As filed with the Securities and Exchange Commission on May 7, 1999
Registration No. 333-64967
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM S-1 AMENDMENT NO. 2
TO
FORM S-3 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. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AGGREGATE AGGREGATE AMOUNT OF
TITLE OF SHARES AMOUNT TO BE PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT PRICE FEE
- - ---------------- ------------- --------- --------- ------------
COMMON STOCK 1,786,991 SHARES $0.5469(2) $ 977,305(2) $ 288.31(2)
COMMON STOCK 26,000,000 SHARES 0.4844(3) 12,594,400(3) 3,715.36(3)
(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 D Convertible Preferred Stock (i) to prevent dilution
resulting from stock splits, stock dividends or similar transactions and (ii)
by reason of changes in the conversion price or conversion rate of the
Company's Series D Convertible Preferred Stock in accordance with the terms
thereof.
(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
National Market System on September 23, 1998. $288.31 was paid by the
registrant in connection with the filing of this registration statement on
September 30, 1998.
(3)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
National Market System on October 26, 1998. The registration fee was paid by
registrant on October 28, 1998.
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.
27,786,991 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 27,786,991 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 these
resales, which consist of:
o 1,786,991 shares of common stock of the Company that the Company originally
issued in a private placement;
o 12,500,000 shares of common stock of the Company that the Company may issue
upon the conversion of shares of our Series D Convertible Preferred Stock;
o 12,500,000 shares of the common stock of the Company that the Company may
issue upon the conversion of authorized but unissued shares of our Series D
Convertible Preferred Stock that shareholders may receive in exchange for
shares of the Series A Convertible Preferred Stock of our subsidiary, NCT
Audio Products, Inc.; and
o 1,000,000 shares of the common stock of the Company that the Company issued
in exchange for shares of common stock of NCT Audio Products, Inc.
------------------------------------------------
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 10.
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 May 7, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
Prospectus Summary Information 1
The Company 1
Recent Developments 3
Risk Factors 10
Use of Proceeds 27
Selling Security Holders 27
Plan of Distribution 28
Description of Securities to be Registered 29
Interests of Named Experts and Counsel 29
The Business 30
Properties 50
Legal Proceedings 50
Market Price of and Dividends on Common 54
Equity
Description of Securities 55
Selected Financial Data 56
Management's Discussion and Analysis 57
Changes in and Disagreements with 73
Accountants
Directors and Executive Officers 74
Executive Compensation 77
Security Ownership 87
Certain Relationships and Related 88
Transactions
Other Expenses of Issuance and 90
Distribution
Indemnification of Directors and Officers 90
Recent Sales of Unregistered Securities 92
Exhibits and Financial Statements 92
Undertakings 103
Signatures 105
---------------
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
three subsidiaries, NCT Audio Products, Inc. ("NCT Audio"), NCT Hearing
Products, Inc. ("NCT Hearing"), and recently formed 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 444 patents worldwide and
an extensive library of know-how and other unpatented technology. These patents
allow us to develop our major products, 89 in all, which include:
o NoiseBuster(R) communications headsets,
o NoiseBuster Extreme!(TM) consumer headsets,
o flat panel transducers,
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, and
o an aircraft cabin quieting system.
Further, in early 1998 the Company introduced the Gekko(TM) flat speakers and
the ClearSpeech(TM) corporate intranet telephone software. The Company believes
these developments will have wide application in the audio and communications
industries.
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. 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. ("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 services and 24.1% 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 our product line expansion, the Company introduced 19 new products
and associated accessories during 1998. 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 February 28, 1999, the
Company had 104 employees, including 48 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 December 31, 1998, the Company had recorded a
liability of $544,000, 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 February 16, 1999, NASDAQ
advised the Company that the issuance of a review decision will likely occur in
July 1999.
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.
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. The conversion is possible because the Company's shareholders
approved an increase in the amount of authorized Common Stock from 185,000,000
to 255,000,000 shares at the October 20, 1998 annual shareholders meeting.
The conversion terms of this placement provide that in no event shall the
conversion price be less than $0.50 per share. The terms also provide that under
no circumstances 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.
Accordingly, those 12,000,000 shares of common stock are to be registered under
this registration statement and prospectus, together with 500,000 shares of
common stock the Company may issue. The issuance of the additional 500,000
shares will enable 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.
The Company also may redeem the Series D Preferred Stock in cash or common
stock.
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. The sale occurred in a private placement pursuant
to Regulation D of the Securities Act and generated $5.2 million in net proceeds
for NCT Audio. 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 Securities Exchange Act of 1934, as amended (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 Securities and Exchange Commission ("SEC") did not declare the registration
statement effective, holders were 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 make such an exchange would then be holders of the
Company's Series D Preferred Stock, with all of the rights and privileges
discussed above. 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.
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. Therefore, such additional 12,000,000 shares of the
Company's common stock are to be registered under this registration statement
and prospectus, together with 500,000 shares of common stock which may be
issued. The issuance of the additional 500,000 shares will enable 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. The Company also may redeem the Series
D Preferred Stock in cash or common 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.
This would be accomplished under Rule 10b-18 of 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 $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 has an exclusive right, as extended, to purchase the assets of
TSA through May 28, 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
the 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 fails to pay the
note by April 16, 1999, (a) the note will 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
will no longer be credited toward the $6.5 million purchase consideration due at
closing. If NCT Audio fails to pay the note by April 30, 1999, the $204,315
portion of the extension fee shall 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 fails to close the contemplated transaction by May 28, 1999, NCT Audio
will 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 received a penalty premium of $100,000 of NCT
Audio's Series A Preferred Stock.
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.
On September 4, 1998, the Company acquired all of the common stock of
Advancel Logic Corporation ("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. These shares are to be registered under this registration
statement and prospectus, together with future payments. Advancel's 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 is 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.
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."
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 issued the Series C Preferred Stock in the fourth quarter of
1997 in a private placement exempt from registration pursuant to Regulation D of
the Securities Act, described below under "Risk Factors."
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
1,000,000 shares of the Company's common stock necessary for the exchange are to
be registered under this registration statement and prospectus.
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.
As noted above, 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 an aggregate 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, having an aggregate of $8.1 million stated value,
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. 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 April 26, 1999, no holder of Series E Preferred Stock had elected
to convert their shares into 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 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 a predetermined
conversion price. The Holder shall purchase the remaining $3.0 million principal
amount of the secured convertible notes on or before June 30, 1999.
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.
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."
<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.
<TABLE>
<CAPTION>
(In Thousands of Dollars and Shares, except per share amount)
Years Ended December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
<S> <C> <C> <C> <C> <C>
Product Sales $ 2,337 $ 1,589 $ 1,379 $ 1,720 $ 2,097
Engineering and development services 4,335 2,297 547 368 425
Technology licensing fees and other 452 6,580 1,238 3,630 802
--------- --------- --------- --------- ---------
Total revenues $ 7,124 $ 10,466 $ 3,164 $ 5,718 $ 3,324
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of product sales $ 4,073 $ 1,579 $ 1,586 $ 2,271 $ 2,235
Cost of engineering and
development services 4,193 2,340 250 316 275
Selling, general and administrative 9,281 5,416 4,890 5,217 11,238
Research and development 9,522 4,776 6,974 6,235 7,220
Interest (income) expense, net (580) (49) 17 1,397(3) (429)
Equity in net (income) loss of
unconsolidated affiliates 1,824 (80) 80 - -
Other (income) expense, net 718 552 192 130 (3,032)(4)
--------- --------- --------- --------- ---------
Total costs and expenses $ 29,031 $ 14,534 $ 13,989 $ 15,566 $ 17,507
--------- --------- --------- --------- ---------
Net loss $ (21,907) $ (4,068) $ (10,825) $ (9,848) $ (14,183)
Less:
Preferred stock dividend requirement - - - 1,623 3,200
Accretion of difference between
carrying amount and redemption amount
of Redeemable preferred stock - - - 285 485
--------- --------- --------- --------- ---------
Net (loss) attributable to
common stockholders $ (21,907) $ (4,068) $ (10,825) $ (11,756) $ (17,868)
========= ========= ========= ========= =========
Weighted average number of common
Shares outstanding (1) - basic
and diluted 82,906 87,921 101,191 124,101 143,855
========= ========= ========= ========= =========
Basic and diluted net loss per share $ (0.26) $ (0.05) $ (0.11) $ (0.09) $ (0.12)
========= ========= ========= ========= =========
<CAPTION>
December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total assets $ 12,371 $ 9,583 $ 5,881 $ 17,361 $ 15,465
Total liabilities 6,903 2,699 3,271 2,984 5,937
Long-term debt - 105 - - -
Accumulated deficit (68,780) (72,848) (83,673) (93,521) (107,704)
Stockholders' equity (2) 5,468 6,884 2,610 14,377 3,426
Working capital (deficiency) 923 1,734 (1,312) 11,696 (1,187)
</TABLE>
(1) Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible preferred stock, since their effect would be
antidilutive.
(2) The Company has never declared nor paid cash dividends on its common stock.
(3) Includes interest expenses of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
(4) Includes a $3.2 million gain from the exercise of an option received from
Verity in connection with the cross license agreement entered into by the
Company.
<PAGE>
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.
Management believes these 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.
The ability of any or all of these areas to generate revenue 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.
GOING CONCERN UNCERTAINTY
We are unsure (1) whether future operations will be profitable enough to
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.
DIVIDENDS
The Company has never declared or paid dividends on its common stock. We have
no present intent to do so.
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 $107.7 million on a
cumulative basis through December 31, 1998. 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. This loss was 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 through December
31, 1998 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 research 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 December 31, 1998, the Company had outstanding
options to purchase 1,350,000 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 provided 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, 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 the common stock for issuance
in the event that option holders exercise their option to purchase shares or 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 December 31, 1998, the
Company had outstanding options to purchase 19,831,821 shares of common stock
under the 1992 Plan. Of those shares, 12,053,571 are currently exercisable and
7,778,250 will become exercisable in increments through August 20, 2002. As of
December 31, 1998, the Company also had granted 240,000 shares of restricted
stock under the 1992 Plan.
The Company has reserved an additional 600,000 shares of common stock for
issuance if four non-employee directors exercise options granted to them by the
Company on January 15, 1999, subject to shareholder approval at the next annual
stockholders' meeting.
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 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 December 31, 1998, 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 December 31, 1998, the Company had reserved 378,984 additional shares
of common stock for issuance upon the exercise of warrants and options granted
outside the plans outlined above. These warrants and options are not included in
the above plans. These shares are registered under the Securities Act. 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 Company registered all of the above shares relating to the 1992 Plan, the
Directors' Plan and the other investors' warrants and options, with the
exception of those granted under the Investor Warrant, under a Registration
Statement dated December 29, 1997, as amended on May 8, 1998 and July 2, 1998
(Registration Statement No. 333-43387).
The aggregate outstanding non-plan stock options and warrants at December 31,
1998 was 8,692,133, of which 8,492,133 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.
The NCT Audio Initial Financing
Between October 10, 1997 and December 4, 1997, NCT Audio raised $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 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.
Also noted above, the Company has issued 1,135,542 shares of its common stock
in exchange for 296 shares of NCT Audio common stock. Of such shares, 1,000,000
are to be 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 Convertible Preferred Stock ("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 those 26
million shares for resale under a Registration Statement dated December 29,
1997, as amended on May 8, 1998 and July 2, 1998 (Registration Statement No.
333-43387). As of December 31, 1998, 10,850 shares of the Series C Preferred
Stock had been converted to 20,655,000 shares of common 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.
<PAGE>
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 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. The Company
is given the right to chose to pay the accretion in either cash or common stock.
The Company also may redeem the Series D Preferred Stock in cash or common
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 any conversion or redemption.
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 are
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 will
enable 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. 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.
The Advancel Logic Corporation Acquisition
On September 4, 1998, the Company acquired all of the common stock of
Advancel Logic Corporation. 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. These shares are to be registered under this registration statement and
prospectus, together with future payments. Advancel's 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.
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 Convertible Preferred Stock (the
"Series E Preferred Stock"), with an aggregate 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, having an aggregate of $8.1 million stated value,
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. 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 April 26, 1999, no holder of Series E Preferred Stock had elected
to convert their shares into 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.
<PAGE>
Secured Convertible Note
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 shall be the lesser of (i) 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 (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 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, and (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.
MATERIAL DEPENDENCE ON CERTAIN PATENT AND TRADEMARK RIGHTS
The Company and its subsidiaries currently hold 444 patents 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.
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 an evolving industry, 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
the rapid pace of change in the industry, 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.
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 December 31, 1998, 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 December 31, 1998. 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.
<PAGE>
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.
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 March 11, 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. Although such amount has been fully reserved by the Company, the Company
expects QSI to repay this indebtedness.
DELISTING FROM NASDAQ NATIONAL MARKET SYSTEM
Prior to the closing 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 was 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.
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. At December 31, 1998, there were 17,280 shares issued and
outstanding. 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 September 30, 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.
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 official text of the judgment will be available in a few weeks.
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 then again heard that AECorp. was continuing to infer that the
Company was infringing.
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:
o the court 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 Funds, S.A. and Austost Anstalt Schaan
("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. 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.
<PAGE>
USE OF PROCEEDS
All of the shares of common stock offered under this registration statement
and prospectus are being offered by their present owners (the "Selling
Stockholders"). The Company will not receive any of the proceeds from their
sale. The Company estimates that the expenses payable in connection with this
registration statement will be approximately $35,000. There are no other
material expenses attributable to the issuance and distribution of the shares of
common stock.
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
Ownership
of Shares
of Common
Number of Stock
of Shares Shares of After
of Common Common Giving
Relationship Stock at Stock Effect to
With The October 22, Offered Proposed
Name of Selling Stockholder Company 1998 For Sale Sale
- - --------------------------- ------------ ----------- ---------- ---------
<S> <C> <C> <C>
Advantage Bermuda Fund, Ltd. 312,500 312,500 (4) -
Alliance Advisory Partners, LLC 389,348 89,348 300,000
Atlantis Capital Fund, Ltd. 5,213,269 3,854,167 (1), (4) 1,359,102
Augustine Capital Management 1,000,000 1,000,000 -
Prakash Bhalerao 40,939 40,939 -
Canadian Advantage Limited Partnership 2,169,049 1,041,667 (4) 1,127,382
Chuck Cheng 5,117 5,117 -
Vijay Chougule 40,939 40,939 -
Amy Dasso 171 171 -
Sanjay Dave 13,860 13,860 -
Dominion Capital Fund, Ltd. 11,515,386 6,875,000 (2), (4) 4,640,386
The Endeavor Capital Fund, S.A. 1,250,000 1,250,000 (4) -
Cynthia Hughes 3,412 3,412 -
Srini Krishnaswami 255,870 255,870 -
Derek Lentz 10,235 10,235 -
Nina Luu 171 171 -
Robert Maffit 5,117 5,117 -
Haresh Makhijani 5,117 5,117 -
Rajesh Parekh 34,116 34,116 -
Soma Pullela 3,412 3,412 -
Vaidyanathan Raghunathan 74,629 74,629 -
Vishnu Reddy 68,232 68,232 -
Balaji A. Sampath 3,483 3,483 -
Lee Scantlin 170,580 170,580 -
Anand Sheel 562,914 562,914 -
Shiraj Shivji 85,290 85,290 -
Mark Snesrud 255,870 255,870 -
Sovereign Partners, LP 14,721,205 11,666,666 (3), (4) 3,054,539
Patricia Steele 171 171 -
Karen Vahtra 3,412 3,412 -
Stephen Voorhees 54,586 54,586 -
---------- ---------- ----------
TOTAL 38,268,400 27,786,991 10,481,409
</TABLE>
<PAGE>
(1)Upon completion of the offering, the Selling Stockholder will own 2.5% of
the Company's issued and outstanding common ctock.
(2)Upon completion of the offering, the Selling Stockholder will own 4.3% of
the Company's issued and outstanding common stock.
(3)Upon completion of the offering, the Selling Stockholder will own 7.1% of
the Company's issued and outstanding common stock.
(4)Based on 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 D Preferred Stock under the Series D
Certificate of Designations including the shares of Series D Preferred Stock
issuable in exchange for 60 shares of NCT Audio Series A Preferred Stock
under the NCT Audio Subscription Agreements and each Selling Stockholder's
pro rata share of 1.0 million shares which may be issued to pay the 4%
accretion payable on the stated value of 12,000 shares of Series D Preferred
Stock. Such pro rata share has been determined for each Selling Stockholder
by dividing the sum of (i) the number of shares of Series D Preferred Stock
acquired by such Selling Stockholder in the July 1998 Series D Preferred
Stock Private Placement and (ii) the shares of Series D Preferred Stock
issuable to each Selling Stockholder in exchange for NCT Audio Series A
Preferred Stock under the terms of the NCT Audio Subscription Agreements by
(iii) 12,000, the total number of shares of Series D Preferred Stock issued
in the July 1998 Series D Preferred Stock Private Placement and issuable in
exchange for NCT Audio Series A Preferred Stock. The number of shares of
common 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 D Preferred Stock is held, (ii) the conversion price as determined
under the Series D Conversion Formula, and (iii) the application of the
24,000,000 share limit on the Company's obligation to issue shares of common
stock upon conversion of the Series D Preferred Stock including shares of
Series D Preferred Stock issued in exchange for NCT Audio Series A Preferred
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.
<PAGE>
DESCRIPTION OF SECURITIES TO BE REGISTERED
This offering consists of the resale of 1,786,991 shares of common stock of
the Company. The Company originally issued these shares on September 4, 1998 in
a private placement exempt from registration under Regulation D of the
Securities Act.
This offering also consists of the resale of 12,500,000 shares of common
stock of the Company. The Company may issue these shares upon the conversion of
issued and outstanding shares of the Company's Series D Preferred Stock. The
Company originally issued the Series D Preferred Stock in a private placement
exempt from registration under Regulation D of the Securities Act.
In addition, this offering consists of the resale of 12,500,000 shares of the
common stock of the Company. The Company may issue these shares upon the
conversion of authorized but unissued shares of the Series D Preferred Stock
which may be issued in exchange for shares of the Series A Preferred Stock of
its subsidiary, NCT Audio. NCT Audio initially issued its preferred stock in a
private placement exempt from registration under Regulation D of the Securities
Act.
In addition, this offering consists of the resale of 1,000,000 shares of the
common stock of the Company. The Company originally issued these shares in
exchange for shares of common stock of NCT Audio on October 12, 1998. That
exchange was exempt from registration under Section 4(2) of the Securities Act.
All of the shares mentioned above may be offered for sale by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
its common stock.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Matters relating to the legality of 27,786,991 shares of Common Stock being
offered by this prospectus have been reviewed for the Company by 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 schedules included in this prospectus and as
exhibits have been audited by Richard A. Eisner & Company, LLP, independent
auditors and other auditors, as set forth in their reports included therein
(which contains an explanatory paragraph relating to the Company's ability to
continue as a going concern) and have been so incorporated in reliance upon such
reports given upon the authority of such firm 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 reports given upon the authority of such firm
as experts in auditing and accounting.
The financial statements of Top Source Automotive, Inc. as of September 30,
1997 and 1998 and for the years ended September 30, 1996, 1997 and 1998 included
in this prospectus were audited by Arthur Anderson, LLP, independent
accountants, as set forth in their report included therein and have been so
incorporated in reliance upon such report given upon the authority of such firm
as experts in auditing and accounting.
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
lines, with 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.
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."
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 forecasted to fund an increasing share of the Company's
requirements. The revenues from these sources, if realized, will reduce the
Company's dependence on engineering and development revenues. This progression
is reflected in the revenue percentages discussed briefly below and more fully
in Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
From the Company's inception 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.
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 444 patents 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 February 28, 1999, the Company had
104 employees, including 48 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 which 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.
<PAGE>
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.
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 Logic Corporation ("Advancel"), a majority
owned subsidiary of the Company, is a participant in the native Java embedded
microprocessor market. The purpose of the Java(TM) (Java is a trademark of Sun
Microsystems, Inc.) platform is to simplify application development by providing
a platform for the same software to run on many different kinds of computers and
other smart devices. Advancel has been developing a family of processor cores,
which will execute instructions written in both Java bytecode and C (and C++)
significantly enhancing the rate of instruction execution, which opens up many
new applications. The potential for applications consists of the next generation
home appliances and automotive applications, manufacturers of smartcard
processors, hearing aids and mobile communications devices.
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.
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 was granted 197 new patents in the field of Active
Wave Management.
The Company now holds or has rights to 305 inventions as of December 31,
1998, including 105 United States patents and over 339 corresponding foreign
patents. The Company has pending 198 U.S. and foreign patent applications. NCT's
engineers have made 137 invention disclosures for which the Company is in the
process of preparing patent applications. The Company's presently owned patents
have expiration dates ranging from 2000 through 2016, with the majority
occurring during or after 2009.
Annuities and maintenance fees for the Company's extensive patent portfolio
are a significant portion of the Company's annual expenses. If, for the reasons
described in Item 7. - "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" below,
it becomes necessary for the Company to reduce its level of operations, the
Company will not be able to continue to meet the extensive monetary outlay for
annuities and maintenance fees to keep all the patents and applications from
becoming abandoned and will have to prioritize its portfolio accordingly.
The Company has been granted the following trademarks:
Mark Field of Use
---- ------------
NCT logo Company logo
NoiseBuster(R) headsets
NoiseEater(R) HVAC systems
ClearSpeech(R) adaptive speech filter products
VariActive(R) headsets
ProActive(R) headsets
The Company has also applied for 12 trademarks including:
Mark Field of Use
---- ------------
NoiseBuster Extreme!(TM) headsets
Gekko(TM) flat audio speakers
ArtGekko(TM) flat audio speakers
Sweet Space(TM) flat audio speakers
Top Down Surround Sound(TM) vehicular audio speakers
X-Static(TM) adaptive speech filter products
No assurance can be given as to the range or degree of protection any 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.
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.
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.
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 very thin wall hanging speakers that are designed to
accept high quality reproductions of the world's most popular artwork, which is
the ArtGekko(TM) line of replacement prints and decorative frames. The art is
printed on acoustically transparent material, which 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.
(000's) As a %
Products Amount of Total
-------- ------ --------
Hearing Products $1,191 56.8%
Communications 488 23.3%
Audio Products 383 18.3%
Other 35 1.6%
--------- ----------
Total $2,097 100.0%
========= ==========
<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.
(000's) As a %
Technology Amount of Total
---------- ------- --------
Audio $350 43.6%
Advancel 200 24.9%
Hearing 86 10.7%
Communications 18 2.2%
Other 148 18.6%
=========== ============
Total $802 100.0%
=========== ============
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. Samples were received in
the first quarter 1999. Full production is scheduled to commence in the first
quarter 2000.
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:
<PAGE>
----------------------------------------------------------------------
Date Initial
Relationship
Key Strategic Alliances Established Applications
------------------------------- --------------- ----------------------
Walker Manufacturing Company Nov. 1989 Mufflers, Industrial
(a division of Tennessee Gas Silencers and Other
Pipeline Company) Vehicular
Applications
AB Electrolux Oct. 1990 Consumer Appliances
Ultra Electronics Ltd. June 1991 Aircraft Cabin
Quieting Systems
Analog Devices, Inc. June 1992 Integrated Circuits
and Related Products
The Charles Stark Draper July 1994 Microphones
Laboratory, Inc.
Applied Acoustic Research, Aug. 1995 TDSS
L.L.C.
Hoover Universal, Inc. May 1996 TDSS
(a wholly-owned subsidiary of
Johnson Controls, Inc.)
New Transducers Ltd. Mar. 1997 Flat Panel
Transducers
Oki Electric Industry Co., Oct. 1997 Communications
Ltd.
Siemens AG Dec. 1997 Microphones
VLSI Technology, Inc. Feb. 1998 Communications
STMicroelectronics SA & Nov. 1998 Java(TM) platform
STMicroelectronics S.r.l.
----------------------------------------------------------------------
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.
<PAGE>
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, the Company has an internal
sales and marketing force of twenty professionals, its executive officers and
directors and nine independent sales representatives. The independent sales
representatives may earn commissions of generally up to 6% of revenues generated
from sales of NCT products to customers the sales representatives introduce to
NCT and up to 5% of research and development funding revenues provided by such
customers. During 1998 and through February 1999, the Company expanded its
internal sales and marketing force by ten, from nineteen to twenty-nine
professionals, and will continue to expand its internal sales force on a limited
basis as the need dictates.
Note 15 - "Notes to Financial Statements" sets forth financial information
relating to foreign and domestic operations and sales for the years ended
December 31, 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
=========== ==========
The Company regularly assesses the realizability of its accounts receivable
and performs a detailed analysis of its aged accounts receivable. When
quantifying the realizability of accounts receivable, the Company takes into
consideration the value of past due receivables and the collectibility of such
receivables, based on credit worthiness.
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and trade
receivables. The Company considers all money market accounts and investments
with original maturities of three months or less at the time of purchase to be
cash equivalents. The Company primarily holds its cash and cash equivalents in
two banks. Deposits in excess of federally insured limits were $0.3 million at
December 31, 1998.
J. Competition
The Company is aware of a number of direct competitors in the field of Active
Wave Management. Indirect competition also exists in the field of passive sound
and vibration attenuation. The Company's principal competitors in active control
systems include Bose Corporation, Group Lotus PLC and Lotus Cars Limited, Lord
Corporation, Matsushita Electric Industrial Co., Ltd., Sennheiser Electronic
Corp. and Sony Corporation, among others. The Company's principal competitors in
other fields of Active Wave Management include IBM Corporation, Lucent
Technologies, Inc. and Texas Instruments, Incorporated. To the Company's
knowledge, each of such entities is pursuing its own technology in active
control systems, either on its own or in collaboration with others and has
recently commenced attempts to commercially exploit such technology. NCT also
believes that a number of other large companies, such as the major domestic and
foreign communications, computer, automobile and appliance manufacturers, as
well as aircraft parts suppliers and manufacturers, have research and
development efforts underway in Active Wave Management and active noise and
vibration control. Many of these companies, as well as the Company's potential
competitors in the passive sound and vibration attenuation field and other
entities which could enter the active noise and vibration attenuation field and
other fields of Active Wave Management as the industry develops, are well
established and have substantially greater management, technical, financial,
marketing and product development resources than the Company.
K. Government Contracts
The Company has acted as a government subcontractor in connection with its
performance of certain engineering and development services. Government
contracts provide for their cancellation at the government's sole discretion, in
which event the contractor or subcontractor may recover its actual costs up to
the date of cancellation, plus a specified profit percentage. Governmental
expenditures for defense are subject to the political process and to rapidly
changing world events, either or both of which may result in significant
reductions in such expenditures in the proximate future. Government contracts
are not viewed as a significant part of the Company's business. No such
contracts were in effect during 1998.
L. Research and Development
Company-sponsored research and development expenses aggregated $7.0
million, $6.2 million and $7.2 million for the fiscal years ended December 31,
1996, 1997 and 1998, respectively.
M. Environmental Regulation Compliance
Compliance with Federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, does not have any material effect upon the capital
expenditures, earnings or competitive position of the Company.
Compliance by existing and potential customers of the Company with Federal,
state and local laws and regulations pertaining to maximum permissible noise
levels occurring from the operation of machinery or equipment or the conduct of
other activities could be beneficial to sellers of noise reduction products and
enhance demand for certain applications of the Company's technology, as well as
products developed or to be developed by the Company. However, at the present
time it is premature to determine what quantitative effect such laws and
regulations will have on the sale of the Company's products and technology.
N. Employees
The Company had 104 employees as of February 28, 1999. None of such employees
is represented by a labor union. The Company considers its relationships with
employees to be satisfactory.
O. Acquisitions and Proposed Transactions
On September 4, 1998, the Company acquired the issued and outstanding common
stock of Advancel, a Silicon Valley-based developer of microprocessor cores that
execute Sun Microsystems' Java(TM) code. The acquisition was pursuant to a stock
purchase agreement dated as of August 21, 1998 (the "Stock Purchase Agreement")
among the Company, Advancel and certain shareholders of Advancel (the "Advancel
Shareholders"). The consideration for the acquisition of the Advancel common
stock consisted of an initial payment of $1.0 million payable by the delivery of
1,786,991 shares of the Company's treasury stock, together with future payments,
payable in cash or in common stock of the Company at the election of the
Advancel Shareholders (individually, an "earnout payment" and collectively, the
"earnout payments") based on Advancel's earnings before interest, taxes,
depreciation and amortization (as defined in the Stock Purchase Agreement) for
each of the calendar years 1999, 2000, 2001 and 2002 (individually, an "earnout
year" and collectively, the "earnout years"). While each earnout payment may not
be less than $250,000 in any earnout year, there is no maximum earnout payment
for any earnout year or for all earnout years in the aggregate. If the Advancel
Shareholders elect to take payment in the form of shares of the Company's common
stock, a formula has been established to determine the number of shares
issuable. In the event that the Company is unable to maintain the registration
statement covering the resale of 1,786,991 shares effective for at least thirty
(30) days, each Advancel Shareholder 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.
NCT Audio, a majority owned subsidiary of the Company, has signed three
letters of intent, one agreement to purchase, and one definitive purchase
agreement pursuant to which it will acquire 100% of the stock or assets of the
companies outlined below. Management believes the consummation of these
acquisitions will provide significant value creation opportunities. By acquiring
companies that specialize in different segments of the audio market in various
locations around the world, management believes it can improve profitability of
the combined companies by sharing some resources, eliminating redundant expenses
and increasing revenue by leveraging each company's distribution channels. Some
of the synergistic opportunities that will be achieved with the acquisitions
include the ability to (i) leverage the extensive dealer network; (ii) gain
access to worldwide consumer audio markets and establish automotive audio
aftermarket accounts; (iii) increase product distribution of all acquisition
companies in world markets; (iv) cross-sell the acquisition companies' products
among distribution channels; and (v) maximize the warehousing and distribution
facilities. Overall, these opportunities are expected to significantly
strengthen the distribution network of NCT Audio's product line into the
worldwide market.
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc., a wholly-owned subsidiary of Top Source
Technologies, Inc. ("TST"). TSA, located in Troy, Michigan, specializes in the
design and manufacture of speaker enclosures that maximize audio output for
automotive OEMs, Tier One suppliers, and key aftermarket accounts. TSA's systems
are factory installed on Chrysler Corporation's ("Chrysler") Wrangler model line
and are also offered as dealer installed accessory packages. Earlier on June 11,
1998, NCT Audio had paid a non-refundable deposit of $1,450,000 towards the
purchase price. The total purchase price is $10,000,000 and up to $6,000,000 in
possible future 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.
NCT Audio has an exclusive right, as extended, to purchase the assets of
TSA through May 28, 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 the 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 fails to pay the note by April 16, 1999, (a) the note will
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 will no longer be credited toward the $6.5
million purchase consideration due at closing. If NCT Audio fails to pay the
note by April 30, 1999, the $204,315 portion of the extension fee shall 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 fails to close the
contemplated transaction by May 28, 1999, NCT Audio will 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
received a penalty premium of $100,000 of NCT Audio's Series A Convertible
Preferred Stock.
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.
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.
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."
<PAGE>
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.
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 official text of the judgment will be available in a
few weeks.
By a letter dated September 9, 1997, outside counsel to Andrea Electronics
Corporation ("AECorp.") notified the Company that AECorp. believed the Company's
use of the term "ANR READY" constituted the use of a trademark owned by AECorp.
The Company has also been informed by representatives of existing and/or
potential customers that AECorp. has made statements claiming the Company's
manufacture and/or sale of certain in-flight entertainment system products may
infringe a patent owned by AECorp. On March 25, 1998, the Company received from
AECorp.'s intellectual property counsel a letter dated March 24, 1998,
announcing and notifying the Company of the issuance of U.S. patent Number
5,732,143 to AECorp. and enclosing a copy of the patent. The subject letter
appears to be one of notice and information and did not contain any claim of
infringement. Following that date, additional correspondence was exchanged
between Company counsel and counsel to AECorp. The Company again was informed by
representatives of existing, and/or potential customers that AECorp. was
continuing to make statements inferring that the Company's manufacture and/or
sale of certain in-flight entertainment system products may infringe patents
owned by AECorp. On October 9, 1998, the Board of Directors of the Company
authorized the commencement of litigation against AECorp. On November 17, 1998,
the Company and NCT Hearing filed a complaint in the United States District
Court, Eastern District of New York against AECorp. requesting that the Court
enter judgment in their favor as follows: (i) declare that the two subject
AECorp. patents and all claims thereof are invalid and unenforceable and that
the Company's products do not infringe any valid claim of the subject AECorp.
patents; (ii) declare that the subject AECorp. patents are unenforceable due to
their misuse by AECorp.; (iii) award compensatory damages in an amount of not
less than $5,000,000 as determined at trial and punitive damages of $50,000,000
for AECorp.'s tortious interference with prospective contractual advantages of
the Company; (iv) enjoin AECorp. from stating in any manner that the Company's
products, or the use of the Company's products, infringe on any claims of the
subject AECorp. patents; and (v) award such other and further relief as the
Court may deem just and proper.
On or about December 30, 1998, AECorp. filed its Answer and Counterclaims
against the Company and NCT Hearing. In its answer, AECorp. generally denies the
Company's and NCT Hearing's allegations, asserts certain procedural affirmative
defenses and brings counterclaims against the Company and NCT Hearing alleging
that the Company has: (i) infringed the two subject AECorp. patents and
AECorp.'s "ANR Ready" mark; (ii) violated the Lanham Act through the Company's
use of such mark; and (iii) unfairly competed with AECorp. through the use of
such mark. On or about January 26, 1999, the Company and NCT Hearing filed a
Reply to AECorp.'s counterclaims generally denying AECorp.'s counterclaims,
asserting certain affirmative defenses to AECorp.'s counterclaims and requesting
that: (i) the counterclaims be dismissed with prejudice; (ii) the Court enter
judgment that the term "ANR Ready" is not a valid trademark; (iii) the Court
enter judgment that the Company and NCT Hearing have not infringed any trademark
right of AECorp.; (iv) the Court enter judgment that the Company and NCT Hearing
have not engaged in any form of federal or state statutory or common law unfair
competition; (v) the Court enter judgment that AECorp. is precluded from
recovery of any claim of right to the term "ANR Ready" by the equitable doctrine
of estoppel; (vi) the Court enter judgment that AECorp. is precluded from
recovering any damages from the Company and NCT Hearing by the equitable
doctrine of laches; (vii) the Court award the Company and NCT Hearing their
costs and reasonable attorneys' fees; and (viii) the Court enter judgment
granting the relief requested in the Company's and NCT Hearing's complaint as
well as such other and further relief as the Court deems just and proper. In the
opinion of management, after consultation with outside counsel, resolution of
this suit should not have a material adverse effect on the Company's financial
position or operations. However, in the event that the lawsuit does result in a
substantial final judgment against the Company, said judgment could have a
material effect on quarterly or annual operating results.
On September 16, 1997, Ally 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.
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 Funds, S.A. and Austost Anstalt Schaan filed
suit against the Company's majority owned subsidiary, NCT Audio, and the Company
in the Supreme Court of the State of New York County of New York. The complaint
alleges an action for breach of contract, common law fraud, negligent
misrepresentation, deceptive trade practices under Section 349 of the General
Business Law of the State of New York, and money had and received, all arising
out of NCT Audio's and the Company's alleged unlawful conduct in connection with
an agreement entered into with plaintiffs for the sale of shares of common stock
of NCT Audio to the plaintiffs in a private placement in December 1997. In this
regard, the complaint alleges that: (i) NCT Audio breached an alleged agreement
with plaintiffs to register shares of NCT Audio's common stock purchased by
plaintiffs or, in the alternative, shares of the Company's common stock
exchangeable for such shares of NCT Audio's common stock under certain
circumstances and to pay penalties set forth in the alleged agreement; (ii) that
NCT Audio made representations that were materially false and misleading through
its facsimiles of non-negotiated agreements as substitutions for the alleged
contract between the parties; (iii) that NCT Audio and the Company acted
negligently and violated duties of full, fair and complete disclosure to the
plaintiffs; (iv) that NCT Audio and the Company engaged in deceptive trade
practices under Section 349 of the New York General Business Law; and (v) that
as a result thereof, NCT Audio and the Company possess money that in equity and
good conscience should not to be retained by NCT Audio and the Company. In the
complaint the plaintiffs demand judgment against NCT Audio and the Company: (i)
for damages in an amount to be determined but not less than $1,819,000; (ii) for
punitive damages in the amount of $3,000,000; (iii) requiring NCT Audio and the
Company to register the shares of common stock of NCT Audio held by the
plaintiffs; (iv) alternatively, rescission with the return of plaintiffs'
$1,000,000 plus interest; (v) for treble damages, reasonable attorney's fees and
costs pursuant to Section 349 and 350 of the New York General Business Law; and
(vi) such other and further relief as the Court may deem just and proper. On
January 14, 1999, NCT Audio and the Company filed removal papers to move the
suit to the United States District Court for the Southern District of New York
and on January 22, 1999, NCT Audio and the Company filed with that Court
Defendants' Answer, Affirmative Defenses, Counterclaims and Third-Party
Complaint. In the opinion of management, after consultation with outside
counsel, resolution of this suit should not have a material adverse effect on
the Company's financial position or operations. However, in the event that the
lawsuit does result in a substantial final judgment against the Company, said
judgment could have a severe material effect on quarterly or annual operating
results.
The Company believes there are no other patent infringement litigations,
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on the financial position and results of
operations.
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 1998 and 1997 for the common stock for specified quarterly
periods is set forth below:
1998 1997
---------------------- -------------------
HIGH LOW HIGH LOW
---------- --------- -------- --------
1st Quarter 15/16 14/16 29/32 3/8
2nd Quarter 23/32 21/32 15/32 7/32
3rd Quarter 9/16 17/32 1 1/8 7/32
4th Quarter 11/32 9/32 2 1/32 9/16
At April 26, 1999, the closing price of the Company's common stock was $0.33.
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 the resale of 1,786,991 shares of common stock of
the Company. The Company originally issued these shares on September 4, 1998 in
a private placement exempt from registration under Regulation D of the
Securities Act.
This offering also consists of the resale of 12,500,000 shares of common
stock of the Company. The Company may issue these shares upon the conversion of
issued and outstanding shares of the Company's Series D Preferred Stock. The
Company originally issued the Series D Preferred Stock in a private placement
exempt from registration under Regulation D of the Securities Act.
In addition, this offering consists of the resale of 12,500,000 shares of the
common stock of the Company. The Company may issue these shares upon the
conversion of authorized but unissued shares of the Series D Preferred Stock
which may be issued in exchange for shares of the Series A Preferred Stock of
its subsidiary, NCT Audio. NCT Audio initially issued its preferred stock in a
private placement exempt from registration under Regulation D of the Securities
Act.
In addition, this offering consists of the resale of 1,000,000 shares of the
common stock of the Company. The Company originally issued these shares in
exchange for shares of common stock of NCT Audio on October 12, 1998. That
exchange was exempt from registration under Section 4(2) of the Securities Act.
All of the shares mentioned above may be offered for sale by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
its common stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below is derived from the
historical financial statements of the Company. The data set forth below is
qualified in its entirety by and should be read in conjunction with the
Company's consolidated "Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that are included
elsewhere herein.
<TABLE>
<CAPTION>
(In Thousands of Dollars and Shares, except per share amount)
Years Ended December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
<S> <C> <C> <C> <C> <C>
Product Sales $ 2,337 $ 1,589 $ 1,379 $ 1,720 $ 2,097
Engineering and development services 4,335 2,297 547 368 425
Technology licensing fees and other 452 6,580 1,238 3,630 802
-------- -------- -------- -------- ---------
Total revenues $ 7,124 $ 10,466 $ 3,164 $ 5,718 $ 3,324
-------- -------- -------- -------- ---------
COSTS AND EXPENSES:
Cost of product sales $ 4,073 $ 1,579 $ 1,586 $ 2,271 $ 2,235
Cost of engineering and
development services 4,193 2,340 250 316 275
Selling, general and administrative 9,281 5,416 4,890 5,217 11,238
Research and development 9,522 4,776 6,974 6,235 7,220
Interest (income) expense, net (580) (49) 17 1,397 (3) (429)
Equity in net (income)
loss of unconsolidated affiliates 1,824 (80) 80 -- --
Other (income) expense, net 718 552 192 130 (3,032)(4)
-------- -------- -------- -------- --------
Total costs and expenses $ 29,031 $ 14,534 $ 13,989 $ 15,566 $ 17,507
-------- -------- -------- -------- --------
Net loss $(21,907) $ (4,068) $(10,825) $ (9,848) $(14,183)
Less:
Preferred stock dividend requirement - - - 1,623 3,200
Accretion of difference between
carrying amount and redemption
amount of Redeemable preferred
stock - - - 285 485
-------- -------- -------- -------- --------
Net (loss) attributable to
common stockholders $(21,907) $(4,068) $(10,825) $(11,756) $(17,868)
======== ======= ======== ======== ========
Weighted average number of common
shares outstanding(1) - basic
and diluted 82,906 87,921 101,191 124,101 143,855
======== ======= ======== ======== ========
Basic and Diluted Net loss per share $ (0.26) $ (0.05) $ (0.11) $ (0.09) $ (0.12)
======== ======= ======== ======== ========
<CAPTION>
December 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------------------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total assets $ 12,371 $ 9,583 $ 5,881 $ 17,361 $ 15,465
Total liabilities 6,903 2,699 3,271 2,984 5,937
Long-term debt -- 105 -- -- --
Accumulated deficit (68,780) (72,848) (83,673) (93,521) (107,704)
Stockholders' equity (2) 5,468 6,884 2,610 14,377 3,426
Working capital (deficiency) 923 1,734 (1,312) 11,696 (1,187)
</TABLE>
(1)Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible Preferred Stock, since their effect would be
antidilutive.
(2) The Company has never declared nor paid cash dividends on its Common Stock.
(3)Includes interest expenses of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
(4)Includes a $3.2 million gain from the exercise of an option received from
Verity in connection with the cross license agreement entered into by the
Company.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
On April 7, 1999, the Company issued a news release including information
about $3.6 million of technology license fees and net profit of $0.1 million for
the first quarter of 1999. Such revenue recognition and the resulting net profit
were not audited. In the circumstances, the amount that may be recognized for
such technology license fees is dependent on a definitive license agreement and
certain valuation considerations. 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 Company is continuing the transition initiated in 1995 from a firm
focused principally on research and development of new technology to a firm
focused on the commercialization of its technology through technology licensing
fees, royalties and product sales. Prior to 1995, the Company derived the
majority of its revenues from engineering and development funding provided by
established companies willing to assist the Company in the development of its
active noise and vibration control technology, and from technology licensing
fees paid by such companies. The Company's strategy generally has been to obtain
technology licensing fees when initiating joint ventures and alliances with new
strategic partners. In 1998, the Company received approximately 13% of its
operating revenues from engineering and development funding, compared with 6% in
1997. Revenues from product sales were limited to sales of specialty products
and prototypes. Since 1991, revenues from product sales have generally been
increasing, although in 1996 product sales declined slightly due to delays in
production and reduced pricing of certain products. In 1998, revenues from
product sales resumed 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.
Note 1 to the accompanying Financial Statements and the "Liquidity and
Capital Resources" section which follows describes the current status of the
Company's available cash balances.
As previously disclosed, the Company implemented changes in its organization
and focus in late 1994. Additionally, in late 1995 the Company redefined its
corporate mission to be the worldwide leader in the advancement and
commercialization of Active Wave Management technology. Active Wave Management
is the electronic and/or mechanical manipulation of sound or signal waves to
reduce noise, improve signal-to-noise ratio and/or enhance sound quality. This
redefinition is the result of the development of new technologies, as previously
noted, such as ASF, TDSS(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
1998.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of the Company's
technologies build as anticipated by management, revenues from technology
licensing fees, royalties and product sales are forecasted to fund an increasing
share of the Company's requirements. The funding from these sources, if
realized, will reduce the Company's dependence on engineering and development
funding. The beginning of this process is shown in the shifting percentages of
operating revenue, discussed below.
In January 1998, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1999.
The Company did not meet the plan's revenue targets and, as noted below, found
it necessary to raise additional capital to fund 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.
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 into United
Airlines' comprehensive in-flight entertainment and information systems.
Management believes these developments and those previously disclosed help
demonstrate the range of commercial potential for the Company's technology and
will contribute to the Company's transition from engineering and development to
technology licensing fees, royalties and product sales.
The availability of high-quality, low-cost electronic components for
integration into the Company's products also is critical to the
commercialization of the Company's technology. The Company is working with its
strategic partners and other suppliers to reduce the size and cost of the
Company's systems, so that the Company will be able to offer low-cost
electronics and other components suitable for high-volume production.
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products. During
1994, the Company acquired a license to two patents in the field of
micro-machined microphones and concluded the acquisition of all of the patents,
know-how and intellectual property of a former competitor, ANVT. During 1995 the
Company acquired several U.S. patents dealing with adaptive speech filtering
which is used in the Company's ClearSpeech(R) product line. Since 1996, the
Company has been granted 197 new patents for various applications in the field
of Active Wave Management. Management believes that the Company's investment in
its technology has resulted in the expansion of its intellectual property
portfolio and improvement in the functionality, speed and cost of components and
products.
The Company has become certified under the International Standards
Organization product quality program known as "ISO 9000", and continues to
successfully maintain its certification. Since the third quarter of 1994, the
Company has reduced its worldwide work force by 40% from 173 to 104 current
employees as of February 28, 1999.
Because the Company did not meet its revenue targets for 1998, it entered
into certain transactions, which provided additional funding as follows:
On July 27, 1998, the Company entered into subscription agreements (the
"Series D Subscription Agreements") to sell 6,000 shares of the Company's Series
D Preferred Stock having an aggregate stated value of $6.0 million in a private
placement, pursuant to Regulation D of the Securities Act, to six unrelated
accredited investors through one dealer (the "1998 Series D Preferred Stock
Private Placement"). The sale of 6,000 shares of Series D Preferred Stock having
an aggregate $6.0 million stated value was completed on August 6, 1998. $5.2
million net proceeds were received by the Company from the 1998 Series D
Preferred Stock Private Placement. Each share of the Series D Preferred Stock
has a par value of $.10 per share and a stated value of one thousand dollars
($1,000) with an accretion rate of four percent (4%) per annum on the stated
value. Each share of Series D Preferred Stock is convertible into fully paid and
nonassessable shares of the Company's common stock subject to certain
limitations. Under the terms of the 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.
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"):
<PAGE>
[(.04) x (N/365) x (1,000)] + 1,000
-----------------------------------
Conversion Price
where
N = the number of days between (i) the Series E Closing
Date, and (ii) the conversion date.
Conversion
Price = the greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by an
additional 2% for every 30 days beyond 60 days from the
issuance that the Registration Statement has not been
filed by the Company) in effect as of the conversion
date times the average market price for the Company's
common stock for the (5) consecutive trading days
immediately preceding such date.
The conversion terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 10,580
shares of Series E Preferred Stock issued under the 1998 Series E Preferred
Stock Private Placement. The Series E Subscription Agreements also provide that
the Company will be required to make certain payments in the event of its
failure to effect conversion in a timely manner. As of April 20, 1999, no shares
of Series E Preferred Stock have been converted to NCT common stock.
In connection with the Series E Preferred Stock, the Company may be obligated
to redeem the excess of the stated value over the amount permitted to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.
Cash and cash equivalents amounted to $0.5 million at December 31, 1998.
Management believes that currently available funds will not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options, the funding derived from
technology licensing fees and royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditures alone
may not be sufficient, and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties and
product sales, and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology license
fees, royalties and product sales and engineering and development revenue. In
that event, the Company would have to substantially reduce its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
On June 16, 1998, NASDAQ notified the Company that the Company's common stock
had failed to maintain a closing bid price of $1.00 or more for the previous
thirty (30) consecutive trade dates in accordance with NASDAQ's Marketplace Rule
4450(a)(5). NASDAQ also notified the Company that no delisting action would be
initiated at that time and that the Company would be provided ninety (90)
calendar days in which to regain compliance with Marketplace Rule 4450(a)(5),
which would be achieved if the closing bid price of the shares of the Company's
common stock equaled or exceeded $1.00 for ten (10) consecutive days before the
end of trading on September 14, 1998. In this regard, NASDAQ advised the Company
that in the event the Company was unable to achieve compliance, it may seek
further procedural remedies. The Company was unable to achieve compliance by
September 14, 1998, and on that date delivered its request for a hearing on the
matter together with the requested fee to NASDAQ's Hearings Department. Such a
hearing was held on November 5, 1998. Under NASDAQ's procedures delisting was
stayed pending the outcome of the hearing. On January 6, 1999, NASDAQ notified
the Company that the Company's securities were delisted from NASDAQ effective
with the close of business, January 6, 1999. On January 20, 1999, the Company
requested a review of the NASDAQ decision. On February 16, 1999, NASDAQ advised
the Company that the issuance of a review decision will likely occur in July
1999. While a delisting of the Company's common stock is not anticipated to have
an immediate effect on the Company's operations, it may make it more difficult
for the Company to raise additional capital to fund future operations.
The accompanying consolidated Financial Statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The propriety of using the going concern
basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private financings and other funding sources to meet its
obligations. The uncertainties described in the preceding paragraphs raise
substantial doubt at December 31, 1998 about the Company's ability to continue
as a going concern. The accompanying consolidated Financial Statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amount of liabilities that might result from the outcome
of these uncertainties.
C. Results of Operations
Year ended December 31, 1998 compared with year ended December 31, 1997.
Total revenues in 1998 decreased by 42% to $3.3 million from $5.7 million in
1997. Total expenses during the same period increased by 12% or $1.9 million,
primarily reflecting the increasing efforts in sales and marketing to introduce
new products.
Technology licensing fees and royalties decreased by 78% or $2.8 million to
$0.8 million from $3.6 million in 1997. The 1997 amount is primarily due to the
$3.0 million technology license fee from Verity and other technology licensing
fees aggregating $0.6 million. See Note 3 - "Notes to Financial Statements".
Product sales increased in 1998 by 22% to $2.1 million from $1.7 million in
1997 reflecting the introduction of the Gekko(TM) flat speakers and increased
sales in the NoiseBuster(R) product line and the ClearSpeech(R) product line.
Revenue from engineering and development services remained constant at $0.4
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company.
Cost of product sales decreased 2% to $2.2 million from $2.3 million in 1997
and the product margin increased to (7)% from (32)% in 1997. The negative margin
of $0.1 million and $0.6 million in 1998 and 1997, respectively, were primarily
due to reserves for inventory slow movement and tooling obsolescence in the
amount of $0.5 million and $0.7 million in 1998 and 1997, respectively, related
to the aviation and industrial headset product lines.
Cost of engineering and development services remained constant at $0.3
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company as noted above.
Selling, general and administrative expenses for the year increased by 115%
or $6.0 million to $11.2 million from $5.2 million for 1997 which was primarily
due to increased efforts in sales and marketing to introduce new products. Sales
and marketing personnel increased by 43% from 1997. In addition, there has been
an increase in consultants for the Company's focus on international sales.
Advertising increased by 227% or $1.2 million to $1.7 million from $0.5 million
primarily due to the introduction of new products through catalogs, mailings and
increased participation in trade shows.
Research and development expenditures for 1998 increased by 16% to $7.2
million from $6.2 million in 1997, primarily due to the acquisition of Advancel.
Included in the Company's total expenses were non-cash expenditures for
depreciation and amortization of $1.0 million for 1998 and $0.9 million in 1997.
Other income in 1998 was $3.3 million compared to zero in 1997. The 1998
other income consists of the gain the Company realized upon the exercise of a
stock option and the subsequent sale of NXT plc ordinary shares. The option had
been acquired by the Company in connection with a cross license agreement among
the Company, NXT plc and NXT.
In 1998, interest income increased to $0.4 million from $0.1 million in 1997
principally from funds on hand at the end of 1997.
The Company has net operating loss carryforwards of $85.8 million and
research and development credit carryforwards of $1.6 million for federal income
tax purposes at December 31, 1998. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
<PAGE>
Year ended December 31, 1997 compared with year ended December 31, 1996.
Total revenues in 1997 increased by 81% to $5.7 million from $3.2 million in
1996. Total expenses during the same period increased by 11% or $1.6 million,
primarily reflecting the one-time $1.4 million non-cash interest charge
associated with the First Quarter 1997 Financing. See Note 8 - "Notes to
Financial Statements."
Technology licensing fees and royalties increased by 193% or $2.4 million to
$3.6 million from $1.2 million in 1996. The 1996 amount was derived principally
from numerous technology license fees reflecting the Company's continuing
emphasis on expanding technology license fee revenue. The 1997 amount is
primarily due to the $3.0 million technology license fee from Verity and other
technology licensing fees aggregating $0.6 million. See Note 3 - "Notes to the
Financial Statements".
Product sales increased in 1997 by 25% to $1.7 million from $1.4 million in
1996 reflecting increases in NoiseBuster Extreme!(TM) and aviation headset
sales.
Engineering and development services decreased by 33% to $0.4 million from
$0.5 million in 1996, primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company.
Cost of product sales increased 44% to $2.3 million from $1.6 million in 1996
and the product margin decreased to (32)% from (15)% in 1996. The negative
margin of $0.6 million in 1997 was primarily due to reserves for inventory
movement and tooling obsolescence in the amount of $0.7 million related to the
industrial headset product lines. The negative margin in 1996 was primarily due
to a lower sales price of the NoiseBuster(R) and a reserve for tooling
obsolescence in the amount of $0.3 million.
Cost of engineering and development services increased 26% to $0.3 million
from $0.2 million in 1996 primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company as noted
above.
Selling, general and administrative expenses for the year increased by 7% or
$0.3 million to $5.2 million from $4.9 million for 1996 which was primarily due
to increased professional fees and related expenses.
Depreciation and amortization included in selling, general and administrative
expenses decreased from $0.5 million in 1996 to $0.4 million primarily due to an
increase in fully depreciated machinery and equipment.
Research and development expenditures for 1997 decreased by 11% to $6.2
million from $7.0 million in 1996, primarily due to limited cash resources
during most of 1997 to fund internal development projects.
In 1997, interest income increased to $0.1 million from near zero in 1996
reflecting the increase in late 1997 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1997, the Company was not required to fund any capital requirements of these
joint ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment.
The Company 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's proceeds from the exercise of stock purchase warrants and
options were nominal in 1998, $1.1 million in 1997 and $1.0 million in 1996.
In January 1998, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1999.
The Company did not meet the plan's revenue targets for 1998 and, as noted
below, found it necessary to raise additional capital to fund it's operations
for 1998 and beyond (refer to Notes 1 and 8 Notes to Financial Statements.).
Because the Company did not meet its revenue targets for 1998, it entered
into certain transactions, which provided additional funding as follows:
On July 15, 1998, the Company transferred $5,000 and all of the business and
assets of its Hearing Products Division as then conducted by the Company and as
reflected on the business books and records of the Company to a newly
incorporated subsidiary company, NCT Hearing, in consideration for 6,400 shares
of NCT Hearing common stock, whereupon NCT Hearing became a wholly-owned
subsidiary of the Company. The Company also granted NCT Hearing an exclusive
worldwide license with respect to all of the Company's relevant patented and
unpatented technology relating to Hearing Products in consideration for (1) a
license fee of $3,000,000 to be paid when proceeds are available from the sale
of NCT Hearing common stock, and (2) running royalties payable with respect to
NCT Hearing's sales of products incorporating the licensed technology and its
sublicensing of such technology. It is anticipated that NCT Hearing will issue
additional shares of its common stock in transactions exempt from registration
in order to raise additional working capital.
On July 27, 1998, the Company entered into subscription agreements to sell
6,000 shares of the Company's Series D Preferred Stock having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act, to six unrelated accredited investors through one dealer.
The sale of 6,000 shares of Series D Preferred Stock having an aggregate $6.0
million stated value was completed on August 6, 1998. $5.2 million net proceeds
were received by the Company from the 1998 Series D Preferred Stock Private
Placement. Each share of the Series D Preferred Stock has a par value of $.10
per share and a stated value of one thousand dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value. Each share of Series D
Preferred Stock is convertible into fully paid and nonassessable shares of the
Company's common stock subject to certain limitations. Under the terms of the
Series D Subscription Agreements, the Company is required to file a registration
statement covering the resale of all shares of common stock of the Company
issuable upon conversion of the Series D Preferred Stock then outstanding within
sixty (60) days after the completion of the 1998 Series D Preferred Stock
Private Placement. The shares of Series D Preferred Stock become convertible
into shares of common stock at any time commencing after the earlier of (i)
ninety (90) days after the Series D Closing Date; (ii) five (5) days after the
Company receives a "no review" status from the SEC in connection with the Series
D Registration Statement; or (iii) the effective date of the Series D
Registration Statement. The Series D Registration Statement became effective on
October 30, 1998, and shares of Series D Preferred Stock became convertible on
that date. Each share of Series D Preferred Stock is convertible into a number
of shares of common stock of the Company as determined in accordance with the
Conversion Formula described above under "Overview".
The conversion terms of the Series D Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 12,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 6,000
shares of Series D Preferred Stock issued under the 1998 Series D Preferred
Stock Private Placement. The Series D Subscription Agreements also provide that
the Company will be required to make certain payments in the event of its
failure to effect conversion in a timely manner. Including shares of common
stock issued for accretion, as of March 12, 1999, all shares of Series D
Preferred Stock have been converted to 12,273,685 shares of NCT common stock.
On July 27, 1998, NCT Audio distributed subscription agreements to sell 60
shares of NCT Audio's Series A Preferred Stock having an aggregate stated value
of $6.0 million in a private placement, pursuant to Regulation D of the
Securities Act, to six unrelated accredited investors through one dealer. The
sale of 60 shares of NCT Audio Series A Preferred Stock having an aggregate $6.0
million stated value was completed on August 17, 1998. NCT Audio received net
proceeds of $5.2 million from the 1998 Series A Preferred Stock Private
Placement. Each share of the NCT Audio Series A Preferred Stock has a par value
of $.10 per share and a stated value of one hundred thousand dollars ($100,000)
with an accretion rate of four percent (4%) per annum on the stated value. Each
share of NCT Audio Series A Preferred Stock is convertible into fully paid and
nonassessable shares of NCT Audio's common stock subject to certain limitations.
Under the terms of the NCT Audio Subscription Agreements, NCT Audio is required
to file a registration statement covering the resale of all shares of common
stock of NCT Audio issuable upon conversion of the NCT Audio Series A Preferred
Stock then outstanding by a date which is not later than thirty (30) days after
the company becomes a "reporting company" under the Exchange Act. The shares of
NCT Audio Series A Preferred Stock become convertible into shares of NCT Audio
common stock at any time after the date the company becomes a "reporting
company" under the Exchange Act. Each share of Series A Preferred Stock is
convertible into a number of shares of Series D Preferred Stock of the Company
as determined in accordance with the Conversion Formula described above under
"Overview".
The conversion terms of the NCT Audio Series A Preferred Stock also provided
that in the event that NCT Audio had not become a "reporting company" under the
Exchange Act by December 31, 1998, or the NCT Audio Registration Statement had
not been declared effective by the SEC by December 31, 1998, the holder would 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 would 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.
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 to sell an aggregate stated value of up to $8.2 million of Series E
Preferred Stock in consideration of $4.0 million, in a private placement,
pursuant to Regulation D of the Securities Act, to six unrelated accredited
investors through one dealer. The sale of 8,145 shares of Series E Preferred
Stock having an aggregate of $8.1 million stated value was completed on March
12, 1999. In 1999, the Company received net proceeds of $3.6 million from the
1998 Series E Preferred Stock Private Placement. In addition to the above noted
Series E Subscription Agreements, the Company issued and sold an aggregate
amount of $1.7 million of Series E Preferred Stock to three accredited investors
through the above noted dealer, in exchange for an aggregate stated value of
$1.7 million of the Company's Series C Preferred Stock held by the three
accredited investors. The Company also issued and sold an aggregate amount of
$0.7 million of Series E Preferred Stock to four accredited investors through
the above noted dealer, in exchange and consideration for an aggregate of 2.1
million shares of the Company's common stock held by the four accredited
investors. Each share of the Series E Preferred Stock has a par value of $.10
per share and a stated value of one thousand dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value. Each share of Series E
Preferred Stock is convertible into fully paid and nonassessable shares of the
Company's common stock subject to certain limitations. Under the terms of the
Series E Subscription Agreements, the Company is required to file a registration
statement covering the resale of all shares of common stock of the Company
issuable upon conversion of the Series E Preferred Stock then outstanding within
sixty (60) days after the completion of the 1998 Series E Preferred Stock
Private Placement. The shares of Series E Preferred Stock become convertible
into shares of common stock at any time commencing after the earlier of (i)
ninety (90) days after the Series E Closing Date; (ii) five (5) days after the
Company receives a "no review" status from the SEC in connection with the
Registration Statement; or (iii) the effective date of the Series E Registration
Statement. Each share of Series E Preferred Stock is convertible into a number
of shares of common stock of the Company as determined in accordance with the
Conversion Formula described above under "Overview".
The conversion terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 10,580
shares of Series E Preferred Stock issued under the 1998 Series E Preferred
Stock Private Placement. The Series E Subscription Agreements also provide that
the Company will be required to make certain payments in the event of its
failure to effect conversion in a timely manner. As of April 20, 1999, no shares
of Series E Preferred Stock have been converted to NCT common stock.
In connection with the Series E Preferred Stock, the Company may be obligated
to redeem the excess of the stated value over the amount permitted to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor 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 shall be the lesser of (i) 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 (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.
Management believes that currently available funds will not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options, the funding derived from
technology licensing fees, royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditure alone
may not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties,
product sales and engineering and development revenue are not realized as
planned, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology license
fees, royalties and product sales and engineering and development revenue. In
that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
The accompanying Financial Statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 1998 about the Company's ability to continue as a going concern.
The accompanying Financial Statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $107.7 million on a
cumulative basis through December 31, 1998. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the license fees and engineering and development funds provided to the venture
or the Company are recovered.
In early 1999, the Company implemented a plan that management believes should
generate sufficient additional funds for the Company to continue its operations
into 1999. Under this plan, the Company needs to generate approximately $22.7
million to fund its operations in 1999. Included in such amount is approximately
$10.8 million in sales of new products and approximately $11.9 million of
technology licensing fees and royalties. This amount excludes any revenues or
cash inflows from the anticipated pending acquisitions of the Company's
subsidiary, NCT Audio. The Company believes that it can generate these funds
from 1999 operations, although there is no certainty that the Company will
achieve this goal. Success in generating technology licensing fees, royalties
and product sales is significant and critical to the Company's ability to
succeed. The Company cannot predict whether it will be successful in obtaining
market acceptance of its new products or in completing its current negotiations
with respect to licenses and royalty revenues. If, during the course of 1999,
management of the Company determines that it will be unable to meet or exceed
the plan discussed above, the Company will consider cost reductions and/or
additional financing alternatives. The Company will monitor its performance
against the plan on a monthly basis and, if necessary, reduce its level of
operations accordingly. The Company believes that the plan discussed above
constitutes a viable plan for the continuation of the Company's business into
2000. See "Forward Looking Statements" above.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties and product sales and engineering and
development revenue or additional capital. In that event, the Company would have
to cut back its level of operations substantially in order to conserve cash.
These reductions could have an adverse effect on the Company's relations with
its strategic partners and customers. See Note 1 Notes to Financial Statements.
At December 31, 1998, cash and cash equivalents were $0.5 million. The
available resources were invested in interest bearing money market accounts. The
Company's investment objective is preservation of capital while earning a
moderate rate of return.
The Company's working capital decreased from $11.7 million at December 31,
1997, to $(1.2) million as of December 31, 1998. This decrease was due primarily
to a decrease in cash and cash equivalents due to increasing efforts to develop
and introduce new product lines and to fund operations.
During 1998, the net cash used in operating activities was $12.8 million.
This utilization reflects the emphasis on the commercial development of its
technology into several product applications, which were scheduled for
introduction in 1998 and 1999.
The net cash used in investing activities amounted to $6.4 million for the
year ended December 31, 1998. Of this amount, $5.1 million was attributable to
the acquisition-related activities of the Company's subsidiary, NCT Audio. Such
investments included $3.5 million for a 20% interest in TSA and a total of $1.5
million loaned to PPI under demand promissory notes. The Company has signed
letters of intent from both TSA and PPI. See "Recent Developments". The net cash
provided by financing activities amounted to $7.2 million primarily from the
1998 financings noted above.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
The Company believes that the level of financial resources available to it is
an essential competitive factor. The Company may elect to raise additional
capital, from time to time, through equity or debt financing in order to
capitalize on business opportunities and market conditions.
<PAGE>
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 December
31, 1998, and no material commitments are anticipated in the near future.
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 September 30, 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 March
31, 1999:
Name Age Positions and Offices
Jay M. Haft 63 Chairman of the Board of Directors
Michael J. Parrella 51 President, Chief Executive Officer and
Director
Irene Lebovics 46 Executive Vice President, Marketing
Cy E. Hammond 44 Senior Vice President, Chief Financial
Officer
Paul Siomkos, P.E. 52 Senior Vice President, Operations
Michael A. Hayes, Ph.D. 46 Senior Vice President, Chief Technical
Officer
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 $100,000 for services rendered in all capacities.
<TABLE>
<CAPTION>
Securities
Underlying
Other Options/ All
Name and Principal Annual Warrants Other
Position Year Salary ($) Bonus ($) Compensation SARs (#) Compensation
- - ------------------ ---- ---------- --------- ------------ ------------ ------------
<S> <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 1996 120,000 106,885 15,348 475,000 5,218 (4)
Officer (1)
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 1996 94,000 - - - -
Officer
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 1996 116,932(9) - - - -
and Secretary (8)
Irene Lebovics 1998 105,000 - 12,000 2,000,000 (2) -
Executive Vice 1997 105,000 - - 301,250 (11) -
President, and 1996 105,000 - - - -
President of
NCT Hearing
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.
(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
Percent
of Total Potential
Options Realized Value
Shares and at Assumed Annual
Underlying Warrants Rates of Stock Price
Options Granted Exercise Appreciation for Option
and to Price and Warrant Term (6)
Warrants Employees Per Expiration -----------------------------
Name Granted in 1998 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> <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 -
</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.
<PAGE>
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.
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.
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.
<PAGE>
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.
As of December 31, 1998, 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 shall be the lesser of (i) the average of the closing bid prices for the
common stock on the securities market on which the common stock is being traded,
for five (5) consecutive trading days prior to the date of conversion, or (ii)
the fixed conversion price of $0.237. In no event will the conversion price be
less than $0.15 per share. The Holder shall purchase the remaining $3.0 million
principal amount of the secured convertible notes on or before June 30, 1999.
<PAGE>
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.
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
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)
[OBJECT OMITTED]
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
NCT 100 26 63 14 38 10
NASDAQ
Composite
Index 100 98 138 170 209 294
NASDAQ
Electronic
Component
Stock Index 100 110 183 316 332 513
(2)
(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.
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.
Amount and
Nature of Approximate
Beneficial Percentage
Name of Beneficial Owner Ownership (1) Of Class (1)
------------------------------- -------------- --------------
Michael J. Parrella 6,250,333 (2) 3.38%
John J. McCloy 3,653,635 (3) 2.02%
Jay M. Haft 1,632,000 (4) 0.91%
Sam Oolie 715,000 (5) 0.40%
Stephan Carlquist 350,000 (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) 15,963,170 (12) 8.33%
Carole Salkind 10,119,043 (13) 5.67%
Her Majesty The Queen, Province
of Alberta, Canada 11,250,000 (14) 6.30%
(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 350,000 shares issuable upon the exercise of currently exercisable
options and 25,000 options to purchase shares in 1999.
(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, 10,838,435
shares issuable to 11 executive officers and directors of the Company upon
the exercise of currently exercisable options, 135,000 restricted shares
issued to 2 directors and one executive officer of the Company and 25,000
shares issuable to 1 director of the Company which become exercisable in
1999. Does not include 6,240,000 shares issuable to 8 executive officers of
the Company which become exercisable over the passage of time.
(13) Carole Salkind's address is 801 Harmon Cove Towers, Secaucus, New Jersey
07094.
(14) Her Majesty the Queen, Province of Alberta, Canada's address is Room 530,
Terrace Building, 9515 107th Street, Edmondton, Alberta T5K 2C3.
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 March 11, 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.
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 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.
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 Amendment No. 1 to this
Registration Statement:
Securities and Exchange Commission $ 4,004
registration fee
Legal Fees and expenses 15,000*
Accounting fees and expenses 15,000*
Miscellaneous expenses 996*
---------
Total $ 35,000*
=========
* 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form S-1:
(1) Financial Statements.
NCT Group, Inc.
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.
Top Source Automotive, Inc.
Report of Independent Accountants
Balance Sheets as of September 30, 1998 and 1997
Statements of Operations for the years ended September 30, 1998, 1997 and 1996
Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996
Notes to Financial Statements
(2) Financial Statement Schedules.
Report of Independent Auditors with Respect to Schedule.
Schedule II. Valuation and Qualifying Accounts.
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
consolidated financial statements filed or notes thereto.
<PAGE>
(3) Exhibits.
Exhibit
Number Description of Exhibit
2(a) Stock Purchase Agreement dated August 21, 1998, among the Company,
Advancel Logic Corporation and the Holders of the Outstanding
Capital Stock of Advancel Logic Corporation, incorporated by
reference to Exhibit 2 of the Company's Registration Statement on
Form S-3 (Registration No. 333-64967) filed on September 30, 1998,
as amended by Amendment No. 1 thereto filed on October 30, 1998.
3(a) Restated Certificate of Incorporation of the Company filed in the
Office of the Secretary of State of the State of Delaware on
September 23, 1996, incorporated herein by reference to Exhibit 3(a)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
3(b) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
State of the State of Delaware on June 20, 1997, incorporated by
reference to Exhibit 3(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
* 3(c) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
State of the State of Delaware on October 21, 1998.
3(d) Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on October 29, 1997,
incorporated by reference to Exhibit 3(c) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
3(e) Certificate of Increase in the Number of Shares in the Series C
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on November 14,
1997, incorporated by reference to Exhibit 3(d) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
3(f) Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on July 24, 1998,
incorporated by reference to Exhibit 4 of the Company's Registration
Statement on Form S-3 (Registration No. 333-64967) filed on
September 30, 1998, as amended by Amendment No. 1 thereto filed on
October 20, 1998.
3(g) By-laws of the Company, incorporated herein by reference to Exhibit
3(b) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
4(a) Warrant to purchase 125,000 shares of common stock of the Company at
a purchase price of $.20 per share issued to John J. McCloy II,
incorporated herein by reference to Exhibit 4(a) to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of common stock of the
Company at a purchase price of $.75 per share issued to John J.
McCloy II, incorporated herein by reference to Exhibit 4(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(c) Warrant #BW-2-R to purchase 862,500 shares of common stock of the
Company at a purchase price of $.75 per share issued to Michael J.
Parrella, incorporated herein by reference to Exhibit 4(c) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
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.
5 Opinion of Crowell & Moring LLP, outside counsel to the Company, as
to the legality of the common stock to which Amendment No. 2 to 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.
<PAGE>
10(r) Asset Purchase Agreement, dated September 16, 1994, between Active
Noise and Vibration Technologies, Inc. and the Company, incorporated
herein by reference to Exhibit 2 to the Company's Current Report on
Form 8-K filed September 19, 1994.
**10(s) Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors (as adopted November 15, 1994 and amended through
August 16, 1996), incorporated herein by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on August 30, 1996
(Reg. No. 333-11209).
10(t) Variation of Teaming Agreement between Noise Cancellation
Technologies, Inc. and Ultra Electronics Limited dated April 6,
1995, incorporated herein by reference to Exhibit 10(c) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(1) Agreement for Sale and Purchase of Part of the Business and
Certain Assets among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited and Ultra Electronics Limited
dated April 6, 1995, incorporated herein by reference to Exhibit
10(d) of the Company's Current
Report on Form 8-K filed August 4, 1995.
10(t)(2) Patent License Agreement among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated April 6, 1995, incorporated herein by
reference to Exhibit 10(e) of the Company's Current Report on Form
8-K filed August 4, 1995.
10(t)(3) License Agreement between Chaplin Patents Holding Co., Inc. and
Ultra Electronics Limited dated April 6, 1995, incorporated herein
by reference to Exhibit 10(f) of the Company's Current Report on
Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among Noise Cancellation
Technologies, Inc., Noise Cancellation Technologies (UK) Limited and
Ultra Electronics Limited dated May 15, 1995, incorporated herein by
reference to Exhibit 10(g) of the Company's Current Report on Form
8-K filed August 4, 1995.
** 10(u) Agreement among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited, Dr. Andrew John
Langley, Dr. Graham Paul Eatwell and Dr. Colin Fraser Ross
dated April 6, 1995, incorporated herein by reference to Exhibit
10(h) of the Company's Current Report on Form 8-K filed August 4,
1995.
10(v) Securities Purchase Agreement dated April 8, 1996, by and among the
Company and Kingdon Associates, L.P., Kingdon Partners, L.P. and M.
Kingdon Offshore NV, together with Exhibit A-1 thereto, Form of
Secured Convertible Note and Exhibit A-2 thereto, Registration
Rights Agreement, incorporated herein by reference to Exhibit 10(a)
of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
10(v)(1) Security Agreement dated April 10, 1996, between the Company and
Kingdon Associates, L.P., Kingdon Partners, L.P. and M. Kingdon
Offshore NV, dated August 13, 1996, incorporated herein by reference
to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
<PAGE>
10(v)(2) Notices of Exercise of Options to Purchase common stock by Kingdon
Associates, L.P., Kingdon Partners, L.P., and M. Kingdon
Offshore,NV, dated August 13, 1996, incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996.
10(v)(3) Notices of Conversion of Secured Convertible Notes by Kingdon
Associates, L.P., Kingdon Partners, L.P. and M. Kingdon Offshore NV,
dated August 13, 1996, incorporated herein by reference to Exhibit
10(d) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996.
10(w)(1) Cross License Agreement dated April 15, 1997, among Verity Group
plc, New Transducers Limited and Noise Cancellation Technologies,
Inc., incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.***
10(w)(2) Security Deed dated April 14, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
10(w)(3) Common Stock Purchase Option dated April 15, 1997, from Noise
Cancellation Technologies, Inc. to Verity Group plc, incorporated by
reference to Exhibit 10(c) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
10(w)(4) Letter Agreement dated April 17, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
10(x)(1) New Cross License Agreement dated September 27, 1997, among Verity
Group plc, New Transducers Limited, Noise Cancellation Technologies,
Inc. and NCT Audio Products, Inc., incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
10(x)(2) Master License Agreement dated September 27, 1997, between New
Transducers Limited and NCT Audio Products, Inc., incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
10(x)(3) Letter Agreement dated September 27, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
10(x)(4) License Agreement dated September 4, 1997, between Noise
Cancellation Technologies, Inc. and NCT Audio Products, Inc.,
incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
10(y) License Agreement dated July 15, 1998, between the Company and NCT
Hearing Products, Inc., incorporated by reference to Exhibit 10 of
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
<PAGE>
* 21 Subsidiaries
* 23(a) Consent of Richard A. Eisner & Company, LLP
23(b) Consent of Arthur Andersen, LLP
23(c) 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.
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.
- - -----------------------
* 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
NCT Group, Inc.
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
Top Source Automotive, Inc.
Report of Independent Certified Public Accountants F-49
Balance Sheets as of September 30, 1998 and 1997 F-50
Statements of Operations for the years ended F-51
September 30, 1998, 1997 and 1996
Statements of Cash Flows for the years ended F-52
September 30, 1998, 1997 and 1996
Notes to Financial Statements F-53
<PAGE>
(Richard A. Eisner & Company, LLP Letterhead)
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
NCT Group, Inc.
We have audited the accompanying consolidated balance sheets of NCT Group, Inc.
(formerly Noise Cancellation Technologies, Inc.) and subsidiaries (the
"Company") as of December 31, 1997 and 1998, and the related consolidated
statements of operations, comprehensive loss, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the 1996, 1997 and 1998 financial statements of
the Company's two foreign subsidiaries. These subsidiaries accounted for
revenues of approximately $407,000, $67,000 and $28,000 for the years ended
December 31, 1996, 1997 and 1998, respectively, and assets of approximately
$515,000, $301,000 and $218,000 as of December 31, 1996, 1997 and 1998,
respectively. These statements were audited by other auditors whose reports have
been furnished to us, one of which contained a paragraph on the subsidiary's
dependence on NCT Group, Inc. for continued financial support. Our opinion,
insofar as it relates to the amounts included for these entities, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
financial statements enumerated above present fairly, in all material respects,
the consolidated financial position of NCT Group, Inc. and subsidiaries as of
December 31, 1997 and 1998 and the consolidated results of their operations and
their consolidated cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has not been able to generate sufficient cash
flow from operating activities to sustain its operations and since it has
incurred net losses since inception and has a working capital deficiency, it has
been and continues to be dependent on equity financing and joint venture
arrangements to support its business efforts. These factors raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 11, 1999
With respect to Note 8
March 24, 1999
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31,
1997 1998
---------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 12,604 $ 529
Accounts receivable:
Trade:
Technology license fees and royalties 200 192
Joint Ventures and affiliates - -
Other 368 691
Unbilled - 61
Allowance for doubtful accounts (38) (228)
---------- -----------
Total accounts receivable $ 530 $ 716
Inventories, net of reserves 1,333 3,320
Other current assets 213 185
---------- -----------
Total current assets $ 14,680 $ 4,750
Property and equipment, net 1,144 997
Goodwill, net of accumulated amortization of
$68,000 - 1,506
Patent rights and other intangibles, net 1,488 2,881
Other assets (Note 6) 49 5,331
---------- -----------
$ 17,361 $ 15,465
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,324 $ 3,226
Accrued expenses 1,392 1,714
Accrued payroll, taxes and related expenses 181 241
Customers' advances 87 -
Other liabilities - 756
---------- -----------
Total current liabilities $ 2,984 $ 5,937
---------- -----------
Commitments and contingencies
Minority interest in consolidated subsidiary
Preferred stock, $.10 par value, 1,000
shares authorized, 60 issued
and outstanding (redemption amount
$6,102,110) $ - $ 6,102
---------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 10,000,000
shares authorized
Series C issued and outstanding 13,250 and
700 shares, respectively (redemption
amount $13,314,399 and $731,222 respectively $ 10,458 $ 702
Series D Preferred stock, 6,000 shares
issued and outstanding (redemption
amount $6,102,110) - 5,240
Series E Preferred stock, 10,580 shares
issued and outstanding (redemption
amount $10,582,319) - 3,298
Common stock, $.01 par value, 185,000,000 and
255,000,000 shares, respectively,
authorized; issued and outstanding
133,160,212 and 156,337,316 shares, respectively 1,332 1,563
Additional paid-in-capital 96,379 107,483
Accumulated deficit (93,521) (107,704)
Other comprehensive loss:
Cumulative translation adjustment 119 45
Stock subscriptions receivable (390) (4,000)
Unearned portion of compensatory stock,
warrants and options - (238)
Treasury stock (6,078,065 shares) - (2,963)
---------- -----------
Total stockholders' equity $ 14,377 $ 3,426
---------- -----------
$ 17,361 $ 15,465
========== ===========
See notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended December 31,
1996 1997 1998
----------- ----------- -----------
REVENUES:
<S> <C> <C> <C>
Technology licensing fees $ 1,238 $ 3,630 $ 802
Product sales, net 1,379 1,720 2,097
Engineering and development services 547 368 425
----------- ----------- -----------
Total revenues $ 3,164 $ 5,718 $ 3,324
----------- ----------- -----------
COSTS AND EXPENSES:
Costs of sales $ 1,586 $ 2,271 $ 2,235
Costs of engineering and development services 250 316 275
Selling, general and administrative 4,890 5,217 11,238
Research and development 6,974 6,235 7,220
Equity in net loss (income) of
unconsolidated affiliates 80 - -
Provision for doubtful accounts 192 130 232
Other (income) expense (Note 1) - - (3,264)
Interest expense (includes $1,420 of discounts on
beneficial conversion feature on convertible
debt in 1997) 45 1,514 9
Interest income (28) (117) (438)
----------- ----------- -----------
Total costs and expenses $ 13,989 $ 15,566 $ 17,507
----------- ----------- -----------
NET (LOSS) $ (10,825) $ (9,848) $ (14,183)
Preferred stock dividend requirement - 1,623 3,200
Accretion of difference between carrying amounts
and redemption amount of redeemable preferred stock - 285 485
----------- ----------- -----------
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (10,825) $ (11,756) $ (17,868)
=========== =========== ===========
Weighted average number of common shares outstanding 101,191 124,101 143,855
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.11) $ (0.09) $ (0.12)
=========== =========== ===========
See notes to Financial Statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(in thousands of dollars)
1996 1997 1998
----------- ----------- -----------
NET (LOSS) $ (10,825) $ (9,848) $ (14,183)
Other comprehensive income/(loss)
Currency translation adjustment (8) (23) (74)
----------- ----------- -----------
COMPREHENSIVE (LOSS) $ (10,833) $ (9,871) $ (14,257)
=========== =========== ===========
See notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands of dollars and shares)
Series C Series D Series E
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
----------------- ----------------- ---------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 - $ - - $ - - $ - 92,829 $ 928
Sale of common stock, less expenses of $245 - - - - - - 18,595 186
Shares issued upon exercise of warrants & options - - - - - - 204 2
Net loss - - - - - - - -
Translation adjustment - - - - - - - -
Restricted shares issued for
Director's compensation - - - - - - 20 -
Consulting expense attributable to options - - - - - - - -
Retirement of shares related to
patent acquisition - - - - - - (25) -
Retirement of shares in settlement
of employee receivable - - - - - - (8) -
--------------------------------------------------------------------------------
Balance at December 31, 1996 - $ - - $ - - $ - 111,615 $ 1,116
Sale of common stock - - - - - - 2,857 29
Shares issued upon exercise of warrants & options - - - - - - 1,996 20
Sale of Series C preferred stock,
less expenses of $1,387 13 11,863 - - - - - -
Discount on beneficial conversion price
to preferred shareholders - (3,313) - - - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - 1,908 - - - - - -
Sale of subsidiary common stock,
less expenses of $65 - - - - - - - -
Common stock issued upon conversion of
convertible debt less expenses of $168 - - - - - - 16,683 167
Net loss - - - - - - - -
Translation adjustment - - - - - - - -
Restricted shares issued for
Directors' compensation - - - - - - 10 -
Warrant issued in conjunction
with convertible debt - - - - - - - -
Compensatory stock options and warrants - - - - - - - -
--------------------------------------------------------------------------------
Balance at December 31, 1997 13 $ 10,458 - $ - - - 133,161 1,332
Shares issued in consideration
for patent rights - - - - - - 1,250 12
Return of shares for subscription receivable - - - - - - - -
Conversion of Series C preferred stock,
less expense of $53 (12) (11,726) - - 2 1,577 20,665 207
Discount on beneficial conversion price
to preferred shareholders - - - - - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - 1,970 - - - - - -
Offering costs of Series A
preferred stock in subsidiary - - - - - - - -
Discount on beneficial conversion price
to preferred shareholders - - - - - - - -
Accretion and amortization of
discount on beneficial conversion price
to preferred shareholders - - - - - - - -
Sale of Series D preferred stock,
less expenses of $862 - - 6 5,138 - - - -
Discount on beneficial conversion price
to preferred shareholders - - - (673) - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - - 775 - - - -
Sale of Series E preferred stock - - - - 9 4,735 - -
Discount on beneficial conversion price
to preferred shareholders - - - - - (3,179) - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - - - - 165 - -
Exchange of subsidiary common stock
for parent common stock - - - - - - 1,135 11
Payment of stock subscription receivable - - - - - - - -
Repurchase of common shares - - - - - - - -
Acquisition of Advancel, less expenses of $23 - - - - - - - -
Other - - - - - - 1 -
Net loss - - - - - - - -
Translation adjustment - - - - - - - -
Restricted shares issued for compensation - - - - - - 125 1
Compensatory stock options and warrants - - - - - - - -
--------------------------------------------------------------------------------
Balance at December 31, 1998 1 $ 702 6 $ 5,240 11 $ 3,298 156,337 $ 1,563
================================================================================
See notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands of dollars and shares)
Add'l Accumu- Cumulative Stock Unearned Portion of
Paid-In lated Translation Subscription Compensatory Stock/
Capital Deficit Adjustment Receivable Options/Warrants
--------- ----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 78,667 $ (72,848) $ 150 $ (13) $ -
Sale of common stock, less expenses of $245 6,178 - - 13 -
Shares issued upon exercise of warrants & options 102 - - - -
Net loss - (10,825) - - -
Translation adjustment - - (8) - -
Restricted shares issued for
Director's compensation 13 - - - -
Consulting expense attributable to options 96 - - - -
Retirement of shares related to
patent acquisition (26) - - - -
Retirement of shares in settlement
of employee receivable (5) - - - -
-----------------------------------------------------------------------------
Balance at December 31, 1996 $ 85,025 $ (83,673) $ 142 $ - $ -
Sale of common stock 471 - - - -
Shares issued upon exercise of warrants & options 1,115 - - (64) -
Sale of Series C preferred stock,
less expenses of $1,387 - - - - -
Discount on beneficial conversion price
to preferred shareholders 3,313 - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders (1,908) - - - -
Sale of subsidiary common stock,
less expenses of $65 3,573 - - (326) -
Common stock issued upon conversion of
convertible debt less expenses of $168 4,714 - - - -
Net loss - (9,848) - - -
Translation adjustment - - (23) - -
Restricted shares issued for
Directors' compensation 2 - - - -
Warrant issued in conjunction
with convertible debt 34 - - - -
Compensatory stock options and warrants 40 - - - -
-------------------------------------------------------------------------------
Balance at December 31, 1997 $ 96,379 $ (93,521) $ 119 $ (390) -
Shares issued in consideration
for patent rights 494 - - - -
Return of shares for subscription receivable - - - 64 -
Conversion of Series C preferred stock,
less expense of $53 9,889 - - - -
Discount on beneficial conversion price
to preferred shareholders - - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders (1,970) - - - -
Offering costs of Series A
Preferred Stock in subsidiary (862) - - - -
Discount on beneficial conversion price
to preferred shareholders 673 - - - -
Accretion and amortization of
discount on beneficial conversion price
to preferred shareholders (775) - - - -
Sale of Series D preferred stock,
less expenses of $862 - - - - -
Discount on beneficial conversion price
to preferred shareholders 673 - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders (775) - - - -
Sale of Series E preferred stock - - - (4,000) -
Discount on beneficial conversion price
to preferred shareholders 3,179 - - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders (165) - - - -
Exchange of subsidiary common stock
for parent common stock 545 - - - -
Payment of stock subscription receivable - - - 326 -
Repurchase of common shares - - - - -
Acquisition of Advancel, less expenses of $23 (151) - - - (94)
Other (48) - - - -
Net loss - (14,183) - - -
Translation adjustment - - (74) - -
Restricted shares issued for compensation 96 - - - -
Compensatory stock options and warrants 301 - - - (144)
--------------------------------------------------------------------------------
Balance at December 31, 1998 $107,483 $(107,704) $ 45 ($4,000) $ (238)
================================================================================
See notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands of dollars)
Treasury Stock
Shares Amount Total
-------- --------- ----------
<S> <C> <C> <C>
Balance at December 31, 1995 - $ - $ 6,884
Sale of common stock, less expenses of $245 - - 6,377
Shares issued upon exercise of warrants & options - - 104
Net loss - - (10,825)
Translation adjustment - - (8)
Restricted shares issued for
Director's compensation - - 13
Consulting expense attributable to options - - 96
Retirement of shares related to
patent acquisition - - (26)
Retirement of shares in settlement
of employee receivable - - (5)
------------------------------------------
Balance at December 31, 1996 - $ - $ 2,610
Sale of common stock - - 500
Shares issued upon exercise of warrants & options - - 1,071
Sale of Series C preferred stock,
less expenses of $1,387 - - 11,863
Discount on beneficial conversion price
to preferred shareholders - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - -
Sale of subsidiary common stock,
less expenses of $65 - - 3,247
Common stock issued upon conversion of
convertible debt less expenses of $168 - - 4,881
Net loss - - (9,848)
Translation adjustment - - (23)
Restricted shares issued for
Directors' compensation - - 2
Warrant issued in conjunction
with convertible debt - - 34
Compensatory stock options and warrants - - 40
-------------------------------------------
Balance at December 31, 1997 - $ - $ 14,377
Shares issued in consideration
for patent rights - - 506
Return of shares for subscription receivable 158 (64) -
Conversion of Series C preferred stock,
less expense of $53 - - (53)
Discount on beneficial conversion price
to preferred shareholders - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - -
Offering costs of Series A
Preferred Stock in subsidiary - - (862)
Discount on beneficial conversion price
to preferred shareholders - - 673
Accretion and amortization of
discount on beneficial conversion price
to preferred shareholders - - (775)
Sale of Series D preferred stock,
less expenses of $862 - - 5,138
Discount on beneficial conversion price
to preferred shareholders - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - -
Sale of Series E preferred stock 2,100 (735) -
Discount on beneficial conversion price
to preferred shareholders - - -
Accretion and amortization of discount on
beneficial conversion price to
preferred shareholders - - -
Exchange of subsidiary common stock
for parent common stock - - 556
Payment of stock subscription receivable - - 326
Repurchase of common shares 5,607 (3,292) (3,292)
Acquisition of Advancel, less expenses of $23 (1,787) 1,128 883
Other - - (48)
Net loss - - (14,183)
Translation adjustment - - (74)
Restricted shares issued for compensation - - 97
Compensatory stock options and warrants - - 157
--------------------------------------------
Balance at December 31, 1998 6,078 $ (2,963) $ 3,426
============================================
See notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Years Ended December 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
Cash flows from operating activities
<S> <C> <C> <C>
Net loss $(10,825) $ (9,848) $(14,183)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 1,000 899 1,030
Common stock options and warrants issued as consideration for:
Compensation 109 42 301
Interest on debentures - 51 -
Convertible debt - 34 -
Costs incurred related to convertible debt - 211 -
Common stock retired in settlement of employee
account receivable (5) - -
Discount on beneficial conversion feature on convertible debt - 1,420 -
Provision for tooling costs and write off 371 515 151
Provision for doubtful accounts 192 130 232
Equity in net loss of unconsolidated 80 - -
Unrealized foreign currency (gain) loss (45) 8 (80)
(Gain) loss on disposition of fixed assets 83 (4) 34
Changes in operating assets and liabilities: - - -
(Increase) decrease in accounts receivable 61 (127) (193)
(Increase) decrease in license fees receivable (150) (50) 8
(Increase) decrease in inventories, net of reserves 813 (433) (1,986)
(Increase) decrease in other assets 67 (12) (12)
Increase in accounts payable and accrued expenses 55 135 1,816
Increase (decrease) in other liabilities 436 (414) 48
--------- --------- ---------
Net cash (used in) operating activities $ (7,758) $ (7,443) $(12,834)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures $ (186) (244) (548)
Acquisition of patent rights - - (822)
Acquisition of Advancel (net of $100 cash acquired) - - 40
Acquisition and advances, including $135 of costs (Note 6) - - (5,134)
Sale of capital expenditures - 67 46
--------- --------- ---------
Net cash (used in) investing activities $ (186) $ (177) $ (6,418)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) $ - $ 3,199 $ -
Sale of common stock and expenses 6,377 500 (51)
Sale of Series C preferred stock and expenses - 11,863 (53)
Sale of Series D preferred stock - - 5,138
Sale of subsidiary Series A preferred stock - - 5,138
Sale of subsidiary stock and expenses - 3,247 (21)
Exercise of stock purchase warrants and options 104 1,071 -
Collections on subscriptions receivable - - 326
Purchase of treasury stock - - (3,292)
--------- --------- ---------
Net cash provided by financing activities $ 6,481 $ 19,880 $ 7,185
--------- --------- ---------
Effect of exchange rate changes on cash $ - $ (24) $ (8)
Net increase (decrease) in cash and cash equivalents $ (1,463) $ 12,236 $(12,075)
Cash and cash equivalents - beginning of period 1,831 368 12,604
--------- --------- ---------
Cash and cash equivalents - end of period $ 368 $ 12,604 $ 529
========= ========= =========
Cash paid for interest $ 4 $ 8 $ 9
========= ========= =========
See Note 7 for issuance of common stock for patents and acquisitions.
See Note 8 with respect to issuance of securities for compensation.
See notes to Financial Statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
1. Background:
NCT Group, Inc. ("NCT" or the "Company") designs, develops, licenses,
produces and distributes electronic systems for Active Wave Management including
systems that electronically reduce noise and vibration. The Company's systems
are designed for integration into a wide range of products serving major markets
in the transportation, manufacturing, commercial, consumer products and
communications industries. The Company has begun commercial application of its
technology through a number of product lines, including NoiseBuster(R)
communications headsets and NoiseBuster Extreme!(TM) consumer headsets,
Gekko(TM) flat speakers, flat panel transducers ("FPT(R)"), ClearSpeech(R),
microphones, speakers and other products, adaptive speech filters ("ASF"), the
ProActive(R) line of industrial/commercial active noise reduction ("ANR")
headsets, an aviation headset for pilots, an industrial muffler or "silencer"
for use with large vacuums and blowers, quieting headsets for patient use in
magnetic resonance imaging ("MRI") machines, and an aircraft cabin quieting
system.
The technology supporting the Company's electronic systems was developed
using technology maintained under various patents (the "Chaplin Patents") held
by Chaplin-Patents Holding Co., Inc. ("CPH") as well as patented technology
acquired or developed by the Company. CPH, formerly a joint venture with Active
Noise Vibration Technologies, Inc. ("ANVT"), was established to maintain and
defend these patent rights. The former joint venture agreement relating to the
Chaplin Patents required that the Company only license or share the related
technology with entities who are affiliates of the Company. As a result, the
Company established various joint ventures and formed other strategic alliances
(see Note 3) to further develop the technology and electronic systems and
components based on the Chaplin Patents, to develop such technology into
commercial applications, to integrate the electronic systems into existing
products and to distribute such systems and products into various industrial,
commercial and consumer markets.
The Company has incurred substantial losses from operations since its
inception, which have amounted to $107.7 million on a cumulative basis through
December 31, 1998 and has negative working capital of $1.2 million at December
31, 1998. These losses, which include the costs for development of products for
commercial use, have been funded primarily from the sale of common stock and
preferred stock, including the exercise of warrants or options to purchase
common stock, and by technology licensing fees and engineering and development
funds received from joint venture and other strategic partners. As discussed in
Note 3, agreements with joint venture and other strategic partners generally
require that a portion of the initial cash flows, if any, generated by the
ventures or the alliances be paid on a preferential basis to the Company's
co-venturers until the technology licensing fees and engineering and development
funds provided to the venture or the Company are recovered. Cash and cash
equivalents amounted to $0.5 million at December 31, 1998. Management believes
that currently available funds will not be sufficient to sustain the Company for
the next 12 months. Such funds consist of available cash and cash from the
exercise of warrants and options, the funding derived from technology licensing
fees, royalties and product sales and engineering development revenue. Reducing
operating expenses and capital expenditure alone will not be sufficient and
continuation as a going concern is dependent upon the level of realization of
funding from technology licensing fees, royalties, product sales and engineering
and development revenue, all of which are presently uncertain. In the event that
anticipated technology licensing fees, royalties, product sales, and engineering
and development revenue are not realized, then management believes additional
working capital financing must be obtained. There is no assurance any such
financing is or would become available.
In that event that funding from internal sources is insufficient, the Company
would have to substantially cut back its level of operations. These reductions
could have an adverse effect on the Company's relations with its strategic
partners and customers. Uncertainty exists with respect to the adequacy of
current funds to support the Company's activities until positive cash flow from
operations can be achieved, and with respect to the availability of financing
from other sources to fund any cash deficiencies (see Note 8 with respect to
recent financing).
On April 30, 1998, the Company completed the sale of 5.0 million ordinary
shares of NXT plc (formerly Verity Group plc ) acquired upon the Company's
exercise on April 7, 1998 of the option it held to purchase such shares at a
price of 50 pence per share. This option was acquired by the Company in
connection with the cross license agreement entered into by the Company, NXT plc
and New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT plc. The
Company realized a $3.2 million gain from the exercise of such option and the
sale of the Verity ordinary shares received therefrom, which is included in
other income in 1998.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 1998 about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. Summary of Significant Accounting Policies:
Consolidation:
The financial statements include the accounts of the Company and its majority
owned subsidiaries. All material inter-company transactions and account balances
have been eliminated in consolidation.
Unconsolidated affiliates include joint ventures and other entities not
controlled by the Company, but over which the Company maintains significant
influence and in which the Company's ownership interest is 50% or less. The
Company's investments in these entities are accounted for on the equity method.
When the Company's equity in cumulative losses exceeds its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method (see Note 3). The Company will not
be able to record any equity in income with respect to an entity until its share
of future profits is sufficient to recover any cumulative losses that have not
previously been recorded.
Revenue Recognition:
Product Sales:
Revenue is recognized when the product is shipped.
Engineering and development services:
Revenue from engineering and development contracts is recognized and billed
as the services are performed. However, revenue from certain engineering and
development contracts are recognized as services are performed under the
percentage of completion method after 10% of the total estimated costs have been
incurred. Under the percentage of completion method, revenues and gross profit
are recognized as work is performed based on the relationship between actual
costs incurred to total estimated costs at completion.
Estimated losses are recorded when identified.
Revenues recorded under the percentage of completion method amounted to
$9,000, zero and $61,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Technology Licensing Fees:
Technology licensing fees paid by joint venturers, co-venturers, strategic
partners or other licensees which are nonrefundable, are recognized in income
upon execution of the license agreement. If any license fee is subject to
completion of any performance criteria specified within the agreement, such
license fee is deferred until such performance criteria is met. See Note 3 with
respect to the license fee recorded by the Company in connection with Ultra
Electronics, Ltd.("Ultra") and NXT.
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.
<PAGE>
Cash and cash equivalents:
The Company considers all money market accounts and highly liquid investments
with original maturities of three months or less at the time of purchase
(principally comprised of high quality investments in commercial paper) to be
cash equivalents.
Inventories:
Inventories are stated at the lower of cost (average) or market.
With regard to the Company's assessment of the realizability of inventory,
the Company periodically conducts a complete physical inventory, and reviews the
movement of inventory on an item by item basis to determine the value of items
which are slow moving and obsolete. After considering potential for near term
product engineering changes and/or technological obsolescence and current
realizability, the Company determines the current need for inventory reserves.
After applying the above noted measurement criteria at December 31, 1997, and
December 31, 1998, the Company determined that a reserve of $0.5 million for
each year was adequate.
Property and Equipment:
Property and equipment are stated at cost and depreciation is recorded on the
straight-line method over the estimated useful lives of the respective assets.
Leasehold improvements are amortized over the shorter of their useful lives or
the related lease term.
Patent Rights:
Patent rights are stated at cost and are amortized on a straight line basis
over the remaining life of each patent (ranging from 1 to 15 years).
Amortization expense was $0.4 million, $0.3 million and $0.5 million for 1996,
1997 and 1998, respectively. Accumulated amortization was $1.8 million and $2.3
million at December 31, 1997 and 1998, respectively.
It is the Company's policy to review the carrying value of its individual
patents when events have occurred which could impair the valuation on any such
patent.
Foreign currency translation:
The financial statements for the United Kingdom operations are translated
into U.S. dollars at year-end exchange rates for assets and liabilities and
weighted average exchange rates for revenues and expenses. The effects of
foreign currency translation adjustments are included as a component of
stockholders' equity and gains and losses resulting from foreign currency
transactions are included in income and have not been material.
<PAGE>
Loss per common share:
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in the year ended December 31, 1997 and has
retroactively applied the effects thereof for all periods presented.
Accordingly, the presentation of per share information includes calculations of
basic and diluted loss per share. The impact on the per share amounts previously
reported (primary and fully diluted) was not significant. Except as described
below, the per share effects of potential common shares such as warrants,
options, and convertible preferred stock have not been included, as the effect
would be antidilutive (see Notes 8 and 9).
The SEC has taken the position that when preferred stock is convertible to
common stock at a conversion rate that is the lower of a rate fixed at issuance
or a fixed discount from the common stock market price at the time of
conversion, the discounted amount is an assured incremental yield, the
"beneficial conversion feature", to the preferred shareholders and should be
accounted for as an embedded dividend to preferred shareholders. As such, this
dividend was recognized in the loss per share calculation.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents. The Company primarily holds
its cash and cash equivalents in two banks. Deposits in excess of federally
insured limits were $0.3 million at December 31, 1998. The Company sells its
products and services to original equipment manufacturers, distributors and end
users in various industries worldwide. As shown below, the Company's five
largest customers accounted for approximately 33.5% of revenues during 1998 and
38.8% of accounts receivable at December 31, 1998. The Company does not require
collateral or other security to support customer receivables.
(in thousands of dollars)
As of December 31, 1998,
and for the year then ended
---------------------------------
Accounts
CUSTOMER Receivable Revenue
-------------------------------- ------------- --------------
VLSI Technology, Inc. $--- $285
TS/2 Inc. 9 275
STMicroelectronics SA and
STMicroelectronics S.r.l 246 246
Telex Communications, Inc. --- 189
Cleverdevices Ltd. 23 119
All Other 438 2,210
------------- --------------
Total $716 $3,324
============= ==============
The Company regularly assesses the realizability of its accounts receivable
and performs a detailed analysis of its aged accounts receivable. When
quantifying the realizability of accounts receivable, the Company takes into
consideration the value of past due receivables and the collectibility of such
receivables, based on credit worthiness.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation:
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The
provisions of SFAS No. 123 allow the Company to either expense the estimated
fair value of stock options and warrants or to continue to follow the intrinsic
value method set forth in APB Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25") but disclose the pro forma effects on net income (loss)
had the fair value of the options or warrants been expensed. The Company has
elected to continue to apply APB 25 in accounting for its employee stock option
and warrant incentive plans. (See Note 9.)
Reporting Comprehensive Loss:
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The
provisions for SFAS No. 130 require the Company to report the change in the
Company's equity during the period from transactions and events other than those
resulting from investments by and distributions to the shareholders.
<PAGE>
Segments of an Enterprise and Related Information:
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). The provisions of SFAS No. 131 require the
Company to disclose the following information for each reporting segment:
general information about factors used to identify reportable segments, the
basis of organization, and the sources of revenues; information about reported
profit or loss and segment assets; and reconciliations of certain reported
segment information to consolidated amounts. Please refer to Note 14 and 15 for
further information.
3. Joint Ventures and Other Strategic Alliances:
The following is a summary of certain of the Company's joint ventures and
other strategic alliances as of December 31, 1998.
The Company and certain of its majority-owned subsidiaries have entered into
agreements to establish joint ventures and other strategic alliances related to
the design, development, manufacture, marketing and distribution of its
electronic systems and products containing such systems. These agreements
generally provide that the Company license technology and contribute a nominal
amount of initial capital and that the other parties provide substantially all
of the funding to support the venture or alliance. This support funding
generally includes amounts paid or services rendered for engineering and
development. In exchange for this funding, the other party generally receives a
preference in the distribution of cash and/or profits from the joint ventures or
royalties from these alliances until such time that the support funding (plus an
"interest" factor in some instances) is recovered. At December 31, 1998, there
were no preferred distributions due to joint venture partners from future
profits of the joint ventures.
Technology licensing fees and engineering and development fees paid by joint
ventures to the Company are recorded as income since there is no recourse to the
Company for these amounts or any commitment by the Company to fund the
obligations of the venture.
When the Company's share of cumulative losses equals its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method. The aggregate amount of the
Company's share of losses in these joint ventures in excess of the Company's
investments which has not been recorded was zero at December 31, 1998. The
Company will not be able to record any equity in income with respect to an
entity until its share of future profits is sufficient to recover any cumulative
losses that have not previously been recorded.
Certain of the joint ventures will be suppliers to the Company and to other
of the joint ventures and will transfer products to the related entities based
upon pricing formulas established in the agreements. The formula is generally
based upon fully burdened cost, as defined in the agreements.
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.
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.
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
============== ===========
<PAGE>
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.
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
<PAGE>
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.
8. Common Stock:
Private Placements and Stock Issuances:
On March 28, 1996, the Company sold 2.0 million shares of its common stock in
a private placement with an investor that provided net proceeds to the Company
of $0.7 million.
On April 10, 1996, the Company sold an additional 1.0 million shares, in the
aggregate, of its common stock in a private placement with three institutional
investors that provided net proceeds to the Company of $0.3 million.
Contemporaneously, the Company sold secured convertible term notes in the
aggregate principal amount of $1.2 million to those institutional investors and
granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion price
under the notes and the exercise price under the options are equal to the price
received by the Company for the sale of such 1.0 shares subject to certain
adjustments.
On August 13, 1996, the three institutional investors converted their
secured, convertible term notes and exercised their options in full. As a
result, the Company issued 13.4 million shares, in the aggregate, of its common
stock to such investors, received $3.45 million in cash and effected by
conversion to its common stock the payment of the notes together with the
accrued interest thereon.
On August 29, 1996, the Company sold 1.8 million shares of its common stock
to a foreign investor, which purchased 4.8 million shares of the Company's
common stock in November, 1995. The Company received $0.9 million of net
proceeds. The purchaser is subject to certain resale and transfer restrictions
with respect to these shares.
Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S of
the Securities Act of 1933, as amended, (the "Securities Act") to five unrelated
investors (the "Investors") through multiple dealers (the "First Quarter 1997
Financing") from which the Company realized $3.2 million of net proceeds. The
Debentures were to mature between January 15, 2000 and March 25, 2000 and earn
8% interest per annum, payable quarterly in either cash or the Company's common
stock at the Company's sole option. Subject to certain common stock resale
restrictions, the Investors, at their discretion, had the right to convert the
principal due on the Debentures into the Company's common stock at any time
after the 45th day following the date of the sale of the Debentures to the
Investors. In the event of such a conversion, the conversion price was the
lesser of 85% of the closing bid price of the Company's common stock on the
closing date of the Debentures' sale or between 75% to 60% (depending on the
Investor and other conditions) of the average closing bid price for the five
trading days immediately preceding the conversion. To provide for the above
noted conversion and interest payment options, the Company reserved 15 million
shares of the Company's common stock for issuance upon such conversion. Subject
to certain conditions, the Company also had the right to require the Investors
to convert all or part of the Debentures under the above noted conversion price
conditions after February 15, 1998. As of June 6, 1997, the Investors had
converted all $3.4 million of the Debentures into 16.5 million shares of the
Company's common stock. At the Company's election, interest due through the
conversion dates of the Debentures was paid through the issuance of an
additional 0.2 million shares of the Company's common stock. In conjunction with
the Debentures, the Company granted a warrant to purchase 75,000 shares of
common stock to one investor. During the year ended December 31, 1997, the
Company valued this warrant, using the Black-Scholes pricing model at $34,000
which was expensed as debt discount. The Company recorded a $1.4 million
non-cash interest expense attributable to the conversions of the Debentures in
the first and second quarters of 1997 as an adjustment during the fourth quarter
of 1997. If the shares were issued in lieu of debt at the respective issuance
dates of the debt, supplementary basic and diluted net loss per share for the
year ended December 31, 1997 would have been a loss of $0.08 per share.
On July 30, 1997 the Company sold 2.9 million shares, in the aggregate, of
its common stock at a price of $0.175 per share in a private placement that
provided net proceeds to the Company of $0.5 million.
On September 4, 1997, the Company transferred $5,000 cash and all of the
business and assets of its Audio Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated company, NCT Audio Products, Inc., in consideration for 5,867
shares of NCT Audio common stock whereupon NCT Audio became a wholly-owned
subsidiary of the Company. The Company also granted NCT Audio an exclusive
worldwide license with respect to all of the Company's relevant patented and
unpatented technology relating to FPT(TM) and FPT(TM) based audio speaker
products for all markets for such products excluding (a) markets licensed to or
reserved by NXT plc and NXT under the Company's cross licensing agreements with
NXT plc and NXT, (b) the ground based vehicle market licensed to OAT, (c) all
markets for hearing aids and other hearing enhancing or assisting devices, and
(d) all markets for headsets, headphones and other products performing functions
substantially the same as those performed by such products in consideration for
a license fee of $3.0 million (eliminated in consolidation) to be paid when
proceeds are available from the sale of NCT Audio common stock and on-going
future royalties payable by NCT Audio to the Company as provided in such license
agreement. In addition, the Company agreed to transfer all of its rights and
obligations under its cross licensing agreements with NXT plc and NXT to NCT
Audio and to transfer the Company's interest in OAT to NCT Audio, which was then
redeemed by OAT on October 8, 1998. (Please refer to Note 3 for further
information.)
Between October 10, 1997 and December 4, 1997 NCT Audio issued 2,145 shares
of its common stock (including 533 shares issued to NXT plc) for an aggregate
purchase price of $4.0 million in a private placement pursuant to Regulation D
under the Securities Act (the "NCT Audio Financing"). NCT Audio has not met
certain conditions regarding the filing of a registration statement for NCT
Audio common stock. As such, holders of NCT Audio common stock have a right to
convert their NCT Audio common stock into a sufficient number of restricted
shares of NCT common stock to equal their original cash investment in NCT Audio,
plus a 20% discount to market. During 1998, two NCT Audio shareholders have
exercised their right to exchange 296 shares of NCT Audio common stock into
1,135,542 shares of NCT common stock under the terms noted above. In connection
therewith the Company recorded goodwill of $556,000 which is being amortized
over five years.
Between October 28, 1997 and December 11, 1997, the Company entered into a
series of subscription agreements (the "Series C Subscription Agreements") to
sell an aggregate amount of $13.3 million of Series C Convertible Preferred
Stock (the "Series C Preferred Stock") in a private placement, pursuant to
Regulation D of the Securities Act, to 32 unrelated accredited investors through
two dealers (the "1997 Series C Preferred Stock Private Placement"). The total
1997 Series C Preferred Stock Private Placement was completed on December 11,
1997. The aggregate net proceeds to the Company of the 1997 Series C Preferred
Stock Private Placement were $11.9 million. Each share of the Series C Preferred
Stock has a par value of $.10 per share and a stated value of one thousand
dollars ($1,000) with an accretion rate of four percent (4%) per annum on the
stated value. Each share of Series C Preferred Stock is convertible into fully
paid and nonassessable shares of the Company's common stock subject to certain
limitations. The shares of Series C Preferred Stock become convertible into
shares of common stock at any time commencing after the earlier of (i) the
effective date of the Series C Registration Statement; or (ii) ninety (90) days
after the date of filing of the Series C Registration Statement. Each share of
Series C Preferred Stock is convertible into a number of shares of common stock
of the Company as determined in accordance with the Series C Conversion Formula
as set forth in the agreement using a conversion price equal to the lesser of
(x) 120% of the five (5) day average closing bid price of common stock
immediately prior to the closing date of the Series C Preferred Stock being
converted or (y) 20% below the five (5) day average closing bid price of common
stock immediately prior to the conversion date thereof.
The conversion terms of the Series C Preferred Stock also provide that in no
event shall the average closing bid price referred to in the Series C Conversion
Formula be less than $0.625 per share and in no event shall the Company be
obligated to issue more than 26.0 million shares of its common stock in the
aggregate in connection with the conversion of the Series C Preferred Stock.
Accordingly, 26.0 million shares of common stock which could be issuable upon
conversion of the Series C Preferred Stock are included in the offering to which
the prospectus relates. Under the terms of the Series C Subscription Agreements,
the Company may be subject to a penalty if the Series C Registration Statement
is not declared effective within one hundred twenty (120) days after the first
closing of any incremental portion of the offering of Series C Preferred Stock,
such penalty to be in an amount equal to one and one half percent (1.5%) per
month of the aggregate amount of Series C Preferred Stock sold in the offering
up to a maximum of ten percent (10%) of such aggregate amount. The Series C
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Series C Subscription Agreements and ending ninety (90) days
after the closing of the offering the Company will be prohibited from issuing
any debt or equity securities other than Series C Preferred Stock, and that the
Corporation will be required to make certain payments in the event of its
failure to effect conversion in a timely manner or in the event it fails to
reserve sufficient authorized but unissued common stock for issuance upon
conversion of the Series C Preferred Stock. As of December 31, 1998, 10,850
shares of Series C Preferred Stock have been converted to 20,665,000 shares of
NCT common stock.
During 1998, the Board of Directors authorized the issuance of a total of
125,000 shares of the Company's common stock to an employee, two directors and a
consultant in connection with their services to the Company. The Company valued
these shares at $97,000, representing the fair value on the date of issuance.
On July 15, 1998 the Company transferred $5,000 and all of the business and
assets of its Hearing Products Division as then conducted by the Company and as
reflected on the business books and records of the Company to a newly
incorporated subsidiary company, NCT Hearing Products, Inc. ("NCT Hearing") in
consideration for 6,400 shares of NCT Hearing common stock whereupon NCT Hearing
became a wholly-owned subsidiary of the Company. The Company also granted NCT
Hearing an exclusive worldwide license with respect to all of the Company's
relevant patented and unpatented technology relating to Hearing Products in
consideration for a license fee of $3.0 million (eliminated in consolidation) to
be paid when proceeds are available from the sale of NCT Hearing common stock
and running royalties payable with respect to NCT Hearing's sales of products
incorporating the licensed technology and its sublicensing of such technology.
It is anticipated that NCT Hearing will issue additional shares of its common
stock in transactions exempt from registration in order to raise additional
working capital.
On July 27, 1998, the Company entered into subscription agreements (the
"Series D Subscription Agreements") to sell 6,000 shares of the Company's Series
D Convertible Preferred Stock ("Series D Preferred Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act of 1933, as amended (respectively "Regulation D" and the
"Securities Act"), to six unrelated accredited investors through one dealer (the
"1998 Series D Preferred Stock Private Placement. The sale of 6,000 shares of
Series D Preferred Stock having an aggregate $6.0 million stated value was
completed on August 6, 1998. $5.2 million net proceeds were received by the
Company from the 1998 Series D Preferred Stock Private Placement. Each share of
the Series D Preferred Stock has a par value of $.10 per share and a stated
value of one thousand dollars ($1,000) with an accretion rate of four percent
(4%) per annum on the stated value. Each share of Series D Preferred Stock is
convertible into fully paid and nonassessable shares of the Company's common
stock subject to certain limitations. Under the terms of the Series D
Subscription Agreements, the Company is required to file a registration
statement ("the Series D Registration Statement") covering the resale of all
shares of common stock of the Company issuable upon conversion of the Series D
Preferred Stock then outstanding within sixty (60) days after the completion of
the 1998 Series D Preferred Stock Private Placement (respectively, the "Series D
Filing Date" and the "Series D Closing Date"). The shares of Series D Preferred
Stock become convertible into shares of common stock at any time commencing
after the earlier of (i) ninety (90) days after the Series D Closing Date; (ii)
five (5) days after the Company receives a "no review" status from the SEC in
connection with the Series D Registration Statement; or (iii) the effective date
of the Series D Registration Statement. The Series D Registration Statement
became effective on October 30, 1998, and shares of Series D Preferred Stock
became convertible on that date. Each share of Series D Preferred Stock is
convertible into a number of shares of common stock of the Company as determined
in accordance with the Series D Conversion Formula as set forth in the agreement
using a conversion price equal to the lesser of (x) 120% of the five (5) day
average closing bid price of common stock immediately prior to the closing date
of the Series D Preferred Stock being converted or (y) 20% below the five (5)
day average closing bid price of common stock immediately prior to the
conversion date thereof.
The conversion terms of the Series D Preferred Stock also provide that in no
event shall the conversion price referred to in the Series D Conversion Formula
be less than $0.50 per share and in no event shall the Company be obligated to
issue more than 12,000,000 shares of its common stock in the aggregate in
connection with the conversion of the 6,000 shares of Series D Preferred Stock
issued under the 1998 Series D Preferred Stock Private Placement. The Series D
Subscription Agreements also provide that the Company will be required to make
certain payments in the event of its failure to effect conversion in a timely
manner. Including shares of common stock issued for accretion, as of March 12,
1999, all shares of Series D Preferred Stock have been converted to 12,273,685
shares of NCT common stock.
On July 27, 1998, NCT Audio entered into subscription agreements (the "NCT
Audio Subscription Agreements") to sell 60 shares of NCT Audio's Series A
Convertible Preferred Stock ("NCT Audio Series A Preferred Stock") having an
aggregate stated value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 NCT Audio Series A Preferred Stock Private
Placement"). The sale of 60 shares of NCT Audio Series A Preferred Stock having
an aggregate $6.0 million stated value was completed on August 17, 1998. NCT
Audio received net proceeds of $5.2 million from the 1998 NCT Audio Series A
Preferred Stock Private Placement. Each share of the NCT Audio Series A
Preferred Stock has a par value of $.10 per share and a stated value of one
hundred thousand dollars ($100,000) with an accretion rate of four percent (4%)
per annum on the stated value. Each share of NCT Audio Series A Preferred Stock
is convertible into fully paid and nonassessable shares of NCT Audio's common
stock subject to certain limitations. Under the terms of the NCT Audio
Subscription Agreements NCT Audio is required to file a registration statement
("NCT Audio Registration Statement") covering the resale of all shares of common
stock of NCT Audio issuable upon conversion of the NCT Audio Series A Preferred
Stock then outstanding by a date (the "Series A Filing Deadline") which is not
later than thirty (30) days after the Company becomes a "reporting company"
under the Exchange Act. The shares of NCT Audio Series A Preferred Stock become
convertible into shares of NCT Audio common stock at any time after the date the
Company becomes a "reporting company" under the Exchange Act. Each share of
Series A Preferred Stock is convertible into a number of shares of common stock
of NCT Audio as determined in accordance with the Series A Conversion Formula as
set forth in the agreement using a conversion price equal to the lesser of (x)
120% of the five (5) day average closing bid price of common stock immediately
prior to the closing date of the Series A Preferred Stock being converted or (y)
20% below the five (5) day average closing bid price of common stock immediately
prior to the conversion date thereof.
The conversion terms of the NCT Audio Series A Preferred Stock also provide
that in the event that NCT Audio has not become a "reporting company" under the
Exchange Act by December 31, 1998, or the NCT Audio Registration Statement has
not been declared effective by the SEC by December 31, 1998, the holder shall be
entitled to exchange each share of NCT Audio Series A Preferred Stock for 100
shares of the Company's Series D Convertible Preferred Stock and thereafter
shall be entitled to all rights and privileges of a holder of the Company's
Series D Preferred Stock. As of December 31, 1998, no NCT Audio Series A
Preferred Stock shareholders have exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Convertible Preferred
Stock.
On July 29, 1998, the Company initiated a plan to repurchase from time to
time up to 10 million shares of the Company's common stock in the open market
pursuant to Rule 10b-18 under the Exchange Act or through block trades. As of
December 31, 1998, the Company had repurchased 5,607,100 shares of the Company's
common stock at per share prices ranging from $0.3438 to $0.6563. The stock
repurchase program was terminated on December 30, 1998.
On September 4, 1998, the Company acquired the issued and outstanding common
stock of Advancel. The acquisition was pursuant to the Stock Purchase Agreement.
The consideration for the acquisition of the Advancel common stock consisted of
an initial payment of $1.0 million payable by the delivery of 1,786,991 shares
of the Company's treasury stock together with future payments, payable in cash
or in common stock of the Company at the election of the Advancel Shareholders
based on Advancel's earnings before interest, taxes, depreciation and
amortization for each of the calendar years 1999, 2000, 2001 and 2002. While
each earnout payment may not be less than $250,000 in any earnout year, there is
no maximum earnout payment for any earnout year or for all earnout years in the
aggregate. To determine the number of shares of the Company's common stock
issuable in connection with an earnout payment, each earnout payment is to be
calculated using the average of the closing prices of the Company's common stock
for each of the twenty (20) business days following the 21st day after the
release of Advancel's audited year-end financials for an earnout year. At that
time, Advancel Shareholders will elect to receive payment in cash or common
stock of the Company. In the event that the Company is unable to maintain the
registration statement covering the resale of 1,786,991 shares effective for at
least thirty (30) days, each Advancel Shareholder shall have the right, until
April 15, 1999, to have the Company redeem up to one-third of the initial
payment shares acquired by such Advancel Shareholder by paying in cash therefor
a sum calculated by using the formula used to determine the number of shares of
the Company's common stock to be delivered in payment of the initial payment of
$1.0 million. The cost of the acquisition has been allocated to the assets
acquired and liabilities assumed based on their fair values as follows:
Asset acquired and liabilities assumed:
Current assets $ 368,109
Property, plant and equipment 4,095
Goodwill 1,018,290
Other assets 13,486
Current liabilities (485,040)
Unearned portion of compensatory stock 141,251
-----------
Cost of acquisition (including expenses of $60,191) $ 1,060,191
===========
The acquisition has been accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the accounts of Advancel
from the date of acquisition. Goodwill on acquisition is being amortized over
five years.
At the Annual Meeting of Stockholders held on October 20, 1998, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock from
185 million to 255 million shares. Such action was deemed by the Board of
Directors to be in the best interest of the Company to make additional shares of
the Company's common stock available for an increase in the number of shares of
common stock covered by the 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>
On October 6, 1992, the Company adopted a stock option plan as amended, the
1992 Plan, for the granting of options to purchase up to 10,000,000 shares of
common stock to officers, employees, certain consultants and certain directors.
The exercise price of all 1992 Plan options must be at least equal to the fair
market value of such shares on the date of the grant and 1992 Plan options are
generally exercisable over a five to ten year period as determined by the Board
of Directors. Vesting of 1992 Plan options varies from (i) fully vested at the
date of grant to (ii) multiple year apportionment of vesting as determined by
the Board of Directors. On October 20, 1998, the stockholders approved an
amendment to the 1992 Plan to increase the aggregate number of shares of
common stock reserved for grants of restricted stock and grants of options to
purchase shares of common stock to 30,000,000 shares. The 1992 Plan was also
amended to eliminate the automatic grant of 75,000 shares of the Company's
common stock upon a new director's initial election to the Board of Directors
and to eliminate the automatic grant of 5,000 shares of the Company's common
stock to each non-employee director for services as a director of the Company
for each subsequent election.
Information with respect to 1992 Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 4,004,248 $1.00 6,022,765 $0.86 9,029,936 $0.72
Options granted 2,156,500 $0.67 4,652,222 $0.55 21,989,000 $0.69
Options exercised (33,533) $0.75 (1,141,795) $0.64 (1,561) $0.27
Options canceled,
expired or forfeited (104,450) $1.37 (503,256) $0.99 (11,185,554) $1.03
--------- --------- ----------
Outstanding at end of
year 6,022,765 $0.86 9,029,936 $0.72 19,831,821 $0.52
========= ========= ==========
Options exercisable
at year-end 5,835,265 $0.86 6,592,436 $0.73 12,053,571 $0.60
========= ========= ==========
</TABLE>
As of December 31, 1998, options for the purchase of 8,515,776 shares were
available for future grants of restricted stock awards and for options to
purchase common stock under the 1992 Plan.
On November 15, 1994, the Board of Directors adopted the Noise Cancellation
Technologies, Inc. Option Plan for Certain Directors (the "Directors Plan"), as
amended. Under the Directors Plan 821,000 shares have been approved by the Board
of Directors for issuance. The options granted under the Directors Plan have
exercise prices equal to the fair market value of the Common Stock on the grant
dates, and expire five years from date of grant. Options granted under the
Directors Plan are fully vested at the grant date.
Information with respect to Directors Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1996 1997 1998
-------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 821,000 $0.73 746,000 $0.73 746,000 $0.73
Options granted - - - - - -
Options exercised - - - - - -
Options canceled,
expired or forfeited (75,000) $0.75 - - - -
-------- ------- -------
Outstanding at end of
year 746,000 $0.73 746,000 $0.73 746,000 $0.73
======== ======= =======
Options exercisable
at year-end 746,000 $0.73 746,000 $0.73 746,000 $0.73
======== ======= =======
</TABLE>
As of December 31, 1998, there were 75,000 options for the purchase of shares
available for future grants under the Directors Plan.
<PAGE>
The following information summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Plan Exercise Price Outstanding (In Years) Price Exercisable Price
- - ---------------- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1987 Plan $0.50 to $0.63 1,350,000 0.18 $0.51 1,350,000 $0.51
Non-Plan $0.27 to $5.09 4,319,449 3.14 $0.36 4,319,449 $0.36
1992 Plan $0.22 to $4.00 19,831,821 6.83 $0.52 12,053,571 $0.60
Director's Plan $0.66 to $0.75 746,000 0.88 $0.73 746,000 $0.73
</TABLE>
Warrants:
The Company's warrants are granted from time to time at the discretion of the
Board of Directors. The exercise price of all warrants generally must be at
least equal to the fair market value of such shares on the date of grant.
Warrants are generally exercisable over a five to ten year period as determined
by the Board of Directors. Warrants generally vest on the grant date.
Information with respect to warrant activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1996 1997 1998
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 4,032,541 $0.71 3,888,539 $0.72 3,146,920 $0.81
Warrants granted - - 2,846,923 $0.76 1,588,164 $0.92
Warrants exercised (144,002) $0.45 (854,119) $0.41 - -
Warrants canceled,
expired or forfeited - - (2,734,423) $0.75 (362,400) $1.16
--------- --------- ---------
Outstanding at end
of year 3,888,539 $0.72 3,146,920 $0.81 4,372,684 $0.82
========= ========= =========
Warrants exercisable
at year-end 3,888,539 $0.72 3,146,920 $0.81 4,172,684 $0.86
========= ========= =========
</TABLE>
The following table summarizes information about warrants outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
---------------------------------------- ------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (In Years) Price Exercisable Price
- - -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$0.50 to $4.00 4,372,684 2.02 $0.82 4,172,684 $0.86
</TABLE>
<PAGE>
10. Related Parties:
Environmental Research Information, Inc.
In 1989, the Company established a joint venture with Environmental Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended for use solely in the process of electric power generation,
transmission and distribution and which reduce noise and/or vibration resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively, "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things, during the period ending February 1996, to make payments to ERI
equal to (i) 4.5% of the Company's sales of Power and Fan Products and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology, subject to an overall maximum of $4,500,000. Michael J. Parrella,
President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Chairman of the Board
of Directors of the Company, shares investment control over an additional 24% of
the outstanding capital of ERI. During the fiscal year ended December 31, 1998,
the Company was not required to make any such payments to ERI under these
agreements.
Quiet Power Systems, Inc.
In 1993, the Company entered into three Marketing Agreements with QuietPower
Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical Solutions,
Inc."), a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing Agreements, QSI has undertaken to use its best
efforts to seek research and development funding for the Company from electric
and natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will record a charge for the amount by which the market price of the Common
Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1993, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America. QSI is entitled to receive a sales commission on
any sales to a customer of such products for which QSI is a procuring cause in
obtaining the first order from such customer. In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross revenue NCT receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
.5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
Under the terms of the second of the three Marketing Agreements, QSI is
granted a non-exclusive right to market the Company's products that are or will
be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to receive commissions similar to those payable to end user and original
equipment manufacturer customers described above. QSI is also entitled to
receive the same 5% commission described above on research and development
funding and technology licenses which it obtains for the Company in the feeder
bowl area. The initial term of this Marketing Agreement is three years with
subsequent automatic one-year renewals unless a party elects not to renew.
Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with equipment used by electric and/or natural gas utilities for
retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products equal to 129% of QSI's
marketing expenses attributable to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues received by the Company from the sale of such products. QSI is
also entitled to receive a 5% commission on research and development funding
similar to that described above. QSI's exclusive rights continue for an
indefinite term provided it meets certain performance criteria relating to
marketing efforts during the first two years following product availability in
commercial quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights become non-exclusive, depending on the circumstances
causing such change, the initial term then becomes either three or five years
from the date of this Marketing Agreement, with subsequent one-year automatic
renewals in each instance unless either party elects not to renew.
For the years ended December 31, 1996, 1997 and 1998 the Company was not
required to pay any commissions to QSI under any of these Marketing Agreements.
The Company has also entered into a Teaming Agreement with QSI under which
each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1996, 1997 and 1998 no
payments were required to be made to QSI.
In March 1995, the Company entered into a Master Agreement with QSI under
which QSI was granted an exclusive worldwide license under certain NCT patents
and technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances
including NCT's failure to develop the products or the failure of the parties to
agree on certain development matters. In consideration of the rights granted
under the Master Agreement, QSI is to pay the Company a royalty of 6% of the
gross revenues received from the sale of the products and 50% of the gross
revenues received from sublicensing the rights granted to QSI under the Master
Agreement after QSI has recouped 150% of the costs incurred by QSI in the
development of the products in question. The Company is obligated to pay similar
royalties to QSI on its sale of the products and the licensing of rights covered
under the Master Agreement outside the utility industry and from sales and
licensing within the utility industry in the Far East. In addition to the
foregoing royalties, QSI is to pay an exclusivity fee to the Company of
$750,000; $250,000 of which QSI paid to the Company in June 1994. The balance is
payable in equal monthly installments of $16,667 beginning in April 1995. QSI's
exclusive rights become non-exclusive with respect to all products if it fails
to pay any installment of the exclusivity fee when due and QSI loses such rights
with respect to any given product in the event it fails to make any development
funding payment applicable to that product. The Master Agreement supersedes all
other agreements relating to the products covered under the Master Agreement,
including those agreements between the Company and QSI described above.
Immediately following the execution to the Master Agreement, the Company and
QSI entered into a letter agreement providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.
In April 1995, the Company and QSI entered into another letter agreement
under which QSI agreed to forfeit and surrender the five year warrant to
purchase 750,000 shares of the Company's common stock issued to QSI under the
first Marketing Agreement described above. In addition, the $500,000 balance of
the exclusivity fee provided for under the Master Agreement was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the indebtedness to be paid under the letter agreement described in the
preceding paragraph was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million, whichever
first occurs. Such indebtedness is to be evidenced by a promissory note, non
payment of which is to constitute an event of termination under the Master
Agreement.
On May 21, 1996, the Company and QSI entered into another letter agreement
extending the time by which the payments from QSI to the Company under the April
1995 letter agreement described above were to be made. Under the letter the
payment of certain arrearages in the payment of the exclusivity fee was to be
made not later than June 15, 1996, with the balance continuing to be payable by
monthly payments of $8,333 as provided in the May 1995 letter agreement. In
addition, the payment of the other indebtedness owed by QSI to the Company was
to be paid by a payment of $25,000 at the time QSI obtained certain anticipated
financing with the balance paid by monthly payments of $15,000 each. Default in
QSI's timely payment of any of the amounts specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.
On April 9, 1997, the Company and QSI entered into another letter agreement
revising the payment schedule set forth in the May 21, 1996 letter agreement
applicable to the payment of the indebtedness owed to the Company by QSI other
than the unpaid portion of the exclusivity fee. Under the revised schedule, the
full amount of such indebtedness is to be paid by an initial payment of $125,000
on or before April 21, 1997, and a second payment of $200,000 upon the closing
of a proposed financing in June 1997 or on January 1, 1998, whichever first
occurs. The Company is also entitled to receive 15% of any other financing
obtained by QSI in the interim as well as interest at the rate of 10% per annum
on the unpaid amount of such indebtedness from July 1, 1997. The letter
agreement also provides for the continuation of QSI's payment of the exclusivity
fee in accordance with the earlier letter agreements as well as the payment of
$11,108 by April 21, 1997, for headset products sold by the Company to QSI in
1996. In the event of a default in QSI's timely payment of any of the amounts
specified in the April 9, 1997 letter agreement, the Company has the right to
cause the termination of the Master Agreement and all rights granted by QSI
thereunder upon 10 days notice of termination to QSI.
As of December 31, 1998, QSI owes the Company $239,000, which is fully
reserved, for the exclusivity fee, rent and engineering services.
<PAGE>
Other Parties
The President and Chief Executive Officer, who is also a stockholder of the
Company, receives an incentive bonus equal to 1% of the cash received by the
Company upon the execution of agreements or other documentation evidencing
transactions with unaffiliated parties. For the year ended December 31, 1997 and
1998, approximately $243,000 and $206,000 was incurred in connection with this
arrangement.
During 1996, 1997 and 1998, the Company purchased $0.6 million, $0.7 million
and $0.2 million, respectively, of products from its various manufacturing joint
venture entities.
11. Income Taxes:
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Accordingly, deferred tax assets and liabilities are established for temporary
differences between tax and financial reporting bases of assets and liabilities.
A valuation allowance is established when the Company determines that it is more
likely than not that a deferred tax asset will not be realized. The Company's
temporary differences primarily result from depreciation related to machinery
and equipment, compensation expense related to warrants, options and reserves.
The adoption of the aforementioned accounting standard had no effect on
previously reported results of operations.
At December 31, 1998, the Company had available net operating loss
carryforwards of approximately $85.8 million and research and development credit
carryforwards of $1.6 million for federal income tax purposes which expire as
follows:
(in thousands of dollars)
Research and
Net Operating Development
Year Losses Credits
---------------- ---------------
1999 $ 151 $ --
2000 129 --
2001 787 --
2002 2,119 --
2003 1,974 --
2004 1,620 --
2005 3,870 141
2006 1,823 192
2007 6,866 118
2008 13,456 321
2009 16,293 413
2010 9,415 61
2011 9,051 67
2012 4,902 (1) 267
2018 13,314 (2)
---------------- ----------------
Total $85,770 $1,580
================ ================
(1) Includes approximately $1.2 million net operating loss relating to NCT
Audio Products, Inc.
(2) Includes approximately $4.4 million net operating loss relating to NCT
Audio Products, Inc.
The Company's ability to utilize its net operating loss carryforwards may be
subject to an annual limitation. The difference between the statutory tax rate
of 34% and the Company's effective tax rate of 0% is due to the increase in the
valuation allowance of $3.3 million, $3.0 million and $1.4 million in 1996, 1997
and 1998, respectively.
<PAGE>
The types of temporary differences that give rise to significant portions of
the deferred tax assets and the federal and state tax effect of those
differences as well as federal net operating loss and research and development
credit at December 31, 1997 and 1998 were as follows:
(in thousands of dollars)
-------------------------
1997 1998
--------- ----------
Accounts receivable $ 207 $ 157
Inventory 191 173
Property and equipment 68 68
Accrued expenses 69 65
Stock compensation 2,698 2,711
Other 299 349
--------- ----------
Total temporary differences $ 3,532 $ 3,523
Federal net operating losses 26,149 27,258
Federal research and development
credits 1,313 1,580
--------- ----------
$ 30,994 $ 32,361
Less: Valuation allowance (30,994) (32,361)
--------- ----------
Deferred taxes $ - -
========= ==========
12. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunale di Milano, Milano, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
Company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira; and (vi) order the Company to pay
damages for the harm done to Mr. Valerio's image for an amount such as the judge
shall deem equitable and in any case for no less than 500 million Lira. The
Company has retained the Italian law firm Verusio e Cosmelli, Giovanni Verusio,
Esq., a member of that firm, as special litigation counsel to the Company in its
defense of this suit. On March 6, 1996, the Company, through its Italian
counsel, filed a brief of reply with the Tribunal of Milan setting forth the
Company's position that: (i) the Civil Tribunal of Milan is not the proper venue
for the suit, (ii) Mr. Valerio's claim is groundless since the parties never
entered into an agreement, and (iii) because Mr. Valerio is not enrolled in the
official Register of Agents, under applicable Italian law Mr. Valerio is not
entitled to any compensation for his alleged activities. . A preliminary hearing
before the Tribunal was held on May 30, 1996, certain pretrial discovery has
been completed and a hearing before a Discovery Judge was held on October 17,
1996. Submission of the parties' final pleadings were to be made in connection
with the next hearing which was scheduled for April 3, 1997. On April 3, 1997,
the Discovery Judge postponed this hearing to May 19, 1998, due to a
reorganization of all proceedings before the Tribunal of Milan. At the hearing
on May 19, 1998, the Discovery Judge established dates for the parties to submit
final pleadings and set September 22, 1998 as the date to send the case before
the Tribunal of Milan sitting in full bench. As of the date hereof the Company
has not been informed of any decision of the Tribunal. In the opinion of
management, after consultation with outside counsel, resolution of this suit
should not have a material adverse effect on the Company's financial position or
operations. However, in the event that the lawsuit does result in a substantial
final judgment against the Company, said judgment could have a severe material
effect on quarterly or annual operating results.
By a letter dated September 9, 1997, outside counsel to Andrea Electronics
Corporation ("AECorp.") notified the Company that AECorp. believed the Company's
use of the term "ANR READY" constituted the use of a trademark owned by AECorp.
The Company has also been informed by representatives of existing and/or
potential customers that AECorp. has made statements claiming the Company's
manufacture and/or sale of certain in-flight entertainment system products may
infringe a patent owned by AECorp. On March 25, 1998, the Company received from
AECorp.'s intellectual property counsel a letter dated March 24, 1998,
announcing and notifying the Company of the issuance of U.S. patent Number
5,732,143 to AECorp. and enclosing a copy of the patent. The subject letter
appears to be one of notice and information and did not contain any claim of
infringement. Following that date, additional correspondence was exchanged
between Company Counsel and counsel to AECorp. The Company again was informed by
representatives of existing, and/or potential customers that AECorp. was
continuing to make statements inferring that the Company's manufacture and/or
sale of certain in-flight entertainment system products may infringe patents
owned by AECorp. On October 9, 1998 the Board of Directors of the Company
authorized the commencement of litigation against AECorp. On November 17, 1998
the Company and NCT Hearing filed a complaint in the United States District
Court, Eastern District of New York against Andrea Electronics Corporation
("AECorp.") requesting that the Court enter judgment in their favor as follows:
(i) declare that the two subject AECorp. patents and all claims thereof are
invalid and unenforceable and that the Company's products do not infringe any
valid claim of the subject AECorp. patents; (ii) declare that the subject
AECorp. patents are unenforceable due to their misuse by AECorp.; (iii) award
compensatory damages in an amount of not less than $5,000,000 as determined at
trial and punitive damages of $50,000,000 for AECorp.'s tortious interference
with prospective contractual advantages of the Company; (iv) enjoin AECorp. from
stating in any manner that the Company's products, or the use of the Company's
products infringe on any claims of the subject AECorp. patents; and (v) award
such other and further relief as the Court may deem just and proper. On or about
December 30, 1998, AECorp. filed its Answer and Counterclaims against the
Company and NCT Hearing. In its answer, AECorp. generally denies the Company's
and NCT Hearing's allegations, asserts certain procedural affirmative defenses
and brings counterclaims against the Company and NCT Hearing alleging that the
Company has: (i) infringed the two subject AECorp. patents and AECorp.'s "ANR
Ready" mark; (ii) violated the Lanham Act through the Company's use of such
mark; and (iii) unfairly competed with AECorp. through the use of such mark. On
or about January 26, 1999, the Company and NCT Hearing filed a Reply to
AECorp.'s counterclaims generally denying AECorp.'s counterclaims, asserting
certain affirmative defenses to AECorp.'s counterclaims and requesting that: (i)
the counterclaims be dismissed with prejudice; (ii) the Court enter judgment
that the term "ANR Ready" is not a valid trademark; (iii) the Court enter
judgment that the Company and NCT Hearing have not infringed any trademark right
of AECorp.; (iv) the Court enter judgment that the Company and NCT Hearing have
not engaged in any form of federal or state statutory or common law unfair
competition; (v) the Court enter judgment that AECorp. is precluded from
recovery of any claim of right to the term "ANR Ready" by the equitable doctrine
of estoppel; (vi) the Court enter judgment that AECorp. is precluded from
recoving any damages from the Company and NCT Hearing by the equitable doctrine
of laches; (vii) the Court award the Company and NCT Hearing their costs and
reasonable attorneys' fees; and (viii) the Court enter judgment granting the
relief requested in the Company's and NCT Hearing's complaint as well as such
other and further relief as the Court deems just and proper. In the opinion of
management, after consultation with outside counsel, resolution of this suit
should not have a material adverse effect on the Company's financial position or
operations. However, in the event that the lawsuit does result in a substantial
final judgment against the Company, said judgment could have a material effect
on quarterly or annual operating results.
On September 16, 1997, Ally Capital Corporation ("Ally") filed suit against
the Company, John J. McCloy, II, Michael J. Parrella, Jay M. Haft, and Alastair
J. Keith in the United States District Court for the District of Connecticut
(the "District Court"). Mr. McCloy is a Director of the Company. Mr. Parrella is
the President and Chief Executive Officer of the Company as well as a Director
of the Company. Mr. Haft is a Director of the Company and Chairman of the Board
of Directors. Mr. Keith is a former Director of the Company. The summons and
complaint in this suit were served on the Company on January 16, 1998. Ally
purports to be a creditor of ANVT. On September 14, 1994, the Company acquired
certain assets of ANVT. Specifically, the Company acquired ANVT's patented and
unpatented intellectual property, the rights and obligations under a defined
list of agreements between ANVT and other parties relating to existing or
potential joint ventures licensing agreements and other business relationships,
and certain items of office and laboratory equipment. For these assets, the
Company paid ANVT two hundred thousand dollars ($200,000.00) and issued ANVT two
million (2,000,000) shares of the Company's common stock. Count 1 of the
complaint alleges misrepresentation and deceit with respect to matters which
allegedly were relevant to the ANVT transaction. Count 2 alleges negligent
misrepresentation with respect to the same facts. Count 3 alleges unfair and
deceptive trade practices in violation of Connecticut General Statutes
ss.42-110a et sec. consisting of the actions described in Counts 1 and 2. In the
complaint, Ally requests actual and punitive damages together with costs and
attorneys fees under Count 1; actual damages together with costs and attorney
fees with respect to Count 2; and, actual damages, treble damages and costs and
attorney fees with respect to Count 3. Ally also requests such other further
relief as may be just. It is not certain from the complaint what Ally is
claiming as actual damages; although, Ally does state that its deficiency claim
against ANVT as of August, 1994, was approximately six hundred twenty-one
thousand dollars ($621,000.00) and that under the terms of the settlement
agreement between Ally and ANVT, Ally is entitled to receive up to an additional
six hundred three thousand eight hundred ninety-one dollars and ninety-seven
cents ($603,891.97) from certain earn-out payments under the asset purchase
agreement between ANVT and the Company. It is not clear whether Ally's
deficiency claim against ANVT was calculated as being in addition to the value
of the common stock of the Company which Ally received. The Company, through its
special litigation counsel, obtained an extension of the time in which it must
answer the complaint to March 4, 1998. On March 4, 1998, the Company, through
such counsel, filed with the District Court a motion to dismiss the complaint
or, in the alternative, to join necessary parties. On March 16, 1998, Ally filed
a notice of voluntary dismissal as to the individual defendants, Messrs McCloy,
Parrella, Haft and Keith. On March 25, 1998, Ally filed its opposition to the
Company's motion to dismiss. On July 15, 1998 the Company paid plaintiff, Ally,
twenty-five thousand ($25,000) dollars in settlement of the suit which was
dismissed on behalf of all defendants with prejudice and without costs on July
16, 1998.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. The summons and complaint alleges the Company breached, and Mr.
Parrella interfered with, a purported contract entered into "in 1996" between
the Company and SCI under which SCI was to be paid commissions by the Company
when the Company received capital from investors who purchased debentures or
convertible preferred stock of the Company during a period presumably commencing
on the date of the alleged contract and allegedly extending at least to May 1,
1998. In this regard, the complaint alleges that SCI by virtue of a purported
right of first refusal that the Company did not honor, is entitled to
commissions totaling $1,500,000 in connection with the Company's sale of
$13,300,000 of preferred stock and a subsidiary of the Company's sale of
$4,000,000 of stock convertible into stock of the Company. In the complaint SCI
demands judgment against the Company for compensatory damages of $1,673,000,
punitive damages of $50,000 and attorneys' fees of $50,000 and demands judgment
against Mr. Parrella for compensatory damages of $150,000, punitive damages of
$500,000 and attorneys' fees of $50,000 as well as unspecified other appropriate
relief. On July 23, 1998 the Company and Mr. Parrella filed a motion to strike
the complaint or in the alternative, to dismiss the tortious interference with
contract claim and the punitive damages claim. On or about August 26, 1998
plaintiffs filed an amended complaint and a response to the Company's and Mr.
Parrella's motion to strike. On September 15, 1998 the Company and Mr. Parrella
filed a motion to strike the amended complaint. On or about September 25, 1998
the Company and Mr. Parrella served the plaintiff with their first request for
the production of documents. On November 12, 1998, the Court granted the
Company's and Mr. Parrella's motion to dismiss the tortious interference with
contracts claim and the punitive damages claim. On or about November 25, 1998,
SCI filed a second amended complaint, which abandoned the punitive damages claim
and the claim against Mr. Parrella. In the opinion of management, after
consultation with outside counsel, resolution of this suit should not have a
material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a material effect on
quarterly or annual operating results.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott & Co.,
Inc. ("AWC") and the Company in the United States District Court, Southern
District of New York. In the complaint, Mellon demands judgment against AWC and
the Company in the amount of $326,000 by reason of its having paid each of AWC
and the Company such sum when acting as escrow agent for the Company's private
placement of securities with certain institutional investors identified to the
Company by AWC. On or about July 27, 1998 AWC filed its Answer, Counterclaim and
Cross-claim requesting: (i) dismissal of Mellon's Amended Complaint against AWC;
(ii) commissions in the amount of $688,000 to be paid by the Company to AWC;
(iii) issuance to AWC of 784,905 shares of the Company's common stock registered
for resale under the Securities Act of 1933, as amended; (iv) a declaration that
AWC is entitled to retain the $326,000 sought by Mellon; and (v) delivery of a
warrant to purchase 461.13 shares of common stock of NCT Audio. On or about
August 20, 1998 the Company filed its reply to AWC's cross-claims. Discovery is
currently taking place in this action. In the opinion of management, after
consultation with outside counsel, resolution of this suit should not have a
material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a material effect on
quarterly operating results.
On December 15, 1998, Balmore Funds, S.A. and Austost Anstalt Schaan filed
suit against the Company's subsidiary, NCT Audio , and the Company in the
Supreme Court of the State of New York County of New York. The complaint alleges
an action for breach of contract, common law fraud, negligent misrepresentation,
deceptive trade practices under Section 349 of the General Business Law of the
State of New York, and money had and received, all arising out of NCT Audio's
and the Company's alleged unlawful conduct in connection with an agreement
entered into with plaintiffs for the sale of shares of common stock of NCT Audio
to the plaintiffs in a private placement in December 1997. In this regard, the
complaint alleges that: (i) NCT Audio breached an alleged agreement with
plaintiffs to register shares of NCT Audio's common stock purchased by
plaintiffs or, in the alternative, shares of the Company's common stock
exchangeable for such shares of NCT Audio's common stock under certain
circumstances and to pay penalties set forth in the alleged agreement; (ii) that
NCT Audio made representations that were materially false and misleading through
its facsimiles of non-negotiated agreements as substitutions for the alleged
contract between the parties; (iii) that NCT Audio and the Company acted
negligently and violated duties of full, fair and complete disclosure to the
plaintiffs; (iv) that NCT Audio and the Company engaged in deceptive trade
practices under Section 349 of the New York General Business Law; and (v) that
as a result thereof, NCT Audio and the Company possess money that in equity and
good conscience should not to be retained by NCT Audio and the Company. In the
complaint the plaintiffs demand judgment against NCT Audio and the Company: (i)
for damages in an amount to be determined but not less than $1,819,000; (ii) for
punitive damages in the amount of $3,000,000; (iii) requiring NCT Audio and the
Company to register the shares of common stock of NCT Audio held by the
plaintiffs; (iv) alternatively, rescission with the return of plaintiffs'
$1,000,000 plus interest; (v) for treble damages, reasonable attorney's fees and
costs pursuant to Section 349 and 350 of the New York General Business Law; and
(vi) such other and further relief as the Court may deem just and proper. On
January 14, 1999, NCT Audio and the Company filed removal papers to move the
suit to the United States District Court for the Southern District of New York
and on January 22, 1999, NCT Audio and the Company filed with that Court
Defendants' Answer, Affirmative Defenses, Counterclaims and Third-Party
Complaint. In the opinion of management, after consultation with outside
counsel, resolution of this suit should not have a material adverse effect on
the Company's financial position or operations. However, in the event that the
lawsuit does result in a substantial final judgment against the Company, said
judgment could have a severe material effect on quarterly or annual operating
results.
The Company believes there are no other patent infringement litigations,
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on financial position and results of operations.
13. Commitments and Contingencies:
The Company is obligated for minimum annual rentals (net of sublease income)
under operating leases for offices, warehouse space and laboratory space,
expiring through April 2007 with various renewal options, as follows:
(in thousands
of dollars)
----------------------- ----------------
Year Ending
December 31, Amount
----------------------- ----------------
1999 $ 679
2000 669
2001 523
2002 63
2003 63
Thereafter 203
================
Total $2,200
================
Rent expense (net of sublease income) was $0.6 million, $0.4 million and $0.6
million for each of the three years ended December 31, 1996, 1997 and 1998,
respectively.
In April, 1996, the Company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, certain
health care benefits to employees and directors of the Company's United States
operations. The Company administers this modified self-insured Benefit Plan
through a commercial third party administrative health care provider. The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million while combined individual and family benefit exposure in
each Benefit Plan fiscal year is limited to $35,000. Benefit claims in excess of
the above mentioned individual or the maximum aggregate stop loss are covered by
a commercial third party insurance provider to which the Company pays a nominal
premium for the subject stop loss coverage. The Company records benefit claim
expense in the period in which the benefit claim is incurred. As of March 11,
1999, the Company was not aware of any material benefit claim liability.
On September 16, 1994, the Company acquired the patents, technology, other
intellectual property and certain related tangible assets of ANVT. In addition,
ANVT is entitled to a future contingent earn-out based on revenues generated by
the ANVT contracts assigned to the Company as well as certain types of
agreements to be entered into by the Company with parties previously having a
business relationship with ANVT. Future contingent payments, if any, will be
charged against the associated revenues. As of the period ended December 31,
1998, no such contingent earn-out or payments were due ANVT.
As of December 31, 1998, the Company is obligated under various agreements
for minimum royalty payments as follows: $295,000, $335,000, $220,000, $240,000
and $60,000 for 1999, 2000, 2001, 2002 and each year thereafter.
In connection with the acquisition of Advancel the Company entered into
employment agreements with four employees. The Company is obligated under these
agreements for $471,500 per annum through 2002.
<PAGE>
14. Business Segment Information:
<TABLE>
<CAPTION>
(in thousands of dollars)
Advancel Total Grand
Audio Hearing Communications Europe Logic Corp Segments Other Total
------- ------- -------------- ---------- ---------- --------- ------- ----------
1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales - External $ 383 $ 1,191 $ 780 $ 28 $ 69 $ 2,451 $ 71 $ 2,522
Net Sales - Other
Operating Segments 2 23 6 1,113 - 1,144 (1,144) -
License Fees and royalties 350 86 18 - 200 654 148 802
Interest Income 110 - - 15 - 125 313 438
Depreciation/Amortization 5 - - 38 8 51 979 1,030
Operating Income (Loss) (4,359) (3,697) (4,326) (12) (658) (13,052) (1,131) (14,183)
Segment Assets 6,752 2,449 301 218 922 10,642 4,823 15,465
Capital Expenditures 33 8 21 102 34 198 350 548
1997
Net Sales - External $ 4 $ 1,709 $ 127 $ 67 $ - $ 1,907 $ 181 $ 2,088
Net Sales - Other
Operating Segments - - - 847 - 847 (847) -
License Fees 3,000 - 345 - - 3,345 285 3,630
Interest Income - - - 18 - 18 99 117
Depreciation/Amortization - - - 44 - 44 855 899
Operating Income (Loss) 785 (3,618) (2,582) (411) - (5,826) (4,022) (9,848)
Segment Assets 2,333 1,227 397 301 - 4,258 13,103 17,361
Capital Expenditures 12 5 13 26 - 56 188 244
1996
Net Sales - External $ 42 $ 1,333 $ 27 $ 407 $ - $ 1,809 $ 117 $ 1,926
Net Sales - Other
Operating Segments - - - 355 - 355 (355) -
License Fees - 2 - - - - 1,236 1,238
Interest Income - - - - - - 28 28
Depreciation/Amortization - - - 63 - 63 937 1,000
Operating Income (Loss) (1,451) (2,492) (2,266) (912) - (7,121) (3,704) (10,825)
Segment Assets - 1,781 108 515 - 2,404 3,477 5,881
Capital Expenditures 15 13 2 71 - 101 85 186
</TABLE>
Audio:
NCT Audio is engaged in the design, development, and marketing of products
which utilizes innovative FPT technology. The products available by NCT Audio
are the Gekko(TM) flat speaker and ArtGekko(TM) printed grille collection. The
Gekko(TM) flat speaker is marketed primarily to the home audio market, with
potential in many other markets including the professional audio systems market,
the automotive audio aftermarket, the aircraft industry, other transportation
markets, as well as the multimedia markets. The principal customers are end
users, automotive OEM's and manufacturers of integrated cabin management
systems.
Hearing:
NCT Hearing designs, develops and markets ANR headset products to the
communications headset market and the telephony headset market. The products
consist of the NoiseBuster(R) product line and the ProActive(R) product line.
The NoiseBuster(R) products consist of the NoiseBuster Extreme!(TM), a consumer
headset, the NB-PCU, a headset used for in-flight passenger entertainment
systems and communications headsets for cellular, multimedia and telephony. The
ProActive(R) products consist of noise reduction headsets and communications
headsets for noisy industrial environments. The majority of Hearing's sales are
in North America. Principal customers consist of end-users, retail stores, OEMs
and the airline industry.
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.
<PAGE>
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 February 9, 1999 NCT Audio and NXT expanded the Cross License Agreement
dated September 27, 1997 to increase NXT's fields of use to include aftermarket
ground-based vehicles and aircraft sound systems and increased the royalties due
NCT Audio from NXT to 10% from 6% and increased the royalties due NXT from NCT
Audio to 7% from 6%. In consideration for granting NXT these expanded licensing
rights, NCT Audio received a $0.5 million license fee. Also on February 9, 1999,
NCT Audio and NXT amended the Master License Agreement to include a minimum
royalty payment of $160,000 in 1999, to be paid in equal quarterly installments.
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Top Source Technologies, Inc.:
We have audited the accompanying balance sheets of Top Source Automotive, Inc.
(a Michigan corporation) as of September 30, 1998, and 1997, and the related
statements of operations and cash flows for each of the three years in the
period ended September 30, 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 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Top Source Automotive, Inc. as
of September 30, 1998 and 1997 and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
West Palm Beach, Florida
January 7, 1999
<PAGE>
<TABLE>
<CAPTION>
TOP SOURCE AUTOMOTIVE, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 and 1997
- - -------------------------------------------------------------------------------
ASSETS 1998 1997
----------- -----------
Current Assets:
<S> <C> <C>
Accounts receivable trade $ 1,599,456 $ 2,198,633
Inventories 349,320 764,788
Prepaid expenses 79,186 64,552
Other 21,988 37,619
----------- -----------
Total current assets 2,049,950 3,065,592
Property and equipment, net 234,960 456,938
Manufacturing and distribution rights, net 147,876 157,013
=========== ===========
TOTAL ASSETS $ 2,432,786 $ 3,679,543
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 245,596 $ 615,420
Accrued liabilities 42,044 261,969
----------- -----------
Total current liabilities 287,640 877,389
Commitments and contingencies (Note 6 )
Stockholders' equity:
Common stock-$.10 par value, 1,000 shares
authorized, issued and outstanding in 1998
and 1997, respectively 100 100
Additional paid-in capital 394,821 394,821
Retained earnings 5,655,589 5,024,029
Receivable from parent (3,905,364) (2,616,796)
------------ ------------
Total stockholders' equity 2,145,146 2,802,154
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,432,786 $ 3,679,543
============ ============
The accompanying notes to financial statements are an integral part of these
balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOP SOURCE AUTOMOTIVE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- - ------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Product sales $ 10,815,205 $16,580,270 $16,102,523
Cost of product sales 7,417,402 11,197,664 10,749,431
--------------------------------------------------
Gross profit 3,397,803 5,382,606 5,353,092
--------------------------------------------------
Expenses:
General and administrative 654,561 674,265 660,198
Selling and marketing 448,393 354,136 369,292
Overhead allocation from parent 1,100,000 1,100,000 1,100,000
Depreciation and amortization 68,850 76,573 94,080
Restructuring expense 15,471 51,433 -
Research and development 38,871 35,038 35,689
--------------------------------------------------
Total expenses 2,326,146 2,291,445 2,259,259
--------------------------------------------------
Income from operations 1,071,657 3,091,161 3,093,833
Other income (expense):
Interest income 306 1,208 2,489
Interest expense (1,831) (2,660) (1,805)
Other income (expense), net (24,244) (4,143) 44,775
--------------------------------------------------
Net other income (expense) (25,769) (5,595) 45,459
--------------------------------------------------
Income before income taxes 1,045,888 3,085,566 3,139,292
Income tax expense (414,328) (1,173,092) (1,242,359)
--------------------------------------------------
Net income $ 631,560 $ 1,912,474 $ 1,896,933
==================================================
The accompanying notes to financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOP SOURCE AUTOMOTIVE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
---------------------------------------------
1998 1997 1996
---------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 631,560 $ 1,912,474 $ 1,896,933
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 278,175 323,444 339,783
Amortization 47,055 45,413 44,737
Loss on disposal of equipment 6,188 33,788 23,722
Decrease (increase) in accounts
receivable, net 599,177 1,271,344 (690,613)
Decrease (increase) in inventories 415,468 (293,877) (2,742)
Decrease (increase) in prepaid expenses (14,634) 69,983 (89,660)
Decrease (increase) in other current
assets 15,631 11,365 (23,821)
Increase (decrease) in accounts payable (369,824) (620,777) 330,267
Increase (decrease) in accrued
liabilities (219,925) 6,748 47,881
----------------------------------------------
Net cash provided by operating activities 1,388,871 2,759,905 1,876,487
----------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment,
net (62,385) (357,940) (516,968)
Reimbursement of tooling costs - 63,364 465,222
Additions to manufacturing and
distribution rights, net (37,918) (2,706) (14,787)
-----------------------------------------------
Net cash used in investing activities (100,303) (297,282) (66,533)
-----------------------------------------------
FINANCING ACTIVITIES:
Increase in receivable from Parent (1,288,568) (2,462,623) (1,809,954)
-----------------------------------------------
Net cash used in financing activities (1,288,568) (2,462,623) (1,809,954)
-----------------------------------------------
Net increase (decrease) in cash and cash
equivalents $ - $ - $ -
===============================================
The accompanying notes to financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
TOP SOURCE AUTOMOTIVE, INC.
- - -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Top Source Automotive, Inc. (the "Company" or "TSA") is focused on
developing and assembling a patented automotive overhead mounted speaker system,
which is called the Overhead Speaker System. The Company is a wholly owned
subsidiary of Top Source Technologies, Inc. (the "Parent Company")
Revenue Recognition - Revenue is currently derived from sales of the OHSS for
both production line and automotive dealership installed units.
Inventories - Inventories are stated at the lower of cost or market and are
valued by the first-in, first-out (FIFO) method.
Fair value of Financial Instruments - The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities
approximates fair value.
Property and Equipment - Property and equipment are stated at cost. Repairs and
maintenance costs are charged to expense as incurred. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, or the lease term if shorter. When property or
equipment is retired or otherwise disposed of, the cost less related accumulated
depreciation is removed from the accounts and the resulting gains or losses are
included in other expense in the accompanying statements of operations.
Manufacturing and Distribution Rights and Patents - These assets are valued at
the lower of cost or net realizable value and are being amortized using the
straight-line method over the terms of the agreements or life of the patents,
ranging from ten to thirteen years.
Research and Development - The costs associated with research and development of
products and technologies are expensed as incurred.
Use of Estimates - The preparation of the 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 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.
2. STATEMENTS OF CASH FLOWS
There were no significant non-cash investing or financing activities for the
years ended September 30, 1998, 1997 and 1996.
<PAGE>
3. INVENTORIES
Inventories consisted of the following at September 30, 1998 and 1997:
1998 1997
Raw materials $247,538 $704,586
Finished goods 101,782 60,202
-------- --------
$349,320 $764,788
======== ========
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1998 and
1997:
Useful
Life (Years) 1998 1997
------------ ------------ ------------
Equipment 2-12 $ 305,813 $ 296,028
Computer equipment 3-4 292,273 274,583
Tooling 2 276,446 242,360
Furniture and fixtures 3-5 126,914 126,089
Vehicles and delivery equipment 3 47,124 60,230
Leasehold improvements 2-5 146,746 146,746
------------ ------------
1,195,316 1,146,036
Less: accumulated depreciation (960,356) (689,098)
------------ ------------
$ 234,960 $ 456,938
============ ============
Depreciation of tooling and production equipment incurred in manufacturing OHSS
in the amount of $256,380, $292,284, and $290,440 for the years ended September
30, 1998, 1997, and 1996, respectively, has been allocated to cost of sales as
it directly relates to the products sold.
5. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS
Manufacturing and distribution rights and patents consisted of the following at
September 30, 1998 and 1997:
Useful
Life (Years) 1998 1997
------------ ------------ ------------
Manufacturing rights 13 $ 58,438 $ 58,438
Distribution rights 13 437,501 437,501
Patents 10 111,223 73,305
------------ ------------
607,162 569,244
Less: accumulated amortization (459,286) (412,231)
$ 147,876 $ 157,013
============ ============
<PAGE>
5. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS (continued)
OHSS (Overhead Speaker System)
The Company has the exclusive right to produce and sell Pelo Sound products in
North, Central and South America and a non-exclusive right to produce and sell
the products in all other areas of the world, excluding Europe. The value of
these rights is being amortized over thirteen years, and has a remaining net
book value of $13,211 at September 30, 1998.
The Company has distribution rights acquired from B&R International Imports,
Corp. related to its Overhead Speaker System. The net book value of these
rights, which are being amortized over thirteen years, is $51,864 at September
30, 1998. The Company also has patents on the OHSS relating to improvements and
perfection's on the Overhead Speaker System. The value of these patents is being
amortized over ten years and has a remaining net book value of $82,801 at
September 30, 1998.
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancelable operating leases. Future
minimum rental commitments under these leases are as follows:
Fiscal Year Ending September 30:
1999 $191,100
2000 143,325
Total rental expense amounted to $197,482, $192,486 and $191,000 for the years
ended September 30, 1998, 1997, and 1996, respectively.
The Parent Company enacted a Retirement Salary Savings Plan (401(k)) (the
"Plan") effective October 1, 1993. All employees that were employed on October
1, 1993 were eligible to join the Plan. Otherwise, they will be eligible to
participate in the Plan if they have completed three months of service and have
attained the age of 21. The enrollment dates are the first day of each quarter.
The Company will match 25% of each dollar contributed by an employee to the Plan
on the first 6% of the salary deferral, not to exceed 1 1/2% of the employee's
total salary eligible under the Plan. The cost the Company incurred for matching
employee contributions and administrative costs during fiscal 1998, 1997, and
1996 was $9,282, $10,694, and $8,096, respectively.
<PAGE>
6. COMMITMENTS AND CONTINGENCIES (continued)
TSA is a co-borrower to the Parent Company's $5,000,000 credit facility ("Credit
Facility") with NationsCredit Commercial Corporation ("NationsCredit"). The
Credit Facility, which is secured by substantially all of the assets of the
Company, enables the Parent Company to borrow up to $5,000,000 based on certain
percentages of accounts receivable and inventory balances. The Credit Facility
allows for borrowing up to 85% of eligible accounts receivable and 50% of
inventory. The interest rate on this Credit Facility is 1-1/2% over the prime
rate and is payable monthly with a required minimum borrowing level of
$2,500,000 for fee calculation purposes. The Credit Facility calls for certain
financial covenants that, if not met, would cause a default under the Credit
Facility and increase the interest rate by 2% over current levels. As of
September 30, 1998, the covenant requiring the Parent Company's fiscal year
pre-tax loss, not to exceed certain levels, as defined in the Credit Facility
has not been met by the Parent Company. NationsCredit agreed to waive this
covenant through fiscal 1999. The Parent Company plans to repay the Credit
Facility in full upon the ultimate sale of TSA (See Note 10 Sale of Top Source
Automotive, Inc.). Upon payment of the Credit Facility, NationsCredit will
release the lien, which it holds on all of the assets of the Parent Company
including TSA's common stock and assets.
For accounting purposes, all amounts outstanding under the Credit Facility
appear on the financial statements of the Parent Company. Therefore, all amounts
drawn or repaid in connection with activity associated with TSA flow through
their intercompany account, which is non interest bearing, and is classified as
a receivable from parent which is a component of stockholders' equity. (See Note
9 Related Party Transactions)
7. INCOME TAXES
The Company's taxable results are included within the consolidated tax return of
the Parent Company for the years ended September 30, 1998, 1997, and 1996. The
provision for income taxes is based on the application of the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS No. 109") to the Company as if it were a separate taxpayer.
Accordingly, the income tax expense included in the accompanying statement of
operations includes both Federal tax at a statutory rate of 34% and state taxes.
Cash paid for state income taxes for the years ended September 30, 1998, 1997
and 1996 was approximately $59,000, $124,000 and $140,000 which primarily
related to state income tax expense.
8. CONCENTRATION OF CREDIT RISK
In fiscal 1998, the majority of the Company's overall revenue was derived from
one customer, an OEM, which accounted for 99% of the total business activity.
That same customer accounted for 99% of net sales in both 1997 and 1996. As of
September 30, 1998 the Company's receivable balance from this OEM customer was
approximately $1,598,612. The loss of this customer would have a material
adverse effect on the Company. Export sales in 1998, 1997 and 1996 were
insignificant.
<PAGE>
9. RELATED PARTY TRANSACTIONS
The Parent Company's corporate general and administrative costs not specifically
attributable to its operating subsidiaries have been allocated to TSA and its
other oil analysis subsidiary. Such costs are included in "overhead allocation
from parent" in the accompanying Statements of Operations and were approximately
$1,100,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
Management believes that the amounts allocated to the Company are no less
favorable to the Company than the expenses the Company would incur to obtain
such services on its own or from unaffiliated third parties.
In connection with the sale of substantially all of the assets and liabilities
of TSA as discussed in Note 10, management of the Company intends to treat the
receivable from the parent as an equity distribution. Accordingly, the
receivable from the parent has been shown as a separate line in Stockholders'
Equity as a reduction of stockholders' equity in the accompanying balance
sheets.
10. SALE OF TOP SOURCE AUTOMOTIVE, INC.
On August 14, 1998, the Parent Company executed a Definitive Asset Purchase
Agreement ("Agreement") with NCT Audio Products Inc., (the "Buyer"or "NCT"), a
subsidiary of the NCT Group, Inc. of Stamford, Connecticut (NASDAQ: "NCTI") to
purchase substantially all of the assets and liabilities of TSA.
Under the terms and subject to the conditions of the Agreement, on the closing
date (the "Closing" or the "Closing Date"), the Buyer agreed to purchase 100% of
the assets (the "Assets") and assume substantially all of the liabilities of TSA
for a minimum of $10,000,000. The purchase consideration of $10,000,000 consists
of a non-refundable deposit of $1,450,000 paid to TSA on June 10, 1998 ("Step
I"), $2,050,000, which was paid into escrow on July 30, 1998 and released to the
Parent Company (and became non-refundable) on December 15, 1998 as a result of
an affirmative shareholder approval from the Parent Company shareholders ("Step
II"), and the balance of $6,500,000 due at the Closing, which was to occur by
March 31, 1999 ("Step III"). Additionally, under the terms of the Agreement, TSA
could receive up to an additional $6,000,000 payable to the Parent Company in
cash expressly contingent upon the future earnings of the Buyer's subsidiary as
defined under the Agreement, for a two-year period following the Closing.
The consummation of the proposed transaction is subject to the satisfaction or
waiver of certain conditions including the Buyer obtaining the necessary
financing. As a result of the completion of Steps I and II of the transaction,
the Buyer became a 20% owner of the Common Stock of TSA. On January 7, 1999, the
Buyer of TSA's Assets, by virtue of not exercising its right to receive an
additional 15% minority stake in TSA maintained its exclusive right to complete
the remainder of the transaction by March 31, 1999. As a result, the Buyer will
remain as a 20% minority owner of TSA unless Step III of the transaction is
completed. On March 30, 1999, the Parent Company granted the Buyer an extension
until May 28, 1999 to complete the purchase of TSA. As consideration for this
extension, the Parent Company received a non-refundable fee from the Buyer of
$350,000. This extension fee consisted of $20,685 in cash, $125,000 of the
Buyer's minority interest in TSA earnings and a $204, 315 note payable due on
April 16, 1999 (the "Note") from the Buyer to TSA. Additionally, due to the
Buyer's failure to close the transaction by March 31, 1999, the Parent Company
received a penalty premium of $100,000 of the Buyer's convertible preferred
stock.
<PAGE>
10. SALE OF TOP SOURCE AUTOMOTIVE, INC. (continued)
If the Note is paid to TSA by April 16, 1999 and the transaction closes by May
28, 1999, then the Buyer will be allowed to apply the $350,000 extension fee as
a credit against the $6,500,000 due to be paid at closing. In the event the
closing occurs by May 28, 1999 and the Note is paid after April 16, 1999 but
before May 1, 1999, then $145,685 of the extension fee can no longer be applied
as a credit against the $6,500,000 due to be paid at closing.
In event the closing occurs by May 28, 1999 and the Note is not paid by April
30, 1999, then none of the $350,000 extension fee can be applied as a credit
against the $6,500,000 due to be paid at closing. In the event the closing does
not occur by May 28, 1999, irrespective of whether or not the Note has been paid
by April 16, 1999 or before April 30, 1999 then none of the $350,000 extension
fee can be applied as a credit against the $6,500,000 due to be paid at closing.
Additionally, if the closing does not occur by May 28, 1999, the buyer will
forfeit all minority earnings in TSA from June 1999 through May 2000.
If the transaction fails to close by May 28, 1999, the Parent Company will be
free to attempt to find another purchaser of TSA and the Buyer will be obligated
to sell its TSA shares to any such purchaser on the same terms and conditions as
the Company receives for its TSA Common Stock.
If the Buyer fails to complete Step III of the transaction, the Parent Company
will not receive the final payment of $6,500,000. This may have an adverse
effect on the short-term financial condition of the Parent Company.
In order to consummate the proposed transaction, the Parent Company must pay in
full its Credit Facility with NationsCredit. Upon payment of its Credit
Facility, NationsCredit will release the lien, which it holds on all of the
assets of the Company, and thus effectively cancel the Credit Facility.
<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 7th day of May, 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, Chief Executive May 7, 1999
----------------------- Officer and Director
Michael J. Parrella (Principal Executive Officer)
/s/ CY E. HAMMOND Senior Vice President and May 7, 1999
------------------------ Chief Financial Officer
Cy E. Hammond (Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Chairman of the Board May 7, 1999
------------------------ of Directors and Director
Jay M. Haft
/s/ JOHN J. McCLOY II Director May 7, 1999
------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director May 7, 1999
------------------------
Samuel A. Oolie
/s/ STEPHAN CARLQUIST Director May 7, 1999
------------------------
Stephan Carlquist
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE II
Board of Directors and Stockholders of
NCT Group, Inc.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements of NCT Group, Inc. (formerly Noise
Cancellation Technologies, Inc.) as of December 31, 1997 and 1998 and for each
of the years in the three-year period ended December 31, 1998 taken as a whole.
The information included on Schedule II is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole. Also, such schedule presents
fairly the information set forth therein in compliance with the applicable
accounting regulations of the Securities and Exchange Commission.
Richard A. Eisner & Company, LLP
New York, New York
March 11, 1999
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of
dollars)
- - ------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- - ------------------------------------------------------------------------------------
(1) (2)
Balance Changed Charged
at in to Balance
beginning costs other Deductions- at end
Description of and accounts- Deductions- of
period expenses describe describe period
- - ------------------------- -------- -------- --------- -------- --------
Year ended December 31,
1996:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful $119 $192 $(188) (2) $ - $123
accounts
======== ======== ========= ======== ========
Year ended December 31,
1997:
Allowance for doubtful $123 $130 $ (65) (2) $150 (3) $ 38
accounts
======== ======== ========= ======== ========
Year ended December 31,
1998:
Allowance for doubtful $ 38 $232 $ (42) (2) $ - $228
accounts
======== ======== ========= ======== ========
Year ended December 31,
1996:
Allowance for inventory $355 $ - $ (93) (1) $ - $262
obsolence
======== ======== ========= ======== ========
Year ended December 31,
1997:
Allowance for inventory $262 $210 $ - $ - $472
obsolence
======== ======== ========= ======== ========
Year ended December 31,
1998:
Allowance for inventory $472 $365 $(329) (1) $ - $508
obsolence
======== ======== ========= ======== ========
</TABLE>
Attention is directed to the foregoing accountants' reports and to the
accompanying Notes to Financial Statements.
(1) To write off reserves applied to prior year-end inventory.
(2) To write off fully reserved accounts receivable deemed uncollectible.
(3) To reduce reserve for accounts collected.
Exhibit 5
April 29, 1999
NCT Group, Inc.
1025 West Nursery Road
Suite 120
Linthicum, Maryland 21090
Re: Form S-1 Amendment No. 2 to the Registration Statement
on Form S-3 No. 333-64967
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 Form S-1 Amendment
No. 2 to the Registration Statement on Form S-3 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 of 27,786,991
shares of Common Stock of the Company (the "Resale Shares").
With respect to the Form S-1 Amendment No. 2 to the Registration Statement
on Form S-3, 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 Form S-1 Amendment No. 2 to the
Registration Statement on Form S-3 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
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in the Registration Statement on Form S-1 Amendment
No. 2 to Form S-3 of our report dated March 11, 1999 (with respect to Note 8
March 24, 1999), on our audits of the consolidated financial statements and
schedule of NCT Group, Inc. (formerly Noise Cancellation Technologies, Inc.)
(the "Company") 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
May 5, 1999
Exhibit 23(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Top Source Automotive, Inc.
As independent certified public accountants, we hereby consent to the use
of our reports (and to all references to our firm) included in or made a part of
this Registration Statement File No. 333-64967.
/s/ ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
May 5, 1999.
Exhibit 23(c)
[Peters Elworthy & Moore letterhead]
NCT Group, Inc.
1025 West Nursery Road
Suite 120 Our Ref: PRC/J
Linthicum
Maryland 21090 Date: 6 May 1999
USA
Dear Sirs
We consent to the incorporation by reference to the Registration Statement on
Form S-1 Amendment No. 2 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, FILED ON APRIL 1, 1999.
</LEGEND>
<CIK> 0000722051
<NAME> NCT GROUP, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 529
<SECURITIES> 0
<RECEIVABLES> 944
<ALLOWANCES> 228
<INVENTORY> 3320
<CURRENT-ASSETS> 4750
<PP&E> 11493
<DEPRECIATION> 7615
<TOTAL-ASSETS> 15465
<CURRENT-LIABILITIES> 5937
<BONDS> 0
0
9240
<COMMON> 1563
<OTHER-SE> 4662
<TOTAL-LIABILITY-AND-EQUITY> 15465
<SALES> 2097
<TOTAL-REVENUES> 3324
<CGS> 2235
<TOTAL-COSTS> 2510
<OTHER-EXPENSES> 14997
<LOSS-PROVISION> 232
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (14183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14183)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
