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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED December 31, 1999
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Commission File Number: 0-18267
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NCT Group, Inc. (formerly known as Noise Cancellation Technologies, Inc.)
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(Exact name of registrant as specified in its charter)
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Delaware 59-2501025
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(State or other jurisdiction of (I.R.S. Employer or
incorporation organization) Identification No.)
1025 West Nursery Road, Suite 120, Linthicum, MD. 21090
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(Address of principal executive offices) (Zip Code)
(410) 636-8700
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(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.01
par value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
nonaffiliates of the Registrant was $301.4 million as of March 31, 2000.
The number of shares outstanding of the Registrant's common stock is 275,068,921
as of March 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual
Meeting of Stockholders of Registrant to be filed with the
Securities and Exchange Commission on or before
April 29, 2000, is incorporated by reference into Part III of
this Form 10-K.
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PART I
ITEM 1. BUSINESS
A. GENERAL DEVELOPMENT OF BUSINESS
NCT Group, Inc. ("NCT" or the "Company") is a leading technology developer
with an extensive portfolio of proprietary algorithms and a wide variety of
product offerings for consumer, commercial and industrial applications. The
Company specializes in the utilization of sound and signal waves to reduce
noise, improve signal-to-noise ratio and enhance sound quality. Commercial
application of the Company's technologies is comprised of a number of product
offerings, including NoiseBuster(R) consumer and communications active noise
reduction ("ANR") headsets; ProActive(R) ANR industrial earmuffs and headsets;
Gekko(TM) flat speakers; and ClearSpeech(R) microphones, speakers and other
products. In addition to products, NCT's innovative algorithms are available for
licensing to manufacturers for use in commercial and consumer products.
During 1999, the Company focused its efforts on the development of
DistributedMedia.com, Inc. ("DMC"). DMC is a wholly-owned subsidiary of NCT
which was formed in November 1998. DMC is a new microbroadcasting media company
that delivers licensed CD-quality music as well as on-air and billboard
advertising to out-of-home commercial and professional venues via a digital
network of place-based micrbroadcasting stations, called Sight & Sound(TM). The
Sight & Sound(TM) system consists of a central control network that
communicates to a digital broadcast station, which plays music selections and
advertisements through flat panel speakers. The speaker grilles double as visual
billboards. The speakers will be provided by NCT Audio Products, Inc..
As of December 31, 1999, the Company and its business units currently hold
503 patents and related rights worldwide and an extensive library of know-how
and other proprietary technology. These patents allow the Company to develop
major product lines, which include:
- NoiseBuster(R) ANR communications headsets
- NoiseBuster(R) ANR consumer headphones
- ProActive(R) industrial/commercial ANR headsets
- Gekko(TM) flat speakers, frames, prints and subwoofers
- ClearSpeech(R) microphones, speakers and other products
- ClearSpeech(R) corporate intranet telephone software
The Company also markets its technologies through licensing to third
parties for fees and royalties. During 1999, the Company entered into a new
technology license agreement with Lernout & Hauspie Speech Products N.V.
("L&H"), has expanded its cross-license agreement with New Transducers Ltd.
("NXT" formerly known as Verity Group plc) and has received royalties pursuant
to several of its technology license agreements.
The Company's operating revenues are comprised of technology licensing fees
and royalties, product sales and engineering and development services.
Historically, the Company derived the
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majority of its revenues from engineering and development services and
technology licensing fees. As distribution channels are established and as
product sales, market acceptance and awareness of the commercial applications of
the Company's technologies build, revenues from technology licensing fees,
royalties and product sales are projected to fund an increasing share of the
Company's requirements. The revenues from these sources, if realized, will
reduce the Company's dependence on revenues from engineering and development
services. Total revenues for 1999 consisted of approximately 31% in product
sales, 19% in engineering and development services and 50% in technology
licensing fees and royalties.
The Company 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"), Ultra Electronics Ltd. ("Ultra"), The Charles Stark
Draper Laboratory, Inc. ("Draper"), Oki Electric Industry Co., Ltd. ("Oki") 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" for further discussion.
An important factor for the Company's continuing development of its
technology is its ability to recruit and retain key personnel. As of December
31, 1999, the Company had 75 employees, including 37 engineers and associated
technical staff members.
The Company was incorporated in Nevada on May 24, 1983. In April 1985, the
Company moved its corporate domicile to Florida and assumed its former name,
Noise Cancellation Technologies, Inc. In January 1987, following the assumption
of control of the Company by the present management, the Company's state of
incorporation was changed 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.
effective October 21, 1998.
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's DMC operations
are located in Stamford, Connecticut.
The Company is organized into strategic business units, each of which is
targeted to the commercialization of its own products in specific markets. These
include its subsidiaries, NCT Audio Products, Inc. ("NCT Audio"), NCT Hearing
Products, Inc. ("NCT Hearing"), Advancel
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Logic Corporation ("Advancel"), and DistributedMedia.com, Inc. The Company also
operates a division, NCT Communications. Refer to Note 17 - "Notes to Financial
Statements" for further information about the Company's business segments.
B. BUSINESS STRATEGY
The Company's strategy is to leverage off its existing base of proprietary
technology by expanding into areas outside of traditional active noise and
vibration control to reach markets having greater opportunities such as
communications, audio and microbroadcasting media. The acquisition of certain
assets and all of the intellectual property of Active Noise and Vibration
Technologies, Inc. ("ANVT") in 1994 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 noise cancellation technology (the "Chaplin Patents") to unaffiliated
third parties (see C. "Technology"). The Company can license the Chaplin Patents
directly to unaffiliated third parties, which provides the Company with a
greater ability to earn technology licensing fees and royalties from such
patents. Thus, while the Company continues to focus on products that the Company
believes will generate near term revenue, it is increasing its emphasis on
technology licensing fees and royalties. Further, the Company is working
continuously to lower the cost of its products and improve their technological
performance.
C. TECHNOLOGY
Active Noise 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.
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ACTIVE NOISE REDUCTION
[WAVE GRAPHIC]
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 SMM as a technically
superior and less expensive alternative to currently available electret
microphones. The SMM has potential applications not only in the audible range of
frequencies, but in the ultrasonic range as well.
ClearSpeech(R) Adaptive Speech Filter ("ClearSpeech(R)" and "ASF"). 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 has
added an acoustic echo cancellation algorithm, which runs on various platforms
including personal computers ("PCs") and fixed floating digital signal
processors ("DSP").
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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.
Java Processor Core. Advancel 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. The potential for
applications consists of the next generation home appliances and automotive
applications, manufacturers of smartcard processors, hearing aids and mobile
communications devices.
Flat Panel Transducer ("FPT"). 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,
automotive and aircraft applications.
Digital Broadcasting Station System ("DBSS") Software. DBSS software is
being utilized by DMC to deliver customized music programming to each site.
Advertising is scheduled and updated via a communications link such as the
Internet. The software also performs status checking, play log functions and
other diagnostic functions made available to the central control network.
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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.
The Company purchased certain assets of ANVT in 1994, which included all of
ANVT's intellectual property rights. Among the ANVT intellectual property rights
were ANVT's interest in the ten 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. In addition, 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.
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In 1994, the Company obtained a license for the exclusive rights to the SMM
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
are used in the Company's ClearSpeech(R) product line.
Since 1996, the Company has been granted 311 new patents.
The Company holds or has rights to 313 inventions as of December 31, 1999,
including 113 United States patents and over 390 corresponding foreign patents
for a total of 503 patents and related rights. The Company has pending 166 U.S.
and foreign patent applications. NCT's engineers have made 151 invention
disclosures for which the Company is in the process of preparing patent
applications. The Company's patents have expiration dates ranging from 2000
through 2016, with the majority occurring during or after 2009.
The Company has been granted the following trademarks:
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MARK FIELD OF USE
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NCT logo Company logo
NoiseBuster(R) headsets
NoiseEater(R) HVAC systems
ClearSpeech(R) adaptive speech filter products
VariActive(R) headsets
ProActive(R) headsets
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The Company has also applied for 12 trademarks including:
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MARK FIELD OF USE
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Gekko(TM) flat audio speakers
ArtGekko(TM) flat audio speakers
Sweet Space(TM) flat audio speakers
Top Down Surround Sound(TM) vehicular audio speakers
Sight & Sound(TM) microbroadcasting
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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 which the
Company
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believes to be commercially significant could permit increased competition, with
potential adverse effects on the Company and its business prospects.
The Company has conducted only limited patent and trademark searches and no
assurances can be given that patents or trademarks do not exist or will not be
issued in the future that would have an adverse effect on the Company's ability
to market its products or maintain its competitive position with respect to its
products. Substantial resources may be required to obtain and defend patent and
trademark rights of the Company.
The Company's policy is to enter into confidentiality agreements with all
of its executive officers, key technical personnel and advisors, but no
assurances can be made that Company know-how, inventions and other secret or
unprotected intellectual property will not be disclosed to third parties by such
persons.
Finally, it should be noted that annuities and maintenance fees for the
Company's extensive patent portfolio are a significant portion of the Company's
annual expenses. If, for the reasons described in Item 7. - "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," 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, NCT then will have to
prioritize its portfolio accordingly.
E. EXISTING PRODUCTS
NCT HEARING PRODUCTS
NoiseBuster(R). NCT is currently marketing its NoiseBuster(R) personal
active noise reduction headphone for consumers at a suggested retail price of
$49. 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 and on the Internet. Initial product shipments of the
original NoiseBuster(R) were made in September 1993. Product shipments of the
current NoiseBuster(R) 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 are the first ANR
offerings for these applications and improve speech intelligibility in the
presence of background noise. Product shipments began during the first quarter
of 1998.
ProActive(R). In 1995, the Company introduced its ProActive(R) line of
active noise reduction headsets for use in commercial and industrial settings.
The line includes a high performance earmuff and headset which combine NCT's
active noise cancellation technology for reduction of
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low frequency noise with passive hearing protection. The ProActive(R) is the
first fully contained, cordless product of its kind, providing workers with the
utmost in mobility and comfort.
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 and in cabins of
five other airlines.
NCT COMMUNICATIONS PRODUCTS
ClearSpeech(R)-Mic. This is the first digital noise reduction microphone
system for use with hands-free car kits. The product substantially reduces
background road, tire, wind, engine and traffic noise from hands-free calls,
allowing the person receiving the call to hear voice more clearly and with less
frustration and anxiety.
ClearSpeech(R)-Speaker. This product cleans background noise from the
incoming speech signal over a two-way or mobile radio for the utmost in
intelligibility. The system is suitable for use with mobile radios, fleet
communication systems, marine radios and many other communication systems.
NCT AUDIO PRODUCTS
Gekko(TM) flat speaker. In 1998, NCT Audio launched the Gekko(TM) flat
speakers and ArtGekko(TM) printed grille collection. This was the first product
launched by NCT Audio to the consumer audio market utilizing the Company's
patented FPT technology. With this technology, these products deliver Sweet
Space(TM) sound that floods the room with sound as opposed to conventional
speakers which deliver sound like a spotlight. The Gekko(TM) flat speakers are
thin wall hanging speakers that are designed to accept high quality
reproductions of the world's most popular artwork, which is the ArtGekko(TM)
line of replacement prints and decorative frames. The art is printed on
acoustically transparent material, which allows all sound from the flat speaker
to pass freely. The images were licensed from several major international
publishers who have access to or represent the rights for over three million
pieces of art. The ArtGekko(TM) collection includes 422 images and 14 different
frame styles.
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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, 1999 (in thousands).
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YEAR ENDED
DECEMBER 31, 1999
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AS A %
PRODUCTS AMOUNT OF TOTAL
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Hearing Products $ 682 30.9%
Communications 670 30.3%
Audio Products 856 38.8%
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Total $ 2,208 100.0%
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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, 1999 (in thousands).
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YEAR ENDED
DECEMBER 31, 1999
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AS A %
TECHNOLOGY AMOUNT OF TOTAL
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Audio $ 506 14.2%
Advancel 1,100 31.0%
Hearing 157 4.4%
Communications 906 25.5%
DMC 850 23.9%
Other 33 1.0%
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Total $ 3,552 100.0%
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F. PRODUCTS UNDER DEVELOPMENT
NCT HEARING PRODUCTS
NCT is continually striving to develop lower cost, higher performance
headset products. There are currently advanced headset models under development
which utilize NCT's proprietary digital technology for both the consumer and
industrial markets.
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SMM
Silicon Micromachined Microphone. The ability to integrate additional
circuitry on the SMM chip has proven attractive to potential users. The SMM's
low noise floor and adjustable sensitivity improve voice recognition in high
ambient noise environments. NCT is working with voice processing and computer
hardware companies to utilize the SMM to enhance the performance of their
systems. In the first quarter of 1996, NCT released initial prototypes of the
devices. In December 1997, the Company announced that Siemens Semiconductors of
Siemens AG ("Siemens") had licensed the Company's SMM technology and that
Siemens would develop, manufacture and market the SMM. Prototype samples were
received. Full production is scheduled to commence in the third quarter of 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 noise and echo cancellation
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 noise and echo cancellation and
speech compression.
NCT AUDIO
FPT-based products. NCT Audio is developing new, lower-cost products for
the consumer market by exploring new printing processes and alternatives to the
current electronics. NCT Audio will continue this development in 2000.
G. STRATEGIC ALLIANCES
The Company's transition from a firm primarily engaged in research and
development to one engaged in the licensing, production, marketing and sale of
technologies and applications 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 applications and products, 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 technologies. The following summarizes the
Company's key alliances:
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DATE INITIAL
RELATIONSHIP
KEY STRATEGIC ALLIANCES ESTABLISHED APPLICATIONS
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Walker Manufacturing Company (a Nov. 1989 Mufflers, Industrial
division of Tennessee Gas Pipeline Silencers and Other
Company) Vehicular Applications
AB Electrolux Oct. 1990 Consumer Appliances
Ultra Electronics Ltd. June 1991 Aircraft Cabin Quieting
Systems
The Charles Stark Draper Laboratory, July 1994 Microphones
Inc.
New Transducers Ltd. Mar. 1997 Flat Panel Transducers
Oki Electric Industry Co., Ltd. Oct. 1997 Communications
Infineon Technologies AG I Gr. Dec. 1997 Microphones
(formerly Siemens AG)
VLSI Technology, Inc. Feb. 1998 Communications
STMicroelectronics SA & Nov. 1998 Java(TM) platform
STMicroelectronics S.r.l.
Lernout & Hauspie Speech Products Mar. 1999 Communications
N.V.
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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. 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 to Walker, the elimination of the Company's
previously expensed obligation to fund the
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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) ("ELECTROLUX")
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.) ("ULTRA")
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. Under this agreement, 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.
THE CHARLES STARK DRAPER LABORATORY, INC. (U.S.) ("DRAPER")
In July 1994, NCT and Draper 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 SMM technology can be used in a wide variety
of applications within the acoustic and communications fields.
NEW TRANSDUCERS LTD. (U.K.) ("NXT")
NXT 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,
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<PAGE> 15
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 provided 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. The
amendments also increased the royalties due NCT Audio from NXT to 10% from 6%
and increased the royalties due NXT from NCT Audio to 7% from 6%. In
consideration for granting these expanded licensing rights, each party 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. (JAPAN) ("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.
INFINEON TECHNOLOGIES AG I GR (FORMERLY SIEMENS SEMICONDUCTORS,
SIEMENS AG (GERMANY) ("INFINEON")
In December 1997, the Company and Infineon executed a license agreement.
Under the terms of the agreement, which included an up-front license fee and
future per unit royalties, Infineon licensed the Company's SMM 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. Infineon 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.
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VLSI TECHNOLOGY, INC. (FRANCE) ("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 (FRANCE AND ITALY) ("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 tiny(2)J(TM) for
Java(TM) ("T(2)J-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
T(2)J-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.
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. (BELGIUM) ("L&H")
On March 31, 1999, the Company signed a license agreement with L&H. The
agreement provides the Company with a worldwide, non-exclusive, non-transferable
license to selected L&H technology for use in NCT's ClearSpeech(R) products. The
Company recorded a prepaid royalty of $0.9 million. On April 12, 1999, the
Company granted a worldwide non-exclusive, non-transferable license to L&H. The
agreement provides L&H access to NCT's present and future noise and echo
cancellation algorithms for use in L&H's technology. In consideration of the
Company's grant of a license to L&H, the Company recognized a non-refundable
royalty fee of $0.8 million. During the third quarter of 1999, the Company and
L&H agreed to offset the balances owed each other.
H. MARKETING AND SALES
In addition to marketing its technology through its strategic alliances as
described above, as of December 31, 1999, the Company has an internal sales and
marketing force of 15 employees, 6 independent sales representatives and its
executive officers and directors. The independent sales representatives may earn
commissions of generally up to 6% of revenues generated from sales of NCT
products to customers the sales representatives introduced to NCT and up to 5%
of research and development funding revenues provided by such customers.
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Note 18 - "Notes to Financial Statements" sets forth financial information
relating to foreign and domestic operations and sales for the years ended
December 31, 1997, 1998 and 1999.
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 inter-company revenue, eliminated in consolidation, 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 outlined below, the Company's two
largest customers accounted for approximately 42% of revenues during 1999 and
10% of gross accounts receivable at December 31, 1999. The Company does not
require collateral or other security to support customer receivables.
<TABLE>
<CAPTION>
(in thousands)
AS OF DECEMBER 31, 1999,
AND FOR THE YEAR THEN ENDED
------------------------------
ACCOUNTS
CUSTOMER RECEIVABLE REVENUE
-------- ---------- -------
<S> <C> <C>
STMicroelectronics SA and
STMicroelectronics S.r.l $ 33 $ 2,156
Lernout & Hauspie Speech Products N.V. -- 800
All Other 204 4,107
------- -------
Total $ 237 $ 7,063
======= =======
</TABLE>
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's cash equivalents consist of commercial
paper and other investments that are readily convertible into cash and have
original maturities of three months or less. The Company primarily maintains its
cash and cash equivalents in two banks.
J. COMPETITION
The Company is aware of a number of direct competitors. The Company's
principal competitors in active control systems include Bose Corporation, Lord
Corporation, Matsushita Electric Industrial Co., Ltd., Sennheiser Electronic
Corp. and Sony Corporation, among others. The Company's principal competitors in
speech applications include IBM Corporation, Lucent Technologies, Inc. and Texas
Instruments, Incorporated. To the Company's knowledge, each of such entities is
pursuing its own technology, either on its own or in collaboration with others,
and
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<PAGE> 18
has 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 that could be potentially competitive to NCT. These
companies are well established and have substantially greater management,
technical, financial, marketing and product development resources than NCT.
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 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 1999.
L. RESEARCH AND DEVELOPMENT
Company-sponsored research and development expenses aggregated $6.2
million, $7.2 million and $6.2 million for the fiscal years ended December 31,
1997, 1998 and 1999, 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. At the present time, it is
premature to determine what quantitative effect such laws and regulations could
have on the sale of the Company's products and technology.
N. EMPLOYEES
The Company had 75 employees as of December 31, 1999. None of such
employees is represented by a labor union. The Company considers its
relationships with employees to be satisfactory.
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O. ACQUISITIONS AND PROPOSED TRANSACTIONS
NCT Audio had actively pursued an acquisition strategy until the fourth
quarter of 1999. During 1998, NCT Audio had signed three letters of intent, an
agreement to purchase, and one definitive purchase agreement (now expired)
pursuant to which it would acquire 100% of the stock or assets of certain
companies. By acquiring companies that specialize in different segments of the
audio market in various locations around the world, management believed it could
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
wouldbe achieved with the acquisitions included the ability to (1) leverage the
extensive dealer networks; (2) gain access to worldwide consumer audio markets
and establish automotive audio aftermarket accounts; (3) increase product
distribution of all acquisition companies in world markets; (4) cross-sell the
acquisition companies' products among distribution channels; and (5) maximize
the warehousing and distribution facilities.
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), a wholly-owned subsidiary of Top
Source Technologies, Inc ("TST"). TSA, located in Troy, Michigan, specializes in
the design and manufacture of speaker enclosures that maximize audio output for
automotive OEMs, Tier One suppliers, and key aftermarket accounts. TSA's systems
are factory installed on Chrysler Corporation's 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 was $10,000,000 with up to an additional
$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 by TST. 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 had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay TST $6.5 million on or before March 31, 1999 to complete the
acquisition of TSA's assets. As consideration for an extension of such exclusive
right from March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST a fee of
$350,000, consisting of $20,685 in cash, $125,000 of NCT Audio's minority
interest in TSA earnings, and a $204,315 note payable due April 16, 1999. If NCT
Audio failed to pay the note by April 16, 1999, (a) the note would begin to
accrue interest on April 17, 1999 at the lower of the rate of two times prime
rate or the highest rate allowable by law; and (b) the $20,685 and $125,000
portion of the extension fee would no longer be credited toward the $6.5 million
purchase price due at closing. If NCT Audio failed to pay the note by April 30,
1999, the $204,315 portion of the extension fee would no longer be credited
toward the $6.5 million closing amount due. To date, NCT Audio has not paid the
note. Further, if NCT Audio failed to close the contemplated transaction by May
28, 1999, NCT Audio would forfeit its minority earnings in TSA for the period
June 1, 1999 through May 30, 2000. In
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<PAGE> 20
addition, due to NCT Audio's failure to close the transaction by March 31, 1999,
NCT Audio was required to pay a penalty premium of $100,000 of NCT Audio's
preferred stock. In exchange for an extension from May 28, 1999 to July 15,
1999, NCT Audio relinquished 25% of its minority equity ownership in TSA, or 5%
of TSA's outstanding stock. As a result, NCT Audio now has a 15% minority
interest in TSA.
On or about July 15, 1999, NCT Audio determined it would not proceed with
the purchase of the assets of TSA, as structured, due primarily to its
difficulty in raising the requisite cash consideration. Consequently, NCT Audio
reduced its net investment in TSA to $1.2 million, representing its 15% minority
interest, net of the above noted penalties, and recorded a $2.4 million charge
in the quarter ended September 30, 1999 for the write-down of its investment to
its estimated net realizable value. On September 30, 1999, Onkyo America
purchased substantially all of the assets of TSA and certain assets of TST used
in TSA's operations. NCT Audio is due and seeks its pro rata share of the
consideration paid by Onkyo America, less the penalties described above. The
amount which TST owes NCT Audio is in dispute; consequently, receipt of the
funds is contingent on the outcome of the arbitration between the Company, TST
and TSA. See "Item 3 - Legal Proceedings."
On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC ("PPI"). PPI, located in Phoenix, Arizona, designs
and manufactures high performance amplifiers, preamplifiers, subwoofers, signal
processors and speakers for the automotive audio aftermarket. PPI has a network
of over 600 dealers for its products throughout the U.S. NCT Audio would acquire
the interest in exchange for shares of its common stock having an aggregate
value of $2,000,000. NCT Audio had also agreed to retire approximately $8.5
million of PPI debt, but NCT Audio had to obtain adequate financing before the
transaction could have been 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 a second 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 was 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 had not obtained the
financing in a timely manner. They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock, they would insist that NCT Audio pay them
that amount in cash at any closing. PPI has experienced significant
organizational changes which has resulted in abandonment of the proposed
acquisition. During the third quarter of 1999, the Company fully reserved the
$1.5 million due from PPI plus interest thereon but continues to seek repayment
of the notes. During the fourth quarter of 1999, NCT Audio suspended activities
associated with execution of its acquisition strategy, including the previously
intended plan to acquire PPI.
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<PAGE> 21
On January 28, 1999, NCT Audio entered into a letter of intent to purchase
100% of the common stock of another speaker manufacturer (the "Third
Acquisition"). As previously noted, NCT Audio suspended its acquisition strategy
and therefore, decided not to enter into binding agreements to consummate the
Third Acquisition.
On June 22, 1999, NCT Hearing signed a letter of intent to acquire sixty
percent (60%) of the common stock of Pro Tech Communications, Inc. ("PCTU") in
exchange for rights to certain NCT Hearing technology, contingent upon obtaining
equity financing for PCTU. The Company is negotiating with accredited investors
for a $1.5 million investment in convertible preferred stock of PCTU,
convertible into shares of PCTU or exchangeable into NCT common stock at their
election.
P. BUSINESS SEGMENTS
For a full discussion of business segments and geographic areas, see
Note 17. - Notes to Financial Statements - "Business Segment Information" and
Note 18. - Notes to Financial Statements - "Geographical Information."
Q. AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission ("SEC"). You may read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's Website at
"http://www.sec.gov."
ITEM 2. PROPERTIES
The Company's executive office is located at the site of its research and
technical support laboratory in Linthicum, Maryland, where it leases
approximately 40,000 square feet of space under leases which expire in July
2003. The leases provide for current monthly rentals of approximately $36,000,
subject to annual inflationary adjustments.
The Company's majority owned subsidiary, Advancel, maintains its research
and engineering facility in San Jose, California, where it leases approximately
6,000 square feet of space under a lease which expires in August 2000. The lease
provides for current monthly rentals of approximately $13,000, subject to annual
inflationary adjustments.
The Company maintains a sales and marketing office in Stamford, Connecticut
where it leases approximately 6,400 square feet of space under a lease which
expires in February 2001 and provides for a current monthly rental of
approximately $9,000, subject to annual inflationary adjustments.
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In March 2000, the Company signed a lease for approximately 18,700 square
feet of space in Westport, Connecticut. The lease expires in March 2010 and
provides for monthly rental of approximately $28,000 for the first five years
and approximately $31,000 per month for the next five years.
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 $4,000, 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. The Company 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
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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 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.
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. 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
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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. Discovery in this suit commenced in mid-1999 and is continuing, although
a trial date has not been set. 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. 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 alleged 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 alleged 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. Since then, there have been no further developments
in this suit. 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.
24
<PAGE> 25
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
scheduled to take 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. ("Balmore") and Austost Anstalt
Schaan ("Austost") 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 alleged 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 alleged 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
25
<PAGE> 26
Southern District of New York and on January 22, 1999, NCT Audio and the Company
filed with that Court Defendants' Answer, Affirmative Defenses, Counterclaims
and Third-Party Complaint. On October 9, 1999, the Company, Balmore and Austost
agreed, in principle, on a mutual release and settlement, subject to court
approval, whereby all charges, claims and counterclaims which have been
individually or jointly asserted against the parties will be dropped. Court
approval is pending.
On September 16, 1999, certain former shareholders and optionees of
Advancel filed a Demand for Arbitration against the Company with the American
Arbitration Association in San Francisco, California. The primary remedy the
claimants seek is recision of the Stock Purchase Agreement, the return of the
Advancel stock surrendered in conjunction with the purchase of Advancel by the
Company and damages to be determined by arbitration. The Company filed a
response and counterclaim on October 13, 1999. After consultation with outside
legal counsel, management recognizes that the Company may lose some or all of
its claims, encountering significant liability. In the event this Demand for
Arbitration does result in a substantial judgment against the Company, said
judgment could have a material effect on the Company's quarterly or annual
operating results. Outside legal counsel has indicated that it is impossible to
estimate a range of potential liability at this early stage with any degree of
certainty. The parties have agreed on an arbitrator who has scheduled late May
2000 for an arbitration hearing. Discovery is currently scheduled to take place
in the action.
On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against TST and TSA
(the "Respondents") alleging, among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio, breach of fiduciary
duty as a majority shareholder owed to NCT Audio which holds 15% of the
outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. NCT Audio seeks recision of the purchase agreement and recovery of
monies paid to TST for TSA's assets. Concurrently, NCT Audio commenced a
preliminary injunction proceeding in the Delaware Court of Chancery, seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration proceeding. Such court action was subsequently withdrawn by the
Company.
On December 8, 1999, Respondents filed an answer and counterclaim in
connection with the arbitration proceeding. Respondents asserted their
counterclaim to recover (i) the monies and stock owned under the extension
agreements; (ii) the $1 million differential between the $9 million purchase
price paid by Onkyo America for TSA's assets and the $10 million purchase price
that NCT Audio had been obligated to pay under the asset purchase agreement;
(iii) expenses associated with extending NCT Audio's time to close the
transaction; and (iv) certain legal expenses incurred by Respondents.
Management believes its position has substantial merit. However, in the
event the Demand for Arbitration does result in a substantial judgment against
the Company, said judgment could have a material effect on the Company's
financial position and quarterly or annual operating results.
26
<PAGE> 27
The Company believes there are no other material patent infringement
claims, litigation 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 of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
None.
27
<PAGE> 28
PART II
ITEM 5. MARKET FOR 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". The Company's common stock currently trades
on the NASDAQ OTC Bulletin Board under the symbol "NCTI". High and low last sale
information for the Company's common stock for specified quarterly periods is
set forth below:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $0.440 $0.190 $0.938 $0.875
2nd Quarter $0.480 $0.230 $0.719 $0.656
3rd Quarter $0.290 $0.172 $0.563 $0.531
4th Quarter $0.197 $0.172 $0.344 $0.281
</TABLE>
On March 30, 2000, the last reported sale of the Company's common stock as
reported by the NASDAQ OTC Bulletin Board was $1.10. As of March 30, 2000, there
were approximately 40,000 holders of record of the Company's common stock.
The Company has neither declared nor paid any dividends on its shares of
common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations, and has no intention of declaring dividends for the
foreseeable future.
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, 1999.
28
<PAGE> 29
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 Item 8 -
"Financial Statements and Supplementary Data" and Item 7 -"Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
are included elsewhere in this document.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS OF DOLLARS AND SHARES, EXCEPT
PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES
Product sales, net $ 1,589 $ 1,379 $ 1,720 $ 2,097 $ 2,208
Engineering and development
services 2,297 547 368 425 1,303
Technology licensing fees and
royalties 6,580 1,238 3,630 802 3,552
------- -------- -------- -------- ---------
Total revenues $10,466 $ 3,164 $ 5,718 $ 3,324 $ 7,063
------- -------- -------- -------- ---------
COSTS AND EXPENSES:
Cost of product sales $ 1,579 $ 1,586 $ 2,271 $ 2,235 $ 2,767
Cost of engineering and
development services 2,340 250 316 275 2,216
Selling, general and
administrative 5,416 4,890 5,217 11,238 11,878
Research and development 4,776 6,974 6,235 7,220 6,223
Interest (income) expense, net (49) 17 1,397(3) (429) 552
Equity in net (income) loss of
unconsolidated Affiliates (80) 80 -- -- --
Other (income) expense, net 552 192 130 (3,032)(4) 7,198(5)
------- -------- -------- -------- ---------
Total costs and expenses $14,534 $ 13,989 $ 15,566 $ 17,507 $ 30,834
------- -------- -------- -------- ---------
Net loss $(4,068) $(10,825) $ (9,848) $(14,183) $ (23,771)
Less:
Preferred stock dividend
requirement -- -- 1,623 3,200 10,567
Accretion of difference between
carrying
Amount and redemption amount of
Redeemable preferred stock -- -- 285 485 494
------- -------- -------- -------- ---------
Net (loss) attributable to common
stockholders $(4,068) $(10,825) $(11,756) $(17,868) $ (34,832)
======= ======== ======== ======== =========
Weighted average number of common
Shares outstanding(1) - basic
and diluted 87,921 101,191 124,101 143,855 190,384
======= ======== ======== ======== =========
Basic and Diluted Net loss per
share $ (0.05) $ (0.11) $ (0.09) $ (0.12) $ (0.18)
======= ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 9,583 $ 5,881 $ 17,361 $ 15,465 $ 13,377
Total current liabilities 2,699 3,271 2,984 5,937 7,728
Long-term debt 105 -- -- -- 4,107
Accumulated deficit (72,848) (83,673) (93,521) (107,704) (131,475)
Stockholders' equity (deficit)(2) 6,884 2,610 14,377 3,426 (367)
Working capital (deficiency) 1,734 (1,312) 11,696 (1,187) (3,281)
</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 expense of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
(4) Includes a $3.2 million gain from the exercise of an option received from
NXT in connection with the cross license agreement entered into by the
Company.
(5) Includes a $2.4 million charge in connection with the Company's write down
of its investment in TSA to its estimated net realizable value; a $1.8
million reserve for promissory note and pre-acquisition costs related to
PPI; and a $3.1 million charge for the impairment of goodwill.
29
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included herein.
A. FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K which are not historical
facts are forward-looking statements which involve risks and uncertainties. The
Company's actual results in fiscal 2000 and beyond may 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 technologies and electronic systems; 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
services 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
NCT Group, Inc. ("NCT" or the "Company") is a technology developer with an
extensive portfolio of proprietary algorithms and a variety of product offerings
for consumer, commercial and industrial applications. The Company specializes in
the utilization of sound and signal waves to reduce noise, improve
signal-to-noise ratio and enhance sound quality. Commercial application of the
Company's technologies is comprised of a number of product offerings, including
NoiseBuster(R) consumer and communications active noise reduction ("ANR")
headsets; ProActive(R) ANR industrial earmuffs and headsets; Gekko(TM) flat
speakers; and ClearSpeech(R) microphones, speakers and other products. In
addition to products, NCT's algorithms are available for licensing to
manufacturers for use in commercial and consumer products.
During 1999, the Company focused its efforts on the development of
DistributedMedia.com, Inc. ("DMC"), a wholly-owned subsidiary of NCT which was
formed in November 1998. DMC is a microbroadcasting media company that delivers
licensed CD-quality music as well as on-air and billboard advertising to
out-of-home commercial and professional venues via a digital network of
place-based micrbroadcasting stations, called Sight & Sound(TM). The Sight &
Sound(TM) system consists of a central control network that communicates to a
digital broadcast station, which plays music selections and advertisements
through flat panel speakers. The speaker grilles
30
<PAGE> 31
double as visual billboards. The speakers will be provided by NCT Audio
Products, Inc. ("NCT Audio").
The Company and its business units currently hold 503 patents and related
rights worldwide and an extensive portfolio of proprietary algorithms, library
of know-how and other unpatented technology. Management believes that its
intellectual property portfolio prevents other competitors and potential
competitors from participating in certain commercial areas without licenses from
the Company. Our intellectual property allows the Company to develop its major
product lines which include: NoiseBuster(R) consumer and communications ANR
headsets; ProActive(R) ANR industrial earmuffs and headsets; Gekko(TM) flat
speakers; and ClearSpeech(R) microphones, speakers and other products.
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products.
Management believes that the Company's investment in its technology has resulted
in the expansion of the value of its intellectual property portfolio and
improvement in the functionality, speed and cost of components and products.
The Company's operating revenues are comprised of technology licensing fees
and royalties, product sales and engineering and development services. Operating
revenues in 1999 consisted of approximately 31% in product sales, 19% in
engineering and development services and 50% in technology licensing fees and
royalties. The Company continues its transition 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. Historically, 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 license fees paid by such
companies. 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 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
generation of cash from these revenue sources, if realized, will reduce the
Company's dependence on engineering and development funding.
The Company continued its practice of marketing its technology through
licensing to third parties for fees, generally by obtaining technology license
fees when initiating joint ventures and alliances with new strategic partners,
and subsequent 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.
31
<PAGE> 32
On February 9, 1999, NCT Audio and New Transducers Ltd. ("NXT") expanded
the Cross License Agreement dated September 27, 1997 to increase NXT's fields of
use to include aftermarket ground-based vehicles and aircraft sound systems 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.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hauspie Speech Products N.V. ("L&H"). The agreement provides the Company with a
worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. Further, on April 12, 1999, the
Company granted a worldwide, non-exclusive, non-transferable license to L&H. The
agreement provides L&H access to NCT's noise and echo cancellation algorithms
for use in L&H's technology.
Presently, the Company is 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; Ultra is installing production
model aircraft cabin quieting systems in the SAAB 340 turboprop aircraft; OKI is
integrating ClearSpeech(R) algorithm into large scale integrated circuits for
communications applications; and BE Aerospace and Long Prosper are providing
NoiseBuster(R) components for United Airlines' and five other international
carriers' comprehensive in-flight entertainment and information systems.
Management believes these developments and others 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 Company is certified under the International Standards Organization
product quality program known as "ISO 9000", and continues to successfully
maintain its certification. 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.
Since its inception, the Company has incurred substantial losses from
operations which have been recurring and amounted to $131.5 million on a
cumulative basis through December 31, 1999. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) technology licensing fees, (4) royalties, (5) product sales,
and (6) engineering and development funds received from strategic partners and
customers.
32
<PAGE> 33
The Company's internally generated funds in 1999 were not sufficient to
cover the operating costs of the Company. The Company was able to continue its
operations during 1999 by raising additional capital to fund its operations for
1999 and beyond. In addition, on August 16, 1999, the Company executed a plan to
outsource logistics and downsize its audio, hearing and product support groups,
thereby reducing its worldwide workforce by approximately 25%. Refer to
"Liquidity and Capital Resources" below and to Notes 1 and 11 - "Notes to the
Financial Statements." The Company's ability of its revenue sources, especially
its technology license fees, royalties and product sales, to generate
significant cash for the Company's operations is critical to the Company's long
term 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.
In 1999, the Company entered into certain transactions which provided
additional funding. These transactions included the issuance of secured
convertible notes; the Series E and Series F Convertible Preferred Stock private
placements; issuance of shares of common stock, in lieu of the cash owed to
suppliers and consultants, to settle certain obligations of the Company; and a
private placement of shares of common stock. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources" and in
Note 11 in the "Notes to the Financial Statements."
As of December 31, 1999, cash and cash equivalents amounted to $1.1 million
and working capital (deficit) was $(3.3) million. 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 through the
private placement of additional equity of the Company in the form of common
stock, convertible preferred stock and/or convertible debt. There is no
assurance any such financing is or would become available.
There can be no assurance that sufficient 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 relationships 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 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
33
<PAGE> 34
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, 1999 about the Company's
ability to continue as a going concern. The accompanying consolidated Financial
Statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets or the amount of liabilities that might
result from the outcome of these uncertainties.
C. RESULTS OF OPERATIONS
Year ended December 31, 1999 compared with year ended December 31, 1998.
Total revenues in 1999 increased by 112% to $7.1 million from $3.3 million
in 1998 reflecting increases in each of the Company's revenue sources. Total
costs and expenses during the same period increased by 76% or $13.3 million,
primarily due to the write down of an investment in an unconsolidated affiliate
($2.4 million), the impairment of goodwill ($3.1 million) and a reserve for
promissory notes and pre-acquisition costs ($1.8 million). Further, 1998 other
income/expense included a $3.2 million gain from the sale of NXT stock.
Technology licensing fees and royalties increased by 343% or $2.8 million
to $3.6 million from $0.8 million in 1998. The technology licensing fees and
royalties for 1999 were primarily due to the $0.2 million technology license fee
and $0.9 million prepaid royalty from STMicroelectronics S.A. ("ST"), an $0.8
million license fee from L&H and other technology licensing fees and royalties
aggregating $1.7 million. (See Note 3 - "Notes to Financial Statements").
Product sales increased in 1999 by 5% to $2.2 million from $2.1 million in
1998 reflecting the increased sales of the Gekko(TM) flat speakers, the
NoiseBuster(R) product line and the ClearSpeech(R) product line.
Revenue from engineering and development services increased in 1999 by 207%
to $1.3 million from $0.4 million in 1998 primarily due to the contract between
Advancel Logic Corporation ("Advancel") and ST. (See Note 3 - "Notes to the
Financial Statements".)
Cost of product sales increased 24% to $2.8 million in 1999 from $2.2
million in 1998 and the product margin deteriorated to (25)% from (7)% in 1998.
The negative margin of $0.6 million in 1999 was primarily due to charges of $0.4
million for slow movement of inventory and tooling obsolescence related to the
NoiseBuster(R) product lines and NCT Audio's subwoofers, $0.4 million for
royalty expense and $0.2 million for the write down of NCT Audio's raw
materials. The negative margin of $0.1 million in 1998 was primarily due to
reserves for slow moving inventory and charges for tooling obsolescence in the
amount of $0.5 million related to the NoiseBuster(R) product lines.
Cost of engineering and development services increased in 1999 by 706% to
$2.2 million primarily due to the contract between Advancel and ST. The gross
margin on engineering and
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<PAGE> 35
development service was a loss of (70%) for 1999 due to the recording of a
reserve for estimated expenses to complete the ST project.
Selling, general and administrative expenses for the year increased by 5%
or $0.6 million to $11.8 million from $11.2 million in 1998 which was primarily
due to amortization of goodwill and increased legal expenses (please refer to
Item 3. "Legal Proceedings").
Research and development expenditures in 1999 decreased by 14% to $6.2
million from $7.2 million in 1998, primarily due to decreased spending on
research and development and the reduction in force in August 1999 (please refer
to Item 3. "Legal Proceedings").
Included in the Company's total expenses were non-cash expenditures for
depreciation and amortization of $2.0 million for 1999 and $1.0 million in 1998.
The Company reduced its investment in an unconsolidated affiliate to 15% of
equity and recorded a $2.4 million charge for the write-down of its investment
to its estimated net realizable value.
In 1999, the Company recorded $3.1 million for the impairment of goodwill.
The Company also recorded a reserve of $1.8 million for the PPI promissory notes
including interest expense and pre-acquisition costs. Interest expense includes
$0.3 million for a beneficial conversion feature and non-cash interest charges
related to the convertible notes. 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 1999, interest income decreased to less than $0.1 million from $0.4
million in 1998 principally due to lower cash resources. Interest expense
increased to $0.4 million in 1999 from less than $0.1 million in 1998, primarily
due to the issuance of convertible notes during 1999.
The Company has net operating loss carryforwards of $101.2 million and
research and development credit carryforwards of $1.7 million for federal income
tax purposes at December 31, 1999. 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.
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".
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<PAGE> 36
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 slow moving inventory 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.
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D. LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $131.5 million on a
cumulative basis through December 31, 1999. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) convertible debt, (4) technology licensing fees,
(5) royalties, (6) product sales, and (7) engineering and development funds
received from strategic partners and customers.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties
product sales and engineering and development services, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
As previously noted, on January 6, 1999, NASDAQ notified the Company that
the Company's securities were delisted from the NASDAQ National Market effective
with the close of business on January 6, 1999. The Company's common stock is now
reported on the OTC Bulletin Board. While delisting of the Company's common
stock has not had an adverse effect on the Company's operations, it may make it
more difficult for the Company to raise additional capital to fund future
operations.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development services.
In that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise substantial doubt at December 31, 1999 about the
Company's ability to continue as a going concern.
At December 31, 1999, cash and cash equivalents were $1.1 million. Such
balance was invested in interest bearing money market accounts. Restricted cash
of $0.7 million was attributed to the proceeds from the PRG Note, which is
restricted to rental and installation costs of DBSS Systems.
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The Company's working capital decreased to a deficit of $(3.3) million at
December 31, 1999, from a deficit of $(1.2) million at December 31, 1998. This
$2.1 million decrease was primarily due to the increase in accrued legal fees
and to fund operations for the period.
During 1999, the net cash used in operating activities was $10.6 million,
compared to $12.8 million used in operating activities during 1998, a decrease
of $2.2 million. The $10.6 million net cash used in operating activities was
primarily due to the write down of the estimated net realizable investment in
TSA, the reserve recorded on the promissory note due from PPI, an increase in
accrued legal expenses and a charge for the impairment of goodwill.
Net inventory decreased during 1999 by $1.0 million, primarily due to the
availability of inventory on hand in the beginning of 1999, resulting in little
or no purchases of finished goods during 1999.
The net cash provided by financing activities was $11.9 million in 1999,
primarily due to the $4.0 million convertible notes (see Note 8 - "Notes to the
Financial Statements" for further details) and $7.4 million net proceeds from
the Series E and the Series F Preferred Stock financings (see Note 11 - "Notes
to the Financial Statements" for further details).
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
Because the Company did not meet its revenue targets for 1999, it was
necessary for the Company to enter into certain transactions, which provided
additional funding as follows:
FUNDING FROM THE SERIES E CONVERTIBLE PREFERRED STOCK
In 1999, the Company received net proceeds of $3.5 million from the
Series E Preferred Stock placement. On December 30, 1998, the Company entered
into a series of subscription agreements to sell 8,145 shares of Series E
Preferred Stock, with a stated value of up to $8.2 million in consideration of
$2.1 million, to six accredited investors through one dealer. The sale of the
shares occurred in a private placement pursuant to Regulation D of the
Securities Act. The Company also issued and sold 1,700 shares of Series E
Preferred Stock, 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 735 shares of Series E Preferred
Stock, 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.
In March 1999, the Company signed a license agreement to exchange 3,600
shares of Series E Preferred Stock for four DMC network affiliate licenses. The
Company, in accordance with its revenue recognition policy, realized only $0.9
million on the issuance of such licenses in consideration of receipt of 3,600
shares of Series E Convertible Preferred Stock.
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In April 1999, the Company entered into a subscription agreement to sell
1,874 shares of Series E Preferred Stock, with a stated value of up to $1.9
million in consideration of $1.9 million to four accredited investors through
one dealer.
Each share of Series E Preferred Stock is convertible into common stock of
the Company according to the conversion formula described in the subscription
agreements. The conversion terms of the placement require the Company to file a
registration statement on either (1) a Form S-3 under certain conditions, or
(2) a Form S-1 under other specified conditions. The shares of the Series E
Preferred Stock become convertible into common stock of NCT at any time
beginning at the earlier of (1) ninety days after the closing date of the
placement, (2) five days after the Company receives a "no review" status from
the SEC in connection with filing one of the above registration statements, or
(3) the effective date of any registration statement.
The conversion terms of the Series E Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 30,000,000 shares of
its common stock in the aggregate in connection with the conversion of the
10,580 shares of Series E Preferred Stock which have been designated. The
Company registered an aggregate of 26,648,696 shares of common stock for the
conversion and payment of accretion of the Series E. 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 the date hereof, holders of 3,828 shares of Series E Preferred
Stock have elected to convert their shares into 26,608,942 shares of common
stock of the Company.
In December 1999, holders of the remaining 5,026 shares of the Company's
Series E Preferred Stock and holders of 974 shares of the Company's Series F
Preferred Stock, an aggregate stated value of $6.0 million, exchanged such
shares for eight DMC network affiliate licenses. No shares of Series E Preferred
Stock are presently outstanding.
SECURED CONVERTIBLE NOTES
In 1999, the Company received proceeds aggregating $3.0 million from the
issuance of secured convertible notes as described herein. Carole Salkind
("Holder"), spouse of a former director and an accredited investor, subscribed
and agreed to purchase secured convertible notes of the Company in an aggregate
principal amount of $4.0 million. A secured convertible note (the "Note") for
$1.0 million was signed on January 26, 1999, and proceeds were received on
January 28, 1999. The Note is to mature on January 25, 2001 and earn interest at
the prime rate as published from time to time in The Wall Street Journal from
the issue date until the Note becomes due and payable. The Holder shall have the
right at any time on or prior to the day the Note is paid in full, to convert at
any time, all or from time to time, any part of the outstanding and unpaid
amount of the Note into fully paid and non-assessable shares of common stock of
the Company at the conversion price. The conversion price, as amended by the
parties on September 19, 1999, of the notes and any future notes, shall be the
lesser of (i) the lowest closing transaction price for the common stock on the
securities market on which the common stock is being traded, at any time during
September 1999; (ii) the average of the closing bid price for the common stock
on the securities market on which the common stock is being traded, for five (5)
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consecutive trading days prior to the date of conversion; or (iii) the fixed
conversion price of $0.17. In no event will the conversion price be less than
$0.12 per share. The Holder shall purchase the remaining $3.0 million principal
amount of the secured convertible notes on or before June 30, 1999. The Company
has agreed to extend such date for the purchase of remaining installments of
secured convertible notes to April 15, 2000. On various dates, the Holder has
purchased additional installments of the remaining $3.0 million principal amount
of the secured convertible notes. As of March 27, 2000, the Company had received
proceeds aggregating $4.0 million from the Holder and had issued secured
convertible notes with the same terms and conditions of the Note described
above.
THE SERIES F CONVERTIBLE PREFERRED STOCK
The Company received $1.0 million for the sale of shares of its Series F
Convertible Preferred Stock as outlined herein. On August 10, 1999, the Company
entered into a subscription agreement (the "Series F Subscription Agreement") to
sell an aggregate stated value of up to $12.5 million (12,500 shares) of Series
F Preferred Stock, in a private placement pursuant to Regulation D of the
Securities Act, to five unrelated accredited investors through one dealer. The
Company received $1.0 million for the sale of 8,500 shares of Series F Preferred
Stock having an aggregate stated value of $8.5 million. At the Company's
election, the investors may invest up to an additional $4.0 million (4,000
shares) in cash or in kind, at a future date. Each share of the Series F
Preferred Stock has a par value of $.10 per share and a stated value of one
thousand dollars ($1,000) with an accretion rate of four percent (4%) per annum
on the stated value. Each share of Series F Preferred Stock is convertible into
fully paid and nonassessable shares of the Company's common stock, subject to
certain limitations. On September 10, 1999, the Company received subscription
agreements from four of the accredited investors in the amount of $4.0 million
for four DMC network affiliate licenses. While the investors agreed upon the
exchange of 8,500 shares of Series F Preferred Stock having aggregate stated
value of $8.5 million, for consideration of $1.0 million, current accounting
policy dictates that the additional $4.0 million for the DMC licenses is to be
considered as additional consideration for the Series F Preferred Stock.
Under the terms of the Series F Subscription Agreement, the Company is
required to file a registration statement ("the Series F Registration
Statement") on Form S-1 on or prior to a date which is no more than forty-five
(45) days from the date that the Company has issued a total of 1,000 shares of
Series F Preferred Stock, covering the resale of all of the registrable
securities (the "Series F Closing Date"). The shares of Series F Preferred Stock
become convertible into shares of common stock at any time commencing after the
earlier of (i) forty-five (45) days after the Series F Closing Date; (ii) five
(5) days after the Company receives a "no review" status from the SEC in
connection with the Series F Registration Statement; or (iii) the effective date
of the Series F Registration Statement. Each share of Series F Preferred Stock
is convertible into a number of shares of common stock of the Company pursuant
to a predetermined conversion formula.
The conversion terms of the Series F Preferred Stock also provided that in
no event shall the Company be obligated to issue more than 35,000,000 shares of
its common stock in the aggregate in connection with the conversion of the
12,500 shares of Series F Preferred Stock. In
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the interest of investor relations of the Company, the maximum number of
conversion shares was increased to 77,000,000 shares of NCT common stock. The
pro rata portion of the shares of common stock issuable upon conversion of the
8,500 shares of Series F Preferred Stock issued and outstanding, or 23,800,000
shares of the Company's common stock, were registered together with 1,944,000
shares of common stock which may be issued, under Registration Statement No.
333-87757. The issuance of the additional 1,944,000 shares will enable the
Company to pay the 4% per annum accretion on the stated value of the issued and
outstanding shares of Series F Preferred Stock. The Company is given the right
to pay the accretion in either cash or common stock.
The Series F Subscription Agreement also provides that the Company will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner. In connection with the Series F Preferred Stock,
the Company may be obligated to redeem the excess of the stated value over the
amount permitted to be converted into common stock. Such additional amounts will
be treated as obligations of the Company. In December 1999, 974 shares of the
Company's Series F Preferred Stock, together with 5,026 shares of the Company's
Series E Preferred Stock, were exchanged for eight DMC network affiliate
licenses. As of January 10, 2000, 4,016 shares of Series F Preferred Stock have
been converted into 36.1 million shares of the Company's common stock. There are
3,510 shares of Series F Preferred Stock outstanding as of the date hereof.
On January 27, 2000, the Series F Preferred Stock Certificate of
Designations was amended to obligate the Company to issue up to seventy-seven
million shares of its common stock upon the conversion of the 12,500 designated
shares of Series F Preferred Stock, as noted above. Such increase in the number
of shares of common stock was made in the interest of investor relations of the
Company. This registration statement and prospectus includes 28,560,000 shares
of common stock for the conversion of the amended Series F Preferred Stock
Certificate of Designations.
SUPPLIER AND CONSULTANT SHARES
In 1999, the Company issued 13,154,820 shares of common stock of the
Company to settle certain of its obligations to certain suppliers and
consultants, of which 12,759,778 shares were registered under Registration
Statement No. 333-87757. The issuance of these shares of common stock of the
Company represented $2.5 million of obligations for which the Company did not
need to use its cash resources.
PRIVATE PLACEMENT OF COMMON STOCK
In 1999, the Company issued shares of its common stock for a total purchase
price of $500,000 in a private placement pursuant to Regulation D of the
Securities Exchange Act of 1933. The Company has certain contingent obligations
under a securities purchase agreement, dated as of December 27, 1999 (the
"Purchase Agreement"), among the Company, Austost, Balmore and Nesher, Inc.
("Nesher"). Based on an offer as of November 9, 1999, the Company, Austost,
Balmore and Nesher entered into the Purchase Agreement whereby the Company, on
December 28, 1999, issued a total of 3,846,155 shares (the "SPA Shares") to
Austost, Balmore
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and Nesher for a total purchase price of $500,000. The price of the SPA Shares
was $0.13 per share, which was $0.03, or 19%, less than the closing bid price
of the Company's common stock as reported by the OTC Bulletin Board on
November 8, 1999, and $0.015, or 10%, less than the closing bid price of the
Company's common stock as reported by the OTC Bulletin Board on
December 27, 1999. This per share price may be subject to decrease upon the
application of a reset provision contained in the Purchase Agreement as
described below.
Under the reset provision, on June 26, 2000, and again on September 25,
2000, the Company may be required to issue additional shares to one or more of
Austost, Balmore or Nesher if the sum of certain items on those dates is less
than 120% of the total purchase price paid by Austost, Balmore and Nesher for
the SPA Shares. Those items are: (i) the aggregate market value of the SPA
Shares held by Austost, Balmore and Nesher (based on the per share closing bid
price on those dates); (ii) the market value of any SPA Shares transferred by
Austost, Balmore and Nesher as permitted under the Purchase Agreement (based on
the per share closing bid price on the date of transfer); and (iii) any amounts
realized by Austost, Balmore and Nesher from sales of any such shares prior to
June 26, 2000 or September 25, 2000, as the case may be. The number of
additional shares of common stock that the Company would be obligated to issue
in such case would be a number of shares having an aggregate market value (based
on the per share closing bid price on such date) that, when added to the sum of
items (i), (ii) and (iii) set forth above, would equal 120% of the total
purchase price paid for the SPA Shares.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties and product sales and engineering and
development revenue or additional capital. In that event, the Company would have
to cut back its level of operations substantially in order to conserve cash.
These reductions could have an adverse effect on the Company's relations with
its strategic partners and customers. (See Note 1 - "Notes to Financial
Statements".)
The Company believes that the level of financial resources available to it
may be a critical component in the Company's ability to continue as a going
concern. The Company may elect to
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raise additional capital, from time to time, through equity or debt financing in
order to capitalize on business opportunities and market conditions.
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, 1999 about the Company's ability to continue as a going concern.
The accompanying Financial Statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
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.
In March 2000, the Company signed a lease for approximately 18,700 square
feet of space in Westport, Connecticut. The lease expires in March 2010 and
provides for monthly rental of approximately $28,000 for the first five years
and approximately $31,000 per month for the next five years.
There were no material commitments for capital expenditures as of
December 31, 1999, and other than the matter discussed above, no material
commitments are anticipated in the near future.
F. YEAR 2000 COMPLIANCE
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. 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.
The Company's cost of administering its Year 2000 Compliance Program was
minimal (less than $100,000) and did not have a material adverse impact on its
business. There has been no indication, to date, that the Year 2000 issue will
have a material impact on future earnings. Yet, the Company can make no
assurances that our customers and suppliers have in place adequate
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systems to resolve their own Year 2000 problems. Such potential problems remain
a possibility and could have an adverse impact on our future results.
ITEM 8. FINANCIAL STATEMENTS.
The Reports of the Independent Auditors Richard A. Eisner & Company, LLP
and the financial statements and accompanying notes are attached.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-2
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss for the years ended December 31, 1997, 1998 and 1999 F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999 F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 F-7
Notes to Financial Statements F-8
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no disagreements with independent accountants on accounting
and financial disclosure matters during the Company's two most recent fiscal
years.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages, positions and the offices
held by each of the executive officers and directors of the Company as of
March 31, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
---- --- ---------------------
<S> <C> <C>
Jay M. Haft 64 Chairman of the Board of Directors
Michael J. Parrella 52 President, Chief Executive Officer and Director
John J. McCloy II 62 Director
Samuel A. Oolie 63 Director
Irene Lebovics 47 Executive Vice President, Marketing
Cy E. Hammond 45 Senior Vice President, Chief Financial Officer
Paul Siomkos, P.E. 53 Senior Vice President, Operations
Michael A. Hayes, Ph.D. 47 Senior Vice President, Chief Technical Officer
Irving M. Lebovics 49 Senior Vice President, Global Sales
James A. McManus 60 President and Chief Executive Officer of
DistributedMedia.com, Inc.
</TABLE>
JAY M. HAFT currently serves as Chairman of the Board of Directors of the
Company. He served as President of the Company from November 1994 to July 1995.
He is also a Director of the Company's subsidiary, NCT Audio, a position which
he has held since August 25, 1997. Mr. Haft is a strategic and financial
consultant for growth stage companies. He is active in international corporate
finance, mergers and acquisitions, as well as in the representation of emerging
growth companies. He has actively participated in strategic planning and fund
raising for many high-tech companies, leading edge medical technology companies
and technical product, service and marketing companies. He is a Managing General
Partner of Gen Am "1" Venture Fund, an international venture capital fund.
Mr. Haft is also a Director of numerous other public and private corporations,
including RVSI, Inc. (OTC), DCAP Group, Inc. (OTC), Encore Medical Corporation
(OTC), Viragen, Inc. (OTC), PC Service Source, Inc. (OTC), DUSA Pharmaceuticals,
Inc. (OTC), Oryx Technology Corp. (OTC), and Thrift Management, Inc. (OTC). He
is currently of counsel to Parker Duryee Rosoff & Haft, in New York. He was
previously a senior corporate partner of such firm (1989-1994), and prior to
that a founding partner of Wofsey, Certilman, Haft et al (1966-1988). He served
as a Commissioner on the Florida Commission for Government Accountability to the
People. He serves on the Board of the Miami City Ballet and is a Trustee of
Florida International University.
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
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capital to restructure the Company and its research and development efforts.
Mr.Parrella serves as Chief Executive Officer and Acting President of NCT Audio,
a position to which he was elected on September 4, 1997, and was appointed a
Director on August 25, 1998. On January 5, 2000, Mr. Parrella was elected Acting
Chief Executive Officer of Advancel. He was also Chairman of the Board of
Environmental Research Information, Inc., an environmental consulting firm, from
December 1987 to March 1991.
IRENE LEBOVICS currently serves as Executive Vice President and Secretary,
NCT Group, Inc., and President of NCT Hearing, a wholly-owned subsidiary of the
Company. On January 5, 2000, Ms. Lebovics was elected Acting Chief Marketing
Officer and Secretary of Advancel. She joined the Company as Vice President of
NCT and President of NCT Medical Systems (NCTM) in July 1989. In March 1990,
NCTM became part of NCT Personal Quieting and Ms. Lebovics served as President.
In January 1993, she was appointed Senior Vice President of the Company. In
November 1994, Ms. Lebovics became President of NCT Hearing. From August 1,
1995, to May 1, 1996, she also served as Secretary of the Company. Ms. Lebovics
has held various positions in product marketing with Bristol-Myers, a consumer
products company, and in advertising with McCaffrey and McCall.
CY E. HAMMOND currently serves as Senior Vice President, Chief Financial
Officer of the Company. He joined the Company as Controller in January 1990 and
was appointed a Vice President in February 1994. Mr. Hammond also serves as
Acting Chief Financial Officer and Treasurer of NCT Audio, a position to which
he was elected on September 4, 1997, and Acting Chief Financial Officer,
Treasurer and Assistant Secretary for Advancel, a position to which he was
elected on January 5, 2000. 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. On January 5, 2000, he was
appointed Acting Chief Technical Officer of Advancel. 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.
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<PAGE> 47
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 the Chairman of Mondial Ltd. and Unified
Waste Services, and is also a director of American University in Cairo and the
Sound Shore Fund, Inc.
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 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 1999.
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.
JAMES MCMANUS currently serves as President and Chief Executive Officer of
DMC, a position he has held since March 1999. Prior to that and from April,
1998, he served as a consultant to DMC. He started his career as a Certified
Public Accountant in California. During the 10 years he spent with the Disney
Company in the financial area, the company's activities included the development
of Audio-Animatronics, Walt Disney World, Disney Theme Hotels, the City Planning
Board for Lake Buena Vista, Florida, and Disney's joint venture with Florida
Telephone. Subsequent to Disney, he designed and executed a financial turnaround
plan for Great Adventure Park in New Jersey. Later, Mr. McManus ran his own
computer consulting firm for several years providing customized computer systems
for small and medium size businesses. He was a member of the Radio City Music
Hall management team that revitalized New York's famous landmark, first as Chief
Financial Officer and then for 10 years as President and CEO. Mr. McManus has
always been active in the business community with involvement as Director, New
York Council of the Boy Scouts of America; Director, Hugh O'Brian Youth
Organization; Director, Association to Help Retarded Children; The Mayor's
Summer Youth Jobs Program and many others.
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<PAGE> 48
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish the
Company with copies of all such reports. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no reports were required for those persons, the Company
believes that, during the period from January 1, 1999 to December 31, 1999, all
filing requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this item is contained in a definitive proxy
statement that the Registrant will file on or before April 29, 2000, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information required under this item is contained in a definitive proxy
statement that the Registrant will file on or before April 29, 2000, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Between 1993 and 1994, the Company entered into five agreements with Quiet
Power 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. In March 1995, the Company entered
into a master agreement with QSI which granted QSI an exclusive worldwide
license to market, sell and distribute various quieting products in the utility
industry. Subsequently, the Company and QSI executed four letter agreements,
primarily revising payment terms. On December 24, 1999, the Company executed a
final agreement with QSI in which the Company agreed to write-off $239,000 of
indebtedness owed by QSI in exchange for the return by QSI to the Company of its
exclusive license to use NCT technology in various quieting products in the
utility industry. Such amount, originally due on January 1, 1998, had been fully
reserved by the Company.
On January 26, 1999, Carole Salkind, an accredited investor and spouse of a
former director, 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 the Company received the proceeds on January 28, 1999. The Note matures on
January 25, 2001 and earns interest at the prime rate as published from time to
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<PAGE> 49
time in The Wall Street Journal from the issue date until the Note becomes due
and payable. The Holder has the right at any time on or prior to the day the
Note is paid in full, to convert at any time, all or from time to time, any part
of the outstanding and unpaid amount of the Note into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price, as amended by the parties on September 19, 1999, of the
Note and any future notes, is the lesser of (i) the lowest closing transaction
price for the common stock on the securities market on which the common stock is
being traded, at any time during September 1999; (ii) the average of the closing
bid price for the common stock on the securities market on which the common
stock is being traded for five (5) consecutive trading days prior to the date of
conversion; or (iii) the fixed conversion price of $0.17. In no event will the
conversion price be less than $0.12 per share. The Holder agreed to purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999. The Company has agreed to extend such date for the
purchase of remaining installments of secured convertible notes to April 15,
2000. On various dates, the Holder has purchased additional installments of the
remaining $3.0 million principal amount of the secured convertible notes to the
Holder. As of March 27, 2000, the Company had received proceeds aggregating $4.0
million from the Holder and had issued secured convertible notes with the same
terms and conditions of the Note described above.
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<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K.
(a) (1) Financial Statements. The following financial statements are filed
as part of this Form 10-K.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1999.
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss for the years ended December 31, 1997, 1998 and 1999.
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1997, 1998 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1998 and 1999.
Notes to Financial Statements.
(a) (2) Financial Statement Schedules.
Report of Independent Auditors with Respect to Schedule.
Schedule II. Valuation and Qualifying Accounts.
Other schedules have been omitted as they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
(a) (3) Exhibits. The exhibits listed on the accompanying Index to Exhibits
are filed as part of this Annual Report on Form 10-K.
(b) No report on Form 8-K was filed during the last quarter of the year covered
by this Annual Report on Form 10-K.
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<PAGE> 51
NCT GROUP, INC.
INDEX TO EXHIBITS
ITEM 14(a)(3)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
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.
</TABLE>
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<PAGE> 52
<TABLE>
<S> <C> <C>
3(f) Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on July 24, 1998,
incorporated by reference to Exhibit 4 of the Company's
Registration Statement on Form S-3 (Registration No. 333-64967)
filed on September 30, 1998, as amended by Amendment No. 1
thereto filed on October 20, 1998.
3(g) By-laws of the Company, incorporated herein by reference to
Exhibit 3(b) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
3(h) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary
of the State of Delaware on July 29, 1999, incorporated herein by
reference to Exhibit 3(h) to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1999.
4(a) Warrant to purchase 125,000 shares of common stock of the Company
at a purchase price of $.20 per share issued to John J. McCloy
II, incorporated herein by reference to Exhibit 4(a) to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of common stock of the
Company at a purchase price of $.75 per share issued to John J.
McCloy II, incorporated herein by reference to Exhibit 4(b) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
4(c) Warrant #BW-2-R to purchase 862,500 shares of common stock of the
Company at a purchase price of $.75 per share issued to Michael
J. Parrella, incorporated herein by reference to Exhibit 4(c) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
4(d) Warrant #BW-4-R to purchase 201,250 shares of common stock of the
Company at a purchase price of $.75 per share issued to Irene
Lebovics, incorporated herein by reference to Exhibit 4(d) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(e) Warrant #BW-9-R and #BW-46-R to purchase 218,500 shares of common
stock of the Company at a purchase price of $.75 per share issued
to Jay M. Haft, incorporated herein by reference to Exhibit 4(e)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
4(f) Secretary's Certificate dated March 20, 1998, as to a two (2)
year extension of the expiration dates of the Warrants described
in 4(b), (c), (d) and (e) above, incorporated herein by reference
to Exhibit 4(f) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
</TABLE>
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<PAGE> 53
<TABLE>
<S> <C> <C>
4(g) Warrant Agreement, dated as of January 20, 1988, between the
Company and American Stock Transfer Company, as Warrant Agent,
relating to certain warrants to purchase common stock of the
Company at a price of $.40 per share issued to Sam Oolie, Oolie
Enterprises, John J. McCloy II, and Michael J. Parrella,
incorporated herein by reference to Exhibit 4(g) to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991.
* 4(h) Certificate of Designations, Preferences and Rights of Series E
Convertible Preferred Stock of the Company filed in
the Office of the Secretary of State of the State of Delaware on
December 24, 1998.
4(i) Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of the State of Delaware on September 8, 1999.
4(j) Certificate of Amendment of Certificate of Designations,
Preferences and Rights of Series F Convertible Preferred Stock of
the Company filed in the Office of the Secretary of the State of
Delaware on January 27, 2000.
4(k) Certificate of Designations, Preferences and Rights of Series G
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of the State of Delaware on March 6, 2000.
4(l) Corrected Certificate of Designations, Preferences and Rights of
Series G Convertible Preferred Stock of the Company filed in the
Office of the Secretary of the State of Delaware on March 10,
2000.
** 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.
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C> <C>
** 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.
</TABLE>
54
<PAGE> 55
<TABLE>
<S> <C> <C>
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.***
</TABLE>
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<PAGE> 56
<TABLE>
<S> <C> <C>
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).
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C> <C>
10(q) Master Agreement between Noise Cancellation Technologies, Inc.
and Quiet Power Systems, Inc. dated March 27, 1995, incorporated
herein by reference to Exhibit 10(a) of the Company's Current
Report on Form 8-K filed with the Securities and Exchange
commission on August 4, 1995.
10(q)(1) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated April 21, 1995, incorporated
herein by reference to Exhibit 10(b) of the Company's Current
Report on Form 8-K filed August 4, 1995.
10(q)(2) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated May 21, 1996, incorporated
herein by reference to Exhibit 10(q)(2) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
10(q)(3) Letter Agreement between Noise Cancellation Technologies, Inc.
and QuietPower Systems, Inc. dated April 9, 1997, incorporated
herein by reference to Exhibit 10(q)(3) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
10(r) Asset Purchase Agreement, dated September 16, 1994, between
Active Noise and Vibration Technologies, Inc. and the Company,
incorporated herein by reference to Exhibit 2 to the Company's
Current Report on Form 8-K filed September 19, 1994.
** 10(s) Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors (as adopted November 15, 1994 and amended through
August 16, 1996), incorporated herein by reference to Exhibit 4
to the Company's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on August 30, 1996
(Reg. No. 333-11209).
10(t) Variation of Teaming Agreement between Noise Cancellation
Technologies, Inc. and Ultra Electronics Limited dated April 6,
1995, incorporated herein by reference to Exhibit 10(c) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(1) Agreement for Sale and Purchase of Part of the Business and
Certain Assets among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited and Ultra Electronics
Limited dated April 6, 1995, incorporated herein by reference to
Exhibit 10(d) of the Company's Current Report on Form 8-K filed
August 4, 1995.
10(t)(2) Patent License Agreement among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated April 6, 1995, incorporated herein by
reference to Exhibit 10(e) of the Company's Current Report on
Form 8-K filed August 4, 1995.
</TABLE>
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<TABLE>
<S> <C> <C>
10(t)(3) License Agreement between Chaplin Patents Holding Co., Inc. and
Ultra Electronics Limited dated April 6, 1995, incorporated
herein by reference to Exhibit 10(f) of the Company's Current
Report on Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among Noise Cancellation
Technologies, Inc., Noise Cancellation Technologies (UK) Limited
and Ultra Electronics Limited dated May 15, 1995, incorporated
herein by reference to Exhibit 10(g) of the Company's Current
Report on Form 8-K filed August 4, 1995.
** 10(u) Agreement among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited, Dr. Andrew John Langley,
Dr. Graham Paul Eatwell and Dr. Colin Fraser Ross dated April 6,
1995, incorporated herein by reference to Exhibit 10(h) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(v) Securities Purchase Agreement dated April 8, 1996, by and
among the Company and Kingdon Associates, L.P., Kingdon Partners,
L.P. and M. Kingdon Offshore NV, together with Exhibit A-1
thereto, Form of Secured Convertible Note and Exhibit A-2
thereto, Registration Rights Agreement, incorporated herein by
reference to Exhibit 10(a) of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996.
10(v)(1) Security Agreement dated April 10, 1996, between the Company and
Kingdon Associates, L.P., Kingdon Partners, L.P. and M. Kingdon
Offshore NV, dated August 13, 1996, incorporated herein by
reference to Exhibit 10(b) of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996.
10(v)(2) Notices of Exercise of Options to Purchase common stock by
Kingdon Associates, L.P., Kingdon Partners, L.P., and M. Kingdon
Offshore,NV, dated August 13, 1996, incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
10(v)(3) Notices of Conversion of Secured Convertible Notes by Kingdon
Associates, L.P., Kingdon Partners, L.P. and M. Kingdon Offshore
NV, dated August 13, 1996, incorporated herein by reference to
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
10(w)(1) Cross License Agreement dated April 15, 1997, among Verity Group
plc, New Transducers Limited and Noise Cancellation Technologies,
Inc., incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.***
10(w)(2) Security Deed dated April 14, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference
to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C> <C>
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.
10(z) License Agreement dated January 25, 1999, between NCT Group, Inc.
and DistributedMedia.com, Inc., incorporated by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
10(aa) Securities Exchange Agreement, dated as of October 9, 1999, among
the Company, Austost Anstalt Schaan and Balmore Funds, S.A.
incorporated by reference to Exhibit 10(a) of the Company's
Current Report on Form 8-K filed on January 12, 2000.
10(ab) Registration Rights Agreement, dated as of October 9, 1999, among
the Company, Austost Anstalt Schaan and Balmore Funds, S.A.
incorporated by reference to Exhibit 10(b) of the Company's
Current Report on Form 8-K filed on January 12, 2000.
</TABLE>
59
<PAGE> 60
<TABLE>
<S> <C> <C>
10(ac) Securities Purchase Agreement, dated as of December 27, 1999,
among the Company, Austost Anstalt Schaan, Balmore Funds, S.A.
and Nesher, Inc. incorporated by reference to Exhibit 10(c) of
the Company's Current Report on Form 8-K filed on January 12,
2000.
10(ad) Registration Rights Agreement, dated as of December 27, 1999,
among the Company, Austost Anstalt Schaan, Balmore Funds, S.A..
Nesher, Inc. and Libra Finance S.A. incorporated by reference to
Exhibit 10(d) of the Company's Current Report on Form 8-K filed
on January 12, 2000.
10(ae) Amendment No. 1 to the Securities Exchange Agreement, dated as of
March 7, 2000, among the Company, Austost Anstalt Schaan and
Balmore Funds, S.A.
* 21 Subsidiaries
23(a) Consent of Richard A. Eisner & Company, LLP
23(b) Consent of Peters Elworthy & Moore, Chartered Accountants.
* 27 Financial Data Schedule.
* 99(a) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding audited financial
statements of the Company's U.K. subsidiaries and reports of
Peters Elworthy & Moore, Chartered Accountants, on their audits
of such financial statements as at December 31, 1998 and for the
year ended December 31, 1998.
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
</TABLE>
60
<PAGE> 61
<TABLE>
<S> <C> <C>
Company's U.K. subsidiaries for the year ended December 31, 1998
were audited under auditing standards substantially similar to
US General Accepted Auditing Standards.
99(e) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. regarding confirmation
that the accounts of the Company's U.K. subsidiaries for the year
ended December 31, 1997 were audited under auditing standards
substantially similar to US General Accepted Auditing Standards,
incorporated by reference to Exhibit 99(d) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
99(f) Employment Agreement by and between the Company and Paul D.
Siomkos, dated February 26, 1998, incorporated by reference to
Exhibit 99 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998.
* 99(g) Letter from Peters Elworthy & Moore, Chartered
Accountants, to Noise Cancellation Technologies, Inc. regarding
confirmation that the accounts for the year ended December 31,
1996 were audited under auditing standards substantially similar
to US General Accepted Auditing Standards.
99(h) Term Sheet Litigation Settlement dated as of October 9, 1999, by
and among NCT Group, Inc., NCT Audio Products, Inc., Austost
Anstalt Schaan, Balmore Funds, S.A. and LH Financial.
99(i) Term Sheet dated as of March 6, 2000, among NCT Group, Inc.,
NCT Hearing Products, Inc. and Pro Tech Communications, Inc.
</TABLE>
- ----------
* 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.
61
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
NCT Group, Inc.
We have audited the accompanying consolidated balance sheets of NCT Group, Inc.
and subsidiaries (the "Company") as of December 31, 1998 and 1999, 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, 1999. 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 1997, 1998 and
1999 financial statements of the Company's two foreign subsidiaries. These
subsidiaries accounted for revenues of approximately $67,000, $28,000 and $4,000
for the years ended December 31, 1997, 1998 and 1999, respectively, and assets
of approximately $301,000, $218,000 and $164,000 as of December 31, 1997, 1998
and 1999, 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, 1998 and 1999 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, 1999 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
February 25, 2000
With respect to Note 11
March 7, 2000
F-1
<PAGE> 63
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
--------- ---------
ASSETS (Note 8)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 529 $ 1,126
Restricted cash -- 667
Accounts receivable, net 716 237
Inventories, net of reserves 3,320 2,265
Other current assets 185 152
--------- ---------
Total current assets $ 4,750 $ 4,447
Property and equipment, net 997 449
Goodwill, net 1,506 3,497
Patent rights and other intangibles, net 2,881 2,296
Other assets 5,331 2,688
--------- ---------
$ 15,465 $ 13,377
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,226 $ 3,647
Accrued expenses 1,714 3,189
Accrued payroll, taxes and related expenses 241 64
Customers' advances -- 21
Other liabilities 756 807
--------- ---------
Total current liabilities $ 5,937 $ 7,728
--------- ---------
Convertible notes and accrued interest $ -- $ 4,107
--------- ---------
Commitments and contingencies
Minority interest in consolidated subsidiary
Preferred stock, $.10 par value, 1,000 shares authorized; 60 and 3 shares
issued and outstanding, respectively
(redemption amount $6,102,110 and $317,162, respectively) $ 6,102 $ 317
--------- -------
Common stock subject to resale guarantee $ -- $ 1,592
--------- -------
Stockholders' equity:
Preferred stock, $.10 par value, 10,000,000 shares authorized
Series C issued and outstanding 700 and 0 shares, respectively
(redemption amount $731,222 and $0, respectively) $ 702 $ --
Series D issued and outstanding 6,000 and 0 shares, respectively
(redemption amount $6,102,110 and $0, respectively) 5,240 --
Series E issued and outstanding 10,580 and 0 shares, respectively
(redemption amount $10,582,319 and $0, respectively) 3,298 --
Series F issued and outstanding 0 and 4,715 shares respectively
(redemption amount $0 and $4,789,407, respectively) -- 2,790
Common stock, $.01 par value, authorized: 255,000,000 and 325,000,000 shares,
respectively; issued: 156,337,316 and 268,770,739 shares, respectively 1,563 2,688
Additional paid-in-capital 107,483 130,865
Accumulated deficit (107,704) (131,475)
Other comprehensive loss:
Cumulative translation adjustment 45 65
Stock subscriptions receivable (4,000) (1,000)
Unearned portion of compensatory stock, warrants and options (238) (55)
Expenses to be paid with common stock -- (1,282)
Treasury stock (6,078,065 shares of common stock) (2,963) (2,963)
--------- ---------
Total stockholders' equity $ 3,426 $ (367)
--------- ---------
$ 15,465 $ 13,377
========= =========
See notes to Financial Statements.
</TABLE>
F-2
<PAGE> 64
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Technology licensing fees and royalties $ 3,630 $ 802 $ 3,552
Product sales, net 1,720 2,097 2,208
Engineering and development services 368 425 1,303
-------- -------- --------
Total revenues $ 5,718 $ 3,324 $ 7,063
-------- -------- --------
COSTS AND EXPENSES:
Costs of product sales $ 2,271 $ 2,235 $ 2,767
Costs of engineering and development services 316 275 2,216
Selling, general and administrative 5,217 11,238 11,801
Research and development 6,235 7,220 6,223
Write down of investment in unconsolidated affiliate -- -- 2,385
Reserve for promissory notes and pre-acquisition costs -- -- 1,788
Impairment of goodwill -- -- 3,125
Provision for doubtful accounts 130 232 77
Other (income) expense - (3,264) (100)
Interest expense (includes $1,420 and $204 of discounts on
beneficial conversion feature on convertible debt
in 1997 and 1999) 1,514 9 578
Interest income (117) (438) (26)
-------- -------- --------
Total costs and expenses $ 15,566 $ 17,507 $ 30,834
-------- -------- --------
NET (LOSS) $ (9,848) $ (14,183) $(23,771)
Preferred stock beneficial conversion feature 1,623 3,200 10,567
Accretion of difference between carrying amounts and
Redemption amount of redeemable preferred stock 285 485 494
-------- -------- --------
NET (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $(11,756) $(17,868) $(34,832)
======== ======== ========
Weighted average number of common shares outstanding 124,101 143,855 190,384
======== ======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.09) $ (0.12) $ (0.18)
======== ======== ========
See notes to Financial Statements.
</TABLE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
-------- ---------- ---------
<S> <C> <C> <C>
NET (LOSS) $ (9,848) $(14,183) $(23,771)
Other comprehensive income/(loss)
Currency translation adjustment (23) (74) 20
-------- -------- --------
COMPREHENSIVE (LOSS) $ (9,871) $(14,257) $(23,751)
======== ======== ========
See notes to Financial Statements.
</TABLE>
F-3
<PAGE> 65
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------- -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- -- $ -- -- $ --
Sale of common stock -- -- -- -- -- --
Shares issued upon exercise of warrants & options -- -- -- -- -- --
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 -- -- -- -- -- --
Net loss -- -- -- -- -- --
Currency translation adjustment -- -- -- -- -- --
Restricted shares issued for Directors' compensation -- -- -- -- -- --
Warrant issued in conjunction with convertible debt -- -- -- -- -- --
Compensatory stock options and warrants -- -- -- -- -- --
------ ------- ------ ------ ------ ------
Balance at December 31, 1997 13 $10,458 -- $ -- -- $ --
Shares issued in consideration for patent rights -- -- -- -- -- --
Return of shares for subscription receivable -- -- -- -- -- --
Conversion of Series C preferred stock, less expenses of $53 (12) (11,726) -- -- 2 1,577
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- 1,970 -- -- -- --
Offering 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 -- -- -- -- -- (3,179)
shareholders
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- -- 165
Exchange of subsidiary common stock for parent common stock -- -- -- -- -- --
Payment of stock subscription receivable -- -- -- -- -- --
Repurchase of common shares -- -- -- -- -- --
Acquisition of Advancel, less expenses of $24 -- -- -- -- -- --
Other -- -- -- -- -- --
Net Loss -- -- -- -- -- --
Currency translation adjustment -- -- -- -- -- --
Restricted shares issued for compensation -- -- -- -- -- --
Compensatory stock options and warrants -- -- -- -- -- --
------ ------- ------ ------ ------ -------
Balance at December 31, 1998 1 $ 702 6 $ 5,240 11 $ 3,298
Sale of common stock, less expenses of $17 -- -- -- -- -- --
Less common stock subject to resale -- -- -- -- -- --
Conversion of Series C preferred stock (1) (730) -- -- -- --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- 28 -- -- -- --
Exchange of Series A preferred stock in subsidiary -- -- -- -- -- --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- -- --
Conversion of Series D preferred stock -- -- (6) (5,273) -- --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- 33 -- --
Sale of Series E preferred stock, less expenses of $487 -- -- -- -- 2 (487)
Conversion of Series E preferred stock -- -- -- -- (4) (2,443)
Exchange of Series E preferred stock for license fees -- -- -- -- (9) (3,631)
Discount on beneficial conversion price to preferred
shareholders -- -- -- -- -- (2,666)
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- -- 5,929
Sale of Series F preferred stock, less expenses of $104 -- -- -- -- -- --
Conversion of Series F preferred stock -- -- -- -- -- --
Exchange of Series F preferred stock for license fees -- -- -- -- -- --
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 -- -- -- -- -- --
Shares issued in consideration for patent rights -- -- -- -- -- --
Shares issued for settlement obligations/prepayments -- -- -- -- -- --
Less common stock subject to resale -- -- -- -- -- --
Warrant issued in conjunction with convertible debt -- -- -- -- -- --
Beneficial conversion feature on convertible note -- -- -- -- -- --
Net loss -- -- -- -- -- --
Currency translation adjustment -- -- -- -- -- --
Shares issued upon exercise of warrants & options -- -- -- -- -- --
Compensatory stock options and warrants -- -- -- -- -- --
------ ------- ------ ------- ------ -------
Balance at December 31, 1999 -- $ -- -- $ -- -- $ --
====== ======= ====== ======= ====== =======
See notes to Financial Statements.
</TABLE>
F-4
<PAGE> 66
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
<TABLE>
<CAPTION>
SERIES F
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ --------- ------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 111,615 $1,116 $ 85,025 $ (83,673)
Sale of common stock -- -- 2,857 29 471 --
Shares issued upon exercise of warrants & options -- -- 1,996 20 1,115 --
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 --
Common stock issued upon conversion of convertible debt
less expenses of $168 -- -- 16,683 167 4,714 --
Net loss -- -- -- -- -- (9,848)
Currency translation adjustment -- -- -- -- -- --
Restricted shares issued for Directors' compensation -- -- 10 -- 2 --
Warrant issued in conjunction with convertible debt -- -- -- -- 34 --
Compensatory stock options and warrants -- -- -- -- 40 --
--- ------- ------- ------ -------- ---------
Balance at December 31, 1997 -- $ -- 133,161 $1,332 $ 96,379 $ (93,521)
Shares issued in consideration for patent rights -- -- 1,250 12 494 --
Return of shares for subscription receivable -- -- -- -- -- --
Conversion of Series C preferred stock, less expenses -- -- 20,665 207 9,889 --
of $53
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- (1,970) --
Offering 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 -- -- -- -- -- --
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 11 545 --
Payment of stock subscription receivable -- -- -- -- -- --
Repurchase of common shares -- -- -- -- -- --
Acquisition of Advancel, less expenses of $24 -- -- -- -- (151) --
Other -- -- 1 -- (48) --
Net Loss -- -- -- -- -- (14,183)
Currency translation adjustment -- -- -- -- -- --
Restricted shares issued for compensation -- -- 125 1 96 --
Compensatory stock options and warrants -- -- -- -- 301 --
--- ------- ------- ------ -------- ---------
Balance at December 31, 1998 -- $ -- 156,337 $1,563 $107,483 $(107,704)
Sale of common stock, less expenses of $17 -- -- 4,135 41 442 --
Less common stock subject to resale -- -- -- -- (600) --
Conversion of Series C preferred stock -- -- 1,512 15 715 --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- (28) --
Exchange of Series A preferred stock in subsidiary -- -- 11,700 117 9,189 --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- (68) --
Conversion of Series D preferred stock -- -- 12,274 123 5,150 --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- (33) --
Sale of Series E preferred stock, less expenses of $487 -- -- -- -- -- --
Conversion of Series E preferred stock -- -- 26,609 266 2,177 --
Exchange of Series E preferred stock for license fees -- -- -- -- 2,781 --
Discount on beneficial conversion price to preferred
shareholders -- -- -- -- 2,666 --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- (5,929) --
Sale of Series F preferred stock, less expenses of $104 9 4,896 -- -- -- --
Conversion of Series F preferred stock (3) (1,652) 25,306 253 1,399 --
Exchange of Series F preferred stock for license fees (1) (574) -- -- 574 --
Discount on beneficial conversion price to preferred
shareholders -- (4,884) -- -- 4,884 --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- 5,004 -- -- (5,004) --
Exchange of subsidiary common stock for parent common -- -- 17,738 178 2,454 --
stock Shares issued in consideration for patent rights -- -- -- -- 88 --
Shares issued for settlement obligations/prepayments -- -- 13,155 132 2,371 --
Less common stock subject to resale -- -- -- -- (537) --
Warrant issued in conjunction with convertible debt -- -- -- -- 446 --
Beneficial conversion feature on convertible note -- -- -- -- 204 --
Net loss -- -- -- -- -- (23,771)
Currency translation adjustment -- -- -- -- -- --
Shares issued upon exercise of warrants & options -- -- 5 -- -- --
Compensatory stock options and warrants -- -- -- -- 41 --
--- ------- ------- ------ -------- ---------
Balance at December 31, 1999 5 $ 2,790 268,771 $2,688 $130,865 $(131,475)
=== ======= ======= ====== ======== =========
See notes to Financial Statements.
</TABLE>
F-5
<PAGE> 67
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
<TABLE>
<CAPTION>
UNEARNED
PORTION OF EXPENSES
STOCK COMPEN- TO BE PAID
CUMULATIVE SUBSCRIP- SATORY WITH TREASURY STOCK
TRANSLATION TION OPTION/ COMMON ---------------
ADJUSTMENT RECEIVABLE WARRANT STOCK SHARES AMOUNT TOTAL
----------- ---------- ---------- ---------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $142 $ -- $ -- $ -- -- $ -- $ 2,610
Sale of common stock -- -- -- -- -- -- 500
Shares issued upon exercise of warrants & options -- (64) -- -- -- -- 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 -- (326) -- -- -- -- 3,247
Common stock issued upon conversion of convertible debt
less expenses of $168 -- -- -- -- -- -- 4,881
Net loss -- -- -- -- -- -- (9,848)
Currency translation adjustment (23) -- -- -- -- -- (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 $119 $ (390) $ -- $ -- -- -- $ 14,377
Shares issued in consideration for patent rights -- -- -- -- -- -- 506
Return of shares for subscription receivable -- 64 -- -- 158 (64) --
Conversion of Series C preferred stock, less expenses
of $53 -- -- -- -- -- -- (53)
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- -- -- --
Offering 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 -- (4,000) -- -- 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 -- -- -- -- 326
Repurchase of common shares -- -- -- -- 5,607 (3,292) (3,292)
Acquisition of Advancel, less expenses of $24 -- -- (94) -- (1,787) 1,128 883
Other -- -- -- -- -- -- (48)
Net Loss -- -- -- -- -- -- (14,183)
Currency translation adjustment (74) -- -- -- -- -- (74)
Restricted shares issued for compensation -- -- -- -- -- -- 97
Compensatory stock options and warrants -- -- (144) -- -- -- 157
---- ------- ----- ------- ----- ------- --------
Balance at December 31, 1998 $ 45 $(4,000) $(238) $ -- 6,078 $(2,963) $ 3,426
Sale of common stock, less expenses of $17 -- -- -- -- -- -- 483
Less common stock subject to resale -- -- -- -- -- -- (600)
Conversion of Series C preferred stock -- -- -- -- -- -- --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- -- --
Exchange of Series A preferred stock in subsidiary -- -- -- -- -- -- 9,306
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- -- -- (68)
Conversion of Series D preferred stock -- -- -- -- -- -- --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- -- -- --
Sale of Series E preferred stock, less expenses of $487 -- 4,000 -- -- -- -- 3,513
Conversion of Series E preferred stock -- -- -- -- -- -- --
Exchange of Series E preferred stock for license
fees -- -- -- -- -- -- (850)
Discount on beneficial conversion price to preferred
shareholders -- -- -- -- -- -- --
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders -- -- -- -- -- -- --
Sale of Series F preferred stock, less expenses of $104 -- (1,000) -- -- -- -- 3,896
Conversion of Series F preferred stock -- -- -- -- -- -- --
Exchange of Series F preferred stock for license fees -- -- -- -- -- -- --
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 -- -- -- -- -- -- 2,632
Shares issued in consideration for patent rights -- -- -- -- -- -- 88
Shares issued for settlement obligations/prepayments -- -- -- (2,503) -- -- --
Less common stock subject to resale -- -- -- 1,221 -- -- 684
Warrant issued in conjunction with convertible debt -- -- -- -- -- -- 446
Beneficial conversion feature on convertible note -- -- -- -- -- -- 204
Net loss -- -- -- -- -- (23,771)
Currency translation adjustment 20 -- -- -- -- -- 20
Shares issued upon exercise of warrants & options -- -- -- -- -- -- --
Compensatory stock options and warrants -- -- 183 -- -- -- 224
---- ------- ----- ------- ----- ------- --------
Balance at December 31, 1999 $ 65 $(1,000) $ (55) $(1,282) 6,078 $(2,963) $ (367)
==== ======= ===== ======= ===== ======= ========
See notes to Financial Statements.
</TABLE>
F-6
<PAGE> 68
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(9,848) $(14,183) $(23,771)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 899 1,030 1,970
Common stock options and warrants issued as consideration for:
Compensation 42 301 224
Interest on debentures 51 -- --
Convertible debt 34 -- --
Operating expenses -- -- 401
Costs incurred related to convertible debt 211 -- 102
Write down of investment in unconsolidated affiliate -- -- 2,385
Discount on beneficial conversion feature on convertible debt 1,420 -- 204
Provision for tooling costs and write off 515 151 180
Provision for inventory -- -- 199
Provision for doubtful accounts 130 232 77
Impairment of goodwill -- -- 3,125
Reserve for promissory note and pre-acquisition costs -- -- 1,788
Preferred stock received for license fee -- -- (850)
(Gain) loss on disposition of fixed assets (4) 34 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (127) (193) 209
(Increase) decrease in license fees receivable (50) 8 192
(Increase) decrease in inventories, net of reserves (433) (1,986) 858
(Increase) in other assets (12) (12) (1,168)
Increase in accounts payable and accrued expenses 135 1,816 2,851
Increase (decrease) in other liabilities (414) 48 427
------- -------- --------
Net cash used in operating activities $(7,451) $(12,754) $(10,597)
------- -------- --------
Cash flows from investing activities:
Capital expenditures $ (244) $ (548) $ (51)
Increase in restricted cash -- -- (667)
Acquisition of patent rights -- (822) --
Acquisition of Advancel (net of $100 cash acquired) -- 40 --
Acquisition and advances, including $135 of costs -- (5,134) --
Sale of capital equipment 67 46 --
------- -------- --------
Net cash used in investing activities $ (177) $ (6,418) $ (718)
------- -------- --------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) $ 3,199 $ -- $ 4,000
Sale of common stock (net) 500 (51) 483
Sale of Series C preferred stock (net) 11,863 (53) --
Sale of Series D preferred stock (net) -- 5,138 --
Sale of Series E preferred stock (net) -- -- 3,513
Sale of Series F preferred stock (net) -- -- 3,896
Sale of subsidiary Series A preferred stock (net) -- 5,138 --
Sale of subsidiary common stock (net) 3,247 (21) --
Exercise of stock purchase warrants and options 1,071 -- --
Collections on subscriptions receivable -- 326 --
Purchase of treasury stock -- (3,292) --
------- -------- --------
Net cash provided by financing activities $19,880 $ 7,185 $ 11,892
------- -------- --------
Effect of exchange rate changes on cash $ (16) $ (88) $ 20
Net increase (decrease) in cash and cash equivalents $12,236 $(12,075) $ 597
Cash and cash equivalents - beginning of period 368 12,604 529
------- ---------- --------
Cash and cash equivalents - end of period $12,604 $ 529 $ 1,126
======= ========== ========
Cash paid for interest $ 8 $ 9 $ 4
======= ========== ========
See Note 9 for issuance of common stock for patents and acquisitions.
See Note 12 with respect to issuance of securities for compensation.
See notes to Financial Statements.
</TABLE>
F-7
<PAGE> 69
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 technologies and products based upon its extensive
portfolio of proprietary algorithms. The Company specializes in the utilization
of sound and signal waves to electronically reduce or eliminate noise and
vibration, improve signal-to-noise ratio and enhance sound quality. The Company
develops its technologies for integration into a wide range of products for
applications serving major markets in the transportation, manufacturing,
commercial, consumer products and communications industries. The Company designs
some of its applications so that other firms can integrate them with their own
inventions and technologies to develop such technology into commercial
applications, to integrate the applications into existing products and to
distribute such technologies and products into various industrial, commercial
and consumer markets. The Company also markets its technologies through
licensing to third parties for fees and royalties. Commercial application of the
Company's technologies is comprised of a number of product lines, including
NoiseBuster(R) communications headsets and NoiseBuster Extreme!(TM) consumer
headsets; Gekko(TM) flat speakers; flat panel transducers ("FPT");
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.
The Company has incurred substantial losses from operations since its
inception, which have amounted to $131.5 million on a cumulative basis through
December 31, 1999. These losses, which include the costs for development of
products for commercial use, have been funded primarily from the sale of
preferred stock and common stock, including the exercise of warrants or options
to purchase common stock, and by technology licensing fees and royalties and
engineering and development funds received from joint venture and other
strategic partners.
Cash and cash equivalents amounted to $1.1 million at December 31, 1999. In
addition, the Company had $3.3 million negative working capital at December 31,
1999. Management believes that currently available funds will not be sufficient
to sustain the Company at present levels for the next 12 months. The Company's
ability to continue as a going concern is dependent on funding from several
sources, including available cash, cash from the exercise of warrants and
options, and cash inflows generated from the Company's revenue sources:
technology licensing fees and royalties, product sales, and engineering and
development services. The level of realization of funding from the Company's
revenue sources is presently uncertain. In the event that anticipated technology
licensing fees and royalties, product sales, and engineering and development
services do not generate sufficient cash, management believes additional working
capital financing must be obtained. There is no assurance any such financing is
or would become available.
F-8
<PAGE> 70
In the event that funding from internal sources is insufficient, the
Company would have to substantially cut back its level of spending which could
substantially curtail the Company's operations. These reductions could have an
adverse effect on the Company's relations with its strategic partners and
customers. Uncertainty exists about the adequacy of current funds to support the
Company's activities until positive cash flow from operations can be achieved,
and uncertainty exists about the availability of financing from other sources to
fund any cash deficiencies. See Note 11 with respect to recent financing.
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, 1999 about the Company's ability to continue
as a going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of the
carrying amount of recorded assets or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries after elimination of all material
inter-company transactions and accounts. Investments in affiliates in which the
Company maintains significant influence, but not control, (20% to 50% ownership)
are accounted for by the equity method. All other investments in affiliates are
carried at cost.
REVENUE RECOGNITION:
Revenue is recognized when earned. Revenue from product sales is recognized
when the product is shipped. Revenue from engineering and development services
is generally recognized and billed as the services are performed. However, for
certain engineering and development services contracts, revenue is recognized
using 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 of
actual costs incurred to total estimated costs at completion. Estimated losses
are recorded when identified. Revenues recognized under the percentage of
completion method amounted to $0, $0.1 million and $1.3 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
F-9
<PAGE> 71
For technology licensing fees paid by joint venturers, co-venturers,
strategic partners or other licensees which are nonrefundable, revenue is
recognized upon execution of the license agreement unless it is subject to
completion of any performance criteria specified within the agreement, in which
case it is deferred until such performance criteria is met. Royalties are
frequently required pursuant to license agreements or may be the subject of
separately executed royalty agreements. Revenue from royalties is recognized
ratably over the royalty period based upon periodic reports submitted by the
royalty obligor or based on minimum royalty requirements.
ADVERTISING:
Advertising costs are expensed as incurred. Advertising expense for years
ended December 31, 1997, 1998 and 1999 was $0.5 million, $1.7 million and $1.2
million, respectively.
CASH AND CASH EQUIVALENTS:
Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash and have original maturities of three months or
less. Restricted cash consists of the balance of an escrow account established
in conjunction with the issuance of a convertible promissory note (see Note 8).
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
on an average cost basis. The Company assesses the realizability of inventories
by periodically conducting a complete physical inventory and reviewing the
movement of inventory on an item-by-item basis to determine the value of items
which are slow moving and obsolete. The potential for near-term product
engineering changes and/or technological obsolescence and current realizability
are considered in determining the adequacy of inventory reserves. At
December 31, 1998 and 1999, the Company's inventory reserves were $0.5 million.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the depreciable assets using the straight-line
method. Leasehold improvements are amortized over the shorter of the useful
lives or the related lease term.
GOODWILL, PATENT RIGHTS AND OTHER INTANGIBLE ASSETS:
The excess of the cost over the fair value of net assets of purchased
businesses is recorded as goodwill. Goodwill is also recorded by the Company on
the acquisition of minority interests of a subsidiary of the Company for shares
of the Company's common stock. Goodwill is amortized on a straight-line basis
over five years. Goodwill amortization expense was $0, less than $0.1 million
and $1.0 million for 1997, 1998 and 1999, respectively. Accumulated goodwill
amortization was less than $0.1 million and $4.2 million at December 31, 1998
and 1999, respectively.
F-10
<PAGE> 72
Patent rights and other intangible assets are stated at cost and are
amortized on a straight-line basis over the remaining useful lives, ranging from
one to fifteen years. Amortization expense was $0.3 million, $0.5 million and
$0.6 million for 1997, 1998 and 1999, respectively. Accumulated amortization was
$2.3 million and $2.9 million at December 31, 1998 and 1999, respectively.
The Company examines the carrying value of goodwill, patent rights and
other intangible assets to determine whether there are any impairment losses. If
indicators of impairment were present in intangible assets used in operations,
and future undiscounted cash flows were not expected to be sufficient to recover
the assets' carrying amount, an impairment loss would be charged to expense in
the period identified.
The Company recognized an impairment loss from goodwill of $3.1 million in
1999. No other events have been identified that would indicate an impairment of
the value of material intangible assets recorded in the accompanying
consolidated financial statements.
FOREIGN CURRENCY TRANSLATION:
The currency effects of translating the financial statements of the
Company's foreign entities that operate in local currency environments, notably
the United Kingdom operations, are included in the "cumulative translation
adjustment" component of stockholders' equity. The currency transaction gains
and losses are included in the consolidated statements of operations and were
not material for any periods presented.
LOSS PER COMMON SHARE:
The Company reports loss per common share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
Generally, the per share effects of potential common shares such as warrants,
options, convertible debt and convertible preferred stock have not been
included, as the effect would be antidilutive (see Notes 11 and 12). However,
when preferred stock will be convertible to common stock at a conversion rate
that is at a discount from the common stock market price at the time of
issuance, the discounted amount is an assured incremental yield, the "beneficial
conversion feature," to the preferred shareholders and is accounted for as an
embedded dividend to preferred shareholders. The Company has reflected such
beneficial conversion feature as a preferred stock dividend and as an adjustment
to the net loss attributable to common stockholders.
CONCENTRATIONS OF CREDIT RISK:
The Company's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents and trade receivables. The
Company maintains its cash and cash equivalents in two banks. The total cash
balances are insured by the F.D.I.C. up to $100,000 per bank. Deposits in excess
of federally insured limits were $1.6 million at December 31, 1999. The
Company's trade accounts receivable result primarily from sales of products and
services to original equipment manufacturers ("OEMs"), distributors and end
users in various industries
F-11
<PAGE> 73
worldwide. During 1999, two customers each had 10% or greater of the total
revenue recognized, an aggregate of 42% of the 1999 total revenue. These same
two customers accounted for approximately 10% of accounts receivable before
allowances at December 31, 1999. The Company does not require collateral or
other security to support customer receivables.
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 these estimates.
STOCK-BASED COMPENSATION:
The Company reports stock-based compensation in accordance with 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 options and warrants. (See Note 12.)
COMPREHENSIVE LOSS:
The Company reports comprehensive loss in accordance with 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
changes in stockholders' equity from all sources during the period other than
those resulting from investments by and distributions to shareholders.
Accordingly, the consolidated statements of comprehensive loss are presented,
while accumulated other comprehensive loss is included on the balance sheet as a
component of stockholders' equity. Due to availability of net operating losses,
there is no tax effect associated with any component of other comprehensive
loss. Comprehensive loss includes gains and losses on foreign currency
translation adjustments.
F-12
<PAGE> 74
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION:
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires 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.
(See Note 17.)
3. JOINT VENTURES AND OTHER STRATEGIC ALLIANCES:
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 technologies and products containing such technologies. 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 often
includes amounts paid or services rendered for engineering and development. In
exchange for this funding, the other parties generally receive 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, 1999, there
were no preferred distributions due to joint venture partners from future
profits of the joint ventures.
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 the equity method of accounting. The Company will not resume
the equity method of accounting until its share of future profits is sufficient
to recover any cumulative losses that have not previously been recorded. At
December 31, 1999, 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.
Certain of the joint ventures become suppliers to the Company and to other
of the joint ventures and transfer products to the related entities based upon
pricing formulas established in the agreements. Such formulas are generally
based upon fully burdened cost, as defined in the agreements.
Technology licensing fees and engineering and development services paid by
joint ventures to the Company are recorded as revenue when there is no recourse
to the Company for these amounts or any commitment by the Company to fund the
obligations of the venture. Total revenues recorded by the Company relating to
the joint ventures and alliances, or their principals, for technology licensing
fees and royalties, engineering and development services and product sales were
as follows (in thousands):
F-13
<PAGE> 75
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
JOINT VENTURE/ALLIANCE 1997 1998 1999
- ---------------------- ------ ---- ------
<S> <C> <C> <C>
Walker Noise Cancellation Technologies $ 61 $ -- $ --
Ultra Electronics, Ltd. -- 68 40
Siemens Medical Systems, Inc. 172 102 14
AB Electrolux 34 -- --
Oki Electric Industry Co., Ltd. -- 8 80
VLSI Technology, Inc. -- 285 --
STMicroelectronics S.A. &
STMicroelectronics S.r.l -- 246 2,156
Lernout & Hauspie Speech Products N.V. 800
New Transducers Ltd. 3,000 -- 500
------ ---- ------
Total $3,267 $709 $3,590
====== ==== ======
</TABLE>
Outlined below is a summary of the nature and terms of selected joint
ventures and other strategic alliances:
Ultra Electronics Ltd. ("Ultra") (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. Such $2.6 million technology
license fee was recognized as revenue in 1995. 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. The Company recognized $68,000 and $40,000 in royalty
revenue in 1998 and 1999, respectively.
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 the terms of the Cross
License, the Company licensed patents and patents pending which relate to FPTTM
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
and 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. Concurrently 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
F-14
<PAGE> 76
specified number of shares of 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 were 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 were covered by the option granted by NXT plc to the Company. The
exercise price under each option was 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 other agreements
(respectively, the "Cross License Agreement dated September 27, 1997" and the
"Master License Agreement"). The material changes effected by these replacement
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 could exercise their respective stock purchase option to
September 27, 1997.
On April 30, 1998, the Company completed the sale of five million ordinary
shares of NXT plc acquired upon the Company's exercise on April 7, 1998 of the
option (described above) it held to purchase such shares at a price of 50 pence
per share. The Company realized a $3.2 million gain from the exercise and sale
of the shares under such option, which is included in other income in 1998.
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. NCT Audio recorded royalty expense of $160,000 in
1999, and a liability of $64,000 ($160,000 royalty expense less patent expense
reimbursement of $96,000) at December 31, 1999.
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
F-15
<PAGE> 77
has granted a non-exclusive license to VLSI for certain patents and patents
pending which relate to the Company's ClearSpeech(R) technologies. In 1998, the
Company recorded $0.3 million in related engineering services. The Company will
recognize royalties on future products sold by VLSI incorporating the
ClearSpeech(R) technology. The Company recognized no royalty revenue in 1999.
STMicroelectronics SA & STMicroelectronics S.r.l ("ST"). On November 16,
1998, Advancel Logic Corporation ("Advancel"), a majority-owned subsidiary
acquired by the Company in September 1998, 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(2)J(TM) for Java(TM) ("t(2)J-Processor Core") to combine it with its proven
secure architecture and advanced nonvolatile memory technology. Advancel
recorded a $0.2 million license fee in 1998. In 1999, Advancel recorded an
additional $0.2 million license fee, $0.9 million non-refundable royalty and
$1.1 million engineering and development services funding.
Lernout & Hauspie Speech Products N.V. ("L&H"). On March 31, 1999, the
Company signed a license agreement with L&H. The agreement provides the Company
with a worldwide, non-exclusive, non-transferable license to selected L&H
technology for use in NCT's ClearSpeech(R) products. The Company recorded a
prepaid royalty of $0.9 million. On April 12, 1999, the Company granted a
worldwide non-exclusive, non-transferable license to L&H. The agreement provides
L&H access to NCT's present and future noise and echo cancellation algorithms
for use in L&H's technology. In consideration of the Company's grant of a
license to L&H, the Company recognized a non-refundable royalty fee of $0.8
million. During the third quarter of 1999, the Company and L&H agreed to offset
the balances owed each other. Consequently, the Company's balance due L&H at
December 31, 1999 is $0.1 million.
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. The Company recognized $0.1 million in royalty
revenue in 1999.
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4. ACCOUNTS RECEIVABLE:
Accounts receivable comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
----- ----
<S> <C> <C>
Technology license fees and royalties $ 192 $ --
Joint ventures and affiliates 33
Other trade receivables 691 287
Unbilled receivables 61 --
----- ----
$ 944 $320
Allowance for doubtful accounts (228) (83)
----- ----
Accounts receivable, net $ 716 $237
===== ====
</TABLE>
5. INVENTORIES:
Inventories comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------ ------
<S> <C> <C>
Components $ 745 $ 360
Finished goods 3,083 2,434
------ ------
$3,828 $2,794
Reserve for obsolete & slow moving inventory (508) (529)
------ ------
Inventories, net of reserves $3,320 $2,265
====== ======
</TABLE>
6. PROPERTY AND EQUIPMENT:
Property and equipment comprise the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ------------------
(YEARS) 1998 1999
----------- ------- -------
<S> <C> <C> <C>
Machinery and equipment 3-5 $ 1,935 $ 1,965
Furniture and fixtures 3-5 1,057 1,070
Leasehold improvements 7-10 1,038 1,038
Tooling 1-3 181 --
Other 5-10 60 60
------- -------
$ 4,271 $ 4,133
Accumulated depreciation (3,274) (3,684)
------- -------
Property and equipment, net $ 997 $ 449
======= =======
</TABLE>
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Depreciation expense for the years ended December 31, 1997, 1998 and 1999
was $0.6 million, $0.5 million and $0.4 million, respectively.
7 OTHER ASSETS:
Other assets primarily comprise the Company's investment in affiliates and
notes receivable and interest thereon, as described herein.
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 was
$10,000,000 and up to an additional $6,000,000 in possible future cash
contingent payments. NCT Audio then paid Top Source Technologies, Inc. ("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 the shareholders of TST approved the
transaction on December 15, 1998, the $2,050,000 was delivered to TSA and NCT
Audio took ownership of the documentation and securities held in escrow. NCT
Audio had an exclusive right, as extended, to purchase the assets of TSA through
July 15, 1999. Under the terms of the original agreement, NCT Audio was required
to pay TST $6.5 million on or before March 31, 1999 to complete the acquisition
of TSA's assets. As consideration for an extension of such exclusive right from
March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST a fee of $350,000,
consisting of $20,685 in cash, $125,000 of NCT Audio's minority interest in TSA
earnings, and a $204,315 note payable due April 16, 1999. Due to the non-payment
of the note by April 30, 1999, (a) the note would begin to accrue interest on
April 17, 1999 at the lower of the rate of two times prime rate or the highest
rate allowable by law; (b) the $20,685 and $125,000 portion of the extension fee
would no longer be credited toward the $6.5 million purchase price due at
closing; and (c) the $204,315 portion of the extension fee would no longer be
credited toward the $6.5 million closing amount due. To date, NCT Audio has not
paid the note. In addition, due to NCT Audio's failure to close the transaction
by March 31, 1999, NCT Audio was required to pay a penalty premium of $100,000
of NCT Audio's preferred stock. Since NCT Audio failed to close the contemplated
transaction by May 28, 1999, NCT Audio has forfeited its minority earnings in
TSA for the period June 1, 1999 through May 30, 2000. In exchange for an
extension from May 28, 1999 to July 15, 1999, NCT Audio relinquished 25% of its
minority equity ownership in TSA. As a result, NCT Audio now has a 15% minority
interest in TSA. On or about July 15, 1999, NCT Audio determined it would not
proceed with the purchase of the assets of TSA, as structured, due primarily to
its difficulty in raising the requisite cash consideration. Consequently, NCT
Audio reduced its net investment in TSA to $1.2 million, representing its 15%
minority interest, net of the above noted penalties, and recorded a $2.4 million
charge in the quarter ended June 30, 1999 for the write-down of its investment
to its estimated net realizable value. On September 30, 1999, Onkyo America
purchased substantially all of the assets of TSA and certain assets of TST used
in TSA's operations. NCT Audio is claiming and seeks its pro rata share of the
consideration paid by Onkyo America, less the penalties described above. The
amount which TST owes NCT Audio is in dispute; consequently, receipt of the
funds is contingent on the outcome of the arbitration between the Company, TST
and TSA. (See Note 15.)
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<PAGE> 80
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"),
a supplier of custom-made automotive audio systems. NCT Audio intended to
acquire such 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 needed to obtain adequate financing before the
transaction could be completed. NCT Audio provided PPI a working capital loan on
June 17, 1998 in the amount of $500,000, evidenced by a demand promissory note.
On August 18, 1998, NCT Audio provided PPI a second working capital loan in the
amount of $1,000,000, 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 was 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 remained willing to do
the transaction, they may choose at some point to abandon the transaction
because NCT Audio had not obtained the financing in a timely manner. The Company
has not been able to obtain the financing to consummate this transaction, and
PPI has experienced significant organizational changes which has resulted in
abandonment of the proposed acquisition. During the third quarter of 1999, the
Company fully reserved the $1.5 million due from PPI plus interest and
pre-acquisition costs thereon amounting to $0.3 million. The Company continues
to seek repayment of the notes. During the fourth quarter of 1999, NCT Audio
suspended its acquisition strategy.
8. CONVERTIBLE NOTES:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. The secured convertible notes are collateralized by the Company's
inventory, machinery, equipment, stocks, bonds, notes, accounts receivable, any
rights or claims that they may have against any other person, firm, or
corporation for monies, choses in action, any bank accounts, checking accounts,
certificates of deposit or any financial instrument, patents and intellectual
property rights or any other assets owned by Borrower as of the date of the
agreement, or hereafter acquired. A secured convertible note (the " Note") for
$1.0 million was signed on January 26, 1999, and proceeds were received on
January 28, 1999. The Note is to mature on January 25, 2001 and earn interest at
the prime rate as published from day to day in The Wall Street Journal from the
issue date until the Note becomes due and payable. The Holder shall have the
right at any time on or prior to the day the Note is paid in full, to convert at
any time, all or from time to time, any part of the outstanding and unpaid
amount of the Note into fully paid and non-assessable shares of common stock of
the Company at the conversion price. The conversion price, as amended by the
parties on September 19, 1999, on the Note and any other notes, shall be the
lesser of (i) the lowest closing transaction price for the common stock on the
securities market on which the common stock is being traded, at any time during
September 1999; (ii) the average of the closing bid 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 (iii) the
fixed conversion price of $0.17. In no event will the conversion price be less
than $0.12 per share. The Company and Holder have agreed to extend the date for
the purchase of the remaining installments of secured convertible notes to
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<PAGE> 81
April 15, 2000. On each of June 4, 1999, June 11, 1999, July 2, 1999, July 23,
1999, August 25, 1999 and September 19, 1999, the Company received proceeds of
$250,000, $250,000, $500,000, $250,000, $500,000 and $250,000, respectively,
from the Holder for other secured convertible notes with the same terms and
conditions of the Note described above. At December 31, 1999, the Company has an
aggregate of $3.0 million of secured convertible notes. The Company recorded a
beneficial conversion feature of $0.2 million in connection with the convertible
notes in 1999.
On July 19, 1999, DistributedMedia.com ("DMC"), a wholly-owned subsidiary
of the Company, signed a convertible guaranteed term promissory note ("PRG
Note") with Production Resource Group ("PRG") in the amount of $1.0 million. PRG
will provide lease financing to DMC for its Sight and Sound(TM) systems (the
"Systems") and will provide integration, installation and maintenance services
to DMC. DMC received a portion of the PRG Note ($125,000) on July 22, 1999. Of
the $1,000,000 note proceeds, $750,000 was deposited into an escrow account and
be used to pay rental and installation costs due from DMC with respect to the
Systems. Further, DMC may draw an additional $125,000 provided that PRG
continues to have a good faith belief that the Systems are functioning properly
and that DMC has obtained at least one network-wide advertising client providing
annual advertising revenues of at least $250,000. At December 31, 1999, the
balance in the escrow account and classified as restricted cash was $667,000.
The PRG Note matures on July 19, 2001 and earns interest at ten percent (10%)
per annum. PRG may convert the PRG Note in whole or in part at its election into
shares of DMC's common stock, without par value, at any time during the period
commencing on the date of issuance and ending on the maturity date. DMC also has
the right to lease from PRG additional Systems with an aggregate value of up to
$9.5 million, provided that PRG is reasonably satisfied with the success of the
DMC business, including the technology and economics thereof and its likelihood
of the continued success. In connection with the PRG Note, PRG was granted a
common stock warrant (see Note 12). In accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation", the Company estimated the fair value of this
warrant to be $0.8 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 5.61%, volatility of
1%, and a term of three years. Such amount is being amortized to interest
expense over the two-year period of the related promissory note. Amortization
amounted to $0.1 million during the year ended December 31, 1999. Unamortized
discount of $0.3 million has been reflected as a reduction of the notes payable
amount in the accompanying December 31, 1999 financial statements.
9. 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
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<PAGE> 82
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
recorded a liability representing the difference between the Company's payment
obligations and the IPI net proceeds from its sale of shares of the Company's
common stock. Such liability was $0.5 million at December 31, 1998 and 1999.
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 (see Note 10)
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's liabilities include an earnout
obligation of $0.1 million and $0.2 million at December 31, 1998 and 1999 (see
Note 15). In addition, the Company's liabilities include a $100,000 note payable
to a former employee of Advancel at December 31, 1998 and 1999. The note bears
interest at a rate of 8.25%, compounded annually and was due in two equal
installments on December 1, 1998 and March 1, 1999. The note has not been paid.
10. COMMON STOCK SUBJECT TO RESALE GUARANTEE:
On September 24, 1999, the Company issued 12,005,847 shares of common stock
to suppliers and consultants to settle current obligations of $1.8 million and
future or anticipated obligations of $0.5 million. On October 27, 1999, the
Company issued an additional 1,148,973 shares of common stock to suppliers and
consultants to settle obligations of $0.2 million. On October 28, 1999, the
Company filed a pre-effective amendment to the Form S-1 resale registration
statement to include such additional shares. The registration statement (File
No. 333-87757) was declared effective by the SEC on November 2, 1999 (see Note
11). During the fourth quarter, suppliers and vendors traded $1.5 million of
such shares and as a result the Company recorded $1.0 million common stock
subject to resale guarantee.
The Company has certain contingent obligations under a securities purchase
agreement, dated as of December 27, 1999 (the "Purchase Agreement"), among the
Company, Austost, Balmore and Nesher, Inc. ("Nesher"). Based on an offer as of
November 9, 1999, the Company, Austost, Balmore and Nesher entered into the
Purchase Agreement whereby the Company, on December 28, 1999, issued a total of
3,846,155 shares (the "SPA Shares") to Austost, Balmore and Nesher for a total
purchase price of $500,000. The price of the SPA Shares was $0.13 per share,
which
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<PAGE> 83
was $0.03, or 19%, less than the closing bid price of the Company's common stock
as reported by the OTC Bulletin Board on November 8, 1999, and $0.015, or 10%,
less than the closing bid price of the Company's common stock as reported by the
OTC Bulletin Board on December 27, 1999. This per share price may be subject to
decrease upon the application of a reset provision contained in the Purchase
Agreement (see Note 11). Due to the provision, the Company recorded the purchase
price ($500,000) plus the guaranteed return on investment of 20% ($100,000) as
common stock subject to resale.
Common stock subject to resale guarantee was $1.6 million at December 31,
1999, which represented the outstanding shares of common stock valued at the
date of issuance to suppliers and consultants ($1.0 million) and the purchase
price plus guaranteed return on investment related to the Purchase Agreement
($0.6 million).
11. COMMON STOCK:
PRIVATE PLACEMENTS AND STOCK ISSUANCES:
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 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 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. The Company reserved 15 million shares of the Company's common stock
for issuance upon such conversion and payment of interest. 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 1997. If shares of common stock had been
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.
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<PAGE> 84
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) all markets for hearing aids and other hearing enhancing or
assisting devices, and (c) 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 (see Note 3).
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. 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 exchange 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 price at date of conversion. During 1998, two NCT Audio shareholders
exercised their right to exchange 296 shares of NCT Audio common stock into
1,135,542 shares of NCT common stock. During 1999, three NCT Audio shareholders
exercised their right to exchange 559 shares of NCT Audio common stock into 17.7
million shares of NCT common stock. In connection therewith the Company recorded
goodwill of $0.6 million and $6.1 million during 1998 and 1999, respectively.
The Company recorded a non-cash charge of $3.1 million in 1999 to write down
goodwill to its estimated realizable value.
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
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<PAGE> 85
percent (4%) per annum on the stated value. Each share of Series C Preferred
Stock is convertible into fully paid and non-assessable 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 have been
registered by the Company. 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. On December 30,
1998, 1,700 shares of the Series C Preferred Stock were exchanged for the
Company's Series E Preferred Stock. At December 31, 1998, 10,850 shares of
Series C Preferred Stock had been converted into 20,665,000 shares of NCT common
stock. The 700 remaining Series C Preferred Stock shares were subject to
mandatory conversion as of November 30, 1999. As such, on November 30, 1999,
these 700 shares were converted to 1,512,000 shares of common stock of the
Company. At December 31, 1999, there were no outstanding shares of Series C
Preferred 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
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<PAGE> 86
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, 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 non-assessable 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 (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 Securities and Exchange Commission
("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 had been
converted into 12,273,685 shares of NCT common stock.
F-25
<PAGE> 87
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 non-assessable 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
(the "Series A Filing Deadline") which is not later than thirty (30) days after
the NCT Audio becomes a "reporting company" under the Securities Exchange Act of
1934, as amended (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 NCT Audio 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 had exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Convertible 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 11,699,857 shares
of the Company's common stock. At December 31, 1999, 3 shares of NCT Audio
Series A Preferred Stock were outstanding. On January 10, 2000, the remaining
3 shares of NCT Audio Series A Preferred Stock were converted into 634,915
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.
F-26
<PAGE> 88
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 21(st) 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 acquisition was accounted for as a purchase
and, accordingly, the accompanying consolidated financial statements include the
accounts of Advancel from the date of acquisition. The cost of the acquisition
was allocated to the assets acquired and liabilities assumed based on their fair
values as follows:
<TABLE>
<S> <C>
Current assets $ 368,109
Property 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
==========
</TABLE>
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 (see Note 12) 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.
F-27
<PAGE> 89
On November 24, 1998, the Company paid $1,000 consideration for
incorporation of DMC which 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 accredited
investors through one dealer (the "1998 Series E Preferred Stock Private
Placement"). The $4.0 million subscription receivable at December 31, 1998
represents a receivable due from the Series E Subscription Agreements. 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 and received net proceeds of $1.8 million. On April 13,
1999, the Company entered into a subscription agreement to sell 1,874 shares of
Series E Preferred Stock, with a stated value of up to $1.9 million in
consideration of $1.9 million to four accredited investors through one dealer.
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 non-assessable 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 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 Company may be obligated to
redeem the excess of the stated value over the amount permitted to be converted
into common stock. Such obligation would be triggered in the event that the
Company issues 30,000,000 shares on conversion of Series E Preferred Stock. The
F-28
<PAGE> 90
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. The Company registered an aggregate of 26,648,696 shares of the
Company's common stock for the conversion of the issued and outstanding shares
of Series E Preferred Stock. The Company is given the right to pay the accretion
in either cash or common stock. The conversion terms further provide that the
Company will be required to make certain payments if it fails to effect a
conversion in a timely manner and may have to redeem the excess of the stated
value over the amount permitted to be converted into common stock. As of
December 31, 1998, no shares of Series E Preferred Stock had been converted into
NCT common stock. During 1999, holders of 3,828 shares of Series E Preferred
Stock elected to convert their shares into 26,608,942 shares of common stock of
the Company. On March 31, 1999, the Company signed a license agreement to
exchange 3,600 shares of Series E Preferred Stock for four DMC network affiliate
licenses. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized only $2.0 million on
the issuance of such licenses in consideration of the receipt of 3,600 shares of
its Series E Convertible Preferred Stock. Subsequently, during the three months
ended June 30, 1999, the Company adjusted such revenue to $0.9 million due to
the valuation of additional shares of Series E Preferred Stock issued during the
period. On December 15, 1999, holders of the remaining 5,026 shares of the
Company's Series E Preferred Stock and holders of 974 shares of the Company's
Series F Convertible Preferred Stock (see below), an aggregate stated value of
$6 million, exchanged such shares for eight DMC network affiliate licenses. No
shares of Series E Preferred Stock were outstanding at December 31, 1999.
On January 25, 1999, the Company granted DMC, a wholly owned subsidiary
of the Company formed on November 24, 1998, an exclusive worldwide license with
respect to all of the Company's relevant patented and unpatented technology
relating to DMC products in consideration for a license fee of $3.0 million
(eliminated in consolidation). Such license fee is to be paid when proceeds are
available from the sale of DMC common stock. In addition, running royalties will
be payable to the Company with respect to DMC's sales of products incorporating
the licensed technology and its sublicensing of such technology. It is
anticipated that DMC will issue shares of its common stock in transactions
exempt from registration in order to raise additional working capital.
At the annual meeting of stockholders of the Company on June 24, 1999, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 255,000,000 to 325,000,000. This
amendment became effective on July 29, 1999, when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In 1999, the Company issued 13,154,820 shares of
common stock to suppliers and consultants to settle current obligations of $1.8
million and future or anticipated obligations of $0.7 million.
On August 10, 1999, the Company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F Convertible Preferred Stock (the
"Series F Preferred Stock"), in a private placement
F-29
<PAGE> 91
pursuant to Regulation D of the Securities Act, to five unrelated accredited
investors through one dealer (the "1999 Series F Preferred Stock Private
Placement"). On August 10, 1999, the Company received $1.0 million for the sale
of 8,500 shares of Series F Preferred Stock having an aggregate stated value of
$8.5 million. At the Company's election, the investors may invest up to an
additional $4.0 million in cash or in kind at a future date. Each share of the
Series F Preferred Stock has a par value of $.10 per share and a stated value of
one thousand dollars ($1,000) with an accretion rate of four percent (4%) per
annum on the stated value. Each share of Series F Preferred Stock is convertible
into fully paid and non-assessable shares of the Company's common stock, subject
to certain limitations. Under the terms of the Series F Subscription Agreement,
the Company was required to file a registration statement on Form S-1 on or
prior to a date which is no more than forty-five (45) days from the date that
the Company has issued a total of 1,000 shares of Series F Preferred Stock,
covering the resale of all of the registrable securities (the "Series F Closing
Date"). The shares of Series F Preferred Stock become convertible into shares of
common stock at any time commencing after the earlier of (i) forty-five (45)
days after the Series F Closing Date; (ii) five (5) days after the Company
receives a "no review" status from the SEC in connection with the Series F
registration statement; or (iii) the effective date of the Series F registration
statement. Each share of Series F Preferred Stock is convertible into a number
of shares of common stock of the Company as determined in accordance with a
formula (the "Series F Conversion Formula"), as defined in the agreement. The
conversion formula provides that the stated value of the preferred stock plus 4%
accretion thereon for the number of days between (i) the Series F Closing Date
and (ii) the conversion date be divided by the amount obtained by multiplying
the 80% times the average market price for the Company's common stock for the
five (5) consecutive trading days immediately preceding such date. The
conversion terms of the Series F Preferred Stock also provide that in no event
shall the Company be obligated to issue more than 35,000,000 shares of its
common stock in the aggregate in connection with the conversion of up to 12,500
shares of Series F Preferred Stock. In the interest of investor relations of the
Company, the maximum number of conversion shares was increased to 77,000,000
shares of the Company's common stock. The Company is also obligated to pay a 4%
per annum accretion on the stated value of Series F Preferred Stock in either
cash or common stock, at the Company's election. The Company registered an
aggregate of 25,744,000 shares of common stock issuable upon conversion and
payment for accretion. In connection with the Series F Preferred Stock, the
Company may be obligated to redeem the excess of the stated value over the
amount permitted to be converted into common stock. Such additional amounts will
be treated as obligations of the Company. On September 10, 1999, the Company
received $4.0 million for four DMC network affiliate licenses from four
accredited investors. While the investors agreed upon the exchange of 8,500
shares of Series F Preferred Stock having aggregate stated value of $8.5
million, for consideration of $1.0 million, the Company has treated the
additional $4.0 million for the DMC licenses as additional consideration for the
Series F Preferred Stock. As of December 31, 1999, 2,811 shares of Series F
Preferred Stock have been converted into 25,306,557 shares of the Company's
common stock. On December 15, 1999, 974 shares of the Company's Series F
Preferred Stock, together with 5,026 shares of the Company's Series E Preferred
Stock, were exchanged for eight DMC network affiliate licenses. At December 31,
1999, there are 4,715 shares of Series F Preferred Stock outstanding.
F-30
<PAGE> 92
The Company has certain contingent obligations under a securities exchange
agreement, dated as of October 9, 1999 (the "Exchange Agreement"), among the
Company, Austost and Balmore. Pursuant to the Exchange Agreement, on October 26,
1999 the Company issued a total of 17,333,334 shares to Austost and Balmore (the
"Exchange Shares") in exchange for 532 shares of common stock of NCT Audio held
by Austost and Balmore. The effective per share price of the Exchange Shares
received by Austost and Balmore was $0.06 per share (representing the total
purchase price originally paid by Austost and Balmore for the NCT Audio shares
of $1.0 million divided by 17,333,334). This effective per share price was
$0.115, or 65.7%, less than the closing bid price of the Company's common stock
as reported by the OTC Bulletin Board on October 25, 1999. This effective per
share price may be subject to increase upon the application of an exchange ratio
adjustment provision contained in the Exchange Agreement on February 15, 2000
(or an earlier date agreed to by all the parties) and may be subject to decrease
upon the application of a reset provision contained in the Exchange Agreement,
as described below.
Under the exchange ratio adjustment provision, the Company has the right to
re-determine the price of the Exchange Shares issued to each of Austost and
Balmore on February 15, 2000 (or another date that is not later than February
15, 2000 and is mutually agreed upon by the Company, Austost and Balmore). If
the aggregate value of the Exchange Shares issued to Austost and Balmore is
greater than $2,600,000 based upon the closing bid price of the Company's common
stock as reported on the OTC Bulletin Board on such date, Austost and Balmore
are required to return to the Company any such Exchange Shares representing the
excess amount. Under the reset provision contained in the Exchange Agreement, on
April 24, 2000, and again on July 24, 2000, the Company may be required to issue
additional shares to either Austost or Balmore or both if the sum of certain
items on those dates is less than $2,600,000. Those items are: (i) the aggregate
market value of the Exchange Shares held by Austost and Balmore (based on the
per share closing bid price on those dates); (ii) the market value of any
Exchange Shares transferred by Austost and Balmore as permitted under the
Exchange Agreement (based on the per share closing bid price on the date of
transfer); and (iii) any amounts realized by Austost and Balmore from sales of
any such shares prior to April 24, 2000 or July 24, 2000, as the case may be.
The number of additional shares of common stock that the Company would be
obligated to issue in such case would be a number of shares having an aggregate
market value (based on the per share closing bid price on such date) that, when
added to the sum of items (i), (ii) and (iii) set forth above, would equal
$2,600,000. The Company recorded step-up acquisition goodwill of $2.6 million.
This transaction contributed to the Company's recording of a $3.1 million
impairment of goodwill.
On March 7, 2000, the Company, Austost and Balmore agreed to amend certain
of the terms and conditions of the Exchange Agreement in order to (1) allow
Austost and Balmore to retain 3,611,111 Returnable Shares in exchange for an
additional 533 shares of Audio common stock from a third party investor (the
"Third Party Shares"), which Austost and Balmore shall deliver to NCT, and
(2) substitute cash payments by Austost and Balmore to the Company in lieu of
Austost's and Balmore's obligation to return the remaining Returnable Shares to
the Company pursuant to the Exchange Agreement.
The Company agreed that Austost and Balmore would retain 10,060,251 shares
of the Company's Common Stock (the "Remaining Returnable Shares"), and Austost
and Balmore
F-31
<PAGE> 93
would agree to pay the Company up to $10,000,000 in cash subject to monthly
limitations from proceeds Austost and Balmore would realize from their
disposition of such Remaining Returnable Shares. Balmore and Austost will
realize a 10% commission on the proceeds from the sale of shares.
The Company has certain contingent obligations under a securities purchase
agreement, dated as of December 27, 1999 (the "Purchase Agreement"), among the
Company, Austost, Balmore and Nesher, Inc. ("Nesher"). Based on an offer as of
November 9, 1999, the Company, Austost, Balmore and Nesher entered into the
Purchase Agreement whereby the Company, on December 28, 1999, issued a total of
3,846,155 shares (the "SPA Shares") to Austost, Balmore and Nesher for a total
purchase price of $500,000. The price of the SPA Shares was $0.13 per share,
which was $0.03, or 19%, less than the closing bid price of the Company's common
stock as reported by the OTC Bulletin Board on November 8, 1999, and $0.015, or
10%, less than the closing bid price of the Company's common stock as reported
by the OTC Bulletin Board on December 27, 1999. This per share price may be
subject to decrease upon the application of a reset provision contained in the
Purchase Agreement as described below.
Under the reset provision, on June 26, 2000, and again on September 25,
2000, the Company may be required to issue additional shares to one or more of
Austost, Balmore or Nesher if the sum of certain items on those dates is less
than 120% of the total purchase price paid by Austost, Balmore and Nesher for
the SPA Shares. Those items are: (i) the aggregate market value of the SPA
Shares held by Austost, Balmore and Nesher (based on the per share closing bid
price on those dates); (ii) the market value of any SPA Shares transferred by
Austost, Balmore and Nesher as permitted under the Purchase Agreement (based on
the per share closing bid price on the date of transfer); and (iii) any amounts
realized by Austost, Balmore and Nesher from sales of any such shares prior to
June 26, 2000 or September 25, 2000, as the case may be. The number of
additional shares of common stock that the Company would be obligated to issue
in such case would be a number of shares having an aggregate market value (based
on the per share closing bid price on such date) that, when added to the sum of
items (i), (ii) and (iii) set forth above, would equal 120% of the total
purchase price paid for the SPA Shares. The 20% of the total purchase price paid
($100,000) is deemed a dividend.
COMMON SHARES AVAILABLE FOR COMMON STOCK OPTIONS, WARRANTS AND CONVERTIBLE
SECURITIES:
At December 31, 1999, the number of shares required to be reserved for the
exercise of options and warrants was 38.8 million. The aggregate number of
shares of common stock required to be reserved for issuance upon the exercise of
all outstanding options and warrants granted was 37.9 million shares of which
options and warrants to purchase 24.7 million shares were currently exercisable
(see Note 12). The aggregate number of shares of common stock required to be
reserved for issuance upon conversion of issued and outstanding shares of Series
F Preferred Stock was 51.7 million shares. The Company has reserved 22.4 million
shares of common stock for issuance to certain holders of NCT Audio common stock
upon exchange of their shares of NCT Audio common stock for shares of the
Company's common stock. The Company has reserved 0.6 million shares of common
stock for issuance upon conversion of the remaining Series A Preferred Stock
into Series D Preferred Stock. The Company also reserved 30.7 million shares of
common stock for issuance upon conversion of the secured convertible
F-32
<PAGE> 94
notes. Common shares issued and required to be reserved for issuance exceed the
number of shares authorized. However, should the aggregate of the number of
issued and outstanding shares and shares required to be reserved for future
issuance reach the authorized limit, shares in excess of the limit will be
borrowed from the 1992 Plan.
12. 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 1997, 1998 and 1999 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 SFAS No. 123,
the Company's net loss would have been $15.8 million, $19.0 million and $27.4
million, or $(0.14), $(0.16) and $(0.20) per share in 1997, 1998 and 1999,
respectively. The fair value of the options and warrants granted in 1997, 1998
and 1999 are estimated in the range of $0.16 to $4.07, $0.24 to $0.81, and $0.26
to $0.64 per share, respectively, on the date of grant using the Black-Scholes
option-pricing model utilizing the following assumptions: dividend yield 0%;
volatility of 1.289, 1.307 and 1.0 in 1997, 1998 and 1999, respectively; risk
free interest rates in the range of 5.79% to 6.63%, 5.28% to 5.55%, and 4.56% to
6.14% for 1997, 1998 and 1999, respectively; and expected life of 3 years. The
weighted average fair value of options and warrants granted during 1997, 1998
and 1999 are estimated in the range of $0.13 to $0.58, $0.53, and $0.28 to $0.48
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.
F-33
<PAGE> 95
1987 Plan activity is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1998 1999
------------------------ -------------------------- --------------------------
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 1,500,000 $0.54 1,350,000 $0.51 1,350,000 $0.51
Options granted 1,350,000 $0.51 -- -- 1,350,000 $0.51
Options exercised -- -- -- -- -- --
Options canceled, expired or
forfeited (1,500,000) $0.54 -- -- (1,350,000) $0.51
---------- --------- ----------
Outstanding at end of year 1,350,000 $0.51 1,350,000 $0.51 1,350,000 $0.51
========== ========= ==========
Options exercisable at year-end 1,350,000 $0.51 1,350,000 $0.51 1,350,000 $0.51
========== ========= ==========
</TABLE>
As of December 31, 1999, 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.
Non-plan stock option activity is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- -----------------------
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 372,449 $1.08 4,319,449 $0.36 4,319,449 $0.36
Options granted 7,844,449 $0.41 -- -- -- --
Options exercised -- -- -- -- -- --
Options canceled, expired or
forfeited (3,897,449) $0.53 -- -- (35,449) $4.86
---------- --------- ---------
Outstanding at end of year 4,319,449 $0.36 4,319,449 $0.36 4,284,000 $0.33
========== ========= =========
Options exercisable at year-end 4,319,449 $0.36 4,319,449 $0.36 4,284,000 $0.33
========== ========= =========
</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
F-34
<PAGE> 96
shares of the Company's common stock to each non-employee director for services
as a director of the Company for each subsequent election.
1992 Plan activity is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1998 1999
---------------------- ------------------------ ------------------------
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 6,022,765 $0.86 9,029,936 $0.72 19,831,821 $0.52
Options granted 4,652,222 $0.55 21,989,000 $0.69 9,398,538 $0.43
Options exercised (1,141,795) $0.64 (1,561) $0.27 (5,000) $0.27
Options canceled, expired or
forfeited (503,256) $0.99 (11,185,554) $1.03 (1,201,122) $0.60
---------- ----------- ----------
Outstanding at end of year 9,029,936 $0.72 19,831,821 $0.52 28,024,237 $0.47
========== =========== ==========
Options exercisable at year-end 6,592,436 $0.73 12,053,571 $0.60 14,751,044 $0.55
========== =========== ==========
</TABLE>
As of December 31, 1999, options for the purchase of 318,360 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 NCT Group, Inc.
Option Plan for Certain Directors (as amended, the "Directors Plan"). 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.
Directors Plan activity is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1998 1999
---------------------- --------------------- ------------------------
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 746,000 $0.73 746,000 $0.73 746,000 $0.73
Options granted -- -- -- -- 538,500 $0.73
Options exercised -- -- -- -- -- --
Options canceled, expired or
forfeited -- -- -- -- (746,000) $0.73
------- ------- --------
Outstanding at end of year 746,000 $0.73 746,000 $0.73 538,500 $0.73
======= ======= ========
Options exercisable at year-end 746,000 $0.73 746,000 $0.73 538,500 $0.73
======= ======= ========
</TABLE>
As of December 31, 1999, there were 282,500 options for the purchase of
shares available for future grants under the Directors Plan.
F-35
<PAGE> 97
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
<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>
1987 Plan $0.50 to $0.63 1,350,000 2.06 $0.51 1,350,000 $ 0.51
=========== ===========
Non-Plan $0.27 to $3.69 4,284,000 2.16 $0.33 4,284,000 $ 0.33
=========== ===========
1992 Plan $0.22 to $0.56 21,093,391 7.07 $0.35 7,927,698 $ 0.33
$0.64 to $1.50 6,620,491 2.80 $0.71 6,512,991 $ 0.71
$2.38 to $4.00 310,355 0.70 $3.01 310,355 $ 3.01
----------- -----------
Total 1992 Plan 28,024,237 14,751,044
=========== ===========
Director's Plan $0.66 to $0.75 538,500 0.53 $0.73 538,500 $ 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.
Generally, warrants are exercisable over a five to ten year period as determined
by the Board of Directors and vest on the grant date.
In July 1999, in connection with the PRG Note, PRG was granted a common
stock warrant equal to either (i) the number of shares of the Company's common
stock (6,666,667) which may be purchased for an aggregate purchase price of
$1,250,000 at the fair market value on July 19, 1999 or (ii) the number of
shares representing five percent of the fully paid non-assessable shares of
common stock of DMC at the purchase price per share equal to either (x) if a DMC
qualified sale (a sale in one transaction in which the aggregate sales proceeds
to DMC equal or exceed $5,000,000) had closed on or before December 31, 1999,
the purchase price per share determined by multiplying the price per share of
DMC common stock or security convertible into DMC common stock by seventy-five
percent (75%) or (y) if a DMC qualified sale had not closed on or before
December 31, 1999, at an aggregate price of $1,250,000.
Warrant activity is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1998 1999
------------------------- ----------------------- -------------------------
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 3,888,539 $0.72 3,146,920 $0.81 4,372,684 $0.82
Warrants granted 2,846,923 $0.76 1,588,164 $0.92 2,587,875 $0.75
Warrants exercised (854,119) $0.41 -- -- -- --
Warrants canceled, expired or
forfeited (2,734,423) $0.75 (362,400) $1.16 (3,225,145) $0.82
---------- --------- ----------
Outstanding at end of year 3,146,920 $0.81 4,372,684 $0.82 3,735,414 $0.77
========== ========= ==========
Warrants exercisable at year-end 3,146,920 $0.81 4,172,684 $0.86 3,735,414 $0.77
========== ========= ==========
</TABLE>
F-36
<PAGE> 98
The following table summarizes information about warrants outstanding at
December 31, 1999:
<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>
$0.50 to $0.69 263,914 2.94 $0.62 263,914 $0.62
$0.75 to $1.66 3,471,500 2.32 $0.78 3,471,500 $0.78
</TABLE>
13. RELATED PARTIES:
Between 1993 and 1994, the Company entered into five agreements with Quiet
Power 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. In March 1995, the Company entered
into a master agreement with QSI which granted QSI an exclusive worldwide
license to market, sell and distribute various quieting products in the utility
industry. Subsequently, the Company and QSI executed four letter agreements,
primarily revising payment terms. On December 24, 1999, the Company executed a
final agreement with QSI in which the Company agreed to write-off $239,000 of
indebtedness owed by QSI in exchange for the return by QSI to the Company of its
exclusive license to use NCT technology in various quieting products in the
utility industry. Such amount, originally due on January 1, 1998, had been fully
reserved by the Company.
The Company's President and Chief Executive Officer, who, at December 31,
1999, holds options and warrants for the right to acquire an aggregate of
15,237,000 shares of the Company's common stock, 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, 1998 and 1999, approximately $243,000,
$206,000 and $169,000 was incurred in connection with this arrangement.
During 1997, 1998 and 1999, the Company purchased $0.7 million, $0.2 million
and $0, respectively, of products from its various manufacturing joint venture
entities.
14. 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
F-37
<PAGE> 99
Company's temporary differences primarily result from depreciation related to
machinery and equipment and compensation expense related to warrants, options
and reserves.
At December 31, 1999, the Company had available net operating loss
carryforwards of approximately $101.2 million and research and development
credit carryforwards of $1.7 million for federal income tax purposes, which
expire as follows (in thousands):
<TABLE>
<CAPTION>
RESEARCH
AND
NET DEVELOPMENT
YEAR LOSSES CREDITS
---- -------- -----------
<S> <C> <C>
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 4,525(1) 267
2018 14,183(2) 167
2019 15,079(3) --
-------- -----------
TOTAL $101,190 $1,747
======== ===========
</TABLE>
- ----------
(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.
(3) Includes approximately $6.5 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 $3.0 million, $1.4 million and $3.3 million in 1997,
1998 and 1999, respectively.
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, 1998 and 1999 were as follows (in thousands):
F-38
<PAGE> 100
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1999
-------- --------
<S> <C> <C>
Accounts receivable $ 157 $ 13
Inventory 173 180
Property and equipment 68 82
Accrued expenses 65 58
Stock compensation 2,711 2,924
Other 349 414
-------- --------
Total temporary differences $ 3,523 $ 3,671
Federal net operating losses 27,258 30,285
Federal research and development credits 1,580 1,747
-------- --------
$ 32,361 $ 35,703
Less: Valuation allowance (32,361) (35,703)
-------- --------
Deferred taxes $ -- $ --
======== ========
</TABLE>
15. 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 (1) the Company is
guilty of breach of contract; (2) certain amounts and commissions are allegedly
owed to him; and (3) he had suffered damage to his image and reputation among
other injuries alleged. 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
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.
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
F-39
<PAGE> 101
to any resolution. The Company was informed by representatives of existing
and/or potential customers that AECorp. was continuing to infer that the Company
was infringing.
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 against AECorp. in the U.S. District Court, Eastern District of New
York. The complaint requested that the court enter judgment in our favor as
follows: (1) declare that the two AECorp. patents at issue are invalid and
unenforceable and that the Company's products do not infringe upon them; (2)
declare that the two AECorp. patents at issue are unenforceable due to misuse by
AECorp.; (3) 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; (4) enjoin AECorp. from stating or
inferring that the Company's products or their use are infringing any
AECorp.-owned patents; and (5) 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 claims that the Company has:
infringed the two AECorp. patents at issue and the "ANR Ready" trademark;
violated the Lanham Act through NCT's use of the trademark; and 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. The Company also argued that AECorp. is prevented from recovering
under certain equitable theories and defenses. Discovery in this suit commenced
in mid-1999 and is continuing, although a trial date has not yet been set. 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 state 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 alleged 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 and the Court has granted two motions to strike
or dismiss some of the plaintiff's claims. No further developments in this suit
have occurred. 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.
F-40
<PAGE> 102
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 either the Company or AWC owe it
$326,000, a sum Mellon purportedly paid to both entities when it acted as escrow
agent for the Company in a private placement of securities with certain
institutional investors. The Company retained counsel and on or about July 27,
1998, AWC filed its answer, counterclaim and cross-claim against Mellon and NCT.
AWC specifically requested that the court: (1) dismiss Mellon's amended
complaint against AWC; (2) grant AWC commissions totaling $688,000 owed to AWC
by the Company; (3) order the Company to issue 784,905 shares of its common
stock; (4) declare that AWC is entitled to keep the $326,000 sought by Mellon;
and (5) 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 scheduled to take 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 and Austost filed suit against NCT Audio and
the Company in New York Supreme Court. The complaint alleged 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 and Austost for the sale of
shares of NCT Audio common stock in a private placement in December 1997.
Specifically, the complaint alleged that: NCT Audio breached an agreement to
register shares of its common stock that Balmore and Austost 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; NCT Audio made materially false and misleading representations when it
faxed non-negotiated agreements instead of executed agreements to Balmore and
Austost; NCT Audio and the Company acted negligently and violated duties of full
and fair disclosure; and NCT Audio and the Company engaged in deceptive trade
practices.
Balmore and Austost further argued that as a result of these alleged
actions, NCT Audio and the Company owed Balmore and Austost compensatory damages
not less than $1,819,000 and punitive damages of $3 million. Balmore and Austost
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 and Austost the $1 million purchase price. Finally, Balmore and Austost
requested treble damages, reasonable attorneys fees, costs and any other relief
the court deemed appropriate.
On January 14, 1999, the Company and NCT Audio filed removal papers to
remove the suit from state court to federal court. On January 22, 1999, the
Company and NCT Audio filed their answer, affirmative defenses, counterclaims
and a third-party complaint. On October 9, 1999, the Company, Balmore and
Austost agreed, in principle, on a mutual release and settlement,
F-41
<PAGE> 103
subject to court approval, whereby all charges, claims and counterclaims which
have been individually or jointly asserted against the parties will be dropped.
Court approval is pending.
On September 16, 1999, certain former shareholders and optionees (the
"Claimants") of Advancel filed a Demand for Arbitration against the Company with
the American Arbitration Association in San Francisco, California. The primary
remedy the Claimants seek is recision of the Stock Purchase Agreement, the
return of the Advancel stock surrendered in conjunction with the purchase of
Advancel by the Company and damages to be determined by arbitration. The Company
filed a response and counterclaim on October 13, 1999. After consultation with
outside legal counsel, management recognizes that the Company may lose some or
all of its claims, encountering significant liability. In the event this Demand
for Arbitration does result in a substantial judgment against the Company, said
judgment could have a material effect on the Company's quarterly or annual
operating results. Outside legal counsel has indicated that it is impossible to
estimate a range of potential liability at this early stage with any degree of
certainty. The parties have agreed on an arbitrator who has scheduled late May
2000 for an arbitration hearing. Discovery is currently scheduled to take place
in the action.
On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against TST and TSA
(the "Respondents") alleging, among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio, breach of fiduciary
duty as a majority shareholder owed to NCT Audio which holds 15% of the
outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. NCT Audio seeks recision of the purchase agreement and recovery of
monies paid to TST for TSA's assets. Concurrently, NCT Audio commenced a
preliminary injunction proceeding in the Delaware Court of Chancery, seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration proceeding. Such court action was subsequently withdrawn by NCT
Audio. On December 8, 1999, Respondents filed an answer and counterclaim in
connection with the arbitration proceeding. Respondents asserted their
counterclaim to recover (i) the monies and stock owned under the extension
agreements; (ii) the $1 million differential between the $9 million purchase
price paid by Onkyo America for TSA's assets and the $10 million purchase price
that NCT Audio had been obligated to pay; (iii) expenses associated with
extending NCT Audio's time to close the transaction; and (iv) certain legal
expenses incurred by Respondents.
The Company believes there are no other patent infringement claims,
litigation, matters or unasserted claims other than the matters discussed above
that could have a material adverse effect on financial position and results of
operations of the Company.
F-42
<PAGE> 104
16. 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 March 2010 with various renewal options, as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------- ------
<S> <C>
2000 $ 862
2001 841
2002 380
2003 380
2004 380
Thereafter 2,038
------
Total $4,881
======
</TABLE>
Rent expense (net of sublease income) was $0.4 million, $0.6 million and
$0.6 million for the years ended December 31, 1997, 1998 and 1999, 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 $40,000. Benefit claims in excess
of these individual or maximum aggregate stop loss limits are covered by a
commercial insurance provider to which the Company pays a nominal premium for
such stop loss coverage. The Company records benefit claim expense in the period
in which the benefit claim is incurred. As of February 25, 2000, the Company was
not aware of any material benefit claim liability.
As of December 31, 1999, the Company is obligated under various agreements
for minimum royalty payments as follows: $335,000, $220,000, $240,000 and
$60,000 for 2000, 2001, 2002 and 2003.
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, subject to the outcome of the
arbitration between the parties (see Note 15).
F-43
<PAGE> 105
17. BUSINESS SEGMENT INFORMATION:
<TABLE>
<CAPTION>
NCT NCT COMMUNI- ADVANCEL TOTAL
AUDIO HEARING CATIONS EUROPE DMC LOGIC CORP SEGMENTS OTHER GRAND TOTAL
-------- ------- --------- ------ ------- ---------- ---------- ------- ------------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Net Sales - External $ 856 $ 708 $ 874 $ 4 $ -- $ 1,069 $ 3,511 $ -- $ 3,511
Net Sales - Other Operating
Segments 4 -- -- 866 -- -- 870 (870) --
License Fees and royalties 506 157 906 -- 850 1,100 3,519 33 3,552
Interest Income 167 -- -- 1 -- -- 168 (142) 26
Depreciation/Amortization 10 -- -- 43 4 16 73 1,897 1,970
Operating Income (Loss) (10,679) (3,414) (2,643) 86 (2,739) (1,453) (20,842) (2,929) (23,771)
Segment Assets 2,228 1,791 897 164 963 728 6,771 6,606 13,377
Capital Expenditures -- -- 1 4 26 3 34 17 51
1998
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
</TABLE>
NCT Audio:
NCT Audio is engaged in the design, development and marketing of products
which utilize 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, the multimedia markets and as an audio/visual advertising medium. The
principal NCT Audio customers are end users, automotive OEM's, manufacturers of
integrated cabin management systems and DMC.
NCT Hearing:
NCT Hearing designs, develops and markets active noise reduction 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
F-44
<PAGE> 106
consist of the NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a
headset used for in-flight passenger entertainment systems and communications
headsets for cellular, multimedia and telephony. The ProActive(R) products
consist of noise reduction headsets and communications headsets for noisy
industrial environments. The majority of NCT Hearing's sales are in North
America. Principal customers consist of end-users, retail stores, OEMs and the
airline industry.
Communications:
The communications division of the Company focuses on the
telecommunications market and in particular the hands-free market. The
communications technology includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression. ClearSpeech(R)-Acoustic Echo Cancellation removes
acoustic echoes in hands-free full-duplex communication systems. Applications
for this technology are cellular telephony, audio and video teleconferencing,
computer telephony and gaming, and voice recognition. ClearSpeech(R)-Compression
maximizes bandwidth efficiency in wireless, satellite and intranet and internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. Applications for this technology are intranet and internet
telephony, audio and video conferencing, PC voice and music, telephone answering
devices, real-time multimedia multitasking, toys and games, and playback
devices. The communications products include the ClearSpeech(R)-Microphone and
the ClearSpeech(R)-Speaker. The majority of Communications' sales are in North
America. Principal markets for Communications are the telecommunications
industries and principal customers are OEM's, system integrators and end-users.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
Company. NCT Europe provides research and engineering to Audio, Hearing and
Communications as needed. NCT Europe also provides a marketing and sales support
service to the Company for European sales.
DMC:
DMC is a new microbroadcasting media company that delivers licensed
CD-quality music as well as on-air and billboard advertising to out-of-home
commercial and professional venues via a digital network of placed-based
microbroadcasting stations, called Sight and Sound(TM). The Sight and Sound(TM)
system consists of a central control network that communicates to a digital
broadcast station, which plays music selections and advertisements through flat
panel speakers. The speaker grilles double as visual billboards. The speakers
will be provided by NCT Audio.
Advancel Logic Corp.:
Advancel is a participant in the native Java(TM) 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
F-45
<PAGE> 107
has been developing a family of processor cores, which will execute instructions
written in both Java bytecode and C (and C++), significantly enhancing the rate
of instruction execution, which opens up many new applications. The potential
for applications consists of the next generation home appliances and automotive
applications, manufacturers of smartcard processors, hearing aids and mobile
communications devices.
Other:
The "Net Sales - Other Operating Segments" primarily consists of
inter-company sales, which are eliminated in consolidation. "Segment Assets"
consists primarily of corporate assets. "Operating Income/(Loss)" primarily
includes corporate charges.
18. GEOGRAPHICAL INFORMATION (BY COUNTRY OF ORIGIN) -
TOTAL SEGMENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues
United States $ 2,089 $ 3,209 $ 3,174
Europe 3,270 71 3,755
Far East 359 44 134
------- ------- -------
Total $ 5,718 $ 3,324 $ 7,063
======= ======= =======
Net (Income) Loss
United States $ 9,211 $13,728 $23,353
Europe 411 12 (86)
Far East 226 443 504
------- ------- -------
Total $ 9,848 $14,183 $23,771
======= ======= =======
Identifiable Assets
United States $17,060 $15,166 $13,174
Europe 301 218 164
Far East -- 81 39
------- ------- -------
Total $17,361 $15,465 $13,377
======= ======= =======
</TABLE>
19. SUBSEQUENT EVENTS:
On January 25, 2000, the Board of Directors designated a new series of
preferred stock based upon a negotiated term sheet. The Series G Preferred Stock
consists of 5,000 designated shares, par value of $0.10 per share and a stated
value of one thousand dollars ($1,000) per share with a cumulative dividend of
four percent (4%) per annum on the stated value payable upon conversion in
either cash or common stock. On March 6, 2000, the Company and an accredited
investor entered into an agreement under which the Company sold an aggregate
stated value of $2.004 million (2,004 shares) of Series G Preferred Stock, in a
private placement pursuant to Regulation D of the Securities Act for an
aggregate of $1.750 million. The Company received $1.0 million for the sale at
the closing and will receive the balance of $750,000, upon the registration of
shares of common stock for resale upon the conversion of the Series G Preferred
F-46
<PAGE> 108
Stock. Each share of Series G Preferred Stock is convertible into fully paid and
nonassessable shares of the Company's common stock pursuant to a predetermined
conversion formula which provides that the conversion price will be the lesser
of (i) the weighted 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 $0.777. The Company plans to register shares of common stock
for the conversion of the Series G Preferred Stock.
On January 27, 2000, the Series F Preferred Stock Certificate of
Designations was amended to obligate the Company to issue up to 77,000,000
shares of its common stock upon the conversion of the 12,500 designated shares
of Series F Preferred Stock, as noted above. Such increase in the number of
shares of common stock was made in the interest of investor relations of the
Company. The Company intends to register additional shares of common stock for
the conversion of the amended Series F Preferred Stock Certificate of
Designations.
20. SUBSEQUENT EVENTS (UNAUDITED):
On March 27, 2000, the Company's subsidiary, DMC, has entered into a joint
venture for the development of a DMC microbroadcasting media market in Israel.
DMC has entered into a license agreement for $2.0 million in connection with
this transaction. The joint venture is equally owned by DMC and its investment
partners. DMC's investor partners are responsible for funding the venture.
On March 27, 2000, the Company received $1.0 million from Carole
Salkind for an additional secured convertible note with the same terms and
conditions of the Note received on January 26, 1999 (see Note 8).
On April 3, 2000, the Company's subsidiary, DMC, has entered into a
license agreement for $2.0 million to develop a portion of the DMC affiliate
network in the New York region.
F-47
<PAGE> 109
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. as of December 31,
1998 and 1999 and for each of the years in the three-year period ended December
31, 1999 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.
/s/ Richard A. Eisner & Company, LLP
New York, New York
February 25, 2000
With respect to Note 11
March 7, 2000
F-48
<PAGE> 110
<TABLE>
<CAPTION>
SCHEDULE II
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------------------------
(1) (2)
Charged
Balance at Charged in to other Balance
beginning costs and accounts- Deductions- at end of
Description of period expenses describe describe period
- --------------------------------- ---------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 $ 123 $130 $ (65)(2) $ (150)(3) $ 38
Year ended December 31, 1998 38 232 (42)(2) -- 228
Year ended December 31, 1999 228 77 (83)(2) (139) 83
Allowance for doubtful accounts
Year ended December 31, 1997 $ 262 $210 $ -- $ -- $ 472
Year ended December 31, 1998 472 365 (329)(1) -- 508
Year ended December 31, 1999 508 21 -- (1) -- 529
Allowance for inventory obsolence
Year ended December 31, 1997 $2,873 $574 $ -- $ -- $3,447
Year ended December 31, 1998 3,447 482 -- (655)(4) 3,274
Year ended December 31, 1999 3,274 410 -- -- 3,684
Accumulated depreciation
Year ended December 31, 1997 $ -- $ -- $ -- $ -- $ --
Year ended December 31, 1998 -- 68 -- -- 68
Year ended December 31, 1999 68 970 3,125 (5) -- 4,163
Amortization of goodwill
Year ended December 31, 1997 $1,478 $335 $ -- $ -- $1,813
Year ended December 31, 1998 1,813 480 -- -- 2,293
Year ended December 31, 1999 2,293 585 -- -- 2,878
Amortization of patents
</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.
(4) To write off tooling against reserve.
(5) To write down goodwill to estimated net realizable value.
F-49
<PAGE> 111
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NCT GROUP, INC.
(FORMERLY KNOWN AS
NOISE CANCELLATION TECHNOLOGIES, INC.)
By: /s/ MICHAEL J. PARRELLA Date: April 14, 2000
------------------------------
Michael J. Parrella, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ MICHAEL J. PARRELLA President, Chief Executive April 14, 2000
- ----------------------- Officer and Director
Michael J. Parrella (Principal Executive Officer)
/s/ CY E. HAMMOND Senior Vice President and April 14, 2000
- ----------------------- Chief Financial Officer
Cy E. Hammond (Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Chairman of the Board April 14, 2000
- ----------------------- of Directors and Director
Jay M. Haft
/s/ JOHN J. McCLOY II Director April 14, 2000
- -----------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director April 14, 2000
- -----------------------
Samuel A. Oolie
</TABLE>
62
<PAGE> 1
EXHIBIT 4(J)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES F CONVERTIBLE PREFERRED STOCK
OF
NCT GROUP, INC.
NCT GROUP, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation") hereby certifies as
follows:
FIRST: That, pursuant to authority conferred upon the Board of Directors of
the Corporation by the Restated Certificate of Incorporation of the Corporation,
and pursuant to the provisions of Section 151 of Title 8 of the Delaware Code of
1953, as amended, said Board of Directors at a meeting duly held on April 13,
1999, adopted a resolution providing for the issuance of a total of Twelve
Thousand Five Hundred (12,500) shares of Series F Convertible Preferred Stock,
and providing for the powers, designations, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions thereof, which original Certificate of Designations, Preferences
and Rights of Series F Convertible Preferred Stock of the Corporation (the
"Certificate of Designations") was filed with the Secretary of State of the
State of Delaware on September 8, 1999;
SECOND: Further, that the Board of Directors of the Corporation, at a
meeting of such Board held on January 25, 2000, adopted a resolution proposing
and declaring advisable the following amendment to the Certificate of
Designations. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that section 4(b) of the Certificate of Designations be
amended to read as follows:
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each of the Series F Preferred Shares
pursuant to Section 4(a) shall be determined according to the
following formula (the "CONVERSION RATE"):
(.04)(N/365)(1,000) + 1,000
---------------------------
CONVERSION PRICE
provided that the Corporation shall have the option to pay the 4%
accretion accruing on each Series F Preferred Share in either cash or
Common Stock of the Corporation. Notwithstanding anything contained
herein to the contrary, the Corporation shall not be required to issue
in
63
<PAGE> 2
excess of Seventy Seven Million (77,000,000) shares of Common Stock
upon conversion of Series F Preferred Shares or such lesser amount as
determined on a pro-rata basis based upon the number of Series F
Preferred Shares issued (the "MAXIMUM SHARE ISSUANCE AMOUNTS").
For purposes of this Certificate of Designations, the following terms
shall have the following meanings:
(i) "CONVERSION PRICE" Means, as of any date of
determination, the amount obtained by multiplying the Conversion
Percentage (as defined below) in effect as of such date by the
Average Market Price (as defined below) for the Common Stock for
the five (5) consecutive trading days immediately preceding such
date;
(ii) "CONVERSION PERCENTAGE" Means 80% and shall be reduced
by an additional 2% for every 30 days (prorated for partial
months) beyond or ninety (90) days from the Issuance Date (as
defined below) that the Registration Statement on Form S-1 is not
filed by the Corporation (the "SCHEDULED FILING DATE");
(iii) "AVERAGE MARKET PRICE" Means, with respect to any
security for any period, that price which shall be computed as
the arithmetic average of the Closing Bid Prices (as defined
below) for such security for each trading day in such period;
(iv) "CLOSING BID PRICE" Means, for any security as of any
date, the last closing bid price on the Nasdaq National Market
System (the "NASDAQ-NM") as reported by Bloomberg Financial
Markets ("BLOOMBERG"), or, if the Nasdaq-NM is not the principal
trading market for such security, the last closing bid price of
such security on the principal securities exchange or trading
market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid
price of such security in the over-the-counter market on the pink
sheets or bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg. If the Closing Bid Price
cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such
date shall be the fair market value as reasonably determined in
good faith by the Board of Directors of the Company (all as
appropriately adjusted for any stock dividend, stock split or
other similar transaction during such period);
64
<PAGE> 3
(v) "N" means the number of days from, but excluding, the
Issuance Date through and including the Conversion Date for the
Series F Preferred Shares for which conversion is being elected;
and
(vi) "ISSUANCE DATE" means the date of issuance of Series F
Preferred Shares having an aggregate stated value of
$1,000,00.00.
THIRD: That section 4(b) of the Certificate of Designations is hereby
deleted and amended to read in its entirety as follows:
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each of the Series F Preferred Shares
pursuant to Section 4(a) shall be determined according to the
following formula (the "CONVERSION RATE"):
(.04)(N/365)(1,000) + 1,000
---------------------------
CONVERSION PRICE
provided that the Corporation shall have the option to pay the 4%
accretion accruing on each Series F Preferred Share in either cash or
Common Stock of the Corporation. Notwithstanding anything contained
herein to the contrary, the Corporation shall not be required to issue
in excess of Seventy Seven Million (77,000,000) shares of Common Stock
upon conversion of Series F Preferred Shares or such lesser amount as
determined on a pro-rata basis based upon the number of Series F
Preferred Shares issued (the "MAXIMUM SHARE ISSUANCE AMOUNTS").
For purposes of this Certificate of Designations, the following terms
shall have the following meanings:
(i) "CONVERSION PRICE" means, as of any date of
determination, the amount obtained by multiplying the Conversion
Percentage (as defined below) in effect as of such date by the
Average Market Price (as defined below) for the Common Stock for
the five (5) consecutive trading days immediately preceding such
date;
(ii) "CONVERSION PERCENTAGE" means 80% and shall be reduced
by an additional 2% for every 30 days (prorated for partial
months) beyond or ninety (90) days from the Issuance Date (as
65
<PAGE> 4
defined below) that the Registration Statement on Form S-1 is not
filed by the Corporation (the "SCHEDULED FILING DATE");
(iii) "AVERAGE MARKET PRICE" means, with respect to any
security for any period, that price which shall be computed as
the arithmetic average of the Closing Bid Prices (as defined
below) for such security for each trading day in such period;
(iv) "CLOSING BID PRICE" means, for any security as of any
date, the last closing bid price on the Nasdaq National Market
System (the "NASDAQ-NM") as reported by Bloomberg Financial
Markets ("BLOOMBERG"), or, if the Nasdaq-NM is not the principal
trading market for such security, the last closing bid price of
such security on the principal securities exchange or trading
market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid
price of such security in the over-the-counter market on the pink
sheets or bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg. If the Closing Bid Price
cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such
date shall be the fair market value as reasonably determined in
good faith by the Board of Directors of the Company (all as
appropriately adjusted for any stock dividend, stock split or
other similar transaction during such period);
(v) "N" means the number of days from, but excluding, the
Issuance Date through and including the Conversion Date for the
Series F Preferred Shares for which conversion is being elected;
and
(vi) "ISSUANCE DATE" means the date of issuance of Series F
Preferred Shares having an aggregate stated value of
$1,000,00.00.
FOURTH: The amendment effected herein was duly adopted in accordance with
the applicable provisions of the General Corporation Law of the State of
Delaware.
66
<PAGE> 5
IN WITNESS WHEREOF, the Corporation has caused this Amendment to the
Certificate of Designations to be signed by Cy E. Hammond, its Senior Vice
President and Chief Financial Officer, as of the 27th day of January, 2000.
NCT GROUP, INC.
By: /s/ CY E. HAMMOND
------------------------------
Cy E. Hammond
Senior Vice President and
Chief Financial
ATTEST:
By: /s/ IRENE LEBOVICS
------------------------------
Irene Lebovics, Secretary
67
<PAGE> 6
<PAGE> 1
EXHIBIT 4(K)
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS
OF
SERIES G CONVERTIBLE PREFERRED STOCK
OF
NCT GROUP, INC.
NCT Group, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "CORPORATION"),
DOES HEREBY CERTIFY
That, pursuant to authority conferred upon the Board of Directors of
the Corporation by the Restated Certificate of Incorporation of the Corporation,
and pursuant to the provisions of Section 151 of Title 8 of the Delaware Code of
1953, as amended, said Board of Directors at a meeting duly held on February 28,
2000, adopted a resolution providing for the issuance of a total of Five
Thousand (5,000) shares of Series G Convertible Preferred Stock, and providing
for the powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
which resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the provisions of
Article IV of the Restated Certificate of Incorporation of the Corporation,
this Board of Directors hereby creates a series of the Preferred Stock of
the Corporation with par value of $0.10 per share (the "PREFERRED STOCK")
to consist of Five Thousand (5,000) shares of the Ten Million (10,000,000)
authorized shares of Preferred Stock, which the Corporation now has
authority to issue, and this Board of Directors hereby fixes the powers,
designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof of
the shares of such series (in addition to the powers, designations,
preferences and relative, participating, optional or other special rights
and qualifications, limitations or restrictions thereof, set forth in
Article IV of the Restated Certificate of Incorporation not inconsistent
with the terms of this resolution and which are applicable to the Preferred
Stock) as follows:
(1) Designation. The designation of said series of Preferred Stock
created by this Resolution shall be Series G Convertible Preferred Stock.
Shares of said Series G Convertible Preferred Stock are herein collectively
referred to as "Series G Preferred Shares" and individually as "Series G
Preferred Share.
68
<PAGE> 2
(2) Par Value and Stated Value. Each Share of Series G Preferred
Stock shall have a par value of $0.10 (the "PAR VALUE"), and a stated value
(face amount) of One Thousand Dollars ($1,000.00) (the "STATED VALUE").
(3) Dividends. A holder of a Series G Preferred Share shall be
entitled to receive a cumulative dividend for each full year during which
such Series G Preferred Share is issued and outstanding, equal to four
percent (4%) of the Stated Value of such Series G Preferred Share, which
shall be payable by the Corporation on the date of conversion of such
Series G Preferred Share into Common Stock of the Corporation ("Dividend
Payment Date"). The dividend shall be payable in cash or in Common Stock at
the Corporation's option. Such dividend shall be payable in preference to
dividends on any Common Stock or stock of any class ranking, as to dividend
rights, junior to Series G Preferred Stock. Such dividend on the Series G
Preferred Share shall be fully cumulative and shall accrue (whether or not
declared and whether or not there shall be funds legally available for the
payment of dividends), without interest, and shall be payable on the
Dividend Payment Date unless such payment would be in violation of the
Delaware General Corporation Law (the "DGCL"). No interest shall accrue on
any unpaid dividends on the Series G Preferred Stock. If such dividend is
paid by the Corporation in Common Stock, the number of shares of Common
Stock to be received shall be determined by dividing the dollar amount of
the dividend by the Conversion Price on the Dividend Payment Date. If such
dividend is paid by the Corporation in Common Stock, said Common Stock
shall be delivered to the holder, or per holder's instructions, at the same
time as the Conversion Certificates.
(4) Holder's Conversion of Series G Preferred Shares. A holder of
Series G Preferred Shares shall have the right, at such holder's option, to
convert the Series G Preferred Shares into shares of the Corporation's
common stock, $.01 par value per share (the "COMMON STOCK"), on the
following terms and conditions:
(a) Conversion Right. Subject to the provisions of Sections 4(f)
and 5(a) below, at any time or times on or after one day following the
Corporation's issuance of its Series G Preferred Stock, any holder of
Series G Preferred Shares shall be entitled to convert any Series G
Preferred Shares into fully paid and nonassessable shares (rounded to
the nearest whole share in accordance with Section 4(g) below) of
Common Stock, at the Conversion Rate (as defined below);
provided, however, that in no event other than upon (i) a
Mandatory Conversion pursuant to Section 4(f) hereof, (ii) a
Redemption Conversion (as defined in Section 5(a)(ii)) pursuant to a
Notice of Redemption at the Corporation's Election, as provided for in
Section 5 hereof, (iii) a conversion pursuant to a Major Transaction
pursuant to Section 4(i) hereof, or (iv) while a Tender Offer (as
defined in Section 4(i)(iii) below) is outstanding, shall any holder
be entitled, or shall the Corporation be entitled as to any holder, to
convert
69
<PAGE> 3
Series G Preferred Shares in excess of that number of Series G
Preferred Shares which, upon giving effect to such conversion, would
cause the aggregate number of shares of Common Stock beneficially
owned by the holder and its affiliates to exceed 4.9% of the
outstanding shares of the Common Stock following such conversion. For
purposes of the foregoing proviso, the aggregate number of shares of
Common Stock beneficially owned by the holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion
of the Series G Preferred Shares (including dividends payable in
respect thereon) with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of
Common Stock which would be issuable upon (i) the conversion of the
remaining, nonconverted Series G Preferred Shares or any other Series
of Preferred Shares beneficially owned by the holder and its
affiliates, or (ii) the exercise of unexercised warrants or of other
rights to acquire shares of Common Stock, as beneficially owned by the
holder or its affiliates. Except as set forth in the preceding
sentence, for purposes of this paragraph, beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and the term "affiliate" shall have
the meaning given in Rule 12b-2 promulgated under such Act.
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each of the Series G Preferred Shares
pursuant to Section 4(a) shall be determined according to the
following formula (the "CONVERSION RATE"):
STATED VALUE NUMBER OF SHARES
------------------
CONVERSION PRICE OF COMMON STOCK
Notwithstanding anything contained herein to the contrary, the
Corporation shall not be required to issue in excess of Ten Million
(10,000,000) shares of Common Stock upon conversion of Series G
Preferred Shares or such lesser amount as determined on a pro-rata
basis based upon the number of Series G Preferred Shares issued and
outstanding (the "MAXIMUM SHARE ISSUANCE AMOUNTS"). If the sum
computed by such Conversion Rate exceeds 10,000,000 shares of Common
Stock, the Corporation shall, within five (5) business days after
receiving the Conversion Notice for which the conversion would exceed
the Maximum Share Issuance Amount, either (1) redeem, in accordance
with Section 5, the Series G Preferred Shares which may not be
converted due to the Maximum Share Issuance Amount, as described in
the preceding sentence, or (2) amend this Certificate of Designations
to provide for a Maximum Shares Issuance Amount which will permit the
conversion of all outstanding Series G Preferred Shares.
70
<PAGE> 4
For purposes of this Certificate of Designations, the following terms
shall have the following meanings:
(i) "CONVERSION PRICE" means, with respect to any date of
determination, the lower of the Fixed Conversion Price (as
defined below) and the Variable Conversion Price (as defined
below);
(ii) "FIXED CONVERSION PRICE" means $0.71925].
(iii) "VARIABLE CONVERSION PRICE" means the amount obtained
by multiplying 0.8 by the average Closing Bid Prices (as defined
below) for the Common Stock for the five consecutive trading days
immediately preceding the relevant date.
(iv) "CLOSING BID PRICE" means, for any security as of any
date, the last closing bid price on the NASDAQ National Market
System (the "NASDAQ-NM") as reported by Bloomberg Financial
Markets ("BLOOMBERG"), or, if the NASDAQ-NM is not the principal
trading market for such security, the last closing bid price of
such security on the principal securities exchange or trading
market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid
price of such security in the over-the-counter market on the pink
sheets or bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg. If the Closing Bid Price
cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such
date shall be the fair market value as reasonably determined in
good faith by the Board of Directors of the Company (all as
appropriately adjusted for any stock dividend, stock split or
other similar transaction during such period);
(c) Adjustment to Conversion Price - Dilution and Other Events.
In order to prevent dilution of the rights granted under this
Certificate of Designations, the Conversion Price will be subject to
adjustment from time to time as provided in this Section 4(c).
(i) Reorganization, Reclassification, Consolidation,
Merger, or Sale. Any recapitalization, reorganization
reclassification, consolidation, merger, sale of all or
substantially all of the Corporation's assets to another Person
(as defined below) or other similar transaction, which is
effected in such a way that holders of Common Stock are entitled
to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for
Common Stock, is referred to herein as an
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"ORGANIC CHANGE." Prior to the consummation of any Organic
Change, the Corporation will make appropriate provision (in form
and substance reasonably satisfactory to the holders of a
majority of the Series G Preferred Shares then outstanding) to
insure that each of the holders of the Series G Preferred Shares
will thereafter have the right to acquire and receive in lieu of
or in addition to (as the case may be) the shares of Common Stock
immediately theretofore acquirable and receivable upon the
conversion of such holder's Series G Preferred Shares, such
shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for the number of shares of Common
Stock immediately theretofore acquirable and receivable upon the
conversion of such holder's Series G Preferred Shares had such
Organic Change not taken place. In any such case, the Corporation
will make appropriate provision (in form and substance reasonably
satisfactory to the holders of a majority of the Series G
Preferred Shares then outstanding) with respect to such holder's
rights and interests to insure that the provisions of this
Section 4(c) and Section 4(d) below will thereafter be applicable
to the Series G Preferred Shares. The Corporation will not effect
any such consolidation, merger or sale, unless prior to the
consummation thereof the successor entity (if other than the
Corporation) resulting from such consolidation or merger assumes,
or the entity purchasing such assets assumes, by written
instrument (in form and substance reasonably satisfactory to the
holders of a majority of the Series G Preferred Shares then
outstanding), the obligation to deliver to each holder of Series
G Preferred Shares such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such holder may be
entitled to acquire. For purposes of this Agreement, "PERSON"
shall mean an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or
agency thereof.
(ii) Notices.
(A) Immediately upon any adjustment of the Conversion
Price, the Corporation will give written notice thereof to
each holder of Series G Preferred Shares, setting forth in
reasonable detail and certifying the calculation of such
adjustment.
(B) The Corporation will give written notice to each
holder of Series G Preferred Shares at least twenty (20)
business days prior to the date on which the Corporation
closes its books or takes a record (I) with respect to any
dividend or distribution upon the Common Stock, (II) with
respect to any pro rata subscription offer
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to holders of Common Stock, or (III) for determining rights
to vote with respect to any Organic Change, dissolution or
liquidation.
(C) The Corporation will also give written notice to
each holder of Series G Preferred Shares at least twenty
(20) business days prior to the date on which any Organic
Change, Major Transaction (as defined in Section 4(i)
below), dissolution or liquidation will take place.
(d) Purchase Rights. If at any time the Corporation grants,
issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to all
the record holders of any class of Common Stock (the "PURCHASE
RIGHTS"), then the holders of Series G Preferred Shares will be
entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Series G Preferred Shares
immediately before the date on which a record is taken for the grant
issuance or sale of such Purchase Rights, or, if no such record is
taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(e) Mechanics of Conversion. Subject to the Corporation's
inability to fully satisfy its obligations under a Conversion Notice
(as defined below) as provided for in Section 6 below:
(i) Holder's Delivery Requirements. To convert Series G
Preferred Shares into full shares of Common Stock on any date
(the "CONVERSION DATE"), the holder thereof shall (A) deliver or
transmit by facsimile, for receipt on or prior to 11:59 p.m.,
Eastern Time, on such date, a copy of a fully executed notice of
conversion in the form attached hereto as Exhibit I (the
"CONVERSION NOTICE") to the Corporation (c/o Cy Hammond, NCT
Group, Inc., 1025 West Nursery Road, Suite 120, Linthicum,
MD 21090, facsimile number 410-636-2141) or its designated
transfer agent (the "TRANSFER AGENT") (c/o Bill Galetta,
American Stock Transfer & Trust Company, 40 Wall Street,
New York, NY 10005, facsimile number 718-921-8328), and
(B) surrender to a common carrier for delivery to the
Corporation or the Transfer Agent as soon as practicable
following such notice, the original certificates representing
the Series G Preferred Shares being converted (or an
indemnification undertaking with respect to such ertificates in
the case of their loss, theft or destruction) (the "PREFERRED
STOCK CERTIFICATES").
(ii) Corporation's Response. Upon receipt by the
Corporation of a facsimile copy of a Conversion Notice, the
Corporation shall
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<PAGE> 7
immediately send, via facsimile, a confirmation of receipt of
such Conversion Notice to such holder. Upon receipt by the
Corporation or the Transfer Agent of the Preferred Stock
Certificates (the "Date of Receipt") to be converted pursuant to
a Conversion Notice, the Corporation or the Transfer Agent (as
applicable) shall, within five (5) business days following the
Date of Receipt, issue and surrender to a common carrier for
overnight delivery to the address as specified in the Conversion
Notice, a certificate (the "Conversion Certificate"), registered
in the name of the holder or its designee, for the number of
shares of Common Stock to which the holder shall be entitled.
(iii) Dispute Resolution. In the case of a dispute as to
the determination of the Closing Bid Price, the Variable
Conversion Price or the arithmetic calculation of the Conversion
Rate, the Corporation shall promptly issue to the holder the
number of shares of Common Stock that is not disputed and shall
submit the disputed determinations or arithmetic calculations to
the holder via facsimile within three (3) business days of
receipt of such holder's Conversion Notice. If such holder and
the Corporation are unable to agree upon the determination of the
Closing Bid Price, the Variable Conversion Price or arithmetic
calculation of the Conversion Rate within two (2) business days
of such disputed determination or arithmetic calculation being
submitted to the holder, then the Corporation shall within one
(1) business day submit via facsimile (A) the disputed
determination of the Closing Bid Price and/or the Variable
Conversion Price to an independent, reputable investment bank or
(B) the disputed arithmetic calculation of the Conversion Rate to
its independent, outside accountant. The Corporation shall cause
the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the
Corporation and the holder of the results no later than
forty-eight (48) hours from the time it receives the disputed
determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be,
shall be binding upon all parties absent manifest error.
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of
Series G Preferred Shares shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on
the Conversion Date.
(v) Corporation's Failure to Timely Convert. If the
Corporation shall fail to issue to a holder, within five (5)
business days following the Date of Receipt, a certificate for
the number of shares of Common Stock to which such holder is
entitled upon such holder's conversion of Series G Preferred
Shares, in addition to all other available remedies which such
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<PAGE> 8
holder may pursue hereunder and under any Securities Purchase
Agreement between the Corporation and the holders of the Series G
Preferred Shares (the "SECURITIES PURCHASE AGREEMENT") (including
indemnification pursuant thereto), the Corporation shall pay
additional damages to such holder on each day after the fifth
(5th) business day following the Date of Receipt by the
Corporation or the Transfer Agent of the Preferred Stock
Certificates to be converted pursuant to the Conversion Notice,
for which such conversion is not timely effected, an amount equal
to 1.0% of the product of (A) the number of shares of Common
Stock not issued to the holder and to which such holder is
entitled and (B) the Closing Bid Price of the Common Stock on the
business day after the fifth (5th) business day following the
Date of Receipt. If, within five (5) days following the Date of
Receipt, the Company fails to deliver the Conversion
certificates, the holder of the Preferred Stock being converted
(a "Converted Holder") purchases, in an arm's-length open market
transaction or otherwise, shares of Common Stock (the "Covering
Shares") in order to make delivery in satisfaction of a sale of
Common Stock by the Converting Holder anticipated to make using
the shares to be issued upon such conversion (a "Buy-In"), the
Converting Holder shall have the right, to require the Company to
pay to the Converting Holder, in lieu and instead of the amounts
due under Section 4 hereof (but in addition to all other amounts
contemplated in other provisions of the Transaction Agreements,
and not in lieu of any such other amounts), the Buy-In Adjustment
Amount (as defined below). The Company shall pay the Buy-In
Adjustment Amount to the Company in immediately available funds
immediately upon demand by the Converting Holder.
For purposes of this section, the "Buy-In Adjustment Amount"
means the amount equal to the excess, if any, of (i) the
Converting Holder's total purchase price (including brokerage
commissions, if any) for the Covering Shares over (ii) the net
proceeds (after brokerage commissions, if any) received by the
Converting Holder from the sale of the Sold Shares. (By way of
illustration and not in any limitation of the foregoing, if the
Converting Holder purchases shares of Common Stock having a total
purchase price (including brokerage commissions) of $11,000 to
cover a Buy-In with respect to shares of Common Stock it sold for
net proceeds of $10,000, the Buy-In Adjustment Amount which
Company will be required to pay to Converting Holder will be
$1,000.)
(f) Mandatory Conversion. If any Series G Preferred Shares
remain outstanding on February 28, 2003, then all such Series G
Preferred Shares shall automatically be converted as of such date in
accordance with this Section 4 as if the holders of such Series G
Preferred Shares had given the Conversion Notice on
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<PAGE> 9
February 28, 2003, and the Conversion Date had been fixed as of
February 28, 2003, for all purposes of this Section 4, and all holders
of Series G Preferred Shares shall thereupon and within two (2)
business days thereafter surrender all Preferred Stock Certificates,
duly endorsed for cancellation, to the Corporation or the Transfer
Agent. No person shall thereafter have any rights in respect of Series
G Preferred Shares, except the right to receive shares of Common Stock
on conversion thereof as provided in this Section 4.
(g) Fractional Shares. The Corporation shall not issue any
fraction of a share of Common Stock upon any conversion. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one share of the Series G Preferred Shares by a holder
thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of a fraction of a share of
Common Stock. If, after the aforementioned aggregation, the issuance
would result in the issuance of a fraction of a share of Common Stock,
the Corporation shall round such fraction of a share of Common Stock
up or down to the nearest whole share.
(h) Taxes. The Corporation shall pay any and all transfer, stamp
duty or other taxes of similar import which may be imposed upon it
with respect to the issuance and delivery of Common Stock upon the
conversion of the Series G Preferred Shares. The Corporation shall in
no event be responsible for taxes on income or gain realized by or
imputed to any holder of Series G Preferred Shares.
(i) Holder's Right to Immediately Convert.
Any holder of Series G Preferred Shares shall be immediately
entitled to convert all of such holder's Series G Preferred Shares
into shares of Common Stock pursuant to this Section 4 upon (i) any
public announcement by the Corporation stating that the Corporation
intends to consummate, or is the subject of, a Major Transaction (as
defined below), (ii) execution of a definitive agreement by the
Corporation with respect to a Major Transaction, or (iii) the
consummation of a Major Transaction. A "MAJOR TRANSACTION" shall be
deemed to have occurred upon the occurrence of any of the following
events:
(i) the consummation of any merger, reorganization,
restructuring, consolidation, or similar transaction by or
involving the Corporation except (A) a merger or consolidation
where the Corporation is a survivor or (B) pursuant to a
migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Corporation;
(ii) the sale of all or substantially all of the assets of
the Corporation or all of its material subsidiaries or any
similar transaction or
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<PAGE> 10
related transactions which effectively results in a sale of all
or substantially all of the assets of the Corporation and/or its
subsidiaries; or
(iii) the occurrence, after the date hereof, of the
acquisition, or the written offer to acquire pursuant to
Regulation 14D (promulgated under the Securities Exchange of
1934), by any person (including any entity or association) or
persons, of securities of the Corporation (or the power to vote
such securities) representing 50% or more of the total voting
power of all outstanding Common Stock or other voting securities
of the Corporation (such offer, a "Tender Offer").
(5) Corporation's Right to Redeem at its Election.
(a) If at any given date the Closing Bid Price of the Common
Stock for each of the ten consecutive trading days shall be at or
above 200% of the Fixed Conversion Price ("REDEMPTION ELECTION DATE"),
and as long as the Corporation has not breached any of the
representations, warranties, and covenants contained herein or in any
related agreements, the Corporation shall have the right, in its sole
discretion, to redeem for Common Stock or for cash ("REDEMPTION AT
CORPORATION'S ELECTION"), on such a Redemption Election Date, any or
all of the Series G Preferred Shares; provided the Corporation shall
first provide no more than ten (10) days and no less than five (5)
days advance written notice as provided in subparagraph 5(a)(ii) below
(which can be given any time on or after a registration statement (the
"REGISTRATION STATEMENT") covering the resale of Common Stock issued
upon conversion of the Series G Preferred Shares and required to be
filed by the Corporation pursuant to any Registration Rights Agreement
between the Corporation and its initial holders of Series G Preferred
Shares (the "REGISTRATION RIGHTS AGREEMENT") is declared effective
(the "REGISTRATION STATEMENT EFFECTIVE DATE") by the U.S. Securities
and Exchange Commission (the "SEC")) and remains currently effective.
If the Corporation elects to redeem some, but not all, of the Series G
Preferred Shares, the Corporation shall redeem a pro rata amount from
each holder of the Series G Preferred Shares.
(i) Redemption Price At Corporation's Election. The
"REDEMPTION PRICE AT CORPORATION'S ELECTION" shall be equal to
(I) the Liquidation Value (as defined in Section 10) as of the
date that the Corporation pays the Redemption Price at
Corporation's Election, divided by the Conversion Rate (as
defined in Section 4(b) above) as of the Redemption Election
Date, multiplied by (II) the average closing sale price as
reported on Bloomberg (as defined in Section 4(b)(iv) above) for
the trading days from the Redemption Election Date to the trading
day immediately before the Corporation pays the Redemption Price
at Corporation's Election.
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(ii) Mechanics of Redemption at Corporation's Election. The
Corporation shall effect each such redemption by giving no more
than ten (10) days and no less than five (5) days prior written
notice ("NOTICE OF REDEMPTION AT CORPORATION'S ELECTION"), to
(A) the Holders of the Series G Preferred Shares selected for
redemption at the address and facsimile number of such holder
appearing in the Corporation's Series G Preferred Stock register,
(B) the Transfer Agent, and (C) the Holders' attorneys, which
Notice of Redemption at Corporation's Election shall be deemed to
have been delivered three (3) business days after the
Corporation's mailing (by overnight or two (2) day courier,
with a copy by facsimile) of such Notice of Redemption at
Corporation's Election. Such Notice of Redemption at
Corporation's Election shall indicate (i) the number of shares of
Series G Preferred Stock that have been selected for redemption,
(ii) the date, which shall not be less than five (5) business
days after the Notice of Redemption at the Corporation's Election
is received by the Holder, that such redemption is to become
effective (the "DATE OF REDEMPTION AT CORPORATION'S ELECTION"),
and (iii) the applicable Redemption Price At Corporation's
Election. Notwithstanding the above, a holder may convert into
Common Stock, prior to the close of business on the Date of
Redemption at Corporation's Election, any Series G Preferred
Shares, subject to the relevant Notice of Redemption At
Corporation's Election, where such redemption is for cash (such
conversion by a holder, a "Redemption Conversion"). Such a notice
by a holder to convert Common Stock prior to the close of
business on the Date of Redemption shall take precedence over any
Notice of Redemption at Corporation's Election.
(b) Corporation Must Have Immediately Available Funds or Credit
Facilities. The Corporation shall not be entitled to send any Notice
of Redemption at Corporation's Election and begin the redemption
procedure under Section 5(a) unless it has:
(i) the full amount of the redemption price in cash or cash
equivalents, available in a demand or other immediately available
account in a bank or similar financial institution; or
(ii) immediately available credit facilities, in the full
amount of the redemption price with a bank or similar financial
institution; or
(iii) an agreement with a standby underwriter willing to
purchase from the Corporation a sufficient number of shares of
stock to provide proceeds necessary to redeem any stock that is
not converted prior to redemptions;
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(iv) if the redemption is to be paid in Common Stock, an
adequate number of authorized but unissued shares of Common Stock
to pay the full amount of the redemption price; or
(v) a combination of the items set forth in (i), (ii),
(iii), and (iv) above, aggregating the full amount of the
redemption price.
(c) Payment of Redemption Price. Each holder submitting Series G
Preferred Shares being redeemed under this Section 5 shall send his
Series G Preferred Share certificates to be redeemed to the
Corporation or its Transfer Agent, and the Corporation shall pay the
applicable redemption price to that holder within five (5) business
days of the Date of Redemption at Corporation's Election. The
Corporation's failure to pay the applicable redemption price within
five (5) business days of the Date of Redemption at Corporation's
Election will result in (i) the nullification of the Notice of
Redemption and (ii) the termination of any future redemption rights of
the Corporation.
(6) Inability to Fully Convert.
(a) Holder's Option if Corporation Cannot Fully Convert. If at
any time after the Registration Statement Effective Date, upon the
Corporation's receipt of a Conversion Notice, the Corporation does not
issue shares of Common Stock which are registered for resale under the
Registration Statement within five (5) business days of the time
required in accordance with Section 4(e) hereof, for any reason or for
no reason, including, without limitation, because the Corporation (x)
does not have a sufficient number of shares of Common Stock authorized
and available, (y) is otherwise prohibited by applicable law or by the
rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over
the Corporation or its Securities, including without limitation The
NASDAQ Stock Market, Inc. from issuing all of the Common Stock which
is to be issued to a holder of Series G Preferred Shares pursuant to a
Conversion Notice, or (z) fails to have a sufficient number of shares
of Common Stock registered and eligible for resale under the
Registration Statement, then the Corporation shall (i) make all
reasonable efforts to correct any impediment as identified in Section
6(a)(x), (y) and (z) herein to enable the Corporation to issue
sufficient shares of Common Stock upon receipt of a Conversion Notice,
(ii) issue as many shares of Common Stock as it is able to issue in
accordance with such holder's Conversion Notice and pursuant to
Section 4(e) above, and (iii) with respect to the unconverted Series G
Preferred Shares, the holder, solely at such holder's option, can, in
addition to any other remedies such holder may have hereunder, under a
Securities Purchase Agreement in respect of its Series G Preferred
Shares (including indemnification thereunder),
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under a Registration Rights Agreement in respect of its Series G
Preferred Shares, at law or in equity, elect to:
(i) require the Corporation to redeem from such holder
those Series G Preferred Shares for which the Corporation is
unable to issue Common Stock in accordance with such holder's
Conversion Notice ("MANDATORY REDEMPTION") at a price per Series
G Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
greater of (x) 125% of the Liquidation Value of such share or
(y)(I) the Liquidation Value (as defined in Section 10) as of
the date that the Corporation pays the Mandatory Redemption
Price, divided by the Conversion Rate (as defined in
Section 4(b) above) as of the date of the Notice in Response to
Inability to Convert, multiplied by (II) the average closing
sale price, as reported on Bloomberg (as defined in
section 4(b)(iv) above) for the five trading days ending on the
trading day before payment of the Mandatory Redemption Price;
(ii) if the Corporation's inability to fully convert Series
G Preferred Shares is pursuant to Section 6(a)(z) above, require
the Corporation to issue restricted shares of Common Stock in
accordance with such holder's Conversion Notice and pursuant to
Section 4(e) above, but which will not effect the Corporation's
obligation to register shares of Common Stock pursuant to any
separate purchase agreement with the Holder; or
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Series G Preferred
Shares that were to be converted pursuant to such holder's
Conversion Notice.
(b) Mechanics of Fulfilling Holder's Election. The Corporation
shall immediately send via facsimile to a holder of Series G Preferred
Shares, upon receipt of a facsimile copy of a Conversion Notice from
such holder which cannot be fully satisfied as described in Section
6(a) above, a notice of the Corporation's inability to fully satisfy
such holder's Conversion Notice (the "INABILITY TO FULLY CONVERT
NOTICE"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Corporation is unable to fully satisfy such
holder's Conversion Notice, (ii) the number of Series G Preferred
Shares which cannot be converted, and (iii) the applicable Mandatory
Redemption Price. Such holder must within five (5) business days of
receipt of such Inability to Fully Convert Notice, deliver written
notice via facsimile to the Corporation ("NOTICE IN RESPONSE TO
INABILITY TO CONVERT") of its election pursuant to Section 6(a) above.
(c) Payment of Redemption Price. If such holder shall elect to
have its shares redeemed pursuant to Section 6(a) above, the
Corporation shall pay the
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Mandatory Redemption Price in cash to such holder within thirty (30)
business days of the Corporation's receipt of the holder's Notice in
Response to Inability to Convert. If the Corporation shall fail to pay
the applicable Mandatory Redemption Price to such holder on a timely
basis as described in this Section 6(c) (other than pursuant to a
dispute as to the determination of the Closing Bid Price, the Variable
Conversion Price or the arithmetic calculation of the Redemption
Rate), such unpaid amount shall bear interest at the lower of (i) a
rate of 1.0% for the first month and a rate of 2.0% per month
thereafter (prorated for partial months), or (ii) the maximum amount
allowable by law (prorated for partial months), until paid in full.
Until the full Mandatory Redemption Price is paid in full to such
holder, such holder may rescind the Mandatory Redemption with respect
to those Series G Preferred Shares for which the full Mandatory
Redemption Price has not been paid and receive back, against return to
the Corporation of the amount of any payments, such Series G Preferred
Shares. Notwithstanding the foregoing, if the Corporation fails to pay
the applicable Mandatory Redemption Price within such thirty business
(30) days time period due to a dispute as to the determination of the
Closing Bid Price, the Variable Conversion Price or the arithmetic
calculation of the Conversion Rate, such dispute shall be resolved
pursuant to Section 4(e)(iii) above.
(d) Pro-rata Conversion and Redemption. In the event the
Corporation receives a Conversion Notice from more than one holder of
Series G Preferred Shares on the same day and the Corporation can
convert and redeem some, but not all, of the Series G Preferred Shares
pursuant to this Section 6, the Corporation shall convert and redeem
from each holder of Series G Preferred Shares electing to have Series
G Preferred Shares converted and redeemed at such time an amount equal
to such holder's pro-rata amount (based on the number of Series G
Preferred Shares held by such holder relative to the number of Series
G Preferred Shares outstanding) of all Series G Preferred Shares being
converted and redeemed at such time.
(7) Reissuance of Certificates. In the event of a conversion or
redemption pursuant to this Certificate of Designations of less than all of
the Series G Preferred Shares represented by a particular Series G
Preferred Share certificate, the Corporation shall promptly cause to be
issued and delivered to the holder of such Series G Preferred Shares a
Series G Preferred Share certificate representing the remaining Series G
Preferred Shares which have not been so converted or redeemed.
(8) Reservation of Shares. The Corporation shall, so long as any of
the Series G Preferred Shares are outstanding, reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Series G Preferred Shares, 125% of such
number of shares of Common Stock as shall from time to time be sufficient
to affect the conversion of the Series G Preferred Shares then issued and
outstanding.
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(9) Voting Rights. Holders of Series G Preferred Shares shall have no
voting rights, except as required by law, including but not limited to the
General Corporation Law of the State of Delaware and as expressly provided
in this Certificate of Designations.
(10) Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation, the holders of the Series G Preferred Shares shall be entitled
to receive in cash out of the assets of the Corporation, whether from
capital or from earnings available for distribution to its stockholders
(the "PREFERRED FUNDS"), after all amounts payable to the holders of the
Corporation's Series C, D, E and F Convertible Preferred Stock and before
any amount shall be paid to the holders of any of the capital stock of the
Corporation of any class junior in rank to the Series G Preferred Shares in
respect of the preferences as to the distributions and payments on the
liquidation, dissolution and winding up of the Corporation, an amount per
Series G Preferred Share equal to the sum of (i) $1,000 and (ii) an amount
equal to the product of (.04) (N/365) ($1,000) (such sum being referred to
as the "LIQUIDATION VALUE") (where N equals the number of days, through and
including the Conversion Date, such Series G Preferred Share was issued and
outstanding, not counting the date of issuance); provided that, if the
Preferred Funds are insufficient to pay the full amount due to the holders
of Series G Preferred Shares, then each holder of Series G Preferred Shares
shall receive a percentage of the Preferred Funds equal to the full amount
of Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designations, Preferences
and Rights as a percentage or the full amount of Preferred Funds payable to
all holders of Series G Preferred Shares. The purchase or redemption by the
Corporation of stock of any class in any manner permitted by law, shall not
for the purposes hereof, be regarded as a liquidation, dissolution, or
winding up of the Corporation. Neither the consolidation or merger of the
Corporation with or into any other Person, nor the sale or transfer by the
Corporation of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution, or winding up
of the Corporation. No holder of Series G Preferred Shares shall be
entitled to receive any amounts with respect thereto upon any liquidation,
dissolution or winding up of the Corporation other than the amounts
provided for herein.
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(11) Preferred Rank. Except for the Corporation's Series C
Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E
Convertible Preferred Stock and Series F Convertible Preferred Stock, all
shares of Series G Convertible Preferred Stock shall be of senior rank and
all shares of Common Stock shall be of junior rank to all Series G
Preferred Shares in respect to the preferences as to distributions and
payments upon the liquidation, dissolution, and winding up of the
Corporation. The rights of the shares of Common Stock shall be subject to
the Preferences and relative rights of the Series G Preferred Shares.
Except for the Corporation's Series C Convertible Preferred Stock, Series D
Convertible Preferred Stock, Series E Convertible Preferred Stock and
Series F Convertible Preferred Stock, the Series G Preferred Shares shall
be of greater rank than any Series of Common or Preferred Stock hereinafter
issued by the Corporation. Without the prior express written consent of the
holders of not less than two-thirds (2/3) of the then outstanding Series G
Preferred Shares, the Corporation shall not hereafter authorize or issue
additional or other capital stock that is of senior or equal rank to the
Series G Preferred Shares in respect of the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the
Corporation. Without the prior express written consent of the holders of
not less than two-thirds (2/3) of the then outstanding Series G Preferred
Shares, the Corporation shall not hereafter authorize or make any amendment
to the Corporation's Certificate of Incorporation or bylaws, or file any
resolution of the board of directors with the Delaware Secretary of State
containing any provisions that would adversely affect or otherwise impair
the rights or relative priority of the holders of the Series G Preferred
Shares relative to the holders of the Common Stock or the holders of any
other class of capital stock in respect of the preferences as to
distributions and payments upon the liquidation, dissolution and winding up
of the Corporation. In the event of the merger or consolidation of the
Corporation with or into another corporation, the Series G Preferred Shares
shall maintain their relative powers, designations, and preferences
provided for herein and no merger shall result inconsistent therewith.
(12) Restriction on Dividends. If any Series G Preferred Shares are
outstanding, without the prior express written consent of the holders of
not less than two-thirds (2/3) of the then outstanding Series G Preferred
Shares, the Corporation shall not directly or indirectly declare, pay or
make any dividends or other distributions upon any of the Common Stock
unless written notice thereof has been given to holders of the Series G
Preferred Shares at least thirty (30) days prior to the earlier of (a) the
record date taken for, or (b) the payment of any such dividend or other
distribution. Notwithstanding the foregoing, this Section 12 shall not
prohibit the Corporation from declaring and paying a dividend in cash or
cash equivalents with respect to the Common Stock so long as the
Corporation: (i) pays simultaneously to each holder of Series G Preferred
Shares an amount in cash or cash equivalents equal to the amount such
holder would have received had all of such holder's Series G Preferred
Shares been converted to Common Stock pursuant to Section 4 hereof one (1)
business day prior to the record date for any such dividend, and (ii) after
giving effect to the payment of any dividend and any other payments
required in connection therewith including to the holders of the Series G
Preferred Shares under clause 12(a)(i) hereof, the Corporation has in cash
or cash
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equivalents an amount equal to the aggregate of: (A) all of its liabilities
reflected on its most recently available balance sheet, (B) the amount of
any indebtedness incurred by the Corporation or any of its subsidiaries
since its most recent balance sheet, and (C) 125% of the amount payable to
all holders of any shares of any class of preferred stock of the
Corporation assuming a liquidation of the Corporation as of the date of its
most recently available balance sheet.
(13) Vote to Change the Terms of Series G Preferred Shares. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3)
of the then outstanding Series G Preferred Shares, shall be required for
any change to this Certificate of Designations or the Corporation's
Certificate of Incorporation which would amend, alter, change or repeal any
of the powers, designations, preferences and rights of the Series G
Preferred Shares.
(14) Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of any certificates representing the Series G Preferred Shares,
and, in the case of loss, theft or destruction, of any indemnification
undertaking by the holder to the Corporation and, in the case of
mutilation, upon surrender and cancellation of the Series G Preferred Share
certificate(s), the Corporation shall execute and deliver new Series G
Preferred Share certificate(s) of like tenor and date; provided, however,
the Corporation shall not be obligated to reissue Series G Preferred Share
certificates if the holder contemporaneously requests the Corporation to
convert such Series G Preferred Shares into Common Stock.
(15) Withholding Tax Obligations. Notwithstanding anything herein to
the contrary, to the extent that the Corporation receives advice in writing
from its counsel that there is a reasonable basis to believe that the
Corporation is required by applicable Federal laws or regulations and
delivers a copy of such written advice to the holders of the Series G
Preferred Shares so effected, the Corporation may reasonably condition the
making of any distribution (as such term is defined under applicable
federal tax law and regulations) in respect of any Series G Preferred
Shares on the holder of such Series G Preferred Shares depositing with the
Corporation an amount of cash sufficient to enable the Corporation to
satisfy its withholding tax obligations (the "WITHHOLDING TAX") with
respect to such distribution. Notwithstanding the foregoing or anything to
the contrary, if any holder of the Series G Preferred Shares so effected
receives advice in writing from its counsel, reasonably acceptable to the
Corporation, that there is a reasonable basis to believe that the
Corporation is not so required by applicable federal laws or regulations
and delivers a copy of such written advice to the Corporation, the
Corporation shall not be permitted to condition the making of any such
distribution in respect of any Series G Preferred Shares on the holder of
such Series G Preferred Shares depositing with the Corporation any
Withholding Tax with respect to such distribution; provided, however, the
Corporation may reasonably condition the making of any such distribution in
respect of any Series G Preferred Shares on the holder of such Series G
Preferred Shares executing and delivering to the Corporation, at the
election of the holder, either (i) if applicable, a properly completed
Internal Revenue Service Form 4224, or (ii) an
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<PAGE> 18
indemnification agreement in reasonably acceptable form, with respect to
any federal tax liability, penalties and interest that may be imposed upon
the Corporation by the Internal Revenue Service as a result of the
Corporation's failure to withhold in connection with such distribution to
such holder. If the conditions in the preceding two sentences are fully
satisfied, the Corporation shall not be required to pay any additional
damages set forth in Section 4(e)(v) of this Certificate of Designations if
its failure to timely deliver any Conversion Shares results solely from the
holder's failure to deposit any withholding tax hereunder or provide to the
Corporation an executed indemnification agreement in the form reasonably
satisfactory to the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be signed by Cy E. Hammond, its Senior Vice President and Chief
Financial Officer, as of the sixth day of March, 2000.
NCT GROUP, INC.
By: /s/ CY E. HAMMOND
-------------------------
Cy E. Hammond
Senior Vice President and
Chief Financial Officer
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EXHIBIT I
NCT GROUP, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and
Rights of Series G Convertible Preferred Stock of NCT Group, Inc. (the
"CERTIFICATE OF DESIGNATIONS"). In accordance with and pursuant to the
Certificate of Designations, the undersigned hereby elects to convert the number
of shares of Series G Convertible Preferred Stock, $.10 par value per share (the
"SERIES G PREFERRED SHARES"), of NCT Group, Inc., a Delaware corporation (the
"CORPORATION"), indicated below into shares of Common Stock, $.01 par value per
share (the "COMMON STOCK"), of the Corporation, by tendering the stock
certificate(s) representing the share(s) of Series G Preferred Shares specified
below as of the date specified below.
The undersigned acknowledges that any sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Series G Preferred
Shares shall be made only pursuant to (i) a registration statement effective
under the Securities Act of 1933, as amended (the "ACT"), or (ii) an opinion of
counsel in form and content reasonably satisfactory to the Corporation that such
sale is exempt from registration required by Section 5 of the Act.
Date of Conversion:
------------------------------------
Number of Series G
Preferred Shares to be converted:
------------------------------------
Stock certificate no(s). of Series G
Preferred Shares to be converted:
------------------------------------
Please confirm the following information:
Conversion Price:
------------------------------------
Number of shares of Common Stock
to be issued:
------------------------------------
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Please issue the Common Stock into which the Series G Preferred Shares are being
converted in the following name and to the following address:
Issue to: 1
------------------------------------
------------------------------------
Facsimile Number:
------------------------------------
Authorization:
------------------------------------
By:
--------------------------------
Title:
-----------------------------
Dated:
-----------------------------
ACKNOWLEDGED AND AGREED:
NCT GROUP, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Date:
------------------------------------
- ----------
1 If other than to the record holder of the Series G Preferred Shares,
any applicable transfer tax must be paid by the undersigned.
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<PAGE> 1
EXHIBIT 4(L)
CORRECTED CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES G CONVERTIBLE PREFERRED STOCK
OF
NCT GROUP, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
NCT Group, Inc.
2. The Certificate of Designations, Preferences and Rights of Series G
Convertible Preferred Stock of the Corporation, which was filed by the Secretary
of State of the State of Delaware on March 6, 2000, is hereby corrected.
3. The inaccuracies to be corrected in said instrument are as follows: In
the first sentence of the second paragraph on page one, (a) the word "special"
is to be inserted after the words "said Board of Directors at a" but before the
words "meeting duly held on", and (b) the words "February 28" are deleted and
the words "March 10" shall be substituted therefor.
4. The instrument in corrected form is as follows:
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES G CONVERTIBLE PREFERRED STOCK
OF
NCT GROUP, INC.
NCT Group, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "CORPORATION"),
DOES HEREBY CERTIFY
That, pursuant to authority conferred upon the Board of Directors of the
Corporation by the Restated Certificate of Incorporation of the Corporation, and
pursuant to the provisions of Section 151 of Title 8 of the Delaware Code of
1953, as amended, said Board of Directors at a special meeting duly held on
March 10, 2000, adopted a resolution providing for the issuance of a total of
Five Thousand (5,000) shares of Series G Convertible Preferred Stock, and
providing
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<PAGE> 2
for the powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
which resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the provisions of
Article IV of the Restated Certificate of Incorporation of the Corporation,
this Board of Directors hereby creates a series of the Preferred Stock of
the Corporation with par value of $0.10 per share (the "PREFERRED STOCK")
to consist of Five Thousand (5,000) shares of the Ten Million (10,000,000)
authorized shares of Preferred Stock, which the Corporation now has
authority to issue, and this Board of Directors hereby fixes the powers,
designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof of
the shares of such series (in addition to the powers, designations,
preferences and relative, participating, optional or other special rights
and qualifications, limitations or restrictions thereof, set forth in
Article IV of the Restated Certificate of Incorporation not inconsistent
with the terms of this resolution and which are applicable to the Preferred
Stock) as follows:
(1) Designation. The designation of said series of Preferred
Stock created by this Resolution shall be Series G Convertible Preferred
Stock. Shares of said Series G Convertible Preferred Stock are herein
collectively referred to as "Series G Preferred Shares" and individually as
"Series G Preferred Share.
(2) Par Value and Stated Value. Each Share of Series G
Preferred Stock shall have a par value of $0.10 (the "PAR VALUE"), and a
stated value (face amount) of One Thousand Dollars ($1,000.00) (the "STATED
VALUE").
(3) Dividends. A holder of a Series G Preferred Share shall be
entitled to receive a cumulative dividend for each full year during which
such Series G Preferred Share is issued and outstanding, equal to four
percent (4%) of the Stated Value of such Series G Preferred Share, which
shall be payable by the Corporation on the date of conversion of such
Series G Preferred Share into Common Stock of the Corporation ("Dividend
Payment Date"). The dividend shall be payable in cash or in Common Stock at
the Corporation's option. Such dividend shall be payable in preference to
dividends on any Common Stock or stock of any class ranking, as to dividend
rights, junior to Series G Preferred Stock. Such dividend on the Series G
Preferred Share shall be fully cumulative and shall accrue (whether or not
declared and whether or not there shall be funds legally available for the
payment of dividends), without interest, and shall be payable on the
Dividend Payment Date unless such payment would be in violation of the
Delaware General Corporation Law (the "DGCL"). No interest shall accrue on
any unpaid dividends on the Series G Preferred Stock. If such dividend is
paid by the Corporation in Common Stock, the number of shares of Common
Stock to be received shall be determined by dividing the dollar amount of
the dividend by the Conversion Price on the Dividend Payment Date. If such
dividend is paid by the Corporation in Common Stock, said Common Stock
shall be delivered to the holder, or per holder's instructions, at the same
time as the Conversion Certificates.
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<PAGE> 3
(4) Holder's Conversion of Series G Preferred Shares. A holder
of Series G Preferred Shares shall have the right, at such holder's option,
to convert the Series G Preferred Shares into shares of the Corporation's
common stock, $.01 par value per share (the "COMMON STOCK"), on the
following terms and conditions:
(a) Conversion Right. Subject to the provisions of
Sections 4(f) and 5(a) below, at any time or times on or after one day
following the Corporation's issuance of its Series G Preferred Stock,
any holder of Series G Preferred Shares shall be entitled to convert
any Series G Preferred Shares into fully paid and nonassessable shares
(rounded to the nearest whole share in accordance with Section 4(g)
below) of Common Stock, at the Conversion Rate (as defined below);
provided, however, that in no event other than upon (i) a
Mandatory Conversion pursuant to Section 4(f) hereof, (ii) a
Redemption Conversion (as defined in Section 5(a)(ii)) pursuant to a
Notice of Redemption at the Corporation's Election, as provided for in
Section 5 hereof, (iii) a conversion pursuant to a Major Transaction
pursuant to Section 4(i) hereof, or (iv) while a Tender Offer (as
defined in Section 4(i)(iii) below) is outstanding, shall any holder
be entitled, or shall the Corporation be entitled as to any holder, to
convert Series G Preferred Shares in excess of that number of Series G
Preferred Shares which, upon giving effect to such conversion, would
cause the aggregate number of shares of Common Stock beneficially
owned by the holder and its affiliates to exceed 4.9% of the
outstanding shares of the Common Stock following such conversion. For
purposes of the foregoing proviso, the aggregate number of shares of
Common Stock beneficially owned by the holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion
of the Series G Preferred Shares (including dividends payable in
respect thereon) with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of
Common Stock which would be issuable upon (i) the conversion of the
remaining, nonconverted Series G Preferred Shares or any other Series
of Preferred Shares beneficially owned by the holder and its
affiliates, or (ii) the exercise of unexercised warrants or of other
rights to acquire shares of Common Stock, as beneficially owned by the
holder or its affiliates. Except as set forth in the preceding
sentence, for purposes of this paragraph, beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and the term "affiliate" shall have
the meaning given in Rule 12b-2 promulgated under such Act.
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each of the Series G Preferred Shares
pursuant to Section 4(a) shall be determined according to the
following formula (the "CONVERSION RATE"):
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STATED VALUE = NUMBER OF SHARES
------------------
CONVERSION PRICE OF COMMON STOCK
Notwithstanding anything contained herein to the contrary, the
Corporation shall not be required to issue in excess of Ten Million
(10,000,000) shares of Common Stock upon conversion of Series G
Preferred Shares or such lesser amount as determined on a pro-rata
basis based upon the number of Series G Preferred Shares issued and
outstanding (the "MAXIMUM SHARE ISSUANCE AMOUNTS"). If the sum
computed by such Conversion Rate exceeds 10,000,000 shares of Common
Stock, the Corporation shall, within five (5) business days after
receiving the Conversion Notice for which the conversion would exceed
the Maximum Share Issuance Amount, either (1) redeem, in accordance
with Section 5, the Series G Preferred Shares which may not be
converted due to the Maximum Share Issuance Amount, as described in
the preceding sentence, or (2) amend this Certificate of Designations
to provide for a Maximum Shares Issuance Amount which will permit the
conversion of all outstanding Series G Preferred Shares.
For purposes of this Certificate of Designations, the following terms
shall have the following meanings:
(i) "CONVERSION PRICE" means, with respect to any date of
determination, the lower of the Fixed Conversion Price (as
defined below) and the Variable Conversion Price (as defined
below);
(ii) "FIXED CONVERSION PRICE" means $0.71925.
(iii) "VARIABLE CONVERSION PRICE" means the amount obtained
by multiplying 0.8 by the average Closing Bid Prices (as defined
below) for the Common Stock for the five consecutive trading days
immediately preceding the relevant date.
(iv) "CLOSING BID PRICE" means, for any security as of any
date, the last closing bid price on the NASDAQ National Market
System (the "NASDAQ-NM") as reported by Bloomberg Financial
Markets ("BLOOMBERG"), or, if the NASDAQ-NM is not the principal
trading market for such security, the last closing bid price of
such security on the principal securities exchange or trading
market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid
price of such security in the over-the-counter market on the pink
sheets or bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg. If the Closing Bid Price
cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such
date shall be the fair market value as reasonably
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<PAGE> 5
determined in good faith by the Board of Directors of the Company
(all as appropriately adjusted for any stock dividend, stock
split or other similar transaction during such period);
(c) Adjustment to Conversion Price - Dilution and Other
Events. In order to prevent dilution of the rights granted under this
Certificate of Designations, the Conversion Price will be subject to
adjustment from time to time as provided in this Section 4(c).
(i) Reorganization, Reclassification, Consolidation,
Merger, or Sale. Any recapitalization, reorganization
reclassification, consolidation, merger, sale of all or
substantially all of the Corporation's assets to another Person
(as defined below) or other similar transaction, which is
effected in such a way that holders of Common Stock are entitled
to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for
Common Stock, is referred to herein as an "ORGANIC CHANGE." Prior
to the consummation of any Organic Change, the Corporation will
make appropriate provision (in form and substance reasonably
satisfactory to the holders of a majority of the Series G
Preferred Shares then outstanding) to insure that each of the
holders of the Series G Preferred Shares will thereafter have the
right to acquire and receive in lieu of or in addition to (as the
case may be) the shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's
Series G Preferred Shares, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's
Series G Preferred Shares had such Organic Change not taken
place. In any such case, the Corporation will make appropriate
provision (in form and substance reasonably satisfactory to the
holders of a majority of the Series G Preferred Shares then
outstanding) with respect to such holder's rights and interests
to insure that the provisions of this Section 4(c) and Section
4(d) below will thereafter be applicable to the Series G
Preferred Shares. The Corporation will not effect any such
consolidation, merger or sale, unless prior to the consummation
thereof the successor entity (if other than the Corporation)
resulting from such consolidation or merger assumes, or the
entity purchasing such assets assumes, by written instrument (in
form and substance reasonably satisfactory to the holders of a
majority of the Series G Preferred Shares then outstanding), the
obligation to deliver to each holder of Series G Preferred Shares
such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to acquire.
For purposes of this Agreement, "PERSON" shall mean an
individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization
and a government or any department or agency thereof.
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(ii) Notices.
(A) Immediately upon any adjustment of the Conversion
Price, the Corporation will give written notice thereof to
each holder of Series G Preferred Shares, setting forth in
reasonable detail and certifying the calculation of such
adjustment.
(B) The Corporation will give written notice to each
holder of Series G Preferred Shares at least twenty (20)
business days prior to the date on which the Corporation
closes its books or takes a record (I) with respect to any
dividend or distribution upon the Common Stock, (II) with
respect to any pro rata subscription offer to holders of
Common Stock, or (III) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(C) The Corporation will also give written notice to
each holder of Series G Preferred Shares at least twenty
(20) business days prior to the date on which any Organic
Change, Major Transaction (as defined in Section 4(i)
below), dissolution or liquidation will take place.
(d) Purchase Rights. If at any time the Corporation grants,
issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to all
the record holders of any class of Common Stock (the "PURCHASE
RIGHTS"), then the holders of Series G Preferred Shares will be
entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Series G Preferred Shares
immediately before the date on which a record is taken for the grant
issuance or sale of such Purchase Rights, or, if no such record is
taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(e) Mechanics of Conversion. Subject to the Corporation's
inability to fully satisfy its obligations under a Conversion Notice
(as defined below) as provided for in Section 6 below:
(i) Holder's Delivery Requirements. To convert Series
G Preferred Shares into full shares of Common Stock on any date
(the "CONVERSION DATE"), the holder thereof shall (A) deliver or
transmit by facsimile, for receipt on or prior to 11:59 p.m.,
Eastern Time, on such date, a copy of a fully executed notice of
conversion in the form attached hereto as Exhibit I (the
"CONVERSION NOTICE") to the Corporation (c/o Cy Hammond, NCT
Group, Inc., 1025 West Nursery Road, Suite 120, Linthicum,
MD 21090, facsimile number 410-636-2141) or its designated
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<PAGE> 7
transfer agent (the "TRANSFER AGENT") (c/o Bill Galetta, American
Stock Transfer & Trust Company, 40 Wall Street, New York,
NY 10005, facsimile number 718-921-8328), and (B) surrender to a
common carrier for delivery to the Corporation or the Transfer
Agent as soon as practicable following such notice, the original
certificates representing the Series G Preferred Shares being
converted (or an indemnification undertaking with respect to such
certificates in the case of their loss, theft or destruction)
(the "PREFERRED STOCK CERTIFICATES").
(ii) Corporation's Response. Upon receipt by the
Corporation of a facsimile copy of a Conversion Notice, the
Corporation shall immediately send, via facsimile, a confirmation
of receipt of such Conversion Notice to such holder. Upon receipt
by the Corporation or the Transfer Agent of the Preferred Stock
Certificates (the "Date of Receipt") to be converted pursuant to
a Conversion Notice, the Corporation or the Transfer Agent (as
applicable) shall, within five (5) business days following the
Date of Receipt, issue and surrender to a common carrier for
overnight delivery to the address as specified in the Conversion
Notice, a certificate (the "Conversion Certificate"), registered
in the name of the holder or its designee, for the number of
shares of Common Stock to which the holder shall be entitled.
(iii) Dispute Resolution. In the case of a dispute as
to the determination of the Closing Bid Price, the Variable
Conversion Price or the arithmetic calculation of the Conversion
Rate, the Corporation shall promptly issue to the holder the
number of shares of Common Stock that is not disputed and shall
submit the disputed determinations or arithmetic calculations to
the holder via facsimile within three (3) business days of
receipt of such holder's Conversion Notice. If such holder and
the Corporation are unable to agree upon the determination of the
Closing Bid Price, the Variable Conversion Price or arithmetic
calculation of the Conversion Rate within two (2) business days
of such disputed determination or arithmetic calculation being
submitted to the holder, then the Corporation shall within one
(1) business day submit via facsimile (A) the disputed
determination of the Closing Bid Price and/or the Variable
Conversion Price to an independent, reputable investment bank or
(B) the disputed arithmetic calculation of the Conversion Rate to
its independent, outside accountant. The Corporation shall cause
the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the
Corporation and the holder of the results no later than
forty-eight (48) hours from the time it receives the disputed
determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be,
shall be binding upon all parties absent manifest error.
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(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of
Series G Preferred Shares shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on
the Conversion Date.
(v) Corporation's Failure to Timely Convert. If the
Corporation shall fail to issue to a holder, within five (5)
business days following the Date of Receipt, a certificate for
the number of shares of Common Stock to which such holder is
entitled upon such holder's conversion of Series G Preferred
Shares, in addition to all other available remedies which such
holder may pursue hereunder and under any Securities Purchase
Agreement between the Corporation and the holders of the Series G
Preferred Shares (the "SECURITIES PURCHASE AGREEMENT") (including
indemnification pursuant thereto), the Corporation shall pay
additional damages to such holder on each day after the fifth
(5th) business day following the Date of Receipt by the
Corporation or the Transfer Agent of the Preferred Stock
Certificates to be converted pursuant to the Conversion Notice,
for which such conversion is not timely effected, an amount equal
to 1.0% of the product of (A) the number of shares of Common
Stock not issued to the holder and to which such holder is
entitled and (B) the Closing Bid Price of the Common Stock on the
business day after the fifth (5th) business day following the
Date of Receipt. If, within five (5) days following the Date of
Receipt, the Company fails to deliver the Conversion
certificates, the holder of the Preferred Stock being converted
(a "Converted Holder") purchases, in an arm's-length open market
transaction or otherwise, shares of Common Stock (the "Covering
Shares") in order to make delivery in satisfaction of a sale of
Common Stock by the Converting Holder anticipated to make using
the shares to be issued upon such conversion (a "Buy-In"), the
Converting Holder shall have the right, to require the Company to
pay to the Converting Holder, in lieu and instead of the amounts
due under Section 4 hereof (but in addition to all other amounts
contemplated in other provisions of the Transaction Agreements,
and not in lieu of any such other amounts), the Buy-In Adjustment
Amount (as defined below). The Company shall pay the Buy-In
Adjustment Amount to the Company in immediately available funds
immediately upon demand by the Converting Holder.
For purposes of this section, the "Buy-In Adjustment Amount"
means the amount equal to the excess, if any, of (i) the
Converting Holder's total purchase price (including brokerage
commissions, if any) for the Covering Shares over (ii) the net
proceeds (after brokerage commissions, if any) received by the
Converting Holder from the sale of the Sold Shares. (By way of
illustration and not in any limitation of the foregoing, if the
Converting Holder purchases shares of Common Stock having a total
purchase price (including brokerage commissions) of
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<PAGE> 9
$11,000 to cover a Buy-In with respect to shares of Common Stock
it sold for net proceeds of $10,000, the Buy-In Adjustment Amount
which Company will be required to pay to Converting Holder will
be $1,000.)
(f) Mandatory Conversion. If any Series G Preferred Shares
remain outstanding on February 28, 2003, then all such Series G
Preferred Shares shall automatically be converted as of such date
in accordance with this Section 4 as if the holders of such
Series G Preferred Shares had given the Conversion Notice on
February 28, 2003, and the Conversion Date had been fixed as of
February 28, 2003, for all purposes of this Section 4, and all
holders of Series G Preferred Shares shall thereupon and within
two (2) business days thereafter surrender all Preferred Stock
Certificates, duly endorsed for cancellation, to the Corporation
or the Transfer Agent. No person shall thereafter have any rights
in respect of Series G Preferred Shares, except the right to
receive shares of Common Stock on conversion thereof as provided
in this Section 4.
(g) Fractional Shares. The Corporation shall not issue any
fraction of a share of Common Stock upon any conversion. All
shares of Common Stock (including fractions thereof) issuable
upon conversion of more than one share of the Series G Preferred
Shares by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance
of a fraction of a share of Common Stock. If, after the
aforementioned aggregation, the issuance would result in the
issuance of a fraction of a share of Common Stock, the
Corporation shall round such fraction of a share of Common Stock
up or down to the nearest whole share.
(h) Taxes. The Corporation shall pay any and all transfer,
stamp duty or other taxes of similar import which may be imposed
upon it with respect to the issuance and delivery of Common Stock
upon the conversion of the Series G Preferred Shares. The
Corporation shall in no event be responsible for taxes on income
or gain realized by or imputed to any holder of Series G
Preferred Shares.
(i) Holder's Right to Immediately Convert.
Any holder of Series G Preferred Shares shall be immediately
entitled to convert all of such holder's Series G Preferred
Shares into shares of Common Stock pursuant to this Section 4
upon (i) any public announcement by the Corporation stating that
the Corporation intends to consummate, or is the subject of, a
Major Transaction (as defined below), (ii) execution of a
definitive agreement by the Corporation with respect to a Major
Transaction, or (iii) the consummation of a Major Transaction. A
"MAJOR TRANSACTION" shall be deemed to have occurred upon the
occurrence of any of the following events:
(i) the consummation of any merger, reorganization,
restructuring, consolidation, or similar transaction by or
involving the Corporation except (A) a merger or
consolidation where the Corporation is
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<PAGE> 10
a survivor or (B) pursuant to a migratory merger effected
solely for the purpose of changing the jurisdiction of
incorporation of the Corporation;
(ii) the sale of all or substantially all of the
assets of the Corporation or all of its material
subsidiaries or any similar transaction or related
transactions which effectively results in a sale of all or
substantially all of the assets of the Corporation and/or
its subsidiaries; or
(iii) the occurrence, after the date hereof, of the
acquisition, or the written offer to acquire pursuant to
Regulation 14D (promulgated under the Securities Exchange of
1934), by any person (including any entity or association)
or persons, of securities of the Corporation (or the power
to vote such securities) representing 50% or more of the
total voting power of all outstanding Common Stock or other
voting securities of the Corporation (such offer, a "Tender
Offer").
(5) Corporation's Right to Redeem at its Election.
(a) If at any given date the Closing Bid Price of the Common
Stock for each of the ten consecutive trading days shall be at or
above 200% of the Fixed Conversion Price ("REDEMPTION ELECTION DATE"),
and as long as the Corporation has not breached any of the
representations, warranties, and covenants contained herein or in any
related agreements, the Corporation shall have the right, in its sole
discretion, to redeem for Common Stock or for cash ("REDEMPTION AT
CORPORATION'S ELECTION"), on such a Redemption Election Date, any or
all of the Series G Preferred Shares; provided the Corporation shall
first provide no more than ten (10) days and no less than five (5)
days advance written notice as provided in subparagraph 5(a)(ii) below
(which can be given any time on or after a registration statement (the
"REGISTRATION STATEMENT") covering the resale of Common Stock issued
upon conversion of the Series G Preferred Shares and required to be
filed by the Corporation pursuant to any Registration Rights Agreement
between the Corporation and its initial holders of Series G Preferred
Shares (the "REGISTRATION RIGHTS AGREEMENT") is declared effective
(the "REGISTRATION STATEMENT EFFECTIVE DATE") by the U.S. Securities
and Exchange Commission (the "SEC")) and remains currently effective.
If the Corporation elects to redeem some, but not all, of the Series G
Preferred Shares, the Corporation shall redeem a pro rata amount from
each holder of the Series G Preferred Shares.
(i) Redemption Price At Corporation's Election. The
"REDEMPTION PRICE AT CORPORATION'S ELECTION" shall be equal to
(I) the Liquidation Value (as defined in Section 10) as of the
date that the Corporation pays the Redemption Price at
Corporation's Election, divided by the Conversion Rate (as
defined in Section 4(b) above) as of the Redemption Election
Date, multiplied by (II) the average closing sale price as
reported on Bloomberg (as defined in Section 4(b)(iv) above) for
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<PAGE> 11
the trading days from the Redemption Election Date to the trading
day immediately before the Corporation pays the Redemption Price
at Corporation's Election.
(ii) Mechanics of Redemption at Corporation's Election. The
Corporation shall effect each such redemption by giving no more
than ten (10) days and no less than five (5) days prior written
notice ("NOTICE OF REDEMPTION AT CORPORATION'S ELECTION"), to
(A) the Holders of the Series G Preferred Shares selected for
redemption at the address and facsimile number of such holder
appearing in the Corporation's Series G Preferred Stock register,
(B) the Transfer Agent, and (C) the Holders' attorneys, which
Notice of Redemption at Corporation's Election shall be deemed to
have been delivered three (3) business days after the
Corporation's mailing (by overnight or two (2) day courier,
with a copy by facsimile) of such Notice of Redemption at
Corporation's Election. Such Notice of Redemption at
Corporation's Election shall indicate (i) the number of shares of
Series G Preferred Stock that have been selected for redemption,
(ii) the date, which shall not be less than five (5) business
days after the Notice of Redemption at the Corporation's Election
is received by the Holder, that such redemption is to become
effective (the "DATE OF REDEMPTION AT CORPORATION'S ELECTION"),
and (iii) the applicable Redemption Price At Corporation's
Election. Notwithstanding the above, a holder may convert into
Common Stock, prior to the close of business on the Date of
Redemption at Corporation's Election, any Series G Preferred
Shares, subject to the relevant Notice of Redemption At
Corporation's Election, where such redemption is for cash (such
conversion by a holder, a "Redemption Conversion"). Such a notice
by a holder to convert Common Stock prior to the close of
business on the Date of Redemption shall take precedence over any
Notice of Redemption at Corporation's Election.
(b) Corporation Must Have Immediately Available Funds or Credit
Facilities. The Corporation shall not be entitled to send any Notice
of Redemption at Corporation's Election and begin the redemption
procedure under Section 5(a) unless it has:
(i) the full amount of the redemption price in cash or cash
equivalents, available in a demand or other immediately available
account in a bank or similar financial institution; or
(ii) immediately available credit facilities, in the full
amount of the redemption price with a bank or similar financial
institution; or
(iii) an agreement with a standby underwriter willing to
purchase from the Corporation a sufficient number of shares of
stock to provide
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<PAGE> 12
proceeds necessary to redeem any stock that is not converted
prior to redemptions;
(iv) if the redemption is to be paid in Common Stock, an
adequate number of authorized but unissued shares of Common Stock
to pay the full amount of the redemption price; or
(v) a combination of the items set forth in (i), (ii),
(iii), and (iv) above, aggregating the full amount of the
redemption price.
(c) Payment of Redemption Price. Each holder submitting Series G
Preferred Shares being redeemed under this Section 5 shall send his
Series G Preferred Share certificates to be redeemed to the
Corporation or its Transfer Agent, and the Corporation shall pay the
applicable redemption price to that holder within five (5) business
days of the Date of Redemption at Corporation's Election. The
Corporation's failure to pay the applicable redemption price within
five (5) business days of the Date of Redemption at Corporation's
Election will result in (i) the nullification of the Notice of
Redemption and (ii) the termination of any future redemption rights of
the Corporation.
(6) Inability to Fully Convert.
(a) Holder's Option if Corporation Cannot Fully Convert. If at
any time after the Registration Statement Effective Date, upon the
Corporation's receipt of a Conversion Notice, the Corporation does not
issue shares of Common Stock which are registered for resale under the
Registration Statement within five (5) business days of the time
required in accordance with Section 4(e) hereof, for any reason or for
no reason, including, without limitation, because the Corporation (x)
does not have a sufficient number of shares of Common Stock authorized
and available, (y) is otherwise prohibited by applicable law or by the
rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over
the Corporation or its Securities, including without limitation The
NASDAQ Stock Market, Inc. from issuing all of the Common Stock which
is to be issued to a holder of Series G Preferred Shares pursuant to a
Conversion Notice, or (z) fails to have a sufficient number of shares
of Common Stock registered and eligible for resale under the
Registration Statement, then the Corporation shall (i) make all
reasonable efforts to correct any impediment as identified in Section
6(a)(x), (y) and (z) herein to enable the Corporation to issue
sufficient shares of Common Stock upon receipt of a Conversion Notice,
(ii) issue as many shares of Common Stock as it is able to issue in
accordance with such holder's Conversion Notice and pursuant to
Section 4(e) above, and (iii) with respect to the unconverted Series G
Preferred Shares, the holder, solely at such holder's option, can, in
addition to any other remedies such holder may have hereunder, under a
Securities Purchase Agreement in respect of its Series G Preferred
Shares (including indemnification thereunder),
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under a Registration Rights Agreement in respect of its Series G
Preferred Shares, at law or in equity, elect to:
(i) require the Corporation to redeem from such holder
those Series G Preferred Shares for which the Corporation is
unable to issue Common Stock in accordance with such holder's
Conversion Notice ("MANDATORY REDEMPTION") at a price per Series
G Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
greater of (x) 125% of the Liquidation Value of such share or (y)
(I) the Liquidation Value (as defined in Section 10) as of the
date that the Corporation pays the Mandatory Redemption Price,
divided by the Conversion Rate (as defined in Section 4(b) above)
as of the date of the Notice in Response to Inability to Convert,
multiplied by (II) the average closing sale price, as reported on
Bloomberg (as defined in section 4(b)(iv) above) for the five
trading days ending on the trading day before payment of the
Mandatory Redemption Price;
(ii) if the Corporation's inability to fully convert Series
G Preferred Shares is pursuant to Section 6(a)(z) above, require
the Corporation to issue restricted shares of Common Stock in
accordance with such holder's Conversion Notice and pursuant to
Section 4(e) above, but which will not effect the Corporation's
obligation to register shares of Common Stock pursuant to any
separate purchase agreement with the Holder; or
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Series G Preferred
Shares that were to be converted pursuant to such holder's
Conversion Notice.
(b) Mechanics of Fulfilling Holder's Election. The Corporation
shall immediately send via facsimile to a holder of Series G Preferred
Shares, upon receipt of a facsimile copy of a Conversion Notice from
such holder which cannot be fully satisfied as described in Section
6(a) above, a notice of the Corporation's inability to fully satisfy
such holder's Conversion Notice (the "INABILITY TO FULLY CONVERT
NOTICE"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Corporation is unable to fully satisfy such
holder's Conversion Notice, (ii) the number of Series G Preferred
Shares which cannot be converted, and (iii) the applicable Mandatory
Redemption Price. Such holder must within five (5) business days of
receipt of such Inability to Fully Convert Notice, deliver written
notice via facsimile to the Corporation ("NOTICE IN RESPONSE TO
INABILITY TO CONVERT") of its election pursuant to Section 6(a) above.
(c) Payment of Redemption Price. If such holder shall elect to
have its shares redeemed pursuant to Section 6(a) above, the
Corporation shall pay the Mandatory Redemption Price in cash to such
holder within thirty (30) business days of the Corporation's receipt
of the holder's Notice in Response to Inability to
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<PAGE> 14
Convert. If the Corporation shall fail to pay the applicable Mandatory
Redemption Price to such holder on a timely basis as described in this
Section 6(c) (other than pursuant to a dispute as to the determination
of the Closing Bid Price, the Variable Conversion Price or the
arithmetic calculation of the Redemption Rate), such unpaid amount
shall bear interest at the lower of (i) a rate of 1.0% for the first
month and a rate of 2.0% per month thereafter (prorated for partial
months), or (ii) the maximum amount allowable by law (prorated for
partial months), until paid in full. Until the full Mandatory
Redemption Price is paid in full to such holder, such holder may
rescind the Mandatory Redemption with respect to those Series G
Preferred Shares for which the full Mandatory Redemption Price has not
been paid and receive back, against return to the Corporation of the
amount of any payments, such Series G Preferred Shares.
Notwithstanding the foregoing, if the Corporation fails to pay the
applicable Mandatory Redemption Price within such thirty business (30)
days time period due to a dispute as to the determination of the
Closing Bid Price, the Variable Conversion Price or the arithmetic
calculation of the Conversion Rate, such dispute shall be resolved
pursuant to Section 4(e)(iii) above.
(d) Pro-rata Conversion and Redemption. In the event the
Corporation receives a Conversion Notice from more than one holder of
Series G Preferred Shares on the same day and the Corporation can
convert and redeem some, but not all, of the Series G Preferred Shares
pursuant to this Section 6, the Corporation shall convert and redeem
from each holder of Series G Preferred Shares electing to have Series
G Preferred Shares converted and redeemed at such time an amount equal
to such holder's pro-rata amount (based on the number of Series G
Preferred Shares held by such holder relative to the number of Series
G Preferred Shares outstanding) of all Series G Preferred Shares being
converted and redeemed at such time.
(7) Reissuance of Certificates. In the event of a conversion or
redemption pursuant to this Certificate of Designations of less than all of
the Series G Preferred Shares represented by a particular Series G
Preferred Share certificate, the Corporation shall promptly cause to be
issued and delivered to the holder of such Series G Preferred Shares a
Series G Preferred Share certificate representing the remaining Series G
Preferred Shares which have not been so converted or redeemed.
(8) Reservation of Shares. The Corporation shall, so long as any of
the Series G Preferred Shares are outstanding, reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Series G Preferred Shares, 125% of such
number of shares of Common Stock as shall from time to time be sufficient
to affect the conversion of the Series G Preferred Shares then issued and
outstanding.
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(9) Voting Rights. Holders of Series G Preferred Shares shall have no
voting rights, except as required by law, including but not limited to the
General Corporation Law of the State of Delaware and as expressly provided
in this Certificate of Designations.
(10) Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation, the holders of the Series G Preferred Shares shall be entitled
to receive in cash out of the assets of the Corporation, whether from
capital or from earnings available for distribution to its stockholders
(the "PREFERRED FUNDS"), after all amounts payable to the holders of the
Corporation's Series C, D, E and F Convertible Preferred Stock and before
any amount shall be paid to the holders of any of the capital stock of the
Corporation of any class junior in rank to the Series G Preferred Shares in
respect of the preferences as to the distributions and payments on the
liquidation, dissolution and winding up of the Corporation, an amount per
Series G Preferred Share equal to the sum of (i) $1,000 and (ii) an amount
equal to the product of (.04) (N/365) ($1,000) (such sum being referred to
as the "LIQUIDATION VALUE") (where N equals the number of days, through and
including the Conversion Date, such Series G Preferred Share was issued and
outstanding, not counting the date of issuance); provided that, if the
Preferred Funds are insufficient to pay the full amount due to the holders
of Series G Preferred Shares, then each holder of Series G Preferred Shares
shall receive a percentage of the Preferred Funds equal to the full amount
of Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designations, Preferences
and Rights as a percentage or the full amount of Preferred Funds payable to
all holders of Series G Preferred Shares. The purchase or redemption by the
Corporation of stock of any class in any manner permitted by law, shall not
for the purposes hereof, be regarded as a liquidation, dissolution, or
winding up of the Corporation. Neither the consolidation or merger of the
Corporation with or into any other Person, nor the sale or transfer by the
Corporation of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution, or winding up
of the Corporation. No holder of Series G Preferred Shares shall be
entitled to receive any amounts with respect thereto upon any liquidation,
dissolution or winding up of the Corporation other than the amounts
provided for herein.
(11) Preferred Rank. Except for the Corporation's Series C
Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E
Convertible Preferred Stock and Series F Convertible Preferred Stock, all
shares of Series G Convertible Preferred Stock shall be of senior rank and
all shares of Common Stock shall be of junior rank to all Series G
Preferred Shares in respect to the preferences as to distributions and
payments upon the liquidation, dissolution, and winding up of the
Corporation. The rights of the shares of Common Stock shall be subject to
the Preferences and relative rights of the Series G Preferred Shares.
Except for the Corporation's Series C Convertible Preferred Stock, Series D
Convertible Preferred Stock, Series E Convertible Preferred Stock and
Series F Convertible Preferred Stock, the Series G Preferred Shares shall
be of
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greater rank than any Series of Common or Preferred Stock hereinafter
issued by the Corporation. Without the prior express written consent of the
holders of not less than two-thirds (2/3) of the then outstanding Series G
Preferred Shares, the Corporation shall not hereafter authorize or issue
additional or other capital stock that is of senior or equal rank to the
Series G Preferred Shares in respect of the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the
Corporation. Without the prior express written consent of the holders of
not less than two-thirds (2/3) of the then outstanding Series G Preferred
Shares, the Corporation shall not hereafter authorize or make any amendment
to the Corporation's Certificate of Incorporation or bylaws, or file any
resolution of the board of directors with the Delaware Secretary of State
containing any provisions that would adversely affect or otherwise impair
the rights or relative priority of the holders of the Series G Preferred
Shares relative to the holders of the Common Stock or the holders of any
other class of capital stock in respect of the preferences as to
distributions and payments upon the liquidation, dissolution and winding up
of the Corporation. In the event of the merger or consolidation of the
Corporation with or into another corporation, the Series G Preferred Shares
shall maintain their relative powers, designations, and preferences
provided for herein and no merger shall result inconsistent therewith.
(12) Restriction on Dividends. If any Series G Preferred Shares are
outstanding, without the prior express written consent of the holders of
not less than two-thirds (2/3) of the then outstanding Series G Preferred
Shares, the Corporation shall not directly or indirectly declare, pay or
make any dividends or other distributions upon any of the Common Stock
unless written notice thereof has been given to holders of the Series G
Preferred Shares at least thirty (30) days prior to the earlier of (a) the
record date taken for, or (b) the payment of any such dividend or other
distribution. Notwithstanding the foregoing, this Section 12 shall not
prohibit the Corporation from declaring and paying a dividend in cash or
cash equivalents with respect to the Common Stock so long as the
Corporation: (i) pays simultaneously to each holder of Series G Preferred
Shares an amount in cash or cash equivalents equal to the amount such
holder would have received had all of such holder's Series G Preferred
Shares been converted to Common Stock pursuant to Section 4 hereof one (1)
business day prior to the record date for any such dividend, and (ii) after
giving effect to the payment of any dividend and any other payments
required in connection therewith including to the holders of the Series G
Preferred Shares under clause 12(a)(i) hereof, the Corporation has in cash
or cash equivalents an amount equal to the aggregate of: (A) all of its
liabilities reflected on its most recently available balance sheet, (B) the
amount of any indebtedness incurred by the Corporation or any of its
subsidiaries since its most recent balance sheet, and (C) 125% of the
amount payable to all holders of any shares of any class of preferred stock
of the Corporation assuming a liquidation of the Corporation as of the date
of its most recently available balance sheet.
(13) Vote to Change the Terms of Series G Preferred Shares. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting,
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of the holders of not less than two-thirds (2/3) of the then outstanding
Series G Preferred Shares, shall be required for any change to this
Certificate of Designations or the Corporation's Certificate of
Incorporation which would amend, alter, change or repeal any of the powers,
designations, preferences and rights of the Series G Preferred Shares.
(14) Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of any certificates representing the Series G Preferred Shares,
and, in the case of loss, theft or destruction, of any indemnification
undertaking by the holder to the Corporation and, in the case of
mutilation, upon surrender and cancellation of the Series G Preferred Share
certificate(s), the Corporation shall execute and deliver new Series G
Preferred Share certificate(s) of like tenor and date; provided, however,
the Corporation shall not be obligated to reissue Series G Preferred Share
certificates if the holder contemporaneously requests the Corporation to
convert such Series G Preferred Shares into Common Stock.
(15) Withholding Tax Obligations. Notwithstanding anything herein to
the contrary, to the extent that the Corporation receives advice in writing
from its counsel that there is a reasonable basis to believe that the
Corporation is required by applicable Federal laws or regulations and
delivers a copy of such written advice to the holders of the Series G
Preferred Shares so effected, the Corporation may reasonably condition the
making of any distribution (as such term is defined under applicable
federal tax law and regulations) in respect of any Series G Preferred
Shares on the holder of such Series G Preferred Shares depositing with the
Corporation an amount of cash sufficient to enable the Corporation to
satisfy its withholding tax obligations (the "WITHHOLDING TAX") with
respect to such distribution. Notwithstanding the foregoing or anything to
the contrary, if any holder of the Series G Preferred Shares so effected
receives advice in writing from its counsel, reasonably acceptable to the
Corporation, that there is a reasonable basis to believe that the
Corporation is not so required by applicable federal laws or regulations
and delivers a copy of such written advice to the Corporation, the
Corporation shall not be permitted to condition the making of any such
distribution in respect of any Series G Preferred Shares on the holder of
such Series G Preferred Shares depositing with the Corporation any
Withholding Tax with respect to such distribution; provided, however, the
Corporation may reasonably condition the making of any such distribution in
respect of any Series G Preferred Shares on the holder of such Series G
Preferred Shares executing and delivering to the Corporation, at the
election of the holder, either (i) if applicable, a properly completed
Internal Revenue Service Form 4224, or (ii) an indemnification agreement in
reasonably acceptable form, with respect to any federal tax liability,
penalties and interest that may be imposed upon the Corporation by the
Internal Revenue Service as a result of the Corporation's failure to
withhold in connection with such distribution to such holder. If the
conditions in the preceding two sentences are fully satisfied, the
Corporation shall not be required to pay any additional damages set forth
in Section 4(e)(v) of this Certificate of Designations if its failure to
timely deliver any Conversion Shares results solely from the holder's
failure to deposit any withholding tax
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hereunder or provide to the Corporation an executed indemnification
agreement in the form reasonably satisfactory to the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Corrected Certificate
of Designations to be signed by Cy E. Hammond, its Senior Vice President and
Chief Financial Officer, as of the tenth day of March, 2000.
NCT GROUP, INC.
By: /s/ CY E. HAMMOND
--------------------------
Cy E. Hammond
Senior Vice President and
Chief Financial Officer
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EXHIBIT I
NCT GROUP, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and
Rights of Series G Convertible Preferred Stock of NCT Group, Inc. (the
"CERTIFICATE OF DESIGNATIONS"). In accordance with and pursuant to the
Certificate of Designations, the undersigned hereby elects to convert the number
of shares of Series G Convertible Preferred Stock, $.10 par value per share (the
"SERIES G PREFERRED SHARES"), of NCT Group, Inc., a Delaware corporation (the
"CORPORATION"), indicated below into shares of Common Stock, $.01 par value per
share (the "COMMON STOCK"), of the Corporation, by tendering the stock
certificate(s) representing the share(s) of Series G Preferred Shares specified
below as of the date specified below.
The undersigned acknowledges that any sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Series G Preferred
Shares shall be made only pursuant to (i) a registration statement effective
under the Securities Act of 1933, as amended (the "ACT"), or (ii) an opinion of
counsel in form and content reasonably satisfactory to the Corporation that such
sale is exempt from registration required by Section 5 of the Act.
Date of Conversion:
------------------------------------
Number of Series G
Preferred Shares to be converted:
------------------------------------
Stock certificate no(s). of Series G
Preferred Shares to be converted:
------------------------------------
Please confirm the following information:
Conversion Price:
------------------------------------
Number of shares of Common Stock
to be issued:
------------------------------------
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Please issue the Common Stock into which the Series G Preferred Shares are being
converted in the following name and to the following address:
Issue to: 2
------------------------------------
------------------------------------
Facsimile Number:
------------------------------------
Authorization:
------------------------------------
By:
--------------------------------
Title:
-----------------------------
Dated:
------------------------------------
ACKNOWLEDGED AND AGREED:
NCT GROUP, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Date:
------------------------------
- ----------
2 If other than to the record holder of the Series G Preferred
Shares, any applicable transfer tax must be paid by the undersigned.
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<PAGE> 1
EXHIBIT 10(AE)
AMENDMENT NO. 1
TO THE
SECURITIES EXCHANGE AGREEMENT
AMENDMENT NO. 1, dated as of March 7, 2000 (the "Amendment"), to the Securities
Exchange Agreement, dated as of October 9, 1999 (the "Exchange Agreement"),
among NCT Group, Inc., a Delaware corporation (the "Company"), Austost Anstalt
Schaan ("Austost") and Balmore Funds, S.A. ("Balmore"). Austost and Balmore are
referred to collectively herein as the "Exchange Holders." Capitalized terms
used herein without definition shall have the respective meanings specified in
the Exchange Agreement.
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to the Exchange Agreement pursuant to
which, inter alia, the Exchange Holders exchanged 533 shares of the common
stock, par value $0.01 per share, of NCT Audio Products ("Audio") for shares of
the common stock, par value $0.01 per share, of the Company (the "Investor
Shares");
WHEREAS, pursuant to Section 1.3 of the Exchange Agreement, based upon the fair
market value of the Company's Common Stock at February 15, 2000, the Exchange
Holders are obligated to return to the Company 13,671,362 shares of Common Stock
(the "Returnable Shares") from the Investor Shares;
WHEREAS, the Exchange Holders and the Company have agreed to amend certain of
the terms and conditions of the Exchange Agreement in order to (1) allow the
Exchange Holders to retain 3,611,111 Returnable Shares in exchange for an
additional 533 shares of Audio common stock from a third party investor (the
"Third Party Shares"), which the Exchange Holders shall deliver to NCT, and
(2) substitute cash payments by the Exchange Holders to the Company in lieu of
the Exchange Holders' obligation to return the remaining Returnable Shares to
the Company pursuant to Section 1.3 of the Exchange Agreement;
WHEREAS, the Exchange Holders and the Company have agreed to enter into this
Amendment for the purpose of setting forth their agreement with respect to such
an amendment; and
WHEREAS, the Exchange Holders and the Company desire to enter into this
Amendment to evidence their mutual agreement with respect thereto and to make
such other changes to the Exchange Agreement, all as specifically provided
herein;
108
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Amendment. The Exchange Agreement is hereby amended to add new Sections 1.4
and 1.5 immediately following Section 1.3 as follows:
"1.4 Return of Third Party Shares.
(a) Notwithstanding Section 1.3 above, the Company agrees that
the Exchange Holders may retain 3,611,111 Returnable Shares in
exchange for an additional 533 shares of Audio common stock from a
third party investor (the "Third Party Shares").
(b) Exchange Holders, within five business days upon receipt of
the Third Party Shares, shall deliver such Third Party Shares to the
Company.
1.5 Return of Proceeds from Exchange Holder's Disposition.
(a) Notwithstanding Section 1.3 above, the Company agrees that
the Exchange Holders may retain 10,060,251 shares of the Company's
Common Stock (the "Remaining Returnable Shares"), and the Exchange
Holders agree to pay the Company up to $10,000,000 in cash from
proceeds the Exchange Holders realize from their disposition of such
Remaining Returnable Shares.
(b) Exchange Holders, during any one of the first three Trading
Days (as defined below) of each month and for twelve consecutive
months (such twelve month period the "Term"; the Term commencing on
April 1, 2000) shall sell for cash a sufficient number of Remaining
Returnable Shares at no less than the fair market value of such
Remaining Returnable Shares (each sale a "Sale of Remaining Returnable
Shares"), in order to receive cash proceeds from each such Sale of
Remaining Returnable Shares equal to a minimum of $550,000 and a
maximum of $3,300,000. Exchange Holders shall pay in cash to the
Company, within five days of the date of each such Sale of Remaining
Returnable Shares during the Term, 90% of the cash proceeds received
by Exchange Holders from each such Sale of Remaining Returnable
Shares. The total sum paid by Exchange Holders to the Company during
the Term, pursuant to such Sales of Remaining Returnable Shares, shall
equal and not exceed $10,000,000; however, if due to fluctuations in
the fair market value of the Company's Common Stock, the Exchange
Holders (i) are unable to or did not generate at least $11,000,000 in
proceeds from such Sales of Remaining Returnable Shares by the
conclusion of the Term and (ii) have sold all of the Remaining
Returnable Shares in the open market in accordance with this Section,
then all of the Exchange Holders' obligations under this Section shall
terminate.
109
<PAGE> 3
(d) Notwithstanding anything contained herein to the contrary,
if at the end of the Term, any of the Remaining Returnable Shares
remain in the possession of the Exchange Holders, all such Remaining
Returnable Shares shall be returned to the Company.
"Trading Day" shall mean (i) a day on which the Common Stock is traded
on The NASDAQ Small Cap Market, the NASDAQ National Market or other
registered national stock exchange on which the Common Stock has been
listed, or (ii) if the Common Stock is not listed on The NASDAQ Small
Cap Market, the NASDAQ National Market or any registered national
stock exchange, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board."
2. Miscellaneous. Except as expressly amended by this Amendment, the terms,
covenants, conditions and agreements of the Exchange Agreement are in all
respects ratified and confirmed and, except as amended hereby, shall continue in
full force and effect.
[THIS PORTION OF PAGE INTENTIONALLY LEFT BLANK]
110
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
as of the date first above written.
NCT GROUP, INC.
By: /s/ CY E. HAMMOND
-------------------------------
Name: Cy E. Hammond
Title: Senior Vice President,
Chief Financial Officer
AUSTOST ANSTALT SCHAAN
By: /s/ THOMAS HACKL
-------------------------------
Name: Thomas Hackl
Title: Representative
BALMORE FUNDS, S.A.
By: /s/ FRANCOIS MORAX
-------------------------------
Name: Francois Morax
Title: Director
111
<PAGE> 1
EXHIBIT 23(A)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements of
NCT Group, Inc. on Form S-1 (File Nos. 333-64967, 333-43387, 333-82359 and
333-87757) and on Form S-8 (File No. 333-11213) of our report, which includes an
explanatory paragraph about substantial doubt existing concerning the Company's
ability to continue as a going concern, dated February 25, 2000 (with respect
to Note 11, March 7, 2000), on our audits of the consolidated financial
statements and schedule of the Company as of December 31, 1999 and 1998 and for
the years ended December 31, 1999, 1998 and 1997 which report is included in
this Annual Report on Form 10-K.
/s/ Richard A. Eisner & Company, LLP
New York, New York
April 12, 2000
112
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, FILED ON APRIL 14, 2000.
</LEGEND>
<CIK> 0000722051
<NAME> NCT GROUP, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,793
<SECURITIES> 0
<RECEIVABLES> 320
<ALLOWANCES> 83
<INVENTORY> 2,265
<CURRENT-ASSETS> 4,447
<PP&E> 11,536
<DEPRECIATION> 8,791
<TOTAL-ASSETS> 13,377
<CURRENT-LIABILITIES> 7,728
<BONDS> 0
0
2,790
<COMMON> 2,688
<OTHER-SE> (3,936)
<TOTAL-LIABILITY-AND-EQUITY> 13,377
<SALES> 2,208
<TOTAL-REVENUES> 7,063
<CGS> 2,767
<TOTAL-COSTS> 4,983
<OTHER-EXPENSES> 25,851
<LOSS-PROVISION> 77
<INTEREST-EXPENSE> 578
<INCOME-PRETAX> (23,771)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,771)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,771)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
<PAGE> 1
EXHIBIT 99(A)
[PETERS ELWORTHY & MOORE LETTERHEAD]
Noise Cancellation Technologies (Europe) Limited
Auditors' Report to the Shareholders
on the Financial Statements for the year ended 31 December 1999
We have audited the financial statements on pages 4 to 14, which have been
prepared in accordance with the Financial Reporting Standard for Smaller
Entities (effective March 1999) under the historical cost convention and the
accounting policies set out on page 7.
RESPECTIVE RESPONSIBILITIES OF THE DIRECTORS AND AUDITORS
As described on page 1 the company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all information and
explanations which we consider necessary in order to provide us with sufficient
evidence to give reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud, other irregularity or
error. In forming our opinion we also evaluated the overall adequacy of the
presentation of the information in the financial statements.
FUNDAMENTAL UNCERTAINTY
In forming our opinion, we have considered the adequacy of the disclosures made
in note 1 of the financial statements concerning the company's operational
results and financial position. In view of the significance of the company
continuing to generate adequate working capital, and its reliance on continued
financial support from the parent company we consider that it should be drawn to
your attention but our opinion is not qualified in this respect.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 1999 and of its profit for the year
then ended and have been properly prepared in accordance with the Companies Act
1985.
/s/ PETERS ELWORTHY & MOORE
- ---------------------------
Chartered Accountants and
Registered Auditor
CAMBRIDGE
17 February 2000
113
<PAGE> 1
EXHIBIT 99(D)
[PETERS ELWORTHY & MOORE LETTERHEAD]
Salisbury House, Station Road
Cambridge CB1 2LA England
Our Ref: PRC/J/5799
Date: 11 April 2000
NCT Group, Inc.
(formerly Noise Cancellation Technologies, Inc.)
1025 West Nursery Road, Suite 120
Linthicum, MD 21090-2103
USA
Dear Sirs:
We are writing to you with confirmation that the accounts for the year ended
31 December 1999 were audited under auditing standards which are "substantially
similar" or "similar in all material respects" to US General Accepted Audit
Standards.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
114
<PAGE> 1
EXHIBIT 99(F)
[PETERS ELWORTHY & MOORE LETTERHEAD]
Salisbury House, Station Road
Cambridge CB1 2LA England
Our Ref: PRC/J
Date: 11 April 2000
NCT Group, Inc.
(formerly Noise Cancellation Technologies, Inc.)
1025 West Nursery Road, Suite 120
Linthicum, MD 21090-2103 USA
Dear Sirs:
We consent to the inclusion of our opinion on the financial statements of Noise
Cancellation Technologies (Europe) Limited as of December 31, 1998 and for the
year ended December 31, 1999, included in the Annual Report on Form 10-K.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
115
<PAGE> 1
EXHIBIT 99(I)
TERM SHEET
FINANCING PROPOSAL FOR PROTECH COMMUNICATIONS, INC.
PAGE 1 OF 3
AMOUNT: $1.5 million in cash to be paid at closing and the
issuance by ProTech Communications, Inc. ("ProTech" or
the "Company") of a warrant for 4.5 million common
shares of ProTech at market price callable upon
effectiveness of an underlying registration statement by
the Company in three (3) 1.5 million share blocks,
each block callable when the Company's common stock
trades a minimum of one hundred fifty thousand (150,000)
shares per day and the common stock price reaches and
maintains for a minimum of fifteen (15) consecutive days
a price 36% above the issuance price per share, 88%
above the issuance price per share and 127% above the
issuance price per share, respectively.
SECURITY: Convertible preferred stock of the Company (the
"Preferred Stock")
VOTING RIGHTS: None, except as may be required by applicable law
ISSUE DATE: To Be Determined
MATURITY DATE: Thirty Six (36) months from Issue Date
PURCHASE PRICE: $1,000 per share (the "Stated Value")
ACCRETION: Four percent (4.0%) payable by the Company in common
stock or cash (at the Company's election) upon
conversion
116
<PAGE> 2
FINANCING PROPOSAL FOR PROTECH COMMUNICATIONS, INC.
PAGE 2 OF 3
CONVERSION
RIGHTS: Each Preferred Share is convertible into the following
number of shares:
Stated Value
----------------
Conversion Price
The conversion price is equal to the lesser of a) 100%
of the market price of the common stock at closing or
b) 20% discount off the lowest average closing bid price
of the common stock for any consecutive five (5) day
period out of the fifteen (15) day period preceding
conversion.
MANDATORY
CONVERSION: At maturity, all unconverted Preferred Shares will
convert at the then prevailing Conversion Price
SUPPLEMENTAL
CONVERSION
RIGHTS: The Investor has the option to convert into NCT Group,
Inc. common stock at a 20% discount to the market upon
conversion at their discretion. Up to one half of the
position is subject to this option at six months after
closing and the other one half 12 months after closing.
REGISTRATION
RIGHTS: The Company will agree to file a registration statement
under the Securities Act of 1933 including the shares of
Common Stock underlying the Convertible Preferred within
60 days of the Closing and will use its best efforts to
cause the registration to become effective on the date
(the "SEC Effective Date") which is the earlier of 150
days after the Closing or within five days of SEC
clearance to request acceleration of effectiveness. The
Company will maintain the effectiveness of such
registration for three years.
117
<PAGE> 3
FINANCING PROPOSAL FOR PROTECH COMMUNICATIONS, INC.
PAGE 3 OF 3
SUPPLEMENTAL
REGISTRATION
RIGHTS: Should the Investor elect the Supplemental Conversion
Rights as noted above, NCT Group, Inc. shall file a
registration statement covering such shares on a post
issuance basis.
<TABLE>
<S> <C> <C>
NCT Group, Inc.
- --------------------------- --------------------------
Investor Investor
/s/ CY E. HAMMOND
- --------------------------- -------------------------- -----------------
Signature Signature Signature
Cy E. Hammond
- --------------------------- -------------------------- -----------------
Print Name Print Name Print Name
March 6, 2000
- --------------------------- -------------------------- -------------
Date Date Date
</TABLE>
<TABLE>
<S> <C>
Pro Tech Communications, Inc. NCT Hearing Products, Inc.
/s/ KEITH LARKIN /s/ IRENE LEBOVICS
- ------------------ -------------------
Signature Signature
Keith Larkin Irene Lebovics
- ------------------ -------------------
Print Name Print Name
March 6, 2000 March 6, 2000
- ------------------ -------------------
Date Date
</TABLE>
118
