SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission File Number: 0-18267
NCT Group, Inc. (formerly known as Noise Cancellation Technologies, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 59-2501025
(State or other jurisdiction of (I.R.S.
Employer or incorporation organization) Identification No.)
1025 West Nursery Road, Suite 120, Linthicum, MD. 21090
(Address of principal executive offices) (Zip Code)
(410) 636-8700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.01
par value.
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /_/
The aggregate market value of the Registrant's voting stock held by
nonaffiliates of the Registrant was $57,315,604 million as of March 23, 1999.
The number of shares outstanding of the Registrant's common stock is 160,745,945
as of March 23, 1999.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain information contained in the Proxy Statement for the
Annual Meeting of Stockholders of Registrant to be filed
with the Securities and Exchange Commission on or before April 30, 1999,
is incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
A. General Development of Business
NCT Group, Inc. ("NCT" or the "Company"), formerly known as Noise
Cancellation Technologies, Inc., designs, develops, licenses, produces and
distributes electronic 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 89
products currently being sold, including NoiseBuster(R) active noise reduction
("ANR") communications and consumer headsets, Gekko(TM) flat speakers,
ClearSpeech(R) microphones and speakers, the ProActive(R) line of
industrial/commercial ANR headsets, an industrial muffler or "silencer" for use
with large vacuums and blowers and aircraft cabin quieting systems.
The Company is organized into strategic business units. These include its
three subsidiaries, NCT Audio Products, Inc. ("NCT Audio"), NCT Hearing
Products, Inc. ("NCT Hearing") the newly formed and DistributedMedia.com, Inc.
("DMC"); and NCT Communications Products, a division of the Company. Each of the
Company's strategic business units is targeted to the commercialization of their
own products in specific markets.
In keeping with the direction established in late 1994, during 1998 the
Company continued the practice of marketing its technology through licensing to
third parties for fees and subsequent royalties in addition to continuing its
product distribution efforts. During 1998, the Company entered into five new
technology license agreements. See F. "Strategic Alliances" and Note 3 "Notes to
Financial Statements."
In late 1995 the Company redefined its corporate mission to be the worldwide
leader in the advancement and commercialization of Active Wave Management
technology. Active Wave Management is the electronic and/or mechanical
manipulation of sound or signal waves to reduce noise, improve signal-to-noise
ratio and/or enhance sound quality.
NCT believes that it has a significant position in Active Wave Management
technology, holding 444 patents and an extensive portfolio of know-how and other
unpatented technology.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of the Company's
technologies build, revenues from technology licensing fees, royalties and
product sales are forecasted to fund an increasing share of the Company's
requirements. The revenues from these sources, if realized, will reduce the
Company's dependence on engineering and development revenues. This progression
is reflected in the revenue percentages discussed briefly below and more fully
in Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
From the Company's inception through December 31, 1998, approximately 26% of
its operating revenues have come from the sale of products and 31% of its
operating revenues have come from licensing of the Company's technology, while
approximately 43% of its operating revenues have come from engineering and
development services.
The Company has entered into a number of strategic supply, manufacturing
and marketing alliances with leading global companies to commercialize its
technology. See F. - "Strategic Alliances" for further information. These
strategic alliances historically have funded a majority of the Company's
research and development, and provided the Company with reliable sources of
components, manufacturing expertise and capacity, as well as extensive
marketing and distribution capabilities. NCT has continuing relationships
with Walker Manufacturing Company ("Walker") (a division of Tennessee Gas
Pipeline Company, a wholly-owned subsidiary of Tenneco, Inc.), AB Electrolux
("Electrolux"), Analog Devices, Inc. ("ADI"), Ultra Electronics Ltd.
("Ultra"), The Charles Stark Draper Laboratory, Inc. ("Draper"), Hoover
Universal, Inc. ("Hoover", a wholly-owned subsidiary of Johnson Controls,
Inc.) and New Transducers, Ltd. ("NXT"), among others, in order to penetrate
major markets more rapidly and efficiently, while minimizing the Company's
own capital expenditures.
An important factor for the Company's continuing development is its ability
to recruit and retain key personnel. As of February 28, 1999 the Company had 104
employees, including 63 engineers and technical staff. Among its engineering
staff and consultants are several scientists and inventors that the Company
believes are preeminent in the active noise and vibration control field
worldwide.
The Company was incorporated in Nevada on May 24, 1983. In April 1985, the
Company moved its corporate domicile to Florida and assumed its former name,
Noise Cancellation Technologies, Inc., and in January 1987, following the
assumption of control of the Company by the present management, it changed its
state of incorporation to Delaware. At the annual meeting of stockholders of the
Company on October 20, 1998, the stockholders approved (among other things)
changing the name of the Company to its present name, NCT Group, Inc. NCT's
executive offices, research and product development facility are located at 1025
West Nursery Road, Suite 120, Linthicum, Maryland 21090; telephone number (410)
636-8700. NCT maintains sales and marketing offices at One Dock Street, Suite
300, Stamford, Connecticut 06902; telephone number (203) 961-0500. The Company's
European operations are conducted through its product development and marketing
facility in Cambridge, England. NCT also maintains a marketing facility in
Tokyo, Japan.
B. Technology
Active noise attenuation is not a new idea. Creating a mirror image of an
unwanted noise or sound wave and using it to cancel or reduce the original sound
wave dates back to the early part of this century. The first systems used a
simple "delay and invert" approach and showed some promise, but the prohibitive
cost of computing power and the inadequacy of acoustics and related technologies
limited their effectiveness.
In the mid-1970's, a major breakthrough took place with the application of
adaptive filters to generate anti-noise. These filters allowed for the
development of active control systems that could continuously adapt to changes
in noise output both in the external world and from control components. A second
breakthrough in the mid-1970's was made by Professor G.B.B. Chaplin. He
recognized that many noise sources, particularly machines, exhibit "tonal" or
repetitive noise. Chaplin further recognized that the predictability of
repetitive noise allows for creation of an accurate anti-noise signal and,
therefore, more effective cancellation or attenuation.
Practical application of this technology was still not possible as the
electronic technology available at the time was insufficient for implementation
of active noise reduction systems. Since that time, digital computer technology
has evolved to the point where cost-effective microprocessors, known as digital
signal processors ("DSP"), can perform the complex calculations involved in
noise cancellation and reduction. This advance has made it feasible to apply
active noise reduction to previously unsolvable problems in low frequency noise
at a reasonable cost.
Active Noise Reduction. Active noise reduction systems are particularly
effective at reducing low frequency noise. As opposed to a passive noise control
system that is designed to mask a noise, active noise control removes a
significant portion of the noise energy from the environment by creating sound
waves that are equal in frequency but opposite in phase. The illustration below
shows the relationship, in time, of a noise signal, an anti-noise signal and the
residual noise that results when they meet.
ACTIVE NOISE REDUCTION
--------------------------------------------
[GRAPHIC OMITTED]
--------------------------------------------
Active Wave Management. Active Wave Management is the combination of active
noise reduction technology and certain other technologies which results in the
electronic and/or mechanical manipulation of sound or signal waves to reduce
noise, improve signal-to-noise ratio and/or enhance sound quality.
Signal Enhancement. Active Wave Management technology also can be used to
attenuate unwanted signals that enter into a communications network, as when
background noise enters telecommunications or radio systems from a telephone
receiver or microphone. The Company has developed patented technology that will
attenuate the background noise "in-wire", so that the signals carried by the
communications network include less of the unwanted noise, allowing the speaker
to be heard more clearly over the network.
Silicon Micromachined Microphone ("SMM"). In 1994, NCT purchased the
exclusive rights to manufacture and commercialize a silicon micromachined
microphone as a technically superior and less expensive alternative to currently
available electret microphones. The SMM has potential applications not only in
the audible range of frequencies, but in the ultrasonic range as well.
ClearSpeech(R). The ClearSpeech(R) algorithm removes noise from voice
transmissions. ClearSpeech(R) parameters can be adjusted to optimize performance
for a particular noise, or can be set to provide noise reduction across a wide
range of noises. ClearSpeech(R) applications include teleconferencing systems,
cellular telephones and "airphones", telephone switches, echo cancellers and
communications systems in which background noise is predominant. ClearSpeech(R)
is currently available for use on three hardware platforms. The Company added an
echo cancellation algorithm to its Windows-based ACM version of ClearSpeech(R)
and has begun testing.
Flat Panel Transducer. The Company has expanded its flat panel transducer
technology to include audio systems for the reproduction of speech and music.
NCT patented Flat Panel Transducer ("FPT") technology utilizes piezo electric
drivers mounted on flat rigid surfaces to create a unique wide dispersion sound
field. Unlike conventional speakers that deliver sound through air in a pistonic
fashion, the FPT design delivers sound throughout the surface of the panel being
driven. This distributed mode method of delivering wide dispersion sound is what
NCT has termed Sweet Space(TM), which floods a room with sound. Uses for FPT
technology include home theatre, professional, car and aircraft applications.
Java Processor Core. Advancel Logic Corporation ("Advancel"), a majority
owned subsidiary of the Company, is a participant in the native Java embedded
microprocessor market. The purpose of the Java(TM) (Java is a trademark of Sun
Microsystems, Inc.) platform is to simplify application development by providing
a platform for the same software to run on many different kinds of computers and
other smart devices. Advancel has been developing a family of processor cores,
which will execute instructions written in both Java bytecode and C (and C++)
significantly enhancing the rate of instruction execution, which opens up many
new applications. The potential for applications consists of the next generation
home appliances and automotive applications, manufacturers of smartcard
processors, hearing aids and mobile communications devices.
C. NCT Proprietary Rights and Protection
NCT holds a large number of patents and patent applications. The Company's
intellectual property strategy has been to build upon its base of core
technology patents with newer advanced technology patents developed by,
purchased by or exclusively licensed to the Company. In many instances, the
Company has incorporated the technology embodied in its core patents into
patents covering specific product applications, including the products' design
and packaging. The Company believes this building-block approach provides
greater protection to the Company than relying solely on the original core
patents. As its patent holdings increase, the Company believes the importance of
its core patents will diminish from a competitive viewpoint.
During 1994, the Company purchased certain assets of Active Noise and
Vibration Technologies, Inc. ("ANVT"), which included all of ANVT's intellectual
property rights. Among the ANVT intellectual property rights were ANVT's
interest in the 10 basic Chaplin Patents which are now solely owned by NCT as
the sole shareholder of Chaplin Patents Holding Co., Inc. ("CPH"), formerly a
joint venture with ANVT. See Notes to Financial Statements. These patents cover
inventions made by Professor G.B.B. Chaplin (the "Chaplin Patents") in the late
1970s and early 1980s (some of which have now expired).
The Chaplin Patents form only one group of core patents upon which NCT's
technology is based. In March 1990, the Company acquired exclusive ownership of
10 patents developed under the auspices of the National Research Development
Corporation ("NRDC"), an organization sponsored by the British Government. Among
other things, the NRDC Patents, of which the Swinbanks and Ross patents are the
most important, utilize the adaptive feed forward approach to active noise
control. The Swinbanks patent covers an improved method of analyzing the
incoming noise or vibration through the use of a "frequency domain" adaptive
filter which splits the incoming noise into different frequency bands for
analysis and recombines the data to generate the anti-noise signal. The Ross
patent covers the use of a "time domain" filter which uses input and error
signals to enhance a system's ability to compensate for feedback from actuators
to sensors. Without this filter, the system will detect and begin canceling its
own self-generated anti-noise.
As part of the purchase of certain ANVT assets, the Company acquired all the
rights to nine inventions previously owned by the Topexpress Group in the United
Kingdom. The international patent coverage of these inventions varies, but eight
have been granted patent protection with numerous counterpart foreign
applications still pending. Among the other intellectual property acquired from
ANVT are patents relating to active auto mufflers and noise suppression
headrests, several patent applications on advanced algorithms, and active noise
headsets, many related disclosures and various disclosures in other areas of
active attenuation of noise and vibration. Additionally, the Company acquired
the rights to three basic inventions known as the Warnaka Patents.
The Company has built upon these core patents with a number of advanced
patents and patent applications. These include the Digital Virtual Earth(TM)
patent, which covers digital feedback control, and patents on multi-channel
noise control. The Company has also applied for patents on combined feed forward
and feedback control, control using harmonic filters, filters for signal
enhancement and speech filtering, control systems for noise shaping and others.
In 1994, the Company obtained a license for the exclusive rights to the
silicon micromachined microphone technology developed by Draper in Cambridge,
Massachusetts. At this time, four patents describing the basic technology have
been issued.
In 1995, the Company acquired several U.S. patents dealing with Adaptive
Speech Filter ("ASF") which are used in the Company's ClearSpeech(R) product
line.
Since 1996, the Company has been granted 197 new patents in the field of
Active Wave Management.
The Company holds or has rights to 305 inventions as of December 31, 1998,
including 105 United States patents and over 339 corresponding foreign patents.
The Company has pending 198 U.S. and foreign patent applications. NCT's
engineers have made 137 invention disclosures for which the Company is in the
process of preparing patent applications. The Company's presently owned patents
have expiration dates ranging from 2000 through 2016 with the majority occurring
during or after 2009.
Annuities and maintenance fees for the Company's extensive patent portfolio
are a significant portion of the Company's annual expenses. If, for the reasons
described in Item 7. - "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" below,
it becomes necessary for the Company to reduce its level of operations, the
Company will not be able to continue to meet the extensive monetary outlay for
annuities and maintenance fees to keep all the patents and applications from
becoming abandoned and will have to prioritize its portfolio accordingly.
No assurance can be given as to the range or degree of protection any patent
issued to, or licensed by, the Company will afford or that such patents or
licenses will provide protection that has commercial significance or will
provide competitive advantages for the Company's products. No assurance can be
given that the Company's owned or licensed patents will afford protection
against competitors with similar technology, or that others will not obtain
patents claiming aspects similar to those covered by the Company's owned or
licensed patents or patent applications. No assurance exists that the Company's
owned or licensed patents will not be challenged by third parties, invalidated,
rendered unenforceable or designed around. Furthermore, there can be no
assurance that any pending patent applications or applications filed in the
future will result in the issuance of a patent. The invalidation, abandonment or
expiration of patents owned or licensed by the Company and believed by the
Company to be commercially significant could permit increased competition, with
potential adverse effects on the Company and its business prospects.
The Company has conducted only limited patent searches and no assurances can
be given that patents do not exist or will not be issued in the future that
would have an adverse effect on the Company's ability to market its products or
maintain its competitive position with respect to its products. Substantial
resources may be required to obtain and defend patent and other rights to
protect present and future technology and other property of the Company.
The Company has been granted the following trademarks:
Mark Field of Use
---- ------------
NCT logo Company logo
NoiseBuster(R) headsets
NoiseEater(R) HVAC systems
ClearSpeech(R) adaptive speech filter products
VariActive(R) headsets
ProActive(R) headsets
The Company has also applied for 12 trademarks including:
Mark Field of Use
---- ------------
NoiseBuster Extreme!(TM) headsets
Gekko(TM) flat audio speakers
ArtGekko(TM) flat audio speakers
Sweet Space(TM) flat audio speakers
Top Down Surround Sound(TM) vehicular audio speakers
X-Static(TM) adaptive speech filter products
No assurance can be given as to the range or degree of protection any
trademark issued to, or licensed by, the Company will afford or that such
trademarks or licenses will provide protection that has commercial significance
or will provide competitive advantages for the Company's products. No assurance
can be given that the Company's owned or licensed trademarks will afford
protection against competitors with similar products or trademarks. No assurance
exists that the Company's owned or licensed trademarks will not be challenged by
third parties, invalidated, or rendered unenforceable. Furthermore, there can be
no assurance that any pending trademark applications or applications filed in
the future will result in the issuance of a trademark. The invalidation,
abandonment or expiration of trademarks owned or licensed by the Company and
believed by the Company to be commercially significant could permit increased
competition, with potential adverse effects on the Company and its business
prospects.
The Company has conducted only limited trademark searches and no assurances
can be given that trademarks do not exist or will not be issued in the future
that would have an adverse effect on the Company's ability to market its
products or maintain its competitive position with respect to its products.
Substantial resources may be required to obtain and defend trademark rights of
the Company.
The Company's policy is to enter into confidentiality agreements with all of
its executive officers, key technical personnel and advisors, but no assurances
can be made that Company know-how, inventions and other secret or unprotected
intellectual property will not be disclosed to third parties by such persons.
<PAGE>
D. Existing Products
NCT Hearing Products
NoiseBuster(R). NCT is currently marketing its NoiseBuster Extreme!(TM)
personal active noise reduction headphone for consumers at a suggested retail
price of $69. This active headphone selectively reduces unwanted noise generated
by aircraft engines, lawnmowers, street traffic, household appliances and other
annoying noise sources, permitting the user to hear desired sounds, such as
human conversation, warning signals or music. The product can also be used with
an aircraft's in-flight entertainment system or a portable audio device. The
Company is marketing the NoiseBuster(R) through distribution channels, including
electronics retail stores, specialty catalogues and directly through a toll-free
"800" number. Initial product shipments of the original NoiseBuster(R) were made
in September 1993. Product shipments of the NoiseBuster Extreme!(TM) began
during the first quarter of 1997.
The NoiseBuster(R) line has been expanded to include communications headsets
for cellular, multimedia and telephony. The products will be the first ANR
offerings for these applications and will improve speech intelligibility in the
presence of background noise. Product shipments began during the first quarter
of 1998. A new and improved line will be launched in the second quarter of 1999.
ProActive(R). In 1995, the Company introduced its ProActive(R) line of active
noise reduction headsets for use in commercial and industrial settings.
NB-PCU. The Company is working with a leading manufacturer and supplier of
aircraft cabin products on the integration of NCT's active noise control
technology into in-flight passenger entertainment systems. As a component of the
system, NCT has also developed a low-cost headset specifically for in-flight use
to be used in conjunction with the integrated electronics. NCT's technology
electronically reduces aircraft engine noise while enhancing the audibility of
desired sounds like speech, music and warning signals. Lowering the engine drone
can help alleviate the anxiety and fatigue often associated with flying. While
the system is in use, passengers inside an aircraft cabin can carry on
conversations at a comfortable level or hear in-flight movies and music without
over amplification and distortion. The system is currently being installed in
first and business class cabins on new United Airlines aircraft making long
trips.
NCT Communications Products
ClearSpeech(R)-Acoustic Echo Cancellation ("AEC"). AEC removes acoustic
echoes in hands-free full-duplex communication systems. AEC is an adaptive,
frequency-based algorithm that continuously tracks and updates the changes in
the acoustic path between the loudspeaker and the microphone to eliminate the
acoustic echo at the source. The algorithm can be changed to accommodate
different audio bandwidths and acoustic tail lengths for use in a variety of
applications such as cellular telephony, audio and video teleconferencing,
computer telephony and gaming, and voice recognition.
ClearSpeech(R)-Compression and TurboCompression ("CTC"). CTC maximizes
bandwidth efficiency in wireless, satellite and intra- and internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. The compression can be combined with ASF technology to further
improve the compression rate and voice quality. CTC comes in two versions and
can be implemented as either a fixed or variable-rate speech coder. CTC has many
applications such as: intranet and internet telephony, audio and video
conferencing, PC voice and music, telephone answering devices, real-time
multimedia multitasking, toys and games, and playback devices such as personal
device assistants ("PDA") and global positioning satellite ("GPS") Navigation
systems.
NCT Audio Products
Gekko(TM) flat speaker. In 1998, NCT Audio, a majority owned subsidiary,
launched the Gekko(TM) flat speakers and ArtGekko(TM) printed grille collection.
This was the first product launched by NCT Audio to the consumer audio market
utilizing the Company's patented FPT technology. With this technology, these
products deliver Sweet Space(TM) sound that floods the room with sound as
opposed to conventional speakers which deliver sound like a spotlight. The
Gekko(TM) flat speakers are very thin wall hanging speakers that are designed to
accept high quality reproductions of the world's most popular artwork, which is
the ArtGekko(TM) line of replacement prints and decorative frames. The art is
printed on acoustically transparent material, which allow all sound from the
flat speaker to pass freely. The images were licensed from several major
international publishers who have access to or represent the rights for over
three million pieces of art. The initial ArtGekko(TM) collection includes 422
images and 14 different frame styles.
<PAGE>
Revenues
Product Revenues
The following table sets forth the percentage contribution of the separate
classes of the Company's products to the Company's product revenues for the year
ended December 31, 1998.
(000's) As a %
Products Amount of Total
-------- ------- --------
Hearing Products $1,191 56.8%
Communications 488 23.3%
Audio Products 383 18.3%
Other 35 1.6%
------- --------
Total $2,097 100.0%
======= ========
Technology Licensing Fees
The following table sets forth the percentage contribution of the separate
classes of the Company's technology to the Company's technology licensing and
royalty revenue for the year ended December 31, 1998.
(000's) As a %
Technology Amount of Total
---------- ------- --------
Audio $350 43.6%
Advancel 200 24.9%
Hearing 86 10.7%
Communications 18 2.2%
Other 148 18.6%
======= ========
Total $802 100.0%
======= ========
E. Products Under Development
......NCT Hearing Products
Advanced Digital Electronic Headsets. NCT is developing advanced headset
models using its proprietary digital technology. Management believes that there
is a broad market for specialty industrial headsets that will permit factory and
assembly workers to operate close to loud machinery in the marine, steel,
textile, paper, construction, road building and metalworking industries, among
others. Conventional ear muffs and protectors are not as effective as the
Company's active headsets, which can selectively block machinery noise while
allowing the worker to listen to ordinary human communications and, where
appropriate, to hear warning signals, tones or bells. The Company is developing
headset models that will operate on a lightweight, rechargeable battery pack,
allowing the worker to move freely about the factory.
......NCT Communications
ClearSpeech(R) Product Line. NCT is continuously improving the quality and
functionality of the ClearSpeech(R) Microphone and ClearSpeech(R) Speaker
products to improve market penetration. NCT has both ASF and AEC on a variety of
DSPs including Analog-Devices and Texas Instruments general purpose DSPs so that
third party developers may integrate the technology into their applications. NCT
has also extended the availability of PC development tools by creating software
developer's kits ("SDKs") for ASF, AEC and compression.
......NCT Microphones
Silicon Micromachined Microphone. In 1994, NCT obtained a license to the
exclusive rights to manufacture and commercialize a silicon micromachined
microphone. A small, compact, surface-mountable silicon actuator, the SMM
provides customers with improved and adjustable sensitivity, a low noise floor
and resistance to environmental extremes. The ability to integrate additional
circuitry on the SMM chip also has proven attractive to potential users. The
SMM's low noise floor and adjustable sensitivity improve voice recognition in
high ambient noise environments. NCT is working with voice processing and
computer hardware companies to utilize the SMM to enhance the performance of
their systems. In the first quarter of 1996, NCT released initial prototypes of
the devices. In December 1997, the Company announced that Siemens Semiconductors
of Siemens AG ("Siemens") had licensed the Company's SMM technology and that
Siemens would develop, manufacture and market the SMM. Samples were received in
the first quarter 1999. Full production is scheduled to commence in the first
quarter 2000.
<PAGE>
......NCT Audio
FPT-based products. NCT Audio began development in 1998 on FPT-based products
for use in automotive and aircraft applications. For these markets, the size and
weight benefits offered by the technology are nearly as important as the sound
quality. Several successful demonstrations of prototype production approaches
for these markets were completed in 1998. NCT Audio will continue product
development for these products in 1999.
......Panels and Enclosures
Electric Utility Transformers. Electric power distribution by utilities
requires the use of large transformers, often placed in residential and
commercial neighborhoods, which emit a low frequency "hum" that is annoying to
people living and working nearby. Utilities try to mask this noise by passive
means, although usually not very successfully. The Company has developed active
enclosure and active panel systems which reduce the "hum" of transformer noise
by use of flat actuators that cause the enclosure or panels to vibrate in a
manner to reduce the noise. The Company can install its active panel system
directly to the metal sides or "skin" of an installed transformer, thus making
its systems available to retrofit markets as well as to original equipment
manufacturers ("OEMs"). As an alternative, an active enclosure can be built to
house the transformer.
In March 1995, the Company entered into an agreement with QuietPower Systems,
Inc., ("QSI") (see Item 13. "Certain Relationships and Related Transactions" and
Note 10 - Notes to Financial Statements) by which QSI received the exclusive
rights to market, sell and distribute transformer quieting products and gas
turbine quieting products in the utility industry. Under the agreement, QSI
funds development of the systems. The agreement generally provides that the
Company manufactures the products and receives a royalty of 6% from QSI on the
sales of the products.
F..Strategic Alliances
The Company's transition from a concern primarily engaged in research and
development to one engaged in the licensing, production, marketing and sale of
Active Wave Management systems has been facilitated by the establishment and
maintenance of strategic alliances with major domestic and international
business concerns. In exchange for the benefits to such concerns' own products
offered by the Company's technology, these alliances under the terms of their
joint venture agreements or licenses provide marketing, distribution and
manufacturing capabilities for the Company's products and enable the Company to
limit the expense of its own research and development activities. In order to
ensure dependable sources of supply and to maintain quality control and cost
effectiveness for components and integrated circuits incorporated in the
Company's systems, an important element of the Company's strategy has been to
identify and enter into alliances with integrated circuit manufacturers that
will develop and produce custom-made chips for NCT product applications, and
with manufacturers of components that will supply and integrate components for
NCT systems. The following is a summary of the Company's key alliances:
<PAGE>
----------------------------------------------------------------------
Date Initial
Relationship
Key Strategic Alliances Established Applications
------------------------------- --------------- ----------------------
Walker Manufacturing Company Nov. 1989 Mufflers, Industrial
(a division of Tennessee Gas Silencers and Other
Pipeline Company) Vehicular
Applications
AB Electrolux Oct. 1990 Consumer Appliances
Ultra Electronics Ltd. June 1991 Aircraft Cabin
Quieting Systems
Analog Devices, Inc. June 1992 Integrated Circuits
and Related Products
The Charles Stark Draper July 1994 Microphones
Laboratory, Inc.
Applied Acoustic Research, Aug. 1995 TDSS
L.L.C.
Hoover Universal, Inc. May 1996 TDSS
(a wholly-owned subsidiary of
Johnson Controls, Inc.)
New Transducers, Ltd. Mar. 1997 Flat Panel
Transducers
Oki Electric Industry Co., Oct. 1997 Communications
Ltd.
Siemens AG Dec. 1997 Microphones
VLSI Technology, Inc. Feb. 1998 Communications
STMicroelectronics SA & Nov. 1998 Java(TM) platform
STMicroelectronics S.r.l.
----------------------------------------------------------------------
<PAGE>
Walker Manufacturing Company (a division of Tennessee Gas Pipeline
Company, a wholly-owned subsidiary of Tenneco, Inc.) (U.S.) ("Walker")
and Walker Electronic Mufflers, Inc. (A wholly-owned subsidiary of
Tennessee Gas Pipeline Company, a wholly-owned subsidiary of Tenneco,
Inc.) (U.S.) )"WEM")
In November 1989, NCT signed its strategic alliance with Walker, a
world-leading manufacturer of automotive parts and mufflers. The alliance
consisted of a Joint Venture and Partnership Agreement with ownership in the
resulting joint venture Walker Noise Cancellation Technologies ("WNCT") shared
equally between NCT Muffler, Inc. and WEM, a wholly-owned subsidiary of
Tennessee Gas Pipeline Company.
On November 15, 1995, the Company and Walker executed a series of related
agreements (the "Restructuring Agreements") regarding the Company's commitment
to help fund $4.0 million of product and technology development work and the
transfer of the Company's 50% interest in WNCT (an equally owned partnership
between Walker and the Company) to Walker. The Restructuring Agreements provided
for the transfer of the Company's interest in WNCT (an equally owned partnership
between Walker and the Company) to Walker, the elimination of the Company's
previously expensed obligation to fund the remaining $2.4 million of product and
technology development work, the transfer to Walker of certain Company owned
tangible assets related to the business of WNCT, the expansion of certain
existing technology licenses and the Company's performance of certain future
research and development activities for Walker at Walker's expense.
WNCT is currently producing and selling industrial silencers on which the
Company receives a royalty.
AB Electrolux (Sweden)
The Company's relationship with Electrolux, one of the world's leading
producers of white goods, was initiated in October 1990. The Company signed its
current agreement with Electrolux, a Joint Development and Supply Agreement, in
June 1991. This agreement provides for NCT to design, develop and supply active
systems for quieting Electrolux products. Electrolux has agreed to purchase the
electronic components for its active noise control products exclusively from
NCT, provided the Company and its supply joint ventures are price and quality
competitive. To date, NCT has completed development of two household appliance
products for Electrolux. No date has been established for product introduction.
Ultra Electronics Ltd. (U.K.)
Since 1991, NCT and Ultra and Ultra's predecessor, part of the Dowty Group,
have been designing and developing systems to enhance passenger comfort by
quieting aircraft passenger compartments in certain propeller-driven aircraft,
which Ultra sells to the worldwide turbo-prop aircraft market. In May 1993,
Ultra and the Company signed a teaming agreement to produce and install the NCT
cabin quieting system on the SAAB 340 aircraft. Deliveries under this agreement
began in 1994. In March 1995, the Company and Ultra amended the teaming
agreement and concluded a licensing and royalty agreement for $2.6 million. In
addition, Ultra will pay the Company a royalty of 1.5% of sales of products
incorporating NCT technology beginning in 1998. See Note 3 - "Notes to Financial
Statements Joint Ventures and Other Strategic Alliances" for further discussion.
Analog Devices, Inc. (U.S.)
In June 1992, NCT and ADI formed an equally owned joint venture to design,
develop, and manufacture computer chips to be incorporated in the Company's
active noise and vibration control systems. ADI is a leading manufacturer of
precision, high-performance integrated circuits used in analog and digital
signal processing applications. Under the terms of the agreement, ADI, as a
subcontractor to the joint venture, will complete the design and development of
specialized chips incorporating NCT's technology.
The Charles Stark Draper Laboratory, Inc. (U.S.)
In July 1994, NCT and Draper Laboratory of Cambridge, Massachusetts entered
into an agreement whereby NCT became the exclusive licensee to a new silicon
micromachined microphone developed by Draper. Under the terms of the agreement
and subsequent agreements, Draper will perform engineering services for NCT to
further develop the technology. The microphone technology can be used in a wide
variety of applications within the acoustic and communications fields.
Applied Acoustic Research, L.L.C, (US) ("AAR")
In December 1995, NCT and AAR of State College, Pennsylvania formed a joint
venture, OnActive Technologies, L.L.C. ("OAT"), to commercialize advanced audio
applications, such as FPT and Top Down Surround Sound (TM) ("TDSS"), into total
audio systems and solutions for the ground based vehicle market. Both partners,
who initially owned equal shares of the joint venture, have licensed their
proprietary technology to the joint venture.
In May 1996, Hoover Universal, Inc., a wholly-owned subsidiary of Johnson
Controls, Inc. ("JCI") acquired a 15% equity interest in OAT for $1.5 million
and acquired rights to certain of the Company's and AAR's related patents for a
total of $1.5 million, half of which was paid to the Company and half of which
was paid to AAR.
On October 8, 1998, AAR, NCT Audio and JCI signed a Redemption Agreement, an
Amended and Restated License Agreement, a Termination Agreement, and a License
Agreement (collectively, the "Termination Agreements") terminating NCT Audio's
ownership interest in OAT. NCT Audio had its ownership interest in OAT redeemed
by OAT in exchange for the rights and licenses granted NCT Audio, under the
License Agreement together with a cash payment of seventy-five thousand dollars
($75,000), the discharge of any indebtedness of NCT Audio to OAT, the license to
certain technology in accordance with specific terms and limitations set forth
in that certain Aftermarket-TDSS License, and the right to receive twenty-two
and one half percent of all royalties to be paid by JCI, relating to the
licensing of that certain proprietary intellectual property of the Company known
as TDSS.
New Transducers Ltd. (U.K.)
New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT, plc (formerly
The Verity Group plc 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 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 from NXT and the Company
will receive royalties on future NXT licensing and product revenue. On April 15,
1997, NXT, plc, NXT and the Company executed several agreements and other
documents (the "New Agreements") which terminated the Cross License, and certain
related agreements and replaced them with a new cross license (the "New Cross
License"), and new related agreements. The material changes effected by the New
Agreements included the inclusion of NXT, plc as a party along with its
wholly-owned subsidiary NXT and providing that the license fee payable to NCT
could be paid in ordinary shares of stock. The subject license fee was paid to
the Company in ordinary shares of NXT, plc stock which were subsequently sold by
the Company. On September 27, 1997, NXT, plc, NXT, NCT Audio and the Company
executed several agreements and other documents, terminating the New Cross
License and a related 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 included an expansion of the fields of use applicable to the
exclusive licenses granted to NXT, plc and NXT and an increase in the royalties
payable on future licensing and product revenues. On February 9, 1999, NCT Audio
and NXT expanded the Cross License Agreement dated September 27, 1997 to
increase NXT's fields of use to include aftermarket ground-based vehicles and
aircraft sound systems and increased the royalties due NCT Audio from NXT to 10%
from 6% and increased the royalties due NXT from NCT Audio to 7% from 6%. In
consideration for granting NXT these expanded licensing rights, NCT Audio
received a license fee. See Note 3 - "Notes to Financial Statements - Joint
Ventures and Other Strategic Alliances" for further discussion.
Oki Electric Industry Co., Ltd. ("Oki")
In October 1997, the Company and Oki executed a license agreement. Under the
terms of the agreement, which included an up-front license fee and future per
unit royalties, Oki licensed the Company's ClearSpeech(R) noise cancellation
algorithm for integration into large-scale integrated circuits for
communications applications. The Company has granted Oki the right to
manufacture, use and sell products incorporating the algorithm. The algorithm is
specifically designed to remove background noise from speech and other
transmitted signals, greatly improving intelligibility and clarity of
communications.
Siemens Semiconductors, Siemens AG
In December 1997, the Company and Siemens executed a license agreement. Under
the terms of the agreement, which included an up-front license fee and future
per unit royalties, Siemens licensed the Company's SSM and will develop,
manufacture and market such microphones as surface mountable devices. The SMM
technology delivers microphone technology on a silicon chip, a breakthrough in
the microphone marketplace. Siemens and the Company have targeted the SMM to the
multimedia, cellular phone, wireless phone, voice recognition and other related
markets. The SMM's small chip dimensions of only 3 mm on each side make it
useful for packaging into products with tight size constraints, such as noise
canceling ear plugs and hearing aids.
VLSI Technology, Inc. ("VLSI")
In February 1998, the Company and VLSI executed a license agreement. Under
the terms of the agreement, which included up-front development fees and future
per unit royalties, VLSI licensed the Company's ClearSpeech(R) noise
cancellation and echo cancellation algorithms for use with VLSI's current and
future integrated circuits targeted to the digital cellular and personal
communications systems ("PCS") phone market, as well as emerging computer
telephony markets. The noise cancellation algorithm is specifically designed to
remove background noise from speech and other transmitted signals, greatly
improving intelligibility and clarity of communications. The echo cancellation
algorithm cancels acoustical echo for hands-free telephony operations including
cellular and speaker phones.
STMicroelectronics SA & STMicroelectronics S.r.l ("ST")
In November 1998, Advancel and ST executed a license agreement. Under the
terms of the agreement, which included a license fee, a minimum royalty within
two years and future per unit royalties, ST licensed Advancel's tiny2J(TM) for
Java(TM) ("T2J-processor core") to combine it with its proven secure
architecture and advanced nonvolatile memory technology, to offer a new
generation of secure microcontrollers for smartcard applications. The
T2J-processor core is the ideal architecture to accelerate the execution of
Javacard(TM)-based smartcard applications such as electronic purse credit/debit
card functions, ID cards that provide authorized access to networks and
subscriber identification modules that secure certain PCS cellular phones
against fraud.
H. Marketing and Sales
In addition to marketing its Active Wave Management technology and systems
through its strategic alliances as described above, the Company has an internal
sales and marketing force of twenty professionals, its executive officers and
directors, and nine independent sales representatives. The independent sales
representatives may earn commissions of generally up to 6% of revenues generated
from sales of NCT products to customers the sales representatives introduce to
NCT and up to 5% of research and development funding revenues provided by such
customers. During 1998 and through February 1999, the Company expanded its
internal sales and marketing force by ten, from nineteen to twenty-nine
professionals and will continue to expand its internal sales force on a limited
basis as the need dictates.
Note 15 - Notes to Financial Statements sets forth financial information
relating to foreign and domestic operations and sales for the years ended
December 31, 1998, 1997 and 1996.
The Company does not have a significant foreign exchange transaction risk
because the majority of its non-U.S. revenue is denominated and settled in U.S.
dollars. The remaining revenue is in British pounds sterling and the Company's
underlying cost is also in pounds sterling, creating a natural foreign exchange
protection.
I. Concentrations of Credit Risk
The Company sells its products and services to OEMs, distributors and end
users in various industries worldwide. As shown below, the Company's five
largest customers accounted for approximately 34% of revenues during 1998 and
39% of gross accounts receivable at December 31, 1998. The Company does not
require collateral or other security to support customer receivables.
(in thousands of dollars)
As of December 31, 1998,
and for the year then ended
-----------------------------
Accounts
CUSTOMER Receivable Revenue
-------------------------------- ----------- ----------
VLSI Technology, Inc. $--- $285
TS/2 Inc. 9 275
STMicroelectronics SA and 246 246
STMicroelectronics S.r.l
Telex Communications, Inc. --- 189
Cleverdevices Ltd. 23 119
All Other 438 2,210
----------- ----------
Total $716 $3,324
=========== ==========
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.
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and trade
receivables. 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. Deposits in excess of federally insured limits were $0.3 million at
December 31, 1998.
J. Competition
The Company is aware of a number of direct competitors in the field of Active
Wave Management. Indirect competition also exists in the field of passive sound
and vibration attenuation. The Company's principal competitors in active control
systems include Bose Corporation, Group Lotus PLC and Lotus Cars Limited, Lord
Corporation, Matsushita Electric Industrial Co., Ltd., Sennheiser Electronic
Corp. and Sony Corporation, among others. The Company's principal competitors in
other fields of Active Wave Management include IBM Corporation, Lucent
Technologies, Inc. and Texas Instruments, Incorporated. To the Company's
knowledge, each of such entities is pursuing its own technology in active
control systems, either on its own or in collaboration with others, and has
recently commenced attempts to commercially exploit such technology. NCT also
believes that a number of other large companies, such as the major domestic and
foreign communications, computer, automobile and appliance manufacturers, as
well as aircraft parts suppliers and manufacturers, have research and
development efforts underway in Active Wave Management and active noise and
vibration control. Many of these companies, as well as the Company's potential
competitors in the passive sound and vibration attenuation field and other
entities which could enter the active noise and vibration attenuation field and
other fields of Active Wave Management as the industry develops, are well
established and have substantially greater management, technical, financial,
marketing and product development resources than the Company.
K. Government Contracts
The Company has acted as a government subcontractor in connection with its
performance of certain engineering and development services. Government
contracts provide for their cancellation at the government's sole discretion, in
which event the contractor or subcontractor may recover its actual costs up to
the date of cancellation, plus a specified profit percentage. Governmental
expenditures for defense are subject to the political process and to rapidly
changing world events, either or both of which may result in significant
reductions in such expenditures in the proximate future. Government contracts
are not viewed as a significant part of the Company's business. No such
contracts were in effect during 1998.
L. Research and Development
Company-sponsored research and development expenses aggregated $7.2 million,
$6.2 million and $7.0 million for the fiscal years ended December 31, 1998, 1997
and 1996, respectively.
M. Environmental Regulation Compliance
Compliance with Federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, does not have any material effect upon the capital
expenditures, earnings or competitive position of the Company.
Compliance by existing and potential customers of the Company with Federal,
state and local laws and regulations pertaining to maximum permissible noise
levels occurring from the operation of machinery or equipment or the conduct of
other activities could be beneficial to sellers of noise reduction products and
enhance demand for certain applications of the Company's technology as well as
products developed or to be developed by the Company. However, at the present
time it is premature to determine what quantitative effect such laws and
regulations will have on the sale of the Company's products and technology.
<PAGE>
N. Employees
The Company had 104 employees as of February 28, 1999. None of such employees
is represented by a labor union. The Company considers its relationships with
employees to be satisfactory.
O. Acquisitions and Proposed Transactions
On September 4, 1998, the Company acquired the issued and outstanding common
stock of Advancel, a Silicon Valley-based developer of microprocessor cores that
execute Sun Microsystems' Java(TM) code. The acquisition was pursuant to a stock
purchase agreement dated as of August 21, 1998 (the "Stock Purchase Agreement")
among the Company, Advancel and certain shareholders of Advancel (the "Advancel
Shareholders"). The consideration for the acquisition of the Advancel common
stock consisted of an initial payment of $1.0 million payable by the delivery of
1,786,991 shares of the Company's treasury stock together with future payments,
payable in cash or in common stock of the Company at the election of the
Advancel Shareholders (individually, an "earnout payment" and collectively, the
"earnout payments") based on Advancel's earnings before interest, taxes,
depreciation and amortization (as defined in the Stock Purchase Agreement) for
each of the calendar years 1999, 2000, 2001 and 2002 (individually, an "earnout
year" and collectively, the "earnout years"). While each earnout payment may not
be less than $250,000 in any earnout year, there is no maximum earnout payment
for any earnout year or for all earnout years in the aggregate. If the Advancel
Shareholders elect to take payment in the form of shares of the Company's Common
Stock, a formula has been established to determine the number of shares
issuable. In the event that the Company is unable to maintain the registration
statement covering the resale of 1,786,991 shares effective for at least thirty
(30) days, each Advancel Shareholder shall have the right, until April 15, 1999,
to have the Company redeem up to one-third of the initial payment shares
acquired by such Advancel Shareholder by paying in cash therefor a sum
calculated by using the formula used to determine the number of shares of the
Company's common stock to be delivered in payment of the initial payment of $1.0
million.
NCT Audio, a majority owned subsidiary of the Company, has signed three
letters of intent, one agreement to purchase, and one definitive purchase
agreement pursuant to which it will acquire 100% of the stock or assets of the
companies outlined below. Management believes the consummation of these
acquisitions will provide significant value creation opportunities. By acquiring
companies that specialize in different segments of the audio market in various
locations around the world, management believes it can improve profitability of
the combined companies by sharing some resources, eliminating redundant
expenses, and increasing revenue by leveraging each company's distribution
channels. Some of the synergistic opportunities that will be achieved with the
acquisitions include the ability to (i) leverage the extensive dealer network;
(ii) gain access to worldwide consumer audio markets and establish automotive
audio aftermarket accounts; (iii) increase product distribution of all
acquisition companies in world markets; (iv) cross-sell the acquisition
companies' products among distribution channels; and (v) maximize the
warehousing and distribution facilities. Overall, these opportunities are
expected to significantly strengthen the distribution network of NCT Audio's
product line into the worldwide market.
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), a wholly-owned subsidiary of Top
Source Technologies, Inc. ("TST"). TSA, located in Troy, Michigan, specializes
in the design and manufacture of speaker enclosures that maximize audio output
for automotive OEMs, Tier One suppliers, and key aftermarket accounts. TSA's
systems are factory installed on Chrysler Corporation's ("Chrysler") Wrangler
model line and are also offered as dealer installed accessory packages. Earlier
on June 11, 1998 NCT Audio had paid a non-refundable deposit of $1,450,000
towards the purchase price. The total purchase price is $10,000,000 and up to
$6,000,000 in possible future contingent payments. The seller may elect to
receive the possible future contingent payments in either cash or shares of NCT
Audio's common stock. The shareholders of TST approved the transaction on
December 15, 1998.
NCT Audio then paid TST $2,050,000 on July 31, 1998. The money was held in
escrow with all of the necessary securities and documents to evidence ownership
of 20% of the total equity rights and interests in TSA. When TST's shareholders
approved the transaction, the $2,050,000 was delivered to TST. In return, NCT
Audio took ownership of the documentation and securities.
NCT Audio has an exclusive option (the "TSA Option") to purchase the assets
of TSA through March 31, 1999. On March 30, 1999, NCT Audio and TST entered into
a letter agreement extending the TSA Option to May 28, 1999 and agreeing to
other certain terms and conditions. Among such terms and conditions, NCT Audio
agreed to pay TST $350,000 consisting of a $204,315 note payable, due April 16,
1999 (the "TST Note"), and $145,685 in cash (collectively the "Extension Fee").
The Extension Fee shall be credited in full against the balance due TST at
closing. Certain penalties apply, including forfeiture of the Extension Fee, if
NCT Audio fails to pay the TST Note by April 16, 1999 or fails to close the
transaction by May 28, 1999. In addition, NCT Audio agreed to issue TST $100,000
of NCT Audio convertible preferred stock.
<PAGE>
On August 17, 1998, NCT Audio agreed to acquire all of the members' interest
in Phase Audio LLC (doing business as Precision Power, Inc. or "PPI"). PPI,
located in Phoenix, Arizona, designs and manufactures high performance
amplifiers, preamplifiers, subwoofers, signal processors and speakers for the
automotive audio aftermarket. PPI has a network of over 600 dealers for its
products throughout the U.S.. NCT Audio will acquire the interest in exchange
for shares of its common stock having an aggregate value of $2,000,000. NCT
Audio also agreed to retire approximately $8.5 million of PPI debt, but NCT
Audio must obtain adequate financing before the transaction can be completed. In
addition, NCT Audio provided PPI a working capital loan on June 17, 1998 in the
amount of $500,000 which is evidenced by a demand promissory note. On August 18,
1998, NCT Audio provided PPI another working capital loan in the amount of
$1,000,000, which is also evidenced by a demand promissory note. The unpaid
principal balance of these notes bear interest at a rate equal to the prime
lending rate plus one percent (1.0%).
As noted, the transaction is contingent on NCT Audio obtaining outside
financing to retire the PPI debt. On January 6, 1999, the PPI members notified
NCT Audio that, while they remain willing to do the transaction, they may choose
at some point to abandon the transaction because NCT Audio has not obtained the
financing in a timely manner. They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock, they would insist that NCT Audio pay them
that amount in cash at any closing. PPI also has requested that the Company or
NCT Audio advance them an additional $1,000,000 loan. The Company and NCT Audio
declined to do so.
On January 28, 1999, NCT Audio entered into a letter of intent to purchase
100% of the common stock of a premier speaker manufacturer (the "Third
Acquisition"). The proposed acquisition is subject to the approval by
stockholders and certain other terms and conditions, including that NCT Audio
obtain adequate financing to consummate the transaction. Shareholders who hold
all of the outstanding shares of common stock of the Third Acquisition have
agreed to vote their shares in favor of the proposed acquisition.
The purchase price is approximately $36.4 million. At closing, approximately
$24.5 million will be paid to shareholders of the Third Acquisition. The balance
of approximately $11.9 million is to be paid by a four-year, straight-line
amortization seller note (payable quarterly) that will have a second lien on the
assets of the Third Acquisition.
The Third Acquisition is a premier speaker manufacturer for the home consumer
market. Ranking among the ten largest speaker manufacturers in the world, the
Third Acquisition sells its well-established speaker lines in over fifty
countries worldwide. The Third Acquisition's dedication to a continuous cycle of
new products for its speaker line allows it to remain a dominant speaker player
in the world market.
P. Business Segments
For a full discussion of business segments and geographic areas, see Note 14.
- - Notes to Financial Statements - "Business Segment Information" and Note 15. -
Notes to Financial Statements - "Geographical Information".
ITEM 2. PROPERTIES
The Company's executive office is located at the site of its research and
technical support laboratory in Linthicum, Maryland, where it leases
approximately 40,000 square feet of space under leases which expire in July
2003. The leases provide for current monthly rentals of approximately $36,000,
subject to annual inflationary adjustments.
The Company's majority owned subsidiary, Advancel, maintains its research and
engineering facility in San Jose, California, where it leases approximately
6,000 square feet of space under a lease which expires in August 2000. The lease
provides for current monthly rentals of approximately $13,000, subject to annual
inflationary adjustments.
The Company maintains a sales and marketing office in Stamford, Connecticut
where it leases approximately 6,400 square feet of space under a lease which
expires in February 2001 and provides for a current monthly rental of
approximately $7,000, subject to annual inflationary adjustments.
The Company's United Kingdom operations are conducted in Cambridge, England
where it leases 4,000 square feet of space under a lease which expires in April
2007, and provides for a current monthly rental of approximately $5,000, subject
to annual inflationary adjustments.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunale di Milano, Milano, 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; 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 any case for no less than 500 million Lira. The
Company has retained the Italian law firm Verusio e Cosmelli, Giovanni Verusio,
Esq., a member of that 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. Submission 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. At the hearing
on May 19, 1998, the Discovery Judge established dates for the parties to submit
final pleadings and set September 22, 1998 as the date to send the case before
the Tribunal of Milan sitting in full bench. As of the date hereof the Company
has not been informed of any decision of the Tribunal. 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.
By a letter dated September 9, 1997, outside counsel to Andrea Electronics
Corporation ("AECorp.") notified the Company that AECorp. believed the Company's
use of the term "ANR READY" constituted the use of a trademark owned by AECorp.
The Company has also been informed by representatives of existing and/or
potential customers that AECorp. has made statements claiming the Company's
manufacture and/or sale of certain in-flight entertainment system products may
infringe a patent owned by AECorp. On March 25, 1998, the Company received from
AECorp.'s intellectual property counsel a letter dated March 24, 1998,
announcing and notifying the Company of the issuance of U.S. patent Number
5,732,143 to AECorp. and enclosing a copy of the patent. The subject letter
appears to be one of notice and information and did not contain any claim of
infringement. Following that date, additional correspondence was exchanged
between Company counsel and counsel to AECorp. The Company again was informed by
representatives of existing, and/or potential customers that AECorp. was
continuing to make statements inferring that the Company's manufacture and/or
sale of certain in-flight entertainment system products may infringe patents
owned by AECorp. On October 9, 1998 the Board of Directors of the Company
authorized the commencement of litigation against AECorp. On November 17, 1998
the Company and NCT Hearing filed a complaint in the United States District
Court, Eastern District of New York against AECorp. requesting that the Court
enter judgment in their favor as follows: (i) declare that the two subject
AECorp. patents and all claims thereof are invalid and unenforceable and that
the Company's products do not infringe any valid claim of the subject AECorp.
patents; (ii) declare that the subject AECorp. patents are unenforceable due to
their misuse by AECorp.; (iii) award compensatory damages in an amount of not
less than $5,000,000 as determined at trial and punitive damages of $50,000,000
for AECorp.'s tortious interference with prospective contractual advantages of
the Company; (iv) enjoin AECorp. from stating in any manner that the Company's
products, or the use of the Company's products infringe on any claims of the
subject AECorp. patents; and (v) award such other and further relief as the
Court may deem just and proper. On or about December 30, 1998, AECorp. filed its
Answer and Counterclaims against the Company and NCT Hearing. In its answer,
AECorp. generally denies the Company's and NCT Hearing's allegations, asserts
certain procedural affirmative defenses and brings counterclaims against the
Company and NCT Hearing alleging that the Company has: (i) infringed the two
subject AECorp. patents and AECorp.'s "ANR Ready" mark; (ii) violated the Lanham
Act through the Company's use of such mark; and (iii) unfairly competed with
AECorp. through the use of such mark. On or about January 26, 1999, the Company
and NCT Hearing filed a Reply to AECorp.'s counterclaims generally denying
AECorp.'s counterclaims, asserting certain affirmative defenses to AECorp.'s
counterclaims and requesting that: (i) the counterclaims be dismissed with
prejudice; (ii) the Court enter judgment that the term "ANR Ready" is not a
valid trademark; (iii) the Court enter judgment that the Company and NCT Hearing
have not infringed any trademark right of AECorp.; (iv) the Court enter judgment
that the Company and NCT Hearing have not engaged in any form of federal or
state statutory or common law unfair competition; (v) the Court enter judgment
that AECorp. is precluded from recovery of any claim of right to the term "ANR
Ready" by the equitable doctrine of estoppel; (vi) the Court enter judgment that
AECorp. is precluded from recovering any damages from the Company and NCT
Hearing by the equitable doctrine of laches; (vii) the Court award the Company
and NCT Hearing their costs and reasonable attorneys' fees; and (viii) the Court
enter judgment granting the relief requested in the Company's and NCT Hearing's
complaint as well as such other and further relief as the Court deems just and
proper. 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 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 Alastair
J. Keith in the United States District Court for the District of Connecticut
(the "District Court"). Mr. McCloy is a Director of the Company. Mr. Parrella is
the President and Chief Executive Officer of the Company as well as a Director
of the Company. Mr. Haft is a Director of the Company and Chairman of the Board
of Directors. Mr. Keith is a former Director of the Company. The summons and
complaint in this suit were served on the Company on January 16, 1998. Ally
purports to be a creditor of ANVT. On September 14, 1994, the Company acquired
certain assets of ANVT. Specifically, the Company acquired ANVT's patented and
unpatented intellectual property, the rights and obligations under a defined
list of agreements between ANVT and other parties relating to existing or
potential joint ventures licensing agreements and other business relationships,
and certain items of office and laboratory equipment. For these assets, the
Company paid ANVT two hundred thousand dollars ($200,000.00) and issued ANVT two
million (2,000,000) shares of the Company's common stock. Count 1 of the
complaint alleges misrepresentation and deceit with respect to matters which
allegedly were relevant to the ANVT transaction. Count 2 alleges negligent
misrepresentation with respect to the same facts. Count 3 alleges unfair and
deceptive trade practices in violation of Connecticut General Statutes
ss.42-110a et sec. consisting of the actions described in Counts 1 and 2. In the
complaint, Ally requests actual and punitive damages together with costs and
attorneys fees under Count 1; actual damages together with costs and attorney
fees with respect to Count 2; and, actual damages, treble damages and costs and
attorney fees with respect to Count 3. Ally also requests such other further
relief as may be just. It is not certain from the complaint what Ally is
claiming as actual damages. Ally does, however, state that its deficiency claim
against ANVT as of August, 1994, was approximately six hundred twenty-one
thousand dollars ($621,000.00) and that under the terms of the settlement
agreement between Ally and ANVT, Ally is entitled to receive up to an additional
six hundred three thousand eight hundred ninety-one dollars and ninety-seven
cents ($603,891.97) from certain earn-out payments under the asset purchase
agreement between ANVT and the Company. It is not clear whether Ally's
deficiency claim against ANVT was calculated as being in addition to the value
of the common stock of the Company which Ally received. The Company, through its
special litigation counsel, obtained an extension of the time in which it must
answer the complaint to March 4, 1998. On March 4, 1998, the Company, through
such counsel, filed with the District Court a motion to dismiss the complaint
or, in the alternative, to join necessary parties. On March 16, 1998, Ally filed
a notice of voluntary dismissal as to the individual defendants, Messrs McCloy,
Parrella, Haft and Keith. On March 25, 1998, Ally filed its opposition to the
Company's motion to dismiss. On July 15, 1998 the Company paid plaintiff, Ally,
twenty-five thousand ($25,000) dollars in settlement of the suit which was
dismissed on behalf of all defendants with prejudice and without costs on July
16, 1998.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. The summons and complaint alleges the Company breached, and Mr.
Parrella interfered with, a purported contract entered into "in 1996" between
the Company and SCI under which SCI was to be paid commissions by the Company
when the Company received capital from investors who purchased debentures or
convertible preferred stock of the Company during a period presumably commencing
on the date of the alleged contract and allegedly extending at least to May 1,
1998. In this regard, the complaint alleges that SCI by virtue of a purported
right of first refusal that the Company did not honor, is entitled to
commissions totaling $1,500,000 in connection with the Company's sale of
$13,300,000 of preferred stock and a subsidiary of the Company's sale of
$4,000,000 of stock convertible into stock of the Company. In the complaint SCI
demands judgment against the Company for compensatory damages of $1,673,000,
punitive damages of $50,000 and attorneys' fees of $50,000 and demands judgment
against Mr. Parrella for compensatory damages of $150,000, punitive damages of
$500,000 and attorneys' fees of $50,000 as well as unspecified other appropriate
relief. On July 23, 1998 the Company and Mr. Parrella filed a motion to strike
the complaint or in the alternative, to dismiss the tortious interference with
contract claim and the punitive damages claim. On or about August 26, 1998
plaintiffs filed an amended complaint and a response to the Company's and Mr.
Parrella's motion to strike. On September 15, 1998 the Company and Mr. Parrella
filed a motion to strike the amended complaint. On or about September 25, 1998
the Company and Mr. Parrella served the plaintiff with their first request for
the production of documents. On November 12, 1998, the Court granted the
Company's and Mr. Parrella's motion to dismiss the tortious interference with
contracts claim and the punitive damages claim. On or about November 25, 1998,
SCI filed a second amended complaint, which abandoned the punitive damages claim
and the claim against Mr. Parrella. 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 material effect on
quarterly or annual operating results.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott & Co.,
Inc. ("AWC") and the Company in the United States District Court, Southern
District of New York. In the complaint, Mellon demands judgment against AWC and
the Company in the amount of $326,000 by reason of its having paid each of AWC
and the Company such sum when acting as escrow agent for the Company's private
placement of securities with certain institutional investors identified to the
Company by AWC. On or about July 27, 1998 AWC filed its Answer, Counterclaim and
Cross-claim requesting: (i) dismissal of Mellon's Amended Complaint against AWC;
(ii) commissions in the amount of $688,000 to be paid by the Company to AWC;
(iii) issuance to AWC of 784,905 shares of the Company's common stock registered
for resale under the Securities Act of 1933, as amended; (iv) a declaration that
AWC is entitled to retain the $326,000 sought by Mellon; and (v) delivery of a
warrant to purchase 461.13 shares of common stock of NCT Audio. On or about
August 20, 1998 the Company filed its reply to AWC's cross-claims. Discovery is
currently taking place in this action. 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 would not have a severe material
effect on quarterly operating results.
On December 15, 1998, Balmore Funds, S.A. and Austost Anstalt Schaan filed
suit against the Company's majority owned subsidiary, NCT Audio , and the
Company in the Supreme Court of the State of New York County of New York. The
complaint alleges an action for breach of contract, common law fraud, negligent
misrepresentation, deceptive trade practices under Section 349 of the General
Business Law of the State of New York, and money had and received, all arising
out of NCT Audio's and the Company's alleged unlawful conduct in connection with
an agreement entered into with plaintiffs for the sale of shares of common stock
of NCT Audio to the plaintiffs in a private placement in December 1997. In this
regard, the complaint alleges that: (i) NCT Audio breached an alleged agreement
with plaintiffs to register shares of NCT Audio's common stock purchased by
plaintiffs or, in the alternative, shares of the Company's common stock
exchangeable for such shares of NCT Audio's common stock under certain
circumstances and to pay penalties set forth in the alleged agreement; (ii) that
NCT Audio made representations that were materially false and misleading through
its facsimiles of non-negotiated agreements as substitutions for the alleged
contract between the parties; (iii) that NCT Audio and the Company acted
negligently and violated duties of full, fair and complete disclosure to the
plaintiffs; (iv) that NCT Audio and the Company engaged in deceptive trade
practices under Section 349 of the New York General Business Law; and (v) that
as a result thereof, NCT Audio and the Company possess money that in equity and
good conscience should not to be retained by NCT Audio and the Company. In the
complaint the plaintiffs demand judgment against NCT Audio and the Company: (i)
for damages in an amount to be determined but not less than $1,819,000; (ii) for
punitive damages in the amount of $3,000,000; (iii) requiring NCT Audio and the
Company to register the shares of common stock of NCT Audio held by the
plaintiffs; (iv) alternatively, rescission with the return of plaintiffs'
$1,000,000 plus interest; (v) for treble damages, reasonable attorney's fees and
costs pursuant to Section 349 and 350 of the New York General Business Law; and
(vi) such other and further relief as the Court may deem just and proper. On
January 14, 1999, NCT Audio and the Company filed removal papers to move the
suit to the United States District Court for the Southern District of New York
and on January 22, 1999, NCT Audio and the Company filed with that Court
Defendants' Answer, Affirmative Defenses, Counterclaims and Third-Party
Complaint. 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.
The Company believes there are no other patent infringement litigations,
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on the financial position and results of
operations.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
An annual meeting of stockholders of the Company was held on October 20,
1998. At the meeting, Jay M. Haft, Michael J. Parrella, John J. McCloy II, Sam
Oolie, Stephan Carlquist and Morton Salkind were elected directors, each to
serve until the next annual meeting of stockholders and until his successor is
elected and qualified. The stockholders also approved an amendment of the
Company's Restated Certificate of Incorporation to change the corporate name to
NCT Group, Inc. and to increase the number of shares of common stock authorized
thereunder from 185,000,000 shares to 255,000,000 shares, approved an amendment
to the NCT Group, Inc. Stock Incentive Plan, approved the grant of options to
certain directors of the Company, and ratified the appointment of Richard A.
Eisner & Company, LLP as the Company's independent auditors for the year ending
December 31, 1998. The vote taken at such meeting was as follows:
(a)With respect to the election of the directors:
FOR WITHHELD
Jay M. Haft 122,204,128 2,808,617
Michael J. Parrella 122,184,858 2,407,917
John J. McCloy II 122,210,058 2,382,717
Sam Oolie 122,190,358 2,402,417
Stephan Carlquist 122,209,758 2,383,017
Morton Salkind 122,206,158 2,386,617
(b)With respect to the proposal to approve the amendment of the Company's
Restated Certificate of Incorporation to change the name of the Company to "NCT
Group, Inc.":
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
122,370,730 1,436,417 776,628
(c)With respect to the proposal to approve the amendment of the Company's
Restated Certificate of Incorporation to increase the number of shares of common
stock authorized thereunder from 185,000,000 to 255,000,000 shares:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
114,559,314 9,230,281 794,180
(d)With respect to the proposal to approve the adoption of an amendment to
the NCT Group, Inc. Stock Incentive Plan:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
35,686,222 9,600,157 1,644,990
(e)With respect to the proposal to approve a plan granting options to
purchase common stock of the Company to two non-employee directors:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
36,735,982 8,472,160 1,723,226
(f)With respect to the proposal to ratify the selection of Richard A. Eisner
& Company, LLP independent auditors for the Company's fiscal year ending
December 31, 1998:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
122,707,302 1,048,472 828,001
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's common stock is currently traded on the NASDAQ OTC Electronic
Bulletin Board under the symbol "NCTI". Prior to January 7, 1999, the Company's
common stock was traded on the NASDAQ National Market System. High and low last
sale information for 1998 and 1997 for the common stock for specified quarterly
periods is set forth below:
1998 1997
---------------------- -------------------
HIGH LOW HIGH LOW
---------- --------- -------- --------
1st Quarter 15/16 14/16 29/32 3/8
2nd Quarter 23/32 21/32 15/32 7/32
3rd Quarter 9/16 17/32 1 1/8 7/32
4th Quarter 11/32 9/32 2 1/32 9/16
At December 31, 1998, there were approximately 40,000 holders of record of
the Company's common stock.
The Company has neither declared nor paid any dividends on its shares of
common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" for a description of the Company's sales of
unregistered securities during the year ended December 31, 1998.
On June 16, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") notified the
Company that the Company's common stock had failed to maintain a closing bid
price of $1.00 or more for the previous thirty (30) consecutive trade dates in
accordance with Nasdaq's Marketplace Rule 4450(a)(5). Nasdaq also notified the
Company that no delisting action would be initiated at that time and that the
Company would be provided ninety (90) calendar days in which to regain
compliance with Marketplace Rule 4450(a)(5) which would be achieved if the
closing bid price of the shares of the Company's common stock equaled or
exceeded $1.00 for ten (10) consecutive days before the end of trading on
September 14, 1998. In this regard, Nasdaq advised the Company that in the event
the Company was unable to achieve compliance, it may seek further procedural
remedies. The Company was unable to achieve compliance by September 14, 1998,
and on that date delivered its request for a hearing on the matter together with
the requested fee to Nasdaq's Hearings Department. Such a hearing was held on
November 5, 1998. Under Nasdaq's procedures delisting was stayed pending the
outcome of the hearing. On January 6, 1999, Nasdaq notified the Company that the
Company's securities were delisted from Nasdaq effective with the close of
business, January 6, 1999. On January 20, 1999, the Company requested a review
of the Nasdaq decision. On February 16, 1999, Nasdaq advised the Company that
the issuance of a review decision will likely occur in July 1999. While a
delisting of the Company's common stock is not anticipated to have an immediate
effect on the Company's operations, it may make it more difficult for the
Company to raise additional capital to fund future operations.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below is 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, except per share amount)
Years Ended December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
<S> <C> <C> <C> <C> <C>
Product Sales $ 2,337 $ 1,589 $ 1,379 $ 1,720 $ 2,097
Engineering and development services 4,335 2,297 547 368 425
Technology licensing fees and other 452 6,580 1,238 3,630 802
-------- -------- -------- -------- ---------
Total revenues $ 7,124 $ 10,466 $ 3,164 $ 5,718 $ 3,324
-------- -------- -------- -------- ---------
COSTS AND EXPENSES:
Cost of product sales $ 4,073 $ 1,579 $ 1,586 $ 2,271 $ 2,235
Cost of engineering and
development services 4,193 2,340 250 316 275
Selling, general and administrative 9,281 5,416 4,890 5,217 11,238
Research and development 9,522 4,776 6,974 6,235 7,220
Interest (income) expense, net (580) (49) 17 1,397 (3) (429)
Equity in net (income)
loss of unconsolidated affiliates 1,824 (80) 80 -- --
Other (income) expense, net 718 552 192 130 (3,032)(4)
-------- -------- -------- -------- --------
Total costs and expenses $ 29,031 $ 14,534 $ 13,989 $ 15,566 $ 17,507
-------- -------- -------- -------- --------
Net loss $(21,907) $ (4,068) $(10,825) $ (9,848) $(14,183)
Less:
Preferred stock dividend requirement - - - 1,623 3,200
Accretion of difference between
carrying amount and redemption
amount of Redeemable preferred
stock - - - 285 485
-------- -------- -------- -------- --------
Net (loss) attributable to
common stockholders $(21,907) $(4,068) $(10,825) $(11,756) $(17,868)
======== ======= ======== ======== ========
Weighted average number of common
shares outstanding(1) - basic
and diluted 82,906 87,921 101,191 124,101 143,855
======== ======= ======== ======== ========
Basic and Diluted Net loss per share $ (0.26) $ (0.05) $ (0.11) $ (0.09) $ (0.12)
======== ======= ======== ======== ========
<CAPTION>
December 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------------------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total assets $ 12,371 $ 9,583 $ 5,881 $ 17,361 $ 15,465
Total liabilities 6,903 2,699 3,271 2,984 5,937
Long-term debt -- 105 -- -- --
Accumulated deficit (68,780) (72,848) (83,673) (93,521) (107,704)
Stockholders' equity (2) 5,468 6,884 2,610 14,377 3,426
Working capital (deficiency) 923 1,734 (1,312) 11,696 (1,187)
</TABLE>
(1)Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible Preferred Stock, since their effect would be
antidilutive.
(2) The Company has never declared nor paid cash dividends on its Common Stock.
(3)Includes interest expenses of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
(4)Includes a $3.2 million gain from the exercise of an option received from
Verity in connection with the cross license agreement entered into by the
Company.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
Statements in this filing which are not historical facts are forward-looking
statements under provisions of the Private Securities Litigation Reform Act of
1995. All forward-looking statements involve risks and uncertainties. The
Company wishes to caution readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause its actual results in fiscal 1999 and
beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems for Active Wave Management; produce a cost
effective product that will gain acceptance in relevant consumer and other
product markets; increase revenues from products; realize funding from
technology licensing fees, royalties, product sales, and engineering and
development revenues to sustain the Company's current level of operation; timely
introduce new products; continue its current level of operations to support the
fees associated with the Company's patent portfolio; maintain satisfactory
relations with its customers; attract and retain key personnel; prevent
invalidation, abandonment or expiration of patents owned or licensed by the
Company and expand its patent holdings to diminish reliance on core patents;
have its products utilized beyond noise attenuation and control; maintain and
expand its strategic alliances; and protect Company know-how, inventions and
other secret or unprotected intellectual property.
Overview
The Company is continuing the transition initiated in 1995 from a firm
focused principally on research and development of new technology to a firm
focused on the commercialization of its technology through technology licensing
fees, royalties and product sales. Prior to 1995, the Company derived the
majority of its revenues from engineering and development funding provided by
established companies willing to assist the Company in the development of its
active noise and vibration control technology, and from technology licensing
fees paid by such companies. The Company's strategy generally has been to obtain
technology licensing fees when initiating joint ventures and alliances with new
strategic partners. In 1998, the Company received approximately 13% of its
operating revenues from engineering and development funding, compared with 6% in
1997. Revenues from product sales were limited to sales of specialty products
and prototypes. Since 1991, revenues from product sales have generally been
increasing, although in 1996 product sales declined slightly due to delays in
production and reduced pricing of certain products. In 1998, revenues from
product sales resumed its year-to-year increase. Management expects that
technology licensing fees, royalties and product sales will become the principal
source of the Company's revenue as the commercialization of its technology
proceeds.
As a result of the 1994 acquisition of certain ANVT assets, the Company
became the exclusive licensee of ten seminal patents, the Chaplin Patents,
through its wholly-owned subsidiary, CPH. The Company's ability to license the
Chaplin Patents directly to unaffiliated third parties provides the Company with
a greater ability to earn technology licensing fees and royalties from such
patents. Further, the Company believes that its intellectual property portfolio
prevents other competitors and potential competitors in the field of Active Wave
Management from participating in certain commercial areas without licenses from
the Company.
Note 1 to the accompanying Financial Statements and the "Liquidity and
Capital Resources" section which follows describes the current status of the
Company's available cash balances.
As previously disclosed, the Company implemented changes in its organization
and focus in late 1994. Additionally, in late 1995 the Company redefined its
corporate mission to be the worldwide leader in the advancement and
commercialization of Active Wave Management technology. Active Wave Management
is the electronic and/or mechanical manipulation of sound or signal waves to
reduce noise, improve signal-to-noise ratio and/or enhance sound quality. This
redefinition is the result of the development of new technologies, as previously
noted, such as ASF, TDSS, FPT, and the SMM, which the Company believes can
produce products for fields beyond noise and vibration reduction and control.
These technologies and products are consistent with shifting the Company's focus
to technology licensing and product marketing in more innovative industries
having greater potential for near term revenue generation. The redefinition of
corporate mission is reflected in the revised business plan, which the Company
began to implement during the first quarter of 1996 and has continued through
1998.
<PAGE>
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of the Company's
technologies build as anticipated by management, revenues from technology
licensing fees, royalties and product sales are forecasted to fund an increasing
share of the Company's requirements. The funding from these sources, if
realized, will reduce the Company's dependence on engineering and development
funding. The beginning of this process is shown in the shifting percentages of
operating revenue, discussed below.
In January 1998, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1999.
The Company did not meet the plan's revenue targets and as noted below, found it
necessary to raise additional capital to fund it's operations for 1998 and
beyond (refer to "Liquidity and Capital Resources" below and to Notes 1 and 8 -
Notes to the Financial Statements.).
Success in generating technology licensing fees, royalties and product sales
is significant and critical to the Company's success. The Company cannot predict
whether it will be successful in obtaining market acceptance of its new products
or in completing its current negotiations with respect to licenses and royalty
revenues.
From the Company's inception through December 31, 1998, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 26%
product sales, 43% engineering and development services and 31% technology
licensing fees and royalties.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the Company's technology into their products and 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 NoiseBuster Extreme!(TM) consumer headsets and
began shipping Gekko(TM) flat speakers in the third quarter of 1998. The Company
is presently selling products through six 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; in the fourth quarter of 1994 Ultra began installing
production model aircraft cabin quieting systems in the SAAB 340 turboprop
aircraft; OKI is integrating ClearSpeech(R) algorithm into large scale
integrated circuits for communications applications; and BE Aerospace and Long
Prosper are providing NoiseBuster(R) components into United Airlines'
comprehensive in-flight entertainment and information systems. Management
believes these developments and those previously disclosed help demonstrate the
range of commercial potential for the Company's technology and will contribute
to the Company's transition from engineering and development to technology
licensing fees, royalties and product sales.
The availability of high-quality, low-cost electronic components for
integration into the Company's products also is critical to the
commercialization of the Company's technology. The Company is working with its
strategic partners and other suppliers to reduce the size and cost of the
Company's systems, so that the Company will be able to offer low-cost
electronics and other components suitable for high-volume production.
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products. During
1994, the Company acquired a license to two patents in the field of
micro-machined microphones and concluded the acquisition of all of the patents,
know-how and intellectual property of a former competitor, ANVT. During 1995 the
Company acquired several U.S. patents dealing with adaptive speech filtering
which is used in the Company's ClearSpeech(R) product line. Since 1996, the
Company has been granted 197 new patents for various applications in the field
of Active Wave Management. Management believes that the Company's investment in
its technology has resulted in the expansion of its intellectual property
portfolio and improvement in the functionality, speed and cost of components and
products.
The Company has become certified under the International Standards
Organization product quality program known as "ISO 9000", and continues to
successfully maintain its certification. Since the third quarter of 1994, the
Company has reduced its worldwide work force by 40% from 173 to 104 current
employees as of February 28, 1999.
<PAGE>
Because the Company did not meet its revenue targets for 1998, it entered
into certain transactions, which provided additional funding as follows:
On July 27, 1998, the Company entered into subscription agreements (the
"Series D Subscription Agreements") to sell 6,000 shares of the Company's Series
D Convertible Preferred Stock ("Series D Preferred Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act of 1933, as amended (respectively, "Regulation D" and the
"Securities Act"), to six unrelated accredited investors through one dealer (the
"1998 Series D Preferred Stock Private Placement"). The sale of 6,000 shares of
Series D Preferred Stock having an aggregate $6.0 million stated value was
completed on August 6, 1998. $5.2 million net proceeds were received by the
Company from the 1998 Series D Preferred Stock Private Placement. Each share of
the Series D Preferred Stock has a par value of $.10 per share and a stated
value of one thousand dollars ($1,000) with an accretion rate of four percent
(4%) per annum on the stated value. Each share of Series D Preferred Stock is
convertible into fully paid and nonassessable shares of the Company's common
stock subject to certain limitations. Under the terms of the Series D
Subscription Agreements, the Company is required to file a registration
statement ("the Series D Registration Statement") covering the resale of all
shares of common stock of the Company issuable upon conversion of the Series D
Preferred Stock then outstanding within sixty (60) days after the completion of
the 1998 Series D Preferred Stock Private Placement (respectively, the "Series D
Filing Date" and the "Series D Closing Date"). The shares of Series D Preferred
Stock become convertible into shares of common stock at any time commencing
after the earlier of (i) ninety (90) days after the Series D Closing Date; (ii)
five (5) days after the Company receives a "no review" status from the SEC in
connection with the Series D Registration Statement; or (iii) the effective date
of the Series D Registration Statement. The Series D Registration Statement
became effective on October 30, 1998, and shares of Series D Preferred Stock
became convertible on that date. Each share of Series D Preferred Stock is
convertible into a number of shares of common stock of the Company as determined
in accordance with the following formula (the "Series D Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
-----------------------------------
Conversion Price
where
N = the number of days between (i) the Series D Closing
Date, and (ii) the conversion date.
Conversion
Price = The greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by
an additional 2% for every 30 days that the
Registration Statement has not been filed by the
Series D Filing Date) in effect as of the conversion
date times the average market price for the Company's
common stock for the (5) consecutive trading days
immediately preceding such date; or (ii) $0.50.
The conversion terms of the Series D Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 12,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 6,000
shares of Series D Preferred Stock issued under the 1998 Series D Preferred
Stock Private Placement. The Series D Subscription Agreements also provide that
the Company will be required to make certain payments in the event of its
failure to effect conversion in a timely manner. Including shares of common
stock issued for accretion, as of March 12, 1999, all shares of Series D
Preferred Stock have been converted to 12,273,685 shares of NCT common stock.
<PAGE>
On July 27, 1998, NCT Audio entered into subscription agreements (the "NCT
Audio Subscription Agreements") to sell 60 shares of NCT Audio's Series A
Convertible Preferred Stock ("NCT Audio Series A Preferred Stock") having an
aggregate stated value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 NCT Audio Series A Preferred Stock Private
Placement"). The sale of 60 shares of NCT Audio Series A Preferred Stock having
an aggregate $6.0 million stated value was completed on August 17, 1998. NCT
Audio received net proceeds of $5.2 million from the 1998 NCT Audio Series A
Preferred Stock Private Placement. Each share of the NCT Audio Series A
Preferred Stock has a par value of $.10 per share and a stated value of one
hundred thousand dollars ($100,000) with an accretion rate of four percent (4%)
per annum on the stated value. Each share of NCT Audio Series A Preferred Stock
is convertible into fully paid and nonassessable shares of NCT Audio's common
stock subject to certain limitations. Under the terms of the NCT Audio
Subscription Agreements, NCT Audio is required to file a registration statement
("NCT Audio Registration Statement") covering the resale of all shares of common
stock of NCT Audio issuable upon conversion of the NCT Audio Series A Preferred
Stock then outstanding by a date (the "Series A Filing Deadline") which is not
later than thirty (30) days after the company becomes a "reporting company"
under the the Exchange Act. The shares of NCT Audio Series A Preferred Stock
become convertible into shares of NCT Audio common stock at any time after the
date the company becomes a "reporting company" under the Exchange Act. Each
share of NCT Audio Series A Preferred Stock is convertible into a number of
shares of common stock of NCT Audio as determined in accordance with the
following formula (the "NCT Audio Conversion Formula"):
[(.04) x (N/365) x (100,000)] + 100,000
---------------------------------------
Conversion Price
where
N = the number of days between (i) the date of completion
of the sale of the 60 shares of NCT Audio Series A
Preferred Stock being offered; and (ii) the conversion
date.
Conversion
Price = the greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by
an additional 2% for every 30 days that the NCT Audio
Registration Statement has not been filed by the
Series A Filing Deadline) in effect as of such date
times the average market price for NCT Audio's common
stock for the (5) consecutive trading days
immediately preceding such date; or (ii) the "Floor
Price" which means the lowest number per share that
will not cause the total number of shares of NCT
Audio common stock issuable upon the conversion of 60
shares of NCT Audio Series A Preferred Stock to equal
or exceed twenty percent (20%) of the issued and
outstanding shares of common stock of NCT Audio on
the date of issuance of the NCT Audio Series A
Preferred Stock as long as the common stock of NCT
Audio is listed on the NASDAQ National Market or the
NASDAQ Small Cap Market (there is no "Floor Price" if
such listing is not so maintained by NCT Audio).
The conversion terms of the NCT Audio Series A Preferred Stock also provide
that in the event that NCT Audio has not become a "reporting company" under the
Exchange Act by December 31, 1998, or the NCT Audio Registration Statement has
not been declared effective by the SEC by December 31, 1998, the holder shall be
entitled to exchange each share of NCT Audio Series A Preferred Stock for 100
shares of the Company's Series D Convertible Preferred Stock and thereafter
shall be entitled to all rights and privileges of a holder of the Company's
Series D Preferred Stock. As of December 31, 1998, no NCT Audio Series A
Preferred Stock shareholders have exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Preferred Stock.
<PAGE>
On December 30, 1998, the Company entered into a series of subscription
agreements (the " Series E Subscription Agreements") to sell an aggregate stated
value of up to $8.2 million of Series E Convertible Preferred Stock (the "Series
E Preferred Stock") in consideration of $4.0 million, in a private placement,
pursuant to Regulation D of the Securities Act, to six unrelated accredited
investors through one dealer (the "1998 Series E Preferred Stock Private
Placement"). The sale of 8,145 shares of Series E Preferred Stock having an
aggregate of $8.1 million stated value was completed on March 12, 1999. In 1999,
the Company received net proceeds of $1.8 million from the 1998 Series E
Preferred Stock Private Placement. In addition to the above noted Series E
Subscription Agreements, the Company issued and sold an aggregate amount of $1.7
million of Series E Preferred Stock to three accredited investors through the
above noted dealer, in exchange for an aggregate stated value of $1.7 million of
the Company's Series C Preferred Stock held by the three accredited investors.
The Company also issued and sold an aggregate amount of $0.7 million of Series E
Preferred Stock to four accredited investors through the above noted dealer, in
exchange and consideration for an aggregate of 2.1 million shares of the
Company's common stock held by the four accredited investors. Each share of the
Series E Preferred Stock has a par value of $.10 per share and a stated value of
one thousand dollars ($1,000) with an accretion rate of four percent (4%) per
annum on the stated value. Each share of Series E 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 Series E Subscription Agreements,
the Company is required to file a registration statement ("the Series E
Registration Statement") on (i) Form S-3 on or prior to the date which is no
more than sixty (60) days from the date that the Company has issued a total of
7,438 shares of Series E Preferred Stock if filed or (ii) Form S-1 on or prior
to a date which is no more than ninety (90) days from the date that the Company
has issued a total of 7,438 shares of Series E Preferred Stock, covering the
resale of all of the Registrable Securities (the "Series E Closing Date"). The
shares of Series E Preferred Stock become convertible into shares of common
stock at any time commencing after the earlier of (i) ninety (90) days after the
Series E Closing Date; (ii) five (5) days after the Company receives a "no
review" status from the SEC in connection with the Registration Statement; or
(iii) the effective date of the Series E Registration Statement. Each share of
Series E Preferred Stock is convertible into a number of shares of common stock
of the Company as determined in accordance with the following formula (the
"Series E Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
-----------------------------------
Conversion Price
where
N = the number of days between (i) the Series E Closing
Date, and (ii) the conversion date.
Conversion
Price = the greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by
an additional 2% for every 30 days beyond 60 days
from the issuance that the Registration Statement has
not been filed by the Company) in effect as of the
conversion date times the average market price for
the Company's common stock for the (5) consecutive
trading days immediately preceding such date.
The conversion terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 10,580
shares of Series E Preferred Stock issued under the 1998 Series E Preferred
Stock Private Placement. The Series E Subscription Agreements also provide that
the Company will be required to make certain payments in the event of its
failure to effect conversion in a timely manner. As of December 31, 1998, no
shares of Series E Preferred Stock have been converted to NCT common stock.
In connection with the Series E Preferred Stock, the Company may be obligated
to redeem the excess of the stated value over the amount permitted to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.
Cash and cash equivalents amounted to $0.5 million at December 31, 1998.
Management believes that currently available funds will 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 and royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditures 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.
<PAGE>
There can be no assurance that funding will be provided by technology license
fees, royalties and product sales and engineering and development revenue. In
that event, the Company would have to substantially reduce 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.
On June 16, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") notified the
Company that the Company's common stock had failed to maintain a closing bid
price of $1.00 or more for the previous thirty (30) consecutive trade dates in
accordance with Nasdaq's Marketplace Rule 4450(a)(5). Nasdaq also notified the
Company that no delisting action would be initiated at that time and that the
Company would be provided ninety (90) calendar days in which to regain
compliance witH Marketplace Rule 4450(a)(5) which would be achieved if the
closing bid price of the shares of the Company's common stock equaled or
exceeded $1.00 for ten (10) consecutive days before the end of trading on
September 14, 1998. In this regard, Nasdaq advised the Company that in the event
the Company was unable to achieve compliance, it may seek further procedural
remedies. The Company was unable to achieve compliance by September 14, 1998,
and on that date delivered its request for a hearing on the matter together with
the requested fee to Nasdaq's Hearings Department. Such a hearing was held on
November 5, 1998. Under Nasdaq's procedures delisting was stayed pending the
outcome of the hearing. On January 6, 1999, Nasdaq notified the Company that the
Company's securities were delisted from Nasdaq effective with the close of
business, January 6, 1999. On January 20, 1999, the Company requested a review
of the Nasdaq decision. On February 16, 1999, Nasdaq advised the Company that
the issuance of a review decision will likely occur in July 1999. While a
delisting of the Company's common stock is not anticipated to have an immediate
effect on the Company's operations, it may make it more difficult for the
Company to raise additional capital to fund future operations.
The accompanying consolidated 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, 1998 about the Company's ability to continue
as a going concern. The accompanying consolidated Financial Statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amount of liabilities that might result from the outcome
of these uncertainties.
<PAGE>
Results of Operations
Year ended December 31, 1998 compared with year ended December 31, 1997.
Total revenues in 1998 decreased by 42% to $3.3 million from $5.7 million in
1997. Total expenses during the same period increased by 12% or $1.9 million,
primarily reflecting the increasing efforts in sales and marketing to introduce
new products.
Technology licensing fees and royalties decreased by 78% or $2.8 million to
$0.8 million from $3.6 million in 1997. The 1997 amount is primarily due to the
$3.0 million technology license fee from Verity and other technology licensing
fees aggregating $0.6 million. See Note 3 - "Notes to Financial Statements".
Product sales increased in 1998 by 22% to $2.1 million from $1.7 million in
1997 reflecting the introduction of the Gekko(TM) flat speakers and increased
sales in the NoiseBuster(R) product line and the ClearSpeech(R) product line.
Revenue from engineering and development services remained constant at $0.4
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company.
Cost of product sales decreased 2% to $2.2 million from $2.3 million in
1997 and the product margin increased to (7)% from (32)% in 1997. The negative
margin of $0.1 million and $0.6 million in 1998 and 1997, respectively, were
primarily due to reserves for inventory slow movement and tooling obsolescence
in the amount of $0.5 million and $0.7 million in 1998 and 1997, respectively,
related to the aviation and industrial headset product lines.
Cost of engineering and development services remained constant at $0.3
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company as noted above.
Selling, general and administrative expenses for the year increased by 115%
or $6.0 million to $11.2 million from $5.2 million for 1997 which was primarily
due to increased efforts in sales and marketing to introduce new products. Sales
and marketing personnel increased by 43% from 1997. In addition, there has been
an increase in consultants for the Company's focus on international sales.
Advertising increased by 227% or $1.2 million to $1.7 million from $0.5 million
primarily due to the introduction of new products through catalogs, mailings and
increased participation in trade shows.
Research and development expenditures for 1998 increased by 16% to $7.2
million from $6.2 million in 1997, primarily due to the acquisition of Advancel.
Included in the Company's total expenses were non-cash expenditures for
depreciation and amortization of $1.0 million for 1998 and $0.9 million in 1997.
Other income in 1998 was $3.3 million compared to zero in 1997. The 1998
other income consists of the gain the Company realized upon the exercise of a
stock option and the subsequent sale of NXT plc ordinary shares. The option had
been acquired by the Company in connection with a cross license agreement among
the Company, NXT plc and NXT.
In 1998, interest income increased to $0.4 million from $0.1 million in 1997
principally from funds on hand at the end of 1997.
The Company has net operating loss carryforwards of $85.8 million and
research and development credit carryforwards of $1.6 million for federal income
tax purposes at December 31, 1998. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
<PAGE>
Year ended December 31, 1997 compared with year ended December 31, 1996.
Total revenues in 1997 increased by 81% to $5.7 million from $3.2 million in
1996. Total expenses during the same period increased by 11% or $1.6 million,
primarily reflecting the one-time $1.4 million non-cash interest charge
associated with the First Quarter 1997 Financing. See Note 8 - "Notes to
Financial Statements."
Technology licensing fees and royalties increased by 193% or $2.4 million to
$3.6 million from $1.2 million in 1996. The 1996 amount was derived principally
from numerous technology license fees reflecting the Company's continuing
emphasis on expanding technology license fee revenue. The 1997 amount is
primarily due to the $3.0 million technology license fee from Verity and other
technology licensing fees aggregating $0.6 million. See Note 3 - "Notes to the
Financial Statements".
Product sales increased in 1997 by 25% to $1.7 million from $1.4 million in
1996 reflecting increases in NoiseBuster Extreme!(TM) and aviation headset
sales.
Engineering and development services decreased by 33% to $0.4 million from
$0.5 million in 1996, primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company.
Cost of product sales increased 44% to $2.3 million from $1.6 million in 1996
and the product margin decreased to (32)% from (15)% in 1996. The negative
margin of $0.6 million in 1997 was primarily due to reserves for inventory
movement and tooling obsolescence in the amount of $0.7 million related to the
industrial headset product lines. The negative margin in 1996 was primarily due
to a lower sales price of the NoiseBuster(R) and a reserve for tooling
obsolescence in the amount of $0.3 million.
Cost of engineering and development services increased 26% to $0.3 million
from $0.2 million in 1996 primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company as noted
above.
Selling, general and administrative expenses for the year increased by 7% or
$0.3 million to $5.2 million from $4.9 million for 1996 which was primarily due
to increased professional fees and related expenses.
Depreciation and amortization included in selling, general and administrative
expenses decreased from $0.5 million in 1996 to $0.4 million primarily due to an
increase in fully depreciated machinery and equipment.
Research and development expenditures for 1997 decreased by 11% to $6.2
million from $7.0 million in 1996, primarily due to limited cash resources
during most of 1997 to fund internal development projects.
In 1997, interest income increased to $0.1 million from near zero in 1996
reflecting the increase in late 1997 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1997, the Company was not required to fund any capital requirements of these
joint ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment.
The Company has net operating loss carryforwards of $76.9 million and
research and development credit carryforwards of $1.3 million for federal income
tax purposes at December 31, 1997. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
<PAGE>
Liquidity and Capital Resources
The Company's proceeds from the exercise of stock purchase warrants and
options were nominal in 1998, $1.1 million in 1997 and $1.0 million
in 1996.
In January 1998, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1999.
The Company did not meet the plan's revenue targets for 1998 and as noted below,
found it necessary to raise additional capital to fund it's operations for 1998
and beyond (refer to Notes 1 and 8 - Notes to Financial Statements.).
Because the Company did not meet its revenue targets for 1998, it entered
into certain transactions, which provided additional funding as follows:
On July 15, 1998 the Company transferred $5,000 and all of the business and
assets of its Hearing Products Division as then conducted by the Company and as
reflected on the business books and records of the Company to a newly
incorporated subsidiary company, NCT Hearing in consideration for 6,400 shares
of NCT Hearing common stock whereupon NCT Hearing became a wholly-owned
subsidiary of the Company. The Company also granted NCT Hearing an exclusive
worldwide license with respect to all of the Company's relevant patented and
unpatented technology relating to Hearing Products in consideration for (1) a
license fee of $3,000,000 to be paid when proceeds are available from the sale
of NCT Hearing common stock, and (2) running royalties payable with respect to
NCT Hearing's sales of products incorporating the licensed technology and its
sublicensing of such technology. It is anticipated that NCT Hearing will issue
additional shares of its common stock in transactions exempt from registration
in order to raise additional working capital.
On July 27, 1998, the Company entered into subscription agreements to sell
6,000 shares of the Company's Series D Preferred Stock having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act, to six unrelated accredited investors through one dealer.
The sale of 6,000 shares of Series D Preferred Stock having an aggregate $6.0
million stated value was completed on August 6, 1998. $5.2 million net proceeds
were received by the Company from the 1998 Series D Preferred Stock Private
Placement. Each share of the Series D Preferred Stock has a par value of $.10
per share and a stated value of one thousand dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value. Each share of Series D
Preferred Stock is convertible into fully paid and nonassessable shares of the
Company's common stock subject to certain limitations. Under the terms of the
Series D Subscription Agreements, the Company is required to file a registration
statement covering the resale of all shares of common stock of the Company
issuable upon conversion of the Series D Preferred Stock then outstanding within
sixty (60) days after the completion of the 1998 Series D Preferred Stock
Private Placement. The shares of Series D Preferred Stock become convertible
into shares of common stock at any time commencing after the earlier of (i)
ninety (90) days after the Series D Closing Date; (ii) five (5) days after the
Company receives a "no review" status from the SEC in connection with the Series
D Registration Statement; or (iii) the effective date of the Series D
Registration Statement. The Series D Registration Statement became effective on
October 30, 1998, and shares of Series D Preferred Stock became convertible on
that date. Each share of Series D Preferred Stock is convertible into a number
of shares of Common Stock of the Company as determined in accordance with the
Conversion Formula described above under "Overview".
The conversion terms of the Series D Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 12,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 6,000
shares of Series D Preferred Stock issued under the 1998 Series D Preferred
Stock Private Placement. The Series D Subscription Agreements also provide that
the Company will be required to make certain payments in the event of its
failure to effect conversion in a timely manner. Including shares of common
stock issued for accretion, as of March 12, 1999, all shares of Series D
Preferred Stock have been converted to 12,273,685 shares of NCT common stock.
<PAGE>
On July 27, 1998, NCT Audio distributed subscription agreements to sell 60
shares of NCT Audio's Series A Preferred Stock having an aggregate stated value
of $6.0 million in a private placement, pursuant to Regulation D of the
Securities Act, to six unrelated accredited investors through one dealer. The
sale of 60 shares of NCT Audio Series A Preferred Stock having an aggregate $6.0
million stated value was completed on August 17, 1998. NCT Audio received net
proceeds of $5.2 million from the 1998 Series A Preferred Stock Private
Placement. Each share of the NCT Audio Series A Preferred Stock has a par value
of $.10 per share and a stated value of one hundred thousand dollars ($100,000)
with an accretion rate of four percent (4%) per annum on the stated value. Each
share of NCT Audio Series A Preferred Stock is convertible into fully paid and
nonassessable shares of NCT Audio's common stock subject to certain limitations.
Under the terms of the NCT Audio Subscription Agreements, NCT Audio is required
to file a registration statement covering the resale of all shares of common
stock of NCT Audio issuable upon conversion of the NCT Audio Series A Preferred
Stock then outstanding by a date which is not later than thirty (30) days after
the company becomes a "reporting company" under the Exchange Act. The shares of
NCT Audio Series A Preferred Stock become convertible into shares of NCT Audio
common stock at any time after the date the company becomes a "reporting
company" under the Exchange Act. Each share of Series A Preferred Stock is
convertible into a number of shares of Series D Preferred Stock of the Company
as determined in accordance with the Conversion Formula described above under
"Overview".
The conversion terms of the NCT Audio Series A Preferred Stock also provide
that in the event that NCT Audio has not become a "reporting company" under the
Exchange Act by December 31, 1998, or the NCT Audio Registration Statement has
not been declared effective by the SEC by December 31, 1998, the holder shall be
entitled to exchange each share of NCT Audio Series A Preferred Stock for 100
shares of the Company's Series D Convertible Preferred Stock and thereafter
shall be entitled to all rights and privileges of a holder of the Company's
Series D Preferred Stock. As of December 31, 1998, no NCT Audio Series A
Preferred Stock shareholders have exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Convertible Preferred
Stock.
On July 29, 1998, the Company initiated a plan to repurchase from time to
time up to 10 million shares of the Company's common stock in the open market
pursuant to Rule 10b-18 under the Exchange Act or through block trades. As of
December 31, 1998, the Company had repurchased 5,607,100 shares of the Company's
common stock at per share prices ranging from $0.3438 to $0.6563. The stock
repurchase program was terminated on December 30, 1998.
On September 4, 1998, the Company acquired the issued and outstanding common
stock of Advancel, a Silicon Valley-based developer of microprocessor cores that
execute Sun Microsystems' Java(TM) code. The acquisition was pursuant to a stock
purchase agreement dated as of August 21, 1998 among the Company, Advancel and
certain shareholders of Advancel. The consideration for the acquisition of the
Advancel common stock consisted of an initial payment of $1.0 million payable by
the delivery of 1,786,991 shares of the Company's treasury stock together with
future payments, payable in cash or in common stock of the Company at the
election of the Advancel Shareholders based on Advancel's earnings before
interest, taxes, depreciation and amortization (as defined in the Stock Purchase
Agreement) for each of the calendar years 1999, 2000, 2001 and 2002. While each
earnout payment may not be less than $250,000 in any earnout year, there is no
maximum earnout payment for any earnout year or for all earnout years in the
aggregate. To determine the number of shares of the Company's common stock
issuable in connection with an earnout payment, each earnout payment is to be
calculated using the average of the closing prices of the Company's common stock
for each of the twenty (20) business days following the 21st day after the
release of Advancel's audited year-end financials for an earnout year. At that
time, Advancel Shareholders will elect to receive payment in cash or common
stock of the Company. In the event that the Company is unable to maintain the
registration statement covering the resale of 1,786,991 shares effective for at
least thirty (30) days, each Advancel Shareholder shall have the right, until
April 15, 1999, to have the Company redeem up to one-third of the initial
payment shares acquired by such Advancel Shareholder by paying in cash therefor
a sum calculated by using the formula used to determine the number of shares of
the Company's common stock to be delivered in payment of the initial payment of
$1.0 million. The cost of the acquisition has been allocated to the assets
acquired and liabilities assumed based on their fair values as follows:
Asset acquired and liabilities assumed:
Current assets $ 368,109
Property, plant and equipment 4,095
Goodwill 1,018,290
Other assets 13,486
Current liabilities (485,040)
Unearned portion of compensatory stock 141,251
----------
Loss of acquisition (including expenses of $60,191) $1,060,191
==========
The acquisition has been accounted for as a purchase and, accordingly, the
accompanying consolidated Financial Statements include the accounts of Advancel
from the date of acquisition.
<PAGE>
On November 24, 1998, the Company paid $1,000 in consideration for a
wholly-owned subsidiary, DistributedMedia.com, Inc. ("DMC"). DMC was formed to
develop, install, and provide an audio/visual advertising medium within
commercial/professional settings.
On December 30, 1998, the Company entered into a series of subscription
agreements to sell an aggregate stated value of up to $8.2 million of Series E
Preferred Stock in consideration of $4.0 million, in a private placement,
pursuant to Regulation D of the Securities Act, to six unrelated accredited
investors through one dealer. The sale of 8,145 shares of Series E Preferred
Stock having an aggregate of $8.1 million stated value was completed on March
12, 1999. In 1999, the Company received net proceeds of $1.8 million from the
1998 Series E Preferred Stock Private Placement. In addition to the above noted
Series E Subscription Agreements, the Company issued and sold an aggregate
amount of $1.7 million of Series E Preferred Stock to three accredited investors
through the above noted dealer, in exchange for an aggregate stated value of
$1.7 million of the Company's Series C Preferred Stock held by the three
accredited investors. The Company also issued and sold an aggregate amount of
$0.7 million of Series E Preferred Stock to four accredited investors through
the above noted dealer, in exchange and consideration for an aggregate of 2.1
million shares of the Company's common stock held by the four accredited
investors. Each share of the Series E Preferred Stock has a par value of $.10
per share and a stated value of one thousand dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value. Each share of Series E
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
Series E Subscription Agreements, the Company is required to file a registration
statement covering the resale of all shares of common stock of the Company
issuable upon conversion of the Series E Preferred Stock then outstanding within
sixty (60) days after the completion of the 1998 Series E Preferred Stock
Private Placement. The shares of Series E Preferred Stock become convertible
into shares of common stock at any time commencing after the earlier of (i)
ninety (90) days after the Series E Closing Date; (ii) five (5) days after the
Company receives a "no review" status from the SEC in connection with the
Registration Statement; or (iii) the effective date of the Series E Registration
Statement. Each share of Series E 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 "Overview".
The conversion terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 10,580
shares of Series E Preferred Stock issued under the 1998 Series E Preferred
Stock Private Placement. The Series E Subscription Agreements also provide that
the Company will be required to make certain payments in the event of its
failure to effect conversion in a timely manner. As of December 31, 1998, no
shares of Series E Preferred Stock have been converted to NCT common stock.
In connection with the Series E Preferred Stock, the Company may be
obligated to redeem the excess of the stated value over the amount permitted to
be converted into common stock. Such obligation will be triggered in the event
that the Company issues 30,000,000 shares on conversion of Series E Preferred
Stock.
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. A secured convertible note (the "Note"), for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in the Wall Street Journal from the issue date until the Note becomes
due and payable. The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time, all or from time to time,
any part of the outstanding and unpaid amount of the Note, into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price shall be the lesser of (i) the average of the closing bid
prices for the common stock on the securities market on which the common stock
is being traded, for five (5) consecutive trading days prior to the date of
conversion or (ii) the fixed conversion price of $0.237. In no event will the
conversion price be less than $0.15 per share. The Holder shall purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999.
<PAGE>
Management believes that currently available funds will 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, royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties,
product sales and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology license
fees, royalties and product sales and engineering and development revenue. In
that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
The accompanying 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, 1998 about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $107.7 million on a
cumulative basis through December 31, 1998. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing 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 early 1999, the Company implemented a plan that management believes should
generate sufficient additional funds for the Company to continue its operations
into 1999. Under this plan, the Company needs to generate approximately $22.7
million to fund its operations in 1999. Included in such amount is approximately
$10.8 million in sales of new products and approximately $11.9 million of
technology licensing fees and royalties. This amount excludes any revenues or
cash inflows from the anticipated pending acquisitions of the Company's
subsidiary, NCT Audio. The Company believes that it can generate these funds
from 1999 operations, although there is no certainty that the Company will
achieve this goal. Success in generating technology licensing fees, royalties
and product sales is significant and critical to the Company's ability to
succeed. The Company cannot predict whether it will be successful in obtaining
market acceptance of its new products or in completing its current negotiations
with respect to licenses and royalty revenues. If, during the course of 1999,
management of the Company determines that it will be unable to meet or exceed
the plan discussed above, the Company will consider cost reductions and/or
additional financing alternatives. The Company will monitor its performance
against the plan on a monthly basis and, if necessary, reduce its level of
operations accordingly. The Company believes that the plan discussed above
constitutes a viable plan for the continuation of the Company's business into
2000. See "Forward Looking Statements" above.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties and product sales and engineering and
development revenue or additional capital. In that event, the Company would have
to cut back its level of operations substantially in order to conserve cash.
These reductions could have an adverse effect on the Company's relations with
its strategic partners and customers. See Note 1 - Notes to Financial
Statements.
<PAGE>
At December 31, 1998, cash and cash equivalents were $0.5 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 decreased from $11.7 million at December 31,
1997, to $(1.2) million as of December 31, 1998. This decrease was due primarily
to a decrease in cash and cash equivalents due to increasing efforts to develop
and introduce new product lines and to fund operations.
During 1998, the net cash used in operating activities was $12.8 million.
This utilization reflects the emphasis on the commercial development of its
technology into several product applications, which were scheduled for
introduction in 1998 and 1999.
The net cash used in investing activities amounted to $6.4 million. Of this
amount, $5.1 million was attributable to the acquisition related activities of
the Company's subsidiary, NCT Audio. Such investments included $3.5 million for
20% interest in TSA and a total of $1.5 million was loaned to PPI under a demand
promissory note. The Company has signed letters of intent from both TSA and PPI.
The net cash provided by financing activities amounted to $7.2 million primarily
from the 1998 financings noted above.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
The Company believes that the level of financial resources available to it is
an essential competitive factor. The Company may elect to raise additional
capital, from time to time, through equity or debt financing in order to
capitalize on business opportunities and market conditions.
Capital Expenditures
The Company intends to continue its business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies;
(ii) utilization of the manufacturing capacity of the Company's allies, enabling
the Company to integrate its active technology into products with limited
capital investment; and (iii) access to well-established channels of
distribution and marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of December
31, 1998, and no material commitments are anticipated in the near future.
Year 2000 Compliance
The Company believes the cost of administrating its Year 2000 Compliance
program will not have a material adverse impact on future earnings. However, the
potential costs and uncertainties associated with any Year 2000 Compliance
program will depend on a number of factors, including software, hardware and the
nature of the industry in which the Company, its subsidiaries, suppliers and
customers operate. In addition, companies must coordinate with other entities
with which they electronically interact, such as customers, suppliers, financial
institutions, etc. The Company estimates that potential costs will not exceed
$0.1 million.
Although the Company's evaluation of its systems is still in process, there
has been no indication that the Year 2000 Compliance issue, as it relates to
internal systems, will have a material impact on future earnings. While the
Company is not aware of any material Year 2000 Compliance issues at its
customers and suppliers, such potential problems remain a possibility and could
have a material adverse impact on the Company's future results. The Company
estimates completion of the evaluation process by September 30, 1999.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS.
The Reports of the Independent Auditors Richard A. Eisner & Company, LLP and
the financial statements and accompanying notes are attached.
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets, as of December 31, 1997, and F-2
1998
Consolidated Statements of Operations and Consolidated F-3
Statement of Comprehensive Loss for the years ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity, for the F-4
years ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows, for the years ended F-5
December 31, 1996, 1997 and 1998
Notes to Financial Statements F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no disagreements with independent accountants on accounting
and financial disclosure matters during the Company's two most recent fiscal
years.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.
The following table sets forth the names, ages, positions and the offices
held by each of the executive officers and directors of the Company as of March
23, 1999:
Name Age Positions and Offices
Jay M. Haft 63 Chairman of the Board of Directors
Michael J. Parrella 51 President, Chief Executive Officer and Director
Irene Lebovics 46 Executive Vice President, Marketing
Cy E. Hammond 44 Senior Vice President, Chief Financial Officer
Paul Siomkos, P.E. 52 Senior Vice President, Operations
Michael A. Hayes, Ph.D. 46 Senior Vice President, Chief Technical Officer
John J. McCloy II 61 Director
Samuel A. Oolie 62 Director
Stephan Carlquist 43 Director
Jay M. Haft currently serves as Chairman of the Board of Directors of the
Company. He served as President of the Company from November 1994 to July 1995.
He is also a Director of the Company's subsidiary, NCT Audio, a position which
he has held since August 25, 1997. Mr. Haft is a strategic and financial
consultant for growth stage companies. He is active in international corporate
finance, mergers and acquisitions, as well as in the representation of emerging
growth companies. He has actively participated in strategic planning and fund
raising for many high-tech companies, leading edge medical technology companies
and technical product, service and marketing companies. He is a Managing General
Partner of Gen Am "1" Venture Fund, an international venture capital fund. Mr.
Haft is also a Director of numerous other public and private corporations,
including Robotic Vision Systems, Inc. (OTC), DCAP Group, Inc. (OTC), Encore
Medical Corporation (OTC), Viragen, Inc. (OTC), PC Service Source, Inc. (OTC),
DUSA Pharmaceuticals, Inc. (OTC), Oryx Technology Corp. (OTC), and Thrift
Management, Inc. (OTC). He is currently of counsel to Parker Duryee Rosoff &
Haft, in New York. He was previously a senior corporate partner of such firm
(1989-1994), and prior to that a founding partner of Wofsey, Certilman, Haft et
al (1966-1988). He is a member of the Florida Commission for Government
Accountability to the People and Treasurer of the Miami City Ballet.
Michael J. Parrella currently serves as President, Chief Executive Officer
and Director of the Company. He was elected President and Chief Operating
Officer of the Company in February 1988 and served in that capacity until
November 1994. From November 1994 to July 1995 Mr. Parrella served as Executive
Vice President of the Company. He initially became a Director in 1986 after
evaluating the application potential of the Company's noise cancellation
technology. At that time, he formed an investment group to acquire control of
the Board and to raise new capital to restructure the Company and its research
and development efforts. Mr. Parrella serves as Chief Executive Officer and
Acting President of NCT Audio, a position to which he was elected on September
4, 1997, and was appointed a Director on August 25, 1998. He was also Chairman
of the Board of Environmental Research Information, Inc., an environmental
consulting firm, from December 1987 to March 1991.
Irene Lebovics currently serves as Executive Vice President, Marketing and
Communications, and President of NCT Hearing, a wholly-owned subsidiary of the
Company. She joined the Company as Vice President of NCT and President of NCT
Medical Systems (NCTM) in July 1989. In March 1990, NCTM became part of NCT
Personal Quieting and Ms. Lebovics served as President. In January 1993, she was
appointed Senior Vice President of the Company. In November 1994, Ms. Lebovics
became President of NCT Hearing. From August 1, 1995, to May 1, 1996, she also
served as Secretary of the Company. Ms. Lebovics has held various positions in
product marketing with Bristol-Myers, a consumer products company, and in
advertising with McCaffrey and McCall.
Cy E. Hammond currently serves as Senior Vice President, Chief Financial
Officer of the Company. He joined the Company as Controller in January 1990 and
was appointed a Vice President in February 1994. Mr. Hammond also serves as
Acting Chief Financial Officer and Treasurer of NCT Audio, a position to which
he was elected on September 4, 1997. During 1989, he was Treasurer and Director
of Finance for Alcolac, Inc., a multinational specialty chemical producer. Prior
to 1989 and from 1973, Mr. Hammond served in several senior finance positions at
the Research Division of W.R. Grace & Co., the last of which included management
of the division's worldwide financial operations.
Paul Siomkos, P.E., joined NCT in April 1998 as Senior Vice President of
Operations. Prior to NCT, Mr. Siomkos held the position of Director of
Operations at Perkin-Elmer, a major technology product manufacturer. For more
than 20 years, Mr. Siomkos managed a production volume in excess of $250
million. Mr. Siomkos holds a Bachelor's in Mechanical Engineering from the City
College of New York, a Master's in Industrial Engineering from Columbia
University and an MBA in Finance from the University of Connecticut. He is also
a licensed Professional Engineer.
Michael A. Hayes, Ph.D., currently serves as Senior Vice President, Chief
Technical Officer after joining the Company in 1996. During 1995 and 1994, Dr.
Hayes served as Deputy Project Director, Research Support for Antarctic Support
Associates, with operations in Chile, New Zealand, Australia, and Antarctica.
From 1991 to 1994, he served as Deputy Program Manager, Special Payloads, for
Martin Marietta Government Services (formerly General Electric Government
Services) while directly managing critical spacecraft sub-system and instrument
development for Goddard Space Flight Center. Prior to 1991, Dr. Hayes served as
a research faculty member at Georgia Institute of Technology, and as a Senior
Process Engineer at Texas Instruments.
John J. McCloy II currently serves as a Director of the Company. He served as
Chief Executive Officer of the Company from September 1987 to November 1994 and
as its Chairman of the Board from September 1986 to November 1994. Additionally,
he served as Chief Financial Officer from November 1990 to February 1993 and as
its Secretary-Treasurer from October 1986 to September 1987. Mr. McCloy was
appointed a Director of the Company's subsidiary, NCT Audio, on November 14,
1997. Since 1981, he has been a private investor concentrating on venture
capital and early stage investment projects in a variety of industries. Mr.
McCloy is also a director of American University in Cairo, the Sound Shore Fund,
Inc., and the Atlantic Council.
Sam Oolie currently serves as a Director of the Company. Mr. Oolie also
serves as a Director of the Company's subsidiary, NCT Audio, a position to which
he was appointed on September 4, 1997. He is Chairman and Chief Executive
Officer of NoFire Technologies, Inc., a manufacturer of high performance fire
retardant products, and has held that position since August 1995. He is also
Chairman of Oolie Enterprises, an investment company, and has held that position
since July 1985. Mr. Oolie currently serves as a director of Avesis, Inc. and
Comverse Technology, Inc. He has also served as a director of CFC Associates, a
venture capital partnership, from January 1984 to December 1998.
Stephan Carlquist was elected as a Director of the Company on July 14, 1997,
and currently serves as a Director of the Company. Mr. Carlquist also currently
serves as a Director of NCT Audio since his appointment on November 14, 1997. He
is President of Electrolux IT Solutions with worldwide responsibility for IT
Services within the Electrolux Group and has held this position since June 1998.
From 1993 to June 1998, Mr. Carlquist was President of ABB Financial Services,
Inc. (USA), one of four business segments in the ABB Group and from June 1990 to
June 1998, he was as well President of ABB Treasury Center (USA), Inc. From
April 1988 to 1990, he was Executive Vice President of ABB World Treasury
Center, Zurich, and from April 1986 to April 1988, he was the President of the
Geneva branch of ASEA Capital Corporation. Mr. Carlquist joined ASEA AB in
September 1983 as Manager, International Cash Management and served in that
capacity until April 1986. From February 1981 to April 1983, he was employed as
a Foreign Exchange Manager/Cash Manager at Atlas Copco AB.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish the
Company with copies of all such reports. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no reports were required for those persons, the Company
believes that, during the period from January 1, 1998, to December 31, 1998, all
filing requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this item is contained in a definitive proxy
statement which the Registrant will file on or before April 30, 1999, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information required under this item is contained in a definitive proxy
statement which the Registrant will file on or before April 30, 1999, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In October 1990, the Company's Board of Directors authorized the issuance of
warrants to acquire 420,000 shares of common stock to each of Messrs. McCloy,
Parrella and Oolie and Ms. Lebovics, exercisable through September 30, 1994, at
$.375 per share, being the market price of the Company's common stock on the
date of such authorization, based upon each such person's commitment to extend
his or her personal guarantee on a joint and several basis with the others in
support of the Company's attempt to secure bank or other institutional
financing, the amount of which to be covered by the guarantee would not exceed
$350,000. No firm commitment for any such financing has been secured by the
Company and at present no such financing is being sought. However, each of such
persons' commitment to furnish said guarantee continues in full force and
effect.
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Co-Chairman, and Chief
Executive Officer of the Company, shares investment control over an additional
24% of the outstanding capital of ERI. The Company believes that the respective
terms of both the establishment of the joint venture with ERI and its
termination were comparable to those that could have been negotiated with other
persons or entities. During the fiscal year ended December 31, 1998, the Company
was not required to make any such payments to ERI under these agreements.
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, 1994, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year, and 1% in the fourth year and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
<PAGE>
Under the terms of the second of the three Marketing Agreements, QSI is
granted a non-exclusive right to market the Company's products that are or will
be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the Company in the feeder
bowl area. The initial term of this Marketing Agreement is three years with
subsequent automatic one-year renewals unless a party elects not to renew.
Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with equipment used by electric and/or natural gas utilities for
retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products equal to 129% of QSI's
marketing expenses attributable to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues received by the Company from the sale of such products. QSI is
also entitled to receive a 5% commission on research and development funding
similar to that described above. QSI's exclusive rights continue for an
indefinite term provided it meets certain performance criteria relating to
marketing efforts during the first two years following product availability in
commercial quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights become non-exclusive, depending on the circumstances
causing such change, the initial term then becomes either three or five years
from the date of this Marketing Agreement, with subsequent one-year automatic
renewals in each instance unless either party elects not to renew. During the
fiscal year ended December 31, 1998, 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, 1998, the Company made
no payments to QSI for project management services.
In March 1995, the Company entered into a Master Agreement with QSI under
which QSI was granted an exclusive worldwide license under certain NCT patents
and technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances,
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 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.
<PAGE>
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 March 11, 1999, QSI owes the Company $239,000, which is fully reserved,
for the exclusivity fee, rent and engineering services.
The Company believes that the terms of its agreements with QSI are comparable
to those that it could have negotiated with other persons or entities.
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. A secured convertible note (the "Note"), for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in the Wall Street Journal from the issue date until the Note becomes
due and payable. The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time, all or from time to time,
any part of the outstanding and unpaid amount of the Note, into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price shall be the lesser of (i) the average of the closing bid
prices for the common stock on the securities market on which the common stock
is being traded, for five (5) consecutive trading days prior to the date of
conversion or (ii) the fixed conversion price of $0.237. In no event will the
conversion price be less than $0.15 per share. The Holder shall purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statements Schedules and
Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
Independent Auditors' Report
Consolidated Balance Sheets, as of December 31, 1997, and December 31, 1998.
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss, for the years ended December 31, 1996, 1997 and 1998.
Consolidated Statements of Stockholders' Equity, for the years ended December
31, 1996, 1997 and 1998.
Consolidated Statements of Cash Flows, for the years ended December 31, 1996,
1997 and 1998.
Notes to Financial Statements.
(2) Financial Statement Schedules.
Report of Independent Auditors with Respect to Schedule.
Schedule II. Valuation and Qualifying Accounts.
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
consolidated financial statements filed or notes thereto.
<PAGE>
(3) Exhibits.
Exhibit
Number Description of Exhibit
2(a) Stock Purchase Agreement dated August 21, 1998, among the
Company, Advancel Logic Corporation and the Holders of the
Outstanding Capital Stock of Advancel Logic Corporation,
incorporated by reference to Exhibit 2 of the Company's
Registration Statement on Form S-3 (Registration No.
333-64967) filed on September 30, 1998, as amended by
Amendment No. 1 thereto filed on October 30, 1998.
3(a) Restated Certificate of Incorporation of the Company filed in
the Office of the Secretary of State of the State of Delaware
on September 23, 1996, incorporated herein by reference to
Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
3(b) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the
Secretary of State of the State of Delaware on June 20, 1997,
incorporated by reference to Exhibit 3(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
* 3(c) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the
Secretary of State of the State of Delaware on October 21,
1998.
3(d) Certificate of Designations, Preferences and Rights of Series
C Convertible Preferred Stock of the Company filed in the
Office of the Secretary of State of the State of Delaware on
October 29, 1997, incorporated by reference to Exhibit 3(c) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
3(e) Certificate of Increase in the Number of Shares in the Series
C Convertible Preferred Stock of the Company filed in the
Office of the Secretary of State of the State of Delaware on
November 14, 1997, incorporated by reference to Exhibit 3(d)
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
3(f) Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock of the Company filed
in the Office of the Secretary of State of the State of
Delaware on July 24, 1998, incorporated by reference to
Exhibit 4 of the Company's Registration Statement on Form
S-3 (Registration No. 333-64967) filed on September 30,
1998, as amended by Amendment No. 1 thereto filed on
October 20, 1998.
* 3(g) Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock of the Company filed in
the Office of the Secretary of State of the State of Delaware
on December 24, 1998.
3(h) By-laws of the Company, incorporated herein by reference to
Exhibit 3(b) to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
1991.
4(a) Warrant to purchase 125,000 shares of Common Stock of the
Company at a purchase price of $.20 per share issued to John
J. McCloy II, incorporated herein by reference to Exhibit 4(a)
to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of Common Stock of
the Company at a purchase price of $.75 per share issued to
John J. McCloy II, incorporated herein by reference to Exhibit
4(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4(c) Warrant #BW-2-R to purchase 862,500 shares of Common Stock of
the Company at a purchase price of $.75 per share issued to
Michael J. Parrella, incorporated herein by reference to
Exhibit 4(c) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
<PAGE>
4(d) Warrant #BW-4-R to purchase 201,250 shares of Common Stock of
the Company at a purchase price of $.75 per share issued to
Irene Lebovics, incorporated herein by reference to Exhibit
4(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4(e) Warrant #BW-9-R and #BW-46-R to purchase 218,500 shares of
Common Stock of the Company at a purchase price of $.75 per
share issued to Jay M. Haft, incorporated herein by reference
to Exhibit 4(e) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
4(f) Secretary's Certificate dated March 20, 1998, as to a two (2)
year extension of the expiration dates of the Warrants
described in 4(b), (c), (d) and (e) above, incorporated herein
by reference to Exhibit 4(f) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
4(g) Warrant Agreement, dated as of January 20, 1988, between
the Company and American Stock Transfer Company, as Warrant
Agent, relating to certain warrants to purchase Common
Stock of the Company at a price of $.40 per share issued to
Sam Oolie, Oolie Enterprises, John J. McCloy II, and
Michael J. Parrella, incorporated herein by reference to
Exhibit 4(gg) to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991.
** 10(a) 1987 Incentive Stock Option Plan, incorporated herein by
reference to Exhibit 10(b) to Amendment No. 1 on Form S-1
to the Company's Registration Statement on Form S-18
(Registration No. 33-19926).
** 10(b) Stock Option Agreement, dated as of February 26, 1987,
between the Company and John J. McCloy II, incorporated herein
by reference to Exhibit 10(b) to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
** 10(c) Stock Option Agreement, dated as of February 26, 1987,
between the Company and Michael J. Parrella, incorporated
herein by reference to Exhibit 10(c) to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
** 10(d) Stock Option Agreement, dated as of February 26, 1987,
between the Company and Sam Oolie, incorporated herein by
reference to Exhibit 10(d) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
** 10(e) Stock Option Agreement, dated as of June 17, 1987,
between the Company and John J. McCloy II, incorporated herein
by reference to Exhibit 10(f) to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
** 10(f) Stock Option Agreement, dated as of March 29, 1990,
between the Company and Jay M. Haft, incorporated herein by
reference to Exhibit 10(m) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
10(g) Lease, dated December 20, 1991, between West Nursery Land
Holding Limited Partnership ("West Nursery") and the Company,
as amended by a letter amendment, dated December 20, 1991,
between West Nursery and the Company, incorporated herein by
reference to Exhibit 10(u) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
<PAGE>
10(h) Lease, dated February 26, 1991, between West Nursery and the
Company, as amended by a letter amendment, dated February 26,
1991, between West Nursery and the Company, incorporated
herein by reference to Exhibit 10(v) to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(i) Lease (undated), between West Nursery and the Company, as
amended by a letter amendment, dated April 23, 1990, between
West Nursery and the Company, incorporated herein by reference
to Exhibit 10(w) to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991;
10(j) Agreement, dated March 4, 1991, between West Nursery and the
Company as amended by the First Amendment of Agreement, dated
December 20, 1991, between West Nursery and the Company,
incorporated herein by reference to Exhibit 10(x) to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
10(k) Patent Assignment Agreement, dated as of June 21, 1989, among
George B.B. Chaplin, Sound Alternators Limited, the Company,
Active Noise and Vibration Technologies, Inc. and Chaplin
Patents Holding Co., Inc., incorporated herein by reference to
Exhibit 10(aa) to Amendment No. 2 on Form S-1 to the Company's
Registration Statement on Form S-18 (Registration No.
33-19926).
10(l) Joint Venture and Partnership Agreement, dated as of November
8, 1989, among the Company, Walker Manufacturing Company, a
division of Tenneco, Walker Electronic Mufflers, Inc. and NCT
Muffler, Inc., incorporated herein by reference to Exhibit
(c)(1) to the Company's Current Report on Form 8-K, dated
November 8, 1989, as amended on Form 8, dated January 24,
1990.
10(l)(1) Letter Agreement between Tenneco Automotive, a division of
Tennessee Gas Pipeline Company, and the Company dated November
22, 1993, incorporated herein by reference to Exhibit 10(a) to
the Company's Current Report on Form 8-K dated November 22,
1993.
10(l)(2) Stock Purchase Agreement between Tenneco Automotive, a
division of Tennessee Gas Pipeline Company, and the Company
dated December 14, 1993, incorporated herein by reference to
Exhibit 10(b) to the Company's Current Report on Form 8-K
dated November 24, 1993.
<PAGE>
10(l)(3) Transfer Agreement among Walker Manufacturing Company a
division of Tennessee Gas Pipeline Company, Walker Electronic
Mufflers, Inc., the Company, NCT Muffler, Inc., Chaplin
Patents Holding Co., Inc. and Walker Noise Cancellation
Technologies dated November 15, 1995, incorporated herein by
reference to Exhibit 10(l)(3) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995. ***
10(l)(4) License Agreement between Chaplin Patents Holding Co., Inc.
and Walker Electronic Mufflers, Inc. dated November 15,
1995, incorporated herein by reference to Exhibit 10(l)(4)
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995. ***
10(l)(5) License Agreement between the Company and Walker Electronic
Mufflers, Inc. dated November 15, 1995, incorporated herein by
reference to Exhibit 10(l)(5) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995. ***
10(l)(6) Support, Research and Development Agreement among Walker
Electronic Mufflers, Inc., the Company, NCT Muffler, Inc.
and Chaplin Patents Holding Co., Inc. dated November 15,
1995, incorporated herein by reference to Exhibit 10(l)(6)
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995. ***
10(l)(7) Mutual Limited Release by (i) the Company, NCT Muffler,
Inc. and Chaplin Patent Holding Co., Inc. and (ii)
Tennessee Gas Pipeline Company and Walker Electronic
Mufflers, Inc. dated November 15, 1995, incorporated herein
by reference to Exhibit 10(l)(7) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995. ***
10(m) Technical Assistance and License Agreement, dated March 25,
1991, among the Company, Foster Electric Co., Ltd. and
Foster/NCT Headsets International Ltd., incorporated herein by
reference to Exhibit 10(nn) to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.***
10(m)(1) Amendment, dated April 16, 1991, to Technical Assistance and
License Agreement, dated March 25, 1991, among the Company,
Foster Electric Co., Ltd. and Foster/NCT Headsets
International Ltd., incorporated herein by reference to
Exhibit 10(nn)(1) to Amendment No. 5 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991.
<PAGE>
10(m)(2) Letter Agreement between Foster Electric Co., Ltd. and the
Company dated November 22, 1993, incorporated herein by
reference to Exhibit 10(b) to the Company's Current Report on
Form 8-K dated November 22, 1993.
10(m)(3) Letter agreement among Foster Electric Co., Ltd., Foster NCT
Headsets International, Ltd. and the Company dated July 28,
1995, incorporated herein by reference to Exhibit 10(a) of the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.
10(n) Joint Development Cooperation Agreement, dated June 28, 1991,
between AB Electrolux and the Company, incorporated herein by
reference to Exhibit 10(oo) to Amendment No. 3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.***
10(n)(1) Amendments to the Joint Development Cooperation Agreement,
dated June 28, 1991, between AB Electrolux and the Company
as set forth in the First Amendment to Joint Development
Cooperation Agreement, dated September 1, 1993, between AB
Electrolux and the Company, incorporated herein by
reference to Exhibit 10(z)(1) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994.***
10(n)(2) Second Amendment to Joint Development Cooperation Agreement,
dated January, 1994 between AB Electrolux and the Company,
incorporated herein by reference to the Exhibit 10(z)(2) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
10(o) Letter Agreement, dated March 19, 1992, between Siemens
Medical Systems, Inc. and NCT Medical Systems, Inc.,
incorporated herein by reference to Exhibit 10(pp) to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10(o)(1) OEM Agreement between the Company and Siemens AG dated
November 24, 1993, incorporated herein by reference to Exhibit
10(a) to the Company's Current Report on Form 8-K dated
November 24, 1993.
** 10(p) Noise Cancellation Technologies, Inc. Stock Incentive
Plan (as adopted April 14, 1993, and amended through August
16, 1996), incorporated herein by reference to Exhibit 4 to
the Company's Registration Statement on Form S-8 filed with
the Securities & Exchange Commission on August 30, 1996 (Reg.
No. 333-11213).
<PAGE>
10(q) Master Agreement between Noise Cancellation Technologies,
Inc. and Quiet Power Systems, Inc. dated March 27, 1995,
incorporated herein by reference to Exhibit 10(a) of the
Company's Current Report on Form 8-K filed with the
Securities and Exchange commission on August 4, 1995.
10(q)(1) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated April 21, 1995,
incorporated herein by reference to Exhibit 10(b) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(q)(2) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated May 21, 1996, incorporated
herein by reference to Exhibit 10(q)(2) of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10(q)(3) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated April 9, 1997, incorporated
herein by reference to Exhibit 10(q)(3) of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10(r) Asset Purchase Agreement, dated September 16, 1994, between
Active Noise and Vibration Technologies, Inc. and the Company,
incorporated herein by reference to Exhibit 2 to the Company's
Current Report on Form 8-K filed September 19, 1994.
** 10(s) Noise Cancellation Technologies, Inc. Option Plan for
Certain Directors (as adopted November 15, 1994 and amended
through August 16, 1996), incorporated herein by reference
to Exhibit 4 to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission
on August 30, 1996 (Reg. No. 333-11209).
10(t) Variation of Teaming Agreement between Noise Cancellation
Technologies, Inc. and Ultra Electronics Limited dated April
6, 1995, incorporated herein by reference to Exhibit 10(c) of
the Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(1) Agreement for Sale and Purchase of Part of the Business and
Certain Assets among Noise Cancellation Technologies, Inc.,
Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated April 6, 1995, incorporated herein
by reference to Exhibit 10(d) of the Company's Current Report
on Form 8-K filed August 4, 1995.
10(t)(2) Patent License Agreement among Noise Cancellation
Technologies, Inc., Noise Cancellation Technologies (UK)
Limited and Ultra Electronics Limited dated April 6, 1995,
incorporated herein by reference to Exhibit 10(e) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(3) License Agreement between Chaplin Patents Holding Co., Inc.
and Ultra Electronics Limited dated April 6, 1995,
incorporated herein by reference to Exhibit 10(f) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among Noise Cancellation
Technologies, Inc., Noise Cancellation Technologies (UK)
Limited and Ultra Electronics Limited dated May 15, 1995,
incorporated herein by reference to Exhibit 10(g) of the
Company's Current Report on Form 8-K filed August 4, 1995.
** 10(u) Agreement among Noise Cancellation Technologies, Inc.,
Noise Cancellation Technologies (UK) Limited, Dr. Andrew
John Langley, Dr. Graham Paul Eatwell and Dr. Colin Fraser
Ross dated April 6, 1995, incorporated herein by reference
to Exhibit 10(h) of the Company's Current Report on Form
8-K filed August 4, 1995.
10(v) Securities Purchase Agreement dated April 8, 1996, by and
among the Company and Kingdon Associates, L.P., Kingdon
Partners, L.P. and M. Kingdon Offshore NV, together with
Exhibit A-1 thereto, Form of Secured Convertible Note and
Exhibit A-2 thereto, Registration Rights Agreement,
incorporated herein by reference to Exhibit 10(a) of the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
10(v)(1) Security Agreement dated April 10, 1996, between the Company
and Kingdon Associates, L.P., Kingdon Partners, L.P. and M.
Kingdon Offshore NV, dated August 13, 1996, incorporated
herein by reference to Exhibit 10(b) of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
<PAGE>
10(v)(2) Notices of Exercise of Options to Purchase Common Stock by
Kingdon Associates, L.P., Kingdon Partners, L.P., and M.
Kingdon Offshore,NV, dated August 13, 1996, incorporated by
reference to Exhibit 10(c) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
10(v)(3) Notices of Conversion of Secured Convertible Notes by Kingdon
Associates, L.P., Kingdon Partners, L.P. and M. Kingdon
Offshore NV, dated August 13, 1996, incorporated herein by
reference to Exhibit 10(d) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
10(w)(1) Cross License Agreement dated April 15, 1997, among Verity
Group plc, New Transducers Limited and Noise Cancellation
Technologies, Inc., incorporated by reference to Exhibit 10(a)
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.***
10(w)(2) Security Deed dated April 14, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
10(w)(3) Common Stock Purchase Option dated April 15, 1997, from Noise
Cancellation Technologies, Inc. to Verity Group plc,
incorporated by reference to Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
10(w)(4) Letter Agreement dated April 17, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by
reference to Exhibit 10(d) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
10(x)(1) New Cross License Agreement dated September 27, 1997, among
Verity Group plc, New Transducers Limited, Noise Cancellation
Technologies, Inc. and NCT Audio Products, Inc., incorporated
by reference to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
10(x)(2) Master License Agreement dated September 27, 1997, between New
Transducers Limited and NCT Audio Products, Inc., incorporated
by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
10(x)(3) Letter Agreement dated September 27, 1997, from Noise
Cancellation Technologies, Inc. to Verity Group plc,
incorporated by reference to Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
10(x)(4) License Agreement dated September 4, 1997, between Noise
Cancellation Technologies, Inc. and NCT Audio Products, Inc.,
incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
10(y) License Agreement dated July 15, 1998, between the Company and
NCT Hearing Products, Inc., incorporated by reference to
Exhibit 10 of the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
<PAGE>
* 21 Subsidiaries
* 23(a) Consent of Richard A. Eisner & Company, LLP
* 27 Financial Data Schedule.
* 99(a) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. regarding audited
financial statements of the Company's U.K. subsidiaries and
reports of Peters Elworthy & Moore, Chartered Accountants,
on their audits of such financial statements as at December
31, 1998 and for the year ended December 31, 1998.
99(b) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding audited
financial statements of the Company's U.K. subsidiaries and
reports of Peters Elworthy & Moore, Chartered Accountants, on
their audits of such financial statements as at December 31,
1997 and for the year ended December 31, 1997, incorporated by
reference to Exhibit 99(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
99(c) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding audited
financial statements of the Company's U.K. subsidiaries and
reports of Peters Elworthy & Moore, Chartered Accountants, on
their audits of such financial statements as at December 31,
1996 and for the year ended December 31, 1996, incorporated by
reference to Exhibit 99(b) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
* 99(d) Letter from Peters Elworthy & Moore, Chartered
Accountants, to Noise Cancellation Technologies, Inc.
regarding confirmation that the accounts for the year end
December 31, 1998 were audited under auditing standards
substantially similar to US General Accepted Auditing
Standards.
99(e) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding confirmation
that the accounts for the year end December 31, 1997 were
audited under auditing standards substantially similar to US
General Accepted Auditing Standards, incorporated by reference
to Exhibit 99(d) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
99(f) Employment Agreement by and between the Company and Paul D.
Siomkos, dated February 26, 1998, incorporated by reference to
Exhibit 99 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998.
* 99(g) Letter from Peters Elworthy & Moore, Chartered
Accountants, to Noise Cancellation Technologies, Inc.
regarding confirmation that the accounts for the year end
December 31, 1995 were audited under auditing standards
substantially similar to US General Accepted Auditing
Standards.
- -----------------------
* Filed herewith.
** Pertains to a management contract or compensation plan or arrangement.
***Confidential treatment requested for portions of this document. Such
portions have been omitted from the document and identified by asterisks.
Such portions also have been filed separately with the Commission pursuant
to the Company's application for confidential treatment.
(b) The following report on Form 8-K was filed during the last quarter of the
period covered by this Report:
A report on Form 8-K was filed on October 21, 1998 reporting the
stockholders approval on October 20, 1998 of an amendment to the Company's
Restated Certificate of Incorporation changing the name of the Company to
"NCT Group, Inc.".
<PAGE>
(Richard A. Eisner & Company, LLP Letterhead)
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
NCT Group, Inc.
We have audited the accompanying consolidated balance sheets of NCT Group, Inc.
(formerly Noise Cancellation Technologies, Inc.) and subsidiaries (the
"Company") as of December 31, 1997 and 1998, and the related consolidated
statements of operations, comprehensive loss, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
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 1996, 1997 and 1998 financial statements of
the Company's two foreign subsidiaries. These subsidiaries accounted for
revenues of approximately $407,000, $67,000 and $28,000 for the years ended
December 31, 1996, 1997 and 1998, respectively, and assets of approximately
$515,000, $301,000 and $218,000 as of December 31, 1996, 1997 and 1998,
respectively. These statements were audited by other auditors whose reports have
been furnished to us, one of which contained a paragraph on the subsidiary's
dependence on NCT Group, Inc. 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 NCT Group, Inc. and subsidiaries as of
December 31, 1997 and 1998 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, 1998 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 and has a working capital deficiency, it has
been and continues to be dependent on equity financing and joint venture
arrangements to support its business efforts. These factors raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 11, 1999
With respect to Note 8
March 24, 1999
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31,
1997 1998
---------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 12,604 $ 529
Accounts receivable:
Trade:
Technology license fees and royalties 200 192
Joint Ventures and affiliates - -
Other 368 691
Unbilled - 61
Allowance for doubtful accounts (38) (228)
---------- -----------
Total accounts receivable $ 530 $ 716
Inventories, net of reserves 1,333 3,320
Other current assets 213 185
---------- -----------
Total current assets $ 14,680 $ 4,750
Property and equipment, net 1,144 997
Goodwill, net of accumulated amortization of
$68,000 - 1,506
Patent rights and other intangibles, net 1,488 2,881
Other assets (Note 6) 49 5,331
---------- -----------
$ 17,361 $ 15,465
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,324 $ 3,226
Accrued expenses 1,392 1,714
Accrued payroll, taxes and related expenses 181 241
Customers' advances 87 -
Other liabilities - 756
---------- -----------
Total current liabilities $ 2,984 $ 5,937
---------- -----------
Commitments and contingencies
Minority interest in consolidated subsidiary
Preferred stock, $.10 par value, 1,000
shares authorized, 60 issued
and outstanding (redemption amount
$6,102,110) $ - $ 6,102
---------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 10,000,000
shares authorized
Series C issued and outstanding 13,250 and
700 shares, respectively (redemption
amount $13,314,399 and $731,222 respectively $ 10,458 $ 702
Series D Preferred stock, 6,000 shares
issued and outstanding (redemption
amount $6,102,110) - 5,240
Series E Preferred stock, 10,580 shares
issued and outstanding (redemption
amount $10,582,319) - 3,298
Common stock, $.01 par value, 185,000,000 and
255,000,000 shares, respectively,
authorized; issued and outstanding
133,160,212 and 156,337,316 shares, respectively 1,332 1,563
Additional paid-in-capital 96,379 107,483
Accumulated deficit (93,521) (107,704)
Other comprehensive loss:
Cumulative translation adjustment 119 45
Stock subscriptions receivable (390) (4,000)
Unearned portion of compensatory stock,
warrants and options - (238)
Treasury stock (6,078,065 shares) - (2,963)
---------- -----------
Total stockholders' equity $ 14,377 $ 3,426
---------- -----------
$ 17,361 $ 15,465
========== ===========
See notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended December 31,
1996 1997 1998
----------- ----------- -----------
REVENUES:
<S> <C> <C> <C>
Technology licensing fees $ 1,238 $ 3,630 $ 802
Product sales, net 1,379 1,720 2,097
Engineering and development services 547 368 425
----------- ----------- -----------
Total revenues $ 3,164 $ 5,718 $ 3,324
----------- ----------- -----------
COSTS AND EXPENSES:
Costs of sales $ 1,586 $ 2,271 $ 2,235
Costs of engineering and development services 250 316 275
Selling, general and administrative 4,890 5,217 11,238
Research and development 6,974 6,235 7,220
Equity in net loss (income) of
unconsolidated affiliates 80 - -
Provision for doubtful accounts 192 130 232
Other (income) expense (Note 1) - - (3,264)
Interest expense (includes $1,420 of discounts on
beneficial conversion feature on convertible
debt in 1997) 45 1,514 9
Interest income (28) (117) (438)
----------- ----------- -----------
Total costs and expenses $ 13,989 $ 15,566 $ 17,507
----------- ----------- -----------
NET (LOSS) $ (10,825) $ (9,848) $ (14,183)
Preferred stock dividend requirement - 1,623 3,200
Accretion of difference between carrying amounts
and redemption amount of redeemable preferred stock - 285 485
----------- ----------- -----------
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (10,825) $ (11,756) $ (17,868)
=========== =========== ===========
Weighted average number of common shares outstanding 101,191 124,101 143,855
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.11) $ (0.09) $ (0.12)
=========== =========== ===========
See notes to Financial Statements
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(in thousands of dollars)
1996 1997 1998
----------- ----------- -----------
NET (LOSS) $ (10,825) $ (9,848) $ (14,183)
Other comprehensive income/(loss)
Currency translation adjustment (8) (23) (74)
----------- ----------- -----------
COMPREHENSIVE (LOSS) $ (10,833) $ (9,871) $ (14,257)
=========== =========== ===========
See notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands of dollars and shares)
Series C Series D Series E
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
----------------- ----------------- ---------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 - $ - - $ - - $ - 92,829 $ 928
Sale of common stock, less expenses of $245 - - - - - - 18,595 186
Shares issued upon exercise of warrants & options - - - - - - 204 2
Net loss - - - - - - - -
Translation adjustment - - - - - - - -
Restricted shares issued for
Director's compensation - - - - - - 20 -
Consulting expense attributable to options - - - - - - - -
Retirement of shares related to
patent acquisition - - - - - - (25) -
Retirement of shares in settlement
of employee receivable - - - - - - (8) -
--------------------------------------------------------------------------------
Balance at December 31, 1996 - $ - - $ - - $ - 111,615 $ 1,116
Sale of common stock - - - - - - 2,857 29
Shares issued upon exercise of warrants & options - - - - - - 1,996 20
Sale of Series C preferred stock,
less expenses of $1,387 13 11,863 - - - - - -
Discount on beneficial conversion price
to preferred shareholders - (3,313) - - - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - 1,908 - - - - - -
Sale of subsidiary common stock,
less expenses of $65 - - - - - - - -
Common stock issued upon conversion of
convertible debt less expenses of $168 - - - - - - 16,683 167
Net loss - - - - - - - -
Translation adjustment - - - - - - - -
Restricted shares issued for
Directors' compensation - - - - - - 10 -
Warrant issued in conjunction
with convertible debt - - - - - - - -
Compensatory stock options and warrants - - - - - - - -
--------------------------------------------------------------------------------
Balance at December 31, 1997 13 $ 10,458 - $ - - - 133,161 1,332
Shares issued in consideration
for patent rights - - - - - - 1,250 12
Return of shares for subscription receivable - - - - - - - -
Conversion of Series C preferred stock,
less expense of $53 (12) (11,726) - - 2 1,577 20,665 207
Discount on beneficial conversion price
to preferred shareholders - - - - - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - 1,970 - - - - - -
Offering costs of Series A
preferred stock in subsidiary - - - - - - - -
Discount on beneficial conversion price
to preferred shareholders - - - - - - - -
Accretion and amortization of
discount on beneficial conversion price
to preferred shareholders - - - - - - - -
Sale of Series D preferred stock,
less expenses of $862 - - 6 5,138 - - - -
Discount on beneficial conversion price
to preferred shareholders - - - (673) - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - - 775 - - - -
Sale of Series E preferred stock - - - - 9 4,735 - -
Discount on beneficial conversion price
to preferred shareholders - - - - - (3,179) - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - - - - 165 - -
Exchange of subsidiary common stock
for parent common stock - - - - - - 1,135 11
Payment of stock subscription receivable - - - - - - - -
Repurchase of common shares - - - - - - - -
Acquisition of Advancel, less expenses of $23 - - - - - - - -
Other - - - - - - 1 -
Net loss - - - - - - - -
Translation adjustment - - - - - - - -
Restricted shares issued for compensation - - - - - - 125 1
Compensatory stock options and warrants - - - - - - - -
--------------------------------------------------------------------------------
Balance at December 31, 1998 1 $ 702 6 $ 5,240 11 $ 3,298 156,337 $ 1,563
================================================================================
See notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands of dollars and shares)
Add'l Accumu- Cumulative Stock Unearned Portion of
Paid-In lated Translation Subscription Compensatory Stock/
Capital Deficit Adjustment Receivable Options/Warrants
--------- ----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 78,667 $ (72,848) $ 150 $ (13) $ -
Sale of common stock, less expenses of $245 6,178 - - 13 -
Shares issued upon exercise of warrants & options 102 - - - -
Net loss - (10,825) - - -
Translation adjustment - - (8) - -
Restricted shares issued for
Director's compensation 13 - - - -
Consulting expense attributable to options 96 - - - -
Retirement of shares related to
patent acquisition (26) - - - -
Retirement of shares in settlement
of employee receivable (5) - - - -
-----------------------------------------------------------------------------
Balance at December 31, 1996 $ 85,025 $ (83,673) $ 142 $ - $ -
Sale of common stock 471 - - - -
Shares issued upon exercise of warrants & options 1,115 - - (64) -
Sale of Series C preferred stock,
less expenses of $1,387 - - - - -
Discount on beneficial conversion price
to preferred shareholders 3,313 - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders (1,908) - - - -
Sale of subsidiary common stock,
less expenses of $65 3,573 - - (326) -
Common stock issued upon conversion of
convertible debt less expenses of $168 4,714 - - - -
Net loss - (9,848) - - -
Translation adjustment - - (23) - -
Restricted shares issued for
Directors' compensation 2 - - - -
Warrant issued in conjunction
with convertible debt 34 - - - -
Compensatory stock options and warrants 40 - - - -
-------------------------------------------------------------------------------
Balance at December 31, 1997 $ 96,379 $ (93,521) $ 119 $ (390) -
Shares issued in consideration
for patent rights 494 - - - -
Return of shares for subscription receivable - - - 64 -
Conversion of Series C preferred stock,
less expense of $53 9,889 - - - -
Discount on beneficial conversion price
to preferred shareholders - - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders (1,970) - - - -
Offering costs of Series A
Preferred Stock in subsidiary (862) - - - -
Discount on beneficial conversion price
to preferred shareholders 673 - - - -
Accretion and amortization of
discount on beneficial conversion price
to preferred shareholders (775) - - - -
Sale of Series D preferred stock,
less expenses of $862 - - - - -
Discount on beneficial conversion price
to preferred shareholders 673 - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders (775) - - - -
Sale of Series E preferred stock - - - (4,000) -
Discount on beneficial conversion price
to preferred shareholders 3,179 - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders (165) - - - -
Exchange of subsidiary common stock
for parent common stock 545 - - - -
Payment of stock subscription receivable - - - 326 -
Repurchase of common shares - - - - -
Acquisition of Advancel, less expenses of $23 (151) - - - (94)
Other (48) - - - -
Net loss - (14,183) - - -
Translation adjustment - - (74) - -
Restricted shares issued for compensation 96 - - - -
Compensatory stock options and warrants 301 - - - (144)
--------------------------------------------------------------------------------
Balance at December 31, 1998 $107,483 $(107,704) $ 45 ($4,000) $ (238)
================================================================================
See notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands of dollars)
Treasury Stock
Shares Amount Total
-------- --------- ----------
<S> <C> <C> <C>
Balance at December 31, 1995 - $ - $ 6,884
Sale of common stock, less expenses of $245 - - 6,377
Shares issued upon exercise of warrants & options - - 104
Net loss - - (10,825)
Translation adjustment - - (8)
Restricted shares issued for
Director's compensation - - 13
Consulting expense attributable to options - - 96
Retirement of shares related to
patent acquisition - - (26)
Retirement of shares in settlement
of employee receivable - - (5)
------------------------------------------
Balance at December 31, 1996 - $ - $ 2,610
Sale of common stock - - 500
Shares issued upon exercise of warrants & options - - 1,071
Sale of Series C preferred stock,
less expenses of $1,387 - - 11,863
Discount on beneficial conversion price
to preferred shareholders - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - -
Sale of subsidiary common stock,
less expenses of $65 - - 3,247
Common stock issued upon conversion of
convertible debt less expenses of $168 - - 4,881
Net loss - - (9,848)
Translation adjustment - - (23)
Restricted shares issued for
Directors' compensation - - 2
Warrant issued in conjunction
with convertible debt - - 34
Compensatory stock options and warrants - - 40
-------------------------------------------
Balance at December 31, 1997 - $ - $ 14,377
Shares issued in consideration
for patent rights - - 506
Return of shares for subscription receivable 158 (64) -
Conversion of Series C preferred stock,
less expense of $53 - - (53)
Discount on beneficial conversion price
to preferred shareholders - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - -
Offering costs of Series A
Preferred Stock in subsidiary - - (862)
Discount on beneficial conversion price
to preferred shareholders - - 673
Accretion and amortization of
discount on beneficial conversion price
to preferred shareholders - - (775)
Sale of Series D preferred stock,
less expenses of $862 - - 5,138
Discount on beneficial conversion price
to preferred shareholders - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - -
Sale of Series E preferred stock 2,100 (735) -
Discount on beneficial conversion price
to preferred shareholders - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - -
Exchange of subsidiary common stock
for parent common stock - - 556
Payment of stock subscription receivable - - 326
Repurchase of common shares 5,607 (3,292) (3,292)
Acquisition of Advancel, less expenses of $23 (1,787) 1,128 883
Other - - (48)
Net loss - - (14,183)
Translation adjustment - - (74)
Restricted shares issued for compensation - - 97
Compensatory stock options and warrants - - 157
--------------------------------------------
Balance at December 31, 1998 6,078 $ (2,963) $ 3,426
============================================
See notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Years Ended December 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
Cash flows from operating activities
<S> <C> <C> <C>
Net loss $(10,825) $ (9,848) $(14,183)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 1,000 899 1,030
Common stock options and warrants issued as consideration for:
Compensation 109 42 301
Interest on debentures - 51 -
Convertible debt - 34 -
Costs incurred related to convertible debt - 211 -
Common stock retired in settlement of employee
account receivable (5) - -
Discount on beneficial conversion feature on convertible debt - 1,420 -
Provision for tooling costs and write off 371 515 151
Provision for doubtful accounts 192 130 232
Equity in net loss of unconsolidated 80 - -
Unrealized foreign currency (gain) loss (45) 8 (80)
(Gain) loss on disposition of fixed assets 83 (4) 34
Changes in operating assets and liabilities: - - -
(Increase) decrease in accounts receivable 61 (127) (193)
(Increase) decrease in license fees receivable (150) (50) 8
(Increase) decrease in inventories, net of reserves 813 (433) (1,986)
(Increase) decrease in other assets 67 (12) (12)
Increase in accounts payable and accrued expenses 55 135 1,816
Increase (decrease) in other liabilities 436 (414) 48
--------- --------- ---------
Net cash (used in) operating activities $ (7,758) $ (7,443) $(12,834)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures $ (186) (244) (548)
Acquisition of patent rights - - (822)
Acquisition of Advancel (net of $100 cash acquired) - - 40
Acquisition and advances, including $135 of costs (Note 6) - - (5,134)
Sale of capital expenditures - 67 46
--------- --------- ---------
Net cash (used in) investing activities $ (186) $ (177) $ (6,418)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) $ - $ 3,199 $ -
Sale of common stock and expenses 6,377 500 (51)
Sale of Series C preferred stock and expenses - 11,863 (53)
Sale of Series D preferred stock - - 5,138
Sale of subsidiary Series A preferred stock - - 5,138
Sale of subsidiary stock and expenses - 3,247 (21)
Exercise of stock purchase warrants and options 104 1,071 -
Collections on subscriptions receivable - - 326
Purchase of treasury stock - - (3,292)
--------- --------- ---------
Net cash provided by financing activities $ 6,481 $ 19,880 $ 7,185
--------- --------- ---------
Effect of exchange rate changes on cash $ - $ (24) $ (8)
Net increase (decrease) in cash and cash equivalents $ (1,463) $ 12,236 $(12,075)
Cash and cash equivalents - beginning of period 1,831 368 12,604
--------- --------- ---------
Cash and cash equivalents - end of period $ 368 $ 12,604 $ 529
========= ========= =========
Cash paid for interest $ 4 $ 8 $ 9
========= ========= =========
See Note 7 for issuance of common stock for patents and acquisitions.
See Note 8 with respect to issuance of securities for compensation.
See notes to Financial Statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
1. Background:
NCT Group, 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, including NoiseBuster(R)
communications headsets and NoiseBuster Extreme!(TM) consumer headsets,
Gekko(TM) flat speakers, flat panel transducers ("FPT(R)"), ClearSpeech(R),
microphones, speakers and other products, adaptive speech filters ("ASF"), the
ProActive(R) 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 amounted to $107.7 million on a cumulative basis through
December 31, 1998 and has negative working capital of $1.2 million at December
31, 1998. 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 $0.5 million at December 31, 1998.
Management believes that currently available funds will 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
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties,
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales, and engineering and development revenue are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
In that event that funding from internal sources is insufficient, 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 8 with respect to
recent financing).
<PAGE>
On April 30, 1998, the Company completed the sale of 5.0 million ordinary
shares of NXT plc (formerly Verity Group plc ) acquired upon the Company's
exercise on April 7, 1998 of the option it held to purchase such shares at a
price of 50 pence per share. This option was acquired by the Company in
connection with the cross license agreement entered into by the Company, NXT plc
and New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT plc. The
Company realized a $3.2 million gain from the exercise of such option and the
sale of the Verity ordinary shares received therefrom, which is included in
other income in 1998.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 1998 about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. 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 when 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 to total estimated costs at completion. Estimated losses are
recorded when identified.
Revenues recorded under the percentage of completion method amounted to
$9,000, zero and $61,000 for the years ended December 31, 1996, 1997 and 1998,
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, such
license fee is deferred until such performance criteria is met. See Note 3 with
respect to the license fee recorded by the Company in connection with Ultra
Electronics, Ltd.("Ultra") and NXT.
<PAGE>
Advertising:
Advertising costs are expensed as incurred. Expense for years ended December
31, 1996, 1997 and 1998 was $0.5 million, $0.5 million and $1.7 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 comprised of high quality investments in commercial paper) to be
cash equivalents.
Inventories:
Inventories are stated at the lower of cost (average) 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 and obsolete. 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, 1997, and
December 31, 1998, the Company determined that a reserve of $0.5 million for
each year 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, $0.3 million and $0.5 million for 1996,
1997 and 1998, respectively. Accumulated amortization was $1.8 million and $2.3
million at December 31, 1997 and 1998, respectively.
It is the Company's policy to review the carrying value of its individual
patents when events have occurred which could impair the valuation on any such
patent.
Foreign currency translation:
The financial statements for the United Kingdom operations are translated
into U.S. dollars at year-end exchange rates for assets and liabilities and
weighted average exchange rates for revenues and expenses. The effects of
foreign currency translation adjustments are included as a component of
stockholders' equity and gains and losses resulting from foreign currency
transactions are included in income and have not been material.
<PAGE>
Loss per common share:
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in the year ended December 31, 1997 and has
retroactively applied the effects thereof for all periods presented.
Accordingly, the presentation of per share information includes calculations of
basic and diluted loss per share. The impact on the per share amounts previously
reported (primary and fully diluted) was not significant. Except as described
below, the per share effects of potential common shares such as warrants,
options, and convertible preferred stock have not been included, as the effect
would be antidilutive (see Notes 8 and 9).
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 loss per share calculation.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents. The Company primarily holds
its cash and cash equivalents in two banks. Deposits in excess of federally
insured limits were $0.3 million at December 31, 1998. 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 33.5% of revenues during 1998 and
38.8% of accounts receivable at December 31, 1998. The Company does not require
collateral or other security to support customer receivables.
(in thousands of dollars)
As of December 31, 1998,
and for the year then ended
---------------------------------
Accounts
CUSTOMER Receivable Revenue
-------------------------------- ------------- --------------
VLSI Technology, Inc. $--- $285
TS/2 Inc. 9 275
STMicroelectronics SA and
STMicroelectronics S.r.l 246 246
Telex Communications, Inc. --- 189
Cleverdevices Ltd. 23 119
All Other 438 2,210
------------- --------------
Total $716 $3,324
============= ==============
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. (See Note 9.)
Reporting Comprehensive Loss:
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The
provisions for SFAS No. 130 require the Company to report the change in the
Company's equity during the period from transactions and events other than
those resulting from investments by and distributions to the shareholders.
<PAGE>
Segments of an Enterprise and Related Information:
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). The provisions of SFAS No. 131 require the Company to disclose
the following information for each reporting segment: general information about
factors used to identify reportable segments, the basis of organization, and the
sources of revenues; information about reported profit or loss and segment
assets; and reconciliations of certain reported segment information to
consolidated amounts. Please refer to Note 14 and 15 for further information.
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, 1998.
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, 1998, 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, 1998. 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.
<PAGE>
Total revenues recorded by the Company relating to the joint ventures and
alliances, or their principals, for technology licensing fees, engineering and
development services and product sales were as follows:
(in thousands of dollars)
Years ended December 31,
-------------------------------------
Joint Venture/Alliance 1996 1997 1998
----------------------
- ---------------------------------------- ----------- ----------- ----------
Walker Noise Cancellation Technologies $ 90 $ 61 $ -
Ultra Electronics, Ltd. 62 - 68
Magneti Marelli S.p.A. 28 - 80
Siemens Medical Systems, Inc. 319 172 102
Foster/NCT Supply, Ltd. 10 28 -
AB Electrolux 12 34 -
Hoover Universal, Inc. 713 - -
OnActive Technologies, LLC - - 75
TS/2 Inc. - - 275
VLSI Technology, Inc. - - 285
STMicroelectronics S.A. & - - 246
STMicroelectronics S.r.l
NXT plc - 3,000 -
----------- ----------- ----------
Total $1,234 $3,295 $1,131
=========== =========== ==========
Outlined below is a summary of the nature and terms of selected ventures or
alliances:
Joint Ventures:
OnActive Technologies, L.L.C. )"OAT") and the Company entered into an
Operating Agreement in December 1995 with Applied Acoustic Research, L.L.C.,
("AAR") to design, develop, manufacture, market, distribute and sell flat panel
transducers 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 neither company was required to make any
additional contribution to OAT. In May 1996, the Operating Agreement was amended
to include Johnson Controls, Inc.'s ("JCI's) $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 provided that services and subcontracts provided to OAT by the
Company, AAR, or JCI (collectively, 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. On October 8, 1998, the Members signed a
Redemption Agreement, an Amended and Restated License Agreement, a Termination
Agreement, and a License Agreement (collectively, the "Termination Agreements")
terminating the ownership interest of NCT Audio, a subsidiary of the Company.
NCT Audio had its ownership interest in OAT redeemed by OAT in exchange for the
rights and licenses granted NCT Audio, under the License Agreement together with
a cash payment of seventy-five thousand dollars ($75,000), the discharge of any
indebtedness of NCT Audio to OAT, the license to certain technology in
accordance with specific terms and limitations set forth in that certain
Aftermarket-TDSS License, and the right to receive 22.5% (twenty-two and one
half percent) of all royalties to be paid by JCI, relating to the licensing of
that certain proprietary intellectual property of the Company known as Top Down
Surround Sound ("TDSS").
<PAGE>
Other Strategic Alliances:
Ultra Electronics Ltd. (formerly Dowty Maritime Limited) 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 1.5% of sales commencing in 1998. Under the agreement, Ultra also
acquired the Company's active aircraft quieting business based in Cambridge,
England, leased a portion of the Cambridge facility and 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. The
Company has recognized $68,000 in royalty revenue in 1998.
New Transducers Ltd.(NXT), a wholly-owned subsidiary of NXT plc (formerly
Verity Group PLC ) 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 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 NXT plc 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 NXT plc (the "NXT plc
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 NXT
plc are covered by the option granted by NXT plc 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, NXT plc, NXT and the
Company executed several agreements and other documents (the "New Agreements")
terminating the Cross License, the Security Deed, the NXT plc Option and the
Registration Rights Agreement and replacing them with new agreements
(respectively the "New Cross License", the "New Security Deed", the "New NXT plc
Option" and the "New Registration Rights Agreement"). The material changes
effected by the New Agreements were the inclusion of NXT plc 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 NXT plc stock; and reducing the exercise
price under the option granted to NXT plc 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 NXT plc stock which were subsequently sold by the Company.
On September 27, 1997, NXT plc, NXT, 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 NXT plc 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 February 9,
1999 NCT Audio and NXT expanded the Cross License Agreement dated September 27,
1997 to increase NXT's fields of use to include aftermarket ground based
vehicles and aircraft sound systems and increased the royalties due NCT Audio
from NXT to 10% from 6% and increased the royalties due NXT from NCT Audio to 7%
from 6%. In consideration for granting NXT these expanded licensing rights, NCT
Audio received $0.5 million license fee. Also on February 9, 1999, NCT Audio and
NXT amended the Master License Agreement to include a minimum royalty payment of
$160,000 in 1999, to be paid in equal quarterly installments.
<PAGE>
TS/2, Inc. ("TS/2"). On January 23, 1998, NCT Audio entered into an
agreement with TS/2. Under the terms of the agreement, NCT Audio granted TS/2 a
non-exclusive license to market NCT Audio's Gekko(TM) flat speakers in the
pro-audio market. NCT Audio recorded $0.3 million license fee and is entitled to
future per-unit revenues on Gekko(TM) products sold by TS/2 into the pro-audio
market. NCT Audio recognized $0.4 million in marketing and product development
expenses in connection with this agreement.
VLSI Technology, Inc. ("VLSI"). On February 5, 1998, the Company entered into
a license, engineering and royalty agreement with VLSI. Under the terms of the
agreement, the Company has granted a non-exclusive license to VLSI for certain
patents and patents pending which relate to the Compmay's ClearSpeech(R)
technologies. Along with the license, the Company has recorded $0.3 million in
related engineering revenue. The Company will recognize royalties on future
products sold by VLSI incorporating the ClearSpeech(R) technology.
STMicroelectronics SA & STMicroelectronics S.r.l ("ST"). On November 16,
1998, Advancel and ST executed a license agreement. Under the terms of the
agreement, which included a license fee, a minimum royalty within two years and
future per unit royalties, ST licensed Advancel's tiny 2J(TM)for Java(TM)
("t2J-Processor Core") to combine it with its proven secure architecture and
advanced nonvolatile memory technology, to offer a new generation of secure
microcontrollers for smartcard applications. The t2J-Processor Core is the ideal
architecture to accelerate the execution of Javacard(TM)-based smartcard
applications such as electronic purse credit/debit card functions, ID cards that
provide authorized access to networks and subscriber identification modules that
secure certain PCS cellular phones against fraud. Advancel recorded $0.2 million
license fee in 1998 and an additional $0.4 million license fee is to be recorded
upon making deliverables, along with $0.9 million minimum royalty over two years
and $0.9 million research and engineering revenue.
4. Inventories:
Inventories comprise the following:
(in thousands of dollars)
December 31,
----------------------------
1997 1998
-------------- -----------
Components $ 514 $ 745
Finished goods 1,291 3,083
-------------- -----------
Gross inventory $ 1,805 $ 3,828
Reserve for obsolete & slow moving inventory (472) (508)
-------------- -----------
Inventory, net of reserves $ 1,333 $ 3,320
============== ===========
5. Property and Equipment:
Property and equipment comprise the following:
(in thousands of
dollars)
Estimated December 31,
Useful Life -------------------------
(Years) 1997 1998
------------- ------------ ------------
Machinery and equipment 3-5 $ 1,801 $ 1,935
Furniture and fixtures 3-5 869 1,057
Leasehold improvements 7-10 1,177 1,038
Tooling 1-3 670 181
Other 5-10 74 60
------------ ------------
Gross $ 4,591 $ 4,271
Less accumulated depreciation (3,447) (3,274)
------------ ------------
Net $ 1,144 $ 997
============ ============
Depreciation expense for the years ended December 31, 1996, 1997 and 1998 was
$0.5 million, $ 0.6 million and $0.5 million, respectively.
<PAGE>
6. Other Assets:
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
business assets of Top Source Automotive, Inc. ("TSA"), an automotive original
equipment audio system supplier. On June 11, 1998, NCT Audio paid a
non-refundable deposit of $1,450,000 towards the purchase price, which is
included in other assets. The total cash purchase price is $10,000,000, and up
to $6,000,000 in possible future contingent payments to be paid in either NCT
Audio common stock or cash, at the seller's election. The transaction is subject
to approval of the shareholders of Top Source Technologies, Inc. ("TST"), TSA's
parent company. On July 31, 1998, NCT Audio paid TST $2,050,000, to be held in
escrow with securities and documentation necessary to represent beneficial
ownership of 20% of the total equity rights and interests in TSA, until such
time as TST's stockholders approve the sale of the business assets of TSA. Such
approval was received on December 15, 1998, and at that time, the $2,050,000 was
delivered to TSA. In return, NCT Audio took ownership of the documentation and
securities. The Company has the exclusive option to purchase the assets of TSA
at any time through March 31, 1999.
Unaudited summarized financial information of TSA is as follows:
For the Twelve
(in thousands Months Ended
(of dollars September 30, 1998
------------------
Current assets $ 2,050
Non-current assets 383
Current liabilities 288
Non-current liabilities -
Income statement data:
Net revenues 10,815
Gross profit 3,398
Net income 632
On August 17, 1998, NCT Audio agreed to acquire all of the members' interest
in Phase Audio LLC dba Precision Power, Inc. ("PPI"), a supplier of custom
automotive audio systems. In consideration, the members of PPI shall receive
$2.0 million. NCT Audio also agreed to retire approximately $8.5 million of PPI
debt. This acquisition is subject to NCT Audio's receipt of the necessary
financing to close the transaction. In addition to the above, on June 17, 1998,
NCT Audio provided a working capital loan in the amount of $0.5 million to PPI,
which is evidenced by a demand promissory note. On August 18, 1998, NCT Audio
provided an additional working capital loan in the amount of $1.0 million to
PPI, which is also evidenced by a demand promissory note. The unpaid principal
balance of these notes bear interest at a rate equal to the prime lending rate
plus one percent (1.0%). The notes aggregating $1.5 million have been included
in other assets.
<PAGE>
7. Other Liabilities:
On June 5, 1998, Interactive Products, Inc. ("IPI") entered into an agreement
with the Company granting the Company a license to, and an option to purchase a
joint ownership interest in, patents and patents pending which relate to IPI's
speech recognition technologies, speech compression technologies and speech
identification and verification technology. The aggregate value of the patented
technology is $1,250,000, which was paid by a $150,000 cash payment and delivery
of 1,250,000 shares of the Company's common stock valued at $0.65625 per share
on June 5, 1998. At such time as IPI sells any of such shares, the proceeds
thereof will be allocated towards a fully paid-up license fee for the technology
rights noted above. In the event that the proceeds from the sale of shares are
less than the $1,100,000, the Company will record a liability representing the
cash payment due. On July 5, 1998 the Company paid IPI $50,000, which was held
in escrow as security for the fulfillment of the Company's obligations, towards
the liability. The Company has recorded a liability of $544,000 at December 31,
1998 representing the difference between the payment obligations and the net
proceeds from the sale of shares of the Company's common stock received by IPI.
On September 4, 1998, the Company acquired the issued and outstanding common
stock of Advancel Logic Corporation ("Advancel"), a Silicon Valley-based
developer of microprocessor cores that execute Sun Microsystems' Java(TM) code.
The acquisition was pursuant to a stock purchase agreement dated as of August
21, 1998 (the "Stock Purchase Agreement") among the Company, Advancel and
certain shareholders of Advancel (the "Advancel Shareholders"). The
consideration for the acquisition of the Advancel common stock consisted of an
initial payment of $1.0 million payable by the delivery of 1,786,991 shares of
the Company's treasury stock (see Note 8) together with future payments, payable
in cash or in common stock of the Company at the election of the Advancel
Shareholders (individually, an "earnout payment" and collectively, the "earnout
payments") based on Advancel's earnings before interest, taxes, depreciation and
amortization (as defined in the Stock Purchase Agreement) for each of the
calendar years 1999, 2000, 2001 and 2002 (individually, an "earnout year" and
collectively, the "earnout years"). While each earnout payment may not be less
than $250,000 in any earnout year, there is no maximum earnout payment for any
earnout year or for all earnout years in the aggregate. In connection therewith
the Company recorded a $77,000 earnout at December 31, 1998. At December 31,
1998 the Company has a $100,000 note payable to a former employee of Advancel.
The note bears interest at a rate of 8.25%, compounded annually and is due in
two equal installments on December 1, 1998 and March 1, 1999. Such note is past
due.
<PAGE>
8. Common Stock:
Private Placements and Stock Issuances:
On March 28, 1996, the Company sold 2.0 million shares of its common stock in
a private placement with an investor that provided net proceeds to the Company
of $0.7 million.
On April 10, 1996, the Company sold an additional 1.0 million shares, in the
aggregate, of its common stock in a private placement with three institutional
investors that provided net proceeds to the Company of $0.3 million.
Contemporaneously, the Company sold secured convertible term notes in the
aggregate principal amount of $1.2 million to those institutional investors and
granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion price
under the notes and the exercise price under the options are equal to the price
received by the Company for the sale of such 1.0 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 13.4 million 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 a 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 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 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 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 Products, Inc., 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 NXT plc and NXT under the Company's cross licensing agreements with
NXT plc 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 NXT plc and NXT to NCT
Audio and to transfer the Company's interest in OAT to NCT Audio, which was then
redeemed by OAT on October 8, 1998. (Please refer to Note 3 for further
information.)
Between October 10, 1997 and December 4, 1997 NCT Audio issued 2,145 shares
of its common stock (including 533 shares issued to NXT plc) 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. During 1998, two NCT Audio shareholders have
exercised their right to exchange 296 shares of NCT Audio common stock into
1,135,542 shares of NCT common stock under the terms noted above. In connection
therewith the Company recorded goodwill of $556,000 which is being amortized
over five years.
Between October 28, 1997 and December 11, 1997, the Company entered into a
series of subscription agreements (the "Series C Subscription Agreements") to
sell an aggregate amount of $13.3 million of Series C Convertible Preferred
Stock (the "Series C Preferred Stock") in a private placement, pursuant to
Regulation D of the Securities Act, to 32 unrelated accredited investors through
two dealers (the "1997 Series C Preferred Stock Private Placement"). The total
1997 Series C Preferred Stock Private Placement was completed on December 11,
1997. The aggregate net proceeds to the Company of the 1997 Series C Preferred
Stock Private Placement were $11.9 million. Each share of the Series C Preferred
Stock has a par value of $.10 per share and a stated value of one thousand
dollars ($1,000) with an accretion rate of four percent (4%) per annum on the
stated value. Each share of Series C Preferred Stock is convertible into fully
paid and nonassessable shares of the Company's common stock subject to certain
limitations. The shares of Series C Preferred Stock become convertible into
shares of common stock at any time commencing after the earlier of (i) the
effective date of the Series C Registration Statement; or (ii) ninety (90) days
after the date of filing of the Series C Registration Statement. Each share of
Series C Preferred Stock is convertible into a number of shares of common stock
of the Company as determined in accordance with the Series C 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 Series C 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.
The conversion terms of the Series C Preferred Stock also provide that in no
event shall the average closing bid price referred to in the Series C 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 Series C Preferred Stock.
Accordingly, 26.0 million shares of common stock which could be issuable upon
conversion of the Series C Preferred Stock are included in the offering to which
the prospectus relates. Under the terms of the Series C Subscription Agreements,
the Company may be subject to a penalty if the Series C Registration Statement
is not declared effective within one hundred twenty (120) days after the first
closing of any incremental portion of the offering of Series C 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 Series C Preferred Stock sold in the offering
up to a maximum of ten percent (10%) of such aggregate amount. The Series C
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Series C 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 Series C 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 Series C Preferred Stock. As of December 31, 1998, 10,850
shares of Series C Preferred Stock have been converted to 20,665,000 shares of
NCT common stock.
During 1998, the Board of Directors authorized the issuance of a total of
125,000 shares of the Company's common stock to an employee, two directors and a
consultant in connection with their services to the Company. The Company valued
these shares at $97,000, representing the fair value on the date of issuance.
On July 15, 1998 the Company transferred $5,000 and all of the business and
assets of its Hearing Products Division as then conducted by the Company and as
reflected on the business books and records of the Company to a newly
incorporated subsidiary company, NCT Hearing Products, Inc. ("NCT Hearing") in
consideration for 6,400 shares of NCT Hearing common stock whereupon NCT Hearing
became a wholly-owned subsidiary of the Company. The Company also granted NCT
Hearing an exclusive worldwide license with respect to all of the Company's
relevant patented and unpatented technology relating to Hearing Products in
consideration for a license fee of $3.0 million (eliminated in consolidation) to
be paid when proceeds are available from the sale of NCT Hearing common stock
and running royalties payable with respect to NCT Hearing's sales of products
incorporating the licensed technology and its sublicensing of such technology.
It is anticipated that NCT Hearing will issue additional shares of its common
stock in transactions exempt from registration in order to raise additional
working capital.
On July 27, 1998, the Company entered into subscription agreements (the
"Series D Subscription Agreements") to sell 6,000 shares of the Company's Series
D Convertible Preferred Stock ("Series D Preferred Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act of 1933, as amended (respectively "Regulation D" and the
"Securities Act"), to six unrelated accredited investors through one dealer (the
"1998 Series D Preferred Stock Private Placement. The sale of 6,000 shares of
Series D Preferred Stock having an aggregate $6.0 million stated value was
completed on August 6, 1998. $5.2 million net proceeds were received by the
Company from the 1998 Series D Preferred Stock Private Placement. Each share of
the Series D Preferred Stock has a par value of $.10 per share and a stated
value of one thousand dollars ($1,000) with an accretion rate of four percent
(4%) per annum on the stated value. Each share of Series D Preferred Stock is
convertible into fully paid and nonassessable shares of the Company's common
stock subject to certain limitations. Under the terms of the Series D
Subscription Agreements, the Company is required to file a registration
statement ("the Series D Registration Statement") covering the resale of all
shares of common stock of the Company issuable upon conversion of the Series D
Preferred Stock then outstanding within sixty (60) days after the completion of
the 1998 Series D Preferred Stock Private Placement (respectively, the "Series D
Filing Date" and the "Series D Closing Date"). The shares of Series D Preferred
Stock become convertible into shares of common stock at any time commencing
after the earlier of (i) ninety (90) days after the Series D Closing Date; (ii)
five (5) days after the Company receives a "no review" status from the SEC in
connection with the Series D Registration Statement; or (iii) the effective date
of the Series D Registration Statement. The Series D Registration Statement
became effective on October 30, 1998, and shares of Series D Preferred Stock
became convertible on that date. Each share of Series D Preferred Stock is
convertible into a number of shares of common stock of the Company as determined
in accordance with the Series D 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 Series D 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.
The conversion terms of the Series D Preferred Stock also provide that in
no event shall the conversion price referred to in the Series D Conversion
Formula be less than $0.50 per share and in no event shall the Company be
obligated to issue more than 12,000,000 shares of its common stock in the
aggregate in connection with the conversion of the 6,000 shares of Series D
Preferred Stock issued under the 1998 Series D Preferred Stock Private
Placement. The Series D Subscription Agreements also provide that the Company
will be required to make certain payments in the event of its failure to effect
conversion in a timely manner. Including shares of common stock issued for
accretion, as of March 12, 1999, all shares of Series D Preferred Stock have
been converted to 12,273,685 shares of NCT common stock.
On July 27, 1998, NCT Audio entered into subscription agreements (the "NCT
Audio Subscription Agreements") to sell 60 shares of NCT Audio's Series A
Convertible Preferred Stock ("NCT Audio Series A Preferred Stock") having an
aggregate stated value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 NCT Audio Series A Preferred Stock Private
Placement"). The sale of 60 shares of NCT Audio Series A Preferred Stock having
an aggregate $6.0 million stated value was completed on August 17, 1998. NCT
Audio received net proceeds of $5.2 million from the 1998 NCT Audio Series A
Preferred Stock Private Placement. Each share of the NCT Audio Series A
Preferred Stock has a par value of $.10 per share and a stated value of one
hundred thousand dollars ($100,000) with an accretion rate of four percent (4%)
per annum on the stated value. Each share of NCT Audio Series A Preferred Stock
is convertible into fully paid and nonassessable shares of NCT Audio's common
stock subject to certain limitations. Under the terms of the NCT Audio
Subscription Agreements NCT Audio is required to file a registration statement
("NCT Audio Registration Statement") covering the resale of all shares of common
stock of NCT Audio issuable upon conversion of the NCT Audio Series A Preferred
Stock then outstanding by a date (the "Series A Filing Deadline") which is not
later than thirty (30) days after the Company becomes a "reporting company"
under the Exchange Act. The shares of NCT Audio Series A Preferred Stock become
convertible into shares of NCT Audio common stock at any time after the date the
Company becomes a "reporting company" under the Exchange Act. Each share of
Series A Preferred Stock is convertible into a number of shares of common stock
of NCT Audio as determined in accordance with the Series A 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 Series A 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.
The conversion terms of the NCT Audio Series A Preferred Stock also provide
that in the event that NCT Audio has not become a "reporting company" under the
Exchange Act by December 31, 1998, or the NCT Audio Registration Statement has
not been declared effective by the SEC by December 31, 1998, the holder shall be
entitled to exchange each share of NCT Audio Series A Preferred Stock for 100
shares of the Company's Series D Convertible Preferred Stock and thereafter
shall be entitled to all rights and privileges of a holder of the Company's
Series D Preferred Stock. As of December 31, 1998, no NCT Audio Series A
Preferred Stock shareholders have exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Convertible Preferred
Stock.
On July 29, 1998, the Company initiated a plan to repurchase from time to
time up to 10 million shares of the Company's common stock in the open market
pursuant to Rule 10b-18 under the Exchange Act or through block trades. As of
December 31, 1998, the Company had repurchased 5,607,100 shares of the Company's
common stock at per share prices ranging from $0.3438 to $0.6563. The stock
repurchase program was terminated on December 30, 1998.
On September 4, 1998, the Company acquired the issued and outstanding common
stock of Advancel. The acquisition was pursuant to the Stock Purchase Agreement.
The consideration for the acquisition of the Advancel common stock consisted of
an initial payment of $1.0 million payable by the delivery of 1,786,991 shares
of the Company's treasury stock together with future payments, payable in cash
or in common stock of the Company at the election of the Advancel Shareholders
based on Advancel's earnings before interest, taxes, depreciation and
amortization for each of the calendar years 1999, 2000, 2001 and 2002. While
each earnout payment may not be less than $250,000 in any earnout year, there is
no maximum earnout payment for any earnout year or for all earnout years in the
aggregate. To determine the number of shares of the Company's common stock
issuable in connection with an earnout payment, each earnout payment is to be
calculated using the average of the closing prices of the Company's common stock
for each of the twenty (20) business days following the 21st day after the
release of Advancel's audited year-end financials for an earnout year. At that
time, Advancel Shareholders will elect to receive payment in cash or common
stock of the Company. In the event that the Company is unable to maintain the
registration statement covering the resale of 1,786,991 shares effective for at
least thirty (30) days, each Advancel Shareholder shall have the right, until
April 15, 1999, to have the Company redeem up to one-third of the initial
payment shares acquired by such Advancel Shareholder by paying in cash therefor
a sum calculated by using the formula used to determine the number of shares of
the Company's common stock to be delivered in payment of the initial payment of
$1.0 million. The cost of the acquisition has been allocated to the assets
acquired and liabilities assumed based on their fair values as follows:
Asset acquired and liabilities assumed:
Current assets $ 368,109
Property, plant and equipment 4,095
Goodwill 1,018,290
Other assets 13,486
Current liabilities (485,040)
Unearned portion of compensatory stock 141,251
-----------
Cost of acquisition (including expenses of $60,191) $ 1,060,191
===========
The acquisition has been accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the accounts of Advancel
from the date of acquisition. Goodwill on acquisition is being amortized over
five years.
At the Annual Meeting of Stockholders held on October 20, 1998, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock from
185 million to 255 million shares. Such action was deemed by the Board of
Directors to be in the best interest of the Company to make additional shares of
the Company's common stock available for an increase in the number of shares of
common stock covered by the NCT Group, Inc. Stock Incentive Plan ("1992 Plan")
pursuant to an amendment of the 1992 Plan approved by the stockholders at such
Annual Meeting, and for acquisitions, public or private financings involving
common stock or preferred stock or other securities convertible to common stock,
stock splits and dividends, present and future employee benefit programs and
other corporate purposes.
On November 24, 1998, the Company paid $1,000 in consideration for a
wholly-owned subsidiary, DistributedMedia.com ("DMC"). DMC was formed to
develop, install, and provide an audio/visual advertising medium within
commercial/professional settings.
On December 30, 1998, the Company entered into a series of subscription
agreements (the " Series E Subscription Agreements") to sell an aggregate stated
value of up to $8.2 million of Series E Convertible Preferred Stock (the "
Series E Preferred Stock") in consideration of $4.0 million, in a private
placement, pursuant to Regulation D of the Securities Act, to six unrelated
accredited investors through one dealer (the "1998 Series E Preferred Stock
Private Placement). The sale of 8,145 shares of Series E Preferred Stock having
an aggregate $8.1 million stated value was completed on March 12, 1999. The
Company received net proceeds of $1.8 million from the 1998 Series E Preferred
Stock Private Placement through March 24, 1999. In addition to the above noted
Series E Subscription Agreements, the Company issued and sold an aggregate
amount of $1.7 million of Series E Preferred Stock to three accredited investors
through the above noted dealer, in exchange for an aggregate stated value of
$1.7 million of the Company's Series C Preferred Stock held by the three
accredited investors. The Company also issued and sold an aggregate amount of
$0.7 million of Series E Preferred Stock to four accredited investors through
the above noted dealer, in exchange and consideration for an aggregate of 2.1
million shares of the Company's common stock held by the four accredited
investors. Each share of the Series E Preferred Stock has a par value of $.10
per share and a stated value of one thousand dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value. Each share of Series E
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
Series E Subscription Agreements the Company is required to file a registration
statement ("the Series E Registration Statement") on (i) Form S-3 on or prior to
the date which is no more than sixty (60) days from the date that the Company
has issued a total of 7,438 shares of Series E Preferred Stock if filed or (ii)
Form S-1 on or prior to a date which is no more than ninety (90) days from the
date that the Company has issued a total of 7,438 shares of Series E Preferred
Stock, covering the resale of all of the Registrable Securities. The shares of
Series E Preferred Stock become convertible into shares of common stock at any
time commencing after the earlier of (i) ninety (90) days after the Series E
Closing Date; (ii) five (5) days after the Company receives a "no review" status
from the SEC in connection with the Registration Statement; or (iii) the
effective date of the Series E Registration Statement. Each share of Series E
Preferred Stock is convertible into a number of shares of common stock of the
Company as determined in accordance with the Series E 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 Series E 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.
The conversion terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 10,580
shares of Series E Preferred Stock issued under the 1998 Series E Preferred
Stock Private Placement. The Series E Subscription Agreements also provide that
the Company will be required to make certain payments in the event of its
failure to effect conversion in a timely manner. As of December 31, 1998, no
shares of Series E Preferred Stock have been converted into NCT common stock.
In connection with the Series E Preferred Stock, the Company may be obligated
to redeem the excess of the stated value over the amount permitted to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.
Common Shares available for common stock options, warrants and convertible
securities:
At December 31, 1998, the aggregate number of shares of common stock required
to be reserved for issuance upon the exercise of all outstanding options and
warrants was 30.6 million shares (see Note 9), and the aggregate number of
shares of common stock required to be reserved for issuance upon conversion of
issued and outstanding shares of Series C Convertible Preferred Stock was 1.5
million shares. The Company also has reserved 15.4 million shares of common
stock for issuance to certain holders of NCT Audio common stock upon their
exercise of certain rights to exchange their shares of NCT Audio common stock
for shares of the Company's common stock, 3.9 million shares of common stock for
the exercise of The New NXT, plc option, 26.0 million shares of common stock for
issuance upon the conversion of the 1998 Series D Preferred Stock Private
Placement and 30.0 million shares of common stock for issuance upon the
conversion of the 1998 Series E Preferred Stock Private Placement. At December
31, 1998, the number of shares available for the exercise of options and
warrants was 39.4 million and of the outstanding options and warrants, options
and warrants to purchase 22.6 million shares were currently exercisable. Common
shares issued and issuable exceed the number of shares authorized at December
31, 1998. However, should shares of common stock issued reach the authorized
limit, shares in excess of the limit will be borrowed from the 1992 Plan.
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 with
157,956 shares of NCT common stock in 1998, and a $0.3 million receivable from
the escrow agent for the NCT Audio financing which was paid on June 30, 1998.
The $4.0 million subscription receivable at December 31, 1998 represents a
receivable due from the Series E Subscription Agreements. Net proceeds to the
Company as of March 24, 1999 was $1.8 million.
<PAGE>
9. 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 1996, 1997 and 1998 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 $12.8
million, $15.8 million and $19.0 million, or $(0.13), $(0.14) and $(0.16) per
share in 1996, 1997 and 1998, respectively. The fair value of the options and
warrants granted in 1996, 1997 and 1998 are estimated in the range of $0.48 to
$0.58, $0.16 to $4.07 and $0.24 to $0.81 per share, respectively, on the date of
grant using the Black-Scholes option-pricing model utilizing the following
assumptions: dividend yield 0%, volatility of 1.225, 1.289 and 1.307 in 1996,
1997 and 1998, respectively, risk free interest rates in the range of 5.05% to
6.50%, 5.79% to 6.63% and 5.28% to 5.55% for 1996, 1997 and 1998, respectively,
and expected life of 3 years. The weighted average fair value of options granted
during 1996, 1997 and 1998 are estimated in the range of $0.49, $0.13 to $0.58,
and $0.53 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>
Information with respect to 1987 Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1996 1997 1998
------------------------------------------------------------------
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 1,540,000 $0.56 1,500,000 $0.54 1,350,000 $0.51
Options granted - - 1,350,000 $0.51 - -
Options exercised - - - - - -
Options canceled,
expired or forfeited (40,000) $1.31 (1,500,000) $0.54 - -
---------- ----------- ----------
Outstanding at end of
year 1,500,000 $0.54 1,350,000 $0.51 1,350,000 $0.51
========== =========== =========
Options exercisable
at year-end 1,500,000 $0.54 1,350,000 $0.51 1,350,000 $0.51
========== =========== =========
</TABLE>
As of December 31, 1998, 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,
---------------------------------------------------------------
1996 1997 1998
---------------------------------------------------------------
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 403,116 $1.04 372,449 $1.08 4,319,449 $0.36
Options granted - - 7,844,449 $0.41 - -
Options exercised (26,667) $0.50 - - - -
Options canceled,
expired or forfeited (4,000) $1.33 (3,897,449) $0.53 - -
------- --------- ---------
Outstanding at end of
year 372,449 $1.08 4,319,449 $0.36 4,319,449 $0.36
======= ========= =========
Options exercisable
at year-end 370,449 $1.07 4,319,449 $0.36 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. On October 20, 1998, the stockholders approved an
amendment to the 1992 Plan to increase the aggregate number of shares of
common stock reserved for grants of restricted stock and grants of options to
purchase shares of common stock to 30,000,000 shares. The 1992 Plan was also
amended to eliminate the automatic grant of 75,000 shares of the Company's
common stock upon a new director's initial election to the Board of Directors
and to eliminate the automatic grant of 5,000 shares of the Company's common
stock to each non-employee director for services as a director of the Company
for each subsequent election.
Information with respect to 1992 Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------------
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 4,004,248 $1.00 6,022,765 $0.86 9,029,936 $0.72
Options granted 2,156,500 $0.67 4,652,222 $0.55 21,989,000 $0.69
Options exercised (33,533) $0.75 (1,141,795) $0.64 (1,561) $0.27
Options canceled,
expired or forfeited (104,450) $1.37 (503,256) $0.99 (11,185,554) $1.03
--------- --------- ----------
Outstanding at end of
year 6,022,765 $0.86 9,029,936 $0.72 19,831,821 $0.52
========= ========= ==========
Options exercisable
at year-end 5,835,265 $0.86 6,592,436 $0.73 12,053,571 $0.60
========= ========= ==========
</TABLE>
As of December 31, 1998, options for the purchase of 8,515,776 shares were
available for future grants of restricted stock awards and for options to
purchase common stock under the 1992 Plan.
On November 15, 1994, the Board of Directors adopted the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors (the "Directors Plan"), as
amended. Under the Directors Plan 821,000 shares have been approved by the Board
of Directors for issuance. The options granted under the Directors Plan have
exercise prices equal to the fair market value of the Common Stock on the grant
dates, and expire five years from date of grant. Options granted under the
Directors Plan are fully vested at the grant date.
Information with respect to Directors Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1996 1997 1998
-------------------------------------------------------------------
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 821,000 $0.73 746,000 $0.73 746,000 $0.73
Options granted - - - - - -
Options exercised - - - - - -
Options canceled,
expired or forfeited (75,000) $0.75 - - - -
-------- ------- -------
Outstanding at end of
year 746,000 $0.73 746,000 $0.73 746,000 $0.73
======== ======= =======
Options exercisable
at year-end 746,000 $0.73 746,000 $0.73 746,000 $0.73
======== ======= =======
</TABLE>
As of December 31, 1998, there were 75,000 options for the purchase of shares
available for future grants under the Directors Plan.
<PAGE>
The following information summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Plan Exercise Price Outstanding (In Years) Price Exercisable Price
- ---------------- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1987 Plan $0.50 to $0.63 1,350,000 0.18 $0.51 1,350,000 $0.51
Non-Plan $0.27 to $5.09 4,319,449 3.14 $0.36 4,319,449 $0.36
1992 Plan $0.22 to $4.00 19,831,821 6.83 $0.52 12,053,571 $0.60
Director's Plan $0.66 to $0.75 746,000 0.88 $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.
Information with respect to warrant activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1996 1997 1998
------------------------------------------------------------------------
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 4,032,541 $0.71 3,888,539 $0.72 3,146,920 $0.81
Warrants granted - - 2,846,923 $0.76 1,588,164 $0.92
Warrants exercised (144,002) $0.45 (854,119) $0.41 - -
Warrants canceled,
expired or forfeited - - (2,734,423) $0.75 (362,400) $1.16
--------- --------- ---------
Outstanding at end
of year 3,888,539 $0.72 3,146,920 $0.81 4,372,684 $0.82
========= ========= =========
Warrants exercisable
at year-end 3,888,539 $0.72 3,146,920 $0.81 4,172,684 $0.86
========= ======== ========
</TABLE>
The following table summarizes information about warrants outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
---------------------------------------- ------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (In Years) Price Exercisable Price
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$0.50 to $4.00 4,372,684 2.02 $0.82 4,172,684 $0.86
</TABLE>
<PAGE>
10. 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, 1998,
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, 1996, 1997 and 1998 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, 1996, 1997 and 1998 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 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 December 31, 1998, QSI owes the Company $239,000, which is fully
reserved, for the exclusivity fee, rent and engineering services.
<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 and
1998, approximately $243,000 and $206,000 was incurred in connection with this
arrangement.
During 1996, 1997 and 1998, the Company purchased $0.6 million, $0.7 million
and $0.2 million, respectively, of products from its various manufacturing joint
venture entities.
11. 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, 1998, the Company had available net operating loss
carryforwards of approximately $85.8 million and research and development credit
carryforwards of $1.6 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 9,415 61
2011 9,051 67
2012 4,902 (1) 267
2018 13,314 (2)
---------------- ----------------
Total $85,770 $1,580
================ ================
(1) Includes approximately $1.2 million net operating loss relating to NCT
Audio Products, Inc.
(2) Includes approximately $4.4 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 $3.3 million, $3.0 million and $1.4 million in 1996, 1997
and 1998, 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, 1997 and 1998 were as follows:
(in thousands of
dollars)
------------------------
1997 1998
--------- ----------
Accounts receivable $ 207 $ 157
Inventory 191 173
Property and equipment 68 68
Accrued expenses 69 65
Stock compensation 2,698 2,711
Other 299 349
--------- ----------
Total temporary differences $ 3,532 $ 3,523
Federal net operating losses 26,149 27,258
Federal research and development
credits 1,313 1,580
--------- ----------
$ 30,994 $ 32,361
Less: Valuation allowance (30,994) (32,361)
--------- ----------
Deferred taxes $ - -
========= ==========
12. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunale di Milano, Milano, 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; 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 any case for no less than 500 million Lira. The
Company has retained the Italian law firm Verusio e Cosmelli, Giovanni Verusio,
Esq., a member of that 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. Submission 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. At the hearing
on May 19, 1998, the Discovery Judge established dates for the parties to submit
final pleadings and set September 22, 1998 as the date to send the case before
the Tribunal of Milan sitting in full bench. As of the date hereof the Company
has not been informed of any decision of the Tribunal. 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.
By a letter dated September 9, 1997, outside counsel to Andrea Electronics
Corporation ("AECorp.") notified the Company that AECorp. believed the Company's
use of the term "ANR READY" constituted the use of a trademark owned by AECorp.
The Company has also been informed by representatives of existing and/or
potential customers that AECorp. has made statements claiming the Company's
manufacture and/or sale of certain in-flight entertainment system products may
infringe a patent owned by AECorp. On March 25, 1998, the Company received from
AECorp.'s intellectual property counsel a letter dated March 24, 1998,
announcing and notifying the Company of the issuance of U.S. patent Number
5,732,143 to AECorp. and enclosing a copy of the patent. The subject letter
appears to be one of notice and information and did not contain any claim of
infringement. Following that date, additional correspondence was exchanged
between Company Counsel and counsel to AECorp. The Company again was informed by
representatives of existing, and/or potential customers that AECorp. was
continuing to make statements inferring that the Company's manufacture and/or
sale of certain in-flight entertainment system products may infringe patents
owned by AECorp. On October 9, 1998 the Board of Directors of the Company
authorized the commencement of litigation against AECorp. On November 17, 1998
the Company and NCT Hearing filed a complaint in the United States District
Court, Eastern District of New York against Andrea Electronics Corporation
("AECorp.") requesting that the Court enter judgment in their favor as follows:
(i) declare that the two subject AECorp. patents and all claims thereof are
invalid and unenforceable and that the Company's products do not infringe any
valid claim of the subject AECorp. patents; (ii) declare that the subject
AECorp. patents are unenforceable due to their misuse by AECorp.; (iii) award
compensatory damages in an amount of not less than $5,000,000 as determined at
trial and punitive damages of $50,000,000 for AECorp.'s tortious interference
with prospective contractual advantages of the Company; (iv) enjoin AECorp. from
stating in any manner that the Company's products, or the use of the Company's
products infringe on any claims of the subject AECorp. patents; and (v) award
such other and further relief as the Court may deem just and proper. On or about
December 30, 1998, AECorp. filed its Answer and Counterclaims against the
Company and NCT Hearing. In its answer, AECorp. generally denies the Company's
and NCT Hearing's allegations, asserts certain procedural affirmative defenses
and brings counterclaims against the Company and NCT Hearing alleging that the
Company has: (i) infringed the two subject AECorp. patents and AECorp.'s "ANR
Ready" mark; (ii) violated the Lanham Act through the Company's use of such
mark; and (iii) unfairly competed with AECorp. through the use of such mark. On
or about January 26, 1999, the Company and NCT Hearing filed a Reply to
AECorp.'s counterclaims generally denying AECorp.'s counterclaims, asserting
certain affirmative defenses to AECorp.'s counterclaims and requesting that: (i)
the counterclaims be dismissed with prejudice; (ii) the Court enter judgment
that the term "ANR Ready" is not a valid trademark; (iii) the Court enter
judgment that the Company and NCT Hearing have not infringed any trademark right
of AECorp.; (iv) the Court enter judgment that the Company and NCT Hearing have
not engaged in any form of federal or state statutory or common law unfair
competition; (v) the Court enter judgment that AECorp. is precluded from
recovery of any claim of right to the term "ANR Ready" by the equitable doctrine
of estoppel; (vi) the Court enter judgment that AECorp. is precluded from
recoving any damages from the Company and NCT Hearing by the equitable doctrine
of laches; (vii) the Court award the Company and NCT Hearing their costs and
reasonable attorneys' fees; and (viii) the Court enter judgment granting the
relief requested in the Company's and NCT Hearing's complaint as well as such
other and further relief as the Court deems just and proper. 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 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 Alastair
J. Keith in the United States District Court for the District of Connecticut
(the "District Court"). Mr. McCloy is a Director of the Company. Mr. Parrella is
the President and Chief Executive Officer of the Company as well as a Director
of the Company. Mr. Haft is a Director of the Company and Chairman of the Board
of Directors. Mr. Keith is a former Director of the Company. The summons and
complaint in this suit were served on the Company on January 16, 1998. Ally
purports to be a creditor of ANVT. On September 14, 1994, the Company acquired
certain assets of ANVT. Specifically, the Company acquired ANVT's patented and
unpatented intellectual property, the rights and obligations under a defined
list of agreements between ANVT and other parties relating to existing or
potential joint ventures licensing agreements and other business relationships,
and certain items of office and laboratory equipment. For these assets, the
Company paid ANVT two hundred thousand dollars ($200,000.00) and issued ANVT two
million (2,000,000) shares of the Company's common stock. Count 1 of the
complaint alleges misrepresentation and deceit with respect to matters which
allegedly were relevant to the ANVT transaction. Count 2 alleges negligent
misrepresentation with respect to the same facts. Count 3 alleges unfair and
deceptive trade practices in violation of Connecticut General Statutes
ss.42-110a et sec. consisting of the actions described in Counts 1 and 2. In the
complaint, Ally requests actual and punitive damages together with costs and
attorneys fees under Count 1; actual damages together with costs and attorney
fees with respect to Count 2; and, actual damages, treble damages and costs and
attorney fees with respect to Count 3. Ally also requests such other further
relief as may be just. It is not certain from the complaint what Ally is
claiming as actual damages; although, Ally does state that its deficiency claim
against ANVT as of August, 1994, was approximately six hundred twenty-one
thousand dollars ($621,000.00) and that under the terms of the settlement
agreement between Ally and ANVT, Ally is entitled to receive up to an additional
six hundred three thousand eight hundred ninety-one dollars and ninety-seven
cents ($603,891.97) from certain earn-out payments under the asset purchase
agreement between ANVT and the Company. It is not clear whether Ally's
deficiency claim against ANVT was calculated as being in addition to the value
of the common stock of the Company which Ally received. The Company, through its
special litigation counsel, obtained an extension of the time in which it must
answer the complaint to March 4, 1998. On March 4, 1998, the Company, through
such counsel, filed with the District Court a motion to dismiss the complaint
or, in the alternative, to join necessary parties. On March 16, 1998, Ally filed
a notice of voluntary dismissal as to the individual defendants, Messrs McCloy,
Parrella, Haft and Keith. On March 25, 1998, Ally filed its opposition to the
Company's motion to dismiss. On July 15, 1998 the Company paid plaintiff, Ally,
twenty-five thousand ($25,000) dollars in settlement of the suit which was
dismissed on behalf of all defendants with prejudice and without costs on July
16, 1998.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. The summons and complaint alleges the Company breached, and Mr.
Parrella interfered with, a purported contract entered into "in 1996" between
the Company and SCI under which SCI was to be paid commissions by the Company
when the Company received capital from investors who purchased debentures or
convertible preferred stock of the Company during a period presumably commencing
on the date of the alleged contract and allegedly extending at least to May 1,
1998. In this regard, the complaint alleges that SCI by virtue of a purported
right of first refusal that the Company did not honor, is entitled to
commissions totaling $1,500,000 in connection with the Company's sale of
$13,300,000 of preferred stock and a subsidiary of the Company's sale of
$4,000,000 of stock convertible into stock of the Company. In the complaint SCI
demands judgment against the Company for compensatory damages of $1,673,000,
punitive damages of $50,000 and attorneys' fees of $50,000 and demands judgment
against Mr. Parrella for compensatory damages of $150,000, punitive damages of
$500,000 and attorneys' fees of $50,000 as well as unspecified other appropriate
relief. On July 23, 1998 the Company and Mr. Parrella filed a motion to strike
the complaint or in the alternative, to dismiss the tortious interference with
contract claim and the punitive damages claim. On or about August 26, 1998
plaintiffs filed an amended complaint and a response to the Company's and Mr.
Parrella's motion to strike. On September 15, 1998 the Company and Mr. Parrella
filed a motion to strike the amended complaint. On or about September 25, 1998
the Company and Mr. Parrella served the plaintiff with their first request for
the production of documents. On November 12, 1998, the Court granted the
Company's and Mr. Parrella's motion to dismiss the tortious interference with
contracts claim and the punitive damages claim. On or about November 25, 1998,
SCI filed a second amended complaint, which abandoned the punitive damages claim
and the claim against Mr. Parrella. 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 material effect on
quarterly or annual operating results.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott & Co.,
Inc. ("AWC") and the Company in the United States District Court, Southern
District of New York. In the complaint, Mellon demands judgment against AWC and
the Company in the amount of $326,000 by reason of its having paid each of AWC
and the Company such sum when acting as escrow agent for the Company's private
placement of securities with certain institutional investors identified to the
Company by AWC. On or about July 27, 1998 AWC filed its Answer, Counterclaim and
Cross-claim requesting: (i) dismissal of Mellon's Amended Complaint against AWC;
(ii) commissions in the amount of $688,000 to be paid by the Company to AWC;
(iii) issuance to AWC of 784,905 shares of the Company's common stock registered
for resale under the Securities Act of 1933, as amended; (iv) a declaration that
AWC is entitled to retain the $326,000 sought by Mellon; and (v) delivery of a
warrant to purchase 461.13 shares of common stock of NCT Audio. On or about
August 20, 1998 the Company filed its reply to AWC's cross-claims. Discovery is
currently taking place in this action. 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 material effect on
quarterly operating results.
On December 15, 1998, Balmore Funds, S.A. and Austost Anstalt Schaan filed
suit against the Company's subsidiary, NCT Audio , and the Company in the
Supreme Court of the State of New York County of New York. The complaint alleges
an action for breach of contract, common law fraud, negligent misrepresentation,
deceptive trade practices under Section 349 of the General Business Law of the
State of New York, and money had and received, all arising out of NCT Audio's
and the Company's alleged unlawful conduct in connection with an agreement
entered into with plaintiffs for the sale of shares of common stock of NCT Audio
to the plaintiffs in a private placement in December 1997. In this regard, the
complaint alleges that: (i) NCT Audio breached an alleged agreement with
plaintiffs to register shares of NCT Audio's common stock purchased by
plaintiffs or, in the alternative, shares of the Company's common stock
exchangeable for such shares of NCT Audio's common stock under certain
circumstances and to pay penalties set forth in the alleged agreement; (ii) that
NCT Audio made representations that were materially false and misleading through
its facsimiles of non-negotiated agreements as substitutions for the alleged
contract between the parties; (iii) that NCT Audio and the Company acted
negligently and violated duties of full, fair and complete disclosure to the
plaintiffs; (iv) that NCT Audio and the Company engaged in deceptive trade
practices under Section 349 of the New York General Business Law; and (v) that
as a result thereof, NCT Audio and the Company possess money that in equity and
good conscience should not to be retained by NCT Audio and the Company. In the
complaint the plaintiffs demand judgment against NCT Audio and the Company: (i)
for damages in an amount to be determined but not less than $1,819,000; (ii) for
punitive damages in the amount of $3,000,000; (iii) requiring NCT Audio and the
Company to register the shares of common stock of NCT Audio held by the
plaintiffs; (iv) alternatively, rescission with the return of plaintiffs'
$1,000,000 plus interest; (v) for treble damages, reasonable attorney's fees and
costs pursuant to Section 349 and 350 of the New York General Business Law; and
(vi) such other and further relief as the Court may deem just and proper. On
January 14, 1999, NCT Audio and the Company filed removal papers to move the
suit to the United States District Court for the Southern District of New York
and on January 22, 1999, NCT Audio and the Company filed with that Court
Defendants' Answer, Affirmative Defenses, Counterclaims and Third-Party
Complaint. 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.
The Company believes there are no other patent infringement litigations,
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on financial position and results of operations.
13. 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
----------------------- ----------------
1999 $ 679
2000 669
2001 523
2002 63
2003 63
Thereafter 203
---------
Total $2,200
=========
Rent expense (net of sublease income) was $0.6 million, $0.4 million and $0.6
million for each of the three years ended December 31, 1996, 1997 and 1998,
respectively.
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 March 11,
1999, 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,
1998, no such contingent earn-out or payments were due ANVT.
As of December 31, 1998, the Company is obligated under various agreements
for minimum royalty payments as follows: $295,000, $335,000, $220,000, $240,000
and $60,000 for 1999, 2000, 2001, 2002 and each year thereafter.
In connection with the acquisition of Advancel the Company entered into
employment agreements with four employees. The Company is obligated under these
agreements for $471,500 per annum through 2002.
<PAGE>
14. Business Segment Information:
<TABLE>
<CAPTION>
(in thousands of dollars)
Advancel Total Grand
Audio Hearing Communications Europe Logic Corp Segments Other Total
------- ------- -------------- ---------- ---------- --------- ------- ----------
1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales - External $ 383 $ 1,191 $ 780 $ 28 $ 69 $ 2,451 $ 71 $ 2,522
Net Sales - Other
Operating Segments 2 23 6 1,113 - 1,144 (1,144) -
License Fees and royalties 350 86 18 - 200 654 148 802
Interest Income 110 - - 15 - 125 313 438
Depreciation/Amortization 5 - - 38 8 51 979 1,030
Operating Income (Loss) (4,359) (3,697) (4,326) (12) (658) (13,052) (1,131) (14,183)
Segment Assets 6,752 2,449 301 218 922 10,642 4,823 15,465
Capital Expenditures 33 8 21 102 34 198 350 548
1997
Net Sales - External $ 4 $ 1,709 $ 127 $ 67 $ - $ 1,907 $ 181 $ 2,088
Net Sales - Other
Operating Segments - - - 847 - 847 (847) -
License Fees 3,000 - 345 - - 3,345 285 3,630
Interest Income - - - 18 - 18 99 117
Depreciation/Amortization - - - 44 - 44 855 899
Operating Income (Loss) 785 (3,618) (2,582) (411) - (5,826) (4,022) (9,848)
Segment Assets 2,333 1,227 397 301 - 4,258 13,103 17,361
Capital Expenditures 12 5 13 26 - 56 188 244
1996
Net Sales - External $ 42 $ 1,333 $ 27 $ 407 $ - $ 1,809 $ 117 $ 1,926
Net Sales - Other
Operating Segments - - - 355 - 355 (355) -
License Fees - 2 - - - - 1,236 1,238
Interest Income - - - - - - 28 28
Depreciation/Amortization - - - 63 - 63 937 1,000
Operating Income (Loss) (1,451) (2,492) (2,266) (912) - (7,121) (3,704) (10,825)
Segment Assets - 1,781 108 515 - 2,404 3,477 5,881
Capital Expenditures 15 13 2 71 - 101 85 186
</TABLE>
Audio:
NCT Audio is engaged in the design, development, and marketing of products
which utilizes innovative FPT technology. The products available by NCT Audio
are the Gekko(TM) flat speaker and ArtGekko(TM) printed grille collection. The
Gekko(TM) flat speaker is marketed primarily to the home audio market, with
potential in many other markets including the professional audio systems market,
the automotive audio aftermarket, the aircraft industry, other transportation
markets, as well as the multimedia markets. The principal customers are end
users, automotive OEM's and manufacturers of integrated cabin management
systems.
Hearing:
NCT Hearing designs, develops and markets ANR headset products to the
communications headset market and the telephony headset market. The products
consist of the NoiseBuster(R) product line and the ProActive(R) product line.
The NoiseBuster(R) products consist of the NoiseBuster Extreme!(TM), a consumer
headset, the NB-PCU, a headset used for in-flight passenger entertainment
systems and communications headsets for cellular, multimedia and telephony. The
ProActive(R) products consist of noise reduction headsets and communications
headsets for noisy industrial environments. The majority of Hearing's sales are
in North America. Principal customers consist of end-users, retail stores, OEMs
and the airline industry.
<PAGE>
Communications:
The communications division of the Company focuses on the telecommunications
market and in particular the hands-free market. The communications technology
includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression. ClearSpeech(R)-Acoustic Echo Cancellation removes
acoustic echoes in hands-free full-duplex communication systems. Applications
for this technology are cellular telephony, audio and video teleconferencing,
computer telephony and gaming, and voice recognition. ClearSpeech(R)-Compression
maximizes bandwidth efficiency in wireless, satellite and intra- and internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. Applications for this technology are intranet and internet
telephony, audio and video conferencing, PC voice and music, telephone answering
devices, real-time multimedia multitasking, toys and games, and playback
devices. The communications products include the ClearSpeech(R)-Microphone and
the ClearSpeech(R)-Speaker. The majority of Communications' sales are in North
America. Principal markets for Communications are the telecommunications
industries and principal customers are OEM's, system integrators and end-users.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
Company. NCT Europe provides research and engineering to Audio, Hearing and
Communications as needed. NCT Europe also provides a marketing and sales support
service to the Company for European sales.
Advancel Logic Corp.:
Advancel is a participant in the native Java embedded microprocessor market.
The purpose of the Java(TM) platform is to simplify application development by
providing a platform for the same software to run on many different kinds of
computers and other smart devices. Advancel has been developing a family of
processor cores, which will execute instructions written in both Java bytecode
and C (and C++) significantly enhancing the rate of instruction execution, which
opens up many new applications. The potential for applications consists of the
next generation home appliances and automotive applications, manufacturers of
smartcard processors, hearing aids and mobile communications devices.
Other:
The Net Sales - Other Operating Segments primarily consists of intercompany
sales and eliminated in consolidation. Segment assets consists primarily of
corporate assets. Operating Loss primarily includes corporate charges.
<PAGE>
15.Geographical Information (by country of origin) - Total Segments:
(in thousands of dollars)
December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
Revenues
United States $2,674 $2,089 $3,209
Europe 480 3,270 71
Far East 10 359 44
------------ ------------ ------------
Total $3,164 $5,718 $3,324
============ ============ ============
Net (Income) Loss
United States $9,752 $9,211 $13,728
Europe 912 411 12
Far East 161 226 443
------------ ------------ ------------
Total $10,825 $9,848 $14,183
============ ============ ============
Identifiable Assets
United States $5,366 $17,060 $15,166
Europe 515 301 218
Far East - - 81
------------ ------------ ------------
Total $5,881 $17,361 $15,465
============ ============ ============
16. Subsequent Events:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. A secured convertible note (the "Note"), for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in the Wall Street Journal from the issue date until the Note becomes
due and payable. The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time, all or from time to time,
any part of the outstanding and unpaid amount of the Note, into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price shall be the lesser of (i) the average of the closing bid
prices for the common stock on the securities market on which the common stock
is being traded, for five (5) consecutive trading days prior to the date of
conversion or (ii) the fixed conversion price of $0.237. In no event will the
conversion price be less than $0.15 per share. The Holder shall purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999.
On February 9, 1999 NCT Audio and NXT expanded the Cross License Agreement
dated September 27, 1997 to increase NXT's fields of use to include aftermarket
ground-based vehicles and aircraft sound systems and increased the royalties due
NCT Audio from NXT to 10% from 6% and increased the royalties due NXT from NCT
Audio to 7% from 6%. In consideration for granting NXT these expanded licensing
rights, NCT Audio received a $0.5 million license fee. Also on February 9, 1999,
NCT Audio and NXT amended the Master License Agreement to include a minimum
royalty payment of $160,000 in 1999, to be paid in equal quarterly installments.
<PAGE>
SIGNATURES
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.
NCT GROUP, INC.
(formerly known as
Noise Cancellation Technologies, Inc.)
By: /s/ MICHAEL J. PARRELLA Date: March 31, 1999
-----------------------
Michael J. Parrella, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
-------------------------------------------------------------------------
/s/ MICHAEL J. PARRELLA President, Chief March 31, 1999
------------------------- Executive Officer
Michael J. Parrella and Director
(Principal Executive
Officer)
/s/ CY E. HAMMOND Senior Vice President March 31, 1999
------------------------- and Chief Financial
Cy E. Hammond Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Chairman of the Board March 31, 1999
------------------------- of Directors and
Jay M. Haft Director
/s/ JOHN J. McCLOY II Director March 31, 1999
-------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director March 31, 1999
-------------------------
Samuel A. Oolie
/s/ STEPHAN CARLQUIST Director March 31, 1999
-------------------------
Stephan Carlquist
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE II
Board of Directors and Stockholders of
NCT Group, Inc.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements of NCT Group, Inc. (formerly Noise
Cancellation Technologies, Inc.) as of December 31, 1997 and 1998 and for each
of the years in the three-year period ended December 31, 1998 taken as a whole.
The information included on Schedule II is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole. Also, such schedule presents
fairly the information set forth therein in compliance with the applicable
accounting regulations of the Securities and Exchange Commission.
Richard A. Eisner & Company, LLP
New York, New York
March 11, 1999
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of
dollars)
- ------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------
(1) (2)
Balance Changed Charged
at in to Balance
beginning costs other Deductions- at end
Description of and accounts- Deductions- of
period expenses describe describe period
- ------------------------- -------- -------- --------- -------- --------
Year ended December 31,
1996:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful $119 $192 $(188) (2) $ - $123
accounts
======== ======== ========= ======== ========
Year ended December 31,
1997:
Allowance for doubtful $123 $130 $ (65) (2) $150 (3) $ 38
accounts
======== ======== ========= ======== ========
Year ended December 31,
1998:
Allowance for doubtful $ 38 $232 $ (42) (2) $ - $228
accounts
======== ======== ========= ======== ========
Year ended December 31,
1996:
Allowance for inventory $355 $ - $ (93) (1) $ - $262
obsolence
======== ======== ========= ======== ========
Year ended December 31,
1997:
Allowance for inventory $262 $210 $ - $ - $472
obsolence
======== ======== ========= ======== ========
Year ended December 31,
1998:
Allowance for inventory $472 $365 $(329) (1) $ - $508
obsolence
======== ======== ========= ======== ========
</TABLE>
Attention is directed to the foregoing accountants' reports and to the
accompanying Notes to Financial Statements.
(1) To write off reserves applied to prior year-end inventory.
(2) To write off fully reserved accounts receivable deemed uncollectible.
(3) To reduce reserve for accounts collected.
Exhibit 3(c)
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
NOISE CANCELLATION TECHNOLOGIES,INC.
NOISE CANCELLATION TECHNOLOGIES, INC., a Delaware corporation (the
"Corporation") hereby certifies as follows:
......FIRST: That the Board of Directors of the Corporation, at a meeting of
such Board held on June 11, 1998, adopted a resolution proposing and declaring
advisable the following amendment to the Restated Certificate of Incorporation
of the Corporation, and declaring that such proposed amendment be submitted for
consideration by the stockholders of the Corporation entitled to vote in respect
thereof. The resolution setting forth the proposed amendment is as follows:
...... "RESOLVED, that paragraph (a) of Article IV of the Restated
Certificate of Incorporation of the Corporation, be amended to read as
follows:
...... `(a) Authorized Shares. The total number of shares of stock
which the Corporation shall have authority to issue is 265,000,000 which
shall consist of 255,000,000 shares, $0.01 par value, designated as Common
Stock and 10,000,000 shares, $.10 par value, designated as Preferred Stock.'"
......SECOND: Paragraph (a) of Article IV of the Restated Certificate of
Incorporation, relating to the capitalization of the Corporation, is hereby
deleted and amended to read in its entirety as follows:
...... "(a) Authorized Shares. The total number of shares of stock
which the Corporation shall have authority to issue is 265,000,000 which
shall consist of 255,000,000 shares, $.01 par value, designated as Common
Stock and 10,000,000 shares, $.10 par value, designated as Preferred Stock."
......THIRD: That the Board of Directors of the Corporation, at a meeting of
such Board held on June 22, 1998, adopted a resolution proposing and declaring
advisable the following amendment to the Restated Certificate of Incorporation
of the Corporation, and declaring that such proposed amendment be submitted for
consideration by the stockholders of the Corporation entitled to vote in respect
thereof. The resolution setting forth the proposed amendment is as follows:
...... "RESOLVED that Article I of the Restated Certificate of
Incorporation of the Corporation be amended to read as follows:
...... `Article I
...... The name of the Corporation (hereinafter referred to as the
`Corporation') is `NCT Group, Inc.'"
......FOURTH: Article I of the Restated Certificate of Incorporation, relating
to the name of the Corporation, is hereby deleted and amended to read in its
entirety as follows:
...... "Article I
...... The name of the Corporation (hereinafter referred to as the
`Corporation') is `NCT Group, Inc.'"
......FIFTH: The two amendments effected herein have been approved by the
holders of at least a majority of all the outstanding shares of the Corporation
entitled to vote thereon at the Annual Meeting of Stockholders of the
Corporation held on October 20, 1998.
......SIXTH: The two amendments effected herein were duly adopted in accordance
with the applicable provisions of Section 242 of the General Corporation Law of
the State of Delaware.
......IN WITNESS WHEREOF, Noise Cancellation Technologies, Inc. has caused
this Certificate of Amendment to be signed by Michael J. Parrella, its
President, and attested to by John B. Horton, its Secretary, this 20th day of
October, 1998.
......ATTEST: Noise Cancellation Technologies, Inc.
By:.../s/ JOHN B. HORTON By: /s/ MICHAEL J. PARRELLA
------------------ -----------------------
John B. Horton, Secretary Michael J. Parrella, President
Exhibit 3(g)
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS
OF
SERIES E CONVERTIBLE PREFERRED STOCK
OF
NCT GROUP, INC.
NCT Group, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY
That, pursuant to authority conferred upon the Board of Directors of the
Corporation by the Restated Certificate of Incorporation of the Corporation, and
pursuant to the provisions of Section 151 of Title 8 of the Delaware Code of
1953, as amended, said Board of Directors at a meeting duly held on December 4,
1998, adopted a resolution providing for the issuance of a total of ten thousand
five hundred eighty (10,580) shares of Series E Convertible Preferred Stock, and
providing for the powers, designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the provisions of
Article IV of the Restated Certificate of Incorporation of the
Corporation, this Board of Directors hereby creates a series of the
Preferred Stock of the Corporation with par value of $0.10 per share (the
"Preferred Stock") to consist of ten thousand five hundred eighty (10,580)
shares of the 10,000,000 authorized shares of Preferred Stock, which the
Corporation now has authority to issue, and this Board of Directors hereby
fixes the powers, designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof of the shares of such series (in addition to the
powers, designations, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions
thereof, set forth in Article IV of the Certificate of Incorporation not
inconsistent with the terms of this resolution and which are applicable to
the Preferred Stock) as follows:
(1) Designation. The designation of said series of Preferred Stock
created by this Resolution shall be Series E Convertible Preferred Stock.
Shares of said Series E Convertible Preferred Stock are herein referred to
as "Series E Preferred Shares."
(2) Par Value, Stated Value and Accretion Rate. Each Share of Series
E Convertible Preferred Stock shall have a par value of $0.10, and a
stated value (face amount) of One Thousand Dollars ($1,000.00) (the
"Stated Value"), with an accretion rate of four percent (4%) per annum on
the Stated Value for the purposes and on the terms set forth herein.
<PAGE>
(3) Dividends. The Series E Preferred Shares shall not bear any
dividends.
(4) Holder's Conversion of Series E Preferred Shares. A holder of
Series E Preferred Shares shall have the right, at such holder's option, to
convert the Series E Preferred Shares into shares of the Corporation's common
stock, $.01 par value per share (the "Common Stock"), on the following terms and
conditions:
(a) Conversion Right. Subject to the provisions of Sections
4(g) and 5(a) below, at any time or times on or after the earlier of
(i) 90 days after the Issuance Date (as defined herein), (ii) 5 days
after receiving a "no-review" status from the U.S. Securities and
Exchange Commission in connection with a registration statement
("Registration Statement") covering the resale of Common Stock
issued upon conversion of the Series E Preferred Shares and required
to be filed by the Corporation pursuant to the Registration Rights
Agreement between the Corporation and its initial holders of Series
E Preferred Shares (the "Registration Rights Agreement"), (iii) the
date that the Registration Statement is declared effective (the
"Registration Statement Effective Date") by the U.S. Securities and
Exchange Commission (the "SEC") any holder of Series E Preferred
Shares shall be entitled to convert any Series E Preferred Shares
into fully paid and nonassessable shares (rounded to the nearest
whole share in accordance with Section 4(h) below) of Common Stock,
at the Conversion Rate (as defined below); provided, however, that
in no event other than upon a Mandatory Conversion pursuant to
Section 4(g) hereof, or upon a Triggering Event pursuant to Section
6(e) hereof, shall any holder be entitled to convert Series E
Preferred Shares in excess of that number of Series E Preferred
Shares which, upon giving effect to such conversion, would cause the
aggregate number of shares of Common Stock beneficially owned by the
holder and its affiliates to exceed 4.9% of the outstanding shares
of the Common Stock following such conversion. For purposes of the
foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of the
Series E Preferred Shares with respect to which the determination of
such proviso is being made, but shall exclude the number of shares
of Common Stock which would be issuable upon (i) conversion of the
remaining, nonconverted Series E Preferred Shares beneficially owned
by the holder and its affiliates beneficially owned by the holder
and its affiliates. Except as set forth in the preceding sentence,
for purposes of this paragraph, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended.
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each of the Series E Preferred Shares
pursuant to Section 4(a) shall be determined according to the
following formula
(the "Conversion Rate")
(.04)(N/365)(1,000) +1,000
Conversion Price
;provided that the Corporation shall have the option to pay the 4%
accretion accruing on each Series E Preferred Share in either cash
or Common Stock of the Corporation. Notwithstanding anything
contained herein to the contrary, the Corporation shall not be
required to issue in excess of 30,000,000 Shares of Common Stock
upon conversion of Series E Preferred Shares or such lesser amount
as determined on a pro-rata basis based upon the number of Series E
Preferred Shares issued (the "Maximum Share Issuance Amounts").
For purposes of this Certificate of Designations, the following
terms shall have the following meanings:
(i) "Conversion Price" means, as of any date of
determination, the amount obtained by multiplying the
Conversion Percentage in effect as of such date by the Average
Market Price for the Common Stock for the five (5) consecutive
trading days immediately preceding such date;
(ii) "Conversion Percentage" means 80% and shall be
reduced by an additional 2% for every 30 days (pro-rated for
partial months) beyond 60 days from the Issuance Date that the
Registration Statement is not filed by the Corporation (in the
case that the Corporation files such Registration Statement on
Form SB-2 or Form S-3) (the "Scheduled S-3/SB-2 Filing Date")
or (ii) ninety (90) days from the Issuance Date that the
Registration Statement is not filed by the Corporation (in the
case that the Corporation files such Registration Statement on
Form S-1) (the "Scheduled S-2 Filing Date");
(iii) "Average Market Price" means, with respect to any
security for any period, that price which shall be computed as
the arithmetic average of the Closing Bid Prices (as defined
below) for such security for each trading day in such period;
(iv) "Closing Bid Price" means, for any security as of
any date, the last closing bid price on the Nasdaq National
Market System (the "Nasdaq-NM") as reported by Bloomberg
Financial Markets ("Bloomberg"), or, if the Nasdaq-NM is not
the principal trading market for such security, the last
closing bid price of such security on the principal securities
exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price of such security in the
over-the-counter market on the pink sheets or bulletin board
for such security as reported by Bloomberg, or, if no closing
bid price is reported for such security by Bloomberg, the last
closing trade price of such security as reported by Bloomberg.
If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the
fair market value as reasonably determined in good faith by
the Board of Directors of the Company (all as appropriately
adjusted for any stock dividend, stock split or other similar
transaction during such period);
<PAGE>
(v) "N" means the number of days from, but excluding,
the Issuance Date through and including the Conversion Date
for the Series E Preferred Shares for which conversion is
being elected;
(vi) "Issuance Date" means the date of issuance of
Series E Preferred Shares having an aggregate stated value of
$7,438,000; and
(c) Adjustment to Conversion Price - Registration Statement.
If the Registration Statement is not declared effective by the SEC
on or before the one hundred twentieth (120th) day following the
S-3/SB-2 Scheduled Filing Date or the S-1 Scheduled Filing Date, as
the case may be, (the "Scheduled Effective Date"), or if after the
Registration Statement has been declared effective by the SEC, sales
cannot be made pursuant to the Registration Statement (whether
because of a failure to keep the registration Statement effective,
to disclose such information as is necessary for sales to be made
pursuant to the Registration Statement, to register sufficient
shares of Common Stock or otherwise), then, as partial relief for
the damages to any holder by reason of any such delay in or
reduction of its ability to sell the underlying shares of Common
Stock (which remedy shall not be exclusive of any other remedies at
law or in equity), the Conversion Percentage shall be adjusted as
follows:
(i) Conversion Percentage. The Conversion Percentage in
effect, during the period that sales cannot be made pursuant
to the Registration Statement, shall be reduced by a number of
percentage points equal to the product of (A) two (2) and (B)
the sum of (I) the number of months (prorated for partial
months) after the Scheduled Effective Date and prior to the
date that the relevant Registration Statement is declared
effective by the SEC and (II) the number of months (prorated
for partial months) that sales cannot be made pursuant to the
Registration Statement after the Registration Statement has
been declared effective. (For example, if the Registration
Statement becomes effective one and one-half (1 1/2) months
after the Scheduled Effective Date, the Conversion Percentage
with respect to the Series E Preferred Shares would decrease
by three percent (3.0% to 77.0%) until any subsequent
adjustment; if thereafter sales could not be made pursuant to
the Registration Statement for a period of two (2) additional
months, the Conversion Percentage with respect to the Series E
Preferred Shares would decrease by an additional four percent
(4%), for an aggregate decrease of seven percent (7.0% to
73.0%).
(d) Adjustment to Conversion Price - Dilution and Other
Events. In order to prevent dilution of the rights granted under
this Certificate of Designations, the Conversion Price will be
subject to adjustment from time to time as provided in this Section
4(d).
(i) Reorganization, Reclassification, Consolidation,
Merger, or Sale. Any recapitalization, reorganization
reclassification, consolidation. merger, sale of all or
substantially all of the Corporation's assets to another
Person (as defined below) or other similar transaction which
is effected in such a way that holders of Common Stock are
entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as an "Organic
Change." Prior to the consummation of any Organic Change, the
Corporation will make appropriate provision (in form and
substance reasonably satisfactory to the holders of a majority
of the Series E Preferred Shares then outstanding) to insure
that each of the holders of the Series E Preferred Shares will
thereafter have the right to acquire and receive in lieu of or
in addition to (as the case may be) the shares of Common Stock
immediately theretofore acquirable and receivable upon the
conversion of such holder's Series E Preferred Shares, such
shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for the number of
shares of Common Stock immediately theretofore acquirable and
receivable upon the conversion of such holder's Series E
Preferred Shares had such Organic Change not taken place. In
any such case, the Corporation will make appropriate provision
(in form and substance reasonably satisfactory to the holders
of a majority of the Series E Preferred Shares then
outstanding) with respect to such holders' rights and
interests to insure that the provisions of this Section 4(d)
and Section 4(e) below will thereafter be applicable to the
Series E Preferred Shares. The Corporation will not effect any
such consolidation, merger or sale, unless prior to the
consummation thereof the successor entity (if other than the
Corporation) resulting from consolidation or merger or the
entity purchasing such assets assumes, by written instrument
(in form and substance reasonably satisfactory to the holders
of a majority of the Series E Preferred Shares then
outstanding), the obligation to deliver to each holder of
Series E Preferred Shares such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such
holder may be entitled to acquire. For purposes of this
Agreement, "Person" shall mean an individual, a limited
liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
(ii) Notices.
(A) Immediately upon any adjustment of the
Conversion Price, the Corporation will give written
notice thereof to each holder of Series E Preferred
Shares, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(B) The Corporation will give written notice to
each holder of Series E Preferred Shares at least twenty
(20) days prior to the date on which the Corporation
closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II)
with respect to any pro rata subscription offer to
holders of Common Stock or (III) for determining rights
to vote with respect to any Organic Change, dissolution
or liquidation.
(C) The Corporation will also give written notice
to each holder of Series E Preferred Shares at least
twenty (20) days prior to the date on which any Organic
Change, Major Transaction (as defined below),
dissolution or liquidation will take place.
(e) Purchase Rights. If at any time the Corporation grants,
issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to
all the record holders of any class of Common Stock (the "Purchase
Rights"), then the holders of Series E Preferred Shares will be
entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common
Stock acquirable upon complete conversion of the Series E Preferred
Shares immediately before the date on which a record is taken for
the grant issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such
Purchase Rights.
(f) Mechanics of Conversion. Subject to the Corporation's
inability to fully satisfy its obligations under a Conversion Notice
(as defined below) as provided for in Section 7 below:
<PAGE>
(i) Holder's Delivery Requirements. To convert Series E
Preferred Shares into full shares of Common Stock on any date
(the "Conversion Date"), the holder thereof shall (A) deliver
or transmit by facsimile, for receipt on or prior to 11:59
p.m., Eastern Standard Time, on such date, a copy of a fully
executed notice of conversion in the form attached hereto as
Exhibit I (the "Conversion Notice") to the Corporation or its
designated transfer agent (the "Transfer Agent"), and (B)
surrender to a common carrier for delivery to the Corporation
or the Transfer Agent as soon as practicable following such
certificates, the original certificates representing the
Series E Preferred Shares being converted (or an
indemnification undertaking with respect to such certificates
in the case of their loss, theft or destruction) (the
"Preferred Stock Certificates") and the originally executed
Conversion Notice.
(ii) Corporation's Response. Upon receipt by the
Corporation of a facsimile copy of a Conversion Notice, the
Corporation shall immediately send, via facsimile, a
confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Corporation or the Transfer Agent
of the Preferred Stock Certificates to be converted pursuant
to a Conversion Notice, together with the originally executed
Conversion Notice, the Corporation or the Transfer Agent (as
applicable) shall, within five (5) business days following the
date of receipt, issue and surrender to a common carrier for
overnight delivery to the address as specified in the
Conversion Notice, a certificate, registered in the name of
the holder or its designee, for the number of shares of Common
Stock to which the holder shall be entitled.
(iii) Dispute Resolution. In the case of a dispute as to
the determination of the Average Market Price or the
arithmetic calculation of the Conversion Rate, the Corporation
shall promptly issue to the holder the number of shares of
Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the
holder via facsimile within three (3) business days of receipt
of such holder's Conversion Notice. If such holder and the
Corporation are unable to agree upon the determination of the
Average Market Price or arithmetic calculation of the
Conversion Rate within two (2) business days of such disputed
determination or arithmetic calculation being submitted to the
holder, then the Corporation shall within one (1) business day
submit via facsimile (A) the disputed determination of the
Average Market Price to an independent, reputable investment
bank or (B) the disputed arithmetic calculation of the
Conversion Rate to its independent, outside accountant. The
Corporation shall cause the investment bank or the accountant,
as the case may be, to perform the determinations or
calculations and notify the Corporation and the holder of the
results no later than forty-eight (48) hours from the time it
receives the disputed determinations or calculations. Such
investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all
parties absent manifest error.
<PAGE>
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion
of Series E Preferred Shares shall be treated for all purposes
as the record holder or holders of such shares of Common Stock
on the Conversion Date.
(v) Corporation's Failure to Timely Convert. If the
Corporation shall fail to issue to a holder within seven (7)
business days following the date of receipt by the Corporation
or the Transfer Agent of the Preferred Stock Certificates to
be converted pursuant to a Conversion Notice, a certificate
for the number of shares of Common Stock to which such holder
is entitled upon such holder's conversion of Series E
Preferred Shares, in addition to all other available remedies
which such holder may pursue hereunder and under the
Securities Purchase Agreement between the Corporation and the
initial holders of the Series E Preferred Shares (the
"Securities Purchase Agreement") (including indemnification
pursuant to Section 8 thereof), the Corporation shall pay
additional damages to such holder on each day after the
seventh (7th) business day following the date of receipt by
the Corporation or the Transfer Agent of the Preferred Stock
Certificates to be converted pursuant to the Conversion
Notice, for which such conversion is not timely effected, an
amount equal to 1.0% of the product of (A) the number of
shares of Common Stock not issued to the holder and to which
such holder is entitled and (B) the Closing Bid Price of the
Common Stock on the business day following the date of receipt
by the Corporation or the Transfer Agent of the Preferred
Stock Certificates to be converted pursuant to the Conversion
Notice.
(g) Mandatory Conversion. If any Series E Preferred Shares
remain outstanding on December 30, 2000, then all such Series E
Preferred Shares shall be converted as of such date in accordance
with this Section 4 as if the holders of such Series E Preferred
Shares had given the Conversion Notice on December 30, 2000, and the
Conversion Date had been fixed as of December 30, 2000, for all
purposes of this Section 4, and all holders of Series E Preferred
Shares shall thereupon and with two (2) business days thereafter
surrender all Preferred Stock Certificates, duly endorsed for
cancellation, to the Corporation or the Transfer Agent. No person
shall thereafter have any rights in respect of Series E Preferred
Shares, except the right to receive shares of Common Stock on
conversion thereof as provided in this Section 4.
<PAGE>
(h) Fractional Shares. The Corporation shall not issue any
fraction of a share of Common Stock upon any conversion. All shares
of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of the Series E Preferred Shares
by a holder thereof shall be aggregated for purposes of determining
whether the conversion would result in the issuance of a fraction of
a share of Common Stock. lf, after the aforementioned aggregation,
the issuance would result in the issuance of a fraction of a share
of Common Stock, the Corporation shall round such fraction of a
share of Common Stock up or down to the nearest whole share.
(i) Taxes. The Corporation shall pay any and all taxes which
may be imposed upon it with respect to the issuance and delivery of
Common Stock upon the conversion of the Series E Preferred Shares.
(j) Conversion Restriction. The right of a holder of Serie E
Preferred Shares to convert Serie E Preferred Shares pursuant to
this Section 4 shall be subject to the following limitations (which
shall be applied independently):
(i) Prior to the earlier of (i) the 90th day following
the Issuance Date or (ii) the Registration Statement Effective
Date (such earlier period shall be hereinafter referred to as
the "Initial Conversion Date"), holders of Series E Preferred
Shares shall not be entitled to convert any Series E Preferred
Shares;
(ii) During the period beginning on the Initial
Conversion Date and ending on the 30th day following the
Initial Conversion Date, each Buyer and all of their
respective successors shall be entitled to convert no more
than 25% of the number of Series E Preferred Shares purchased
by such Buyer;
(iii) During the period beginning on the Initial
Conversion Date and ending on the 60th day following the
Initial Conversion Date, each Buyer and all of their
respective successors shall be entitled to convert no more
than 50% of the number of Series E Preferred Shares purchased
by such Buyer;
(iv) During the period beginning on the Initial
Conversion Date and ending on the 90th day following the
Initial Conversion Date, each Buyer and all of their
respective successors shall be entitled to convert no more
than 75% of the number of Series E Preferred Shares purchased
by such Buyer;
(v) After the 90th day following the Initial Conversion
Date, each holder of the Series E Preferred Shares shall be
entitled to convert any and all of the Series E Preferred
Shares then held by such person.
<PAGE>
Provided however, notwithstanding the foregoing, any holder of
Series E Preferred Shares shall be immediately entitled to convert
all of such holder's Series E Preferred Shares into shares of Common
Stock pursuant to this Section 4 upon (i) the occurrence of any
Triggering Event, (ii) any public announcement by the Corporation
stating that the Corporation intends to consummate, or is the
subject of, a Major Transaction, (iii) execution of a definitive
agreement by the Corporation with respect to a Major Transaction,
(iv) the consummation of a Major Transaction, or (v) if the Closing
Price of the Common Stock as reported by NASDAQ or on another
securities exchange or market on which the Common Stock is listed
for the previous five (5) trading days is greater than $1.25. A
"Major Transaction" shall be deemed to have occurred upon the
occurrence of any of the following events:
(i) the consummation of any merger, reorganization,
restructuring, consolidation, or similar transaction by or
involving the Corporation except (A) a merger or consolidation
where the Corporation is a survivor or (B) pursuant to a
migratory merger effected solely for the purpose of changing
the jurisdiction of incorporation of the Corporation;
(ii) the sale of all or substantially all of the assets
of the Corporation or all of its material subsidiaries or any
similar transaction or related transactions which effectively
results in a sale of all or substantially all of the assets of
the Corporation and/or its subsidiaries; or
(iii) the occurrence, after the date hereof, of the
acquisition, by any person (including any entity or
association) or persons (other than any existing stockholder
of the Corporation or two or more existing stockholders of the
Corporation acting in concert), of securities of the
Corporation (or the power to vote such securities)
representing 50% or more of the total voting power of all
outstanding Common Stock or other voting securities of the
Corporation.
(k) Mandatory Redemption by the Corporation in the Event that
the Maximum Share Issuance is Reached.
(i) Notice of Maximum Share Issuance Event. In the event
that the number of shares of Common Stock issuable upon
conversion of the Series E Preferred Shares exceeds the
Maximum Share Issuance Amount (the "Maximum Share Issuance
Triggering Event"), the Corporation shall be required to
immediately notify all of the Holders of such fact via
facsimile and overnight courier (the "Maximum Share Issuance
Notice") and shall be obligated to redeem all of the remaining
Series E Preferred Shares then outstanding at a price per
Series E Preferred Share equal to 125% of the Liquidation
Value of such share plus the unpaid 4% per annum accretion
rate.
<PAGE>
(ii) Payment of Redemption Price. Following receipt of
such Maximum Share Issuance Notice, each holder of Series E
Preferred Shares shall thereafter promptly send such holder's
Series E Preferred Share certificates to be redeemed to the
Corporation or its Transfer Agent. The Corporation shall pay
the applicable redemption price, as calculated pursuant to
Section 4(k)(i) above, in cash to such holder within fifteen
(15) days after the Maximum share Issuance Triggering Event;
provided that a holder's Series E Preferred Shares
certificates shall have been so delivered to the Corporation
or its Transfer Agent; provided, further, that if the
Corporation is unable to redeem all of the Series E Preferred
Shares, the Corporation shall redeem an amount from each
holder of Series E Preferred Shares equal to such holder's
pro-rata amount (based on the number of Series E Preferred
Shares held by such holder relative to the number of Series E
Preferred Shares outstanding) of all Series E Preferred Shares
being redeemed. If the Corporation shall fail to redeem all of
the Series E Preferred Shares submitted for redemption (other
than pursuant to an arithmetic calculation of the rate of
redemption), the applicable redemption price payable in
respect of such unredeemed Series E Preferred Shares shall
bear interest at the rate of 1% from the first month and a
rate of 2.5% per month thereafter (prorated for partial
months) until paid in full.
(5) Corporation's Right to Redeem at its Election.
(a) At any time, as long as the Corporation has not received a
notice of Conversion from the holder and has not breached any of the
representations, warranties, and covenants contained herein or in
any related agreements, the Corporation shall have the right, in its
sole discretion, to redeem ("Redemption at Corporation's Election"),
from time to time, any or all of the Series E Preferred Shares;
provided (i) the Corporation shall first provide no more than five
(5) days and no less than (1) day advance written notice as provided
in subparagraph 5(a)(ii) below (which can be given any time on or
after 80 days after the Issuance Date, and (ii) that the Corporation
shall only be entitled to redeem Series E Preferred Shares having an
aggregate Stated Value (as defined above) of at least Five Hundred
Thousand Dollars ($500,000). If the Corporation elects to redeem
some, but not all, of the Series E Preferred Shares, the Corporation
shall redeem a pro-rata amount from each Holder of the Series E
Preferred Shares.
(i) Redemption Price At Corporation's Election. The
"Redemption Price at Corporation's Election" shall be
calculated as 125% of Stated Value, plus the unpaid 4% per
annum accretion of the Series E Preferred Shares being
redeemed pursuant to this Section 5(a).
<PAGE>
(ii) Mechanics of Redemption at Corporation's Election.
The Corporation shall effect each such redemption by giving no
more than five (5) days and no less than one (1) day prior
written notice ("Notice of Redemption at Corporation's
Election") to (A) the Holders of the Series E Preferred Shares
selected for redemption at the address and facsimile number of
such Holder appearing in the Corporation's Series E Preferred
Stock register and (B) the Transfer Agent, which Notice of
Redemption At Corporation's Election shall be deemed to have
been delivered three (3) business days after the Corporation's
mailing (by overnight or two (2) day courier, with a copy by
facsimile) of such Notice of Redemption at Corporation's
Election. Such Notice of Redemption At Corporation's Election
shall indicate (i) the number of shares of Series E Preferred
Stock that have been selected for redemption, (ii) the date
which such redemption is to become effective (the "Date of
Redemption At Corporation's Election") and (iii) the
applicable Redemption Price At Corporation's Election, as
defined in subsection (a)(i) above. Notwithstanding the above,
Holder may convert into Common Stock, prior to the close of
business on the Date of Redemption at Corporation's Election,
any Series E Preferred Shares which it is otherwise entitled
to convert, including Series E Preferred Shares that have been
selected for redemption at Corporation's election pursuant to
this subsection 5(a).
(b) Corporation Must Have Immediately Available Funds or
Credit Facilities. The Corporation shall not be entitled to send any
Redemption Notice and begin the redemption procedure under Sections
5(a) unless it has:
(i) the full amount of the redemption price in cash,
available in a demand or other immediately available account
in a bank or similar financial institution; or
(ii) immediately available credit facilities, in the
full amount of the redemption price with a bank or similar
financial institution, or
(iii) an agreement with a standby underwriter willing to
purchase from the Corporation a sufficient number of shares of
stock to provide proceeds necessary to redeem any stock that
is not converted prior to redemptions; or
(iv) a combination of the items set forth in (i), (ii),
and (iii) above, aggregating the full amount of the redemption
price.
(c) Payment of Redemption Price. Each Holder submitting Series
E Preferred Shares being redeemed under this Section 5 shall send
their Series E Preferred Share Certificates to be redeemed to the
Corporation or its Transfer Agent, and the Corporation shall pay the
applicable redemption price to that Holder within five (5) business
days of the Date of Redemption at Corporation's Election.
<PAGE>
(6) Redemption at Option of Holders.
(a) [LEFT INTENTIONALLY BLANK]
(b) Redemption Option Upon Triggering Event. In addition to
all other rights of the holders of Series E Preferred Shares
contained herein, after a Triggering Event (as defined below), the
holders of Series E Preferred Shares shall have the right in
accordance with Section 6(g), at the option of the holders of at
least two-thirds (2/3) of the Series E Preferred Shares then
outstanding, to require the Corporation to redeem all of the Series
E Preferred Shares then outstanding at a price per Series E
Preferred Share equal to the greater of (i) 125% of the Liquidation
Value of such Share and (ii) the price calculated in accordance with
the Redemption Rate as of the date immediately preceding such
Triggering Event on which the exchange or market on which the Common
Stock is traded is open.
(c) "Redemption Rate." The "Redemption Rate" shall, as of any
date of determination, be equal to (i) the Conversion Rate in effect
as of such date as calculated pursuant to Section 4(b) multiplied by
(ii) the Closing Bid Price of the Common Stock on such date.
(d) [LEFT INTENTIONALLY BLANK]
(e) "Triggering Event." A "Triggering Event" shall be deemed
to have occurred at such time as any of the following events:
(i) [LEFT INTENTIONALLY BLANK]
(ii) [LEFT INTENTIONALLY BLANK]
(iii) the Corporation's notice to any holder of Series E
Preferred Shares, including by way of public announcement, at
any time, of its intention for any reason not to comply with
requests for conversion of any Series E Preferred Shares for
shares of Common Stock;
<PAGE>
(iv) if for any reason the Corporation breaches any
material representation or fails to perform or observe any
covenant, agreement, or other provision contained herein or in
the Securities Purchase Agreement or the Registration Rights
Agreement, and such failure is not cured within 30 days after
the Corporation receives notice thereof from holders of at
least 10% of the Series E Preferred Shares then outstanding
("Notice of Triggering Event"), of the occurrence thereof, and
such failure has had, or could reasonably be expected to have,
a material adverse effect on (A) the financial condition,
operating results, business, properties, or operations of the
Corporation and its subsidiaries taken as a whole taking into
account any proceeds reasonably expected to be received by the
Corporation or its subsidiaries in the foreseeable future from
insurance policies or rights of indemnification or (B) the
Series E Preferred Shares;
(f) [LEFT INTENTIONALLY BLANK]
(g) Mechanics of Redemption at Option of Holder Upon
Triggering Event. Within one (1) day after receipt of a Notice of
Triggering Event, the Corporation shall deliver written notice
thereof via facsimile and overnight courier to each holder of Series
E Preferred Shares. At any time after receipt of a Notice of
Triggering Event, the holders of at least two-thirds (2/3) of the
Series E Preferred Shares then outstanding may require the
Corporation to redeem all of the Series E Preferred Shares then
outstanding in accordance with Section 6(b) by delivering written
notice thereof via facsimile and overnight courier ("Notice of
Redemption at Option of Buyer Upon Triggering Event") to the
Corporation, which Notice of Redemption at Option of Buyer Upon
Triggering Event shall indicate (i) the number of Series E Preferred
Shares that such holders are voting in favor of redemption and (ii)
the applicable redemption price, as calculated pursuant to Section
6(b) above.
<PAGE>
(h) Payment of Redemption Price. Upon the Corporation's
receipt of a Notice(s) of Redemption at Option of Holder Upon
Triggering Event from the holders of at least two-thirds (2/3) of
the Series E Preferred Share then outstanding, the Corporation shall
immediately notify each holder by facsimile of the Corporation's
receipt of such requisite notices necessary to affect a redemption
and each holder of Series E Preferred Shares shall thereafter
promptly send such holder's Series E Preferred Share certificates to
be redeemed to the Corporation or its Transfer Agent. The
Corporation shall pay the applicable redemption price, as calculated
pursuant to Section 6(b) above, in cash to such holder within thirty
(30) days after the Corporation' receipt of the requisite notices
required to affect a redemption; provided that a holder's Series E
Preferred Shares certificates shall have been so delivered to the
Corporation or its Transfer Agent; provided further that if the
Corporation is unable to redeem all of the Series E Preferred
Shares, the Corporation shall redeem an amount from each holder of
Series E Preferred Shares equal to such holder's pro-rata amount
(based on the number of Series E Preferred Shares held by such
holder relative to the number of Series E Preferred Shares
outstanding) of all Series E Preferred Shares being redeemed. If the
Corporation shall fail to redeem all of the Series E Preferred
Shares submitted for redemption (other than pursuant to a dispute as
to the determination of the Closing Bid Price or the arithmetic
calculation of the Redemption Rate), the applicable redemption price
payable in respect of such unredeemed Series E Preferred Shares
shall bear interest at the rate of 1% for the first month and a rate
of 2.5% per month thereafter (prorated for partial months) until
paid in full. Until the Corporation pays such unpaid applicable
redemption price in full to each holder, holders of at least
two-thirds (2/3) of the Series E Preferred Shares then outstanding,
including shares of Series E Preferred Shares submitted for
redemption pursuant to this Section 6 and for which the applicable
redemption price has not been paid, shall have the option (the "Void
Optional Redemption Option") to, in lieu of redemption, require the
Corporation to promptly return to each holder all of the Series E
Preferred Shares that were submitted for redemption by such holder
under this Section 6 and for which the applicable redemption price
has not been paid, by sending written notice thereof to the
Corporation via facsimile (the "Void Optional Redemption Notice").
Upon the Corporation's receipt of such Void Optional Redemption
Notice(s) and prior to payment of the full applicable redemption
price to each holder, (i) the Notice(s) of Redemption at Option of
Holder Upon Triggering Event shall be null and void with respect to
those Series E Preferred Shares submitted for redemption and for
which the applicable redemption price has not been paid, (ii) the
Corporation shall immediately return any Series E Preferred Share
certificates submitted to the Corporation by each holder for
redemption under this Section 6(h) and for which the applicable
redemption price had not been paid, (iii) the Conversion Percentage
in effect at such time and thereafter shall be reduced by a number
of percentage points equal to the product of (A) two and one-half
(2.5) and (B) the number of months (prorated for partial months) in
the period beginning on the date on which the Notice(s) of
Redemption at Option of Buyer Upon Triggering Event is delivered to
the Corporation and ending on the date on which the Void Optional
Redemption Notice(s) is delivered to the Corporation.
Notwithstanding the foregoing, in the event of a dispute as to the
determination of the Closing Bid Price or the arithmetic calculation
of the Redemption Rate, such dispute shall be resolved pursuant to
Section 4(f)(iii) above with the term "Closing Bid Price" being
substituted for the term "Average Market Price" and the term
"Redemption Rate" being substituted for the term "Conversion Rate."
<PAGE>
(7) Inability to Fully Convert.
(a) Holder's Option if Corporation Cannot Fully Convert. If at
any time after the Registration Statement Effective Date, upon the
Corporation's receipt of a Conversion Notice, the Corporation does
not issue shares of Common Stock which are registered for resale
under the Registration Statement within five (5) business days of
the time required in accordance with Section 4(f) hereof, for any
reason or for no reason, including, without limitation, because the
Corporation (x) does not have a sufficient number of shares of
Common Stock authorized and available, (y) is otherwise prohibited
by applicable law or by the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or its
Securities, including without limitation The Nasdaq Stock Market,
Inc. from issuing all of the Common Stock which is to be issued to a
holder of Series E Preferred Shares pursuant to a Conversion Notice
or (z) fails to have a sufficient number of shares of Common Stock
registered and eligible for resale under the Registration Statement,
then the Corporation shall issue as many shares of Common Stock as
it is able to issue in accordance with such holder's Conversion
Notice and pursuant to Section 4(f) above and, with respect to the
unconverted Series E Preferred Shares, the holder, solely at such
holder's option, can, in addition to any other remedies such holder
may have hereunder, under the Securities Purchase Agreement
(including indemnification under Section 8 thereof), under the
Registration Rights Agreement, at law or in equity, elect to:
(i) require the Corporation to redeem from such holder
those Series E Preferred Shares for which the Corporation is
unable to issue Common Stock in accordance with such holder's
Conversion Notice ("Mandatory Redemption") at a price per
Series E Preferred Share (the "Mandatory Redemption Price")
equal to the greater of (x) 125% of the Liquidation Value of
such share and (y) the Redemption Rate as of such Conversion
Date;
(ii) if the Corporation's inability to fully convert
Series E Preferred Shares is pursuant to Section 7(a)(z)
above, require the Corporation to issue restricted shares of
Common Stock in accordance with such holder's Conversion
Notice and pursuant to Section 4(f) above; or
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Series E
Preferred Shares that were to be converted pursuant to such
holder's Conversion Notice.
(b) Mechanics of Fulfilling Holder's Election. The Corporation
shall immediately send via facsimile to a holder of Series E
Preferred Shares, upon receipt of a facsimile copy of a Conversion
Notice from such holder which cannot be fully satisfied as described
in Section 7(a) above, a notice of the Corporation's inability to
fully satisfy such holder's Conversion Notice (the "Inability to
Fully Convert Notice"). Such Inability to Fully Convert Notice shall
indicate (i) the reason why the Corporation is unable to fully
satisfy such holder's Conversion Notice, (ii) the number of Series E
Preferred Shares which cannot be converted and (iii) the applicable
Mandatory Redemption Price. Such holder must within five (5)
business days of receipt of such Inability to Fully Convert Notice
deliver written notice via facsimile to the Corporation ("Notice in
Response to Inability to Convert") of its election pursuant to
Section 7(a) above.
<PAGE>
(c) Payment of Redemption Price. If such holder shall elect to
have its shares redeemed pursuant to Section 7(a) above, the
Corporation shall pay the Mandatory Redemption Price in cash to such
holder within thirty (30) days of the Corporation's receipt of the
holder's Notice in Response to Inability to Convert. If the
Corporation shall fail to pay the applicable Mandatory Redemption
Price to such holder on a timely basis as described in this Section
7(c) (other than pursuant to a dispute as to the determination of
the Closing Bid Price or the arithmetic calculation of the
Redemption Rate), such unpaid amount shall bear interest at the rate
of 1% for the first month and a rate of 2.5% per month thereafter
(prorated for partial months) until paid in full. Until the full
Mandatory Redemption Price is paid in full to such holder, such
holder may void the Mandatory Redemption with respect to those
Series E Preferred Shares for which the full Mandatory Redemption
Price has not been paid and receive back such Series E Preferred
Shares. Notwithstanding the foregoing, if the Corporation fails to
pay the applicable Mandatory Redemption Price within such thirty
(30) days time period due to a dispute as to the determination of
the Closing Bid Price or the arithmetic calculation of the
Redemption Rate, such dispute shall be resolved pursuant to Section
4(f)(iii) above with the term "Closing Bid Price" being substituted
for the term "Average Market Price" and the term, "Redemption Rate"
being substituted for the term "Conversion Rate."
(d) Pro-rata Conversion and Redemption. In the event the
Corporation receives a Conversion Notice from more than one holder
of Series E Preferred Shares on the same day and the Corporation can
convert and redeem some, but not all, of the Series E Preferred
Shares pursuant to this Section 7, the Corporation shall convert and
redeem from each holder of Series E Preferred Shares electing to
have Series E Preferred Shares converted and redeemed at such time
an amount equal to such holder's pro-rata amount (based on the
number of Series E Preferred Shares held by such holder relative to
the number of Series E Preferred Shares outstanding) of all Series E
Preferred Shares being converted and redeemed at such time.
(8) Reissuance of Certificates. In the event of a conversion or
redemption pursuant to this Certificate of Designations of less than all
of the Series E Preferred Shares represented by a particular Series E
Preferred Share certificate, the Corporation shall promptly cause to be
issued and delivered to the holder of such Series E Preferred Shares a
Series E Preferred Share certificate representing the remaining Series E
Preferred Shares which have not been so converted or redeemed.
(9) Reservation of Shares. The Corporation shall, so long as any of
the Series E Preferred Shares are outstanding, reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Series E Preferred Shares, 100% of such
number of shares of Common Stock as shall from time to time be sufficient
to affect the conversion of all of the Series E Preferred Shares then
outstanding.
(10) Voting Rights. Holders of Series E Preferred Shares shall have
no voting rights, except as required by law, including but not limited to
the General Corporation Law of the State of Delaware and as expressly
provided in this Certificate of Designations.
<PAGE>
(11) Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation, the holders of the Series E Preferred Shares shall be
entitled to receive in cash out of the assets of the Corporation, whether
from capital or from earnings available for distribution to its
stockholders (the "Preferred Funds"), after all amounts payable to the
holders of the Corporation's Series C Convertible Preferred Stock and the
holders of the Corporation's Series D Convertible Preferred Stock and
before any amount shall be paid to the holders of any of the capital stock
of the Corporation of any class junior in rank to the Series E Preferred
Shares in respect of the preferences as to the distributions and payments
on the liquidation, dissolution and winding up of the Corporation, an
amount per Series E Preferred Share equal to the sum of (i) $1,000 and
(ii) an amount equal to the product of (.04) (N/365) ($1,000) (such sum
being referred to as the "Liquidation Value"); provided that, if the
Preferred Funds are insufficient to pay the full amount due to the holders
of Series E Preferred Shares and holders of shares of other classes or
series of preferred stock of the Corporation that are of equal rank with
the Series E Preferred Shares as to payments of Preferred Funds (the "Pari
Passu Shares"), then each holder of Series E Preferred Shares and Pari
Passu Shares shall receive a percentage of the Preferred Funds equal to
the full amount of Preferred Funds payable to such holder as a liquidation
preference, in accordance with their respective Certificate of
Designations, Preferences and Rights as a percentage or the full amount of
Preferred Funds payable to all holders of Series E Preferred Shares and
Pari Passu Shares. The purchase or redemption by the Corporation of stock
of any class in any manner permitted by law, shall not for the purposes
hereof, be regarded as a liquidation, dissolution or winding up of the
Corporation. Neither the consolidation or merger of the Corporation with
or into any other Person, nor the sale or transfer by the Corporation of
less than substantially all of its assets, shall, for the purposes hereof,
be deemed to be a liquidation, dissolution or winding up of the
Corporation. No holder of Series E Preferred Shares shall be entitled to
receive any amounts with respect thereto upon any liquidation, dissolution
or winding up of the Corporation other than the amounts provided for
herein.
<PAGE>
(12) Preferred Rank. All shares of Series C Convertible Preferred
Stock and all shares of Series D Convertible Preferred Stock shall be of
senior rank and all shares of Common Stock shall be of junior rank to all
Series E Preferred Shares in respect to the preferences as to
distributions and payments upon the liquidation, dissolution, and winding
up of the Corporation. The rights of the shares of Common Stock shall be
subject to the Preferences and relative rights of the Series E Preferred
Shares. Except for the Corporation's Series C Convertible Preferred Stock
and Series D Convertible Preferred Stock, the Series E Preferred Shares
shall be of greater rank than any Series of Common or Preferred Stock
hereinafter issued by the Corporation. Without the prior express written
consent of the holders of not less than two-thirds (2/3) of the then
outstanding Series E Preferred Shares, the Corporation shall not hereafter
authorize or issue additional or other capital stock that is of senior or
equal rank to the Series E Preferred Shares in respect of the preferences
as to distributions and payments upon the liquidation, dissolution and
winding up of the Corporation. Without the prior express written consent
of the holders of not less than two-thirds (2/3) of the then outstanding
Series E Preferred Shares, the Corporation shall not hereafter authorize
or make any amendment to the Corporation's Certificate of Incorporation or
bylaws, or file any resolution of the board of directors with the Delaware
Secretary of State containing any provisions, which would adversely affect
or otherwise impair the rights or relative priority of the holders of the
Series E Preferred Shares relative to the holders of the Common Stock or
the holders of any other class of capital stock in respect of the
preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Corporation. In the event of the merger
or consolidation of the Corporation with or into another corporation, the
Series E Preferred Shares shall maintain their relative powers,
designations, and preferences provided for herein and no merger shall
result inconsistent therewith.
(13) Restriction on Dividends. If any Series E Preferred Shares are
outstanding, without the prior express written consent of the holders of
not less than two-thirds (2/3) of the then outstanding Series E Preferred
Shares, the Corporation shall not directly or indirectly declare, pay or
make any dividends or other distributions upon any of the Common Stock
unless written notice thereof has been given to holders of the Series E
Preferred Shares at least thirty (30) days prior to the earlier of (a) the
record date taken for or (b) the payment of any such dividend or other
distribution. Notwithstanding the foregoing, this Section 13 shall not
prohibit the Corporation from declaring and paying a dividend in cash with
respect to the Common Stock so long as the Corporation: (i) pays
simultaneously to each holder of Series E Preferred Shares an amount in
cash equal to the amount such holder would have received had all of such
holder's Series E Preferred Shares been converted to Common Stock pursuant
to Section 4 hereof one business day prior to the record date for any such
dividend, and (ii) after giving effect to the payment of any dividend and
any other payments required in connection therewith including to the
holders of the Series E Preferred Shares under clause 13(a)(i) hereof, the
Corporation has in cash or cash equivalents an amount equal to the
aggregate of: (A) all of its liabilities reflected on its most recently
available balance sheet, (B) the amount of any indebtedness incurred by
the Corporation or any of its subsidiaries since its most recent balance
sheet and (C) 125% of the amount payable to all holders of any shares of
any class of preferred stock of the Corporation assuming a liquidation of
the Corporation as of the date of its most recently available balance
sheet.
(14) Vote to Change the Terms of Series E Preferred Shares. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds
(2/3) of the then outstanding Series E Preferred Shares, shall be required
for any change to this Certificate of Designations or the Corporation's
Certificate of Incorporation which would amend, alter, change or repeal
any of the powers, designations, preferences and rights of the Series E
Preferred Shares.
<PAGE>
(15) Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence satisfactory to the Corporation of the loss, theft, destruction
or mutilation of any certificates representing the Series E Preferred
Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Corporation and, in the
case of mutilation, upon surrender and cancellation of the Series E
Preferred Share certificate(s), the Corporation shall execute and deliver
new Series E Preferred Share certificate(s) of like tenor and date;
provided, however, the Corporation shall not be obligated to re-issue
Series E Preferred Share certificates if the holder contemporaneously
requests the Corporation to convert such Series E Preferred Shares into
Common Stock.
(16) Withholding Tax Obligations. Notwithstanding anything herein to
the contrary, to the extent that the Corporation receives advice in
writing from its counsel that there is a reasonable basis to believe that
the Corporation is required by applicable federal laws or regulations and
delivers a copy of such written advice to the holders of the Series E
Preferred Shares so effected, the Corporation may reasonably condition the
making of any distribution (as such term is defined under applicable
federal tax law and regulations) in respect of any Series E Preferred
Shares on the holder of such Series E Preferred Shares depositing with the
Corporation an amount of cash sufficient to enable the Corporation to
satisfy its withholding tax obligations (the "Withholding Tax") with
respect to such distribution. Notwithstanding the foregoing or anything to
the contrary, if any holder of the Series E Preferred Shares so effected
receives advice in writing from its counsel that there is a reasonable
basis to believe that the Corporation is not so required by applicable
federal laws or regulations and delivers a copy of such written advice to
the Corporation, the Corporation shall not be permitted to condition the
making of any such distribution in respect of any Series E Preferred
Shares on the holder of such Series E Preferred Shares depositing with the
Corporation any Withholding Tax with respect to such distribution,
provided, however, the Corporation may reasonably condition the making of
any such distribution in respect of any Series E Preferred Shares on the
holder of such Series E Preferred Shares executing and delivering to the
Corporation, at the election of the holder, either: (i) if applicable, a
property completed Internal Revenue Service Form 4224, or (a) an
indemnification agreement in reasonably acceptable form, with respect to
any federal tax liability, penalties and interest that may be imposed upon
the Corporation by the Internal Revenue Service as a result of the
Corporation's failure to withhold in connection with such distribution to
such holder. If the conditions in the preceding two sentences are fully
satisfied, the Corporation shall not be required to pay any additional
damages set forth in Section 2(f)(v) of this Certificate of Designations
if its failure to timely deliver any Conversion Shares results solely from
the holder's failure to deposit any withholding tax hereunder or provide
to the Corporation an executed indemnification agreement in the form
reasonably satisfactory to the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be signed by Michael J. Parrella, its President and Chief
Executive Officer, as of the 23rd day of December, 1998.
NCT GROUP, INC.
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella
President and Chief Executive Officer
<PAGE>
EXHIBIT I
NCT GROUP, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and
Rights of NCT Group, Inc. (the "Certificate of Designations"). In accordance
with and pursuant to the Certificate of Designations, the undersigned hereby
elects to convert the number of shares of Series E Convertible Preferred Stock,
$.10 par value per share (the "Series E Preferred Shares"), of NCT Group, Inc.,
a Delaware corporation (the "Corporation"), indicated below into shares of
Common Stock, $.01 par value per share (the "Common Stock"), of the Corporation,
by tendering the stock certificate(s) representing the share(s) of Series E
Preferred Shares specified below as of the date specified below.
The undersigned acknowledges that any sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Series E Preferred
Shares shall be made only pursuant to (i) a registration statement effective
under the Securities Act of 1933, as amended (the "Act"), or (ii) an opinion of
counsel in form and content reasonably satisfactory to the Corporation that such
sale is exempt from registration required by Section 5 of the Act.
Date of Conversion:
------------------------------------------
Number of Series E
Preferred Shares to be converted
------------------------------------------
Stock certificate no(s). of Series E
Preferred Shares to be converted:
------------------------------------------
Please confirm the following information:
Conversion Price:
------------------------------------------
Number of shares of Common Stock to be
issued:
------------------------------------------
please issue the Common Stock into which the Series E Preferred Shares are being
converted in the following name and to the following address:
Issue to:1
==========================================
Facsimile Number:
------------------------------------------
Authorization:
------------------------------------------
By:_______________________________________
Title:____________________________________
Dated:
------------------------------------------
ACKNOWLEDGED AND AGREED:
NCT GROUP, INC.
By: _____________________________
Name:___________________________
Title:____________________________
Date:____________________________
Exhibit 21
NCT Group, Inc.
SUBSIDIARIES
Jurisdiction
Name of Incorporation
Ownership or Organization Equity
NCT Muffler, Inc. Delaware 100%
NCT Far East, Inc. Delaware 100%
NCT Medical Systems, Inc. Delaware 90%
Noise Cancellation Technologies
(Europe) Ltd. UK 100%
2020 Science Limited UK 100%
Analog/NCT Supply Ltd. Delaware 50%
Chaplin Patents Holding Co., Inc. Delaware 100%
Harris Supply L.L.C. Delaware 50%
NCT Audio Products, Inc. Delaware 76.9%
NCT Hearing Products, Inc. Delaware 100%
DistributedMedia.com, Inc. Delaware 100%
Advancel Logic Corporation California ~100%
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements
of NCT Group, Inc. (formerly Noise Cancellation Technologies, Inc.) 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 March 11, 1999
(with respect to Note 8, March 24, 1999), on our audits of the consolidated
financial statements and schedule of the Company as of December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996 which report is
included in this Annual Report on Form 10-K.
/s/ Richard A. Eisner & Company, LLP
New York, New York
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, FILED ON APRIL 1, 1999.
</LEGEND>
<CIK> 0000722051
<NAME> NCT GROUP, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 529
<SECURITIES> 0
<RECEIVABLES> 944
<ALLOWANCES> 228
<INVENTORY> 3320
<CURRENT-ASSETS> 4750
<PP&E> 11493
<DEPRECIATION> 7615
<TOTAL-ASSETS> 15465
<CURRENT-LIABILITIES> 5937
<BONDS> 0
0
9240
<COMMON> 1563
<OTHER-SE> 4662
<TOTAL-LIABILITY-AND-EQUITY> 15465
<SALES> 2097
<TOTAL-REVENUES> 3324
<CGS> 2235
<TOTAL-COSTS> 2510
<OTHER-EXPENSES> 14997
<LOSS-PROVISION> 232
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (14183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14183)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
Exhibit 99(a)
[Peters Elworthy & Moore Letterhead]
Noise Cancellation Technologies (Europe) Limited
(formally Noise Cancellation Technologies (UK) Limited)
Auditors' Report to the Shareholders
on the Financial Statements for the year ended 31 December 1998
We have audited the financial statements on pages 4 to 14, which have been
prepared under the historical cost convention and the accounting policies set
out on page 7.
Respective responsibilities of the directors and auditors
As described on page 1 of the company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of Opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all information and
explanations which we consider necessary in order to provide us with sufficient
evidence to give reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud, other irregularity or
error. In forming our opinion we also evaluated the overall adequacy of the
presentation of the information in the financial statements.
Fundamental Uncertainty
In forming our opinion, we have considered the adequacy of the disclosures made
in note 1 of the financial statements concerning the company's operational
results and financial position. In view of the significance of the company
continuing to generate adequate working capital, and its reliance on continued
financial support from the parent company we consider that it should be drawn to
your attention but our opinion is not qualified in this respect.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 1998 and of its loss for the year
then ended and have been properly prepared in accordance with the Companies Act
1985.
/s/ PETERS ELWORTHY & MOORE
Chartered Accountants and
Registered Auditor
CAMBRIDGE
23 February 1999
Exhibit 99(d)
[PETERS ELWORTHY & MOORE LETTERHEAD]
Salisbury House, Station Road
Cambridge CB1 2LA England
Our Ref: PRC/J/5799
Date:. 31 March 1999
NCT Group, Inc.
(formerly Noise Cancellation Technologies, Inc.)
1025 West Nursery Road, Suite 120
Linthicum, MD 21090-2103
USA
Dear Sirs:
We are writing to you with confirmation that the accounts for the year ended 31
December 1998 were audited under auditing standards which are "substantially
similar" or "similar in all material respects" to US General Accepted Audit
Standards.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
Exhibit 99(g)
[PETERS ELWORTHY & MOORE LETTERHEAD]
Salisbury House, Station Road
Cambridge CB1 2LA England
Our Ref: PRC/J
Date:. 24 March 1999
NCT Group, Inc.
(formerly Noise Cancellation Technologies, Inc.)
1025 West Nursery Road, Suite 120
Linthicum, MD 21090-2103 USA
Dear Sirs:
We consent to the inclusion of our opinion on the financial statements of Noise
Cancellation Technologies (Europe) Limited as of December 31, 1998 and for the
year ended December 31, 1998, included in the Annual Report on Form
10-K.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
