As filed with the Securities and Exchange Commission on October 28, 1999
Registration No. 333-87757
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
NCT GROUP, INC.
(formerly Noise Cancellation Technologies, Inc.)
(Exact name of Registrant as specified in Charter)
Delaware 59-2501025
(State or Other Jurisdiction (I.R.S. Employer
Of Incorporation or Identification No.)
Organization)
1025 West Nursery Road, Linthicum, Maryland 21090
(410) 636-8700
(Address, Including Zip Code, and Telephone Number, Including Area
Code, or Registrant's Principal Executive Offices)
CY E. HAMMOND
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
NCT GROUP, INC.
1025 WEST NURSERY ROAD, SUITE 120
LINTHICUM, MARYLAND 21090
(410) 636-8700
(Name and Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Copies of all communications and notices to:
WILLIAM P. O'NEILL, ESQ.
CROWELL & MORING LLP
1001 PENNSYLVANIA AVE, NW
WASHINGTON, DC 20004
(202) 624-2500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of the Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
PROPOSED
PROPOSED MAXIMUM
TITLE OF MAXIMUM AGGREGATE AMOUNT OF
SHARES TO BE AMOUNT TO BE AGGREGATE PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT PRICE FEE
- --------------------------------------------------------------------------------
COMMON STOCK 37,354,805 SHARES $0.195 (2) $7,284,187 (2) $2,025.00 (2)
COMMON STOCK 18,482,307 SHARES $0.1800 (2) $3,326,815 (2) $ 924.85 (2)
(1) In accordance with Rule 416 promulgated under the Securities Act of 1933,
this registration statement also covers such indeterminate number of
additional shares of common stock as may become issuable upon conversion of
the Company's Series F Convertible Preferred Stock to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933, based
on the average of the high and low prices for the common stock on the
NASDAQ OTC Bulletin Board on September 23, 1999 and October 25, 1999,
respectively. The fees noted above were paid by the registrant in
connection with the filing of this registration statement, as amended, on
September 21, 1999, September 23, 1999, and October 13, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>
PROSPECTUS
NCT GROUP, INC.
55,837,112 shares of Common Stock for resale
by Selling Stockholders
NCT GROUP, INC. We design and produce electronic
1025 West Nursery Road systems for Active Wave Management.
Suite 120 Active Wave Management permits the
Linthicum, Maryland 21090 manipulation of sound and signal waves
to enhance, reduce or eliminate sound.
Certain existing shareholders of NCT Group, Inc.
are offering 55,837,112 shares of the Company's common stock
for sale at prevailing market prices.
The Company's common stock currently trades
under the symbol "NCTI" on NASDAQ's OTC Bulletin Board.
The Company will not receive any of the proceeds
of the resales, which consist of:
o 25,744,000 shares of common stock of the Company that the Company may
issue upon the conversion of issued and outstanding shares of our Series F
Convertible Preferred Stock.
o 12,759,778 shares of common stock of the Company that the Company issued
to certain consultants, service providers and trade vendors to settle
obligations owed to them by the Company.
o 17,333,334 shares of common stock of the Company that the Company issued in
exchange for 532 shares of common stock of NCT Audio Products, Inc. held by
investors.
------------------------------------------------
This investment involves a High Degree of Risk.
You should purchase shares only after carefully
considering the risks described in the
"RISK FACTORS" section beginning on Page 12.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or
disapproved these securities, or determined that
this Prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
The information in this Prospectus is not complete and may be changed. The
Selling Stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Prospectus is not an offer to sell these securities and neither we nor the
Selling Stockholders are soliciting offers to buy these securities in any state
where the offer or sale is not permitted.
The date of this Prospectus is October 28, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
Prospectus Summary Information 1
The Company 1
Recent Developments 3
Risk Factors 12
Use of Proceeds 31
Selling Security Holders 31
Plan of Distribution 33
Description of Securities to be Registered 33
Interests of Named Experts and Counsel 34
The Business 35
Properties 54
Legal Proceedings 55
Market Price of and Dividends on Common Equity 59
Description of Securities 59
Selected Financial Data 60
Management's Discussion and Analysis 62
Changes in and Disagreements with Accountants 79
Directors and Executive Officers 80
Executive Compensation 83
Security Ownership 93
Certain Relationships and Related Transactions 94
Other Expenses of Issuance and Distribution 96
Indemnification of Directors and Officers 96
Recent Sales of Unregistered Securities 98
Exhibits and Financial Statements 98
Undertakings 109
Signatures 111
---------------
IN DECIDING TO BUY OUR COMMON STOCK, YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE NOT MAKING
AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU
SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THE DATE ON THE FRONT OF THE DOCUMENT.
<PAGE>
PROSPECTUS SUMMARY INFORMATION
This summary section briefly describes the key aspects of both the Company
and the offering covered by this prospectus. This section is a summary only and
refers to more specific and comprehensive information found in subsequent
sections. Investors should refer to these individual sections for a more
detailed explanation of each topic.
Whenever possible, the Company has provided definitions of noise cancellation
technologies within the text. Also note that market data presented in this
prospectus are based on management's estimates, in reliance on third-party
sources where possible. While our management believes these estimates are
reliable and reasonable, in certain cases such estimates cannot be verified by
information from or analysis by independent sources. Accordingly, the Company
cannot give assurances that such market data are accurate in all material
respects.
THE COMPANY
NCT Group, Inc. (formerly Noise Cancellation Technologies, Inc.) ("NCT" or
the "Company") designs and produces electronic systems for Active Wave
Management. Active Wave Management is the use of active noise control
technology, in conjunction with other technologies, to manipulate sound or
signal waves. The Company develops its technologies to reduce or eliminate noise
and enhance sound quality in a wide array of products. The Company designs some
of its products so that other firms can integrate them with their own inventions
and technologies to serve major markets in the transportation, manufacturing,
commercial, consumer products and communications industries.
The Company is organized into strategic business units. These include its
subsidiaries, NCT Audio Products, Inc. ("NCT Audio"), NCT Hearing Products, Inc.
("NCT Hearing"), Advancel Logic Corporation ("Advancel"), and
DistributedMedia.com, Inc. ("DMC"); and its division, NCT Communications. Each
of the Company's strategic business units is targeted to the commercialization
of its own products in specific markets.
The Company and its business units currently hold 473 patents and related
rights worldwide and an extensive library of know-how and other unpatented
technology. These patents allow us to develop our major product lines which
include:
o NoiseBuster(R) communications headsets,
o NoiseBuster Extreme!(TM) consumer headsets,
o Gekko(TM) flat speakers, frames, prints and subwoofers,
o ClearSpeech(R) microphones, speakers and other products,
o adaptive speech filters,
o the ProActive(R) line of industrial/commercial active noise reduction
headsets,
o an aviation headset for pilots,
o an industrial muffler or "silencer,"
o quieting headsets for patient use in magnetic resonance imaging machines,
o an aircraft cabin quieting system, and
o ClearSpeech(TM) corporate intranet telephone software.
The Company also markets its technologies through licensing to third parties
for fees and royalties. For example, during 1998 the Company entered into five
new technology license agreements and during 1998 and 1999, the Company received
royalties arising out of its cross license agreement with NXT plc (formerly
known as Verity Group plc) and New Transducers Ltd. ("NXT"). The cross license
agreement further allows for sublicensing.
The Company's operating revenues are comprised of technology licensing fees
and royalties, product sales and engineering and development services. Prior to
1995, the Company derived the majority of its revenues from engineering and
development services and technology licensing fees. Since 1991, revenues from
product sales have generally increased. Management expects that technology
licensing fees, royalties and product sales will become the principal sources of
the Company's revenue as the commercialization of its technology proceeds.
Operating revenues in 1998 consisted of 63.1% in product sales, 12.8% in
engineering and development services and 24.1% in technology licensing fees and
royalties. Total revenues for the first six months of 1999 consisted of 21% in
product sales, 20% in engineering and development services and 59% in technology
licensing fees and royalties.
STRATEGY
Since 1995, the goal of the Company has been to become the worldwide leader
in the advancement and commercialization of Active Wave Management technology.
To achieve our goal, the Company has expanded its technological developments
into areas outside of traditional noise control or muffling devices. Active Wave
Management and active noise control systems are superior to traditional passive
methods of noise control because they:
o generally reduce only unwanted noise and permit desired sounds, such
as the human voice, music or warning tones, to pass freely;
o are more successful in attenuating low frequency noise;
o contribute to energy and other economic savings; and
o generally are smaller and lighter than traditional devices.
As part of the broadening of our product offerings, the Company introduced 19
new products and associated accessories during 1998 and has made various product
enhancements to date during 1999. Another example of our commitment to
technological and development expansion is the Company's acquisition of certain
assets and all of the intellectual property of Active Noise and Vibration
Technologies, Inc. in 1994. This acquisition served two functions: (1) it
expanded our portfolio of intellectual property, and (2) allowed the Company to
license certain, formerly restricted jointly-held patents to unaffiliated third
parties. This new licensing power is expected to contribute further to our
generation of fees and royalties.
We also anticipate that as we establish distribution channels and as consumer
awareness of our products increases, so, too, will product sales and revenues
from licensing fees and royalties. This money will enable the Company to become
less dependent on revenues from research, development and engineering. At the
same time, NCT continues to strive to lower the cost of our products and enhance
their technological performance.
Finally, the Company recognizes that it cannot achieve its corporate mission
without recruiting and retaining key personnel. As of August 31, 1999, the
Company had 85 employees, including 49 engineers and associated technical staff
members. Among our engineering staff and consultants are several scientists and
inventors that we believe are preeminent in the active noise and vibration
control field worldwide.
STRATEGIC ALLIANCES
In addition to expanding our technological applications, the Company has
entered into a number of strategic supply, manufacturing and marketing alliances
with leading global companies. These alliances historically have funded a
substantial portion of the Company's research and development. They also
represent reliable sources of components, manufacturing expertise and capacity,
and marketing and distribution capabilities. The Company has existing,
continuing relationships with, among others, (1) Walker Manufacturing Company (a
division of Tennessee Gas Pipeline Company, a wholly-owned subsidiary of
Tenneco, Inc.), (2) AB Electrolux, (3) Analog Devices, Inc., (4) Ultra
Electronics Ltd., (5) The Charles Stark Draper Laboratory, Inc., (6) Hoover
Universal, Inc., and (7) New Transducers Ltd. See Item 1. - "The Business"
Section G. - "Strategic Alliances" for further information.
RECENT DEVELOPMENTS
On June 5, 1998, the Company entered into an agreement with Interactive
Products, Inc. ("IPI"). The agreement grants NCT a license to certain patents
and pending patents to IPI's speech recognition and other speech-related
technologies. The agreement also grants the Company an option to purchase a
joint venture ownership interest in those same patents and pending patents. The
total value of the patented technology was $1,250,000. The Company paid IPI a
$150,000 cash payment and delivered 1,250,000 shares of NCT common stock. The
stock was valued at $0.65625 per share on June 5, 1998, the date of delivery of
the shares.
Whenever IPI sells any of its shares of NCT common stock, the proceeds will
be allocated towards the license fee for the technology rights. If the proceeds
from the sale of all of the shares is less than $1.1 million, the Company will
record a liability in the amount of the difference. On July 5, 1998, NCT paid
IPI $50,000, which IPI has agreed to hold in escrow as security for the
remaining amount due. As of June 30, 1999, the Company had recorded a liability
of $454,000, 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 June 16, 1998, the National Association of Securities Dealers Automated
Quotations Stock Market ("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 trading dates. NASDAQ rules require a company
to sustain a closing bid price of $1.00 or more for this period to remain listed
on the exchange's National Market System. The exchange granted the Company
ninety (90) days to regain compliance. In order to achieve compliance, the
Company's common stock price had to equal or exceed $1.00 for ten consecutive
trading days before the end of trading on September 14, 1998. The Company did
not achieve compliance before the deadline. On that day, the Company requested a
hearing, which was held on November 5, 1998. NASDAQ notified the Company on
January 6, 1999 that it had decided to deny the Company's request for an
exception and delist our common stock at the close of trading that day. Our
common stock now trades on NASDAQ's OTC Bulletin Board. On January 20, 1999, the
Company requested a review of the NASDAQ decision. On August 9, 1999, the NASDAQ
Review Counsel denied the Company's appeal of the delisting decision.
On July 15, 1998, the Company transferred $5,000 and all of the business and
assets of its Hearing Products Division to a newly incorporated subsidiary, NCT
Hearing. As a result, the Company received 6,400 shares of NCT Hearing common
stock which, in turn, 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 return, NCT Hearing must pay a licensing fee of $3,000,000
when it sells its common stock. The Company anticipates that NCT Hearing will
issue additional shares of its common stock in future exempt transactions to
raise working capital.
<PAGE>
Between July 27, 1998 and August 4, 1998, the Company issued and sold 6,000
shares of its Series D Convertible Preferred Stock (the "Series D Preferred
Stock") to six accredited investors. The sale occurred in a private placement
pursuant to Regulation D of the Securities Act of 1933, as amended (the
"Securities Act") and generated $5.2 million in net proceeds. The Series D
Preferred Stock is convertible into shares of the Company's common stock
according to the conversion formula described in the issuance's subscription
agreement. For a more detailed discussion of the Series D Preferred Stock
placement, see "Risk Factors - Possible Future Dilution."
Between July 27, 1998 and August 4, 1998, NCT Audio issued and sold 60 shares
of its Series A Convertible Preferred Stock ("Series A Preferred Stock") to the
same six accredited investors in a private placement pursuant to Regulation D of
the Securities Act and generated $5.2 million in net proceeds for NCT Audio. NCT
Audio Series A Preferred Stock becomes convertible into shares of the Company's
Series D Preferred Stock under certain circumstances. Further, the subscription
agreement requires NCT Audio to file a registration statement covering the
resale of all shares of its common stock issuable upon conversion of the
preferred stock then outstanding. For a more detailed discussion of the Series A
Preferred Stock placement, see "Risk Factors Possible Future Dilution."
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.
This would be accomplished under Rule 10b-18 of the Securities Exchange Act of
1934 (the "Exchange Act") or through block trades. As of December 31, 1998, the
Company had repurchased 5,607,100 shares of its common stock. The purchase price
ranged from $0.3438 to $0.6563 per share. The Company terminated the repurchase
program on December 30, 1998.
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), an automotive audio system
supplier. 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 an additional $6,000,000 in possible future cash
contingent payments. The shareholders of Top Source Technologies, Inc., TSA's
parent company, approved the transaction on December 15, 1998.
NCT Audio then paid Top Source Technologies, Inc. $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 Top Source Technologies, Inc.'s shareholders approved the
transaction, the $2,050,000 was delivered to TSA. In return, NCT Audio took
ownership of the documentation and securities held in escrow.
NCT Audio had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay Top Source Technologies, Inc. $6.5 million on or before
March 31, 1999 to complete the acquisition of TSA's assets. As consideration for
an extension of such exclusive right from March 31, 1999 to May 28, 1999, NCT
Audio agreed to pay Top Source Technologies, Inc. a fee of $350,000 consisting
of $20,685 in cash, $125,000 of NCT Audio's minority interest in TSA earnings,
and a $204,315 note payable, due April 16, 1999. If NCT Audio failed to pay the
note by April 16, 1999, (a) the note would begin to accrue interest on April 17,
1999 at the lower of the rate of two times prime rate or the highest rate
allowable by law; and (b) the $20,685 and $125,000 portion of the extension fee
would no longer be credited toward the $6.5 million purchase consideration due
at closing. If NCT Audio failed to pay the note by April 30, 1999, the $204,315
portion of the extension fee would no longer be credited toward the $6.5 million
closing amount due. To date, NCT Audio has not paid the note. Further, if NCT
Audio failed to close the contemplated transaction by May 28, 1999, NCT Audio
would forfeit its minority earnings in TSA for the period June 1, 1999 through
May 30, 2000. In addition, due to NCT Audio's failure to close the transaction
by March 31, 1999, NCT Audio is required to pay a penalty premium of $100,000 of
NCT Audio's preferred stock. In exchange for an extension from May 28, 1999 to
July 15, 1999, NCT Audio relinquished 25% of its minority equity ownership in
TSA. As a result, NCT Audio now has a 15% minority interest in TSA.
On or about July 15, 1999, NCT Audio determined it would not proceed with the
purchase of the assets of TSA, as structured, due primarily to its difficulty in
raising the requisite cash consideration. If TSA is sold to another purchaser,
NCT Audio will receive its pro rata share (15%) of such consideration.
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
supplies custom-made automotive audio systems. 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 $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 bears interest at a rate equal to the prime
lending rate plus one percent (1.0%).
<PAGE>
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. To date, the Company has not been able to
obtain the financing to consummate this transaction, and PPI is currently
experiencing significant organizational changes which will likely result in
cancellation of the agreement for NCT Audio to acquire the members' interest in
PPI. During the third quarter of 1999, the Company fully reserved the $1.5
million due from PPI. NCT Audio is seeking a substitute acquisition.
On September 4, 1998, the Company acquired all of the common stock of
Advancel. The Company initially paid $1,000,000, payable by the delivery of
1,786,991 authorized shares of its common stock held as treasury shares. The
Company registered such shares under a Registration Statement dated September
30, 1998, as amended on October 28, 1998 and May 7, 1999 (Registration Statement
No. 333-64967). Advancel's former shareholders may elect to receive the future
payments in cash or additional shares of the Company's common stock. The future
payments will be based on Advancel's earnings before interest, taxes,
depreciation and amortization for each of the next four years. The future
payments cannot be less than $250,000 in any year, and there is neither a
maximum payment for any one year nor an aggregate maximum amount. If Advancel's
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. See "Risk Factors - Possible Future Dilution."
On September 23, 1998, the Company exchanged 135,542 shares of its common
stock for 30 shares of common stock of NCT Audio. The exchange was made in
response to the exercise of certain exchange rights granted to purchasers of NCT
Audio common stock in the NCT Audio initial financing, described below under
"Risk Factors - Possible Future Dilution."
Between April 30 and December 31, 1998, the Company issued 20,665,000 shares
of common stock in connection with the conversion of 10,850 shares of the
Company's Series C Convertible Preferred Stock ("Series C Preferred Stock"). The
Company originally had issued and sold 13,250 shares of its Series C Preferred
Stock in a private placement under Regulation D of the Securities Act between
October 28, 1997 and December 11, 1997. The Series C Preferred Stock is
convertible into shares of the Company's common stock in accordance with a
predetermined conversion formula. For a more detailed discussion on the Series C
Preferred Stock, see "Risk Factors - Possible Future Dilution."
On October 12, 1998, the Company exchanged 1,000,000 shares of its common
stock for 266 shares of the common stock of NCT Audio. The exchange was exempt
from registration requirements under Section 4(2) of the Securities Act. This
exchange was made in response to the exercise of certain exchange rights granted
to purchasers of NCT Audio common stock in the NCT Audio initial financing. The
Company registered these 1,000,000 shares under Registration Statement No.
333-64967.
At the annual meeting of stockholders of the Company on October 20, 1998, the
stockholders approved changing the name of the Company from Noise Cancellation
Technologies, Inc. to NCT Group, Inc. The new name became effective October 21,
1998. The Company filed the appropriate amendment to its Certificate of
Incorporation with the Office of the Secretary of State of Delaware to comply
with applicable Delaware General Corporation Law.
At the annual meeting of stockholders of the Company on October 20, 1998, the
stockholders also approved an amendment to increase the number of shares of
common stock the Company is authorized to issue from 185,000,000 to 255,000,000.
This amendment became effective on October 21, 1998 when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware to comply with applicable Delaware General
Corporation Law.
On December 30, 1998, the Company entered into a series of subscription
agreements to sell 8,145 shares of Series E Convertible Preferred Stock (the
"Series E Preferred Stock"), with a stated value of up to $8.2 million in
consideration of $4.0 million, to six accredited investors through one dealer.
The sale of the shares occurred in a private placement pursuant to Regulation D
of the Securities Act. In 1999, the Company received net proceeds of $3.6
million from the Series E Preferred Stock placement. In addition to the
transactions described above, the Company issued and sold an aggregate amount of
$1.7 million of Series E Preferred Stock to three accredited investors through
the same dealer in exchange for $1.7 million of the Company's Series C Preferred
Stock held by the three investors. The Company also issued and sold an aggregate
amount of $0.7 million of Series E Preferred Stock to four accredited investors,
in exchange and consideration for an aggregate of 2.1 million shares of the
Company's common stock held by the four investors. Each share of Series E
Preferred Stock is convertible into common stock of the Company according to the
conversion formula described in the issuance's subscription agreement. For a
more detailed discussion of the Series E Preferred Stock, see "Risk Factors -
Possible Future Dilution."
<PAGE>
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. On September 19, 1999, the Company and Holder agreed to amend the terms
of the conversion price of the secured convertible note subscription agreement
and the notes. For a more detailed discussion of the secured convertible notes
and the recent amendment, see "Risk Factors - Possible Future Dilution."
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. 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. To date, the Company has not been able to
obtain the financing to consummate this transaction.
On February 9, 1999, NCT Audio and NXT expanded a cross licensing agreement
dated September 27, 1997 to increase NXT's fields of use, increase the royalties
due NCT Audio from NXT and increase the royalties due NXT from NCT Audio. 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."
On March 31, 1999, the Company signed a license agreement to exchange 3,600
shares of Series E Preferred Stock for four DMC network affiliate licenses
incorporating the Digital Broadcasting Station System ("DBSS"). The exchange of
shares of Series E Preferred Stock is in lieu of cash consideration. The DBSS
technology was developed by the Company for DMC, a wholly-owned subsidiary of
the Company. DMC was incorporated to develop, install and provide an
audio/visual advertising medium within commercial/professional settings. DBSS
schedules advertisers' customized broadcast messages, which are downloaded via
the Internet with the respective music genre of choice to the
commercial/professional establishments.
The Company anticipates the sale of such licenses to approximate $1.0 million
each based on regional and commercial/professional settings. The Company has
developed standard license agreements to coincide with its current business plan
and delineate the extent and nature of the rights and duties of the Company and
its licensees. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized $2.0 million on the
issuance of such licenses in consideration of the receipt of 3,600 shares of its
Series E Preferred Stock. Subsequently, during the three months ended June 30,
1999, the Company adjusted such revenue to $0.9 million due to the valuation of
additional shares of Series E Preferred Stock issued during the period.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hauspie Speech Products N.V. ("L&H"). The agreement provides the Company with a
worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. Further, on April 12, 1999, the
Company granted a worldwide, non-exclusive, non-transferable license to L&H. The
agreement provides L&H access to NCT's noise and echo cancellation algorithms
for use in L&H's technology.
At the annual meeting of stockholders of the Company on June 24, 1999, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 255,000,000 to 325,000,000. This
amendment became effective on July 29, 1999 when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware to comply with applicable Delaware General
Corporation Law.
<PAGE>
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In connection therewith, management has negotiated
with certain vendors and creditors to settle obligations owed by the Company. As
such, 12,759,778 shares of the Company's common stock are to be registered
under this registration statement and prospectus.
On June 24, 1999, NCT Hearing, a wholly-owned subsidiary of the Company,
signed a letter of intent to acquire sixty percent (60%) of the common stock of
Pro Tech Communications, Inc. ("Pro Tech") in exchange for rights to certain NCT
Hearing technology. The acquisition is pending $2.0 million of equity financing
to be raised by NCT Hearing.
On July 19, 1999, DMC signed a convertible guaranteed term promissory note
("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. PRG will provide lease financing to DMC for its Sight and Sound(TM)
systems (the "Systems") and will provide integration, installation and
maintenance services to DMC. DMC received a portion of the PRG Note ($125,000)
on July 22, 1999. Of the total amount, $750,000 has been deposited into an
escrow account and will be used to pay rental and installation costs due from
DMC with respect to the Systems. Further, DMC may draw an additional $125,000
provided that PRG continues to have a good faith belief that the Systems are
functioning properly and that DMC has obtained at least one network-wide
advertising client providing annual advertising revenues of at least $250,000.
The PRG Note matures on July 19, 2001 and earns interest at ten percent (10%)
per annum. PRG may convert the PRG Note in whole or in part, at the election of
PRG, into shares of DMC's common stock, without par value, at any time during
the period commencing on the date of issuance and ending on the maturity date.
DMC has the right to lease from PRG additional Systems with an aggregate value
of up to $9.5 million, provided that PRG is reasonably satisfied with the
success of the DMC business, including its technology and economics and the
likelihood of its continued success. In connection with the PRG Note, PRG was
granted a common stock warrant equal to, at PRG's election, either (i) the
number of shares of the Company's common stock which may be purchased for an
aggregate purchase price of $1,250,000 at the fair market value on July 19, 1999
or (ii) the number of shares representing five percent of the fully paid
non-assessable shares of common stock of DMC at the purchase price per share
equal to either (x) if a DMC qualified sale (a sale in one transaction in which
the aggregate sales proceeds to DMC equal or exceed $5,000,000) has closed on or
before December 31, 1999, the purchase price per share determined by multiplying
the price per share of DMC common stock or security convertible into DMC common
stock by seventy-five percent (75%) or (y) if a DMC qualified sale has not
closed on or before December 31, 1999, at an aggregate price of $1,250,000.
On August 10, 1999, the Company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F Convertible Preferred Stock (the
"Series F Preferred Stock"), in a private placement pursuant to Regulation D of
the Securities Act, to five unrelated accredited investors through one dealer
(the "1999 Series F Preferred Stock Private Placement"). The Company received
$1.0 million for the sale of 8,500 shares of Series F Preferred Stock having an
aggregate of $8.5 million stated value. At the Company's election, the investors
may invest up to an additional $4.0 million in cash or in kind, at a future
date. Each share of the Series F 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 F
Preferred Stock is convertible into fully paid and nonassessable shares of the
Company's common stock, subject to certain limitations. See "Risk Factors -
Possible Future Dilution" for a more detailed discussion of the Series F
Preferred Stock Placement.
On August 16, 1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. Consequently, the
Company has reduced its worldwide work force by approximately 25%.
On October 9, 1999, the Company, NCT Audio, Balmore Funds, S.A. and Austost
Anstalt Schaan ("Balmore"), and LH Financial agreed, in principle, to settle all
legal charges, claims and counterclaims which have individually or jointly been
asserted against the parties. See a detailed description of the background of
the litigation being settled at "Risk Factors - Litigation." Such litigation
settlement is contingent upon the approval of the court.
On October 9, 1999, pursuant to the NCT Audio stock agreement, the Company,
NCT Audio and Balmore agreed to exchange 532 shares of NCT Audio common stock
held by Balmore into 17,333,334 shares of common stock of the Company. As such,
this registration statement and prospectus includes 17,333,334 shares of common
stock of the Company. The issuance of such shares of common stock was approved
by the Company's Board of Directors on October 22, 1999.
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary 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 in this registration statement and prospectus. Operating results for
the periods ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
<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)
========== ========== ========== ========== ==========
<PAGE>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
(unaudited) (unaudited)
----------------------- -----------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
<S> <C> <C> <C> <C>
Product sales $ 664 $ 576 $ 1,065 $ 1,228
Engineering and development
services 128 366 149 1,175
Technology licensing fees and other 36 779 346 3,501
---------- ---------- ---------- -----------
Total revenues $ 828 $ 1,721 $ 1,560 $ 5,904
---------- ---------- ---------- -----------
COSTS AND EXPENSES:
Cost of product sales $ 567 $ 649 $ 869 $ 1,083
Cost of engineering and
development services 106 395 128 903
Selling, general and administrative 1,735 2,678 4,454 5,663
Research and development 1,833 1,745 3,297 3,458
Other (income)/expense, net (3,339)(4) 204 (3,382)(4) 307
Write down of investment in
unconsolidated affiliates - 2,385(5) - 2,385(5)
Interest (income)/expense, net (91) (33) (212) (57)
---------- ---------- ---------- -----------
Total costs and expenses $ 811 $ 8,023 $ 5,154 $ 13,742
---------- ---------- ---------- -----------
Net income/(loss) $ 17 $ (6,302) $ (3,594) $ (7,838)
Less:
Preferred stock dividend
requirement $ - $ 134 $ 1,690 $ 5,240
Accretion of difference between
carrying amount and redemption
amount of redeemable preferred
stock 98 25 483 184
========== ========== ========== ===========
Net (loss) attributable to
common stockholders $ (81) $ (6,461) $ (5,767) $ (13,262)
========== ========== ========== ===========
Weighted average number of common
shares outstanding (1) - basic
and diluted 138,073 174,238 135,968 165,247
========== ========== ========== ===========
Basic and diluted loss per share $ 0.00 $ (0.04) $ (0.04) $ (0.08)
========== ========== ========== ===========
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)
June 30, 1999
(unaudited)
-------------
BALANCE SHEET DATA:
<S> <C>
Total assets $ 18,329
Total current liabilities 8,486
Long-term debt 1,653
Accumulated deficit (115,542)
Stockholders' equity (2) 7,879
Working capital (deficiency) (2,382)
</TABLE>
<PAGE>
(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
NXT in connection with the cross license agreement entered into by the
Company.
(5)Includes a $2.4 million charge in connection with the Company's write down
of its investment in TSA to its estimated net realizable value.
EXECUTIVE OFFICES
Our principal executive office is located at 1025 West Nursery Road, Suite
120, Linthicum, Maryland 21090. The telephone number is (410) 636-8700. NCT also
maintains sales and marketing offices at One Dock Street, Suite 300, Stamford,
Connecticut, 06902. The telephone number is (203) 961-0500.
RISK FACTORS
The shares of common stock covered by this registration statement and
prospectus represent a speculative investment and entail elements of risk.
Investors should carefully consider the following risk factors before making a
decision to invest in the Company. Investors also should examine the information
included in subsequent sections of and as exhibits to this registration
statement and prospectus.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" - those which
are not historical facts but rather estimates made by Company management. All
forward-looking statements involve risks and uncertainties. The Company wishes
to caution investors that the important factors discussed below have, or could,
both (1) affect the Company's actual performance, and (2) cause actual
performance to differ materially from our predictions.
The Company believes that the assumptions underlying such forward looking
statements are reasonable. At the same time, it would be prudent to remember
that our assumptions could be inaccurate. Therefore, we cannot give any
assurances that these statements will, in fact, be correct.
OUR CURRENT FINANCIAL CONDITION
As of December 31, 1998, NCT had cash and cash equivalents amounting to $0.5
million, decreasing from $12.6 million at December 31, 1997. Cash and cash
equivalents at June 30, 1999 were $0.1 million.
Management believes that currently available funds will not be sufficient to
sustain the Company at present levels over the next 12 months. The Company's
ability to continue as a going concern is dependent on funding from several
areas, including:
o the exercise of warrants and options,
o technology licensing fees and royalties,
o product sales, and
o engineering and development revenues.
The ability of any or all of these revenue areas to generate cash inflows is
presently uncertain. In the event that these activities do not generate
sufficient revenue, management believes that the Company would have to raise
additional working capital. There is no assurance, however, that the Company
could raise such capital.
The Company also cannot give any assurance that it will be able to allocate
sufficient funding to these areas. In that event, the Company will have to
substantially cut back its level of operations. These reductions could, in turn,
affect our relationships with our strategic partners and customers.
<PAGE>
GOING CONCERN UNCERTAINTY
We are unsure (1) whether future operations will be profitable or generate
sufficient cash to fund the business, and (2) whether the Company can generate
or rely upon sufficient public and private financings and other funding sources
to meet our obligations.
The Company's independent auditors issued a report on their audit of our
consolidated financial statements as of and for the year ended December 31,
1998. Their report contains an explanatory paragraph. This paragraph notes that
certain factors raise substantial doubt as to our ability to continue as a going
concern. Investors should read the auditors' report and examine the Company's
financial statements.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company due to cash constraints. In connection therewith,
management has negotiated with vendors and creditors to settle certain
obligations.
NO HISTORY OF DIVIDENDS
The Company has never declared or paid dividends on its common stock. We have
no present intent to pay dividends on our common stock. The Company has, from
time to time, fulfilled its dividend (or payment in kind) obligation on its
preferred stock.
See "Possible Future Dilution" below.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company has incurred substantial losses from operations since its
inception. These losses have been recurring and amounted to $115.5 million on a
cumulative basis through June 30, 1999. The Company has funded these losses
primarily from the sale of its common stock, including the exercise of warrants
and options to purchase common stock. The Company also offsets its losses with
technology licensing fees and the engineering and development funds we receive
from our joint venture and strategic alliance partners.
The Company incurred a net loss of $14.2 million for the year ended December
31, 1998 and a net loss of $7.8 million for the six months ended June 30, 1999.
These losses were attributable in great part to increased sales and marketing
costs, including a substantial increase in sales and marketing personnel and
advertising expenditures to facilitate the introduction of new products.
To make a profit, NCT must independently and with our partners successfully
develop, manufacture and sell a sufficiently large quantity of our products and
collect fees and royalties from licensing our proprietary technology. The
Company can give no assurances, however, that future operations will be
profitable enough to generate sufficient cash to fund such development,
manufacturing and sales or that the Company can generate or rely upon sufficient
funding sources to meet our obligations.
<PAGE>
LIMITED REVENUES
Although the Company has begun to actively market the sale and licensing of
our products, operating revenues from inception in April 1986 to the date hereof
have been limited. In total over the five years ended December 31, 1998, the
Company has generated revenues as noted below:
o $ 9.1 million from the sale of products,
o $12.7 million from technology licenses and royalties, and
o $ 8.0 million from engineering and development services.
Despite the Company's growing sales of active wave attenuation and other
products in a limited number of applications, significant further development
will be necessary before many of our potential products will achieve expected
commercial end-use applications.
POSSIBLE FUTURE DILUTION
The following sections discuss the risks associated with investing in the
Company's common stock given that future dilution is possible. Specifically,
these sections outline the myriad circumstances which could lead to a possible
negative effect on the value per share of our common stock should holders of the
Company's convertible securities or options and warrants convert their
securities or exercise their rights to acquire common stock.
The 1987 Plan
In 1987, the Company adopted the 1987 Stock Option Plan (the "1987 Plan"),
which provides for the grant of up to 4,000,000 shares of common stock as either
incentive or nonstatutory stock options. The 1987 Plan allows for the grant of
incentive stock options to full-time employees, including directors and
officers. It further allows for the grant of nonstatutory stock options to
employees and non-employee directors of the Company. See Note 9 - "Notes to
Financial Statements - Common Stock Options and Warrants" for a more detailed
description of the 1987 Plan. At June 30, 1999, the Company had outstanding
options to purchase 250,000 shares of common stock under its 1987 Plan. All of
such options are exercisable.
The 1992 Plan
At the 1993 annual stockholders meeting, the Company's shareholders approved
a stock option plan previously adopted in October 1992 by the NCT Board of
Directors covering 6.0 million shares of the Company's common stock (the "1992
Plan"). The 1992 Plan provides for the grant of options to purchase common stock
and awards of restricted common stock to employees, officers and directors of
the Company. At the 1996 annual stockholders meeting, shareholders approved an
amendment to the 1992 Plan, increasing the number of shares covered to 10.0
million. The shareholders also approved the addition of active consultants as
persons eligible to participate. At the 1998 annual stockholders meeting,
shareholders again approved an amendment to the 1992 Plan, increasing the number
of shares covered to 30.0 million and permitting outside directors to
participate. The amendment also (1) deleted the formula for grants of awards of
restricted common stock and options to purchase common stock to outside
directors, and (2) directed that the Company's Board of Directors, or a
committee appointed by the Board consisting of at least two outside directors,
administer the 1992 Plan.
The Company has reserved 30.0 million shares of common stock for issuance
in the event that option holders exercise their options to purchase shares or
that the Company grants restricted stock under the 1992 Plan. Of those 30.0
million shares, 10.0 million are registered under the Securities Act. The
Company plans to register the remaining 20.0 million shares. As of June 30,
1999, the Company had outstanding options to purchase 28,236,251 shares of
common stock under the 1992 Plan. Of those shares, 14,171,001 are currently
exercisable and the balance will become exercisable in increments through April
13, 2004. As of June 30, 1999, the Company also had granted 240,000 shares of
restricted stock under the 1992 Plan.
The Directors' Plan
In 1994, the Company adopted (and has since amended twice) an option plan for
certain directors (the "Directors' Plan"). At the 1995 annual stockholders
meeting, shareholders approved the grant to two directors of the option to
purchase a total of 725,000 shares of NCT common stock. The shareholders, at the
1996 annual meeting, approved an increase in the number of shares to 821,000 and
made minor changes concerning the Directors' Plan's administration. The Company
has reserved 821,000 shares of common stock for issuance upon the directors'
exercise of their options. All of the shares are registered under the Securities
Act. As of June 30, 1999, the Company had granted options to purchase 746,000
shares of common stock which are currently exercisable under the Directors'
Plan.
Other Investors' Warrants and Options
As of June 30, 1999, the Company had reserved 378,984 additional shares of
common stock for issuance upon the exercise of warrants and options; these
warrants and options are not included in the above plans. The Company also has
reserved 1,429,414 shares for issuance upon the exercise of warrants earlier
granted to:
o an investor in an early 1997 private placement pursuant to Regulation S
(the "Investor Warrant"),
o three placement agents in partial consideration for services rendered in
connection with the 1997 and 1998 preferred stock placements described
below,
o one financial consultant for services rendered in connection with another
financing completed by the Company, and
o one consultant for services rendered in connection with the Company's
efforts to complete development and licensing agreements with a large
European company.
The aggregate outstanding non-plan stock options and warrants at June 30,
1999 was 8,660,684, of which 8,460,684 were exercisable.
As of December 31, 1998, the weighted average exercise prices for all
currently exercisable warrants and options were $0.86 and $0.54, respectively.
Options granted in 1999 were granted with an exercise price of $0.41, the fair
market value of the Company's common stock on the date of grant.
The NCT Audio Initial Financing
Between October 10, 1997 and December 4, 1997, NCT Audio sold 2,145 common
shares for approximately $4.0 million in a private placement under Regulation D
of the Securities Act (the "NCT Audio Initial Financing"). The terms of the sale
allow the purchasers of NCT Audio's common stock to exchange their shares for an
equally valued amount of the Company's common stock at a predetermined exchange
ratio. The purchasers could not, however, exercise their exchange right if NCT
Audio filed a registration statement for an initial public offering with the
Securities and Exchange Commission ("SEC") within 90 days. If the registration
statement did not become effective within 180 days, the exchange right was
renewed. Purchasers of a total of $1.7 million of NCT Audio common stock later
agreed to extend the former period from 90 days to 150 days and the latter
period from 180 days to 240 days. NCT Audio, however, failed to file a
registration statement within the extended 150 day period. At the same time, the
Company is under no obligation to register any of its shares of common stock
which may be issued in connection with the above exchange right.
To date, the Company has issued 18,468,876 shares of its common stock in
exchange for 828 shares of NCT Audio common stock. Of such shares, 17,333,334
are being registered under this registration statement and prospectus. It is not
possible at this time to determine the maximum number of shares of common stock
the Company would have to issue if all of the remaining purchasers of NCT Audio
common stock were to exercise their exchange right.
The Series C Convertible Preferred Stock
Between October 28, 1997 and December 11, 1997, the Company issued and sold
13,250 shares of its Series C Preferred Stock in a private placement under
Regulation D of the Securities Act. The Series C Preferred Stock is convertible
into shares of the Company's common stock in accordance with a predetermined
conversion formula. The conversion terms also provide that (1) in no event shall
the average closing bid price be less than $0.625 per share, and (2) under no
circumstances shall the Company be obligated to issue more than 26 million
shares of its common stock in the aggregate in connection with the conversion.
The Company registered such 26 million shares under Registration Statement No.
333-43387 dated December 29, 1997, as amended May 8, 1998, July 2, 1998, and
June 16, 1999. To date, 10,850 shares of the Series C Preferred Stock have been
converted to 20,655,000 shares of common stock and 1,700 have been exchanged for
the Company's Series E Preferred Stock. Because the Company may elect to pay the
accretion in common stock, it is not possible at this time to determine the
number of shares of common stock the Company would have to issue upon conversion
of all of the 700 remaining outstanding Series C Preferred Stock shares.
The Series D Convertible Preferred Stock
Between July 27, 1998 and August 4, 1998, the Company issued and sold 6,000
shares of its Series D Preferred Stock in a private placement pursuant to
Regulation D of the Securities Act. Upon approval at the October 20, 1998 annual
stockholders meeting by the Company's shareholders of an increase in the
authorized common stock of the Company from 185,000,000 to 225,000,000 shares,
the Series D Preferred Stock became convertible into shares of the Company's
common stock according to the conversion formula described in the issuance's
subscription agreement.
The conversion terms of this placement provide that in no event shall the
conversion price be less than $0.50 per share. Further, the conversion terms
provide that under no circumstances shall the Company be obligated to issue more
than 12,000,000 shares of common stock in the aggregate in connection with the
conversion, or more than 12,000,000 additional shares of common stock in the
aggregate in connection with the conversion of 6,000 shares of Series D
Preferred Stock issuable upon the exchange of the NCT Series A Preferred Stock
described below. The Company also is obligated to pay a 4% per annum accretion
on the stated value of the 6,000 shares of Series D Preferred Stock and has the
right to chose to pay the accretion in either cash or common stock. Accordingly,
the Company registered such 12,000,000 shares, together with an additional
500,000 shares the Company may issue to pay the 4% per annum accretion on the
Series D Preferred Stock, under Registration Statement No. 333-64967. The
Company also may redeem the Series D Preferred Stock in cash or common stock. In
connection with the conversion of the 6,000 shares of Series D Preferred Stock
during the six months ended June 30, 1999, the Company issued 12,273,685 shares
of the Company's common stock.
The Series A Convertible Preferred Stock of NCT Audio
Between July 27, 1998 and August 4, 1998, NCT Audio issued and sold 60 shares
of its Series A Preferred Stock in a private placement pursuant to Regulation D
of the Securities Act. The subscription agreement requires NCT Audio to file a
registration statement covering the resale of all shares of its common stock
issuable upon conversion of the preferred stock then outstanding. NCT Audio must
do so no later than thirty (30) days after it becomes a "reporting company"
under the Exchange Act.
The NCT Audio Series A Preferred Stock becomes convertible into common stock
of NCT Audio any time after the business unit becomes a reporting company. If,
by December 31, 1998, NCT Audio either failed to become a reporting company or
the SEC did not declare the registration statement effective, holders became
entitled to exchange each share of Series A Preferred Stock into 100 shares of
the Company's Series D Preferred Stock. Holders who elected to do so would then
be holders of the Company's Series D Preferred Stock, with all of the rights and
privileges discussed above.
Thus, if the holders of all 60 shares of the NCT Audio Series A Preferred
Stock exchanged them for 6,000 shares of the Company's Series D Preferred Stock
and then converted the Series D Preferred Stock for common stock (as described
above), anywhere up to an additional 12,000,000 shares of the Company's common
stock would become issuable. The issuance of an additional 500,000 shares
enables the Company to pay the 4% per annum accretion payable on the stated
value of the 6,000 shares of Series D Preferred Stock. The Company is given the
right to chose to pay the accretion in either cash or common stock. Accordingly,
the Company registered such 12,000,000 shares, together with an additional
500,000 shares the Company may issue to pay the 4% per annum accretion on the
Series A Preferred Stock, under Registration Statement No. 333-64967. The
Company also may redeem the Series D Preferred Stock in cash or common stock. On
March 30, 1999, holders of 57 shares of NCT Audio Series A Preferred Stock
exercised this election and converted their shares into 11.7 million shares of
the Company's common stock. Thus, as of the date hereof, 3 shares of NCT Audio
Series A Preferred Stock are issued and outstanding.
The Advancel Logic Corporation Acquisition
On September 4, 1998, the Company acquired all of the common stock of
Advancel. The Company initially paid $1,000,000, payable by the delivery of
1,786,991 authorized shares of its common stock held as treasury stock.
Advancel's former shareholders may elect to receive the future payments in cash
or additional shares of the Company's common stock. The future payments will be
based on Advancel's earnings before interest, taxes, depreciation and
amortization for each of the next four years. The future payments cannot be less
than $250,000 in any year, and there is neither a maximum payment for any one
year nor an aggregate maximum amount. If Advancel's 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. If the Company had been
unable to maintain an effective registration statement for the resale of the
initial 1,786,991 shares for at least thirty (30) days, each Advancel
shareholder had the right, until April 15, 1999, to require the Company to
redeem up to one-third of the initial payment shares for a predetermined cash
amount. The Company registered such shares under Registration Statement No.
333-64967 dated September 30, 1998, as amended on October 29, 1998 and May 7,
1999.
The Series E Convertible Preferred Stock
On December 30, 1998, the Company entered into a series of subscription
agreements to sell 8,145 shares of Series E Preferred Stock, with a stated value
of up to $8.2 million in consideration of $4.0 million, to six accredited
investors through one dealer. The sale of the shares occurred in a private
placement pursuant to Regulation D of the Securities Act. In 1999, the Company
received net proceeds of $3.6 million from the Series E Preferred Stock
placement. In addition to the transactions described above, the Company issued
and sold an aggregate amount of $1.7 million of Series E Preferred Stock to
three accredited investors through the same dealer in exchange for $1.7 million
of the Company's Series C Preferred Stock held by the three investors. The
Company also issued and sold an aggregate amount of $0.7 million of Series E
Preferred Stock to four accredited investors, in exchange and consideration for
an aggregate 2.1 million shares of the Company's common stock held by the four
investors.
Each share of Series E Preferred Stock is convertible into common stock of
the Company according to the conversion formula described in the issuance's
subscription agreement. The conversion terms of the placement require the
Company to file a registration statement on either (1) a Form S-3 under certain
conditions, or (2) a Form S-1 under other specified conditions. The shares of
the Series E Preferred Stock become convertible into common stock of NCT at any
time beginning at the earlier of (1) ninety days after the closing date of the
placement, (2) five days after the Company receives a "no review" status from
the SEC in connection with filing one of the above registration statements, or
(3) the effective date of any registration statement.
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 which have been designated. Based upon
8,855 shares of Series E Preferred Stock issued and outstanding, 25,108,696
shares of the Company's common stock were registered under a registration
statement and prospectus, together with 1,540,000 shares of common stock which
may be issued (Registration Statement No. 333-82359). The issuance of the
additional 1,540,000 shares will enable the Company to pay the 4% per annum
accretion on the stated value of the 8,855 issued and outstanding shares of
Series E Preferred Stock. The Company is given the right to pay the accretion in
either cash or common stock. The conversion terms further provide that the
Company will be required to make certain payments if it fails to effect a
conversion in a timely manner and may have to redeem the excess of the stated
value over the amount permitted to be converted into common stock. As of
September 17, 1999, holders of 2,308 shares of Series E Preferred Stock have
elected to convert their shares into approximately 15.5 million shares of common
stock of the Company. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" - D. "Liquidity and Capital
Resources" for further discussion of the Series E Preferred Stock Placement.
On March 31, 1999, the Company signed a license agreement to exchange 3,600
shares of Series E Preferred Stock for four DMC network affiliate licenses
incorporating DBSS. The exchange of shares of Series E Preferred Stock is in
lieu of cash consideration. The DBSS technology was developed by the Company for
DMC, a wholly-owned subsidiary of the Company. DMC was incorporated to develop,
install and provide an audio/visual advertising medium within
commercial/professional settings. DBSS schedules advertisers' customized
broadcast messages, which are downloaded via the Internet with the respective
music genre of choice to the commercial/professional establishments.
The Company anticipates the sale of such licenses to approximate $1.0 million
each based on regional and commercial/professional settings. The Company has
developed standard license agreements to coincide with its current business plan
and delineate the extent and nature of the rights and duties of the Company and
its licensees. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized only $2.0 million on
the issuance of such licenses in consideration of the receipt of 3,600 shares of
its Series E Convertible Preferred Stock. Subsequently, during the three months
ended June 30, 1999, the Company adjusted such revenue to $0.9 million due to
the valuation of additional shares of Series E Preferred Stock issued during the
period.
Secured Convertible Notes
Carole Salkind, spouse of a former director and an accredited investor,
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, as amended by the parties on September 19, 1999 on the notes and any
future notes, shall be the lesser of (i) the lowest closing transaction price
for the common stock on the securities market on which the common stock is being
traded, at any time during September 1999; (ii) the average of the closing bid
price 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 (iii) the fixed conversion price of $0.17. In no event will the
conversion price be less than $0.12 per share. The Holder shall purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999. The Company and Holder have agreed to extend such date for
the purchase of remaining installments of secured convertible notes to December
1, 1999. On various dates, the Holder has purchased additional installments of
the remaining $3.0 million principal amount of the secured convertible notes. As
of October 11, 1999, the Company has received proceeds aggregating $3.0 million
from the Holder and has issued secured convertible notes with the same terms and
conditions of the Note described above.
The Series F Convertible Preferred Stock
On August 10, 1999, the Company entered into a subscription agreement to
sell an aggregate stated value of up to $12.5 million (12,500 shares) of Series
F Preferred Stock, in a private placement pursuant to Regulation D of the
Securities Act, to five unrelated accredited investors through one dealer. The
Company received $1.0 million for the sale of 8,500 shares of Series F Preferred
Stock having an aggregate of $8.5 million stated value. At the Company's
election, the investors may invest up to an additional $4.0 million in cash or
in kind, at a future date. Each share of the Series F 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 F 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 F Subscription Agreement, the Company is
required to file a registration statement ("the Series F Registration
Statement") on Form S-1 on or prior to a date which is no more than forty-five
(45) days from the date that the Company has issued a total of 1,000 shares of
Series F Preferred Stock, covering the resale of all of the registrable
securities (the "Series F Closing Date"). The shares of Series F Preferred Stock
become convertible into shares of common stock at any time commencing after the
earlier of (i) forty-five (45) days after the Series F Closing Date; (ii) five
(5) days after the Company receives a "no review" status from the SEC in
connection with the Series F Registration Statement; or (iii) the effective date
of the Series F Registration Statement. Each share of Series F Preferred Stock
is convertible into a number of shares of common stock of the Company pursuant
to a predetermined conversion formula.
The conversion terms of the Series F Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 35,000,000 shares of
its common stock in the aggregate in connection with the conversion of the
12,500 shares of Series F Preferred Stock. As of the date hereof, 8,500 shares
of Series F Preferred Stock are issued and outstanding. As such, 23,800,000
shares of the Company's common stock are to be registered under this
registration statement and prospectus, together with 1,944,000 shares of common
stock which may be issued. The issuance of the additional 1,944,000 shares will
enable the Company to pay the 4% per annum accretion on the stated value of the
8,500 issued and outstanding shares of Series F Preferred Stock. The Company is
given the right to pay the accretion in either cash or common stock. The Series
F Subscription Agreement also provides 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 the date hereof, no shares of Series F Preferred Stock have been
converted into NCT common stock. In connection with the Series F 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 additional
amounts will be treated as obligations of the Company. Such obligation will be
triggered in the event that the Company issues 35,000,000 shares upon conversion
of Series F Preferred Stock.
Supplier and Consultant Shares
As noted in "Recent Developments", the Company has issued 12,759,778 shares
of common stock of the Company to settle certain of its obligations to certain
suppliers and consultants. The issuance of these shares of common stock of the
Company have an immediate, dilutive effect on existing holders of the Company's
common stock.
The possibility of sale of the shares of common stock described in this
"Possible Future Dilution" section, all of which are already registered or which
the Company plans to register under this registration statement and prospectus,
may adversely affect the market price of the common stock. This does not,
however, include: (1) the shares issuable upon the other investors warrants and
options, (2) the shares relating to NCT Audio's Initial Financing, (3) shares of
common stock in excess of 1,000,000 which the Company may elect to issue to pay
the 4% accretion connected with conversion of the Series D Preferred Stock, (4)
shares of common stock in excess of 1,540,000 which the Company may elect to
issue to pay the 4% accretion in conjunction with conversion of the Series E
Preferred Stock, and (5) shares of common stock in excess of 1,944,000 which the
Company may elect to issue to pay the 4% accretion in conjunction with
conversion of the Series F Preferred Stock.
MATERIAL DEPENDENCE ON CERTAIN PATENT AND TRADEMARK RIGHTS
The Company and its subsidiaries currently hold 473 patents and related
rights worldwide and an extensive library of know-how and other unpatented
technology. The Company cannot, however, give any assurances as to:
o the range or degree of protection provided by any of its patents or
trademarks,
o that such patents, trademarks or licenses will provide protection that has
any commercial significance or any competitive advantage,
o that such patents, trademarks or licenses will provide protection against
competitors with similar technology or trademarks,
o that others will not obtain patents claiming aspects similar to those
covered by the Company's owned or licensed patents or patent applications,
o that third parties will not challenge the Company's owned or licensed
patents or patent applications, or
o that regulatory authorities will grant any pending patent or trademark
application.
The Company also believes that increased competition could result should its
present, commercially significant patents or trademarks be invalidated or
expire. This increased competition could have a material adverse effect on the
Company's business prospects. While the Company intends to file extensions for
certain patents, it further cannot make any assurances that patent authorities
will grant those extensions.
The Company has conducted only limited patent and trademark searches. Thus,
patents or trademarks superior to those held by the Company could already exist
or be issued in the future to our competitors. This, too, could have a material
adverse impact on the Company's business prospects. Further, the Company would
have to expend substantial resources in obtaining and defending its patent and
trademark rights to protect the present and future technology of NCT.
There also has been an inquiry regarding the product design of one of the
Company's products as it relates to a patent held by another company. Yet
another competitor has implied that a possible conflict exists between the
Company's application of certain of its technology and a recently granted patent
of the competitor. Our competitor further implies that our use of a generic
phrase to describe our product conflicts with a trademark for which the
competitor has applied. The Company believes these claims are without merit and
intends to conduct a vigorous defense. Even if the claims had some merit, we
believe that we could modify our current design at little cost to avoid
infringement. The Company does not believe these claims, even if unfavorably
adjudicated, would result in damages having a material adverse effect on the
business. See Item 3 - "Legal Proceedings" for further discussion.
Competitors have filed notices of opposition with respect to two of NCT
Audio's applications for trademarks. The Company and NCT Audio believe these
claims are without merit and NCT Audio intends to prosecute its applications
zealously. However, if authorities deny NCT Audio's applications, NCT could be
required to (1) obtain a license to use the subject trademarks, or (2) refrain
from using the trademarks and adopt others. Either of these options could
involve significant expense, although neither should have a long-term, material
adverse effect on the operating results of NCT Audio or the Company.
The Company's policy is to enter into confidentiality agreements with all of
its executive officers, key technical personnel and advisors. At the same time,
we cannot give any assurances that such persons will not disclose Company
know-how, inventions and other secret or unprotected intellectual property to
third parties, whether in violation of those agreements or otherwise.
Finally, it should be noted that 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", 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.
RAPID TECHNOLOGICAL CHANGE AND COMPETITION
Active Wave Management is evolving and is characterized by rapid
technological change. The Company intends to engage continually in research and
development activities. This includes improving our current products and
developing new products. Our success, however, depends on the popularity of our
products in the commercial arena, which the Company cannot guarantee. Because of
this rapid pace of change, the Company also cannot guarantee that our products
will not become unmarketable or obsolete by a competitor's more rapid
introduction to the marketplace.
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 Andrea Electronics Corporation, Bose Corporation, Digisonix,
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 these companies
is pursuing its own technology in fields similar to ours.
NCT also believes that a number of other large companies, such as the major
domestic and international communications, computer, automobile and appliance
manufacturers, and aircraft parts suppliers and manufacturers have research and
development efforts underway. Many of these companies, as well as the Company's
potential competitors in the passive sound and vibration attenuation and Active
Wave Management fields, are both well established and have substantially greater
financial, management, technical, marketing and product development resources
than the Company.
<PAGE>
RELIANCE UPON STRATEGIC ALLIANCES AND COMMERCIAL ACCEPTANCE
As previously described, the Company and its subsidiaries have entered into
numerous strategic alliances related to the design, manufacture, marketing and
distribution of our products. These agreements generally provide that in
exchange for substantially all funding, the Company will license its technology
to our partners and contribute a nominal amount of initial capital. Our partners
also receive a preference in the distribution of cash and/or profits or
royalties until the Company repays the funding, plus some interest in some
instances. At June 30, 1999, however, there were no preferred distributions due
to joint venture partners.
The Company markets its products by identifying potential markets and teaming
up with major domestic and international businesses to support product
development, manufacturing and distribution. Our ability to enter and succeed in
new markets is dependent on these companies' assessment of the Company and its
products' profitability. Success also depends on end-users' acceptance of our
products. For example, from 1995 through 1998, sales for active headsets did not
increase at the rate anticipated and demand for mufflers, kitchen exhaust and
HVAC fan quieting systems was not at the volume anticipated.
The Company also arranges for the supply of other products, such as
integrated circuits, for its active control systems. The Company is able to do
so by entering into alliances with dependable manufacturers believed also to be
dependable sources of supply. The Company cannot, however, make assurances that
these manufacturers will be able to meet the demands of the Company and our
customers in the future.
CUMULATIVE LOSSES IN JOINT VENTURES
When the Company's share of losses in an alliance is greater than its
investment, the Company has no obligation to fund such additional losses. When
this occurs, the Company suspends applying the equity method of accounting for
its investment in the alliance. The Company estimates no material aggregate
losses in its strategic alliances in excess of its investments which have not
been recorded at June 30, 1999. NCT will not be able to record any equity income
with respect to an entity until its share of future profits is large enough to
recover any losses that have not yet been recorded.
DEPENDENCE UPON EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL
The Company's operations now and in the near future are in large part
dependent upon the efforts of our executive officers and other key personnel.
None of these individuals is contractually bound to remain with the Company.
Moreover, the Company's growth and expansion into new products could require
additional expertise in areas like manufacturing and marketing. This could put
an additional strain on our human resources and may require hiring additional
personnel or training existing personnel. Certain academicians now consult for
the Company part-time but could terminate their association at any time.
Certain employees and consultants have been approached by competitors, and
the Company cannot give any assurances that these people will remain with NCT.
The loss of key personnel or the failure to recruit new employees could impede
the achievement of our new corporate mission.
<PAGE>
POSSIBLE RISKS ASSOCIATED WITH AGREEMENTS WITH RELATED PARTIES
Between 1993 and 1994, the Company entered into five agreements with
QuietPower Systems, Inc. ("QSI"). Environmental Research Information, Inc.
("ERI") owns 33% of QSI and Jay M. Haft, Chairman of the Board of Directors of
the Company, owns another 2% of QSI. Michael J. Parrella, President of the
Company, owns 12% of the outstanding capital of ERI and shares investment
control over an additional 24% of its outstanding capital.
Under the agreements, QSI is given rights to market certain of the Company's
products and technologies. Under one of the agreements, QSI's rights are
exclusive so long as QSI meets specified marketing and sales performance
criteria. Under another, QSI may receive up to 129% of its marketing expenses
for marketing certain products. The agreement defines such expenses as the
lesser of (1) actual expenses, or (2) 35% of the Company's revenues attributable
to the products. Commissions and fees payable under all of the agreements mirror
the Company's standard terms and do not exceed six percent (6%). As of the date
of this prospectus, the Company has not had to pay any commissions to QSI.
In March 1995, the Company entered into a master agreement with QSI (the
"Master Agreement"). The Master Agreement grants QSI an exclusive worldwide
license to market, sell and distribute various quieting products in the utility
industry. QSI must fund development of the products and the Company must
manufacture them. At the same time, QSI may obtain the right to manufacture
under certain circumstances, such as NCT's failure to develop the products
itself. As payment for these rights, QSI will pay the Company a royalty of six
percent (6%) of its gross revenues from the sale of the quieting products and
50% of its gross revenues received from sublicensing its rights. QSI need pay
these amounts, however, only after it has recouped 150% of its own development
costs. The Company also must pay QSI similar royalties anytime QSI sells and
licenses the products outside of the utility industry and/or within the industry
in the Far East.
Finally, the Master Agreement obligates QSI to pay an exclusivity fee of
$750,000; QSI paid $250,000 of that amount to the Company in June 1994 and was
to pay the balance in equal monthly installments of $16,667 beginning in April
1995. Under the Master Agreement, QSI loses its exclusive rights to all of the
products if it fails to timely pay any of the installments. QSI also could lose
its exclusive rights with respect to any given product if it fails to make a
product-specific development funding payment. Immediately after completing the
Master Agreement, the companies entered into a letter agreement. That first
letter agreement allowed the Company to terminate the Master Agreement if QSI
did not pay another approximately $500,000 of indebtedness it owed the Company
by May 15, 1995.
In April 1995, the Company entered into a second letter agreement with QSI.
QSI agreed to forfeit its five year warrant to purchase 750,000 shares of common
stock of the Company. The Company previously had given QSI the warrant under the
Master Agreement. The second letter agreement also reduced the $500,000 balance
of the exclusivity fee to $250,000, to be paid in thirty (30) equal monthly
installments of $8,333. Further, the second letter agreement changed the
deadline for payment of the $500,000 indebtedness noted above to the earlier of
(1) May 15, 1996, or (2) the date of closing of a financing agreement of QSI in
an amount exceeding $1.5 million.
In May 1996, the Company and QSI entered into a third letter agreement. The
third letter agreement gave QSI until June 15, 1996 to pay certain arrearages in
the payment of the exclusivity fee, and obligated QSI to pay the balance in the
same monthly installment payments outlined in the April 1995 letter. In
addition, the $500,000 indebtedness was to be paid by (1) a $25,000 payment at
the time it obtained financing, and (2) monthly payments of $15,000.
On April 9, 1997, the Company and QSI entered into a fourth letter agreement,
which again revised the payment schedule. Under the revised schedule, QSI had to
pay $125,000 on or before April 12, 1997 and a second payment of $200,000 upon
the closing of a proposed financing in June 1997 or January 1998 (whichever came
first) to extinguish its indebtedness. QSI also bound itself to pay the Company
15% of any other financing it may receive in the interim and interest of 10% per
year beginning July 1, 1997. The fourth letter agreement also provided for the
continuation of QSI's payment of $11,108 by April 21, 1997 for headset products
sold by the Company to QSI in 1996.
As of August 31, 1999, QSI still owes the Company $239,000 of the
indebtedness which was originally due on January 1, 1998. QSI informed the
Company that it could not pay this amount because of a temporary shortage of
cash and other assets. Such amount has been fully reserved by the Company.
DELISTING FROM NASDAQ NATIONAL MARKET SYSTEM
Prior to the delisting of the Company's common stock as of the close of
trading on January 6, 1999, the Company's common stock was listed on the NASDAQ
National Market System ("NMS"). NASDAQ's rules require that in order to be and
remain listed on NMS, a company must (1) have net tangible assets of $4.0
million, (2) a market value of publicly held shares of $5.0 million, and (3) a
minimum bid price of $1.00 per share. NASDAQ will delist a company if it fails
to meet any of these requirements for thirty (30) consecutive trading days.
From April 30, 1998 to June 15, 1998, the minimum bid price for the Company's
common stock fell below $1.00. NASDAQ notified the Company on June 16, 1998 of
the deficiency and gave the Company ninety (90) days to regain compliance. The
Company could regain compliance by meeting the standard for a minimum of ten
(10) consecutive business days during the ninety day grace period.
As of the given deadline, September 14, 1998, the Company had failed to
achieve compliance. On that day, the Company requested a hearing with NASDAQ's
Hearings Department. The department held the hearing on November 5, 1998. On
January 6, 1999, NASDAQ notified the Company that it was delisting the Company's
stock at the close of trading that day. On January 20, 1999, the Company
requested a review of the delisting decision. On August 9, 1999, the NASDAQ
Review Counsel denied that appeal. Thus, NCT's common stock will continue to be
listed on the OTC Bulletin Board.
The loss of the NASDAQ/NMS designation could have a material adverse effect
on the Company's business prospects. NASDAQ provides brokers and others with
immediate access to the best bid and asked prices, as well as other information,
about our common stock. With the loss of the designation, stockholders may find
it more difficult to buy, sell and obtain pricing information about our common
stock. The Company also risks no longer qualifying as a "margin security" as
defined by the Federal Reserve Board.
The loss of the designation, coupled with a failure to have either (1) net
tangible assets in excess of $2.0 million or (2) average revenue of at least
$6.0 million for the last three years, could cause the common stock to become
subject to the SEC's "penny stock" rules. The penny stock rules impose
additional sales practice requirements on broker-dealers who sell penny stock
securities to people who are not established customers or accredited investors.
For example, the broker must make a special suitability determination for the
buyer and the buyer must give written consent before the sale. The rules also
require that the broker-dealer:
o send buyers an SEC-prepared disclosure schedule before completing the sale,
o disclose his commissions and current quotations for the security,
o disclose whether the broker-dealer is the sole market maker for the penny
stock and, if so, his control over the market, and
o send monthly statements disclosing recent price information held in the
customer's account and information on the limited market in penny stocks.
These additional burdens may discourage broker-dealers from effecting
transactions in penny stocks. Thus, if our common stock were to fall within the
definition of a penny stock, the Company's liquidity could be reduced. In turn,
there could be a material effect on the trading market for our common stock.
POSSIBLE VOLATILITY OF COMMON STOCK
Historically, the market prices for the securities of emerging and
high-technology companies have been highly volatile. Any future announcement
concerning the Company or its competitors could have a significant impact on the
price of our common stock.
BLANK CHECK PREFERRED STOCK
The Board of Directors has total discretion in the issuance and determination
of the rights and privileges of any shares of preferred stock, which the Company
may issue in the future. Such rights and privileges may be detrimental to the
holders of common stock. The Company is authorized to issue 10.0 million shares
of preferred stock. There were 9,554 and 17,280 shares of preferred stock issued
and outstanding, respectively, at June 30, 1999 and December 31, 1998. If the
Company were to issue preferred stock in the future, it could discourage or
impede a tender offer, proxy contest or other similar transaction involving a
change in control. Other shareholders may favor such a transaction. Management
is not aware of any effort at present, however, to acquire or take control of
the Company.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to identify the applicable year and is an issue
which exists for all companies that rely on computers as the year 2000
approaches. The failure to correct any such programs may result in incorrect
results when computers perform arithmetic operations, comparisons of data or
field sorting and some non-information systems functions that rely on computers
making calculations.
Based on our assessment, the Company believes that the cost of administering
its Year 2000 Compliance Program will be minimal and will not have a material
adverse impact on its business. The future is uncertain, however, and any one of
a number of factors could affect the cost and effectiveness of the Company's
compliance program. These factors include: (1) software, (2) hardware, and (3)
the nature of the industry in which the Company, our subsidiaries, suppliers and
customers operate. It is also necessary that companies coordinate efforts: the
Company can make no assurances that the businesses with which we interact will
resolve their own Year 2000 issues. Nevertheless, the Company estimates that the
potential costs will not exceed $0.1 million.
The Company continues to evaluate our Year 2000 compliance efforts and the
impact of the issue on our business. There has been no indication, to date, that
the Year 2000 problem will have a material impact on future earnings. Yet, as
noted above, the Company can make no assurances that our customers and suppliers
have in place adequate systems to resolve their own Year 2000 problems. Such
potential problems remain a possibility and could have a material adverse impact
on our future results. The Company estimates completion of the evaluation
process by December 1, 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
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.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
This pronouncement replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share exclude any dilutive effect of
options, warrants and convertible securities. Dilutive earnings per share is
very similar to the previously reported fully diluted earnings per share. The
Company adopted SFAS No. 128 and has retroactively applied its effects for all
periods presented. The impact on our previously reported per share amounts was
insignificant. The effects of potential common shares such as warrants, options
and convertible preferred stock has not been included, as the effect would be
antidilutive.
<PAGE>
LITIGATION
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. Mr. Valerio alleged that:
o an independent sales representation agreement between the Company and Mr.
Valerio, but not executed by the Company, is a valid contract;
o the Company is guilty of a breach of contract;
o the Company unilaterally and illegally terminated the contract;
o the Company owes Mr. Valerio $30,000 for certain amounts allegedly
previously owed;
o the Company owes unestimated commissions to Mr. Valerio;
o the Company owes Mr. Valerio damages for harm and loss of earnings, in an
amount no less than 3 billion Lira (U.S. $18.9 million); and
o the Company owes Mr. Valerio damages for the damage to his image and
reputation, in an amount no less than 500 million Lira (U.S. $3.1 million).
The Company retained an Italian law firm specializing in litigation and,
through its counsel, filed a reply brief responding to Mr. Valerio's
allegations. The Company argued that even if the Tribunal were the appropriate
forum for the suit, Mr. Valerio's claim is groundless because a valid contract
was never formed. Further, the Company argued that Mr. Valerio is not enrolled
in the official Register of Agents and, thus, under applicable Italian law is
not entitled to any compensation. Since the submission, the Tribunal has held a
pretrial discovery hearing and a hearing before a Discovery Judge. The Discovery
Judge held another hearing on May 19, 1998 and established deadlines for final
pleadings and a trial date. The Tribunal of Milan, sitting in full bench, heard
the case on September 22, 1998. On May 4, 1999, the Company's Italian law firm
informed the Company that the Tribunal of Milan had verbally granted the
Company's objection to lack of venue and had consequently rejected Mr. Valerio's
claim and awarded the Company expenses in the amount of approximately $7,000.
The Company is awaiting receipt of the official text of the judgment.
By a letter dated September 9, 1997, counsel to competitor Andrea Electronics
Corporation ("AECorp.") informed the Company that AECorp. believed NCT was
improperly using the term "ANR Ready" and infringing upon a trademark owned by
AECorp. Representatives of existing and/or potential customers also have
informed the Company that AECorp. has made statements claiming that the
Company's manufacture and/or sale of certain in-flight entertainment system
products infringe a patent owned by the competitor. The Company received a
notice dated March 24, 1998 from AECorp.'s intellectual property counsel
notifying the Company of its concerns but did not confirm any intention to file
suit against NCT. The Company, through special outside counsel, exchanged
correspondence with AECorp. but the parties could not come to any resolution.
The Company was informed by representatives of existing and/or potential
customers that AECorp. was continuing to infer that the Company was infringing.
<PAGE>
On October 9, 1998, the Company's Board of Directors authorized litigation
against AECorp. On November 17, 1998, the Company and NCT Hearing filed a
complaint in the U.S. District Court, Eastern District of New York against
AECorp. The complaint requested that the court enter judgment in our favor as
follows:
o declare that the two AECorp. patents at issue are invalid and unenforceable
and that the Company's products do not infringe upon them;
o declare that the two AECorp. patents at issue are unenforceable due to
misuse by AECorp.;
o award the Company compensatory damages of no less than $5 million and
punitive damages of $50 million for AECorp.'s tortious interference with
the Company's prospective contractual advantages;
o enjoin AECorp. from stating or inferring that the Company's products or
their use are infringing any AECorp.-owned patents; and
o award any other relief the court deems appropriate.
On or about December 30, 1998, AECorp. filed its answer to the Company's
complaint. AECorp. generally denied the above allegations and brought
counterclaims against the Company. These include that the Company has:
o infringed the two AECorp. patents at issue and the "ANR Ready" trademark;
o violated the Lanham Act through NCT's use of the trademark; and
o unfairly competed with AECorp. by using the trademark.
The Company and NCT Hearing have since filed a Reply and requested that the
court dismiss the counterclaims and enter judgment in favor of the Company and
NCT Hearing. We also argued that AECorp. is prevented from recovering under
certain equitable theories and defenses. 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 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit in a
Maryland court against the Company and Michael J. Parrella, its Chief Executive
Officer and Director. The complaint alleges that the Company breached, and Mr.
Parrella interfered with, a purported contract entered into "in 1996" between
the Company and SCI. SCI claims that under the contract, the Company agreed to
pay SCI commissions when NCT received capital from its investors. The complaint
further alleges that SCI is due commissions totaling $1.5 million because the
Company refused to honor SCI's right of first refusal. SCI seeks $1,673,000 in
compensatory damages, $50,000 in punitive damages and $50,000 in attorneys fees
from the Company. SCI also seeks $150,000 in compensatory damages, $500,000 in
punitive damages and $50,000 in attorneys fees from Mr. Parrella. The Company
has filed two motions to strike or dismiss some of the plaintiff's claims and is
awaiting the Court's decision. At this early stage, the Company cannot assess
the likelihood of an adverse result. Management believes it has many meritorious
defenses and intends to conduct a vigorous defense. In the event the case
results in a substantial judgment against the Company, however, the judgment
could have a severe material effect on quarterly or annual operating results.
On June 25, 1998, Mellon Bank FSB ("Mellon") filed suit against Alexander
Wescott & Co., Inc. ("AWC") and the Company in a district court in the Southern
District of New York. Mellon alleged that the Company and AWC each owe it
$326,000, sums Mellon purportedly paid to both entities when it acted as escrow
agent for the Company in a private placement of securities with certain
institutional investors. The Company retained counsel and on or about July 27,
1998, AWC filed its answer, counterclaim and cross-claim against Mellon and NCT.
AWC specifically requested that the court:
o dismiss Mellon's amended complaint against AWC;
o grant AWC commissions totaling $688,000 owed to AWC by the Company;
o order the Company to issue 784,905 shares of its common stock;
o declare that AWC is entitled to keep the $326,000 sought by Mellon; and
o order the delivery of a warrant to purchase 461.13 shares of the 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 the 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 filed suit against NCT Audio and the Company
in New York Supreme Court. The complaint alleges breach of contract, common law
fraud, negligent misrepresentation, deceptive trade practices, and money had and
received. These claims all allegedly arose in connection with an agreement the
Company entered into with Balmore for the sale of shares of NCT Audio common
stock in a private placement in December 1997. Specifically, the complaint
alleges that:
o NCT Audio breached an agreement to register shares of its common stock that
Balmore purchased or, in the alternative, shares of the Company's common
stock exchangeable for NCT Audio's shares under certain circumstances, and
to pay penalties if it failed to do so;
o NCT Audio made materially false and misleading representations when it
faxed non-negotiated agreements instead of executed agreements to Balmore;
o NCT Audio and the Company acted negligently and violated duties of full and
fair disclosure; and
o NCT Audio and the Company engaged in deceptive trade practices.
Balmore further argued that as a result of these alleged actions, NCT Audio
and the Company owed Balmore compensatory damages not less than $1,819,000 and
punitive damages of $3 million. Balmore also requested that the court require
NCT Audio and the Company to register the shares it holds of NCT Audio common
stock or rescind the agreement and return to Balmore the $1 million purchase
price. Finally, Balmore requested treble damages, reasonable attorneys fees,
costs and any other relief the court deemed appropriate.
On January 14, 1999, the Company and NCT Audio filed removal papers to
remove the suit from state court to federal court. On January 22, 1999, the
Company and NCT Audio filed their answer, affirmative defenses, counterclaims
and a third-party complaint. On October 9, 1999, the Company and Balmore agreed,
in principle, on a mutual release and settlement, subject to court approval,
whereby all charges, claims and counterclaims which have been individually
or jointly asserted against the parties will be dropped.
USE OF PROCEEDS
All of the shares of common stock offered hereby are being offered by the
Selling Stockholders. The Company will not receive any of the proceeds from
their sale. The Company estimates that expenses payable in connection with this
registration statement will be approximately $40,000. There are no other
material incremental expenses attributable solely to the issuance and
distribution of the above-described shares.
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth certain information with respect to the
Selling Stockholders. The shares of common stock set forth therein have been
included in the registration statement of which this prospectus forms a part
pursuant to registration commitments afforded to the Selling Stockholders by
contractual obligations. The Company will not receive any proceeds from the sale
of the shares by the Selling Stockholders.
<TABLE>
<CAPTION>
Beneficial Number of Beneficial
Ownership Shares of Ownership of
of Shares Common Shares of Common
of Common Stock Stock After Giving
Relationship With Stock at Offered Effect to
Name of Selling Stockholder The Company September 20, 1999 For Sale Proposed Sale
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aerotek, Inc. Service Provider 161,529 161,529 -
Alliance Advisory Partners, LLC Consultant 1,131,987 1,042,639 89,348 (2)
Atlantis Capital Fund, Ltd. 7,777,936 (1) 6,314,852 (1) 1,463,084 (3)
Austost Anstalt Schaan 8,666,667 8,666,667 -
Balmore Funds, S.A. 8,666,667 8,666,667 -
Cabot Industrial Trust Service Provider/Vendor 954,447 954,447 -
Canadian Advantage Limited
Partnership 2,901,027 (1) 2,607,716 (1) 293,311 (4)
Columbia Consultants, Ltd. Service Provider/Vendor 58,009 58,009 -
Dominion Capital Fund, Ltd. 9,450,210 (1) 6,323,938 (1) 3,126,272 (5)
The Endeavour Capital Fund, S.A. 345,801 (1) 257,440 (1) 88,361 (2)
Walter Goodman Consultant 73,685 73,685 -
Gray, Cary Ware & Freden Service Provider 165,102 165,102 -
Jay M. Haft Chairman of the Board 1,748,681 (6) 65,790 1,682,891 (6)
of Directors
Tom Hall Consultant 54,961 54,961 -
JDA Advertising Service Provider/Vendor 980,159 980,159 -
Jens Johnson Photography Service Provider/Vendor 10,768 10,768 -
Judge Technical Service Provider/Vendor 408,000 408,000 -
KCSA Worldwide Service Provider/Vendor 197,959 197,959 -
Kerison & Willoughby Capital Ltd.
fbo Hachette Filipacchi Magazines Service Provider/Vendor 421,053 421,053 -
Kew Professional Service Provider/Vendor 15,107 15,107 -
Lev, Berlin & Dole, P.C. Service Provider/Vendor 263,158 263,158 -
Long Host Limited Service Provider/Vendor 2,929,172 2,929,172 -
McManus & Associates Consultant 237,638 237,638 -
Met Laboratories Service Provider/Vendor 53,685 53,685 -
Tsuneo Mikamo Consultant 450,959 450,959 -
News USA Service Provider/Vendor 776,316 776,316 -
Oblon, Spivak, McClelland,
Maier & Neustadt, P.C. Service Provider/Vendor 129,235 129,235 -
Portal Publications Ltd. 790,412 790,412 -
Portofino Licensing, Ltd. 163,536 163,536 -
Reiner Associates Consultant 36,843 36,843 -
SGS U.S. Testing Company Service Provider/Vendor 19,185 19,185 -
Signs Now Service Provider/Vendor 105,949 105,949 -
Sonic Design Solutions Consultant 81,173 81,173 -
Sovereign Partners, LP 11,207,343 (1) 10,240,054 (1) 967,289 (7)
TAC Engineering Resources Service Provider/Vendor 200,247 200,247 -
Tycon Equity Partners, LLC Consultant 460,527 460,527 -
Ultimate Sound Service Provider/Vendor 53,158 53,158 -
UMI Publications Service Provider/Vendor 45,790 45,790 -
Virginia Tech Service Provider/Vendor 631,579 631,579 -
Welty, Shimeall & Associates Service Provider/Vendor 155,199 155,199 -
Wilson Sonsini Goodrich & Rosati Service Provider/Vendor 566,809 566,809 -
---------- ----------- ----------
TOTAL 63,547,668 55,837,112 7,710,556
========== =========== ==========
</TABLE>
(1) Includes each Selling Stockholder's pro rata share of the maximum number of
shares of common stock which the Company is obligated to issue upon
conversion of the Company's Series F Preferred Stock under the Series F
Certificate of Designations. Such pro rata share has been determined for
each Selling Stockholder by dividing the number of shares of Preferred
Stock acquired by such Selling Stockholder by the total designated number
of shares of Series F Preferred Stock (pro rata share of the 8,500 shares
of Series F Preferred Stock issued and outstanding to the 12,500 shares of
Series F Preferred Stock designated) and each Selling Shareholder's pro
rata share of 1,944,000 shares which may be issued to pay the 4% accretion
on the stated value of Series F Preferred Stock. The number of shares of
Preferred Stock issued upon conversion to any particular Selling
Stockholder may be more or less than the amount shown depending on (i) the
length of time the Series F Preferred Stock is held, (ii) the conversion
price as determined under the Series F Conversion Formula, and (iii) the
application of the 35,000,000 share limit on the Company's obligation to
issue shares of common stock upon conversion of the Series F Preferred
Stock.
(2) Upon completion of the offering, the Selling Stockholder will own less than
0.1% of the Company's issued and outstanding common stock.
(3) Upon completion of the offering, the Selling Stockholder will own 0.8% of
the Company's issued and outstanding common stock.
(4) Upon completion of the offering, the Selling Stockholder will own 0.2% of
the Company's issued and outstanding common stock.
(5) Upon completion of the offering, the Selling Stockholder will own 1.6% of
the Company's issued and outstanding common stock.
(6) Includes 218,500 shares issuable upon the exercise of currently exercisable
warrants, 10,000 restricted shares and 1,419,500 shares issuable upon the
exercise of currently exercisable options. Upon completion of the offering,
the Selling Shareholder will own 0.9% of the Company's issued and
outstanding common stock.
(7) Upon completion of the offering, the Selling Stockholder will own 0.5% of
the Company's issued and outstanding common stock.
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Stockholders that there are no
underwriting arrangements with respect to the sale of the shares, that such
shares will be sold from time to time in the over-the-counter market at then
prevailing prices or at prices related to the then current market price or in
private transactions at negotiated prices. The shares offered hereby may be sold
by one or more of the following methods, without limitation: (a) a block trade
in which a broker or dealer so engaged will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to facilitate
the transaction; (b) purchase by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers and dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from Selling
Stockholders in amounts to be negotiated. Such brokers and dealers and any other
participating brokers and dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales. Shares of common
stock offered hereby may be used to cover short sales or other hedging
transactions. From time to time, one or more of the Selling Stockholders herein
may pledge, hypothecate or grant a security interest in some or all of the
shares owned by them, and the pledgees, secured parties or persons to whom such
securities have been hypothecated shall, upon foreclosure in the event of
default, be deemed Selling Stockholders for purposes thereof.
DESCRIPTION OF SECURITIES TO BE REGISTERED
This offering consists of 25,744,000 shares of common stock of the Company,
which may be issued upon the conversion of issued and outstanding shares of the
Company's Series F Preferred Stock. The Company originally issued the Series F
Preferred Stock in a private placement exempt from registration under Regulation
D of the Securities Act by persons not deemed "affiliates" as that term is
defined under the Securities Act.
In addition, this offering consists of 12,759,778 shares of common stock of
the Company that the Company issued to certain consultants, service providers
and trade vendors to settle obligations owed to them by the Company.
This offering also includes 17,333,334 shares of the Company's common stock
which the Company issued in exchange for 532 shares of common stock of NCT Audio
held by investors.
All of the foregoing shares of common stock of the Company may be offered for
sale by the Selling Stockholders. The Company will not receive any of the
proceeds from the sale of such shares.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Matters relating to the legality of 55,837,112 shares of common stock being
offered by this prospectus have been reviewed for the Company by its outside
counsel, Crowell & Moring LLP.
The consolidated financial statements of the Company at December 31, 1997 and
1998 and for the years ended December 31, 1996, 1997 and 1998 and the related
financial statement schedule included in this prospectus and as exhibits have
been audited by Richard A. Eisner & Company, LLP, independent auditors, as set
forth in their reports included therein (which contains an explanatory paragraph
relating to the existence of substantial doubt about the Company's ability to
continue as a going concern and which are based in part on the report of Peters
Elworthy & Moore, Chartered Accountants). The financial statements and schedule
referred to above are included in reliance upon such reports given upon the
authority of such firms as experts in auditing and accounting.
The financial statements of the Company's subsidiary, Noise Cancellation
Technologies (Europe) Limited, at December 31, 1997 and 1998 and for the years
ended December 31, 1996, 1997 and 1998 included into this prospectus and as
exhibits have been audited by Peters Elworthy & Moore, Chartered Accountants, as
set forth in their report included therein (which contains a paragraph on the
dependence on NCT Group, Inc. for continued financial support) and have been so
incorporated in reliance upon such report given upon the authority of such firm
as experts in auditing and accounting.
<PAGE>
INFORMATION WITH RESPECT TO THE REGISTRANT
ITEM 1. THE BUSINESS
A. General Development of Business
NCT 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
offerings, with in excess of 89 products currently being sold, including
NoiseBuster(R) communications headsets and NoiseBuster Extreme!(TM) consumer
headsets, Gekko(TM) flat speakers, flat panel transducers, ClearSpeech(R)
microphones, speakers and other products, adaptive speech filters, the
ProActive(R) line of industrial/commercial active noise reduction 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 machines, and an aircraft cabin quieting system.
In early 1998, the Company introduced the Gekko(TM) flat speakers and the
ClearSpeech(R) corporate intranet telephone software (the "I-Phone") which the
Company believes will have wide application in the audio and communications
industries. As part of its product line expansion plans, the Company introduced
over 19 new products and associated accessories during 1998 and has continued
product enhancements during 1999.
In keeping with the direction established in late 1994, during 1997 and 1998
the Company continued the practice of marketing its technology through licensing
to third parties for fees and subsequent royalties. During 1997, the Company
entered into ten new technology license agreements. During 1998, the Company
entered into five new technology license agreements. Also during 1998, the
Company received royalties arising out of its cross license agreement with NXT
plc (formerly known as Verity Group plc) and New Transducers Ltd. The cross
license agreement further allows for sublicensing. See G. "Strategic Alliances"
and Note 3 - "Notes to Consolidated Financial Statements." As noted in "Recent
Developments," during 1999, the Company has entered into a new technology
license agreement with L&H, has expanded its cross-license agreement with NXT
plc and has received royalties pursuant to several of its technology license
agreements.
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.
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 projected 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 in 1983 to December 31, 1998, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 26% in
product sales, 43% in engineering and development services and 31% in technology
licensing fees and royalties. Total revenue for the six months ended June 30,
1999 consisted of approximately 21% in product sales, 20% in engineering and
development services and 59% in technology licensing fees and royalties.
Active noise control offers many advantages over traditional passive methods
of noise control such as conventional mufflers, ear protectors and acoustical
padding. Active noise control systems: (i) generally reduce only unwanted noise
and permit desired sounds such as the human voice, music or warning tones to
pass freely, (ii) are more successful in attenuating low frequency noise, (iii)
contribute to energy savings and provide other economic benefits in various
applications, and (iv) generally are smaller and lighter.
NCT believes that it has a significant position in Active Wave Management
technology, holding 473 patents and related rights and an extensive portfolio of
know-how and other unpatented technology.
The Company also has entered into a number of strategic supply,
manufacturing and marketing alliances with leading global companies to
commercialize its technology. 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"), Applied
Acoustic Research, L.L.C. ("AAR"), Hoover Universal, Inc. ("Hoover") and New
Transducers Ltd., among others, in order to penetrate major markets more rapidly
and efficiently, while minimizing the Company's own capital expenditures. See G.
"Strategic Alliances" and Note 3 - "Notes to Financial Statements."
An important factor for the Company's continuing development is its ability
to recruit and retain key personnel. As of August 31, 1999, the Company had 85
employees, including 49 engineers and associated technical staff members. 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 the name Noise
Cancellation Technologies, Inc. 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 changing the name of the Company
from Noise Cancellation Technologies, Inc. to NCT Group, Inc. The new name
became effective October 21, 1998. The Company filed the appropriate amendment
to its Certificate of Incorporation with the Office of the Secretary of State of
Delaware to comply with applicable Delaware General Corporation Law.
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. The Company's Advancel operations are
conducted in San Jose, California.
The Company is organized into strategic business units, each of which is
targeted to the commercialization of its own products in specific markets. Refer
to Note 14 "Notes to Financial Statements" for further information about the
Company's business segments.
B. Business Strategy
The Company revised its strategy and redefined its mission during 1994 and
1995, expanding its technology development into areas outside of traditional
active noise and vibration control in order to address markets having greater
opportunities such as communications and audio. The acquisition of certain
assets and all of the intellectual property of Active Noise and Vibration
Technologies, Inc. ("ANVT") broadened the Company's portfolio of intellectual
property and removed restrictions on the Company regarding licensing a series of
patents developed by Professor G.B.B. Chaplin relating to active wave management
technology, (the "Chaplin Patents") to unaffiliated third parties (see C.
"Technology"). The Company can now license the Chaplin Patents directly to
unaffiliated third parties, which provides the Company with a greater ability to
earn technology licensing fees and royalties from such patents. Thus, while the
Company continues to focus on products that the Company believes will generate
near term revenue, it is increasing its emphasis on technology licensing fees
and royalties. Further, the Company is working continuously to lower the cost of
its products and improve their technological performance.
C. 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 ("ANR"). 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, ANR 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 which follows
shows the relationship, in time, of a noise signal, an anti-noise signal and the
residual noise that results when they meet.
<PAGE>
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. An application of this technology is
in-wire attenuation of siren noise over two-way radio communications between
emergency vehicles and dispatchers at hospitals and police or fire stations.
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.
Adaptive Speech Filter ("ASF"). The adaptive speech filter algorithm removes
noise from voice transmissions. ASF 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. ASF applications include teleconferencing
systems, cellular telephones and "airphones," telephone switches, echo
cancellers, and communications systems in which background noise is predominant.
ASF is currently available for use on three hardware platforms. The Company has
added an echo cancellation algorithm which may be combined with ASF on a variety
of platforms.
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
acoustic echo cancellation algorithm which runs on various platforms including
PCs and fixed and floating DSPs.
Java Processor Core. 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.
NCT Audio. The Company has expanded its flat panel transducer ("FPT")
technology to include audio systems for the reproduction of speech and music.
The Company is developing Top Down Surround SoundTM ("TDSS(TM)") for the
automobile audio market, in both original equipment manufacturer ("OEM") and
after-market versions. TDSS(TM) employs FPT technology to produce sound much
closer to the listener's ear than conventional speakers. This placement and
revolutionary technology allows for a "sweet space" ("Sweet Space(TM)")
listening experience as opposed to a conventional speaker system's "sweet spot"
listening experience. The Company has also developed flat audio speaker products
utilizing FPT technology for commercial and consumer use.
Flat Panel Transducer. NCT patented 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.
<PAGE>
D. 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 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. These patents cover inventions made
by Professor G.B.B. Chaplin 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 belonging to 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, active noise
headsets and 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 also has applied for patents on combined feedforward
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 ASF which is
used in the Company's ClearSpeech(R) product line.
Since 1996, the Company has been granted 280 new patents in the field of
Active Wave Management.
The Company now holds or has rights to 313 inventions as of July 31, 1999,
including 113 United States patents and over 360 corresponding foreign patents.
The Company has pending 171 U.S. and foreign patent applications. NCT's
engineers have made 151 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.
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
<PAGE>
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 patent
or trademark issued to, or licensed by, the Company will afford or that such
patents, 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 patents or
trademarks will afford protection against competitors with similar patents,
products or trademarks. No assurance exists that the Company's owned or licensed
patents or trademarks will not be challenged by third parties, invalidated, or
rendered unenforceable. Furthermore, there can be no assurance that any pending
patent or trademark applications or applications filed in the future will result
in the issuance of a patent or trademark. The invalidation, abandonment or
expiration of patents or 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 patent and trademark searches and no
assurances can be given that patents or 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 patent and
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.
Finally, it should be noted that 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.
E. 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, while 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.
<PAGE>
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 also has 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
also 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 and five other international carriers.
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, 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 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 allows 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.
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 and the six months ended June 30, 1999.
Year ended Six months ended
December 31, 1998 June 30, 1999
--------------------- --------------------
(000's) As a % (000's) As a %
Products Amount of Total Amount of Total
--------- --------- --------- ---------
Hearing Products $ 1,191 56.8% $ 408 33.2%
Communications 488 23.3% 463 37.7%
Audio Products 383 18.3% 355 28.9%
Other 35 1.6% 2 0.2%
--------- --------- --------- ---------
Total $ 2,097 100.0% $ 1,228 100.0%
========= ========= ========= =========
<PAGE>
Technology Licensing Fees and Royalty Revenues
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 and the six months ended
June 30, 1999.
Year ended Six months ended
December 31, 1998 June 30, 1999
------------------------ ------------------------
(000's) As a % (000's) As a %
Technology Amount of Total Amount of Total
---------- ------ -------- ------ --------
Audio $ 350 43.6% $ 500 14.3%
Advancel 200 24.9% 1,100 31.4%
Hearing 86 10.7% 156 4.4%
Communications 18 2.2% 863 24.7%
DMC - - 850 24.3%
Other 148 18.6% 32 0.9%
----------- ----------- ----------- -----------
Total $ 802 100.0% $ 3,501 100.0%
=========== =========== =========== ===========
F. 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.
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. Prototype samples have
been received in 1999. Full production is scheduled to commence in 2000.
<PAGE>
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 also has extended the availability of PC development tools by
creating software developer's kits for ASF, AEC and compression.
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.
G. 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:
----------------------------------------------------------------------
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.
----------------------------------------------------------------------
Walker Manufacturing Company (a division of Tennessee Gas Pipeline Company, a
wholly-owned subsidiary of Tenneco, Inc.) (U.S.) 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 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)
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, 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., a wholly-owned subsidiary of NXT plc, and the Company
executed a cross licensing agreement (the "Cross License") on March 28, 1997.
Under the 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.
<PAGE>
H. Marketing and Sales
In addition to marketing its Active Wave Management technology and systems
through its strategic alliances as described above, as of August 31, 1999, the
Company has an internal sales and marketing force of fifteen employees, nine
independent sales representatives, and its executive officers and directors. 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.
Note 15 - "Notes to Financial Statements" sets forth financial information
relating to foreign and domestic operations and sales for the years ended
December 31, 1996, 1997 and 1998.
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
=========== ==========
During the six months ended June 30, 1999, each of four customers accounted
for more than 10% of the revenue recognized; and at June 30, 1999, two customer
accounts each exceeded 10% of the total outstanding accounts receivable.
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.
<PAGE>
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 or 1999.
L. Research and Development
Company-sponsored research and development expenses aggregated $7.0 million,
$6.2 million and $7.2 million for the fiscal years ended December 31, 1996, 1997
and 1998, respectively. Such expenses for the six months ended June 30, 1999
were approximately $3.5 million.
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.
N. Employees
The Company had 85 employees as of August 31, 1999. None of such employees is
represented by a labor union. The Company considers its relationships with
employees to be satisfactory.
<PAGE>
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.
NCT Audio, a majority owned subsidiary of the Company, has signed three
letters of intent, an agreement to purchase and one definitive purchase
agreement (now expired) 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:
o leverage the extensive dealer network;
o gain access to worldwide consumer audio markets and establish automotive
audio aftermarket accounts;
o increase product distribution of all acquisition companies in world
markets; o cross-sell the acquisition companies' products among
distribution channels; and
o 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., 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 an additinal
$6,000,000 in possible future cash contingent payments. 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.
<PAGE>
NCT Audio had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay TST $6.5 million on or before March 31, 1999 to complete the
acquisition of TSA's assets. As consideration for an extension of such exclusive
right from March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST a fee of
$350,000 consisting of $20,685 in cash, $125,000 of NCT Audio's minority
interest in TSA earnings, and a $204,315 note payable, due April 16, 1999. If
NCT Audio failed to pay the note by April 16, 1999, (a) the note would begin to
accrue interest on April 17, 1999 at the lower of the rate of two times prime
rate or the highest rate allowable by law; and (b) the $20,685 and $125,000
portion of the extension fee would no longer be credited toward the $6.5 million
purchase consideration due at closing. If NCT Audio failed to pay the note by
April 30, 1999, the $204,315 portion of the extension fee would no longer be
credited toward the $6.5 million closing amount due. To date, NCT Audio has not
paid the note. Further, if NCT Audio failed to close the contemplated
transaction by May 28, 1999, NCT Audio would forfeit its minority earnings in
TSA for the period June 1, 1999 through May 30, 2000. In addition, due to NCT
Audio's failure to close the transaction by March 31, 1999, NCT Audio is
required to pay a penalty premium of $100,000 of NCT Audio's preferred stock. In
exchange for an extension from May 28, 1999 to July 15, 1999, NCT Audio
relinquished 25% of its minority equity ownership in TSA. As a result, NCT Audio
now has a 15% minority interest in TSA.
On or about July 15, 1999, NCT Audio determined it would not proceed with the
purchase of the assets of TSA, as structured, due primarily to its difficulty in
raising the requisite cash consideration. If TSA is sold to another purchaser,
NCT Audio will receive its pro rata share (15%) of such consideration.
On August 17, 1998, NCT Audio agreed to acquire all of the members' interest
in Phase Audio LLC. 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 bears 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 is currently experiencing significant
organizational changes which will likely result in cancellation of the agreement
for NCT Audio to acquire the members' interest in PPI. NCT Audio is seeking a
substitute acquisition.
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 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. 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. To date,
the Company has not been able to obtain the financing to consummate this
transaction.
<PAGE>
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."
Q. Available Information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from the SEC's Website at "http://www.sec.gov."
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 European 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.
The Company maintains a sales and marketing office in Tokyo, Japan, where it
leases approximately 800 square feet of space under a lease which expires in May
2000, and provides for a current monthly rental of approximately $3,000.
<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. On May 4, 1999, the Company's
Italian law firm informed the Company that the Tribunal of Milan had verbally
granted the Company's objection to lack of venue and had consequently rejected
Mr. Valerio's claim and awarded the Company expenses in the amount of
approximately $7,000. The Company is awaiting the official text of the judgment.
By a letter dated September 9, 1997, outside counsel to Andrea Electronics
Corporation 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.
<PAGE>
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 Corporation filed suit in a Connecticut federal
court against the Company, John J. McCloy II, Michael J. Parrella, Jay M. Haft
and Alistair J. Keith, former and current directors of the Company. Ally alleges
three claims arising out of an agreement which the Company entered into with
ANVT. Under the agreement, the Company had agreed to acquire ANVT's patented and
unpatented intellectual property, certain rights and obligations belonging to
ANVT under some 21 of its own agreements and certain office and laboratory
equipment. The Company paid ANVT $200,000 and issued it 2.0 million shares of
the Company's common stock. Ally, an unsecured creditor of ANVT, claimed some
interest in the Company's common stock. Ally, an unsecured creditor of ANVT,
claimed some interest in the Company's payment to ANVT and alleged fraud,
negligent misrepresentation and unfair trade practices against the Company to
recover its purported losses. On July 15, 1998, the Company paid Ally $25,000 in
settlement of the suit.
On June 10, 1998, Schwebel Capital Investments, Inc. 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.
<PAGE>
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott & Co.,
Inc. 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; (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 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. On October 9, 1999, the Company and Balmore agreed, in principle, on
a mutual release and settlement, subject to court approval, whereby all charges,
claims and counterclaims which have been individually or jointly asserted
against the parties will be dropped.
The Company believes there are no other material 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. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the January 6, 1999 delisting of the Company's common stock from
NASDAQ's National Market System, the Company's common stock was listed on the
NASDAQ/NMS under the symbol "NCTI". See "Risk Factors - Delisting from NASDAQ
National Market System." The Company's common stock currently trades on the
NASDAQ OTC Bulletin Board under the symbol "NCTI". High and low last sale
information for the Company's common stock for specified quarterly periods is
set forth below:
1999 1998 1997
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
1st Quarter $0.440 $0.190 $0.938 $0.875 $0.906 $0.375
2nd Quarter $0.480 $0.230 $0.719 $0.656 $0.469 $0.219
3rd Quarter $0.290 $0.172 $0.563 $0.531 $1.125 $0.219
4th Quarter $0.197 $0.172 $0.344 $0.281 $2.031 $0.563
(1999 through
October 25,
1999)
At October 25, 1999, the last sale price of the Company's common stock was
$0.1850.
At December 31, 1998, there were approximately 40,000 record holders 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
registered and unregistered securities during the year ended December 31, 1998.
ITEM 5. DESCRIPTION OF SECURITIES
This offering consists of 25,744,000 shares of common stock of the Company
which may be issued upon the conversion of issued and outstanding shares of the
Company's Series F Preferred Stock. The Company originally issued the Series F
Preferred Stock in a private placement exempt from registration under Regulation
D of the Securities Act by persons not deemed "affiliates" as that term is
defined under the Securities Act.
In addition, this offering consists of 12,759,778 shares of common stock of
the Company that the Company issued to certain consultants, service providers
and trade vendors to settle obligations owed to them by the Company.
This offering also includes 17,333,334 shares of the Company's common stock
which the Company issued in exchange for 532 shares of common stock of NCT Audio
held by investors.
All of the foregoing shares of common stock of the Company may be offered for
sale by the Selling Stockholders. The Company will not receive
any of the proceeds from the sale of such shares.
<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 in this registration statement and prospectus. Operating results for
the periods ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
<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)
========== ========== ========== ========== ==========
<PAGE>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
(unaudited) (unaudited)
----------------------- -----------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
<S> <C> <C> <C> <C>
Product sales $ 664 $ 576 $ 1,065 $ 1,228
Engineering and development
services 128 366 149 1,175
Technology licensing fees and other 36 779 346 3,501
---------- ---------- ---------- -----------
Total revenues $ 828 $ 1,721 $ 1,560 $ 5,904
---------- ---------- ---------- -----------
COSTS AND EXPENSES:
Cost of product sales $ 567 $ 649 $ 869 $ 1,083
Cost of engineering and
development services 106 395 128 903
Selling, general and administrative 1,735 2,678 4,454 5,663
Research and development 1,833 1,745 3,297 3,458
Other (income)/expense, net (3,339)(4) 204 (3,382)(4) 307
Write down of investment in
unconsolidated affiliates - 2,385(5) - 2,385(5)
Interest (income)/expense, net (91) (33) (212) (57)
---------- ---------- ---------- -----------
Total costs and expenses $ 811 $ 8,023 $ 5,154 $ 13,742
---------- ---------- ---------- -----------
Net income/(loss) $ 17 $ (6,302) $ (3,594) $ (7,838)
Less:
Preferred stock dividend
requirement $ - $ 134 $ 1,690 $ 5,240
Accretion of difference between
carrying amount and redemption
amount of redeemable preferred
stock 98 25 483 184
========== ========== ========== ===========
Net (loss) attributable to
common stockholders $ (81) $ (6,461) $ (5,767) $ (13,262)
========== ========== ========== ===========
Weighted average number of common
shares outstanding (1) - basic
and diluted 138,073 174,238 135,968 165,247
========== ========== ========== ===========
Basic and diluted loss per share $ 0.00 $ (0.04) $ (0.04) $ (0.08)
========== ========== ========== ===========
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)
June 30, 1999
(unaudited)
-------------
BALANCE SHEET DATA:
<S> <C>
Total assets $ 18,329
Total current liabilities 8,486
Long-term debt 1,653
Accumulated deficit (115,542)
Stockholders' equity (2) 7,879
Working capital (deficiency) (2,382)
</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
NXT in connection with the cross license agreement entered into by the
Company.
(5)Includes a $2.4 million charge in connection with the Company's write down
of its investment in TSA to its estimated net realizable value.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. 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.
B. Overview
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(TM), 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
1999.
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. In the six months ended June 30, 1999, 20% of the Company's revenue was
from engineering and development services. 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 their 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.
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.
<PAGE>
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 its 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. Total revenues for the first six months of 1999
consisted of 21% in product sales, 20% in engineering and development services
and 59% in 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' magnetic resonance imaging 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 for United
Airlines' and five other international carriers' 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 280 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 from 173 to 85 employees as of
August 31, 1999.
Because the Company did not meet its revenue targets for 1998, it entered
into certain transactions which provided additional funding. These transactions
(as defined below) included the Series D Preferred Stock Private Placement, the
1998 NCT Audio Series A Preferred Stock Private Placement, the 1998 Series E
Preferred Stock Private Placement, issuance of secured convertible notes and the
Series F Preferred Stock Private Placement. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources."
<PAGE>
On March 31, 1999, the Company signed a license agreement to exchange 3,600
shares of Series E Preferred Stock for four (4) DMC network affiliate licenses
incorporating DBSS. The exchange of shares of Series E Preferred Stock is in
lieu of cash consideration. The DBSS technology was developed by the Company for
DMC, a wholly-owned subsidiary of the Company. DMC was incorporated to develop,
install and provide an audio/visual advertising medium within
commercial/professional settings. DBSS schedules advertisers' customized
broadcast messages, which are downloaded via the Internet with the respective
music genre of choice to the commercial/professional establishments.
The Company anticipates the sale of such licenses to approximate $1.0 million
each based on regional and commercial/professional settings. The Company has
developed standard license agreements to coincide with its current business plan
and delineate the extent and nature of the rights and duties of the Company and
its licensees. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized only $2.0 million on
the issuance of such licenses in consideration of the receipt of 3,600 shares of
its Series E Convertible Preferred Stock. During the three months ended June 30,
1999, the Company adjusted such revenue to $0.9 million due to the valuation of
additional shares of Series E Preferred Stock issued during the period.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hauspie Speech Products N.V. ("L&H"). The agreement provides the Company with a
worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. Further, on April 12, 1999, the
Company granted a worldwide, non-exclusive, non-transferable license to L&H. The
agreement provides L&H access to NCT's noise and echo cancellation algorithms
for use in L&H's technology.
At the annual meeting of stockholders of the Company on June 24, 1999, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 255,000,000 to 325,000,000. This
amendment became effective on July 29, 1999 when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware to comply with applicable Delaware General
Corporation Law.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company due to current cash constraints. In connection
therewith, management has negotiated with certain vendors and creditors to
settle obligations owed by the Company.
On August 16, 1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. As a result, the Company
has reduced its worldwide workforce by approximately 25%.
Cash and cash equivalents amounted to $0.1 million as of June 30, 1999 and
$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.
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.
As previously noted, on January 6, 1999, NASDAQ notified the Company that the
Company's securities were delisted from NASDAQ effective with the close of
business on January 6, 1999. While a delisting of the Company's common stock is
not anticipated to have an adverse 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 June 30, 1999 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>
C. Results of Operations
Six months ended June 30, 1999 compared with six months ended June 30, 1998.
Total revenues for the first six months of 1999 were $5.9 million compared to
$1.6 million for the same period in 1998, an increase of $4.3 million or 278%.
Revenues for the first six months of 1999 included a net license fee of $0.9
million for DBSS technology and total revenue recognized from STMicroelectronics
S.A. ("ST") of $2.0 million.
Consistent with the Company's objectives, technology licensing fees and
royalties increased to $3.5 million in the first six months of 1999 versus $0.3
million for the same period in 1998, an increase of $3.2 million, primarily due
to a $0.9 million prepaid royalty and a $0.2 million license fee from ST and a
$0.9 million net DBSS license fee. The technology license fee consideration is
occasioned by 3,600 shares of Series E Preferred Stock returned to the Company
in lieu of cash consideration. The DBSS license includes the rights to exploit
the DBSS technology in a specific geographical area within one of four networks.
The technology includes hardware, software, rights to practice the intellectual
property and the license to deliver music along with advertising content. The
Company anticipates the sale of such licenses to approximate $1.0 million each
based on regional and commercial/professional settings. During the three months
ended March 31, 1999, the Company, in accordance with its revenue recognition
policy, realized only $2.0 million on the issuance of such licenses in
consideration of the receipt of 3,600 shares of its Series E Preferred Stock.
During the three months ended June 30, 1999, the Company adjusted such revenue
to $0.9 million, due to the valuation of additional shares of Series E Preferred
Stock issued during the period.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and five other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
Product sales increased to $1.2 million for the first six months of 1999
versus $1.1 million for the same period in 1998, an increase of $0.1 million or
15%, primarily reflecting increased sales of ClearSpeech(R) and Gekko(TM) flat
speakers. Primarily due to an agreement with ST, engineering and development
services have increased to $1.2 million compared to $0.1 million for the same
period in 1998.
Cost of product sales was $1.1 million for the first six months of 1999
versus $0.9 million for the same period in 1998, an increase of $0.2 million or
25%, primarily reflecting the increase in product sales and an inventory reserve
of $0.2 million for slow moving hearing product inventory. Product margin was
12% for the first six months of 1999 versus 18% during the same period in 1998
due to the above noted inventory reserve offset by the sales mix of more
profitable products, particularly the sales of ClearSpeech(R) products and
Gekko(TM) flat speakers. Cost of engineering and development services increased
to $0.9 million for the first six months of 1999 versus $0.1 million for the
same period in 1998, due to the agreement with ST. The gross margin on
engineering and development services increased to 23% for the first six months
of 1999 from 14% during the same period in 1998 due to more profitable contracts
in 1999.
Selling, general and administrative expenses for the first six months of 1999
were $5.7 million versus $4.5 million for the same period in 1998, an increase
of $1.2 million or 27% primarily due to an 11% increase in the number of sales
and marketing professionals, additional corporate and marketing efforts in DMC,
a new wholly-owned subsidiary of the Company and an increase of $0.5 million in
legal expenses.
Research and development expenditures for the first six months of 1999 were
$3.5 million versus $3.3 million for the same period in 1998, an increase of
$0.2 million or 5%, primarily due to costs attributable to Advancel Logic
Corporation, a subsidiary of the Company acquired in September 1998, and
continued efforts to focus on near term product sales and technology licensing
fees. The Company continues to focus on products utilizing its hearing, audio,
communications and microphone technologies, products which have been developed
within a short time period and are targeted for rapidly emerging markets.
<PAGE>
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 had 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 was
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.
D. Liquidity and Capital Resources
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $115.5 million on a
cumulative basis through June 30, 1999. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
(1) the sale of common stock, including the exercise of warrants or options to
purchase common stock, (2) the sale of preferred stock convertible into common
stock, (3) technology licensing fees, (4) royalties, (5) product sales, and (6)
engineering and development funds received from strategic partners and
customers.
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, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures 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 services, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales and engineering and development services 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.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development revenue.
In that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise substantial doubt at June 30, 1999, about the
Company's ability to continue as a going concern.
At June 30, 1999, cash was $0.1 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 deficit in working capital increased to $(2.4) million at June
30, 1999, from $(1.2) million at December 31, 1998. This $1.2 million
deterioration was primarily due to a decrease in cash and cash equivalents due
to increasing efforts to develop and introduce new product lines and to fund
operations for the period.
During the first six months of 1999, the net cash used in operating
activities was $4.5 million, compared to $7.3 million used in operating
activities during the same period of 1998. The decrease of $2.8 million was
primarily due to the write down of the estimated net realizable investment in
TSA.
Net inventory decreased during the first six months of 1999 by $0.2 million,
primarily due to an increase in reserves for slow moving hearing product
inventory.
The net cash provided by financing activities amounted to $5.0 million,
primarily due to the $1.5 million convertible notes (see Note 6 - "Notes to the
Condensed Consolidated Financial Statements" for further details) and $3.5
million net proceeds from the Series E Preferred Stock financing (see Note 8 -
"Notes to the Condensed Consolidated Financial Statements" for further details).
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
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 (the
"Series D 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 "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, and the
Company received $5.2 million net proceeds. 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.
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
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
(the "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 Preferred Stock and thereafter shall be
entitled to all rights and privileges of a holder of the Company's Series D
Preferred Stock. On March 30, 1999, holders of 57 shares of NCT Audio Series A
Preferred Stock exercised this election and converted their shares into 11.7
million shares of the Company's common stock. As of the date hereof, 3 shares of
the NCT Audio Series A Preferred Stock are issued and outstanding.
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 had 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.
On November 24, 1998, the Company paid $1,000 in consideration for a
wholly-owned subsidiary, DistributedMedia.com, Inc.. 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 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 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 Company is also obligated to pay a 4% per
annum accretion on the stated value of Series E Preferred Stock. The Company is
given the right to pay the accretion in either cash or common stock. 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 September 17, 1999, holders of 2,308 shares of Series E Preferred
Stock have elected to convert their shares into approximately 15.5 million
shares of common stock of the Company.
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 subscribed and agreed to purchase secured convertible notes
of the Company in an aggregate principal amount of $4.0 million. A secured
convertible 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, as amended by the parties on September 19, 1999 on the notes and any
future notes, shall be the lesser of (i) the lowest closing transaction price
for the common stock on the securities market on which the common stock is being
traded, at any time during September 1999; (ii) the average of the closing bid
price 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 (iii) the fixed conversion price of $0.17. In no event will the
conversion price be less than $0.12 per share. The Holder shall purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999. The Company and Holder have agreed to extend such date for
the purchase of remaining installments of secured convertible notes to Demember
1, 1999. On various dates, the Holder has purchased additional installments of
the remaining $3.0 million principal amount of the secured convertible notes. As
of October 11, 1999, the Company has received proceeds aggregating $3.0 million
from the Holder and has issued secured convertible notes with the same terms and
conditions of the Note described above.
On March 31, 1999, the Company signed a license agreement to exchange 3,600
shares of Series E Preferred Stock for four (4) DMC network affiliate licenses
incorporating DBSS. The exchange of shares of Series E Preferred Stock is in
lieu of cash consideration. The DBSS technology was developed by the Company for
DMC, a wholly-owned subsidiary of the Company. DMC was incorporated to develop,
install and provide an audio/visual advertising medium within
commercial/professional settings. DBSS schedules advertisers' customized
broadcast messages, which are downloaded via the Internet with the respective
music genre of choice to the commercial/professional establishments.
The Company anticipates the sale of such licenses to approximate $1.0 million
each based on regional and commercial/professional settings. The Company has
developed standard license agreements to coincide with its current business plan
and delineate the extent and nature of the rights and duties of the Company and
its licensees. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized only $2.0 million on
the issuance of such licenses in consideration of the receipt of 3,600 shares of
its Series E Preferred Stock. During the three months ended June 30, 1999, the
Company adjusted such revenue to $0.9 million due to the valuation of additional
shares of Series E Preferred Stock issued during the period.
On August 10, 1999, the Company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F Preferred Stock, in a private
placement pursuant to Regulation D of the Securities Act, to five unrelated
accredited investors through one dealer (the "1999 Series F Preferred Stock
Private Placement"). The Company received $1.0 million for the sale of 8,500
shares of Series F Preferred Stock having an aggregate of $8.5 million stated
value. At the Company's election, the investors may invest up to an additional
$4.0 million in cash or in kind, at a future date. Each share of the Series F
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 F 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 F Subscription Agreement, the
Company is required to file a registration statement ("the Series F Registration
Statement") on Form S-1 on or prior to a date which is no more than forty-five
(45) days from the date that the Company has issued a total of 1,000 shares of
Series F Preferred Stock, covering the resale of all of the registrable
securities (the "Series F Closing Date"). The shares of Series F Preferred Stock
become convertible into shares of common stock at any time commencing after the
earlier of (i) forty-five (45) days after the Series F Closing Date; (ii) five
(5) days after the Company receives a "no review" status from the SEC in
connection with the Series F Registration Statement; or (iii) the effective date
of the Series F Registration Statement. Each share of Series F 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 F Conversion
Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
-----------------------------------
Conversion Price
where
N = the number of days between (i) the Series F Closing
Date, and (ii) the conversion date.
Conversion
Price = the 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 Series F 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 five (5) consecutive trading
days immediately preceding such date.
The conversion terms of the Series F Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 35,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 12,500
shares of Series F Preferred Stock issued under the 1999 Series F Preferred
Stock Private Placement. The Company is also obligated to pay a 4% per annum
accretion on the stated value of Series F Preferred Stock. The Company is given
the right to pay the accretion in either cash or common stock. The Series F
Subscription Agreement also provides 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 the date hereof, no shares of Series F Preferred Stock have been
converted to NCT common stock.
In connection with the Series F 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 35,000,000 shares on conversion of Series F Preferred Stock.
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
June 30, 1999 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.
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.
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.
E. 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 June 30,
1999, and no material commitments are anticipated in the near future except for
the proposed acquisition transactions, subject to obtaining financing, as
outlined in "The Business - Acquisitions and Proposed Transactions".
F. 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 December 1, 1999.
ITEM 8. 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 as of the Company's 1998 10-K filing, filed as
of April 1, 1999.
<PAGE>
ITEM 9. 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 April
9, 1999. At the annual meeting of stockholders of the Company held on June 24,
1999, each of the directors was reelected to serve as director of the Company
until the next annual meeting of stockholders and until his successor is elected
and qualified.
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, 46 Senior Vice President, Chief Technical
Ph.D. Officer
Irving M. Lebovics 48 Senior Vice President, Global Sales
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. In addition, Mr. Haft is a Director of the
Company's subsidiary, NCT Hearing, a position to which he was appointed on July
15, 1998. 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), 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 former 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 was appointed a Director on August 25,
1997, and serves as Chief Executive Officer and Acting President of NCT Audio, a
position to which he was elected on September 4, 1997. In addition, Mr. Parrella
is a Director of NCT Hearing, a position to which he was appointed on July 15,
1998. Mr. Parrella served as 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. On April 13, 1999, Ms. Lebovics was
elected Secretary of the Company. Irene Lebovics is the spouse of Irving M.
Lebovics, Senior Vice President, Global Sales.
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.
Irving M. Lebovics currently serves as Senior Vice President, Global Sales.
He joined the Company in February 1998 as Vice President, Worldwide Sales. From
January 1996 to February 1998, Mr. Lebovics was a principal of Enhanced Signal
Processing which exclusively sold the Company's technologies to large original
equipment manufacturers. From 1993 to 1996, Mr. Lebovics served as Vice
President of Sales for Kasten Chase Applied Research, a wide area network
hardware and software provider to companies such as Dow Jones and the Paris and
Madrid stock exchanges. From 1985 to 1993, Mr. Lebovics served as Vice President
of Sales for Relay Communications, a provider of PC-to-mainframe communications
software and Microcom, Inc. (which acquired Relay Communications), a leading
provider of modems and local area network equipment including bridges and
routers. Irving M. Lebovics is the spouse of Irene Lebovics, Executive Vice
President of the Company.
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.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
A. Executive Compensation and Summary Compensation Table
Set forth below is certain information for the three fiscal years ended
December 31, 1998, 1997 and 1996 relating to compensation received by the
Company's Chief Executive Officer and all executive officers of the Company
other than the Chief Executive Officer (collectively the "Named Executive
Officers") whose total annual salary and bonus for the fiscal year ended
December 31, 1998 exceeded $100,000 for services rendered in all capacities.
<TABLE>
<CAPTION>
Securities
Underlying
Other Annual Options/Warrants All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) SARs(#) Compensation
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. Parrella 1998 $120,000 $205,889 $20,615 12,000,000 (2) $ 5,918 (4)
President and 1997 120,000 243,058 15,348 3,062,500 (3) 5,218 (4)
Chief Executive Officer (1) 1996 120,000 106,885 15,348 475,000 5,218 (4)
Paul D. Siomkos 1998 105,192 78,125 (5) 8,367 1,000,000 (2) -
Senior Vice President, 1997 - - - - -
Operations 1996 - - - - -
Cy E. Hammond 1998 94,000 42,570 12,000 500,000 (2) -
Senior Vice President, 1997 94,000 65,939 - 150,000 (6) -
Chief Financial Officer 1996 94,000 - - - -
Irving M. Lebovics 1998 89,583 (7) - 27,917 600,000 (2) -
Senior Vice President, 1997 - - - 100,000 (7) -
Global Sales 1996 - - - 100,000 (7) -
John B. Horton 1998 105,000 - 12,000 200,000 (2) -
Senior Vice President, 1997 105,000 50,000 - 325,000 (10) -
General Counsel and Secretary 1996 116,932 (9) - - - -
Irene Lebovics 1998 105,000 - 12,000 2,000,000 (2) -
Executive Vice President, and 1997 105,000 - - 301,250 (11) -
President of NCT Hearing 1996 105,000 - - - -
Products, Inc.
</TABLE>
(1) Mr. Haft was elected Chairman of the Board and relinquished the title of
Chief Executive Officer on July 17, 1996. Prior thereto, and from November
15, 1994, Mr. Haft served as Co-Chairman of the Board and Chief Executive
Officer. From July 17, 1996 to June 19, 1997, the authority and
responsibility of the Chief Executive Officer were delegated by the Board
of Directors to the Executive Committee consisting of Messrs. Haft and
Parrella with Mr. Haft serving as the Committee's Chairman. Mr. Parrella
was elected Chief Executive Officer on June 19, 1997.
(2) Refer to "Options and Warrants Granted in 1998" table and the footnotes
thereto. On December 4, 1998, the following options were cancelled: as to
Mr. Parrella, 6,000,000 shares; as to Mr. Siomkos, 500,000 shares; as to
Mr. Hammond, 250,000 shares; as to Mr. Lebovics, 300,000 shares; as to Mr.
Horton, 100,000 shares; and as to Ms. Lebovics, 1,000,000 shares.
(3) Includes a warrant to purchase 862,500 shares of the Company's common stock
and an option to purchase 250,000 shares of the Company's common stock as
new grants due to the extension of the expiration dates for an additional
two years.
(4) Consists of annual premiums for a $2.0 million personal life insurance
policy paid by the Company on behalf of Mr. Parrella.
(5) Represents the fair market value on the date of grant of 100,000 shares of
the Company's common stock issued in connection with his offer of
employment.
(6) Includes a warrant to purchase 25,000 shares of the Company's common stock
as a new grant due to the extension of the expiration date for an
additional two years.
(7) From January 1, 1996 to February 12, 1998, services were rendered to the
Company by Enhanced Signal Processing ("ESP"), a firm in which Mr. Lebovics
was a principal. During that period, ESP received $0.5 million from the
Company, which included but was not limited to Mr. Lebovics' services.
While employed by ESP, ESP received options to purchase 400,000 shares of
the Company's common stock of which options to purchase 200,000 shares were
assigned to Mr. Lebovics.
<PAGE>
(8) Mr. Horton resigned as Senior Vice President, General Counsel and Secretary
on February 19, 1999. Ms. Lebovics was elected Secretary of the Company on
April 13, 1999.
(9) Mr. Horton was elected Senior Vice President, General Counsel and Secretary
of the Company on May 6, 1996. Services were rendered by Mr. Horton as a
consultant to the Company for the period January, 1995 through April, 1996.
(10) Includes an option to purchase 200,000 shares of the Company's common stock
as a new grant due to the extension of the expiration date for an
additional two years.
(11) Includes a warrant to purchase 201,250 shares of the Company's common stock
as a new grant due to the extension of the expiration date for an
additional two years.
Stock Options and Warrants
The following table summarizes the Named Executive Officers' stock option and
warrant activity during 1998:
<TABLE>
<CAPTION>
Options and Warrants Granted in 1998
Potential Realized Value
at Assumed Annual
Underlying Total Options Rates of Stock Price
Options and Warrants Appreciation for Option
and Granted to Exercise and Warrant Term (6)
Warrants Employees Price Expiration -------------------------------
Name Granted in 1998 Per Share Date 5% 10%
- ------------------- ---------- ------------- --------- ---------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Parrella 6,000,000 (1) 27.3% $0.3125 01/14/08 $1,045,296 $2,563,715
6,000,000 (2) 27.3% 1.0625 - (2) - (2) - (2)
Paul D. Siomkos 500,000 (3) 2.3% 0.3125 04/19/08 87,108 213,643
500,000 (2) 2.3% 0.7813 - (2) - (2) - (2)
Cy E. Hammond 250,000 (4) 1.1% 0.3125 02/13/08 43,554 106,821
250,000 (2) 1.1% 1.0313 - (2) - (2) - (2)
Irving M. Lebovics 300,000 (5) 1.4% 0.3125 02/13/08 52,265 128,186
300,000 (2) 1.4% 1.0313 - (2) - (2) - (2)
John B. Horton 100,000 (4) 0.5% 0.3125 02/13/08 17,422 42,729
100,000 (2) 0.5% 1.0313 - (2) - (2) - (2)
Irene Lebovics 1,000,000 (4) 4.5% 0.3125 02/13/08 174,216 427,286
1,000,000 (2) 4.5% 1.0313 - (2) - (2) - (2)
</TABLE>
(1) Options to purchase these shares were granted pursuant to the 1992 Plan, of
which an option to purchase 2,000,000 shares is currently exercisable and
the remaining amount vest over the passage of time.
(2) Options to purchase these shares were cancelled on December 4, 1998.
(3) Options to purchase these shares were granted pursuant to the 1992 Plan and
in connection with an offer of employment and vest 25% immediately and 25%
on the anniversary date each year following.
(4) Options to purchase these shares were granted pursuant to the 1992 Plan and
vested 20% on October 20, 1998 upon the Company's stockholders' approval of
the increase in the number of shares of the Company's common stock included
in the 1992 Plan. The remaining amount vest 20% on the anniversary date of
each grant.
(5) Options to purchase these shares were granted pursuant to the 1992 Plan and
vested 25% on October 20, 1998 upon the Company's stockholders' approval of
the increase in the number of shares of the Company's common stock included
in the 1992 Plan. The remaining amount vest 25% on the anniversary date of
each grant.
(6) The dollar amounts on these columns are the result of calculations at the
5% and 10% rates required by the SEC and, therefore, are not intended to
forecast possible future appreciation, if any, of the stock price.
<PAGE>
<TABLE>
<CAPTION>
1998 Aggregated Options and Warrant Exercises and
December 31, 1998 Option and Warrant Values
Number of Shares
Number Underlying Value of Unexercised
of Unexercised Options In-the-Money Options
Shares and Warrants at and Warrants at
Acquired December 31, 1998 December 31, 1998
on Value ---------------------------- ----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Michael J. Parrella - $ - 6,237,000 4,000,000 $ 7,043 $ -
Paul D. Siomkos - - 125,000 375,000 - -
Cy E. Hammond - - 444,718 200,000 783 -
Irving M. Lebovics - - 275,000 225,000 1,565 -
John B. Horton - - 654,417 80,000 783 -
Irene Lebovics - - 792,550 800,000 1,565 -
</TABLE>
Compensation Arrangements with Certain Officers and Directors
On February 1, 1996, the Compensation Committee awarded Mr. Parrella an
incentive bonus equal to 1% of the cash received by the Company upon the
execution of the agreement or other documentation evidencing transactions with
unaffiliated parties (other than certain parties involved in transactions then
in negotiation) or otherwise received at the closing of said transactions which
occur subsequent to January 1, 1996.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1998, the following persons
served as members of the Compensation Committee of the Company's Board of
Directors: Stephan Carlquist, Morton Salkind and Sam Oolie. Mr. Carlquist was
Chairman of the Committee during such fiscal year. Messrs. Carlquist and Oolie
have also served as members of the Board of Directors of NCT Audio since
November 14, 1997, and September 4, 1997, respectively. Mr. Salkind resigned as
Director of the Company and Director of NCT Audio on January 19, 1999.
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
$0.375 per share, such price being the market price of the Company's common
stock on the date of such authorization. The Board of Directors took such action
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.
<PAGE>
In 1993, the Company entered into three Marketing Agreements with Quiet Power
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%
of 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, 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. 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.
<PAGE>
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 it incurred 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. QSI also 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 a second 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. The payment of
the indebtedness to be paid under the first agreement described in the preceding
paragraph also 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,
nonpayment of which is to constitute an event of termination under the Master
Agreement.
On May 21, 1996, the Company and QSI entered into a third 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 third letter
agreement, 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 a fourth 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 on January 1,
1998. The Company is also entitled to receive 15% of any other financing
obtained by QSI in the interim and interest at the rate of 10% per annum on the
unpaid amount of such indebtedness from July 1, 1997. The fourth 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 ten (10) days notice of termination to QSI.
<PAGE>
As of August 31, 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, subscribed and agreed to purchase secured convertible notes
of the Company in an aggregate principal amount of $4.0 million. A secured
convertible 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, as amended by the parties on September 19, 1999 on the notes and any
future notes, shall be the lesser of (i) the lowest closing transaction price
for the common stock on the securities market on which the common stock is being
traded, at any time during September 1999; (ii) the average of the closing bid
price 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 (iii) the fixed conversion price of $0.17. In no event will the
conversion price be less than $0.12 per share. The Holder shall purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999. The Company and Holder have agreed to extend such date for
the purchase of remaining installments of secured convertible notes to December
1, 1999. On various dates, the Holder has purchased additional installments of
the remaining $3.0 million principal amount of the secured convertible notes. As
of October 11, 1999, the Company has received proceeds aggregating $3.0 million
from the Holder and has issued secured convertible notes with the same terms and
conditions of the Note described above.
Compensation Committee Report on Executive Compensation
As previously reported, at the conclusion of the Annual Meeting of
Stockholders on July 17, 1996, Mr. Haft resigned as Chief Executive Officer of
the Company and was appointed Chairman of the Board of Directors. The Board of
Directors designated an Executive Committee comprised of Messrs. Haft and
Parrella, with Mr. Haft acting as the Chairman of the Committee. The Board of
Directors granted the Executive Committee the power and authority to act in the
place of the Chief Executive Officer during the existence of a vacancy in that
office. On June 19, 1997, Mr. Parrella was re-elected President and was elected
Chief Executive Officer of the Company. At the conclusion of the Annual Meeting
of Stockholders on October 20, 1998, Mr. Parrella was re-elected President and
Chief Executive Officer of the Company.
Mr. Parrella's salary for 1998 was continued at the rate of $120,000 per
year, the same as his salary in 1997 and 1996. As reported in last year's
Compensation Committee Report, on May 8, 1995, the Compensation Committee, in
recognition of the efforts of Mr. Parrella under the difficult conditions the
Company was then facing and in recognition of the importance of his continued
services to the ongoing restructuring program, awarded Mr. Parrella a cash bonus
of 1% of the cash to be received by the Company upon the establishment of
certain significant business relationships. Any such percentage bonus was made
contingent upon the execution of relevant documentation or other form of closing
with regard to these relationships. Effective January 1, 1996, the above noted
percentage bonus arrangement was extended indefinitely until modified or
terminated by the Board of Directors. Mr. Parrella was paid a bonus of $205,889
under this percentage bonus arrangement during 1998. On January 15, 1998, the
Board of Directors granted Mr. Parrella an option to purchase 6,000,000 shares
of the Company's common stock. Vesting requirements were as follows: As to
2,000,000 shares, the date on which the Company's stockholders approve an
amendment to the 1992 Plan increasing the number of shares covered by the 1992
Plan to 30,000,000 shares and providing for the other matters set forth in the
resolutions adopted by the Board of Directors on January 15, 1998 (the "1/15/98
Amendment"); as to another 2,000,000 shares, the later to occur of (i) the date
on which the Company's stockholders approve the 1/15/98 Amendment, or (ii) the
date on which the Company's common stock has traded on The Nasdaq Stock Market,
Inc.'s National Market System, Small Cap Market or Electronic Bulletin Board or
other national or regional exchange or public trading facility as may then be
applicable at a price of $2.50 per share or more for the preceding 60
consecutive days or January 15, 2001, whichever shall first occur; as to the
remaining 2,000,000 shares, the later to occur of (i) the date described in
clause (i) of the preceding sentence, or (ii) the date on which the Company's
common stock has traded on the trading facilities in clause (ii) of the
preceding sentence at a price of $3.50 per share or more for the preceding 60
consecutive days or the date set forth in clause (ii) of the preceding sentence,
whichever shall first occur. In addition, in 1998, Mr. Parrella received a
$20,615 annual automobile allowance and the Company paid the $5,918 annual
premium for a $2.0 million personal life insurance policy on his behalf.
<PAGE>
The base salary of Mr. Siomkos, as Senior Vice President, Operations, was
established at $150,000. In addition to the salary, the Company granted him a
one-time bonus of 100,000 shares of the Company's common stock in connection
with his employment offer. Mr. Siomkos was granted an option to purchase 500,000
shares of the Company's common stock at an exercise price of $0.7813 per share
on April 20, 1998, also in connection with his offer of employment. On December
4, 1998, the option was cancelled and reissued at $0.3125, the fair market value
on the date of grant. In addition, Mr. Siomkos received an $8,367 automobile
allowance.
The base salary of Mr. Hammond, as Senior Vice President, Chief Financial
Officer, was $94,000 for 1998, the same as his salary in 1997 and 1996. In
recognition of Mr. Hammond's efforts in connection with the Company's private
placements of $16.0 million of convertible preferred stock and other
accomplishments, Mr. Hammond was awarded a cash bonus of $42,570 in 1998. In
addition, the Company granted Mr. Hammond an option to purchase 250,000 shares
of the Company's common stock at an exercise price of $1.0313 per share on
February 14, 1998. On December 4, 1998, the option was cancelled and reissued at
$0.3125, the fair market value on the date of grant. In addition, in 1998, Mr.
Hammond received a $12,000 annual automobile allowance. On April 13, 1999, Mr.
Hammond was elected to the additional offices of Treasurer and Assistant
Secretary of the Company.
Mr. Lebovics joined the Company in February 1998 as Vice President,
Worldwide Sales, at a base salary of $95,000. In addition to the salary, Mr.
Lebovics received a non-refundable draw of $25,000 per annum. On July 15, 1998,
Mr. Lebovics' base salary was increased to $120,000 and the non-refundable draw
was also increased to $30,000 per annum. Mr. Lebovics was promoted to Senior
Vice President, Global Sales, in January 1999. The Company granted Mr. Lebovics
an option to purchase 300,000 shares of the Company's common stock at an
exercise price of $1.0313 per share on February 14, 1998. On December 4, 1998,
the option was cancelled and reissued at $0.3125, the fair market value on the
date of grant. In addition, Mr. Lebovics received a $5,000 automobile allowance.
The base salary of Mr. Horton, as Senior Vice President, General Counsel and
Secretary of the Company was established at $105,000 in 1998, which was the same
as his salary rate for 1997. The Company granted Mr. Horton an option to
purchase 100,000 shares of the Company's common stock at an exercise price of
$1.0313 per share on February 14, 1998. On December 4, 1998, the option was
cancelled and reissued at $0.3125, the fair market value on the date of grant.
In addition, Mr. Horton received a $12,000 annual automobile allowance. Mr.
Horton resigned as Senior Vice President, General Counsel and Secretary on
February 19, 1999.
The base salary of Ms. Lebovics, as Executive Vice President and President of
NCT Hearing Products, Inc., was established at $105,000 for 1998, which was the
same as her salary for 1997 and 1996. The Company granted Ms. Lebovics an option
to purchase 1,000,000 shares of the Company's common stock at an exercise price
of $1.0313 per share on February 14, 1998. On December 4, 1998, the option was
cancelled and reissued at $0.3125, the fair market value on the date of grant.
In addition, Ms. Lebovics received a $12,000 annual automobile allowance. On
April 13, 1999, Ms. Lebovics was elected Secretary of the Company.
Because of the Company's uncertain business prospects and limited cash
resources, in determining the appropriate levels of compensation for the Chief
Executive Officer and the Named Executive Officers, the Compensation Committee
did not deem it relevant, useful or even feasible to consider the compensation
practices of other companies having more certain prospects and greater cash
resources. Rather, the Compensation Committee took into consideration the
contribution being made to the Company's development efforts by these officers,
the extent to which they had received previous reductions in overall levels of
compensation in November of 1994 in connection with the Company's restructuring,
the absence, in many instances, of any material increase in salary or other cash
compensation for any of the past several years, the importance of the Company
continuing to receive their services and the benefit of their knowledge of the
Company's technologies, and the Company's ability to provide them with adequate
levels of remuneration either in cash or in securities. Accordingly, it is the
opinion of the Committee that the above-described rates of compensation are
reasonable in light of these factors and the financial condition of the Company.
THE COMPENSATION COMMITTEE
By: /s/ STEPHAN CARLQUIST, Chairman
/s/ SAM OOLIE
<PAGE>
Performance Graph
Note: The stock price performance shown on the graph below is not necessarily
indicative of future price performance.
NCT Group, Inc.
Stock Performance (1)
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
NCT 100 26 63 14 38 10
NASDAQ Composite
Index 100 98 138 170 209 294
NASDAQ Electronic
Component Stock
Index (2) 100 110 183 316 332 513
</TABLE>
(1) Assumes an investment of $100.00 in the Company's common stock and in each
index on December 31, 1993.
(2) The Company has selected the NASDAQ Electronic Components Stock Index
composed of companies in the electronics components industry listed on the
NASDAQ National Market System. Because the Company knows of no other
publicly owned company whose business consists solely or primarily of the
development, production and sale of systems for the cancellation or control
of noise and vibration by electronic means and other applications of Active
Wave Management technology, it is unable to identify a peer group or an
appropriate published industry or line of business index other than the
NASDAQ Electronics Components Stock Index.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of April 9, 1999, information concerning
the shares of common stock beneficially owned by each person who, to the
knowledge of the Company, is the holder of 5% or more of the common stock of the
Company, each Director, and each Named Executive Officer, and all executive
officers and Directors of the Company as a group. Except as otherwise noted,
each beneficial owner has sole investment and voting power with respect to the
listed shares.
<TABLE>
<CAPTION>
Amount and
Nature of Approximate
Beneficial Percentage
Name of Beneficial Owner Ownership (1) Of Class (1)
------------------------------- --------------- --------------
<S> <C> <C> <C>
Michael J. Parrella 6,250,333 (2) 3.38%
John J. McCloy 3,653,635 (3) 2.02%
Jay M. Haft 1,666,891 (4) 0.93%
Sam Oolie 750,500 (5) 0.42%
Stephan Carlquist 355,000 (6) 0.20%
Paul D. Siomkos 225,000 (7) 0.13%
Cy E. Hammond 444,718 (8) 0.25%
Irving M. Lebovics 275,000 (9) 0.15%
John B. Horton 654,417 (10) 0.37%
Irene Lebovics 1,588,067 (11) 0.89%
All Executive Officers and
Directors as a Group (11 persons) 16,038,561 (12) 8.37%
Carole Salkind 24,101,057 (13) 13.22%
Her Majesty The Queen,
Province of Alberta, Canada 9,500,000 (14) 5.27%
</TABLE>
(1) Assumes the exercise of currently exercisable outstanding options or
warrants to purchase shares of common stock. The percent of class ownership
is calculated separately for each person based on the assumption that the
person listed on the table has exercised all options and warrants shown for
that person, but that no other holder of options or warrants has exercised
such options or warrants.
(2) Includes 862,500 shares issuable upon the exercise of currently exercisable
warrants and 5,374,500 shares issuable upon the exercise of currently
exercisable options.
(3) Includes 862,500 shares issuable upon the exercise of currently exercisable
warrants and 1,050,000 shares issuable upon the exercise of currently
exercisable options.
(4) Includes 218,500 shares issuable upon the exercise of currently exercisable
warrants, 10,000 restricted shares and 1,403,500 shares issuable upon the
exercise of currently exercisable options.
(5) Includes 25,000 restricted shares and 440,000 shares issuable upon the
exercise of currently exercisable options.
(6) Includes 5,000 restricted shares and 350,000 shares issuable upon the
exercise of currently exercisable options.
(7) Includes 100,000 restricted shares and 125,000 shares issuable upon the
exercise of currently exercisable options.
(8) Includes 25,000 shares issuable upon the exercise of currently exercisable
warrants and 419,718 shares issuable upon the exercise of currently
exercisable options.
(9) Includes 275,000 shares issuable upon the exercise of currently exercisable
options.
(10) Includes 20,000 shares issuable upon the exercise of currently exercisable
warrants and 634,417 shares issuable upon the exercise of currently
exercisable options.
(11) Includes 201,250 shares issuable upon the exercise of currently exercisable
warrants and 591,300 shares issuable upon the exercise of currently
exercisable options.
(12) Includes 2,189,750 shares issuable to 6 executive officers and directors of
the Company upon the exercise of currently exercisable warrants, 10,848,435
shares issuable to 11 executive officers and directors of the Company upon
the exercise of currently exercisable options, 140,000 restricted shares
issued to 3 directors and one executive officer of the Company. Does not
include 6,240,000 shares issuable to 8 executive officers of the Company
which become exercisable over the passage of time and 25,000 shares
issuable to 1 director of the Company which become exercisable in 1999.
<PAGE>
(13) Carole Salkind's address is 801 Harmon Cove Towers, Secaucus, New Jersey
07094. On various dates in 1999, including September 7, 1999, Ms. Salkind
filed Form 13D with the SEC reflecting the number of shares beneficially
owned and the approximate percentage of class as indicated herein.
(14) Her Majesty the Queen, Province of Alberta, Canada's address is Room 530,
Terrace Building, 9515 107th Street, Edmondton, Alberta T5K 2C3. On June
18, 1999, Her Majesty the Queen, Province of Alberta, Canada, filed Form
13G with the SEC reflecting the number of shares beneficially owned as
indicated herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Transactions with Management and Certain Relationships
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., 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. 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, 1996, 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, a company which is 33% owned by ERI and 2% owned by Mr. Haft. See
"Risk Factors - Possible Risks Associated with Agreements or With Related
Parties" and Note 10 - "Notes to the Financial Statements."
As of August 31, 1999, QSI owes the Company $239,000 for the exclusivity fee,
rent and engineering services which was due on January 1, 1998 and is fully
reserved.
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.
<PAGE>
B. Indebtedness of Management
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor, subscribed and agreed to purchase secured convertible notes
of the Company in an aggregate principal amount of $4.0 million. A secured
convertible 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, as amended by the parties on September 19, 1999 on the notes and any
future notes, shall be the lesser of (i) the lowest closing transaction price
for the common stock on the securities market on which the common stock is being
traded, at any time during September 1999; (ii) the average of the closing bid
price 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 (iii) the fixed conversion price of $0.17. In no event will the
conversion price be less than $0.12 per share. The Holder shall purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999. The Company and Holder have agreed to extend such date for
the purchase of remaining installments of secured convertible notes to December
1, 1999. On various dates, the Holder has purchased additional installments of
the remaining $3.0 million principal amount of the secured convertible notes. As
of October 11, 1999, the Company has received proceeds aggregating $3.0 million
from the Holder and has issued secured convertible notes with the same terms and
conditions of the Note described above.
C. Compliance with Section 16(a) of the Exchange Act
Section 16(a) of 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 SEC. Officers, directors and greater than 10% stockholders
are required by regulations of the SEC 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 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by the
registrant with respect to the offering described in this registration
statement:
Securities and Exchange Commission $ 2,949.85
registration fee
Legal Fees and expenses 10,000.00*
Accounting fees and expenses 25,000.00*
Miscellaneous expenses 2,050.15*
----------
Total $40,000.00*
==========
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IX of the Registrant's Certificate of Incorporation provides as
follows:
(a) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person of
whom he or she is the legal representative, is or was a director or
officer, of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law, as
the same exists or may hereafter be amended (but, in the case of any
such amendment only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service
was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only
upon delivery to the Corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled
to be indemnified under this Section or otherwise. The Corporation
may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect
as the foregoing indemnification of directors and officers.
(b) If a claim under paragraph (a) of this Section is not paid in full by
the Corporation within thirty days after a written claim has been
received by the Corporation, the claimant may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if
any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it
permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on the Corporation. Neither
the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because
he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable
standard of conduct.
(c) The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred
in this Section shall not be exclusive of any right which any person
may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, by-law, agreement, vote of stockholders
or disinterested directors or otherwise.
(d) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation
Law.
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
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. To the date
hereof during 1999, the Company has not sold any unrestricted securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form S-1:
(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
Condensed Consolidated Statements of Operations and Condensed Consolidated
Statements of Comprehensive Income/(Loss), for the three and six months ended
June 30, 1998 and 1999 (unaudited)
Condensed Consolidated Balance Sheets, as of December 31, 1998 and June 30, 1999
(unaudited)
Condensed Consolidated Statements of Cash Flows, for the six months ended June
30, 1998 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
(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) 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.
3(h) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
the State of Delaware on July 29, 1999, incorporated herein by
reference to Exhibit 3(h) to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1999.
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.
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(g) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
* 4(h) 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.
4(i) Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of the State of Delaware on September 8, 1999.
4(j) Term Sheet Share Exchange executed October 9, 1999, by and among
NCT Group, Inc., NCT Audio Products, Inc., Austost Anstalt Schaan,
and Balmore Funds, S.A.
5 Opinion of Crowell & Moring LLP, outside counsel to the Company, as
to the legality of the shares of common stock to which this
Registration Statement relates.
** 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.
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.
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.
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).
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.
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.
* 21 Subsidiaries
23(a) Consent of Richard A. Eisner & Company, LLP
23(b) Consent of Peters Elworthy & Moore, Chartered Accountants.
* 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.
<PAGE>
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, 1996.
* 99(d) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding confirmation that
the accounts of the Company's U.K. subsidiaries for the year ended
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 of the Company's U.K. subsidiaries for the year ended
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 ended December 31, 1996 were audited under
auditing standards substantially similar to US General Accepted
Auditing Standards.
99(h) Term Sheet Litigation Settlement dated as of October 9, 1999, by and
among NCT Group, Inc., NCT Audio Products, Inc., Austost Anstalt
Schaan, Balmore Funds, S.A. and LH Financial.
- -----------------------
* Filed with the Company's Annual Report on form 10-K for its fiscal
year ended December 31, 1998.
** 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.
<PAGE>
FINANCIAL STATEMENT INDEX
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-2
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 F-6
ended December 31, 1996, 1997 and 1998
Notes to Financial Statements F-7
Condensed Consolidated Statements of Operations and F-49
Condensed Consolidated Statements of Comprehensive
Income/(Loss), for the three and six months ended
June 30, 1998 and 1999 (unaudited)
Condensed Consolidated Balance Sheets, as of December 31, F-50
1998 and June 30, 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows, for the F-51
six months ended June 30, 1998 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements F-52
<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
With respect to last paragraph of Note 16
June 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). As set forth in Note 16, on June 24, 1999, the
Company's Board of Directors approved the issuance of up to 15 million shares of
the Company's common stock to be used to settle certain obligations of the
Company.
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.
<PAGE>
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.
<PAGE>
Foreign currency translation:
The financial statements for the United Kingdom operations are translated
into U.S. dollars at year-end exchange rates for assets and liabilities and
weighted average exchange rates for revenues and expenses. The effects of
foreign currency translation adjustments are included as a component of
stockholders' equity and gains and losses resulting from foreign currency
transactions are included in income and have not been material.
Loss per common share:
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in the year ended December 31, 1997 and has
retroactively applied the effects thereof for all periods presented.
Accordingly, the presentation of per share information includes calculations of
basic and 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.
<PAGE>
(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.
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.
<PAGE>
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.
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
=========== =========== ==========
<PAGE>
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").
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.
<PAGE>
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.
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 Company'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.
<PAGE>
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.
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. If the acquisition of the 20% interest in
TSA had occurred as of January 1, 1998, the Company's unaudited net loss and net
loss per share basic and diluted would have been $(14.8) million and $(0.13),
respectively.
<PAGE>
Unaudited summarized financial information of TSA is as follows:
For the Twelve
Months Ended
(in thousands 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.
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.
<PAGE>
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.
<PAGE>
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.
<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 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
============
<PAGE>
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 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.
<PAGE>
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, 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.
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)
basic and diluted 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>
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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.
<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 December 31, 1998, QSI owes the Company $239,000, which is fully
reserved, for the exclusivity fee, rent and engineering services.
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 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
================
<PAGE>
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.
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>
<PAGE>
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.
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.
<PAGE>
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.
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 June 4, 1999, the Company received proceeds of $250,000
from the Holder for another secured convertible note with the same terms and
conditions of the Note described above.
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.
On June 24, 1999, the Company's Board of Directors approved the issuance of
up to 15 million shares of the Company's common stock to be used to settle
certain obligations of the Company. In connection therewith, management expects
to negotiate with vendors and creditors to settle certain obligations. At the
annual meeting of stockholders of the Company on June 24, 1999, the stockholders
approved an amendment to increase the number of shares of common stock the
Company is authorized to issue from 255 million to 325 million. This amendment
will become effective when the Company files the appropriate amendment to its
Certificate of Incorporation with the Office of the Secretary of State of
Delaware.
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(In thousands except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
REVENUES:
<S> <C> <C> <C> <C>
Technology licensing fees and royalties $ 36 $ 779 $ 346 $ 3,501
Product sales, net 664 576 1,065 1,228
Engineering and development services 128 366 149 1,175
--------- --------- --------- ---------
Total revenues $ 828 $ 1,721 $ 1,560 $ 5,904
--------- --------- --------- ---------
COSTS AND EXPENSES:
Costs of product sales $ 567 $ 649 $ 869 $ 1,083
Costs of engineering and development services 106 395 128 903
Selling, general and administrative 1,735 2,678 4,454 5,663
Research and development 1,833 1,745 3,297 3,458
Other (income)/expense (3,339) 204 (3,382) 307
Write down of investment in
unconsolidated subsidiary (Note 4) - 2,385 - 2,385
Interest (income)/expense (91) (33) (212) (57)
--------- --------- --------- ---------
Total costs and expenses $ 811 $ 8,023 $ 5,154 $ 13,742
--------- --------- --------- ---------
NET INCOME/(LOSS) $ 17 $ (6,302) $ (3,594) $ (7,838)
========= ========= ========= =========
Preferred stock dividend requirement $ - $ 134 $ 1,690 $ 5,240
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock 98 25 483 184
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (81) $ (6,461) $ (5,767) $(13,262)
========= ========= ========= =========
Basic and diluted loss per share $ 0.00 $ (0.04) $ (0.04) $ (0.08)
========= ========= ========= =========
Weighted average common shares outstanding -
basic and diluted 138,073 174,238 135,968 165,247
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(in thousands, unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET INCOME/(LOSS) $ 17 $ (6,302) $ (3,594) $ (7,838)
Other comprehensive (loss)
Currency translation adjustment (10) (3) (13) 21
--------- --------- --------- ---------
COMPREHENSIVE INCOME/(LOSS) $ 7 $ (6,305) $ (3,607) $ (7,817)
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands of dollars)
December 31, June 30,
1998 1999
------------ ------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 529 $ 63
Accounts receivable:
Technology license fees and royalties 192 1,996
Other 691 917
Unbilled 61 -
Allowance for doubtful accounts (228) (171)
------------ ------------
Total accounts receivable, net $ 716 $ 2,742
Inventories, net of reserves (Note 2) 3,320 3,134
Other current assets 185 165
------------ ------------
Total current assets $ 4,750 $ 6,104
Property and equipment, net 997 805
Goodwill, net 1,506 4,605
Patent rights and other intangibles, net (Note 5) 2,881 3,466
Other assets (Note 4) 5,331 3,349
------------ ------------
$ 15,465 $ 18,329
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,226 $ 4,764
Accrued expenses 1,714 1,676
Accrued payroll, taxes and related expenses 241 456
Other liabilities (Note 5) 756 1,567
Customers' advances - 23
------------ ------------
Total current liabilities $ 5,937 $ 8,486
------------ ------------
Long term liabilities:
Convertible notes (Note 6) $ - $ 1,653
------------ ------------
Total long term liabilities $ - $ 1,653
------------ ------------
Commitments and contingencies
Minority interest in consolidated subsidiary
Preferred stock in subsidiary, $.10 par value, 1,000
shares authorized, issued and outstanding 60 and 3
shares, respectively (redemption amount $6,102,110
and $311,113, respectively) $ 6,102 $ 311
------------ ------------
Stockholders' equity (Note 3)
Preferred stock, $.10 par value, 10,000,000 shares
authorized
Series C preferred stock, 700 shares issued and
outstanding (redemption amount $731,222 and
$745,107, respectively) $ 702 $ 716
Series D preferred stock, issued and outstanding,
6,000 and 0 shares, respectively (redemption amount
$6,102,110 and $0, respectively) 5,240 -
Series E preferred stock, issued and outstanding,
10,580 and 8,854 shares, respectively (redemption
amount $10,582,319 and $8,984,924, respectively) 3,298 5,216
Common stock, $.01 par value, authorized 255,000,000 and
325,000,000 shares, respectively; issued 156,337,316 and
180,315,858 shares, respectively 1,563 1,803
Additional paid-in-capital 107,483 119,786
Unearned portion of compensatory stock, warrants and options (238) (353)
Accumulated deficit (107,704) (115,542)
Cumulative translation adjustment 45 66
Stock subscriptions receivable (4,000) -
Treasury stock (6,078,065 shares of common stock and
6,078,065 shares of common stock and 1,726 shares of
Series E preferred stock, respectively) (2,963) (3,813)
------------ ------------
Total stockholders' equity $ 3,426 $ 7,879
------------ ------------
$ 15,465 $ 18,329
============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited) (in thousands of dollars)
Six months ended June 30,
-------------------------
1998 1999
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $ (3,594) $ (7,838)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 480 900
Common stock options and warrants issued as
consideration for compensation 184 254
Provision for tooling costs 33 4
Provision for doubtful accounts 24 32
Loss on disposition of fixed assets 32 -
Write down of investment in unconsolidated subsidiary
(Note 4) - 2,385
Preferred stock received for license fees - (850)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (471) (254)
(Increase) decrease in license fees receivable 200 (1,804)
(Increase) decrease in inventories, net (1,535) 186
(Increase) decrease in other assets (2,007) 18
Increase (decrease) in accounts payable and
accrued expenses (458) 1,255
Increase (decrease) in other liabilities (145) 1,210
---------- ----------
Net cash (used in) operating activities $ (7,257) $ (4,502)
---------- ----------
Cash flows from investing activities:
Capital expenditures $ (390) $ (52)
Acquisition of patent rights (Note 5) (150) (900)
Sale of fixed assets 46 -
Interest on note receivable (Note 4) - (74)
---------- ----------
Net cash (used in) investing activities $ (494) $ (1,026)
---------- ----------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) (Note 6) $ - $ 1,500
Sale of preferred stock (net) (Note 8) (32) 3,529
Sale of subsidiary common stock (net) (17) -
Exercise of stock options and warrants - 1
Stock subscription receivable 390 -
---------- ----------
Net cash provided by financing activities $ 341 $ 5,030
---------- ----------
Effect of exchange rate changes on cash $ (10) $ 32
---------- ----------
Net (decrease) in cash and cash equivalents $ (7,420) $ (466)
Cash and cash equivalents - beginning of period 12,604 529
---------- ----------
Cash and cash equivalents - end of period $ 5,184 $ 63
========== ==========
Cash paid for interest $ 1 $ 1
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to instructions and rules of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and certain adjustments to reserves and
allowances) considered necessary for a fair presentation have been included.
Operating results for the three months ended June 30, 1999 and the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
NCT Group, Inc. (the "Company" or "NCT") Annual Report on Form 10-K, for the
year ended December 31, 1998, as amended by Amendment No. 1 thereto filed on May
3, 1999 and Amendment No. 2 thereto filed on May 3, 1999.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $115.5 million on a
cumulative basis through June 30, 1999. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
(1) the sale of common stock, including the exercise of warrants or options to
purchase common stock, (2) the sale of preferred stock convertible into common
stock, (3) technology licensing fees, (4) royalties, (5) product sales and (6)
engineering and development funds received from strategic partners and
customers.
Cash, cash equivalents and short-term investments amounted to $0.1 million
at June 30, 1999, decreasing from $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, product sales and engineering development revenue.
Reducing operating expenses and capital expenditures 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 services are not realized, management
believes additional working capital financing must be obtained. There is no
assurance any such financing is or would become available.
On February 9, 1999, NCT Audio Products, Inc. ("NCT Audio") and New
Transducers Ltd. ("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. The expanded agreement also 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 license rights, NCT Audio received licensing fees of $0.5 million. 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 by NCT Audio
to NXT in equal quarterly installments. The Company has recorded a liability of
$53,333 at June 30, 1999.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In connection therewith, management expects to
negotiate with vendors and creditors to settle certain obligations.
On June 24, 1999, NCT Hearing Products, Inc. ("NCT Hearing"), a wholly
owned subsidiary of the Company, signed a letter of intent to acquire sixty
percent (60%) of the common stock of Pro Tech Communications, Inc. ("Pro Tech")
in exchange for rights to certain NCT Hearing technology. The acquisition is
pending $2.0 million of equity financing to be raised by NCT Hearing.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described above raise substantial doubt at June 30, 1999, about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets or the amount of liabilities that might
result from the outcome of these uncertainties.
<PAGE>
2. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, June 30,
1998 1999
------------ ------------
Components $ 745 $ 604
Finished Goods 3,083 3,092
------------ ------------
Gross Inventories $ 3,828 $ 3,696
Reserve for Obsolete & Slow Moving Inventory (508) (562)
------------ ------------
Inventories, Net of Reserves $ 3,320 $ 3,134
============ ============
The reserve for obsolete and slow moving inventory at June 30, 1999 has
increased to $0.6 million primarily due to a $0.2 million charge for slow moving
hearing product inventory during the first six months of 1999.
3. Stockholders' Equity:
The changes in stockholders' equity during the six months ended June 30,
1999, were as follows:
<TABLE>
<CAPTION>
(in thousands)
----------------------------------------------------------------------------------------------------------
Exchange/ Accretion/ Net Stock Unearned
Conver- Dividend Sale Subscrip- Compen- Transla-
Balance sion of of of tion satory tion Balance
at Preferred Preferred Common Receiv- Options/ Net Adjust- at
12/31/98 Stock Stock Stock able Warrants Loss ment 6/30/99
----------------------------------------------------------------------------------------------------------
Series C
Preferred
Stock:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares 1 - - - - - - - 1
Amount $ 702 $ - $ 14 $ - $ - $ - $ - $ - $ 716
Series D
Preferred
Stock:
Shares 6 (6) - - - - - - -
Amount $ 5,240 $ (5,273) 33 $ - $ - $ - $ - $ - $ -
Series E
Preferred
Stock:
Shares 11 (2) - - - - - - 9
Amount $ 3,298 $ (1,209) $ 3,127 $ - $ - $ - $ - $ - $ 5,216
Common
Stock:
Shares 156,337 23,974 - 5 - - - - 180,316
Amount $ 1,563 $ 240 $ - $ - $ - $ - $ - $ - $ 1,803
Treasury
Stock:
Shares 6,078 2 - - - - - - 6,080
Amount $ (2,963) $ (850) $ - $ - $ - $ - $ - $ - $ (3,813)
Additional
Paid-in
Capital $ 107,483 $ 11,622 $(3,235) $3,916 $ - $ - $ - $ - $ 119,786
Accumulated
(Deficit) $(107,704) $ - $ - $ - $ - $ - $(7,838) $ - $(115,542)
Cumulative
Translation
Adjustment $ 45 $ - $ - $ - $ - $ - $ - $ 21 $ 66
Stock
Subscription
Receivable $ (4,000) $ - $ - $ - $ 4,000 $ - $ - $ - $ -
Unearned
Compensatory
Stock Option $ (238) $ - $ - $ - $ - $ (115) $ - $ - $ (353)
</TABLE>
<PAGE>
4. Other Assets:
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), an automotive audio system
supplier for a purchase price of $10,000,000 and up to an additional $6,000,000
in possible future cash contingent payments. On June 11, 1998, NCT Audio had
paid a non-refundable deposit of $1,450,000 towards the purchase price. The
shareholders of Top Source Technologies, Inc., TSA's parent company, approved
the transaction on December 15, 1998.
NCT Audio then paid Top Source Technologies, Inc. $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 Top Source Technologies, Inc.'s shareholders approved the
transaction, the $2,050,000 was delivered to TSA. In return, NCT Audio took
ownership of the documentation and securities held in escrow.
NCT Audio had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay Top Source Technologies, Inc. $6.5 million on or before
March 31, 1999 to complete the acquisition of TSA's assets. As consideration for
an extension of such exclusive right from March 31, 1999 to May 28, 1999, NCT
Audio agreed to pay Top Source Technologies, Inc. a fee of $350,000 consisting
of $20,685 in cash, $125,000 of NCT Audio's minority interest in TSA earnings,
and a $204,315 note payable, due April 16, 1999. If NCT Audio failed to pay the
note by April 16, 1999, (a) the note would begin to accrue interest on April 17,
1999 at the lower of the rate of two times the prime rate or the highest rate
allowable by law; and (b) the $20,685 and $125,000 portion of the extension fee
would no longer be credited toward the $6.5 million purchase consideration due
at closing. If NCT Audio failed to pay the note by April 30, 1999, the $204,315
portion of the extension fee would no longer be credited toward the $6.5 million
closing amount due. To date, NCT Audio has not paid the note. Further, if NCT
Audio failed to close the contemplated transaction by May 28, 1999, NCT Audio
would forfeit its minority earnings in TSA for the period June 1, 1999 through
May 30, 2000. In addition, due to NCT Audio's failure to close the transaction
by March 31, 1999, NCT Audio must pay a penalty premium of $100,000 of NCT
Audio's Series A Preferred Stock. In exchange for an extension from May 28, 1999
to July 15, 1999, NCT Audio's interest in TSA was reduced from 20% to 15%.
On or about July 15, 1999, NCT Audio determined it would not proceed with
the purchase of the assets of TSA, as structured, primarily due to its
difficulty in raising the requisite cash consideration. As a result, NCT Audio
has reduced the net investment in TSA to $1.2 million, representing a 15%
minority interest (net of the above noted penalties and the minority interest in
TSA earnings), and recorded a $2.4 million write down to its estimated net
realizable value at June 30, 1999. If TSA is sold to another purchaser, NCT
Audio will receive its pro rata share (15%) of such consideration less the above
noted penalties.
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 supplies custom-made automotive audio systems. 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 $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 bears 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. Negotiations for NCT Audio's acquisition of
PPI are continuing.
5. 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, speech compression and speech identification and
verification technologies. The aggregate value of the patented technologies 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 $454,000 at June 30, 1999 representing
the difference between the proceeds of the sale of the shares issued on June 5,
1998 and the balance due on the license fee.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hasupie Speech Products N.V. ("L&H"). The agreement provides the Company with a
world-wide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. The Company recorded a $0.9 million
patent technology right and a $0.9 million liability at June 30, 1999.
On April 12, 1999, the Company granted a world-wide non-exclusive,
non-transferable license to L&H. The agreement provides L&H access to NCT's
noise and echo cancellation algorithms for use in L&H's technology. In
consideration of the Company's grant of a license to L&H, the Company recognized
a non-refundable royalty fee of $0.8 million.
6. Convertible Notes:
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. The Company and Holder have agreed to extend such date for
the purchase of remaining installments of secured convertible notes to October
1, 1999. On each of June 4, 1999, June 11, 1999, July 2 1999 and July 23,1999
the Company received proceeds of $250,000, $250,000, $500,000 and $250,000,
respectively, from the Holder for other secured convertible notes with the same
terms and conditions of the Note described above.
7. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. Reference is made to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as amended, for
a discussion of this suit. On May 4, 1999, the Company's Italian law firm
informed the Company that the Tribunal of Milan had verbally granted the
Company's objection to lack of venue and had consequently rejected Mr. Valerio's
claim and awarded the Company expenses in the amount of approximately $7,000.
The Company is awaiting receipt of the official text of the judgement.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, as amended, for a discussion of this
matter. There were no material developments in this matter during the period
covered by this report.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott &
Co., Inc. and the Company in the United States District Court, Southern District
of New York. Reference is made to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, as amended. There were no material
developments in this matter during the period covered by this report.
On November 17, 1998, the Company and NCT Hearing Products, Inc. ("NCT
Hearing") filed suit against Andrea Electronics Corporation in the United States
District Court, Eastern District of New York. Reference is made to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as
amended. There were no material developments in this matter during the period
covered by this report.
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. Reference is made to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended, for a discussion of this matter. There were no material
developments in this matter during the period covered by this report.
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.
8. Common Stock:
For the six-month period ended June 30, 1999, the Company issued
12,273,685 shares of the Company's common stock in connection with the
conversion of the Company's Series D Convertible Preferred Stock ("Series D
Preferred Stock") issued in the third quarter of 1998 in a private placement
exempt from registration pursuant to Regulation D of the Securities Act of 1933
(the "Securities Act"). Reference is made to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, as amended, for further
discussion.
For the six-month period ended June 30, 1999, 57 shares of NCT Audio
Series A Convertible Preferred Stock, issued in the third quarter of 1998 in a
private placement exempt from registration pursuant to Regulation D of the
Securities Act, were exchanged for 5,700 shares of Series D Preferred Stock,
which were converted into 11,699,857 shares of the Company's common stock.
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, as amended, for further discussion.
During the six-month period ended June 30, 1999, the Company received
gross proceeds of $4.0 million less expenses of $0.5 million in connection with
the Company's Series E Convertible Preferred Stock ("Series E Preferred Stock")
issued in the fourth quarter of 1998 in a private placement exempt from
registration pursuant to Regulation D of the Securities Act. As of July 31,
1999, 785 shares of the Company's Series E Preferred Stock had been converted
into 5.1 million shares of the Company's common stock. Reference is made to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended, for further discussion.
On March 31, 1999, the Company signed a license agreement to exchange
3,600 shares of Series E Preferred Stock for four (4) DistributedMedia.com, Inc.
("DMC") network affiliate licenses incorporating the Digital Broadcasting
Station System ("DBSS"). The exchange of shares of Series E Preferred Stock is
in lieu of cash consideration. The DBSS technology was developed by DMC, a
wholly-owned subsidiary of the Company. DMC was incorporated to develop, install
and provide an audio/visual advertising medium within commercial/professional
settings. DBSS schedules advertisers' customized broadcast messages, which are
downloaded via the Internet with the respective music genre of choice to the
commercial/professional establishments.
The Company anticipates the sale of such licenses to approximate $1.0
million each based on regional and commercial/professional settings. The Company
has developed standard license agreements to coincide with its current business
plan and delineate the extent and nature of the rights and duties of the Company
and its licensees. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized $2.0 million on the
issuance of such licenses in consideration of the receipt of 3,600 shares of its
Series E Preferred Stock in a related party transaction. During the three months
ended June 30, 1999, the Company adjusted such revenue to $0.9 million based
upon the valuation of additional shares of Series E Preferred Stock issued
during the three months ended June 30, 1999. As a result, realization of revenue
was limited to the related party's consideration representing the Series E
Preferred Stock.
On April 13, 1999, the Board of Directors granted options to purchase 8.6
million shares of the Company's common stock to certain officers, other
employees and consultants of the Company. Options to purchase 3.4 million of
such options vest immediately. Options to purchase 5.2 million of such shares
will not become vested or exercisable thereafter until the satisfaction of
additional vesting requirements based on the passage of time. The foregoing
options were granted with the exercise price equal to the fair value of the
Company's common stock on April 13, 1999, or $0.41 per share, as determined from
the closing bid price as reported by NASDAQ OTC Bulletin Board.
At the annual meeting of stockholders of the Company on June 24, 1999, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 255,000,000 to 325,000,000. This
amendment became effective on July 29, 1999, when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In connection therewith, management expects to
negotiate with vendors and creditors to settle certain obligations.
At June 30, 1999, the aggregate number of shares of common stock required
to be reserved for issuance upon the exercise of all outstanding options and
warrants was 37.8 million shares, and the aggregate number of shares of common
stock required to be reserved for issuance upon conversion of issued and
outstanding shares of the remaining Series C Convertible Preferred Stock was 1.5
million shares. The Company has also reserved 18.8 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, 0.7 million shares of common stock
reserved for the issuance upon exchange of the remaining Series A Preferred
Stock for Series D Preferred Stock, 26.6 million shares of common stock reserved
for the issuance upon conversion of Series E Preferred Stock and 6.5 million
shares of common stock reserved for the issuance upon conversion of the secured
convertible notes. At June 30, 1999, the number of shares available for the
exercise of options and warrants was 39.3 million and of the outstanding options
and warrants, options and warrants to purchase 25.5 million shares were
currently exercisable.
<PAGE>
9. Business Segment Information:
During 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosure 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.
<TABLE>
<CAPTION>
(In thousands of dollars)
Segment
---------------------------------------------------------------------------------------------------------
Advancel
Logic Total Grand
Audio Hearing Communications Europe DMC Corp Segments Other Total
---------------------------------------------------------------------------------------------------------
For the six
months ended
June 30, 1999:
Net Sales -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External $ 352 $ 432 $ 666 $ 2 $ - $ 943 $ 2,395 $ 8 $ 2,403
Net Sales -
Other Operating
Segments 2 - - 438 - - 440 (440) -
License Fees
and Royalties 500 156 863 - 850 1,100 3,469 32 3,501
Write down of
investment in
unconsolidated
subsidiary (2,385) - - - - - (2,385) - (2,385)
Interest
Income, net 91 - - 1 - - 92 (35) 57
Depreciation/
Amortization 6 - - 10 - 7 23 877 900
Operating
Income (Loss) (5,424) (1,683) (1,099) 46 (99) 778 (7,481) (357) (7,838)
Segment Assets 4,453 2,347 1,108 193 442 2,063 10,606 7,723 18,329
Capital
Expenditures - - 1 9 3 35 48 4 52
For the six
months ended
June 30, 1998:
Net Sales -
External $ 85 $ 763 $ 337 $ 7 $ - $ - $ 1,192 $ 22 $ 1,214
Net Sales -
Other Operating
Segments - 16 4 482 - - 502 (502) -
License Fees
and Royalties 275 71 - - - - 346 - 346
Equity in net
loss of
Unconsolidated
affiliates -
net of
amortization - - - - - - - - -
Interest
Income, net 13 - - - - - 13 199 212
Depreciation/
Amortization - - - 30 - - 30 450 480
Operating
Income (Loss) (1,564) (1,447) (2,055) (141) - - (5,207) 1,613 (3,594)
Segment Assets 3,252 2,475 446 232 - - 6,405 8,371 14,776
Capital
Expenditures 159 - 5 73 - - 237 153 390
</TABLE>
Audio:
NCT Audio is engaged in the design, development, and marketing of
products, which utilize innovative flat panel transducer technology. The
products available from NCT Audio include 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 and multimedia
markets. The principal customers are end-users, automotive original equipment
manufacturers ("OEMs") and manufacturers of integrated cabin management systems.
Hearing:
NCT Hearing designs, develops and markets active noise reduction ("ANR")
headset products to the communications headset market and the telephony headset
market. The product lines include 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 NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
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 OEMs, 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.
DMC:
DMC, a wholly-owned subsidiary of the Company formed on November 24, 1998,
develops, installs and provides an audio/visual advertising medium within
commercial/professional settings. DMC installs flat panel transducer-based
speakers, a personal computer containing DMC's Sight and Sound Digital Broadcast
Station software, telephone access to the internet, amplifiers and related
components. The Digital Broadcast Station software schedules advertisers'
customized broadcast messages, which are downloaded via the internet, with the
respective music genre choice to the commercial/professional establishments. DMC
has selected four vertical markets for initial network development: health,
fitness, education and hospitality. DMC will also develop private networks for
large customers with multiple outlets such as large fast food chains and retail
chains.
Advancel Logic Corporation:
Advancel Logic Corporation ("Advancel"), acquired by the Company on
September 4, 1998, is a participant in the native Java(TM) (Java(TM) is a
trademark of Sun Microsystems, Inc.) 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/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, smartcards for a variety of
applications, hearing aids and mobile communications devices.
Other:
The Net Sales - Other Operating Segments primarily consists of
inter-company sales and items eliminated in consolidation. Segment assets
consist primarily of corporate assets.
10. Subsequent Events
On July 19, 1999, DMC signed a convertible guaranteed term promissory note
("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. PRG will provide lease financing to DMC for its Sight and Sound(TM)
systems (the "Systems") and will provide integration, installation and
maintenance services to DMC. A portion of the PRG Note ($125,000) was received
on July 22, 1999. Of the total amount, $750,000 will be deposited into an escrow
account and will be used to pay rental and installation costs due from DMC with
respect to the Systems. Further, DMC may draw an additional $125,000 provided
that PRG continues to have a good faith belief that the Systems are functioning
properly and that DMC has obtained at least one network-wide advertising client
providing annual advertising revenues of at least $250,000. The PRG Note matures
on July 19, 2001 and earns interest at ten percent (10%) per annum. PRG may
convert the PRG Note in whole or in part at the election of PRG into shares of
DMC's common stock, without par value, at any time during the period commencing
on the date of issuance and ending on the maturity date. DMC shall have the
right to lease from PRG additional Systems with an aggregate value of up to $9.5
million, provided that PRG is reasonably satisfied with the success of the DMC
business, including the technology and economics thereof and the likelihood of
the continued success thereof. In connection with this note, PRG was granted a
common stock warrant equal to either (i) the number of shares of the Company's
common stock which may be purchased for an aggregate purchase price of
$1,250,000 at the fair market value on July 19,1999 or (ii) the number of shares
representing five percent of the fully paid non-assessable shares of common
stock of DMC at the purchase price per share equal to either (i) if a DMC
qualified sale (a sale in one transaction in which the aggregate sales proceeds
to DMC equal or exceed $5,000,000) has closed on or before December 31, 1999,
the purchase price per share determined by multiplying the price per share of
DMC common stock or security convertible into DMC common stock by seventy-five
percent (75%) or (ii) if a DMC qualified sale has not closed on or before
December 31, 1999, at an aggregate price of $1,250,000.
On August 10, 1999, the Company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F Preferred Stock, in a private
placement pursuant to Regulation D of the Securities Act, to five unrelated
accredited investors through one dealer (the "1999 Series F Preferred Stock
Private Placement"). The Company received $1.0 million for the sale of 8,500
shares of Series F Preferred Stock having an aggregate of $8.5 million stated
value. At the Company's election, the investors may invest up to an additional
$4.0 million in cash or in kind, at a future date. Each share of the Series F
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 F 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 F Subscription Agreement, the
Company is required to file a registration statement ("the Series F Registration
Statement") on Form S-1 on or prior to a date which is no more than forty-five
(45) days from the date that the Company has issued a total of 1,000 shares of
Series F Preferred Stock, covering the resale of all of the registrable
securities (the "Series F Closing Date"). The shares of Series F Preferred Stock
become convertible into shares of common stock at any time commencing after the
earlier of (i) forty-five (45) days after the Series F Closing Date; (ii) five
(5) days after the Company receives a "no review" status from the SEC in
connection with the Series F Registration Statement; or (iii) the effective date
of the Series F Registration Statement. Each share of Series F 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 F Conversion
Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
-----------------------------------
Conversion Price
where
N = the number of days between (i) the Series F Closing
Date, and (ii) the conversion date.
Conversion
Price = 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 Series F 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 five (5) consecutive
trading days immediately preceding such date.
The conversion terms of the Series F Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 35,000,000 shares of
its common stock in the aggregate in connection with the conversion of the
12,500 shares of Series F Preferred Stock issued under the 1999 Series F
Preferred Stock Private Placement. The Company is also obligated to pay a 4% per
annum accretion on the stated value of Series F Preferred Stock. The Company is
given the right to pay the accretion in either cash or common stock. The Series
F Subscription Agreement also provides 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 the date hereof, no shares of Series F Preferred Stock have been
converted to NCT common stock.
In connection with the Series F 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 35,000,000 shares on conversion of Series F Preferred
Stock.
On August 16,1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. The Company reduced its
worldwide work force by 25%. Charges related to this amount to $0.1 million and
will be recorded in the third quarter of 1999.
<PAGE>
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or event arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that the undertakings set forth in paragraphs (1)(i) and
(1)(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) That for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Linthicum, Maryland, on this 28th day of October, 1999.
NCT GROUP, INC.
(formerly Noise Cancellation Technologies, Inc.)
By: /s/ MICHAEL J. PARRELLA
------------------------------
Michael J. Parrella, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Capacity Date
---------------------------------------------------------------------------
/s/ MICHAEL J. PARRELLA President, October 28, 1999
----------------------------- Chief Executive
Michael J. Parrella Officer and Director
(Principal Executive
Officer)
/s/ CY E. HAMMOND Senior Vice President and October 28, 1999
----------------------------- Chief Financial Officer
Cy E. Hammond (Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Chairman of the Board October 28, 1999
----------------------------- of Directors and
Jay M. Haft Director
/s/ JOHN J. McCLOY II Director October 28, 1999
-----------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director October 28, 1999
-----------------------------
Samuel A. Oolie
<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)
Charged Charged
Balance in to Balance
at costs other at end
beginning and accounts- Deductions- of
Description of period expenses describe describe period
- ------------------------- --------- -------- --------- ----------- -------
Year ended December 31, 1996:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $119 $192 $(188)(2) $ - $123
========= ======== ========= =========== ========
Year ended December 31, 1997:
Allowance for doubtful accounts $123 $130 $ (65)(2) $150(3) $ 38
========= ======== ========= =========== ========
Year ended December 31, 1998:
Allowance for doubtful accounts $ 38 $232 $ (42)(2) $ - $228
========= ======== ========= =========== ========
Year ended December 31, 1996:
Allowance for inventory obsolence $355 $ - $ (93)(1) $ - $262
======== ======== ========= =========== ========
Year ended December 31, 1997:
Allowance for inventory obsolence $262 $210 $ - $ - $472
======== ======== ========= =========== ========
Year ended December 31, 1998:
Allowance for inventory obsolence $472 $365 $(329)(1) $ - $508
======== ======== ========= =========== ========
</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 4(i)
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS
OF
SERIES F 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 April 13,
1999, adopted a resolution providing for the issuance of a total of Twelve
Thousand Five Hundred (12,500) shares of Series F 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 Twelve Thousand Five Hundred (12,500)
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 F Convertible Preferred Stock.
Shares of said Series F Convertible Preferred Stock are herein referred to
as "Series F Preferred Shares."
(2) Par Value, Stated Value and Accretion Rate. Each Share of Series
F 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.
(3) Dividends. The Series F Preferred Shares shall not bear any
dividends.
(4) Holder's Conversion of Series F Preferred Shares. A holder of
Series F Preferred Shares shall have the right, at such holder's option,
to convert the Series F 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) 45 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 F 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
F Preferred Shares (the "Registration Rights Agreement"), and (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 F Preferred
Shares shall be entitled to convert any Series F 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 F
Preferred Shares in excess of that number of Series F 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 F 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 conversion of the
remaining, nonconverted Series F Preferred Shares 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 F 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 F Preferred Share in either cash
or cash equivalent or Common Stock of the Corporation.
Notwithstanding anything contained herein to the contrary, the
Corporation shall not be required to issue in excess of Thirty-five
Million (35,000,000) shares of Common Stock upon conversion of
Series F Preferred Shares or such lesser amount as determined on a
pro-rata basis based upon the number of Series F Preferred Shares
actually issued if less than Thirty-five Million (35,000,000) (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 (as defined below) in effect as of such
date by the Average Market Price (as defined below) 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 thirty (30) days
(prorated for partial months) beyond forty-five (45) days from
the Issuance Date (as defined below) that the Registration
Statement on Form S-1 is not filed by the Corporation (the
"S-1 Filing Deadline as defined in the Registration Rights
Agreement");
(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);
(v) "N" means the number of days from, but excluding,
the Issuance Date through and including the Conversion Date
for the Series F Preferred Shares for which conversion is
being elected;
(vi) "Issuance Date" means the date of issuance of
Series F Preferred Shares having an aggregate stated value of
$1,000,000.00; and
(c) Adjustment to Conversion Price - Registration Statement.
If (x) the Registration Statement is not declared effective by the
SEC on or before the one hundred twentieth (120th) day following the
S-1 Filing Deadline as defined in the Registration Rights Agreement
(the "Scheduled Effective Date"), or (y) if after the Registration
Statement has been declared effective by the SEC, sales of Common
Stock issued upon conversion of all or any Series f Preferred Shares
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. For any period (x) after the
Scheduled Effective Date during which the Registration
Statement has not been declared effective by the SEC and (y)
after the Registration Statement has been declared effective
by the SEC and sales of Common Stock issued upon conversion of
all or any Series F Preferred Shares cannot be made pursuant
to the Registration Statement, the Conversion Percentage in
effect immediately prior to such period 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 (pro-rated for
partial months), if any, 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
(pro-rated 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 F Preferred Shares would
decrease by three percent (3.0%) to seventy-seven percent
(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 F Preferred Shares would decrease
by an additional four percent (4%), for an aggregate decrease
of seven percent (7.0%) to seventy-three percent (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 F Preferred Shares then outstanding) to insure
that each of the holders of the Series F 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 F 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 F
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 F Preferred Shares then
outstanding) with respect to such holder's 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 F 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 F Preferred Shares then
outstanding), the obligation to deliver to each holder of
Series F 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 F 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 F 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 F 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 F 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 F 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:
(i) Holder's Delivery Requirements. To convert Series F
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 F 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.
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion
of Series F 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 F
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 F 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 F Preferred Shares
remain outstanding on August 9, 2001, then all such Series F
Preferred Shares shall be converted as of such date in accordance
with this Section 4 as if the holders of such Series F Preferred
Shares had given the Conversion Notice on August 9, 2001, and the
Conversion Date had been fixed as of August 9, 2001, for all
purposes of this Section 4, and all holders of Series F Preferred
Shares shall thereupon and within 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 F Preferred
Shares, except the right to receive shares of Common Stock on
conversion thereof as provided in this Section 4.
(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 F 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 F Preferred Shares.
(j) Conversion Restriction. The right of a holder of Series F
Preferred Shares to convert Series F 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 F Preferred
Shares shall not be entitled to convert any Series F 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 F 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 F 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 F Preferred Shares purchased
by such Buyer;
(v) After the 90th day following the Initial Conversion
Date, each holder of the Series F Preferred Shares shall be
entitled to convert any and all of the Series F Preferred
Shares then held by such person.
Provided however, notwithstanding the foregoing, any holder of
Series F Preferred Shares shall be immediately entitled to convert
all of such holder's Series F 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 F 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 F Preferred Shares then outstanding at a price per
Series F Preferred Share equal to 125% of the Liquidation
Value of such share plus the unpaid 4% per annum accretion
rate.
(ii) Payment of Redemption Price. Following receipt of
such Maximum Share Issuance Notice, each holder of Series F
Preferred Shares shall thereafter promptly send such holder's
Series F 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 F 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 F Preferred
Shares, the Corporation shall redeem an amount from each
holder of Series F Preferred Shares equal to such holder's
pro-rata amount (based on the number of Series F Preferred
Shares held by such holder relative to the number of Series F
Preferred Shares outstanding) of all Series F Preferred Shares
being redeemed. If the Corporation shall fail to redeem all of
the Series F 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 F Preferred Shares shall
bear interest at the rate of 1% from the first month and a
rate of 2.5% per month thereafter (pro-rated 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 F Preferred Shares;
provided (i) the Corporation shall first provide no more than five
(5) days and no less than one (1) day advance written notice as
provided in subparagraph 5(a)(ii) below (which can be given any time
on or after eighty (80) days after the Issuance Date); and (ii) that
the Corporation shall only be entitled to redeem Series F 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 F Preferred
Shares, the Corporation shall redeem a pro rata amount from each
holder of the Series F 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 F Preferred Shares being
redeemed pursuant to this Section 5(a).
(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 F Preferred
Shares selected for redemption at the address and facsimile
number of such holder appearing in the Corporation's Series F
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 F 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 F Preferred
Shares which it is otherwise entitled to convert, including
Series F 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
F Preferred Shares being redeemed under this Section 5 shall send
his Series F 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.
(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 F Preferred Shares
contained herein, after a Triggering Event (as defined below), the
holders of Series F 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 F Preferred Shares then
outstanding, to require the Corporation to redeem all of the Series
F Preferred Shares then outstanding at a price per Series F
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 F
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 F Preferred Shares for
shares of Common Stock;
(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 F 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 F 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
F 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 F Preferred Shares then outstanding may require the
Corporation to redeem all of the Series F 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 F 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.
(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 F 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 F Preferred Shares shall thereafter
promptly send such holder's Series F 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's receipt of the requisite notices
required to affect a redemption; provided that a holder's Series F
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 F Preferred
Shares, the Corporation shall redeem an amount from each holder of
Series F Preferred Shares equal to such holder's pro-rata amount
(based on the number of Series F Preferred Shares held by such
holder relative to the number of Series F Preferred Shares
outstanding) of all Series F Preferred Shares being redeemed. If the
Corporation shall fail to redeem all of the Series F 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 F 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 F Preferred Shares then outstanding,
including shares of Series F 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 F
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 F Preferred Shares submitted for redemption and for
which the applicable redemption price has not been paid, (ii) the
Corporation shall immediately return any Series F 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."
(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 F 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 F 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 F 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 F 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 F 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 F
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 F
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 F
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.
(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 F Preferred Shares for which the full Mandatory Redemption
Price has not been paid and receive back such Series F 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 F Preferred Shares on the same day and the Corporation can
convert and redeem some, but not all, of the Series F Preferred
Shares pursuant to this Section 7, the Corporation shall convert and
redeem from each holder of Series F Preferred Shares electing to
have Series F Preferred Shares converted and redeemed at such time
an amount equal to such holder's pro-rata amount (based on the
number of Series F Preferred Shares held by such holder relative to
the number of Series F Preferred Shares outstanding) of all Series F
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 F Preferred Shares represented by a particular Series F
Preferred Share certificate, the Corporation shall promptly cause to be
issued and delivered to the holder of such Series F Preferred Shares a
Series F Preferred Share certificate representing the remaining Series F
Preferred Shares which have not been so converted or redeemed.
(9) Reservation of Shares. The Corporation shall, so long as any of
the Series F 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 F 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 F Preferred Shares then
outstanding.
(10) Voting Rights. Holders of Series F 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.
(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 F 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, D and E 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 F
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 F 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 F 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 F Preferred Shares as to payments of Preferred Funds
(the "Pari Passu Shares"), then each holder of Series F 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 F 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 F 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.
(12) Preferred Rank. Except for the Corporation's Series C
Convertible Preferred Stock, Series D Convertible Preferred Stock and
Series E Convertible Preferred Stock, all shares of Series F Convertible
Preferred Stock shall be of senior rank and all shares of Common Stock
shall be of junior rank to all Series F 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 F Preferred Shares. Except for the Corporation's Series C
Convertible Preferred Stock, Series D Convertible Preferred Stock and
Series E Convertible Preferred Stock, the Series F Preferred Shares shall
be of greater rank than any Series of Common or Preferred Stock 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 F
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 F 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 F
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 F 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 F 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 F 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 F 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 F
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 F Preferred Shares an amount in
cash or cash equivalent equal to the amount such holder would have
received had all of such holder's Series F 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 F 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 F 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 F 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 F
Preferred Shares.
(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 F 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 F
Preferred Share certificate(s), the Corporation shall execute and deliver
new Series F Preferred Share certificate(s) of like tenor and date;
provided, however, the Corporation shall not be obligated to reissue
Series F Preferred Share certificates if the holder contemporaneously
requests the Corporation to convert such Series F 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 F
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 F Preferred
Shares on the holder of such Series F 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 F 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 F Preferred
Shares on the holder of such Series F 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 F Preferred Shares on the
holder of such Series F Preferred Shares executing and delivering to the
Corporation, at the election of the holder, either: (i) if applicable, a
properly completed Internal Revenue Service Form 4224; or (ii) 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 Cy E. Hammond, its Senior Vice President and Chief
Financial Officer, as of the 10th day of August, 1999.
NCT GROUP, INC.
By: /s/ CY E. HAMMOND
-----------------
Cy E. Hammond
Senior Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT I
NCT GROUP, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock 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 F Convertible Preferred Stock, $.10 par value per share (the
"Series F 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 F 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 F 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 F
Preferred Shares to be converted
-----------------------------------------
Stock certificate no(s). of Series F
Preferred Shares to be converted:
-----------------------------------------
Please confirm the following information:
Conversion Price:
-----------------------------------------
Number of shares of Common Stock to be
issued:
-----------------------------------------
<PAGE>
Please issue the Common Stock into which the Series F 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:___________________________
- ------
(1) If other than to the record holder of the Series F Preferred Shares, any
applicable transfer tax must be paid by the undersigned.
Exhibit 4(j)
TERM SHEET SHARE EXCHANGE
o Austost Anstalt Schaan ("Austost") and Balmore Funds, S.A. ("Balmore")
agree to exchange all of the shares of NCT Audio Products, Inc. common
stock held by each of them for shares of NCT Group, Inc. ("NCTI") common
stock pursuant to a conversion formula which will net each of Austost and
Balmore $1,300,000 upon their disposition of such shares.
o NCTI will issue to each of Austost and Balmore and register for each of
them the number of shares represented by dividing $1,300,000 by $0.15 per
share as a good faith estimate of a sufficient number of shares of common
stock of NCTI, or 8,666,667 shares for each of them (17,333,334 shares in
the aggregate). Such common stock is to be priced after 90 days or sooner
if agreed by both Austost/Balmore and NCTI.
o NCTI will include such shares in a Pre-Effective Amendment to its
Registration Statement on Form S-1 presently pending with the Securities
and Exchange Commission ("SEC"). Such amendment will be filed with the SEC
as expeditiously as economically feasible.
o To the extent the number of shares so issued and registered is not
sufficient to net either of Austost or Balmore $1,300,000 upon their
disposition of the shares, NCTI will issue additional shares.
Date: October 9, 1999
Agreed:
/s/ NCT GROUP, INC.
- ---------------------------
NCT Group, Inc.
/s/ NCT AUDIO PRODUCTS, INC.
- ---------------------------
NCT Audio Products, Inc.
/s/ AUSTOST ANSTALT SCHAAN
- ---------------------------
Austost Anstalt Schaan
/s/ BALMORE FUNDS, S.A.
- ---------------------------
Balmore Funds, S.A.
Exhibit 5
October 28, 1999
NCT Group, Inc.
1025 West Nursery Road
Suite 120
Linthicum, Maryland 21090
Re: Pre-effective Amendment No. 1 to
Registration Statement on Form S-1
Gentlemen:
We serve as outside counsel to NCT Group, Inc., a Delaware corporation (the
"Company"), and have acted as counsel in connection with the preparation and
filing with the Securities and Exchange Commission of the Registration Statement
on Form S-1 that the Company is filing today with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the sale by
certain Selling Stockholders, as defined in such Registration Statement, of
55,837,112 shares of common stock of the Company (the "Resale Shares").
With respect to the Registration Statement on Form S-1, we are of the
opinion that the Resale Shares have been duly authorized by the Company, have
been validly issued and are fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as Exhibit No. 5 to the Registration Statement on Form S-1
referred to above and to the reference therein to our firm under the caption
"Interests of Named Experts and Counsel" in the Prospectus.
Respectfully submitted,
/s/ Crowell & Moring LLP
---------------------------------------
CROWELL & MORING LLP
Signed By:
/s/ WILLIAM P. O'NEILL
Date: October 28, 1999
Reviewed By:
/s/ STEVE SCHNITZER
Date: October 28, 1999
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in the Pre-effective Amendment No. 1 to the
Registration Statement on Form S-1 of our report dated March 11, 1999 (with
respect to Note 8, March 24, 1999 and with respect to last paragraph of Note 16,
June 24, 1999), on our audits of the consolidated financial statements and
schedules of NCT Group, Inc. (formerly Noise Cancellation Technologies, Inc.) as
of December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998, and to the reference to the firm under the caption
"Interests of Named Experts and Counsel" included in the Prospectus.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
October 27, 1999
Exhibit 23(b)
[Peters Elworthy & Moore letterhead]
NCT Group, Inc.
1025 West Nursery Road
Suite 120 Our Ref: PRC/J
Linthicum
Maryland 21090 Date: October 27, 1999
USA
Dear Sirs
We consent to the incorporation by reference to the Pre-Effective Amendment No.
1 to Registration Statement on Form S-1 of our report dated February 23, 1999,
on the financial statements and schedule of Noise Cancellation Technologies
(Europe) Limited (the "Company") as at December 31, 1998 and December 31, 1997
and for each of the years in the three year period ended December 31, 1998,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998, and to the reference to the firm under the caption "Experts" included
in the Prospectus.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
Exhibit 99(h)
TERM SHEET LITIGATION SETTLEMENT
o In consideratin of mutual promises and covenants as outlined herein,
Austost Anstalt Schaan, Balmore Funds, S.A. and LH Financial agree to drop
all charges, claims and counterclaims made individually or jointly against
NCT Group, Inc. and NCT Audio products, Inc.; concurrently, NCT Group, Inc.
and NCT Audio Products, Inc. agree to drop all charges, claims and
counterclaims made individually or jointly against Austost Anstalt Schaan,
Balmore Funds, S.A. and LH Financial. In settlement of the litigation, the
parties agree to exchange mutual general releases of all charges, claims
and counterclaims relating to or arising out of the subject matter of the
lawsuit, agree to exchange covenants not to sue, and agree to the dismissal
of the complaint and counterclaim with prejudice.
Date: October 9, 1999
Agreed:
/s/ NCT GROUP, INC.
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NCT Group, Inc.
/s/ NCT AUDIO PRODUCTS, INC.
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NCT Audio Products, Inc.
/s/ AUSTOST ANSTALT SCHAAN
- ------------------------------
Austost Anstalt Schaan
/s/ BALMORE FUNDS, S.A.
- ------------------------------
Balmore Funds, S.A.
/s/ LH FINANCIAL
- ------------------------------
LH Financial
