 shares of NCT Audio common stock for an aggregate
purchase price of $1.0 million. The issuance and purchase of such shares closed
on October 10, 1997. It is anticipated that NCT Audio will issue additional
shares of its common stock in transactions exempt from registration in order to
raise additional working capital.
ITEM 6 - EXHIBITS
(a) Exhibits
Exhibit No. Description
10(a) New Cross License Agreement dated September 27, 1997,
among Verity Group plc, New Transducers Limited,
Noise Cancellation Technologies, Inc. and NCT Audio
Products, Inc.
10(b) Master License Agreement dated September 27, 1997,
between New Transducers Limited and NCT Audio
Products, Inc.
10(c) Letter Agreement dated September 27, 1997, from Noise
Cancellation Technologies, Inc. to Verity Group plc.
10(d) License Agreement dated September 4, 1997, between
Noise Cancellation Technologies, Inc. and NCT Audio
Products, Inc.
11 Computation of Net Profit (Loss) Per Share.
27 Financial Data Schedule.
NOISE CANCELLATION TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ MICHAEL J. PARRELLA
Michael J. Parrella
President,
Chief Executive Officer
By: /s/ CY E. HAMMOND
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: November 14, 1997