As filed with the Securities and Exchange
Commission on December 12, 2000 Registration No. 333-47084
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
NCT GROUP, INC.
(Exact name of Registrant as specified in Charter)
Delaware 59-2501025
(State or Other Jurisdiction (I.R.S. Employer
Of Incorporation or Identification No.)
Organization)
20 Ketchum Street, Westport, Connecticut 06880
(203) 226-4447
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
CY E. HAMMOND
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
20 KETCHUM STREET, WESTPORT, CONNECTICUT 06880
(203) 226-4447
(Name and Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Copies of all communications and notices to:
WILLIAM P. O'NEILL, ESQ.
CROWELL & MORING LLP
1001 PENNSYLVANIA AVE, NW
WASHINGTON, DC 20004
(202) 624-2500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO BE AMOUNT TO BE AGGREGATE PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT PRICE REGISTRATION FEE
--------------------- ------------------ ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK 90,761,040 SHARES $0.3090 (2) $28,045,161 (2) $7,403.92 (2)
</TABLE>
(1) Inaccordance with Rule 416 promulgated under the Securities Act of 1933,
this registration statement also covers such indeterminate number of
additional shares of common stock as may become issuable upon conversion of
NCT Group, Inc.'s (the "Company") Series G Convertible Preferred Stock to
prevent dilution resulting from stock splits, stock dividends or similar
transactions.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933, based
on the average of the high and low prices for the common stock on the NASD
OTC Bulletin Board on September 25, 2000. The fees noted above were paid by
the registrant on September 27, 2000 and September 28, 2000 in connection
with the filing of this registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>
PROSPECTUS
NCT GROUP, INC.
90,761,040 shares of Common Stock for resale
by Selling Stockholders
NCT GROUP, INC. We design and develop products and
20 Ketchum Street license technologies which permit the
Westport, Connecticut 06880 manipulation of sound and signal waves
to enhance signals and reduce noise.
Certain shareholders of NCT Group, Inc. (the "Selling Stockholders") are
offering 90,761,040 shares of the Company's common stock for sale at prevailing
market prices. The Company's common stock currently trades under the symbol
"NCTI" on the NASD's OTC Bulletin Board. We will not receive any proceeds from
the sale of our common stock by the Selling Stockholders except in circumstances
where the net proceeds from such sales exceed our obligations to certain of the
Selling Stockholders, if ever. The shares being offered hereby consist of:
o 23,529,412 shares of common stock that the Company may issue upon the
conversion of the Company's secured convertible notes;
o 4,682,941 shares of common stock that the Company may issue as interest
upon conversion of the Company's secured convertible notes;
o 83,625 shares of common stock that the Company may issue upon the exercise
of replacement warrants the Company issued to the principals of the
placement agent for certain of the Company's financing transactions;
o 4,820,000 additional shares of common stock of the Company that the Company
may issue upon the conversion of issued and outstanding shares of the
Company's Series G Convertible Preferred Stock in accordance with the
Series G Certificate of Designations, as amended;
o 602,000 shares of common stock that the Company may issue to pay the
cumulative dividend on the stated value of the issued and outstanding
shares of the Company's Series G Convertible Preferred Stock as provided in
the Series G Certificate of Designations, as amended;
o 12,500,000 shares of common stock that the Company may issue in exchange
for 2,000 shares of common stock of its subsidiary, ConnectClearly.com,
Inc., held by three accredited investors;
o 7,405,214 shares of common stock that the Company issued to acquire 100% of
the capital stock of Theater Radio Network, Inc.;
o 7,126,548 shares of common stock that the Company issued in conjunction
with its purchase of 100% of the common stock of Midcore Software, Inc.;
o 9,523,810 shares of common stock issued by the Company as prepaid
development costs pursuant to an amended strategic alliance and technology
development agreement with Infinite Technology Corporation, which may be
acting as an underwriter with respect to the sale of such shares;
o 7,500,000 shares of common stock that the Company may issue in exchange for
1,500 shares of convertible preferred stock of its majority owned
subsidiary, Pro Tech Communications, Inc.;
o 300,000 shares of common stock that the Company may issue upon the exercise
of a warrant the Company issued to a provider of debt financing to the
Company and its subsidiary, Distributed Media Corporation;
o 10,000,000 shares of common stock that the Company may issue upon the
exercise of warrants that the Company issued to the placement agent for
certain completed private placements;
o 2,415,467 shares of common stock that the Company issued to certain
consultants, service providers and trade vendors which may be acting as
underwriters with respect to the sale of such shares, to settle and prepay
current and future amounts due to them by the Company; and
o 272,023 shares of common stock that the Company issued in exchange for
shares of common stock of NCT Audio Products, Inc.
------------------------------------------------
This investment involves a High Degree of Risk. You should purchase
shares only after carefully considering the risks described in the
"RISK FACTORS" section beginning on Page 15.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined that this
Prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
The information in this Prospectus is not complete and may be changed. The
Selling Stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This Prospectus is not an offer to sell these securities and neither we nor
the Selling Stockholders are soliciting offers to buy these securities in
any state where the offer or sale is not permitted.
The date of this Prospectus is December 12, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
Prospectus Summary Information 1
The Company 1
Recent Developments 3
Risk Factors 15
Use of Proceeds 31
Selling Security Holders 32
Plan of Distribution 34
Description of Securities to be Registered 35
Interests of Named Experts and Counsel 35
The Business 36
Properties 56
Legal Proceedings 57
Market Price of Common Equity and Recent
Sales of Unregistered Securities 61
Selected Financial Data 62
Management's Discussion and Analysis 64
Changes in and Disagreements with Accountants 81
Directors and Executive Officers 82
Executive Compensation 85
Security Ownership of Certain Beneficial Owners 94
Certain Relationships and Related Transactions 95
Other Expenses of Issuance and Distribution 97
Indemnification of Directors and Officers 97
Exhibits and Financial Statements 99
Undertakings 113
Signatures 114
---------------
IN DECIDING TO BUY OUR COMMON STOCK, YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE NOT MAKING
AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU
SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THE DATE ON THE FRONT OF THE DOCUMENT.
<PAGE>
PROSPECTUS SUMMARY INFORMATION
This summary section briefly describes the key aspects of both the Company
and the offering covered by this prospectus. This section is a summary only and
refers to more specific and comprehensive information found in subsequent
sections. Investors should refer to these individual sections for a more
detailed explanation of each topic.
Whenever possible, the Company has provided definitions of its technologies
within the text. Also note that market data presented in this prospectus are
based on management's estimates, in reliance on third-party sources where
possible. While our management believes these estimates are reasonable, in
certain cases such estimates cannot be verified by information from or analysis
by independent sources. Accordingly, the Company cannot give assurances that
such market data are accurate or complete in all material respects.
THE COMPANY
NCT Group, Inc. (formerly Noise Cancellation Technologies, Inc.)
(hereinafter referred to as "NCT" or the "Company") designs and develops
products and licenses technologies 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, improve
signal-to-noise ratio and enhance sound quality. The Company develops its
technologies to reduce or eliminate noise and enhance sound quality in a wide
array of products. The Company designs some of its products so that other firms
can integrate them with their own inventions and technologies to serve major
markets in the transportation, manufacturing, commercial, consumer products and
communications industries.
The Company is organized into strategic business units which in May 2000,
were realigned to comprise three groups: media, communications and technology.
The media group currently consists of Distributed Media Corporation (formerly
DistributedMedia.com, Inc.) (hereinafter referred to as "DMC"), DMC's
subsidiary, DMC Cinema, Inc. ("Cinema") and NCT Audio Products, Inc. ("NCT
Audio"). The communications group currently consists of NCT Hearing Products,
Inc. ("NCT Hearing"), NCT Hearing's subsidiary, Pro Tech Communications, Inc.
("Pro Tech"), Noise Cancellation Technologies (Europe) Ltd. ("NCT Europe"),
Midcore Software, Inc. ("Midcore") and ConnectClearly.com, Inc. ("CCC"). The
technology group currently consists of Advancel Logic Corporation ("Advancel")
and certain assets and operations held directly by the Company. Each of the
Company's strategic business units is targeted to the commercialization of its
own products in specific markets.
As of October 31, 2000, the Company and its business units held 585 patents
and related rights worldwide and an extensive library of know-how and other
unpatented technology. These patents allow the Company to develop its product
lines which include:
o Sight & Sound(TM)place-based audio and billboard media
o NoiseBuster(R)communications headsets,
o NoiseBuster Extreme!(TM)consumer headsets,
o Gekko(TM)flat speakers, frames, prints and subwoofers,
o ClearSpeech(R)microphones, speakers and other products,
o adaptive speech filters,
o the ProActive(R)line of industrial/commercial active noise reduction headsets,
o an aviation headset for pilots,
o an industrial muffler or "silencer,"
o quieting headsets for patient use in magnetic resonance imaging machines,
o an aircraft cabin quieting system,
o ClearSpeech(R)corporate intranet telephone software,
o voice communication web phone for integration into web sites,
o I-phone for full Intranet and Internet communications,
o in-theater advertising, and
o MidPoint Internet software.
The Company also markets its technologies through licensing to third
parties for fees and royalties. For example, during 1999, the Company expanded
its cross license agreement with NXT plc (formerly known as Verity Group plc)
and New Transducers Ltd. ("NXT"). The cross license agreement further allows for
sublicensing.
The Company's operating revenues are comprised of technology licensing fees
and royalties, product sales, advertising and engineering and development
services. Historically, the Company derived the majority of its revenues from
engineering and development services. Management expects that technology
licensing fees, royalties and product sales will become the principal sources of
the Company's revenue as the commercialization of its technology proceeds.
Operating revenues in 1999 consisted of approximately 31% in product sales, 19%
in engineering and development services and 50% in technology licensing fees and
royalties. For the nine months ended September 30, 2000, the Company's operating
revenues consisted of approximately 13% in product sales, 1% in engineering and
development services, 2% in advertising and 84% in technology licensing fees and
royalties.
STRATEGY
The Company's strategy is to leverage off its existing base of proprietary
technology by expanding into areas outside of traditional active noise control
such as communications, audio and microbroadcasting media. The Company's
acquisition of certain assets and all of the intellectual property of Active
Noise and Vibration Technologies, Inc. ("ANVT") in 1994 expanded NCT's portfolio
of intellectual property and allowed the Company to license certain, formerly
restricted jointly-held patents to unaffiliated third parties.
We anticipate that as we establish distribution channels and as consumer
awareness of our products increases, so, too, will product sales and revenues
from licensing fees and royalties. The funds derived from these revenue sources
will enable the Company to become less dependent on revenues derived from
research, development and engineering. At the same time, NCT continues to strive
to lower the cost of our products and enhance their technological performance.
Finally, the Company recognizes that it cannot achieve its corporate
mission without recruiting and retaining key personnel. As of October 31, 2000,
the Company had 88 employees, including 27 engineers and associated technical
staff members. Among our engineering staff and consultants are several
scientists and inventors that we believe are preeminent in the active noise and
vibration control field worldwide.
STRATEGIC ALLIANCES
In addition to expanding our technological applications, the Company has
entered into a number of strategic supply, manufacturing and marketing alliances
with leading global companies. These alliances historically have funded a
substantial portion of the Company's research and development. They also
represent reliable sources of components, manufacturing expertise and capacity,
and marketing and distribution capabilities. The Company has existing,
continuing relationships with, among others, (1) Walker Manufacturing Company (a
division of Tennessee Gas Pipeline Company, a wholly-owned subsidiary of
Tenneco, Inc.), (2) AB Electrolux, (3) Ultra Electronics Ltd., (4) The Charles
Stark Draper Laboratory, Inc., (5) Oki Electric Industry Co., Ltd. and (6) New
Transducers Ltd. See "The Business" - Section G. - "Strategic Alliances" for
further information.
RECENT DEVELOPMENTS
Until the fourth quarter of 1999, NCT Audio had actively pursued an
acquisition strategy. 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"), TSA's parent company (now also known as Global Technovations,
Inc.), $2,050,000 on July 31, 1998. The money was held in escrow with all of the
necessary securities and documents to evidence ownership of 20% of the total
equity rights and interests in TSA. The shareholders of TST approved the
transaction on December 15, 1998. When TST's shareholders approved the
transaction, the $2,050,000 was delivered to TSA. In return, NCT Audio took
ownership of the documentation and securities held in escrow.
NCT Audio had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay 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 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, resulting in NCT Audio holding 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, Inc.
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. In
August 2000, Global Technovations announced that it had completed the purchase
of 100% of the stock of Onkyo America. 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 "Risk Factors - Litigation"
and "Legal Proceedings."
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. These notes
bear interest at a rate equal to the prime lending rate plus one percent (1.0%).
The Company was not able to obtain the financing to consummate this transaction,
and PPI experienced significant organizational changes which 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 its acquisition strategy.
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. On September 19, 1999, the Company and the Holder agreed to amend the
terms of the conversion price of the secured convertible note subscription
agreement and the notes. For a more detailed discussion of the secured
convertible notes and the amendment, see "Risk Factors - Possible Future
Dilution." This registration statement and prospectus includes 23,529,412 shares
of common stock that may be required upon the conversion of the aggregate $4.0
million secured convertible notes along with 4,682,941 shares of common stock
for interest.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In connection therewith, management negotiated with
certain vendors, consultants and creditors and in 1999, issued 13,154,820 shares
of the Company's common stock to settle obligations owed by the Company. Of such
shares, 12,759,778 shares of the Company's common stock were registered under
Registration Statement No. 333-87757 filed on September 24, 1999, as amended
October 28, 1999. In June 2000, a consultant surrendered 776,316 of such NCT
shares of common stock to the Company for failure to fulfill its performance
obligations.
On July 19, 1999, DMC signed a convertible guaranteed term promissory note
("PRG Note") with Production Resource Group ("PRG") with an outstanding
principal of up to $1.0 million. PRG was to provide lease financing to DMC for
its Sight and Sound(TM) systems (the "Systems") as well as integration,
installation and maintenance services to DMC. DMC received a portion of the PRG
Note ($125,000) on July 22, 1999. Of the total amount of $1.0 million, $750,000
was deposited into an escrow account and used to pay rental and installation
costs due from DMC with respect to the Systems. The PRG Note was to mature on
July 19, 2001 and earn interest at ten percent (10%) per annum. PRG had the
right to 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 from
issuance through the maturity date. DMC also had the right to lease additional
Systems from PRG with an aggregate value of up to $9.5 million, provided that
PRG was reasonably satisfied with the success of the DMC business, including its
technology and economics and the likelihood of its continued success. In
connection with the PRG Note, DMC and the Company granted PRG a common stock
warrant ("PRG Warrant") to purchase either 6,666,667 shares of the Company's
common stock or an interest in DMC.
On August 10, 1999, the Company entered into a subscription agreement to
sell an aggregate stated value of up to $12.5 million (12,500 shares) of Series
F Convertible Preferred Stock (the "Series F Preferred Stock"), in a private
placement pursuant to Regulation D of the Securities Act, to five unrelated
accredited investors through one dealer. The 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. The Company
treated the $4.0 million for DMC licenses, subscribed on September 10, 1999, as
additional consideration for the Series F Preferred Stock. Each share of the
Series F Preferred Stock has a par value of $0.10 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, as amended in January 2000.
On September 10, 1999, NCT executed subscription agreements in the amount
of $4 million for four DMC network affiliate licenses incorporating digital
broadcasting station system ("DBSS") software. The initial $1 million was
received on October 13, 1999; installments of $500,000 were received on November
12, 1999, November 19, 1999 and December 23, 1999; and installments of $250,000
were received on December 15, 1999 and December 30, 1999. The final $1 million
installment was received on August 28, 2000. Such $4.0 million for DMC licenses
was treated as additional consideration for the Series F Preferred Stock.
On October 9, 1999, the Company, NCT Audio, Balmore Funds S.A. ("Balmore"),
Austost Anstalt Schaan ("Austost") and LH Financial agreed, in principle, to
settle all legal charges, claims and counterclaims which had individually or
jointly been asserted against the parties. See a detailed description of the
background of the litigation being settled at "Legal Proceedings." Such
litigation settlement was approved by the court in March 2000.
On October 9, 1999, pursuant to a securities exchange agreement, the
Company, NCT Audio, Balmore and Austost agreed to exchange 532 shares of NCT
Audio common stock held by Balmore and Austost for 17,333,334 shares of common
stock of the Company. Such 17,333,334 shares of common stock of the Company were
registered under Registration Statement No. 333-87757. The issuance of such
shares of common stock was approved by the Company's Board of Directors on
October 22, 1999. See "Risk Factors - Possible Future Dilution" for a more
detailed discussion of these exchange shares. The Company recorded a non-cash
charge, impairment loss from goodwill, of approximately $3.1 million in the
fourth quarter of 1999 in connection with this transaction.
On November 15, 1999, the Company's Board of Directors unanimously approved
an amendment to the Company's Restated Certificate of Incorporation to increase
the number of authorized shares of common stock of the Company. The amendment
required the affirmative vote of a majority of the outstanding shares of common
stock of the Company. As such, holders of the common stock of the Company were
asked to approve and did approve an amendment to increase the authorized shares
of common stock from 325,000,000 to 450,000,000 at the annual meeting of
shareholders held on July 13, 2000. The Board of Directors also ratified the
stand down by the Directors and senior officers of the Company of the reserve
requirement for all options and warrants outstanding previously granted to this
group.
On November 15, 1999, the Board of Directors approved the issuance of
shares of the Company's common stock to three accredited investors in a private
placement pursuant to Regulation D of the Securities Act. Based on an offer on
November 9, 1999 and pursuant to a securities purchase agreement dated December
27, 1999 among the parties, the Company issued 3,846,155 shares of common stock
on December 28, 1999 for a total purchase price of $500,000. In addition,
288,461 shares of common stock were issued to the placement agent. These
4,134,616 shares of common stock were registered under Registration Statement
No. 333-35210 filed on April 28, 2000, as amended June 13, 2000.
Effective December 1, 1999, the Company and holders of the Company's Series
F Preferred Stock agreed to amend the Series F Certificate of Designations,
Rights and Preferences of the Series F Preferred Stock to increase the maximum
number of conversion shares to seventy-seven million (77,000,000). The holders
also agreed to waive certain notice and redemption requirements required of the
Company. This action was considered to be in the best interests of the Company
and its investor relationships. The amendment was approved by the Company's
Board of Directors and became effective on January 27, 2000, when the Company
filed such amendment to the Certificate of Designations with the Office of the
Secretary of State of Delaware. The Company registered 28,560,000 shares of
common stock of the Company that the Company may issue upon the conversion of
shares of its Series F Preferred Stock in accordance with the amended
Certificate of Designations under Registration Statement No. 33-25210 effective
June 15, 2000
On December 15, 1999, holders of the remaining 5,026 shares of the
Company's Series E Convertible Preferred Stock ("Series E Preferred Stock") and
holders of 974 shares of the Company's Series F Preferred Stock, an aggregate
stated value of $6 million, exchanged such shares for eight DMC network
affiliate licenses.
In 1999, DMC (1) secured Compaq Computer Corporation as a charter DMC
advertiser and an official supplier of customized components for the Sight &
Sound(TM) system; (2) signed Wherehouse Entertainment, Inc. for the retail
installation of 1,446 Sight & Sound(TM) systems; and (3) signed Barnes & Noble
College Bookstores for the retail installation of multiple Sight & Sound(TM)
systems in their entire network of 380 college bookstores. In January 2000, DMC
announced the appointment of Interep Nontraditional Media ("Interep") as a DMC
advertising sales representative. Management considers the appointment of
Interep as a DMC advertising sales representative an important component to
DMC's market penetration strategy. The Company may require additional capital to
support and sustain the execution of the DMC strategy until DMC revenues
generate a positive cash flow.
On January 25, 2000, the Company's Board of Directors designated a new
series of preferred stock based upon a negotiated term sheet. The Series G
Convertible Preferred Stock (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
approximately $2.0 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 $1.75 million. The Company received $1.0 million for the sale at
the closing and received the balance of $750,000 on June 28, 2000. 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) 80% of the
average of the closing bid price for the common stock on the securities market
on which the common stock is being traded for five (5) consecutive trading days
prior to the date of conversion; or (ii) the fixed conversion price of $0.71925.
As such, the Company registered 4,008,000 shares of its common stock, together
with an additional 160,320 shares for the 4% per annum dividend, that the
Company may issue upon the conversion of the Series G Preferred Stock and
warrants for 167,500 shares which were issued in conjunction with the Series G
Preferred Stock transaction under Registration Statement No. 333-35210 effective
June 15, 2000. See "Risk Factors - Possible Future Dilution."
On March 7, 2000, the Company, Austost and Balmore agreed to amend certain
of the terms and conditions of the October 9, 1999 exchange agreement. Under the
securities exchange agreement, Austost and Balmore were obligated to return
13,671,362 shares of NCT common stock to the Company. The amendment (i) allows
Austost and Balmore to retain 3,611,111 returnable NCT shares in exchange for an
additional 533 shares of NCT Audio common stock from a third party investor,
which Austost and Balmore would deliver to NCT; and (ii) substitutes 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 agreed 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. Austost and Balmore will realize a 10% commission on the proceeds from
the sale of shares.
On March 7, 2000, the Company's subsidiary, DMC, entered into a license
agreement with Eagle Assets Limited to develop a portion of the DMC affiliate
network in the New York City region. The total amount of the license fee was
$2.0 million of which $1.6 million has been deferred at September 30, 2000.
On March 14, 2000, the Company announced the formation and financing of a
new web phone subsidiary, ConnectClearly.com, Inc. CCC will focus on e-commerce
and electronic customer relationship management applications of NCT's
proprietary Internet telephony software. During August 2000, the Company
arranged $2.0 million in financing for this subsidiary, as discussed below.
On March 27, 2000, the Company received the final $1.0 million installment
from Carole Salkind for an additional secured convertible note with the same
terms and conditions of the note executed on January 26, 1999.
On March 30, 2000, DMC entered into a joint venture for the development of
a DMC microbroadcasting media market in Israel. DMC entered into a license
agreement for $2.0 million in connection with this transaction of which $1.6
million has been deferred at September 30, 2000. The joint venture is equally
owned by DMC and its investment partner, Brookepark Limited. DMC's investor
partner is responsible for funding the venture.
On April 21, 2000, the Company's Board of Directors made several senior
management changes. Mr. Jay Haft retired as Chairman of the Board of Directors
but remains a Director of the Company. Mr. Michael Parrella was elected Chairman
of the Board of Directors and retains his position as Chief Executive Officer.
Ms. Irene Lebovics was elected President of the Company.
On May 3, 2000, the Company announced that Delphi Automotive Systems has
licensed the Company's ClearSpeech(R) noise, acoustic echo and live echo
cancellation algorithms for use in their Mobile Multi Media Computing Platform
for hands-free cellular communications in exchange for future per unit
royalties.
Effective May 8, 2000, the Company, Advancel and Infinite Technology
Corporation ("ITC") entered into a strategic alliance and technology license
agreement. Under the agreement, Advancel granted ITC exclusive rights to create,
make, market, sell and license products and intellectual property based upon
Advancel's Java Turbo-J(TM) technology and non-exclusive rights to Advancel's
Java smartcard microprocessor core.
On May 26, 2000, the Company, CCC, and two investors entered into two
promissory notes of $250,000 each in a bridge financing arrangement. These notes
were repaid in August 2000 from the proceeds of a $2.0 million equity financing
arrangement for CCC as discussed below. Such notes accrued interest at 10% per
annum.
On June 2, 2000, the Company and DMC entered into a promissory note ("Roth
Note") with Roth Bros, Inc. ("Roth") in the amount of $0.8 million that is
restricted in its use for equipment purchase, rental and installation costs as
it pertains to the installation of DBSS systems. The Roth Note matures
twenty-four (24) months from the date of execution and earns interest at fifteen
percent (15%) per annum. In connection with the Roth Note, Roth was granted a
common stock warrant for the purchase of 300,000 shares of the Company's common
stock. Such 300,000 shares of the Company's common stock are included under this
registration statement and prospectus.
On June 28, 2000, the Company executed a promissory note for $275,000 which
was collateralized by the Remaining Returnable Shares. The Company received
$250,000 in proceeds from this note, reflecting an original issue discount
provision of $25,000. The note matured on August 28, 2000 and was repaid by
Austost and Balmore by selling Remaining Returnable Shares.
Effective June 30, 2000, the Company, Advancel and ITC entered into a
Technology License Amendment which amended and replaced the Strategic Alliance
and Technology License Agreement which had an effective date of May 8, 2000. In
consideration for certain exclusive rights granted by the Company to ITC, the
Company received 1.2 million shares of ITC common stock (a fair market value of
$6 million) and will receive on-going unit royalties. With the exception of
certain rights granted to ST Microelectronics in 1998, the license grants ITC an
exclusive irrevocable worldwide license to design, make, use, transfer, market
and sell products and intellectual property incorporating or based upon the
Company's TJ and T2J technology.
Effective June 30, 2000, the Company, Advancel and ITC entered into a
Strategic Alliance and Technology Development Amendment pursuant to which the
Company will fund specific product application research and engineering
development related to microprocessor and semiconductor chips. On September 7,
2000, the Company issued 9,523,810 shares of its common stock to ITC (the "ITC
Shares") as prepaid research and engineering costs. Such shares are included
under this registration statement and prospectus. If ITC does not realize $2.4
million in net proceeds from the sale of the ITC Shares, the Company is
obligated to make up the difference in cash, additional shares of common stock
of the Company, or the return of shares of ITC common stock held by the Company,
at the Company's discretion. Similarily, if ITC realizes net proceeds in excess
of such amount, it is obligated to refund the excess to the Company or to return
the excess ITC Shares.
In the ITC transaction, for financial reporting purposes in the three
months ended September 30, 2000, the Company combined both its $6.0 million
Technology License Amendment and its Strategic Alliance and Technology
Development Amendment, and recognized a net $3.6 million of revenue.
As noted, on July 13, 2000, at the Company's annual meeting of
shareholders, the stockholders approved an amendment to increase the number of
shares of common stock the Company is authorized to issue from 325 million to
450 million. Such amendment became effective on July 18, 2000 when the Company
filed a Certificate of Amendment to its Restated Certificate of Incorporation
with the Office of the Secretary of State of Delaware to comply with applicable
Delaware General Corporation Law.
Also on July 13, 2000, the stockholders approved an amendment to the
Company's 1992 Stock Option Plan to increase the number of shares available for
issuance thereunder from 30 million to 50 million.
During July 2000, the Company received proceeds from two promissory notes
for $275,000 each which were collateralized by the Remaining Returnable Shares.
The Company received $500,000 in proceeds from these notes, reflecting an
original issue discount of $25,000 per note. The notes matured in September 2000
and were repaid by Austost and Balmore by selling Remaining Returnable Shares.
On August 10, 2000, the Company entered into an agreement with three
accredited investors for the financing of its subsidiary, CCC. In connection
with the initial funding of CCC, the Company issued 1,000 shares of CCC common
stock to these investors in consideration for $1.0 million. These investors have
agreed to acquire 1,000 additional shares of CCC common stock for another $1.0
million in August 2001. These shares of CCC common stock are exchangeable for
shares of NCT common stock. This registration statement and prospectus includes
12,500,000 shares of common stock that may be issued upon the exchange of CCC
common shares.
On August 18, 2000, Cinema acquired 100% of the outstanding capital stock
of Theater Radio Network, Inc. ("TRN"), a provider of entertainment audio
programming in multiplex cinemas nationwide. In connection with this
acquisition, the Company issued 7,405,214 restricted shares of its common stock
based upon a trailing market price (as defined in the stock purchase agreement)
of $0.3376 per share, for a total value of $2,500,000 and a 7.5% equity interest
in Cinema. Such shares of common stock of the Company are included under this
registration statement and prospectus. See "Risk Factors - Possible Future
Dilution."
On August 29, 2000, the Company acquired all of the outstanding capital
stock of Midcore Software, Inc., a Connecticut corporation and provider of
Internet infrastructure software for business networks, through a merger into
NCT Midcore, Inc., a newly formed, wholly-owned subsidiary of the Company, which
was subsequently renamed Midcore Software, Inc. In connection therewith, the
Company issued 13,913,355 restricted shares of its common stock based upon a
10-day weighted average closing bid price of $0.34626 per share, an aggregate
value of $4,817,638. Of these shares, 7,126,548 are included under this
registration statement and prospectus. In addition, the purchase consideration
includes $1,725,000 to be paid by the Company in cash over 36 months based upon
earned royalties, as defined in the merger agreement. If after 36 months the
total royalty has not been earned, then the parties have the right to collect
the remaining unpaid balance through the issuance of the Company's common stock.
See "Risk Factors - Possible Future Dilution."
On September 12, 2000, NCT Hearing granted an exclusive license to Pro Tech
Communications, Inc. for rights to certain NCT technologies for use in light
weight cellular, multimedia and telephony headsets. In consideration for this
license, NCT Hearing received approximately 23.4 million shares of Pro Tech's
common stock, representing approximately 84% of Pro Tech's issued and
outstanding common shares. Pro Tech sells high quality, light weight headsets to
high-profile users, including the NASA space program and McDonald's. Pro Tech's
common stock currently trades under the symbol "PCTU" on the NASD's OTC Bulletin
Board. As a condition precedent to the transaction, the Company had arranged
$1.5 million in equity financing for Pro Tech in the form of convertible
preferred stock of Pro Tech (see below).
On September 12, 2000, the Company granted a warrant to Libra Finance S.A.
to purchase up to 10,000,000 shares of common stock at an exercise price of
$0.317 per share, the closing bid price on September 12, 2000. Libra Finance
S.A. is an affiliate of Austost and Balmore. The Company granted the warrant as
consideration for advisory services with respect to its recent acquisitions and
financings completed during the third quarter of 2000. Such shares are included
in this registration statement and prospectus.
On September 26, 2000, the Company's Board of Directors approved an
amendment to the Series G Certificate of Designations, Rights and Preferences to
increase the maximum share issuance amounts thereunder from 10 million shares to
24 million shares. This action was considered in the best interest of the
Company and its investor relationships. The amendment became effective on
September 27, 2000 when the Company filed it with the Office of the Secretary of
State of Delaware. This registration statement and prospectus includes 4,820,000
shares of common stock of the Company along with 602,000 shares of common stock
for the cumulative dividend that the Company may issue upon the conversion of
our Series G Preferred Stock in accordance with the amended Certificate of
Designations.
On September 27, 2000, the Company filed name changes with the Office of
the Secretary of State of Delaware for certain of its subsidiaries as follows:
Distributed Media Corporation was formerly known as DistributedMedia.com, Inc.
and Midcore Software, Inc. was formerly known as NCT Midcore, Inc.
On September 27, 2000, the Company entered into a private equity credit
line with Crammer Road LLC ("Crammer"), pursuant to which the Company may issue
its common stock to be sold by Crammer and Crammer would retain a portion of the
proceeds received for NCT common stock sold. In conjunction with this
transaction, the Company issued Crammer a warrant for 250,000 shares of the
Company's common stock. The Company and Crammer are currently renegotiating
certain provisions of the private equity credit agreement.
On September 29, 2000, the Company entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with Pro Tech, Austost, Balmore and
Zakeni Limited (Austost, Balmore and Zakeni Limited collectively the "Pro Tech
Investors") to consummate the $1.5 million financing arranged by the Company for
Pro Tech in connection with its sale of Pro Tech Series A Convertible Preferred
Stock ("Pro Tech Preferred") to the Pro Tech Investors. Under such agreement,
the Pro Tech Investors may elect to exchange their Pro Tech Preferred for shares
of common stock of the Company at the then lowest average of the average closing
bid price for a share of the Company's common stock as reported on the NASD OTC
Bulletin Board for any consecutive five day period out of fifteen trading days
preceding the date of such exchange, less a discount of 20%. This registration
statement and prospectus includes 7,500,000 shares of the Company's common stock
that the Pro Tech Investors may offer to sell if they elect to exchange their
Pro Tech Preferred for the Company's common stock.
On September 29, 2000, the Company and DMC signed separate agreements to
license the use of certain technology for $1.0 million each with Vidikron of
America, Inc. ("Vidikron"). The total amount of the license fees was $2.0
million of which the Company's revenue recognized was limited to $1.0 million in
accordance with generally accepted accounting principles. The Company
anticipates acquiring majority control of Vidikron during the fourth quarter of
2000 or in the first quarter of 2001.
In December 2000, the Board of Directors approved the issuance of up to
12,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company, including PRG as noted above. During 2000, 2,415,467
shares of the Company's common stock were issued to pay current and prepay
future amounts due to certain consultants and suppliers. These shares of the
Company's common stock are included under this registration statement and
prospectus.
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below is derived from the
historical financial statements of the Company. The data set forth below is
qualified in its entirety by and should be read in conjunction with the
Company's consolidated financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that are included
elsewhere in this registration statement and prospectus. Operating results for
the three and nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------------------------
1995 1996 1997 1998 1999
------------------------------------------------------
<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)
========== =========== ========= ========= =========
Basic and diluted loss per share $ (0.05) $ (0.11) $ (0.09) $ (0.12) $ (0.18)
========== =========== ========= ========= =========
Weighted average number of common
Shares outstanding(1) - basic and diluted 87,921 101,191 124,101 143,855 190,384
========== =========== ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Technology licensing fees and royalties $ 8 $ 7,316 $ 3,509 $ 7,906
Product sales, net 574 422 1,802 1,205
Advertising revenue - 242 - 242
Engineering and development services 128 29 1,303 59
---------- ---------- ---------- ----------
Total revenues $ 710 $ 8,009 $ 6,614 $ 9,412
========== ========== ========== ==========
COSTS AND EXPENSES:
Cost of product sales $ 634 $ 268 $ 1,717 $ 1,045
Royalty expense - 177 - 363
Cost of media sales - 410 - 410
Cost of engineering and development servies 761 27 1,664 54
Selling, general and administrative 2,318 2,705 7,981 5,380
Research and development 1,644 720 5,102 3,351
Other (income)/expense, net 2,292 (222) 2,599 2,920(6)
Write down of investment in unconsolidated
affiliate - - 2,385 -
Interest (income)/expense 16 284 (41) 1,655
---------- ---------- ---------- ----------
Total costs and expenses $ 7,665 $ 4,369 $ 21,407 $ 15,178
---------- ---------- ---------- ----------
NET (LOSS)/INCOME $ (6,955) $ 3,640 $ (14,793) $ (5,766)
========== ========== ========== ==========
Preferred stock beneficial conversion feature $ - $ 3,569 $ - $ 3,569
Preferred stock dividend requirement 5,327 375 10,567 1,104
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock 131 15 315 87
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (12,413) $ (319) $ (11,436) $ (10,526)
========== ========== ========== ==========
Basicand diluted income/(loss) per share $ (0.06) $ (0.00) $ (0.14) $ (0.04)
========== ========== ========== ==========
Weighted average common shares outstanding -
basic and diluted 188,009 296,377 173,453 281,815
========== ========== ========== ==========
</TABLE>
<PAGE>
December 31,
------------------------------------------------------
1995 1996 1997 1998 1999
------------------------------------------------------
BALANCE SHEET DATA: (In thousands)
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)
September 30, 2000
-------------------------
(In thousands, unaudited)
BALANCE SHEET DATA:
Total assets $ 37,936
Total current liabilities 15,127
Long-term debt 2,500
Accumulated deficit (137,241)
Stockholders' equity (deficit)(2) 14,051
Working capital (deficiency) (4,222)
(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 notes and pre-acquisition costs related to
PPI; and a $3.1 million charge for the impairment of goodwill.
(6) Includes a non-cash charge of $3.1 million for the impairment of goodwill
in NCT Audio.
EXECUTIVE OFFICES
Our principal executive office is located at 20 Ketchum Street, Westport,
Connecticut 06880. The telephone number is (203) 226-4447. NCT's corporate
headquarters are located at 1025 West Nursery Road, Suite 120, Linthicum,
Maryland 21090. The telephone number is (410) 636-8700.
RISK FACTORS
The shares of common stock covered by this registration statement and
prospectus represent a speculative investment and entail elements of risk.
Investors should carefully consider the following risk factors before making a
decision to invest in the Company. Investors also should examine the information
included in subsequent sections of and as exhibits to this registration
statement and prospectus.
<PAGE>
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" - those which
are not historical facts but rather estimates made by Company management. All
forward-looking statements involve risks and uncertainties. The Company wishes
to caution investors that the important factors discussed below have, or could,
both (1) affect the Company's actual performance, and (2) cause actual
performance to differ materially from our predictions.
The Company believes that the assumptions underlying such forward looking
statements are reasonable. At the same time, it would be prudent to remember
that our assumptions could be inaccurate. Therefore, we cannot give any
assurances that these statements will, in fact, be correct.
OUR CURRENT FINANCIAL CONDITION
As of December 31, 1999, NCT had cash and cash equivalents amounting to
$1.1 million, increasing from $0.5 million at December 31, 1998. At September
30, 2000, the Company's unrestricted cash and cash equivalents were $0.4
million. Management believes that currently available funds will not be
sufficient to sustain the Company at present levels over the next 12 months. The
Company's ability to continue as a going concern is dependent on funding from
several revenue sources, including:
o technology licensing fees and royalties,
o product sales,
o advertising, and
o engineering and development revenues.
The ability of any or all of these revenue sources to generate cash inflows
is presently uncertain. In the event that these activities do not generate
sufficient cash, management believes that the Company would have to raise
additional working capital. There is no assurance, however, that the Company
could raise such capital.
The Company cannot give any assurance that it will be able to generate
sufficient cash from the revenue sources outlined above. In that event, the
Company will have to substantially cut back its level of operations. These
reductions could, in turn, affect our relationships with our strategic partners
and customers.
GOING CONCERN UNCERTAINTY
We are unsure (1) whether future operations will be profitable or generate
sufficient cash to fund the business, and (2) whether the Company can generate
or rely upon sufficient public and private financings and other funding sources
to meet our obligations.
The Company's independent auditors issued a report on their audit of our
consolidated financial statements as of and for the year ended December 31,
1999. Their report contained an explanatory paragraph that noted that certain
factors raise substantial doubt as to our ability to continue as a going
concern. Investors should read the auditors' report and examine the Company's
financial statements.
PRIVATE PLACEMENT OF COMMON STOCK TO VENDORS
During 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. In June 2000, a consultant surrendered 776,316 of such
shares of common stock to the Company for failure to fulfill its performance
obligations. During 2000, the Company issued an additional 2,415,467 shares of
common stock to certain consultants and suppliers to settle and prepay current
and future amounts due to them by the Company. Such 2,415,467 shares are
included under this registration statement and prospectus. The issuance of these
shares of common stock of the Company has an immediate, dilutive effect on
existing holders of the Company's common stock. The Company anticipates paying
for certain products and services to vendors by issuing additional shares of
common stock until our cash flow from operations is sufficient to meet our
operating costs, if ever. There is no assurance our vendors will accept our
common stock in full or partial discharge of our obligations to them or in
exchange for their agreement to provide products and services to us in the
future. Further, the Company's issuance of common stock to vendors to discharge
current and future obligations of the Company could be integrated with other
private placements or public offerings by the Company of its common stock or
convertible securities. Any such integration of our placements and offerings
could lead to the vendors' rescission with respect to the common stock issued to
them, requiring the Company immediately to use its cash on hand (if any) to
payoff past obligations that it believed it had fully discharged.
NO HISTORY OF DIVIDENDS
The Company has never declared or paid dividends on its common stock. We
have no present intention to pay dividends on our common stock. The Company has,
from time to time, fulfilled its dividend (or payment in kind) obligation on its
preferred stock. See "Possible Future Dilution" below.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company has incurred substantial losses from operations since its
inception. These losses have been recurring and amounted to $137.2 million on a
cumulative basis through September 30, 2000. The Company has funded these losses
primarily from the sale of its common stock, including the exercise of warrants
and options to purchase common stock. The Company also offsets its losses with
technology licensing fees and the engineering and development funds it receives
from its joint venture and strategic alliance partners.
The Company incurred a net loss of $23.8 million for the year ended
December 31, 1999. This loss was attributable in part to certain non-recurring
charges (write-down of its investment in TSA, reserve for PPI promissory note,
pre-acquisition costs related to PPI, and impairment of goodwill) and increased
sales and marketing costs, including a substantial increase in sales and
marketing personnel and advertising expenditures to facilitate the introduction
of new products. The Company's net loss for the nine months ended September 30,
2000 was $5.8 million, attributable in part to the recording of an impairment of
goodwill (non-cash charge) of $3.1 million in NCT Audio.
To make a profit, NCT must independently and with its partners successfully
develop, manufacture and sell a sufficiently large quantity of our products, as
well as collect fees and royalties from licensing our proprietary technology.
The Company can give no assurances, however, that future operations will be
profitable enough to generate sufficient cash to fund such development,
manufacturing and sales or that the Company can generate or rely upon sufficient
funding sources to meet our obligations.
LIMITED REVENUES
Although the Company has begun to actively market the sale and licensing of
our products, operating revenues from inception in April 1986 to the date hereof
have been limited. In total over the five years ended December 31, 1999, the
Company has generated revenues as noted below:
o $ 9.0 million from the sale of products,
o $15.8 million from technology licenses and royalties, and
o $ 4.9 million from engineering and development services.
Despite the Company's sales of products in a limited number of
applications, significant further development will be necessary before many of
our potential products will achieve expected commercial end-use applications.
POSSIBLE FUTURE DILUTION FROM THE EXERCISE OF OUTSTANDING OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES AND EXCHANGE RIGHTS
The following sections discuss the risks associated with investing in the
Company's common stock given that future dilution is possible. Specifically,
these sections outline the myriad circumstances which could lead to a possible
negative effect on the value per share of our common stock should holders of the
Company's convertible securities, convertible notes, exchange rights, options
and warrants convert their securities or notes or exercise their rights to
acquire common stock. At December 31, 1999, the issued and outstanding shares of
common stock and those required to be reserved for issuance exceeded the number
of shares of common stock authorized. To alleviate this, the Directors and
senior officers of the Company agreed, as necessary, to set aside the reserve
requirement for all options and warrants previously granted to them. The
Company's reserve requirements, in large part, are a function of the price of
the Company's common stock. At its annual meeting held on July 13, 2000, the
Company obtained the approval of its shareholders to increase the number of
shares of common stock the Company is authorized to issue from 325,000,000 to
450,000,000. Nearly all of those additional shares have either been used by the
Company in connection with recent acquisitions, or are reserved for future
issuance upon the exercise of warrants, exchange rights and call rights granted
by the Company in connection with financing arrangements recently put into place
for the Company and its subsidiaries.
<PAGE>
The 1987 Stock Option Plan
In 1987, the Company adopted the 1987 Stock Option Plan (the "1987 Plan"),
which provides for the grant of up to 4,000,000 shares of common stock as either
incentive or nonstatutory stock options. The 1987 Plan allows for the grant of
incentive stock options to full-time employees, including directors and
officers. It further allows for the grant of nonstatutory stock options to
employees and non-employee directors of the Company. See Note 12 - "Notes to
Financial Statements - Common Stock Options and Warrants" for a more detailed
description of the 1987 Plan. As of October 31, 2000, the Company had
outstanding options to purchase 1,350,000 shares of common stock under its 1987
Plan. All of such options are exercisable.
The 1992 Stock Option Plan
At the 1993 annual stockholders meeting, the Company's shareholders
approved a stock option plan previously adopted in October 1992 by the Board of
Directors covering 6.0 million shares of the Company's common stock (the "1992
Plan"). The 1992 Plan provides for the grant of options to purchase common stock
and awards of restricted common stock to employees, officers and directors of
the Company. At the 1996 annual stockholders meeting, shareholders approved an
amendment to the 1992 Plan, increasing the number of shares covered to 10.0
million. The shareholders also approved the addition of active consultants as
persons eligible to participate. At the 1998 annual stockholders meeting,
shareholders again approved an amendment to the 1992 Plan, increasing the number
of shares covered to 30.0 million and permitting outside directors to
participate. The amendment also (1) deleted the formula for grants of awards of
restricted common stock and options to purchase common stock to outside
directors, and (2) directed that the Company's Board of Directors, or a
committee appointed by the Board consisting of at least two outside directors,
administer the 1992 Plan. On January 19, 2000, the Company's Board of Directors
further amended the 1992 Plan, subject to shareholder approval, to increase the
aggregate number of shares covered thereunder to 50.0 million. The Company's
shareholders approved this amendment at the annual meeting held on July 13,
2000. On January 19, 2000, the Company's Board of Directors granted options to
acquire 12,775,000 shares under the 1992 Plan, as amended, subject to
shareholder approval.
The Company is required to reserve 50.0 million shares of common stock for
issuance in the event that option holders exercise their options to purchase
shares or that the Company grants restricted stock under the 1992 Plan. Of these
50.0 million shares, 30.0 million have been registered under the Securities Act.
As of October 31, 2000, the Company had outstanding options to purchase
38,749,370 shares of common stock under the 1992 Plan. As of October 31, 2000,
the Company also had granted 240,000 shares of restricted stock under the 1992
Plan.
The Directors' Stock Option Plan
In 1994, the Company adopted (and has since amended twice) an option plan
for certain directors (the "Directors' Plan"). At the 1995 annual stockholders
meeting, shareholders approved the grant to two directors of the option to
purchase a total of 725,000 shares of NCT common stock. The shareholders, at the
1996 annual meeting, approved an increase in the number of shares to 821,000 and
made minor changes concerning the Directors' Plan's administration. The Company
has reserved 821,000 shares of common stock for issuance upon the directors'
exercise of their options. All of the shares are registered under the Securities
Act. As of October 31, 2000, under the Directors' Plan, the Company had
outstanding options to purchase 538,500 shares of common stock, all of which are
currently exercisable.
The PRG Warrant
On July 19, 1999, PRG was granted a common stock warrant equal to, at PRG's
election, either (i) the number of shares of the Company's common stock which
may be purchased for an aggregate purchase price of $1,250,000 at the fair
market value on July 19, 1999; or (ii) the number of shares representing five
percent of the fully paid non-assessable shares of common stock of DMC at the
purchase price per share equal to either (x) if a DMC qualified sale (a sale in
one transaction in which the aggregate sales proceeds to DMC equal or exceed
$5,000,000) has closed on or before December 31, 1999, the purchase price per
share of DMC common stock or security convertible into DMC common stock by
seventy-five percent (75%) or (y) if a DMC qualified sale has not closed on or
before December 31, 1999, at an aggregate price of $1,250,000. The closing bid
price on July 19, 1999 was $0.1875. As such, the Company has reserved 6,666,667
shares of common stock for the PRG Warrant.
Other Investors' Warrants and Options
As of October 31, 2000, the Company had reserved 378,984 additional shares
of common stock for issuance upon the exercise of warrants and options; these
warrants and options are not included in the above plans. The Company also has
reserved 1,429,414 shares for issuance upon the exercise of warrants earlier
granted to:
o an investor in an early 1997 private placement pursuant to Regulation S
(the "Investor Warrant"),
o three placement agents in partial consideration for services rendered in
connection with the 1997 and 1998 preferred stock placements described
below,
o one financial consultant for services rendered in connection with another
financing completed by the Company, and
o one consultant for services rendered in connection with the Company's
efforts to complete development and licensing agreements with a large
European company.
In March 2000, the Company issued warrants for 167,500 shares of common
stock in conjunction with the closing of the Series G Preferred Stock. See
"Series G Preferred Stock" below.
In June 2000, the Company issued warrants for 300,000 shares of common
stock to the holder of an $0.8 million promissory note issued by the Company and
DMC in June 2000. The 300,000 shares of common stock that the Company may issue
under this warrant are included in this registration statement and prospectus.
In September 2000, the Company issued warrants for 10 million shares of
common stock to Libra Finance S.A. which served as placement agent for certain
of the Company's recent financing transactions and had advised the Company with
respect to its recent acquisitions. Such 10 million shares of common stock are
included under this registration statement and prospectus.
In September 2000, in conjunction with the execution of a private equity
credit agreement, the Company issued the investor a warrant for 250,000 shares
of NCT common stock.
The aggregate reserve for outstanding non-plan stock options and warrants
at October 31, 2000, excluding the PRG Warrant, was 18,788,664, all of which are
fully vested and immediately exercisable.
As of December 31, 1999, the weighted average exercise prices for the then
exercisable options and warrants were $0.45 and $0.77, respectively. Options and
warrants granted subsequent to December 31, 1999 have been granted at the fair
market value of the Company's common stock when granted.
The NCT Audio Initial Financing
Between October 10, 1997 and December 4, 1997, NCT Audio sold 2,145 common
shares for approximately $4.0 million in a private placement under Regulation D
of the Securities Act (the "NCT Audio Initial Financing"). The terms of the sale
allow the purchasers of NCT Audio's common stock to exchange their shares for an
equally valued amount of the Company's common stock at a predetermined exchange
ratio.
To date, the Company has issued 22,756,622 shares of its common stock in
exchange for 1,413 shares of NCT Audio common stock. Of such shares, 272,023 are
included in this registration statement and prospectus, 404,612 were registered
under Registration Statement No. 333-35210, another 17,333,334 were registered
under Registration Statement No. 333-87757 and an additional 1,000,000 shares
were registered under Registration Statement No. 333-64967. The Company has
provided a reserve of 5,718,750 shares of its common stock for the exchange of
732 shares of NCT Audio common stock assuming a 5-day average closing bid price
of $0.30.
Secured Convertible Notes
Carole Salkind, spouse of a former director and an accredited investor,
subscribed and agreed to purchase secured convertible notes of the Company in an
aggregate principal amount of $4.0 million. The first 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 matures on January 25, 2001 and earns
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
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 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 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.
In addition to this first Note, the Holder was required to purchase the
remaining $3.0 million principal amount of secured convertible notes containing
the same terms and maturity date as the initial Note on or before June 30, 1999.
The Company agreed to extend such date for the purchase of remaining
installments of secured convertible notes to April 15, 2000. On various dates,
the Holder purchased additional installments of the remaining $3.0 million
principal amount of the secured convertible notes. The Company received the
final installment in March 2000.
At the fixed conversion price of $0.17, the Company would be required to
issue 23,529,412 shares of its common stock upon conversion of the aggregate
$4.0 million of secured notes. The Company is including in this registration
statement and prospectus all 23,529,412 shares, together with 4,682,941 shares
of common stock to pay accrued interest (calculated at 9.5% per annum for two
years) on all of the secured convertible notes.
Preferred Stock
To raise working capital, from time to time, the Company has issued shares
of preferred stock generally convertible into or exchangeable for shares of NCT
common stock. Such preferred stock includes the Company's Series C, D, E, F and
G convertible preferred stock, NCT Audio's Series A Preferred Stock and Pro
Tech's Series A Preferred Stock. Presently, only the Series G Convertible
Preferred Stock (described below) and Pro Tech's Series A Preferred Stock are
outstanding.
The Series G Convertible Preferred Stock
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 $2.0 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 $1.75 million. The Company received $1.0 million for the sale at
the closing and received the balance of $750,000 on June 28, 2000, after the
registration of shares of common stock for resale upon the conversion of the
Series G Preferred 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) 80% of 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 $0.71925. The Company registered 4,008,000
shares of the Company's common stock, together with an additional 160,320 shares
for the 4% per annum dividend, that the Company may issue upon the conversion of
the Series G Preferred Stock and warrants for 167,500 shares which were issued
in conjunction with the Series G Preferred Stock transaction under Registration
Statement No. 333-35210 filed on April 28, 2000, as amended June 13, 2000. The
warrants are exercisable at $0.71925 per share and expire on March 31, 2005. On
various dates through September 30, 2000, an aggregate of 1,080 shares of Series
G Preferred Stock have been converted into 4,037,728 shares of the Company's
common stock. As of September 30, 2000, there are 924 shares of Series G
Preferred Stock outstanding.
On September 27, 2000, the Series G Preferred Stock Certificate of
Designations was amended to obligate the Company to issue up to 24 million
shares of its common stock upon the conversion of the 5,000 designated shares of
Series G Preferred Stock. Such amendment was made in the interest of investor
relations of the Company. This registration statement and prospectus includes
4,820,000 shares of common stock together with 602,000 shares for the 4% per
annum cumulative dividend, that the Company may issue upon the conversion of the
remaining issued and outstanding 924 shares of Series G Preferred stock. Such
share amounts were calculated at 80% of $0.30 (estimated five-day average
closing bid) with three years of dividends, then all increased in accordance
with Series G Preferred Stock Registration Rights Agreement.
ConnectClearly Transaction
In connection with the initial funding of the Company's subsidiary,
ConnectClearly.com, Inc., the Company issued 1,000 shares of CCC common stock to
three accredited investors in consideration for $1.0 million. These investors
have agreed to acquire 1,000 additional shares of CCC common stock for another
$1.0 million in August 2001. These CCC common shares are exchangeable for shares
of NCT common stock. This registration statement and prospectus includes
12,500,000 shares of common stock that may be issued upon the exchange of CCC
common shares.
POSSIBLE FUTURE DILUTION FROM CONTINGENT EARN OUTS AND OTHER OBLIGATIONS ARISING
FROM RECENT ACQUISITIONS
TRN Acquisition
On August 18, 2000, Cinema acquired 100% of the outstanding capital stock
of Theater Radio Network, Inc., a provider of entertainment audio programming in
multiplex cinemas nationwide. In connection with the acquisition, the Company
issued 7,405,214 restricted shares of its common stock based upon a trailing
market price (as defined in the stock purchase agreement) of $0.3376 per share,
for a total value of $2,500,000 and a 7.5% equity interest in Cinema. Such
shares are included under this registration statement and prospectus. The
Company may be required to issue additional shares of common stock to the former
shareholders of TRN in the future under certain earn out provisions. In
addition, the Company is obligated to issue and register additional shares if
the trailing market price of the Company's common stock prior to effectiveness
of this registration statement is less than $0.3376.
Midcore Acquisition
On August 29, 2000, the Company acquired all of the outstanding capital
stock of Midcore Software, Inc., provider of Internet infrastructure software
for business networks, through a merger into NCT Midcore, Inc. In connection
therewith, the Company issued 13,913,355 restricted shares of its common stock
based upon a 10-day weighted average closing bid price of $0.34626 per share,
for an aggregate value of $4,817,638. Of these shares, 7,126,548 are included
under this registration statement and prospectus. In addition, the purchase
consideration includes $1,725,000 to be paid by the Company in cash over 36
months based upon earned royalties, as defined in the merger agreement. If after
36 months the total royalty has not been earned, then the parties have the right
to collect the remaining unpaid balance through the issuance of the Company's
common stock. The Company is obligated to issue additional shares of its common
stock if the value of certain shares issued at the closing is less than $1.5
million on the third anniversary of the closing. In addition, the Company is
obligated to issue and register additional shares if the closing bid price of
the Company's common stock prior to effectiveness of this registration statement
in less than $0.34626.
Pro Tech Preferred Stock
On September 12, 2000, NCT Hearing granted Pro Tech a license for an
exclusive right to certain NCT technologies for use in light weight cellular,
multimedia and telephony headsets. As consideration for such license, Pro Tech
issued approximately 23.4 million shares of its common stock to NCT Hearing as
of September 13, 2000. A condition precedent to this transaction was that the
Company arrange for $1.5 million equity financing for Pro Tech to be used for
working capital purposes. On September 29, 2000, the Company entered into a
Securities Purchase and Supplemental Exchange Rights Agreement with Pro Tech and
the Pro Tech Investors to consummate the $1.5 million financing arranged by the
Company for Pro Tech in connection with its sale of Pro Tech Series A
Convertible Preferred Stock to the Pro Tech Investors. Under such agreement, the
Pro Tech Investors may elect to exchange their Pro Tech Preferred for shares of
common stock of the Company at the then lowest average of the average closing
bid price for a share of the Company's common stock as reported on the NASD OTC
Bulletin Board for any consecutive five day period out of fifteen trading days
preceding the date of such exchange, less a discount of 20%. This registration
statement and prospectus includes 7,500,000 shares of the Company's common stock
that the Pro Tech Investors may offer to sell if they elect to exchange their
Pro Tech Preferred for the Company's common stock.
PRIVATE EQUITY CREDIT AGREEMENT
The Company and Crammer are presently renegotiating key terms of a private
equity credit agreement which was executed on September 27, 2000, pursuant to
which shares of the Company's common stock would be sold by Crammer who would
retain part of the proceeds from their sale. The issuance and sale of such
shares of the Company's common stock would have an immediate, dilutive effect on
existing holders of the Company's common stock.
MATERIAL DEPENDENCE ON CERTAIN PATENT AND TRADEMARK RIGHTS
As of October 31, 2000, the Company and its subsidiaries, held 585 patents
and related rights worldwide and an extensive library of know-how and other
unpatented technology. The Company cannot, however, give any assurances as to:
o the range or degree of protection provided by any of its patents or
trademarks,
o that such patents, trademarks or licenses will provide protection that has
any commercial significance or any competitive advantage,
o that such patents, trademarks or licenses will provide protection against
competitors with similar technology or trademarks,
o that others will not obtain patents claiming aspects similar to those
covered by the Company's owned or licensed patents or patent applications,
o that third parties will not challenge the Company's owned or licensed
patents or patent applications, or
o that regulatory authorities will grant any pending patent or trademark
application.
The Company also believes that increased competition could result should
its present, commercially significant patents or trademarks be invalidated or
expire. This increased competition could have a material adverse effect on the
Company's business prospects. While the Company intends to file extensions for
certain patents, it cannot make any assurances that patent authorities will
grant those extensions.
The Company has conducted only limited patent and trademark searches. Thus,
patents or trademarks superior to those held by the Company could already exist
or be issued in the future to our competitors. This, too, could have a material
adverse impact on the Company's business prospects. Further, the Company would
have to expend substantial resources in obtaining and defending its patent and
trademark rights to protect the present and future technology of NCT.
There also has been an inquiry regarding the product design of one of the
Company's products as it relates to a patent held by another company. A second
competitor has implied that a possible conflict exists between the Company's
application of certain of its technology and a recently granted patent of the
competitor. The same competitor further implies that our use of a generic phrase
to describe our product conflicts with a trademark for which the competitor has
applied. The Company believes these claims are without merit and intends to
conduct a vigorous defense. Even if the claims had some merit, we believe that
we could modify our current design at little cost to avoid infringement. The
Company does not believe these claims, even if unfavorably adjudicated, would
result in damages having a material adverse effect on the business. See "Legal
Proceedings" for further discussion.
Competitors have filed notices of opposition with respect to two of NCT
Audio's applications for trademarks. The Company and NCT Audio believe these
claims are without merit and NCT Audio intends to prosecute its applications
zealously. However, if authorities deny NCT Audio's applications, NCT could be
required to (1) obtain a license to use the subject trademarks, or (2) refrain
from using the trademarks and adopt others. Either of these options could
involve significant expense, although neither should have a long-term, material
adverse effect on the operating results of NCT Audio or the Company.
The Company's policy is to enter into confidentiality agreements with all
of its executive officers, key technical personnel and advisors. At the same
time, we cannot give any assurances that such persons will not disclose Company
know-how, inventions and other secret or unprotected intellectual property to
third parties, whether in violation of those agreements or otherwise.
Finally, it should be noted that annuities and maintenance fees for the
Company's extensive patent portfolio are a significant portion of the Company's
annual expenses. If, for the reasons described in "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. The Company then will have to prioritize
its portfolio accordingly.
RAPID TECHNOLOGICAL CHANGE AND COMPETITION
NCT is using its existing technologies to enter into new business areas
which are evolving and characterized by rapid technological change. The Company
intends to engage continually in research and development activities. This
includes improving our current products and developing new products. Our
success, however, depends on the popularity of our products in the commercial
arena, which the Company cannot guarantee. Because of this rapid pace of change,
the Company also cannot guarantee that our products will not become unmarketable
or obsolete by a competitor's more rapid introduction to the marketplace.
The Company is aware of a number of direct competitors. Indirect
competition also exists in the field of passive sound attenuation. 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
telecommunications signal processing include Lucent Technologies, Inc. and Texas
Instruments, Incorporated. To the Company's knowledge, each of these companies
is pursuing its own technology in fields similar to ours.
NCT also believes that a number of other large companies, such as the major
domestic and international communications, computer, automobile and appliance
manufacturers, and aircraft parts suppliers and manufacturers have research and
development efforts underway. Many of these companies are both well established
and have substantially greater financial, management, technical, marketing and
product development resources than the Company.
RELIANCE UPON STRATEGIC ALLIANCES AND COMMERCIAL ACCEPTANCE
As previously described, the Company and its subsidiaries have entered into
numerous strategic alliances related to the design, manufacture, marketing and
distribution of our products. These agreements generally provide that in
exchange for substantially all funding, the Company will license its technology
to our partners and contribute a nominal amount of initial capital. Our partners
also receive a preference in the distribution of cash and/or profits or
royalties until the Company repays the funding, plus some interest in some
instances. At September 30, 2000, however, there were no preferred distributions
due to joint venture partners.
The Company markets its products by identifying potential markets and
teaming up with major domestic and international businesses to support product
development, manufacturing and distribution. Our ability to enter and succeed in
new markets is dependent on these companies' assessment of the Company and its
products' profitability. Success also depends on end-users' acceptance of our
products. For example, from 1995 through 1999, sales for active headsets did not
increase at the rate anticipated, and demand for mufflers, kitchen exhaust and
HVAC fan quieting systems was not at the volume anticipated.
The Company also arranges for the supply of other products, such as
integrated circuits, for its active control systems. The Company is able to do
so by entering into alliances with dependable manufacturers believed also to be
dependable sources of supply. The Company cannot, however, make assurances that
these manufacturers will be able to meet the demands of the Company and our
customers in the future.
<PAGE>
CUMULATIVE LOSSES IN JOINT VENTURES
When the Company's share of losses in an alliance is greater than its
investment, the Company has no obligation to fund such additional losses. When
this occurs, the Company suspends applying the equity method of accounting for
its investment in the alliance. The Company estimates no material aggregate
losses in its strategic alliances in excess of its investments which have not
been recorded at September 30, 2000. NCT will not be able to record any equity
income with respect to an entity until its share of future profits is large
enough to recover any losses that have not yet been recorded.
DEPENDENCE UPON EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL
The Company's operations now and in the near future are in large part
dependent upon the efforts of our executive officers and other key personnel.
Only one senior vice president is contractually bound to remain with the
Company. Moreover, the Company's growth and expansion into new products could
require additional expertise in areas like manufacturing and marketing. This
could put an additional strain on our human resources and may require hiring
additional personnel or training existing personnel. Certain academicians now
consult for the Company part-time but could terminate their association at any
time.
Certain employees and consultants have been approached by competitors, and
the Company cannot give any assurances that these people will remain with NCT.
The loss of key personnel or the failure to recruit new employees could impede
the achievement of our new corporate mission.
POSSIBLE RISKS ASSOCIATED WITH AGREEMENTS WITH RELATED PARTIES
Between 1993 and 1994, the Company entered into five agreements with
QuietPower Systems, Inc. ("QSI"). Environmental Research Information, Inc.
("ERI") owns 33% of QSI and Jay M. Haft, a director of the Company and former
Chairman of the Board of Directors, owns another 2% of QSI. Michael J. Parrella,
Chairman of the Board of Directors and Chief Executive Officer of the Company,
owns 12% of the outstanding capital of ERI and shares investment control over an
additional 24% of its outstanding capital stock. The Company's Senior Vice
President, Business Development, hired in January 2000, owns 20% of the
outstanding capital stock of ERI and 3% of the outstanding capital stock of QSI.
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 letter 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.
DELISTING FROM NASDAQ NATIONAL MARKET SYSTEM
Prior to the delisting of the Company's common stock as of the close of
trading on January 6, 1999, the Company's common stock was listed on the NASDAQ
National Market System ("NMS"). NASDAQ's rules require that in order to be and
remain listed on NMS, a company must (1) have net tangible assets of $4.0
million, (2) a market value of publicly held shares of $5.0 million, and (3) a
minimum bid price of $1.00 per share. NASDAQ will delist a company if it fails
to meet any of these requirements for thirty (30) consecutive trading days.
From April 30, 1998 to June 15, 1998, the minimum bid price for the
Company's common stock fell below $1.00. NASDAQ notified the Company on June 16,
1998 of the deficiency and gave the Company ninety (90) days to regain
compliance. The Company could regain compliance by meeting the standard for a
minimum of ten (10) consecutive business days during the ninety day grace
period.
As of the given deadline, September 14, 1998, the Company had failed to
achieve compliance. On that day, the Company requested a hearing with NASDAQ's
Hearings Department. The department held the hearing on November 5, 1998. On
January 6, 1999, NASDAQ notified the Company that it was delisting the Company's
stock at the close of trading that day. On January 20, 1999, the Company
requested a review of the delisting decision. On August 9, 1999, the NASDAQ
Review Counsel denied that appeal. Thus, NCT's common stock will continue to be
listed on the OTC Bulletin Board.
The loss of the NASDAQ/NMS designation could have a material adverse effect
on the Company's business prospects. NASDAQ provides brokers and others with
immediate access to the best bid and asked prices, as well as other information,
about our common stock. With the loss of the designation, stockholders may find
it more difficult to buy, sell and obtain pricing information about our common
stock. The Company also risks no longer qualifying as a "margin security" as
defined by the Federal Reserve Board.
The loss of the designation, coupled with a failure to have either (1) net
tangible assets in excess of $2.0 million or (2) average revenue of at least
$6.0 million for the last three years, could cause the common stock to become
subject to the SEC's "penny stock" rules. The penny stock rules impose
additional sales practice requirements on broker-dealers who sell penny stock
securities to people who are not established customers or accredited investors.
For example, the broker must make a special suitability determination for the
buyer and the buyer must give written consent before the sale. The rules also
require that the broker-dealer:
o send buyers an SEC-prepared disclosure schedule before completing the sale,
o disclose his commissions and current quotations for the security,
o disclose whether the broker-dealer is the sole market maker for the penny
stock and, if so, his control over the market, and
o send monthly statements disclosing recent price information held in the
customer's account and information on the limited market in penny stocks.
These additional burdens may discourage broker-dealers from effecting
transactions in penny stocks. Thus, if our common stock were to fall within the
definition of a penny stock, the Company's liquidity could be reduced. In turn,
there could be an adverse effect on the trading market for our common stock.
POSSIBLE VOLATILITY OF COMMON STOCK
Historically, the market prices for the securities of emerging and
high-technology companies have been highly volatile. Any future announcement
concerning the Company or its competitors could have a significant impact on the
price of our common stock.
BLANK CHECK PREFERRED STOCK
The Board of Directors has total discretion in the issuance and
determination of the rights and privileges of any shares of preferred stock
which the Company may issue in the future. Such rights and privileges may be
detrimental to the holders of common stock. The Company is authorized to issue
10.0 million shares of preferred stock. There were 924 shares of preferred stock
issued and outstanding at September 30, 2000. If the Company were to issue
preferred stock in the future, it could discourage or impede a tender offer,
proxy contest or other similar transaction involving a change in control. Other
shareholders may favor such a transaction. Management is not aware of any effort
at present, however, to acquire or take control of the Company.
RECENT AUTHORITATIVE ACCOUNTING GUIDANCE
SEC Staff Accounting Bulletin No. 101 ("SAB 101") was released on December
3, 1999 and provides the SEC staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. Generally, the
staff believes that revenue relating to nonrefundable, up-front fees in certain
arrangements for research and development activities should be deferred and
recognized over the term of the agreement. The Company adopted SAB 101 during
the second quarter of 2000, retroactive to January 1, 2000. The effect of the
adoption was deferral of first quarter 2000 revenue and net income of $3.9
million.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"). As amended by SFAS No. 137,
the Company is required to adopt SFAS 133 for all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because the Company currently
holds no derivative financial instruments and does not currently engage in
hedging activities, adoption of SFAS 133 is expected to have no material impact
on the Company's financial condition or results of operations.
LITIGATION
By a letter dated September 9, 1997, counsel to competitor Andrea
Electronics Corporation ("AECorp.") informed the Company that AECorp. believed
NCT was improperly using the term "ANR Ready" and infringing upon a trademark
owned by AECorp. Representatives of existing and/or potential customers also
have informed the Company that AECorp. has made statements claiming that the
Company's manufacture and/or sale of certain in-flight entertainment system
products infringe a patent owned by the competitor. The Company received a
notice dated March 24, 1998 from AECorp.'s intellectual property counsel
notifying the Company of its concerns but did not confirm any intention to file
suit against NCT. The Company, through special outside counsel, exchanged
correspondence with AECorp., but the parties could not come to any resolution.
The Company was informed by representatives of existing and/or potential
customers that AECorp. was continuing to infer that the Company was infringing.
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 the Company's
favor as follows:
o declare that the two AECorp. patents at issue are invalid and unenforceable
and that the Company's products do not infringe upon them;
o declare that the two AECorp. patents at issue are unenforceable due to
misuse by AECorp.;
o award the Company compensatory damages of no less than $5 million and
punitive damages of $50 million for AECorp.'s tortious interference with
the Company's prospective contractual advantages;
o enjoin AECorp. from stating or inferring that the Company's products or
their use are infringing any AECorp.-owned patents; and
o award any other relief the court deems appropriate.
On or about December 30, 1998, AECorp. filed its answer to the Company's
complaint. AECorp. generally denied the above allegations and brought
counterclaims against the Company. These include claims that the Company has:
o infringed the two AECorp. patents at issue and the "ANR Ready" trademark;
o violated the Lanham Act through NCT's use of the trademark; and
o unfairly competed with AECorp. by using the trademark.
The Company and NCT Hearing have since filed a Reply and requested that the
court dismiss the counterclaims and enter judgment in favor of the Company and
NCT Hearing. The Company and NCT Hearing also argued that AECorp. is prevented
from recovering under certain equitable theories and defenses. In the opinion of
management, after consultation with outside counsel, resolution of this suit
should not have a material adverse effect on the Company's financial position or
operations. However, in the event that the lawsuit does result in a substantial
final judgment against the Company, said judgment could have a material effect
on quarterly or annual operating results.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit in
a Maryland 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. 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. During the second quarter of 2000, the Company and SCI have had verbal
discussions regarding a settlement. The Court has scheduled a pre-trial
conference in this case for March 2001.
On September 16, 1999, the Company filed a Demand for Arbitration before
the American Arbitration Association in Wilmington, Delaware, against Top Source
Technologies, Inc. and Top Source Automotive, Inc. (the "Respondents") alleging,
among other things, breach of the asset purchase agreement (see "Recent
Developments" above), breach of fiduciary duty as a majority shareholder and
breach of obligation of good faith and fair dealing. The Company seeks
rescission of the purchase agreement and recovery of monies paid to TST for
TSA's assets. Concurrently, the Company 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 (see "Recent Developments" above); (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.
Management believes its position has merit. However, in the event the
Demand for Arbitration does result in a substantial judgment against the
Company, said judgment could have a material adverse effect on the Company's
financial position and quarterly or annual operating results.
USE OF PROCEEDS
All of the shares of common stock offered hereby are being offered by the
Selling Stockholders. The Company does not anticipate receiving any of the
proceeds from their sale. As described above, if the net proceeds from the sale
of the ITC Shares exceeds $2,400,000, the Company is entitled to receive the
excess from the Selling Shareholder. In addition, should the net proceeds from
the sale of shares of common stock placed with vendors and consultants in
discharge of past and future obligations of the Company exceed the value of
those obligations, the Company is entitled to receive the excess from the
Selling Shareholder. Any net proceeds received by the Company from the sale of
common stock by such Selling Stockholders will be used for working capital
purposes. The Company estimates that expenses payable in connection with this
registration statement will be approximately $60,000. There are no other
material incremental expenses of the Company attributable solely to the issuance
and distribution of the above-described shares.
SELLING SECURITY HOLDERS
The following table sets forth certain information with respect to the
Selling Stockholders. The shares of common stock set forth therein have been
included in the registration statement of which this prospectus forms a part
pursuant to registration commitments afforded to the Selling Stockholders by
contractual obligations. The Company will not receive any proceeds from the sale
of the shares by the Selling Stockholders except in circumstances where the net
proceeds from such sales exceed our obligations to the Selling Stockholder, if
ever. Certain Selling Stockholders, including ITC; Alliance Advisory Partners
Micro Technology Group, L.L.C.; Piedmont Consultants, Inc.; Thacher Vendig &
Company; Interep National Radio Sales; Michael Donahue; Kalkines, Arley, Zall &
Bernstein LLP; Lev & Berlin, P.C.; Mesa Partners, Inc.; Track Marketing
Partners; and Trillium Entertainment, LLC., may be acting as underwriters with
respect to the shares sold by them in this offering.
<TABLE>
<CAPTION>
Beneficial
Ownership
Beneficial of Shares
Ownership Number of of Common
of Shares Shares of Stock After
Relation- of Common Common Giving
ship Stock at Stock Effect to
with the September 19, Offered Proposed
Name of Selling Stockholder Company 2000 For Sale Sale
---------------------------------------------------------- --------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Carole Salkind 38,617,746 (1) 28,212,353(1) 10,405,393(2)
Bruce P. Rothman 27,875 27,875 -
Robert L. Stanley 27,875 27,875 -
James A. Steinkirchner 27,875 27,875 -
The Endeavor Capital Investment Fund, S.A. 5,546,995 (3) 5,422,000(3) 124,995 *
Austost Anstalt Schaan 11,641,917 (4) 7,187,500(4) 4,454,417 (5)
Balmore S.A. 12,334,417 (4) 7,187,500(4) 5,146,917 (6)
Zakeni Limited 5,625,000 (4) 5,625,000(4) -
Libra Finance S.A. 10,288,461 10,000,000 288,461 *
Jeff Arthur 2,546,816 2,546,816 -
LaJuanda Barrera 223,467 223,467 -
Robert Crisp 567,536 567,536 -
Steven Esrick 2,546,816 2,546,816 -
Allan Martin 1,209,560 1,209,560 -
Sun State Capital Management Inc. 311,019 311,019 -
Clara W. Boan, Trustee for the Clara W. Boan Trust 113,247 113,247 -
Cheryl Bray 70,779 70,779 -
Paul Finkel 113,247 113,247 -
Scott Hambley 56,623 56,623 -
Barry Marshall-Johnson 1,981,820 1,981,820 -
Hilda Marshall-Johnson and Barry Marshall-Johnson 113,247 113,247 -
Michelle Jordano 198,182 198,182 -
George Klein 113,247 113,247 -
Edward Lau 99,091 99,091 -
Jerrold Metcoff 5,783,397 1,894,909 3,888,488 (7)
Robert Millstein 410,520 410,520 -
Mitchell Pines 209,507 209,507 -
H. Sheparson Wild 113,247 113,247 -
David B. Wilson 4,310,707 1,412,388 2,898,319 *
Robert Wilson and Patricia Wilson 226,494 226,494 -
Infinite Technology Corporation 9,523,810 9,523,810 -
Roth Bros., Inc. 300,000 300,000 -
Edward J. Frey Jr. 272,023 272,023 -
Alliance Advisory Partners MicroTechnology Group, L.L.C. 332,300 332,300 -
Piedmont Consultants, Inc. 300,000 300,000 -
Thacher Vendig & Company 300,000 300,000
Interep National Radio Sales 57,143 57,143 -
Michael Donahue 51,429 51,429 -
Kalkines, Arley, Zall & Bernstein LLP 323,909 323,909 -
Lev & Berlin, P.C. 228,571 228,571 -
Mesa Partners, Inc. 42,857 42,857 -
Track Marketing Partners 707,829 707,829 -
Trillium Entertainment, LLC 71,429 71,429 -
------------- ------------- --------------
TOTAL 117,968,030 90,761,040 27,206,990
============= ============= ==============
</TABLE>
* Less than one percent (1.0%)
(1) Includes 23,529,412 shares of common stock for repayment of principal and
4,682,941 shares of common stock for payment of interest thereon which the
Company may issue upon conversion of secured convertible notes (the
"Notes") of the Company in the aggregate principal amount of $4.0 million
held by the Selling Stockholder. Under the amended terms of the Secured
Note Subscription Agreement and the Notes, the Notes are convertible into
common stock of the Company at any time from issuance to maturity at a
conversion price equal to the lesser of (i) $0.172, the lowest closing
transaction price for the common stock on the OTC Bulletin Board at any
time during September 1999, (ii) the average of the closing bid prices for
such common stock on the OTC Bulletin Board for the five consecutive
trading days ending one trading day prior to the date a conversion notice
is sent to the Company; or (iii) $0.17, but in no event may such conversion
price be less than $0.12 per share. Interest on the Notes is payable at the
prime rate published from time to time in The Wall Street Journal. The
shares of common stock for repayment of principal were calculated at an
assumed conversion price of $0.17, as provided for in (iii) above. The
shares of common stock for payment of interest were calculated at an
assumed compound interest rate of 9.5% per annum for an assumed two-year
period.
(2) Upon completion of the offering, the Selling Stockholder will own 3.2% of
the Company's issued and outstanding common stock.
(3) Includes Selling Stockholder's share of the number of shares of common
stock which the Company may issue upon conversion of the Company's Series G
Preferred Stock in accordance with the Certificate of Designations,
Preferences and Rights, as amended. Such share amount was determined by
dividing the stated value of the issued and outstanding Series G Preferred
Stock by 80% of an assumed 5-day average closing bid price of $0.30 plus
cumulative dividends thereon calculated at 4% per annum for a three-year
period, then applying a factor of 125% in accordance with the related
Registration Rights Agreement. The number of shares of common stock issued
upon conversion may be more or less than the amount shown depending on (i)
the length of time the Series G Preferred Stock is held, (ii) the
conversion price as determined under the Series G Conversion Formula, and
(iii) the application of the 24,000,000 amended share limited on the
Company's obligation to issue shares of common stock upon conversion of the
Series G Preferred Stock.
(4) Includes each Selling Stockholder's pro rata share of the shares of the
Company's common stock initially required to be registered pursuant to the
Registration Rights Agreement entered into in conjunction with the
ConnectClearly.com, Inc. private placement. Also includes each Selling
Stockholder's pro rata share of shares of the Company's common stock that
may be issued upon exchange of shares of Pro Tech's Series A Preferred
Stock. Such pro rata share has been determined for each Selling Stockholder
by dividing the stated value of Pro Tech Preferred Stock by 80% of an
assumed 10-day average closing bid price of $0.30, then applying a factor
of 115% in accordance with the related Registration Rights Agreement.
(5) Upon completion of the offering, the Selling Stockholder will own 1.4% of
the Company's issued and outstanding common stock.
(6) Upon completion of the offering, the Selling Stockholder will own 1.6% of
the Company's issued and outstanding common stock.
(7) Upon completion of the offering, the Selling Stockholder will own 1.2% of
the Company's issued and outstanding common stock.
PLAN OF DISTRIBUTION
The shares offered by this prospectus may be sold from time to time by
Selling Stockholders, who consist of the persons named under "Selling Security
Holders" above and those persons' pledgees, donees, transferees or other
successors in interest. The Selling Stockholders may sell the shares on the NASD
OTC Bulletin Board or otherwise, at market prices or at negotiated prices. They
may sell shares by one or a combination of the following:
o a block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchase by a broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which a broker solicits
purchasers;
o privately negotiated transactions;
o if such a sale qualifies, in accordance with Rule 144 promulgated under the
Securities Act rather than pursuant to this prospectus; and
o any other method permitted pursuant to applicable law.
In making sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated prior to the sale.
With regard to the shares offered hereby, the Selling Stockholders and any
broker-dealers that participate in the distribution may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
proceeds or commissions received by them, and any profits on the resale of
shares sold by broker-dealers, may be deemed to be underwriting discounts and
commissions.
If any Selling Stockholder notifies us that a material arrangement has been
entered into with a broker-dealer for the sale of shares through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, we will file a prospectus supplement, if required
pursuant to Rule 424(c) under the Securities Act, setting forth:
o the name of each of the participating broker-dealers,
o the number of shares involved,
o the price at which the shares were sold,
o the commission paid or discounts or concessions allowed to the
broker-dealers, where applicable,
o a statement to the effect that the broker-dealers did not conduct any
investigation to verify the information set out or incorporated by
reference in this prospectus, and
o any other facts material to the transaction.
We are paying the expenses incurred in connection with preparing and filing
this prospectus and the registration statement to which it relates, other than
selling commissions. In addition, in the event the Selling Stockholders sell
short shares of common stock issuable upon conversion of our Series G Preferred
Stock, this prospectus may be delivered in connection with such short sales and
the shares offered by this prospectus may be used to cover such short sales. To
the extent, if any, that the Selling Stockholders may be considered
"underwriters" within the meaning of the Securities Act, the sale of the shares
by them shall be covered by this prospectus.
We have advised the Selling Stockholders that the anti-manipulation rules
under the Exchange Act may apply to sales of shares in the market and to the
activities of the Selling Stockholders and their affiliates. In addition, we
will make copies of this prospectus available to the Selling Stockholders and
have informed them of the need for delivery of copies of this prospectus to
purchasers at or prior to the time of any sale of the shares offered hereby.
DESCRIPTION OF SECURITIES TO BE REGISTERED
This offering consists of an aggregate of 90,761,040 shares of common stock
of the Company, par value $0.01 per share, that may be offered for sale by the
Selling Stockholders. Each share of common stock has one vote in matters
presented to the shareholders. The Company has never paid dividends on its
common stock. Holders of the common stock will be subordinate to holders of the
Company's Preferred Stock with respect to the payment of dividends, if any, and
in any dissolution or liquidation of the Company.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Matters relating to the legality of 90,761,040 shares of common stock being
offered by this prospectus have been reviewed for the Company by its outside
counsel, Crowell & Moring LLP.
The consolidated financial statements of the Company at December 31, 1998
and 1999 and for the years ended December 31, 1997, 1998 and 1999 and the
related financial statement schedule included in this prospectus and as exhibits
have been audited by Richard A. Eisner & Company, LLP, independent auditors, as
set forth in their reports included therein (which contains an explanatory
paragraph relating to the existence of substantial doubt about the Company's
ability to continue as a going concern and which are based in part on the report
of Peters Elworthy & Moore, Chartered Accountants). The financial statements and
schedule referred to above are included in reliance upon such reports given upon
the authority of such firms as experts in auditing and accounting.
The financial statements of the Company's subsidiary, Noise Cancellation
Technologies (Europe) Limited, at December 31, 1998 and 1999 and for the years
ended December 31, 1997, 1998 and 1999 included in this prospectus and as
exhibits have been audited by Peters Elworthy & Moore, Chartered Accountants, as
set forth in their report included therein (which contains a paragraph on the
dependence on NCT Group, Inc. for continued financial support) and have been so
incorporated in reliance upon such report given upon the authority of such firm
as experts in auditing and accounting.
INFORMATION WITH RESPECT TO THE REGISTRANT
BUSINESS
A. General Development of Business
NCT Group, Inc. 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 DMC. DMC
is 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 microbroadcasting 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 October 31, 2000, the Company and its business units held 585 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:
o NoiseBuster(R) ANR communications headsets
o NoiseBuster(R) ANR consumer headphones
o ProActive(R) industrial/commercial ANR headsets
o Gekko(TM) flat speakers, frames, prints and subwoofers
o ClearSpeech(R) microphones, speakers and other products
o 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. 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, advertising and engineering and development
services. Historically, the Company derived the 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, and for
the nine months ended September 30, 2000 consisted of approximately 13% in
product sales, 2% in advertising, 1% in engineering and development services and
84% in technology license 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 (a division of Tennessee Gas
Pipeline Company, a wholly owned subsidiary of Tenneco, Inc.), AB Electrolux,
Ultra Electronics Ltd., The Charles Stark Draper Laboratory, Inc., Oki Electric
Industry Co., Ltd. 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 October 31,
2000, the Company had 88 employees, including 27 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 are located at 20 Ketchum Street, Westport,
Connecticut 06880; telephone number (203) 226-4447. The Company's corporate
headquarters and research and product development facility are located in
Linthicum, Maryland; telephone number (410) 636-8700. The Company's European
operations are conducted through its product development and marketing facility
in Cambridge, England. The Company also maintains a presence in the Pacific Rim.
The Company's DMC and Advancel operations are located in Westport, Connecticut.
The Company is organized into strategic business units which in May 2000,
were realigned to comprise three groups: communications, media and technology.
Each of the strategic business units is targeted to the commercialization of its
own products in specific markets. The media group currently consists of
Distributed Media Corporation, DMC's subsidiary, DMC Cinema, Inc. and NCT Audio
Products, Inc. The communications group currently includes of NCT Hearing
Products, Inc., NCT Hearing's subsidiary, Pro Tech Communications, Inc., Noise
Cancellation Technologies (Europe) Ltd., Midcore Software, Inc. and
ConnectClearly.com, Inc. The technology group currently consists of Advancel
Logic Corporation. 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, e-business 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"). ANR systems are particularly effective at
reducing low frequency noise. ANR creates sound waves that are equal in
frequency but opposite in phase to the noise. The illustration which follows
shows the relationship, in time, of a noise signal, an anti-noise signal and the
residual noise that results when they meet.
<PAGE>
ACTIVE NOISE REDUCTION
--------------------------------------------
[GRAPHIC OMITTED]
--------------------------------------------
Signal Enhancement. NCT's 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 ( "ASF"). The ClearSpeech(R)
algorithm removes noise from voice transmissions. ASF is effective against a
variety of stationary noises whose amplitude and pitch change slowly compared to
the spectral variations characteristic of human speech. ASF applications include
teleconferencing systems, cellular telephones and "airphones," telephone
switches, echo cancellers, and communications systems in which background noise
is predominant. ASF is currently available for use on three hardware platforms
including personal computers ("PCs") and fixed and floating digital signal
processors ("DSP").
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. 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 a personal
digital assistant ("PDA") and global positioning satellite ("GPS") navigation
systems.
ClearSpeech(R)-Reference Noise Filter ("RNF"). RNF isolates and removes
interfering signals, such as background radio, television, machine and siren
noise, so communications can be heard more clearly. RNF algorithm was designed
to remove interference from a desired signal in applications where a reference
signal for the interference is available.
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.
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., 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 patent,
which covers digital feedback control, and patents on multi-channel noise
control. The Company also has applied for patents on combined feedforward and
feedback control, control using harmonic filters, filters for signal enhancement
and speech filtering, control systems for noise shaping and others.
In 1994, the Company obtained a license for the exclusive rights to the 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 393 new patents.
The Company holds or has rights to 317 inventions as of October 31, 2000,
including 117 United States patents and over 468 corresponding foreign patents
for a total of 585 patents and related rights. The Company has pending 155 U.S.
and foreign patent applications. NCT's engineers have made 155 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:
Mark Field of Use
---------- -----------------
NCT logo Company logo
NoiseBuster(R) headsets
NoiseEater(R) HVAC systems
ClearSpeech(R) adaptive speech filter products
VariActive(R) headsets
ProActive(R) headsets
The Company has also applied for 12 trademarks including:
Mark Field of Use
--------- ------------------
Gekko(TM) flat audio speakers
ArtGekko(TM) flat audio speakers
Sweet Space(TM) flat audio speakers
Sight & Sound(TM) microbroadcasting
The Gekko(TM) and Art Gekko(TM) trademark applications have been challenged
by another trademark holder on the grounds of similarity and confusion in a
proceeding currently pending before the U.S. Trademark Office.
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 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 "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
$39. 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 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.
<PAGE>
Revenues
Product Revenues
The following table sets forth the percentage contribution of the separate
classes of the Company's products to the Company's product revenues for the year
ended December 31, 1999 (in thousands).
Year ended
December 31, 1999
---------------------
As a %
Products Amount of Total
--------- ---------
Hearing Products $ 682 30.9%
Communications 670 30.3%
Audio Products 856 38.8%
--------- ---------
Total $ 2,208 100.0%
========= =========
For the three and nine months ended September 30, 1999 and 2000, product
revenues consisted of the following (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Amount As a % of Total Amount As a % of Total
------------ ------------------- -------------- ----------------
Product 1999 2000 1999 2000 1999 2000 1999 2000
------------- ------ ----- --------- --------- ------- ------ -------- -------
Headsets $ 116 $213 20.2% 50.4% $ 524 $ 493 29.1% 40.9%
Communications 184 69 32.1% 16.3% 647 382 35.9% 31.7%
Audio 282 102 49.1% 24.1% 637 288 35.3% 23.9%
Other (8) 39 (1.4%) 9.2% (6) 42 (0.3%) 3.5%
------ ----- --------- --------- ------- ------ -------- -------
Total $ 574 $423 100.0% 100.0% $1,802 $1,205 100.0% 100.0%
====== ===== ========= ========= ======= ====== ======== =======
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).
Year ended
December 31, 1999
------------------------
As a %
Technology Amount of Total
---------- --------- ----------
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%
--------- ----------
Total $ 3,552 100.0%
========= ==========
Technology licensing fees and royalties were approximately 91% and 84% of
total revenues for the three and nine months ended September 30, 2000,
respectively. Such 2000 revenue was predominantly due to the revenue recognized
from the license to Infinite Technology Corporation of $3.6 million, license to
Pro Tech of $2.5 million and DMC licenses of approximately $1.8 million as
explained in "Management's Discussion and Analysis - Results of Operations."
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.
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 late 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 has continued this development in 2000.
<PAGE>
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:
----------------------------------------------------------------------
Date Initial
Relationship
Key Strategic Alliances Established Applications
------------------------------- --------------- ----------------------
Walker Manufacturing Company Nov. 1989 Mufflers, Industrial
(a division of Tennessee Gas Silencers and Other
Pipeline Company) Vehicular
Applications
AB Electrolux Oct. 1990 Consumer Appliances
Ultra Electronics Ltd. June 1991 Aircraft Cabin
Quieting Systems
The Charles Stark Draper July 1994 Microphones
Laboratory, Inc.
New Transducers Ltd. Mar. 1997 Flat Panel
Transducers
Oki Electric Industry Co., Oct. 1997 Communications
Ltd.
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 Mar. 1999 Communications
Products N.V.
----------------------------------------------------------------------
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 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.
<PAGE>
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, 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.
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 tiny2J(TM) for
Java(TM) ("T2J-processor core") to combine it with its proven secure
architecture and advanced nonvolatile memory technology, to offer a new
generation of secure microcontrollers for smartcard applications. The
T2J-processor core is the ideal architecture to accelerate the execution of
Javacard(TM)-based smartcard applications such as electronic purse credit/debit
card functions, ID cards that provide authorized access to networks and
subscriber identification modules that secure certain PCS cellular phones
against fraud.
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 October 31, 2000, the Company has an internal sales and
marketing force of 14 employees, 4 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.
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. For the nine months ended
September 30, 2000, three customers comprised approximately 76% of total
revenues and three customers each exceeded 10% of the September 30, 2000
accounts receivable, net of reserves. The Company does not require collateral or
other security to support customer receivables.
(in thousands)
As of December 31, 1999,
And for the year then ended
-----------------------------
Accounts
CUSTOMER Receivable Revenues
------------------------------------ ----------- ----------
STMicroelectronics SA and
STMicroelectronics S.r.l $ 33 $ 2,156
Lernout & Hauspie Speech Products - 800
N.V.
All Other 204 4,107
----------- ----------
Total $ 237 $ 7,063
=========== ==========
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 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 or as of the date hereof during 2000.
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, and $0.7 million and $3.4 million for the
three and nine months ended September 30, 2000, 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 88 employees as of October 31, 2000. None of such employees
is represented by a labor union. The Company considers its relationships with
employees to be satisfactory.
O. Acquisitions and Proposed Transactions
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
would be 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., a wholly owned subsidiary of Top Source
Technologies, Inc.. 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 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 "Legal Proceedings."
On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC. PPI, located in Phoenix, Arizona, designs and
manufactures high performance amplifiers, preamplifiers, subwoofers, signal
processors and speakers for the automotive audio aftermarket. PPI has a network
of over 600 dealers for its products throughout the U.S. NCT Audio 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.
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 August 18, 2000, Cinema acquired 100% of the outstanding capital stock
of Theater Radio Network, Inc., a provider of entertainment audio programming in
multiplex cinemas nationwide. In connection with this acquisition, the Company
issued 7,405,214 restricted shares of its common stock based upon a trailing
market price of $0.3376 per share, for a total value of $2,500,000 and a 7.5%
equity interest in Cinema.
On August 29, 2000, the Company acquired all of the outstanding capital
stock of Midcore Software, Inc., a Connecticut corporation and provider of
Internet infrastructure software for business networks, through a merger into
NCT Midcore, Inc., a newly formed, wholly-owned subsidiary of the Company, which
was subsequently renamed Midcore Software, Inc. In connection therewith, the
Company issued 13,913,355 restricted shares of its common stock based upon a
10-day weighted average closing bid price of $0.34626 per share, for an
aggregate value of $4,817,638. In addition, the purchase consideration includes
$1,725,000 to be paid by the Company in cash over 36 months based upon earned
royalties, as defined in the merger agreement. If after 36 months the total
royalty has not been earned, then the parties have the right to collect the
remaining unpaid balance through the issuance of the Company's common stock.
On September 12, 2000, NCT Hearing granted an exclusive license to Pro Tech
Communications, Inc. for rights to certain NCT technologies for use in light
weight cellular, multimedia and telephony headsets. In consideration for this
license, the Company received approximately 23.4 million shares of Pro Tech's
common stock representing approximately 84% of Pro Tech's issued and outstanding
shares. Pro Tech sells high quality, light weight headsets to high-profile
users, including the NASA space program and McDonald's. Pro Tech's common stock
currently trades under the symbol "PCTU" on the NASD's OTC Bulletin Board. As a
condition precedent to the transaction, the Company had arranged $1.5 million in
equity financing for Pro Tech in the form of convertible preferred stock of Pro
Tech. Such convertible preferred stock is convertible into shares of Pro Tech's
common stock or exchangeable for shares of NCT's common stock.
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.
<PAGE>
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."
PROPERTIES
The Company's principal executive office is located in Westport,
Connecticut where it leases approximately 18,700 square feet of space. The lease
expires in March 2010 and provides for monthly rental of approximately $28,000
for the first five years and $31,000 per month for the next five years. This
facility also houses the Company's subsidiary, DMC, and sales and marketing
offices which were previously located in Stamford, Connecticut. Effective August
31, 2000, this facility also houses the Company's subsidiary, Advancel.
The Company's corporate headquarters are 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. Utilizing early partial
termination features of the leases, the Company is in the process of downsizing
its space in the Maryland facility to approximately 19,000 square feet.
The Company's majority owned subsidiary, Advancel, had maintained its
research and engineering facility in San Jose, California, where it leased
approximately 6,000 square feet of space under a lease which expired in August
2000. The lease provided for monthly rentals of approximately $13,000, subject
to annual inflationary adjustments. Effective August 31, 2000, Advancel closed
the San Jose, California facility and relocated its operations to Westport,
Connecticut.
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.
Until July 2000, the Company maintained a sales and marketing office in
Tokyo, Japan, where it leased approximately 800 square feet of space under a
lease which expired in May 2000, and provided for a monthly rental of
approximately $3,000. Although the Company does not lease office space in Asia,
the Company continues to operate and maintain a presence in the Pacific Rim.
Pro Tech's executive, sales and manufacturing offices presently occupy
approximately 5,000 square feet of space located at 3309 and 3311 Industrial
25th Street, Fort Pierce, Florida, pursuant to three leases expiring on November
30, 2000. Pro Tech has entered into a new five-year lease agreement effective
February 1, 2001 for approximately 13,000 square feet at an average annual cost
of approximately $109,000.
LEGAL PROCEEDINGS
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 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, then its 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. During the second quarter of 2000, the Company and SCI have
had verbal discussions regarding a settlement. The Court has scheduled a
pre-trial conference in this case for March 2001.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott &
Co., Inc. ("AWC") and the Company in the United States District Court, Southern
District of New York. In the complaint, Mellon demands judgment against AWC and
the Company in the amount of $326,000 by reason of its having paid each of AWC
and the Company such sum when acting as escrow agent for the Company's private
placement of securities with certain institutional investors identified to the
Company by AWC. On or about July 27, 1998, AWC filed its Answer, Counterclaim
and Cross-claim requesting: (i) dismissal of Mellon's Amended Complaint against
AWC; (ii) commissions in the amount of $688,000 to be paid by the Company to
AWC; (iii) issuance to AWC of 784,905 shares of the Company's common stock
registered for resale under the Securities Act; (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. In March 2000, the
Company, Mellon and AWC reached an agreement, which was subsequently approved by
the Court, in which all matters were resolved, with no material financial or
other consequence to the Company.
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
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 was received in March 2000.
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 rescission 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. On April 25, 2000, both parties
reached a resolution of the matter. The parties withdrew all charges and claims
with the exception of the following. Regarding the Stock Purchase Agreement, NCT
and Advancel did not release the Claimants from any claims arising out of or
relating to Claimants' use, misuse, destruction or theft of NCT and/or
Advancel's property, confidential information, trade secrets or intellectual
property or any claims arising out of or relating to the Proprietary Information
and Invention Agreements. Also, NCT and Advancel did not release Claimants from
any of their obligations under the Non-compete Covenants. NCT has no further
obligations to the Claimants under the Stock Purchase Agreement as a result of
the resolution of this matter which was of no financial or other consequence to
the Company.
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 rescission 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.
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.
<PAGE>
MARKET PRICE OF THE REGISTRANT'S COMMON EQUITY AND RECENT SALES OF UNREGISTERED
SECURITIES IN PRIVATE PLACEMENTS
Prior to the January 6, 1999 delisting of the Company's common stock from
NASDAQ's National Market System, the Company's common stock was listed on the
NASDAQ/NMS under the symbol "NCTI". See "Risk Factors - Delisting from NASDAQ
National Market System." The Company's common stock currently trades on the NASD
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:
2000 1999 1998
------------------- --------------------- ---------------------
HIGH LOW HIGH LOW HIGH LOW
---------- ------- ----------- -------- --------- ----------
1st Quarter $1.660 $0.160 $0.440 $0.190 $0.938 $0.875
2nd Quarter $1.225 $0.370 $0.480 $0.230 $0.719 $0.656
3rd Quarter $0.520 $0.302 $0.285 $0.172 $0.563 $0.531
4th Quarter* $0.406 $0.195 $0.225 $0.115 $0.344 $0.281
* through 12/05/00
On December 4, 2000, the last reported sale of the Company's common stock
as reported by the NASD OTC Bulletin Board was $0.225. As of November 30, 2000,
there were approximately 55,000 holders of record of the Company's common stock.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a description of
the Company's sales of unregistered securities during the year ended December
31, 1999 and the period ended September 30, 2000.
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below is derived from
the historical financial statements of the Company. The data set forth below is
qualified in its entirety by and should be read in conjunction with the
Company's financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" that are included elsewhere in
this registration statement and prospectus. Operating results for the three and
nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------------------------
1995 1996 1997 1998 1999
------------------------------------------------------
<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)
========== =========== ========= ========= =========
Basic and Diluted loss per share $ (0.05) $ (0.11) $ (0.09) $ (0.12) $ (0.18)
========== =========== ========= ========= =========
Weighted average number of common
Shares outstanding(1) - basic and diluted 87,921 101,191 124,101 143,855 190,384
========== =========== ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In thousands except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Technology licensing fees and royalties $ 8 $ 7,316 $ 3,509 $ 7,906
Product sales, net 574 422 1,802 1,205
Advertising revenue - 242 - 242
Engineering and development services 128 29 1,303 59
---------- ---------- ---------- ----------
Total revenues $ 710 $ 8,009 $ 6,614 $ 9,412
========== ========== ========== ==========
COSTS AND EXPENSES:
Cost of product sales $ 634 $ 268 $ 1,717 $ 1,045
Royalty expense - 177 - 363
Cost of media sales - 410 - 410
Cost of engineering and development servies 761 27 1,664 54
Selling, general and administrative 2,318 2,705 7,981 5,380
Research and development 1,644 720 5,102 3,351
Other (income)/expense, net 2,292 (222) 2,599 2,920(6)
Write down of investment in unconsolidated
affiliate - - 2,385 -
Interest (income)/expense 16 284 (41) 1,655
---------- ---------- ---------- ----------
Total costs and expenses $ 7,665 $ 4,369 $ 21,407 $ 15,178
---------- ---------- ---------- ----------
NET (LOSS)/INCOME $ (6,955) $ 3,640 $ (14,793) $ (5,766)
========== ========== ========== ==========
Preferred stock beneficial conversion feature $ - $ 3,569 $ - $ 3,569
Preferred stock dividend requirement 5,327 375 10,567 1,104
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock 131 15 315 87
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (12,413) $ (319) $ (11,436) $ (10,526)
========== ========== ========== ==========
Basicand diluted income/(loss) per share $ (0.06) $ (0.00) $ (0.14) $ (0.04)
========== ========== ========== ==========
Weighted average common shares outstanding -
basic and diluted 188,009 296,377 173,453 281,815
========== ========== ========== ==========
</TABLE>
<PAGE>
December 31,
------------------------------------------------------
1995 1996 1997 1998 1999
------------------------------------------------------
BALANCE SHEET DATA: (In thousands)
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)
September 30, 2000
-------------------------
(In thousands, unaudited)
BALANCE SHEET DATA:
Total assets $ 37,936
Total current liabilities 15,127
Long-term debt 2,500
Accumulated deficit (137,241)
Stockholders' equity (deficit)(2) 14,051
Working capital (deficiency) (4,222)
(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 notes and pre-acquisition costs related to
PPI; and a $3.1 million charge for the impairment of goodwill.
(6) Includes a non-cash charge of $3.1 million for the impairment of goodwill
in NCT Audio.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included herein.
A. Forward-Looking Statements
Statements in this registration statement and prospectus 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, advertising 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
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 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 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 microbroadcasting 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.
As of October 31, 2000, the Company and its business units held 585 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. The Company's intellectual property allows it to
develop its major product lines.
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, advertising 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. For the nine months ended September 30, 2000,
operating revenues consisted of approximately 13% in product sales, 84% in
technology licensing fees and royalties 2% in advertising and 1% in engineering
and development services. 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 sources 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.
Presently, the Company is selling products through three of its alliances:
Walker is manufacturing and selling industrial silencers; Ultra is installing
production model aircraft cabin quieting systems in the SAAB 340 turboprop
aircraft; and Oki is integrating ClearSpeech(R) algorithm into large scale
integrated circuits for communications applications. 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 entitled to receive royalties
from Walker on its sales of industrial silencers, from Ultra on its sales of
aircraft cabin quieting systems and from Oki on its sales of communications
products. In addition, the Company is entitled to royalties from NXT on its sale
of certain audio products and from suppliers to United Airlines and other major
carriers for integrated noise cancellation active-ready passenger headsets.
Through the September 2000 acquisition of Pro Tech, the Company has
expanded its presence in the telecommunications headset market. Pro Tech is
currently expanding its headset product line for telephony, cellular and
multimedia communications and is positioning itself to increase market share in
the lightweight headset market.
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 $137.2 million on a
cumulative basis through September 30, 2000. 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.
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. The ability of the Company's revenue sources, especially its
technology license fees, royalties and product sales, to generate significant
cash for the Company's operations is critical to its 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. At September 30, 2000, cash
and cash equivalents were $0.4 million and working capital (deficit) was $(4.2)
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 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 September 30, 2000 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
Three months ended September 30, 2000 compared to three months ended September
30, 1999.
Total revenues for the three months ended September 30, 2000 totaled $8.0
million, compared to $0.7 million for three months ended September 30, 1999, or
an increase of $8.3 million.
The Company's technology licensing fees and royalties recognized totaled
$7.3 million for the three months ended September 30, 2000 compared to $8,000
for the three months ended September 30, 1999, an increase of $7.3 million,
primarily due to the Company's technology licensing fees agreements with ITC,
Vidikron and Pro Tech. In the ITC transaction, the Company combined both its
$6.0 million license agreement and its Strategic Alliance and Technology
Development Amendment which calls for future payment of $2.5 million to ITC, for
financial reporting purposes and recognized a net $3.6 million of revenue. In
the Vidikron transaction, compliance with EITF No. 86-29, "Nonmonetary
Transactions: Magnitude of Boot and the Exceptions to the Use of the Fair
Value," whereby the revenue recognized from the sale of two (2) technology
licenses to Vidikron was limited to $1.0 million as compared to the fair value
of such licenses of approximately $2.0 million. In addition, the Company
recognized approximately $2.5 million in license revenue, as limited by EITF
86-29, in the Company's acquisition of Pro Tech. In the transaction with Pro
Tech the Company granted an exclusive license to Pro Tech for rights to certain
NCT technologies for use in lightweight headsets in cellular, multimedia and
telephony markets. The Company received 23.4 million shares of Pro Tech's common
stock, net of shares issued to an outside consultant, representing approximately
83% of the common stock issued and outstanding. The amounts recognized on these
three licenses represent the license fee revenue applicable to the minority
interest shareholders.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
The Company continues its efforts to expand its media business segment and
for the three months ended September 30, 2000, generated advertising revenue of
$0.2 million and media revenue of $0.2 million with cost of sales associated
with such revenue amounting to approximately $0.4 million and $0.02 million,
respectively, for the same period.
Product sales were $0.4 million for the three months ended September 30,
2000 compared to $0.6 million for the three months ended September 30, 1999, a
decrease of $0.2 million primarily due to lack of cash to fund advertising and
the acquisition of new product inventory.
For the three months ended September 30, 2000 cost of product sales was
$0.3 million compared to $0.6 million for the three months ended September 30,
1999, a decrease of $0.3 million, or 50 %. The decrease was primarily due to
lower sales for the quarter ending September 30, 2000.
For the three months ended September 30, 2000, selling, general and
administrative expenses amounted to $2.7 million as compared to $2.3 million for
the three months ended September 30, 1999, an increase of $0.4 million, or
17.4%, primarily due to the costs associated with the growth of DMC.
For the three months ended September 30, 2000, research and development
expenditures amounted to $0.7 million as compared to $1.6 million for the three
months ended September 30, 1999, a decrease of $0.9 million or 56.3%. Research
and development formerly conducted at Advancel has been outsourced to ITC
commencing in the third quarter of 2000. The Company continues to focus on
products utilizing its hearing, audio, communications and microphone
technologies, products which have been developed within a short time period and
are targeted for rapidly emerging markets.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999.
For the nine months ended September 30, 2000, total revenues amounted to
$9.4 million, compared to $6.6 million for the nine months ended September 30,
1999, or an increase of 42.4%.
Consistent with the Company's objectives, technology licensing fees and
royalties increased to $7.9 million in the first nine months of 2000 as compared
to $3.5 million for the same period in 1999, an increase of $4.4 million,
primarily due to the technology license fee for the licensing of the Company's
TJ and T2J Technology to ITC and the licensing agreements with Pro Tech and
Vidikron. In the ITC transaction, the Company combined both its $6.0 million
license agreement and its Strategic Alliance and Technology Development
Amendment which calls for future payment of $2.5 million to ITC, for financial
reporting purposes and recognized a net $3.6 million of revenue. In the
transaction with Pro Tech, the Company granted an exclusive license to Pro Tech
for rights to certain NCT technologies for use in lightweight headsets in
cellular, multimedia and telephony markets. The Company received 23.3 million
shares of Pro Tech's common stock representing approximately 84% of the common
stock issued and outstanding. At September 30, 2000, the Company recognized
approximately $2.5 million of license fee revenue with respect to this
transaction as limited by EITF 86-29, in the Company's acquisition of Pro Tech.
In the transaction with Vidikron, the Company and DMC signed separate agreements
to license the use of certain technology for $1.0 million each with Vidikron.
The fair value of the license fees was $2.0 million but due to the Company's
compliance with EITF No. 86-29, the revenue the Company was allowed to recognize
from the sale of these two (2) technology licenses to Vidikron was limited to
$1.0 million. Such amounts recognized on each of these three licenses represent
the license fee revenue applicable to the minority interest shareholders.
During the second quarter of 2000, retroactive to January 1, 2000, the
Company adopted the accounting policies of SAB 101. Adopting SAB 101 effective
January 1, 2000, required the Company to restate its first quarter 2000
revenues, deferring recognition of $3.9 million of previously recognized DMC
license fees. Such deferred revenue is being amortized over three years in
accordance with the Company's interpretation of SAB 101. The Company has
recognized $0.8 million of such revenue in the nine months ended September 30,
2000.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
For the nine months ended September 30, 2000, product sales were $1.2
million compared to $1.8 million for nine months ended September 30, 1999, a
decrease of $0.6 million or 33.3%, primarily due to lack of cash to fund
advertising and the acquisition of new product inventory.
For the nine months ended September 30, 2000, cost of product sales
amounted to $1.0 million versus $1.7 million for nine months ended September 30,
1999, a decrease of $0.7 million or 41.2%. The decrease was primarily due to a
reduction of product sales for the nine months ended September 30, 2000 as
compared to the nine months ended September 30, 1999. For the nine months ended
September 30, 2000 product margin increased to 13.3% as compared to 4.7% during
the nine months ended September 30, 1999 due primarily to the sale of product
inventory and reduction of new product manufacture.
The gross margin on engineering and development services increased to 8.5%
for the nine months ended September 30, 2000 from (27.7%) for the same period in
1999 due primarily through attrition of Advancel employees and completion of
certain on going contracts.
For the nine months ended September 30, 2000, selling, general and
administrative expenses totaled $5.4 million as compared to $8.0 million for the
nine months ended September 30, 1999, a decrease of $2.6 million or 32.5%,
primarily due to a decrease in litigation and patent expenses as well as a
decrease in selling and marketing related expenses, primarily advertising and
headcount and travel related expenses.
For the nine months ended September 30, 2000, research and development
expenditures totaled $3.4 million as compared to $5.1 million for the nine
months ended September 30, 1999, a decrease of $1.7 million or 33.3%, primarily
through attrition of Advancel employees in 1999. Commencing in the third quarter
of 2000, research and development formerly conducted at Advancel has been
outsourced to ITC. The Company continues to focus on products utilizing its
hearing, audio, communications and microphone technologies, products which have
been developed within a short time period and are targeted for rapidly emerging
markets.
For the nine months ended September 30, 2000, other expenses include
one-time, non-cash charges of $3.1 million for impairment of goodwill. This is
related to the Company's ownership of NCT Audio, and results from conversions
and exchanges of NCT Audio's common stock and preferred stock for the Company's
common stock.
Year ended December 31, 1999 compared to 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 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
"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 "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 to year ended December 31, 1997.
Total revenues in 1998 decreased by 42% to $3.3 million from $5.7 million
in 1997. Total expenses during the same period increased by 12% or $1.9 million,
primarily reflecting the increasing efforts in sales and marketing to introduce
new products.
Technology licensing fees and royalties decreased by 78% or $2.8 million to
$0.8 million from $3.6 million in 1997. The 1997 amount is primarily due to the
$3.0 million technology license fee from Verity and other technology licensing
fees aggregating $0.6 million. See Note 3 - "Notes to Financial Statements".
Product sales increased in 1998 by 22% to $2.1 million from $1.7 million in
1997 reflecting the introduction of the Gekko(TM) flat speakers and increased
sales in the NoiseBuster(R) product line and the ClearSpeech(R) product line.
Revenue from engineering and development services remained constant at $0.4
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company.
Cost of product sales decreased 2% to $2.2 million from $2.3 million in
1997 and the product margin increased to (7)% from (32)% in 1997. The negative
margin of $0.1 million and $0.6 million in 1998 and 1997, respectively, were
primarily due to reserves for 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.
D. Liquidity and Capital Resources
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $137.2 million on a
cumulative basis through September 30, 2000. 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.
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 September 30, 2000 about the
Company's ability to continue as a going concern.
Pursuant to the amended Exchange Agreement between the Company and Austost
and Balmore (See Note 12 - "Notes to the Condensed Consolidated Financial
Statements" for further details), Austost and Balmore would retain 10,060,251
shares of the Company's Common Stock (the "Remaining Returnable Shares"), and
Austost and Balmore would agree to pay the Company up to $10.0 million in cash,
subject to monthly limitations, from proceeds that Austost and Balmore would
realize from their disposition of such Remaining Returnable Shares. Austost and
Balmore would realize a 10% commission on the proceeds from the sale of shares.
The fair market value of such shares at September 30, 2000 was approximately
$1.8 million, net of commissions.
At September 30, 2000, cash and cash equivalents were $0.4 million. Cash
balances are invested in interest bearing money market accounts. The Company's
investment objective is preservation of capital while earning a moderate rate of
return.
The Company's working capital deficit was $(4.2) million at September 30,
2000, compared to a deficit of $(3.3) million at December 31, 1999. This $0.9
million increase was primarily due to additional DBSS installation expenses
which utilized the remainder of the restricted cash at September 30, 2000.
For the nine months ended September 30, 2000, the net cash used in
operating activities was $7.3 million compared to $6.6 million for the nine
months ended September 30, 1999. The increase in net cash used in operating
activities for the nine months ended September 30, 2000 of $0.7 million is
primarily due to the reduction of accounts payable and accrued expenses.
At September 30, 2000, net inventory increased by $0.5 million from June
30, 2000 due primarily from the acquisition of Pro Tech.
The net cash provided by financing activities amounted to $6.3 million,
primarily due to the additional $1.0 million secured convertible note (see Note
8 - "Notes to the Condensed Consolidated Financial Statements" for further
details), net proceeds of $2.0 million from the Series G Preferred Stock
financing (see Note 12 - "Notes to the Condensed Consolidated Financial
Statements" for further details) and $1.0 million proceeds from the sale of
subsidiary common stock (see Note 12 - "Notes to the Condensed Consolidated
Financial Statements" for further details).
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
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 for working capital purposes and to consummate certain
acquisitions, 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.
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. 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.
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,
spouse of a former director and an accredited investor, subscribed and agreed to
purchase secured convertible notes of the Company in an aggregate principal
amount of $4.0 million. A secured convertible note for $1.0 million was signed
on January 26, 1999, and proceeds were received on January 28, 1999. The Note is
to mature on January 25, 2001 and earn interest at the prime rate as published
from 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) 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.
<PAGE>
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 could 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 $0.10 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
a number of fully paid and nonassessable shares of the Company's common stock,
subject to certain limitations pursuant to a predetermined conversion formula.
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 was
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
became 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 received 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.
The conversion terms of the Series F Preferred Stock provided that the
Company would not 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 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 would 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.
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. As such, 28,560,000 shares of common stock for the conversion of shares
of Series F Preferred Stock pursuant to the amended Series F Preferred Stock
Certificate of Designations were registered under Registration Statement No.
333-35210.
The Series F Subscription Agreement also provides that the Company would 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 would be obligated to redeem the excess of the stated value over the
amount permitted to be converted into common stock. Such additional amounts
would 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. At various dates through August 21, 2000 the other 7,526
shares of Series F Preferred Stock have been converted into 48,776,638 shares of
the Company's common stock. Presently, there are no shares of Series F Preferred
Stock outstanding.
During 2000, the Company entered into private placements of its securities
which provided additional funding. These transactions include the issuance of
Series G Convertible Preferred Stock, the issuance of Company common stock in
connection with the acquisition of TRN and Midcore, issuance of common stock to
fund the technology development by ITC, and the grant of warrants to Libra
Finance S.A. in connection with its role in the Company's financing efforts.
On March 6, 2000, the Company and an accredited investor entered into an
agreement under which the Company sold an aggregate stated value of $2.0 million
(2,004 shares) of Series G Convertible Preferred Stock (the "Series G Preferred
Stock") in a private placement pursuant to Regulation D of the Securities Act
for an aggregate of $1.75 million. 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. The Company received $1.0 million for the sale at the closing and
received the balance of $750,000 on June 28, 2000. 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) 80% of the average
of the closing bid price for the common stock on the securities market on which
the common stock is being traded for five (5) consecutive trading days prior to
the date of conversion; or (ii) the fixed conversion price of $0.71925. The
Company registered 4,008,000 shares of the Company's common stock, together with
an additional 160,320 shares for the 4% per annum dividend, that the Company may
issue upon the conversion of the Series G Preferred Stock and warrants for
167,500 shares which were issued in conjunction with the Series G Preferred
Stock transaction under Registration Statement No. 333-35210 filed on April 28,
2000, as amended June 13, 2000. The warrants are exercisable at $0.71925 per
share and expire on March 31, 2005. On various dates through September 30, 2000,
an aggregate of 1,080 shares of Series G Preferred Stock have been converted
into 4,037,728 shares of the Company's common stock. As of September 30, 2000,
there are 924 shares of Series G Preferred Stock outstanding.
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. In June 2000, a consultant surrendered 776,316
of such NCT shares of common stock to the Company for failure to fulfill its
performance obligations. During 2000, 2,415,467 shares of the Company's common
stock were issued to pay current and future amounts due to certain consultants
and suppliers. These shares of the Company's common stock are included under
this registration statement and prospectus.
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 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 Company's contingent obligations
hereunder expired on September 25, 2000.
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 by private placements of the Company's securities. The
Company anticipates seeking shareholder approval to authorize additional shares
of common stock in the future if it becomes necessary to continue to fund its
working capital requirements by raising additional funds. If such authorization
is not forthcoming or investors are not interested in buying our stock, 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 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
September 30, 2000 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.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
There were no material commitments for capital expenditures as of September
30, 2000, and no other material commitments are anticipated in the near future.
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no disagreements with independent accountants on accounting
and financial disclosure matters as of the Company's 1999 10-K filing, filed as
of April 14, 2000.
On July 17, 2000, the Company notified its independent accountants, Richard
A. Eisner & Co., LLP ("RAE") that the auditing services of RAE would no longer
be required. RAE's dismissal was approved by the Company's Board of Directors.
RAE originally was selected as the Company's independent accountants in January
1995 to audit the Company's consolidated financial statements as of and for the
year ended December 31, 1994.
During the two fiscal years ended December 31, 1999, and during the
subsequent interim period preceding their dismissal as the Company's independent
accountants, there were no disagreements with RAE on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of RAE,
would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report. RAE's reports on the Company's
consolidated financial statements as of and for the years ended December 31,
1999 and December 31, 1998, did not contain any adverse opinion and were not
qualified or modified as to audit scope or accounting principles.
Also on July 17, 2000, the Company engaged the accounting firm of Goldstein
Golub Kessler LLP ("GGK") as independent accountants to audit the consolidated
financial statements of the Company for the fiscal year ending December 31,
2000. The engagement was authorized by the Company's Board of Directors. During
the fiscal year ended December 31, 1999, and the subsequent period, neither the
Company nor any person on the Company's behalf consulted GGK regarding either
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's consolidated financial statements.
<PAGE>
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
September 30, 2000.
Name Age Positions and Offices
Michael J. Parrella 53 Chairman of the Board of Directors
and Chief Executive Officer
Jay M. Haft 64 Director
John J. McCloy II 62 Director
Samuel A. Oolie 64 Director
Cy E. Hammond 46 Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
Paul Siomkos, P.E. 54 Senior Vice President, Operations
Irving M. Lebovics 49 Senior Vice President, Global Sales
James A. McManus 60 President and Chief Executive Officer of
Distributed Media Corporation
Irene Lebovics 47 President and Secretary
Michael A. Hayes, Ph.D. 47 Senior Vice President, Chief Technical Officer
Jonathan M. Charry, Ph.D. 52 Senior Vice President, Corporate Development
Michael J. Parrella currently serves as Chairman of the Board of Directors
and Chief Executive Officer of the Company. Mr. Parrella was elected Chairman of
the Board of Directors of the Company on April 21, 2000, on which date he
relinquished the position of President. From November 1994 to July 1995, Mr.
Parrella served as Executive Vice President of the Company. Prior to that, from
February 1988 until November 1994, he served as President and Chief Operating
Officer 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 of
Directors and to raise new capital to restructure the Company and its research
and development efforts. Mr. Parrella also serves as Chief Executive Officer and
Acting President of NCT Audio a position to which he was elected on September 4,
1997. He became a director of NCT Audio on August 25, 1998. On January 5, 2000,
Mr. Parrella was elected Acting Chief Executive Officer of Advancel. Mr.
Parrella is a director of Advancel, serves as Chairman of the Board of DMC, and
serves as Chairman of the Board of NCT Hearing.
Jay M. Haft currently serves as a director of the Company and had served as
Chairman of the Board of Directors of the Company until April 21, 2000. From
November 1994 to July 1995, he served as President of the Company. He also
serves as a director of the Company's subsidiaries, NCT Audio, DMC, Advancel and
NCT Hearing. Mr. Haft is a strategic and financial consultant for growth stage
companies. 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).
Mr. Haft 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 a director of
numerous 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 served as a Commissioner on
the Florida Commission for Government Accountability to the People. Mr. Haft
serves as Treasurer of the Miami City Ballet and is a Trustee of Florida
International University.
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 Chairman of the Board of Directors of the Company from September 1986 to
November 1994. In addition, he served as the Company's 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 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. He is a
director of American University in Cairo and the Sound Shore Fund, Inc.
Sam Oolie currently serves as a director of the Company. Since his
appointment on September 4, 1997, Mr. Oolie has also served as a director of NCT
Audio. He is Chairman of NoFire Technologies, Inc., a manufacturer of
high-performance, fire-retardant products, and has held that position since
August 1995. Since July 1985, he has also served as Chairman of Oolie
Enterprises, an investment company. Mr. Oolie currently serves as a director of
Avesis, Inc. and Comverse Technology, Inc. He served as a director of CFC
Associates, a venture capital partnership, from January 1984 to December 1999.
Cy E. Hammond currently serves as Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary 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.
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, 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.
Irene Lebovics currently serves as 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.
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.
Jonathan M. Charry, Ph.D. currently serves as Senior Vice President of
Corporate Development. Dr. Charry was formerly Chairman and CEO of Digital Power
Networks, Inc. and Environmental Research Information, Inc. He has held
appointments as a Rockefeller Foundation Fellow and Assistant Professor at the
Rockefeller University, Adjunct Professor in Applied Social Psychology at New
York University, and Senior Research Scientist at the New York Institute of
Basic Research. He is a member of the American Psychological Association, The
Rockefeller University Chapter of Sigma Xi, the American Association for the
Advancement of Science, and the New York Academy of Sciences.
EXECUTIVE COMPENSATION
A. Executive Compensation and Summary Compensation Table
Set forth below is certain information for the three fiscal years ended
December 31, 1999, 1998 and 1997 relating to compensation received by the
Company's Chief Executive Officer and the other four most highly compensated
officers of the Company whose total annual salary and bonus for the fiscal year
ended December 31, 1999 exceeded $100,000 (collectively the "Named Executive
Officers").
<TABLE>
<CAPTION>
Securities
Underlying All
Name and Principal Other Annual Options/Warrants Other
Position Year Salary($) Bonus($) Compensation ($) SARs (#) Compensation
------------------------- -------- ------------ ----------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. Parrella(1) 1999 $120,000 $ 168,678 $ 22,008 6,812,500 (1) $ 6,418 (4)
Chairman of Board and 1998 120,000 205,889 20,615 12,000,000 (2) 5,918 (4)
Chief Executive Officer 1997 120,000 243,058 15,348 3,062,500 (3) 5,218 (4)
Cy E. Hammond 1999 94,000 92,941 12,000 175,000 (5) -
Senior Vice President, 1998 94,000 42,570 12,000 500,000 (2) -
Chief Financial Officer 1997 94,000 65,939 - 150,000 (6) -
Treasurer and
Assistant Secretary
Paul D. Siomkos 1999 150,000 - 12,000 150,000 -
Senior Vice President, 1998 105,192 (7) 78,125(7) 8,367 1,000,000 (2) -
Operations
Irving M. Lebovics 1999 150,000 (8) - 9,000 250,000 -
Senior Vice President, 1998 113,375 (9) - 4,125 600,000 (2) -
Global Sales 1997 - - - 100,000 (9) -
James A. McManus 1999 101,846 (10) 59,410(10) - 250,000 -
President and
Chief Executive Officer,
DMC
</TABLE>
(1) Mr. Parrella served as the Company's President and Chief Executive Officer
during fiscal 1999. On April 21, 2000, Mr. Parrella assumed the role of
Chairman of the Board of Directors and relinquished the position of
President. In addition to a grant under the 1992 Plan for the purchase of
5,000,000 shares, includes replacement grants of warrants and options that
would have otherwise expired in 1999. Includes a warrant to purchase
862,500 shares of the Company's common stock and an option granted under
the 1987 Plan to purchase 250,000 shares of the Company's common stock as
new grants due to the extension of the expiration dates from 1999 to
February 1, 2004. In addition, includes various options under the 1992 Plan
to acquire 699,500 shares of the Company's common stock as new grants due
to the extension of expiration dates from 1999 to February 1, 2004.
(2) On December 4, 1998, the following options were cancelled: as to Mr.
Parrella, 6,000,000 shares; as to Mr. Hammond, 250,000 shares; as to Mr.
Siomkos, 500,000 shares; and as to Mr. Lebovics, 300,000 shares. Such
options had been granted to employees on various dates in 1998 at exercise
prices up to $1.0625 per share and were replaced by new grants for the same
number of shares on December 4, 1998 at an exercise price of $0.3125 per
share, the then fair market value of the stock.
(3) Includes a warrant to purchase 862,500 shares of the Company's common stock
and an option granted under the 1987 Plan to purchase 250,000 shares of the
Company's common stock as new grants due to the extension of the expiration
dates for an additional two years.
(4) Consists of annual premiums for a $2.0 million personal life insurance
policy paid by the Company on behalf of Mr. Parrella.
(5) Includes a warrant to purchase 25,000 shares of the Company's common stock
as a new grant due to the extension of the expiration date from 1999 to
February 1, 2004.
(6) Includes a warrant to purchase 25,000 shares of the Company's common stock
as a new grant due to the extension of the expiration date for an
additional two years.
(7) Mr. Siomkos was employed by the Company effective March 23, 1998. The 1998
bonus represents the fair market value on the date of award of 100,000
shares of the Company's common stock issued in connection with his offer of
employment.
(8) Mr. Lebovics' compensation is comprised of a base salary of $120,000 per
annum, a non-recoverable draw of $30,000 per annum and an automobile
allowance of $9,000 per annum.
(9) Mr. Lebovics was employed by the Company effective February 13, 1998. From
January 1, 1996 to February 12, 1998, his services were rendered to the
Company by Enhanced Signal Processing ("ESP"), a firm in which Mr. Lebovics
was a principal. During that period, ESP received $0.5 million from the
Company, which included but was not limited to Mr. Lebovics' services.
While Mr. Lebovics was employed by ESP, the Company granted ESP options to
purchase 400,000 shares of the Company's common stock, of which options to
purchase 200,000 shares were assigned to Mr. Lebovics.
(10) Mr. McManus, President and Chief Executive Officer of DMC was hired
effective March 1, 1999. Prior to that and from April 1998, Mr. McManus
served as a consultant to DMC. In accordance with his letter of employment,
Mr. McManus is paid a salary at the rate of $120,000 per annum and a
guaranteed first year bonus of $70,000. The amount herein represents
payments for the period employed in 1999.
<PAGE>
B. Stock Options and Warrants
The following table summarizes the Named Executive Officers' stock option
and warrant activity during 1999:
Options and Warrants Granted in 1999
<TABLE>
<CAPTION>
Potential Realized Value
Shares Percent of at Assumed Annual
Underlying Total Options Rates of Stock Price
Options And Warrants Appreciation for Option
and Granted to Exercise and Warrant Term (6)
Warrants Empoyees Price Expiration ---------- ------------
Name Granted in 1999 (2) Per Share Date 5% 10%
--------------------- ------------- ------------ --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. Parrella 5,000,000 (1) 69.2% $0.41 04/13/09 $1,289,234 $3,267,172
862,500 (3) 66.0% (3) 0.75 02/01/04 178,720 394,924
250,000 (4) 100.0% (4) 0.50 02/01/04 34,535 76,314
15,000 (5) 93.4% (5) 0.6875 02/01/04 2,849 6,296
15,000 (5) 93.4% (5) 0.6876 02/01/04 2,850 6,297
500,000 (5) 93.4% (5) 0.6563 02/01/04 90,662 200,339
15,000 (5) 93.4% (5) 0.6562 02/01/04 2,719 6,009
15,000 (5) 93.4% (5) 0.7187 02/01/04 2,978 6,582
139,500 (5) 93.4% (5) 0.75 02/01/04 28,906 63,875
Cy E. Hammond 150,000 (1) 2.1% 0.41 04/13/09 38,667 98,015
25,000 (3) 1.9% (3) 0.75 02/01/04 5,180 11,447
Paul D. Siomkos 150,000 (1) 2.1% 0.41 04/13/09 38,677 98,015
Irving M. Lebovics 250,000 (1) 3.5% 0.41 04/13/09 64,462 163,359
James A. McManus 250,000 (1) 3.5% 0.41 04/13/09 64,462 163,359
</TABLE>
(1) Options to acquire these shares were granted pursuant to the 1992 Plan.
Vesting of such 1999 grants is as follows: 16% on the date of grant (April
13, 1999); 12% on each of the first and second anniversaries; 30% after the
first and second year of profitability but in no case later than five years
from the date of grant (April 13, 2004). These options were granted with an
exercise price of $0.41 per share, the fair market value of the Company's
common stock on the date of grant.
(2) Percentages for the grants described in (1) above are based upon the
aggregate total granted under the 1992 Plan less amounts granted to
consultants and non-employee directors (i.e., directors other than Messrs.
Haft and Parrella) and amounts attributable to replacement grants.
Percentages for grants attributable to the re-granting of options and
warrants which would have otherwise expired in 1999 are determined based
upon the aggregate total re-granted under the applicable plan less amounts
granted to non-employee directors and consultants.
(3) Represents replacement grants of warrants. These warrants are vested.
Expiration dates for such warrants to purchase common stock of the Company
were extended five years from the date re-granted. The expiration date for
such warrants had previously been extended for an additional two years from
the original expiration dates in 1997. The exercise price of such warrants
was not revised from the original exercise price and exceeded the fair
market value of the stock on the date re-granted.
(4) Represents replacement options under the 1987 Plan. These options are
vested.
(5) Represents replacement grants under the 1992 Plan. Expiration dates for
re-granted options were extended to expiration dates equal to the lesser of
five years from the date re-granted or ten years from the original grant
date. These options are vested. In the aggregate, these options represent
93.4% of the options re-granted under the 1992 Plan.
(6) The dollar amounts on these columns are the result of calculations of the
respective exercise prices at the assumed 5% and 10% rates of appreciation
compounded annually through the applicable expiration date. Actual gains
realized, if any, on stock option exercises and common stock holdings are
dependent on the future performance of the Company's common stock and
overall market conditions. 1999 Aggregated Option and Warrant Exercises and
December 31, 1999 Option and Warrant Values
The following table sets forth certain information with respect to the
exercise of options and warrants to purchase common stock during the fiscal year
ended December 31, 1999, and the unexercised options and warrants held and the
value thereof at that date, by each of the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Shares
Number Underlying Value of Unexercised
of Unexercised Options In-the-Money Options
Shares and Warrants at And Warrants at
Acquired December 31, 1999 December 31, 1999
on Value ---------------------------------- --------------------------
Name Exercise (#) Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
--------------------- ------------ ---------- --------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Michael J. Parrella - $ - 7,037,000 8,200,000 $ - $ -
Cy E. Hammond - - 518,718 276,000 - -
Paul D. Siomoks - - 274,000 376,000 - -
Irving M. Lebovics - - 540,000 210,000 - -
James A. McManus - - 100,000 150,000 - -
</TABLE>
10-Year Option/Warrant Repricings
The following table summarizes for the Named Executive Officers the stock
options and warrants which have been repriced during the ten-year period ending
December 31, 1999.
From time to time, the Company issues replacement grants for options and
warrants that would otherwise expire. In 1999, the Board of Directors re-granted
such options and warrants that would have otherwise expired in 1999 to
applicable employees and active consultants. All of such options and warrants
were fully vested. The new term for the replacement options was the lesser of 5
years from the date re-granted or 10 years from the original grant date.
Warrants were re-granted for 5 years. Such replacement options and warrants were
granted at the original exercise price which in every case exceeded the fair
market price of the Company's common stock of $0.24 on February 1, 1999, the
date of the new grant.
<PAGE>
Number of Market Length of
Securities Price of Exercise Option
Underlying Stock at Price at Term
Options/ Time of Time of Remaining
Warrants Repricing Repricing New at Date of
Reprice or or or Exercise Repricing
Amended Amendment Amendment Price Amend-
Name Date (#) ($) ($) ($) ment
-------------------- ------- --------- --------- --------- ------- --------
Michael J. Parrella 2/1/99 862,500 $0.24 $0.75 $0.75 0 years
2/1/99 250,000 $0.24 $0.50 $0.50 0 years
2/1/99 15,000 $0.24 $0.6875 $0.6875 0 years
2/1/99 15,000 $0.24 $0.6876 $0.6876 0 years
2/1/99 500,000 $0.24 $0.6563 $0.6563 0 years
2/1/99 15,000 $0.24 $0.6562 $0.6562 0 years
2/1/99 15,000 $0.24 $0.7187 $0.7187 0 years
2/1/99 139,500 $0.24 $0.75 $0.75 0 years
12/4/98 6,000,000 $0.3125 $1.0625 $0.3125 9 years
1/22/97 862,500 $0.50 $0.75 $0.75 0 years
1/22/97 250,000 $0.50 $0.50 $0.50 0 years
Cy E. Hammond 2/1/99 25,000 $0.24 $0.75 $0.75 0 years
12/4/98 250,000 $0.3125 $1.0313 $0.3125 9 years
1/22/97 25,000 $0.50 $0.75 $0.75 0 years
Paul D. Siomkos 12/4/98 500,000 $0.3125 $0.7813 $0.3125 9 years
Irving M. Lebovics 12/4/98 300,000 $0.3125 $1.0313 $0.3125 9 years
C. Compensation Arrangements with Certain Officers and Directors
Mr. Parrella's incentive bonus is equal to 1% of the cash received by the
Company upon the execution of transactions with unaffiliated parties. Such
arrangement has been in effect since the initial award by the Compensation
Committee on February 1, 1996.
In February 1998, the Company entered into an employment agreement with
Paul Siomkos, its then new Senior Vice President of Operations. The term of this
employment agreement is four years. Such agreement provides for a base salary of
$150,000 and that the amount of any incentive bonus be at the sole discretion of
the Company. Mr. Siomkos receives an automobile allowance of $1,000 per month.
In March 1999, the Company hired James McManus as the President and Chief
Executive Officer of the Company's subsidiary, DistributedMedia.com, Inc. In
conjunction therewith, the Company entered into a letter of employment which
provides for a base annual salary of $120,000, annual 5% increases of his base
salary, a guaranteed first year bonus of $70,000 and $50 per site installed with
DMC's DBSS (digital broadcasting station system) during Mr. McManus' first year
of employment.
D. Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1999, John McCloy, Stephen
Carlquist and Sam Oolie served as members of the Compensation Committee of the
Company's Board of Directors. Each of Messrs. McCloy, Carlquist and Oolie also
served as members of the Board of Directors of NCT Audio since their respective
appointments in 1997. Mr. Carlquist resigned as director of the Company and
director of NCT Audio on September 23, 1999. Prior to his resignation, Mr.
Carlquist was Chairman of the Compensation Committee.
The Company and QSI entered into nine agreements from 1993 to 1997. The
Company's relationship with QSI was terminated in fiscal 1999. See "Certain
Relationships and Related Transactions" for further information.
On January 26, 1999, Carole Salkind, an accredited investor and spouse of
Mort Salkind, a director of the Company who resigned on January 19, 1999,
subscribed and agreed to purchase secured convertible notes of the Company in an
aggregate principal amount of $4.0 million. During fiscal 1999, the Company
received an aggregate of $3.0 million proceeds for the secured convertible
notes. The Company received the remaining $1.0 million installment on March 27,
2000. See "Certain Relationships and Related Transactions" for further
information.
E. Board Compensation Committee Report on Executive Compensation
Mr. Haft served as Chairman of the Company's Board of Directors since July
17, 1996. He also has served as Chairman of the Executive Committee of the Board
of Directors since July 1995. From November 1994 through July 1995, Mr. Haft was
Chief Executive Officer of the Company. Mr. Haft continues to receive
compensation from the Company. The total compensation paid by the Company to Mr.
Haft in 1999, 1998 and 1997 was $85,500 ($12,500 of which was paid in shares of
common stock of the Company in lieu of cash), $96,000 and $96,000, respectively.
At the June 24, 1999 meeting of the Board of Directors, Mr. Haft's total
compensation was reduced to an annual rate of $75,000 effective July 1, 1999. On
February 1, 1999, Mr. Haft was re-granted a warrant to acquire 218,500 shares of
common stock of the Company at an exercise price of $0.75. In addition, he was
re-granted options under the Directors' Plan to acquire an aggregate of 538,500
shares of common stock as follows: 90,000 shares at an exercise price of
$0.6875; 45,000 shares at an exercise price of $0.6562; 45,000 shares at an
exercise price of $0.7187; and 358,500 shares at an exercise price of $0.75.
These warrants and options are fully vested and expire February 1, 2004. These
replacement grants were all at exercise prices in excess of the fair market
value on the date re-granted. On April 13, 1999, Mr. Haft was granted an option
under the 1992 Plan to acquire 100,000 shares of common stock at an exercise
price of $0.41 per share, the fair market value of the stock on the grant date.
The vesting requirements are as follows: 40% immediately and 30% on each of the
first and second anniversaries of the date of grant. These options expire on
April 13, 2009.
Mr. Parrella has served as the Company's Chief Executive Officer since June
19, 1997 and has served as its President since July 1995. Mr. Parrella's base
salary for 1999 was continued at the rate of $120,000 per annum, the same as his
base salary in 1998 and 1997. Mr. Parrella also is eligible for a cash incentive
bonus. As previously reported, in May 1995, in recognition of the efforts of Mr.
Parrella under the difficult conditions the Company was then facing and in
recognition of the importance of his continued services to the then ongoing
restructuring program, the Board of Directors awarded Mr. Parrella a cash bonus
of 1% of the cash to be received by the Company upon the establishment of
certain significant business relationships. Such percentage bonus was made
contingent upon the execution of relevant documentation or other form of closing
with regard to these relationships. Effective January 1, 1996, this percentage
bonus arrangement was extended indefinitely until modified or terminated by the
Company's Board of Directors. Under this percentage bonus arrangement during
1999, Mr. Parrella was paid a bonus of $168,678. Also in 1999, the Company paid
Mr. Parrella a $22,008 annual automobile allowance and the Company paid the
$5,918 annual premium for a $2.0 million personal life insurance policy on his
behalf.
Certain of Mr. Parrella's options and warrants which would have expired in
1999 were re-granted to him on February 1, 1999 as follows: a warrant for
862,500 shares at an exercise price of $0.75 per share and expiration date of
February 1, 2004, an option under the 1987 Plan to acquire 250,000 shares of
common stock at $0.50 per share and expiration date of February 1, 2004 and
various options under the 1992 Plan aggregating 699,500 shares at prices ranging
from $0.66562 to $0.75 with expiration date of February 1, 2004. The exercise
price of all of Mr. Parrella's replacement grants exceeded the fair market value
of the stock on the date of the new grants. On April 13, 1999, Mr. Parrella was
granted an option under the 1992 Plan to purchase 5,000,000 shares of the
Company's common stock. The exercise price is $0.41 per share which was the
closing bid price of the Company's common stock on April 13, 1999, the date of
grant. Vesting requirements are as follows: as to 800,000 shares, immediately;
as to 600,000 shares, April 13, 2000; as to another 600,000 shares, April 13,
2001; as to 1,500,000 shares, after the first year of profitability; as to the
remaining 1,500,000 shares, after the second year of profitability. Regardless
of the vesting requirements, the options become exercisable after five years, or
after April 13, 2004.
The base salary of Mr. Hammond, as Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary, was $94,000 for 1999, the same as
his salary in 1998 and 1997. On April 13, 1999, Mr. Hammond was elected to the
additional offices of Treasurer and Assistant Secretary of the Company. In
recognition of Mr. Hammond's efforts in connection with the Company's private
placements of convertible preferred stock, generating other cash resources for
the Company and other accomplishments, Mr. Hammond was awarded a cash bonus of
$92,941 in 1999. Also in 1999, the Company paid Mr. Hammond a $12,000 annual
automobile allowance. On February 1, 1999, a warrant for the purchase of 25,000
shares of common stock which had an expiration date in 1999, was re-granted with
an expiration date of February 1, 2004 at an exercise price of $0.75. Such
exercise price exceeded the fair market value of the common stock on the date of
the replacement grant. On April 13, 1999, Mr. Hammond was granted an option to
acquire 150,000 shares of common stock of the Company at an exercise price of
$0.41 per share, the fair market value on the date of grant. The vesting
requirements are as follows: 16% immediately, 12% on each of the first and
second anniversaries of the date of grant, 30% after each of the first and
second years of profitability of the Company, but in any case, all options
become exercisable after the fifth anniversary.
The base salary of Mr. Siomkos, as Senior Vice President, Operations, was
$150,000. In addition, Mr. Siomkos was paid a $12,000 automobile allowance. Mr.
Siomkos was granted an option to acquire 150,000 shares of common stock of the
Company at an exercise price of $0.41 per share, the fair market value on the
date of grant. The vesting requirements are as follows: 16% immediately, 12% on
each of the first and second anniversaries of the date of grant, 30% after each
of the first and second years of profitability of the Company, but in any case,
all options become exercisable after the fifth anniversary.
Mr. Lebovics joined the Company in February 1998 as Vice President,
Worldwide Sales, at a base salary of $95,000. In addition to the salary, Mr.
Lebovics received a non-refundable draw of $25,000 per annum. On July 15, 1998,
Mr. Lebovics' base salary was increased to $120,000 and the non-refundable draw
was also increased to $30,000 per annum. Mr. Lebovics was promoted to Senior
Vice President, Global Sales in January 1999. Mr. Lebovics was granted an option
to acquire 250,000 shares of common stock of the Company at an exercise price of
$0.41 per share, the fair market value on the date of grant. The vesting
requirements are as follows: 16% immediately, 12% on each of the first and
second anniversaries of the date of grant, 30% after each of the first and
second years of profitability of the Company, but in any case, all options
become exercisable after the fifth anniversary.
The base salary and guaranteed first year bonus of Mr. McManus, President
and Chief Executive Officer of DMC, were established at $120,000 and $70,000,
respectively. Mr. McManus was granted an option to acquire 250,000 shares of
common stock of the Company at an exercise price of $0.41 per share, the fair
market value on the date of grant. The vesting requirements are as follows: 40%
immediately and 30% on each of the first and second anniversaries of the date of
grant.
Because of the Company's uncertain business prospects and limited cash
resources, in determining the appropriate levels of compensation for the Chief
Executive Officer and the Named Executive Officers, the Compensation Committee
did not deem it relevant or useful to consider the compensation practices of
other companies having more certain prospects and greater cash resources.
Rather, the Compensation Committee took into consideration the contribution
being made to the Company's development efforts by these officers; the absence,
in certain instances, of any material increase in salary or other cash
compensation for any of the past several years; the importance of the Company
continuing to receive their services and the benefit of their knowledge of the
Company's technologies; and the Company's ability to provide them with adequate
levels of remuneration either in cash or in securities. Accordingly, it is the
opinion of the Committee that the above-described rates of compensation are
reasonable in light of these factors and the financial condition of the Company.
THE COMPENSATION COMMITTEE
By: /s/ SAM OOLIE
/s/ JOHN MCCLOY
<PAGE>
F. Performance Graph
Note: The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
NCT Group, Inc.
Stock Performance (1)
[OBJECT OMITTED]
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NCT 100 83 54 150 37 18
-----------------------------------------------------------------------------------------
NASDAQ Composite Index 100 141 174 213 300 546
-----------------------------------------------------------------------------------------
NASDAQ Electronic Components
Stock Index (2) 100 166 286 300 464 910
-----------------------------------------------------------------------------------------
</TABLE>
(1) Assumes an investment of $100.00 in the Company's common stock and in each
index on December 31, 1994.
(2) The Company has selected the NASDAQ Electronic Components Stock Index
composed of companies in the electronics components industry listed on the
NASDAQ National Market System. Because the Company knows of no other
publicly owned company whose business consists solely or primarily of the
development, production and sale of systems for the cancellation or control
of noise and vibration by electronic means and other applications of the
Company's technology, it is unable to identify a peer group or an
appropriate published industry or line of business index other than the
NASDAQ Electronics Components Stock Index.
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of August 31, 2000, information
concerning the shares of common stock beneficially owned by each person who, to
the knowledge of the Company, is (1) the holder of 5% or more of the common
stock of the Company, (2) each person who presently serves as a director of the
Company, (3) the five most highly compensated executive officers of the Company
(including the Company's Chief Executive Officer) in the last fiscal year, and
(4) all executive officers and directors of the Company as a group. Except as
otherwise noted, each beneficial owner has sole investment and voting power with
respect to the listed shares.
Amount and
Nature of Approximate
Beneficial Percentage
Name of Beneficial Owner Ownership (1) Of Class
(1)
------------------------------- -------------- ------------
Michael J. Parrella 10,145,888 (2) 3.1%
Jay M. Haft 2,032,681 (3) *
John J. McCloy 2,581,998 (4) *
Sam Oolie 1,049,813 (5) *
Cy E. Hammond 686,718 (6) *
Paul D. Siomkos 447,000 (7) *
Irving M. Lebovics 1,220,517 (8) *
James A. McManus 230,000 (9) *
All Executive Officers and 20,014,165 (10) 5.9%
Directors as a
Group (10 persons)
Carole Salkind 38,617,746 (11) 11.1%
* Less than one percent.
(1) Assumes the exercise of currently exercisable options or warrants to
purchase shares of common stock. The percentage of class ownership is
calculated separately for each person based on the assumption that the
person listed on the table has exercised all options and warrants currently
exercisable by that person, but that no other holder of options or warrants
has exercised such options or warrants.
(2) Includes 862,500 shares issuable upon the exercise of currently exercisable
warrants, 9,274,500 shares issuable upon the exercise of currently
exercisable options and 8,888 shares held in custody for Mr. Parrella's
dependent children.
(3) Includes 218,500 shares issuable upon the exercise of currently exercisable
warrants, 10,000 shares from a stock award granted by the Company and
1,703,500 shares issuable upon the exercise of currently exercisable
options.
(4) Includes 862,500 shares issuable upon the exercise of currently exercisable
warrants, 5,000 shares from a stock award granted by the Company, 1,135,000
shares issuable upon the exercise of currently exercisable options and
300,000 shares held by the John J. McCloy II Family Trust for which the
named person's spouse serves as trustee, shares as to which Mr. McCloy has
no voting or investment power.
(5) Includes 25,000 shares from a stock award granted by the Company, 710,000
shares issuable upon the exercise of currently exercisable options, 75,000
shares owned by the named person's spouse, as to which Mr. Oolie has no
voting or investment power, 20,000 shares owned by Oolie Enterprises, and
44,313 shares held by the Oolie Family Support Foundation.
(6) Includes 25,000 shares issuable upon the exercise of currently exercisable
warrants and 661,718 shares issuable upon the exercise of currently
exercisable options.
(7) Includes 447,000 shares issuable upon the exercise of currently exercisable
options. In February 2000, Mr. Siomkos sold 100,000 shares of the Company's
common stock that had been granted to him by the Company as a stock
incentive award upon his employment in 1998.
(8) Includes 630,000 shares issuable upon the exercise of currently exercisable
options and 590,517 shares owned jointly with his spouse. Irving Lebovics
is married to Irene Lebovics who is also employed by the Company and serves
as its President and Secretary. Ms. Lebovics holds a warrant to acquire
201,250 shares and various options to acquire an aggregate of 2,391,300
shares of common stock of the Company, shares as to which Mr. Lebovics
disclaims beneficial ownership.
(9) Includes 215,000 shares issuable upon the exercise of currently exercisable
options and 10,000 shares owned by the named person's spouse, as to which
Mr. McManus has no voting or investment power.
(10) Includes 2,169,750 shares issuable to 3 directors and 2 executive officers
of the Company upon the exercise of currently exercisable warrants,
16,195,018 shares issuable to 10 persons upon the exercise of currently
exercisable options, and 40,000 shares from stock awards issued by the
Company to 3 directors. Excludes options to acquire 14,779,000 shares from
the Company which are not presently exercisable but become exercisable over
time by the 10 executive officers and directors of the Company as a group.
(11) Carole Salkind's address is 801 Harmon Cove Towers, Secaucus, New Jersey
07094. Includes 23,529,412 shares issuable upon the conversion of secured
convertible notes calculated at a conversion price of $0.17 per share on
the aggregate of four million dollars ($4,000,000) of convertible secured
notes outstanding. Such beneficial ownership indicated herein is based on
information contained in Form 13D/A filed by Ms. Salkind with the
Securities and Exchange Commission on April 3, 2000. Also includes
4,682,941 shares of common stock for interest calculated at 9.5% per annum
for two years on the secured convertible notes. Excludes shares
beneficially owned by Morton Salkind, Ms. Salkind's husband and a former
director of the Company, as to which she has no voting or investment power.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Transactions with Management and Certain Relationships
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, former Chairman of the Board of Directors of
the Company, owns another 2% of QSI. Michael J. Parrella, Chairman of the Board
of Directors and Chief Executive Officer of the Company, owns 12% of the
outstanding capital of ERI and shares investment control over an additional 24%
of its outstanding capital. The Company's Senior Vice President, Business
Development, hired in January 2000, owns 20% of the outstanding capital stock of
ERI and 3% of the outstanding capital stock of QSI. 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.
B. Indebtedness of Management
On January 26, 1999, Carole Salkind, an accredited investor and spouse of a
former director of the Company, 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 time in The Wall Street Journal from its 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 April 15, 2000, as extended. On various dates,
the Holder purchased additional installments of the remaining $3.0 million
principal amount of the secured convertible notes. As of March 31, 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.
C. Compliance with Section 16(a) of the Exchange Act
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% shareholders 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 all filing requirements applicable to its officers, directors, and
greater than 10% shareholders were complied with during the period from January
1, 1999 to December 31, 1999.
<PAGE>
OTHER INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by the
registrant with respect to the offering described in this registration
statement:
Securities and Exchange Commission
registration fee $7,403.92
Legal Fees and expenses 30,000.00*
Accounting fees and expenses 16,000.00*
Miscellaneous expenses 6,596.08*
------------
Total $60,000.00*
============
* Estimated
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VIII of the Registrant's Restated Certificate of Incorporation
provides as follows:
(a) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person of
whom he or she is the legal representative, is or was a director or
officer, of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law, as
the same exists or may hereafter be amended (but, in the case of any
such amendment only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service
was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only
upon delivery to the Corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled
to be indemnified under this Section or otherwise. The Corporation
may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect
as the foregoing indemnification of directors and officers.
(b) If a claim under paragraph (a) of this Section is not paid in full by
the Corporation within thirty days after a written claim has been
received by the Corporation, the claimant may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if
any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it
permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on the Corporation. Neither
the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because
he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable
standard of conduct.
(c) The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred
in this Section shall not be exclusive of any right which any person
may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, by-law, agreement, vote of stockholders
or disinterested directors or otherwise.
(d) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation
Law.
<PAGE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements. The following financial statements are filed as
part of this Registration Statement Form S-1.
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
Condensed Consolidated Statements of Operations and Condensed Consolidated
Statements of Comprehensive (Loss)/Income for the three and nine months ended
September 30, 1999 and 2000 (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1999 and September 30,
2000 (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
(a) (2) Financial Statement Schedules.
Report of Independent Auditors with Respect to Schedule.
Schedule II. Valuation and Qualifying Accounts.
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
consolidated financial statements filed or notes thereto.
(a) (3) Exhibits.
The exhibits listed on the accompanying Index to Exhibits are filed as part of
this Registration Statement on Form S-1.
<PAGE>
NCT Group, Inc.
Index to Exhibits Item 16(a)(3)
Exhibit
Number Description of Exhibit
2(a) Stock Purchase Agreement dated August 21, 1998, among the Company,
Advancel Logic Corporation and the Holders of the Outstanding
Capital Stock of Advancel Logic Corporation, incorporated by
reference to Exhibit 2 of the Company's Registration Statement on
Form S-3 (Registration No. 333-64967) filed on September 30, 1998,
as amended by Amendment No. 1 thereto filed on October 30, 1998.
3(a) Restated Certificate of Incorporation of the Company filed in the
Office of the Secretary of State of the State of Delaware on
September 23, 1996, incorporated herein by reference to Exhibit 3(a)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
3(b) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
State of the State of Delaware on June 20, 1997, incorporated by
reference to Exhibit 3(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
* 3(c) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
State of the State of Delaware on October 21, 1998.
3(d) Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on October 29, 1997,
incorporated by reference to Exhibit 3(c) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
3(e) Certificate of Increase in the Number of Shares in the Series C
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on November 14,
1997, incorporated by reference to Exhibit 3(d) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
3(f) Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on July 24, 1998,
incorporated by reference to Exhibit 4 of the Company's Registration
Statement on Form S-3 (Registration No. 333-64967) filed on
September 30, 1998, as amended by Amendment No. 1 thereto filed on
October 20, 1998.
3(g) By-laws of the Company, incorporated herein by reference to Exhibit
3(b) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
3(h) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
the State of Delaware on July 29, 1999, incorporated herein by
reference to Exhibit 3(h) to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1999.
3(i) 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 18, 2000, incorporated by reference to
the Company's Registration Statement on Form S-8 filed on October
13, 2000.
4(a) Warrant to purchase 125,000 shares of common stock of the Company at
a purchase price of $.20 per share issued to John J. McCloy II,
incorporated herein by reference to Exhibit 4(a) to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of common stock of the
Company at a purchase price of $.75 per share issued to John J.
McCloy II, incorporated herein by reference to Exhibit 4(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(c) Warrant #BW-2-R to purchase 862,500 shares of common stock of the
Company at a purchase price of $.75 per share issued to Michael J.
Parrella, incorporated herein by reference to Exhibit 4(c) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(d) Warrant #BW-4-R to purchase 201,250 shares of common stock of the
Company at a purchase price of $.75 per share issued to Irene
Lebovics, incorporated herein by reference to Exhibit 4(d) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(e) Warrant #BW-9-R and #BW-46-R to purchase 218,500 shares of common
stock of the Company at a purchase price of $.75 per share issued to
Jay M. Haft, incorporated herein by reference to Exhibit 4(e) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(f) Secretary's Certificate dated March 20, 1998, as to a two (2) year
extension of the expiration dates of the Warrants described in 4(b),
(c), (d) and (e) above, incorporated herein by reference to Exhibit
4(f) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
4(g) Warrant Agreement, dated as of January 20, 1988, between the Company
and American Stock Transfer Company, as Warrant Agent, relating to
certain warrants to purchase common stock of the Company at a price
of $.40 per share issued to Sam Oolie, Oolie Enterprises, John J.
McCloy II, and Michael J. Parrella, incorporated herein by reference
to Exhibit 4(g) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
* 4(h) Certificate of Designations, Preferences and Rights of Series E
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on December 24,
1998.
4(i) Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of the State of Delaware on September 8, 1999.
4(j) 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.
4(m) Certificate of Amendment of the Certificate of Designations,
Preferences and Rights of Series G Convertible Preferred Stock of
the Company filed in the Office of the Secretary of the Sate of
Delaware on September 27, 2000, incorporated herein by reference to
Exhibit 4(m) of the Company's Pre-effective Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-47084)
filed on October 25, 2000.
5 Opinion of Crowell & Moring LLP.
** 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.
<PAGE>
** 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.
<PAGE>
10(l)(1) Letter Agreement between Tenneco Automotive, a division of Tennessee
Gas Pipeline Company, and the Company dated November 22, 1993,
incorporated herein by reference to Exhibit 10(a) to the Company's
Current Report on Form 8-K dated November 22, 1993.
10(l)(2) Stock Purchase Agreement between Tenneco Automotive, a division of
Tennessee Gas Pipeline Company, and the Company dated December 14,
1993, incorporated herein by reference to Exhibit 10(b) to the
Company's Current Report on Form 8-K dated November 24, 1993.
10(l)(3) Transfer Agreement among Walker Manufacturing Company a division
of Tennessee Gas Pipeline Company, Walker Electronic Mufflers, Inc.,
the Company, NCT Muffler, Inc., Chaplin Patents Holding Co., Inc.
and Walker Noise Cancellation Technologies dated November 15, 1995,
incorporated herein by reference to Exhibit 10(l)(3) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. ***
10(l)(4) License Agreement between Chaplin Patents Holding Co., Inc.
and Walker Electronic Mufflers, Inc. dated November 15, 1995,
incorporated herein by reference to Exhibit 10(l)(4) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. ***
10(l)(5) License Agreement between the Company and Walker Electronic
Mufflers, Inc. dated November 15, 1995, incorporated herein by
reference to Exhibit 10(l)(5) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995. ***
10(l)(6) Support, Research and Development Agreement among Walker Electronic
Mufflers, Inc., the Company, NCT Muffler, Inc. and Chaplin Patents
Holding Co., Inc. dated November 15, 1995, incorporated herein by
reference to Exhibit 10(l)(6)to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995. ***
10(l)(7) Mutual Limited Release by (i) the Company, NCT Muffler, Inc. and
Chaplin Patent Holding Co., Inc. and (ii) Tennessee Gas Pipeline
Company and Walker Electronic Mufflers, Inc. dated November 15,
1995, incorporated herein by reference to Exhibit 10(l)(7) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. ***
10(m) Technical Assistance and License Agreement, dated March 25, 1991,
among the Company, Foster Electric Co., Ltd. and Foster/NCT Headsets
International Ltd., incorporated herein by reference to Exhibit
10(nn) to Amendment No. 1 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.***
10(m)(1) Amendment, dated April 16, 1991, to Technical Assistance and License
Agreement, dated March 25, 1991, among the Company, Foster
Electric Co., Ltd. and Foster/NCT Headsets International Ltd.,
incorporated herein by reference to Exhibit 10(nn)(1) to Amendment
No. 5 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991.
10(m)(2) Letter Agreement between Foster Electric Co., Ltd. and the
Company dated November 22, 1993, incorporated herein by reference
to Exhibit 10(b) to the Company's Current Report on Form 8-K dated
November 22, 1993.
10(m)(3) Letter agreement among Foster Electric Co., Ltd., Foster NCT
Headsets International, Ltd. and the Company dated July 28, 1995,
incorporated herein by reference to Exhibit 10(a) of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
10(n) Joint Development Cooperation Agreement, dated June 28, 1991,
between AB Electrolux and the Company, incorporated herein by
reference to Exhibit 10(oo) to Amendment No. 3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.***
10(n)(1) Amendments to the Joint Development Cooperation Agreement, dated
June 28, 1991, between AB Electrolux and the Company as set forth in
the First Amendment to Joint Development Cooperation Agreement,
dated September 1, 1993, between AB Electrolux and the Company,
incorporated herein by reference to Exhibit 10(z)(1) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.***
10(n)(2) Second Amendment to Joint Development Cooperation Agreement, dated
January, 1994 between AB Electrolux and the Company, incorporated
herein by reference to the Exhibit 10(z)(2) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
10(o) Letter Agreement, dated March 19, 1992, between Siemens Medical
Systems, Inc. and NCT Medical Systems, Inc., incorporated herein by
reference to Exhibit 10(pp) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10(o)(1) OEM Agreement between the Company and Siemens AG dated November 24,
1993, incorporated herein by reference to Exhibit 10(a) to the
Company's Current Report on Form 8-K dated November 24, 1993.
** 10(p) Noise Cancellation Technologies, Inc. Stock Incentive Plan (as
adopted April 14, 1993, and amended through August 16, 1996),
incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 filed with the Securities &
Exchange Commission on August 30, 1996 (Reg. No. 333-11213).
10(q) Master Agreement between Noise Cancellation Technologies, Inc. and
Quiet Power Systems, Inc. dated March 27, 1995, incorporated herein
by reference to Exhibit 10(a) of the Company's Current Report on
Form 8-K filed with the Securities and Exchange commission on
August 4, 1995.
10(q)(1) Letter Agreement between Noise Cancellation Technologies, Inc. and
QuietPower Systems, Inc. dated April 21, 1995, incorporated herein
by reference to Exhibit 10(b) of the Company's Current Report on
Form 8-K filed August 4, 1995.
10(q)(2) Letter Agreement between Noise Cancellation Technologies, Inc. and
QuietPower Systems, Inc. dated May 21, 1996, incorporated herein
by reference to Exhibit 10(q)(2) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
10(q)(3) Letter Agreement between Noise Cancellation Technologies, Inc. and
QuietPower Systems, Inc. dated April 9, 1997, incorporated herein
by reference to Exhibit 10(q)(3) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
10(r) Asset Purchase Agreement, dated September 16, 1994, between Active
Noise and Vibration Technologies, Inc. and the Company, incorporated
herein by reference to Exhibit 2 to the Company's Current Report on
Form 8-K filed September 19, 1994.
** 10(s) Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors (as adopted November 15, 1994 and amended through
August 16, 1996), incorporated herein by reference to Exhibit 4 to
the Company's Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on August 30, 1996
(Reg. No. 333-11209).
10(t) Variation of Teaming Agreement between Noise Cancellation
Technologies, Inc. and Ultra Electronics Limited dated April 6,
1995, incorporated herein by reference to Exhibit 10(c) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(1) Agreement for Sale and Purchase of Part of the Business and Certain
Assets among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited and Ultra Electronics Limited
dated April 6, 1995, incorporated herein by reference to Exhibit
10(d) of the Company's Current Report on Form 8-K filed August 4,
1995.
10(t)(2) Patent License Agreement among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated April 6, 1995, incorporated herein by
reference to Exhibit 10(e) of the Company's Current Report on Form
8-K filed August 4, 1995.
10(t)(3) License Agreement between Chaplin Patents Holding Co., Inc.
and Ultra Electronics Limited dated April 6, 1995, incorporated
herein by reference to Exhibit 10(f) of the Company's Current Report
on Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated May 15, 1995, incorporated herein by
reference to Exhibit 10(g) of the Company's Current Report on Form
8-K filed August 4, 1995.
** 10(u) Agreement among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited, Dr. Andrew John Langley,
Dr. Graham Paul Eatwell and Dr. Colin Fraser Ross dated April 6,
1995, incorporated herein by reference to Exhibit 10(h) of the
Company's Current Report on Form 8-K filed August 4, 1995.
<PAGE>
10(v) Securities Purchase Agreement dated April 8, 1996, by and among the
Company and Kingdon Associates, L.P., Kingdon Partners, L.P. and M.
Kingdon Offshore NV, together with Exhibit A-1 thereto, Form of
Secured Convertible Note and Exhibit A-2 thereto, Registration
Rights Agreement, incorporated herein by reference to Exhibit 10(a)
of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
10(v)(1) Security Agreement dated April 10, 1996, between the Company and
Kingdon Associates, L.P., Kingdon Partners, L.P. and M. Kingdon
Offshore NV, dated August 13, 1996, incorporated herein by reference
to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
10(v)(2) Notices of Exercise of Options to Purchase common stock by Kingdon
Associates, L.P., Kingdon Partners, L.P., and M. Kingdon Offshore,
NV, dated August 13, 1996, incorporated by reference to Exhibit
10(c) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996.
10(v)(3) Notices of Conversion of Secured Convertible Notes by Kingdon
Associates, L.P., Kingdon Partners, L.P. and M. Kingdon Offshore
NV, dated August 13, 1996, incorporated herein by reference to
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
10(w)(1) Cross License Agreement dated April 15, 1997, among Verity Group
plc, New Transducers Limited and Noise Cancellation Technologies,
Inc., incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.***
10(w)(2) Security Deed dated April 14, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
10(w)(3) Common Stock Purchase Option dated April 15, 1997, from Noise
Cancellation Technologies, Inc. to Verity Group plc, incorporated by
reference to Exhibit 10(c) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
10(w)(4) Letter Agreement dated April 17, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
10(x)(1) New Cross License Agreement dated September 27, 1997, among Verity
Group plc, New Transducers Limited, Noise Cancellation Technologies,
Inc. and NCT Audio Products, Inc., incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.
10(x)(2) Master License Agreement dated September 27, 1997, between New
Transducers Limited and NCT Audio Products, Inc., incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
10(x)(3) Letter Agreement dated September 27, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
10(x)(4) License Agreement dated September 4, 1997, between Noise
Cancellation Technologies, Inc. and NCT Audio Products, Inc.,
incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
10(y) License Agreement dated July 15, 1998, between the Company and NCT
Hearing Products, Inc., incorporated by reference to Exhibit 10 of
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
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.
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., incorporated by reference to Exhibit 10(ae)
of the Company's Annual Report on Form 10-K filed on April 14, 2000.
10(af) Letter Agreements dated December 1, 1999, between the Company and
holders of Series F Preferred Stock: Atlantis Capital Fund; Canadian
Advantage Limited Partners; Dominion Capital Fund, Ltd.; The
Endeavour Capital Fund, S.A.; and Sovereign Partners, LP.
incorporated by reference to Exhibit 10(af) of the Company's
Registration Statement on Form S-1 filed on April 20, 2000.
10(ag) Strategic Alliance and Technology License Agreement entered into as
of May 8, 2000 among NCT Group, Inc., Advancel Logic Corporation and
Infinite Technology Corporation, incorporated by reference to
Exhibit 10(ag) of the Company's Pre-effective Amendment No. 1 to the
Registration Statement on Form S-1 filed on June 13, 2000.
10(ah) License Agreement Amendment dated effective June 30, 2000, between
NCT Group, Inc., Advancel Logic Corporation and Infinite Technology
Corporation, incorporated herein by reference to Exhibit 10 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2000.
10(ai) Agreement and Plan of Merger dated August 29, 2000, among NCT Group,
Inc, NCT Midcore, Inc. and Midcore Software, Inc., incorporated
herein by reference to Exhibit 2 of the Company's Current Report
on Form 8-K filed on September 13, 2000.
10(aj) Stock Purchase Agreement dated August 18, 2000 by and between NCT
Group, Inc., DistributedMedia.com, Inc., DMC Cinema, Inc. and Jeff
Arthur, LaJuanda Barrera, Robert Crisp, Steven Esrick and Alan
Martin, incorporated herein by reference to Exhibit 10(aj) of the
Company's Pre-effective Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-47084) filed on October 25,
2000.
10(ak) Securities Purchase and Supplemental Exchange Rights Agreement dated
August 10, 2000 by and among ConnectClearly.com, Inc. NCT Group,
Inc. and Austost Anstalt Schaan, Balmore S.A. and Zakeni Limited,
incorporated herein by reference to Exhibit 10(ak) of the Company's
Pre-effective Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 333-47084) filed on October 25, 2000.
10(al) Strategic Alliance and Technology Development Amendment dated
effective June 20, 2000, between NCT Group, Inc., Advancel Logic
Corporation and Infinite Technology Corporation, incorporated
herein by reference to Exhibit 10(al) of the Company's Pre-effective
Amendment No. 1 to Registration Statement on Form S-1 (Registration
No. 333-47084) filed on October 25, 2000.
10(am) Securities Purchase and Supplemental Exchange Rights Agreement
dated September 29, 2000 by and among Pro Tech Communications, Inc.,
NCT Group, Inc., Austost Anstalt Schaan, Balmore S.A. and Zakeni
Limited, incorporated herein by reference to Exhibit 10(am) of the
Company's Pre-effective Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-47084) filed on October 25, 2000.
10(an) Stock Purchase Agreement between NCT Hearing Products, Inc.
and Pro Tech Communications, Inc. dated as of September 13, 2000.
10(ao) License Agreement between NCT Hearing Products, Inc. and Pro Tech
Communications, Inc. dated September 12, 2000.
* 21 Subsidiaries
23(a) Consent of Richard A. Eisner & Company, LLP
23(b) Consent of Peters Elworthy & Moore, Chartered Accountants.
23(c) Consent of Crowell & Moring LLP is contained in Exhibit 5.
* 27 Financial Data Schedule.
* 99(a) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding audited financial
statements of the Company's U.K. subsidiaries and reports of Peters
Elworthy & Moore, Chartered Accountants, on their audits of such
financial statements as at December 31, 1998 and for the year ended
December 31, 1998.
99(b) Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
Cancellation Technologies, Inc. regarding audited financial
statements of the Company's U.K. subsidiaries and reports of Peters
Elworthy & Moore, Chartered Accountants, on their audits of such
financial statements as at December 31, 1997 and for the year ended
December 31, 1997, incorporated by reference to Exhibit 99(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
99(c) Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
Cancellation Technologies, Inc. regarding audited financial
statements of the Company's U.K. subsidiaries and reports of Peters
Elworthy & Moore, Chartered Accountants, on their audits of such
financial statements as at December 31, 1996 and for the year ended
December 31, 1996, incorporated by reference to Exhibit 99(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
* 99(d) Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
Cancellation Technologies, Inc. regarding confirmation that the
accounts of the Company's U.K. subsidiaries for the year ended
December 31, 1998 were audited under auditing standards
substantially similar to US General Accepted Auditing Standards.
99(e) Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
Cancellation Technologies, Inc. regarding confirmation that the
accounts of the Company's U.K. subsidiaries for the year ended
December 31, 1997 were audited under auditing standards
substantially similar to US General Accepted Auditing Standards,
incorporated by reference to Exhibit 99(d) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
99(f) Employment Agreement by and between the Company and Paul D. Siomkos,
dated February 26, 1998, incorporated by reference to Exhibit 99 to
the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1998.
<PAGE>
* 99(g) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding confirmation that
the accounts for the year ended December 31, 1996 were audited under
auditing standards substantially similar to US General Accepted
Auditing Standards.
-----------------------
* Filed with the Company's Annual Report on Form 10-K for its fiscal
year ended December 31, 1998.
** Pertains to a management contract or compensation plan or
arrangement.
*** Confidential treatment requested for portions of this document. Such
portions have been omitted from the document and identified by
asterisks. Such portions also have been filed separately with the
Commission pursuant to the Company's application for confidential
treatment.
<PAGE>
FINANCIAL STATEMENT INDEX
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-2
Consolidated Statements of Operations and Consolidated
Statement 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
Condensed Consolidated Statements of Operations and Condensed
Consolidated Statements of Comprehensive (Loss)/Income for the
three and nine months ended September 30, 1999 and 2000 (unaudited) F-48
Condensed Consolidated Balance Sheets as of December 31, 1999
and September 30, 2000 (unaudited) F-49
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 2000 (unaudited) F-50
Notes to Condensed Consolidated Financial Statements (unaudited) F-51
<PAGE>
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
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
1998 1999
---------- -----------
ASSETS (Note 8)
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.
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended December 31,
1997 1998 1999
--------- --------- ---------
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.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Years ended December 31,
1997 1998 1999
--------- --------- ---------
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.
<PAGE>
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 Preferred Stock Convertible Preferred Stock Convertible 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 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 - - - - - -
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 - $ - - $ - - $ -
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to Financial Statements.
<PAGE>
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 Accumu-
----------------------------- ----------------------------- Paid-In lated
Shares Amount Shares Amount Capital Deficit
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <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 of $53 - - 20,665 207 9,889 -
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 onbeneficial 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 stock - - 17,738 178 2,454 -
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)
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to Financial Statements.
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
<TABLE>
<CAPTION>
Unearned Expenses
Portion of to be paid
Cumulative Stock Compensatory with Treasury Stock
Translation Subscription Option/ Common ------------------
Adjustment Receivable Warrant Stock Shares Amount Total
----------------------------------------------------------- -------- --------- ---------
<S> <C> <C> <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 optionsand 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)
=========================================================== ================== =========
</TABLE>
See notes to Financial Statements.
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands of dollars) 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
========= ========= =========
</TABLE>
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.
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
1. Background:
NCT Group, Inc. ("NCT" or the "Company") designs, develops, licenses,
produces and distributes 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.
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.
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.
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 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.
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):
<PAGE>
Years ended December 31,
-------------------------------------
Joint Venture/Alliance 1997 1998 1999
---------------------------------------- ----------- ----------- ----------
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
=========== =========== ==========
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
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 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
tiny2J(TM) for Java(TM) ("t2J-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.
<PAGE>
4. Accounts Receivable:
Accounts receivable comprise the following (in thousands):
December 31,
----------------------------
1998 1999
-------------- -----------
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
============== ===========
5. Inventories:
Inventories comprise the following (in thousands):
December 31,
----------------------------
1998 1999
-------------- -----------
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
============== ===========
6. Property and Equipment:
Property and equipment comprise the following (in thousands):
Estimated December 31,
Useful Life ----------------------
(Years) 1998 1999
------------- --------- ----------
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
========= ==========
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.)
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 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 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 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.
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 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 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.
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.
On September 4, 1998, the Company acquired the issued and outstanding
common stock of Advancel. The acquisition was pursuant to the Stock Purchase
Agreement. The consideration for the acquisition of the Advancel common stock
consisted of an initial payment of $1.0 million payable by the delivery of
1,786,991 shares of the Company's treasury stock together with future payments,
payable in cash or in common stock of the Company at the election of the
Advancel Shareholders based on Advancel's earnings before interest, taxes,
depreciation and amortization for each of the calendar years 1999, 2000, 2001
and 2002. While each earnout payment may not be less than $250,000 in any
earnout year, there is no maximum earnout payment for any earnout year or for
all earnout years in the aggregate. To determine the number of shares of the
Company's common stock issuable in connection with an earnout payment, each
earnout payment is to be calculated using the average of the closing prices of
the Company's common stock for each of the twenty (20) business days following
the 21st day after the release of Advancel's audited year-end financials for an
earnout year. At that time, Advancel Shareholders will elect to receive payment
in cash or common stock of the Company. In the event that the Company is unable
to maintain the registration statement covering the resale of 1,786,991 shares
effective for at least thirty (30) days, each Advancel Shareholder shall have
the right, until April 15, 1999, to have the Company redeem up to one-third of
the initial payment shares acquired by such Advancel Shareholder by paying in
cash therefor a sum calculated by using the formula used to determine the number
of shares of the Company's common stock to be delivered in payment of the
initial payment of $1.0 million. The 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:
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
============
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.
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
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 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.
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 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 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.
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 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.
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
Contract Average Average
Range of Number Life Exercise Number Exercise
Plan Exercise Price Outstanding (In Years) Price Exercisable Price
---------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1987 Plan $0.50 to $0.63 1,350,000 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>
The following table summarizes information about warrants outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Contract Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (In Years) Price Exercisable Price
------------------------------------------------------ ------------------------
$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
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 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):
Research
Net and
Operating Development
Year Losses Credits
------------- ------------ -------------
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
============ =============
(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):
December 31,
-------------------------
1998 1999
----------- ----------
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 $ - -
=========== ==========
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 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.
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, 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 rescission 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 rescission 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.
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):
Year Ending
December 31, Amount
----------------------- -----------
2000 $ 862
2001 841
2002 380
2003 380
2004 380
Thereafter 2,038
-----------
Total $ 4,881
===========
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).
17.Business Segment Information:
<TABLE>
<CAPTION>
(in thousands of dollars)
-------------------------
NCT NCT Communi- Advancel Grand
Audio Hearing cations Europe DMC Logic Corp Segments Other Total
----------------------------------------------------------------------------------------------
<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 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 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):
December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
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
============ ============ ============
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
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 collateralized 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.
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Technology licensing fees and royalties $ 8 $ 7,316 $ 3,509 $ 7,906
Product sales, net 574 422 1,802 1,205
Advertising revenue - 242 - 242
Engineering and development services 128 29 1,303 59
---------- ---------- ---------- ----------
Total revenues $ 710 $ 8,009 $ 6,614 $ 9,412
========== ========== ========== ==========
COSTS AND EXPENSES:
Cost of product sales $ 634 $ 268 $ 1,717 $ 1,045
Royalty expense - 177 - 363
Cost of media sales - 410 - 410
Cost of engineering and development servies 761 27 1,664 54
Selling, general and administrative 2,318 2,705 7,981 5,380
Research and development 1,644 720 5,102 3,351
Other (income)/expense, net 2,292 (222) 2,599 2,920
Write down of investment in unconsolidated
affiliate (Note 7) - - 2,385 -
Interest (income)/expense 16 284 (41) 1,655
---------- ---------- ---------- ----------
Total costs and expenses $ 7,665 $ 4,369 $ 21,407 $ 15,178
---------- ---------- ---------- ----------
NET (LOSS)/INCOME $ (6,955) $ 3,640 $ (14,793) $ (5,766)
========== ========== ========== ==========
Preferred stock beneficial conversion feature $ - $ 3,569 $ - $ 3,569
Preferred stock dividend requirement 5,327 375 10,567 1,104
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock 131 15 315 87
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (12,413) $ (319) $ (11,436) $ (10,526)
========== ========== ========== ==========
Basicand diluted income/(loss) per share $ (0.06) $ (0.00) $ (0.14) $ (0.04)
========== ========== ========== ==========
Weighted average common shares outstanding -
basic and diluted 188,009 296,377 173,453 281,815
========== ========== ========== ==========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
NET (LOSS)/INCOME $ (6,955) $ 3,640 $ (14,793) $ (5,766)
Other comprehensive income:
Currency translation adjustment 9 28 30 3
Unrealized loss on marketable securities - (397) - (397)
---------- ---------- ---------- ----------
COMPREHENSIVE (LOSS)/INCOME $ (6,946) $ 3,271 $ (14,763) $ (6,160)
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
<TABLE>
<CAPTION>
(in thousands of dollars)
December 31, September 30,
1999 2000
-------------- --------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 1,126 $ 367
Restricted cash 667 -
Accounts receivable, net of reserves (Note3) 237 5,835
Investment in marketable securities - 2,081
Inventories, net of reserves (Note 4) 2,265 2,309
Other current assets(Note 7) 152 313
-------------- --------------
Total current assets 4,447 10,905
Property and equipment, net 449 595
Goodwill, net 3,497 11,978
Patent rights and other intangibles, net (Note7) 2,296 5,231
Other assets (Note 6) 2,688 9,227
-------------- --------------
$ 13,377 $ 37,936
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,647 $ 2,410
Accrued expenses 3,253 5,675
Current maturities of convertible notes (Note 8) - 2,323
Deferred income - 2,142
Other liabilities (Notes 2 and 7) 828 2,119
Notes Payable(Note 7) - 458
-------------- --------------
Total current liabilities 7,728 15,127
-------------- --------------
Long term liabilities:
Deferred income - 1,945
Royalty payable - 1,150
Convertible notes (Note 8) 4,107 2,500
-------------- --------------
Total long term liabilities 4,107 5,595
-------------- --------------
Commitments and contingencies
Common stock subject to resale guarantee (Note11) 1,592 191
-------------- --------------
Minority interest in consolidated subsidiary - 1,472
Preferred stock in subsidiary, $.10 par value, 1,000 shares
authorized; issued and outstanding, 60 and 0 shares, respectively
(redemption amount $6,102,110 and $0, respectively) 317 -
Preferred stock in subsidiary, $.10 par value, 1,500 share
authorized; issued and outstanding, 0 and 1,500 shares,
respectively (redemption amount $0 and $1,500,329, respectively) - 1,500
Stockholders' equity(deficit) (Note 6):
Preferred stock, $.10 par value, 10,000,000 Series Fshares and
24,000,000 Series G shares authorized:
Series F preferred stock, issued and outstanding, 2,790 and 0
shares, respectively (redemption amount $4,789,407 and $0,
respectively 2,790 -
Series G preferred stock, issued and outstanding, 0 and
924 shares respectively (redemption amount $0 and $936,213,
respectively - 745
Common stock, $.01 par value, authorized 255,000,000 and
450,000,000 shares, respectively; issued 268,770,739 and
329,428,500 shares, respectively 2,688 3,294
Additional paid-in-capital 130,865 153,122
Unearned portion of compensatory stock, warrants and options (55) (41)
Unrealized loss on marketable securities - (397)
Expenses to be paid with common stock (1,282) (574)
Accumulated deficit (131,475) (137,241)
Cumulative translation adjustment 65 68
Stock subscriptions receivable (1,000) (1,962)
Treasury stock, 6,078,065 shares of common stock (2,963) (2,963)
-------------- --------------
Total stockholders' equity(deifict) (367) 14,051
-------------- --------------
$ 13,377 $ 37,936
============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
(in thousands of dollars)
Nine months ended September 30,
-------------------------------
1999 2000
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (14,793) $ (5,766)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 1,389 1,323
Common stock options and warrants issued as
consideration for:
Compensation 167 14
Operating expenses - 75
Provision for tooling costs 69 -
Provision for doubtful accounts 92 (10)
Loss on disposition of fixed assets - 31
Write down of investment in unconsolidated
affiliate (Note 7) 2,385 -
Preferred stock received for license fees (850) -
Impairment of goodwill (Note 12) - 3,073
Reserve for note receivable 1,624 -
Beneficial conversion feature on convertible
note (Note 8) 204 1,000
Common stock received for license fee - (6,030)
Amortization of debt discount 47 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 64 (345)
(Increase) decrease in license fees receivable (265) (4,633)
(Increase) decrease in inventories, net 460 512
(Increase) decrease in other assets 37 177
Increase (decrease) in accounts payable and
accrued expenses 2,351 (2,448)
Increase (decrease) in other liabiliti 453 5,728
--------------- --------------
Net cash (used in) operating activities $ (6,566) $ (7,299)
--------------- --------------
Cash flows from investing activities:
Capital expenditures (136) (108)
Decerase in restricted cash - 667
Acquisition of patent rights (900) -
Deferred charges - (411)
Cash and cash equivalents received from acquisitions $ - $ 88
--------------- --------------
Net cash (used in) investing activities $ (1,036) $ 236
--------------- --------------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) (Note8) 4,000 1,000
Notes payable - 1,250
Sale of preferred stock (net) (Note 12) 4,435 2,004
Sale of subsidiary common stock - 1,000
Sale of common stock (net) 1 -
Sale of common stock subject to resale (Note 11) - 620
Collection of subscription receivable - 1,000
Exercise of stock options, net - 748
Repayment of:
Promissory notes - (1,325)
--------------- --------------
Net cash provided by financing activities $ 8,436 $ 6,297
--------------- --------------
Effect of exchange rate changes on cash $ 31 $ 7
--------------- --------------
Net increase (decrease) in cash and cash equivalents $ 865 $ (759)
Cash and cash equivalents - beginning of period 529 1,126
--------------- --------------
Cash and cash equivalents - end of period $ 1,394 $ 367
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1 $ -
=============== ==============
Supplemental disclosures of non-cash investing and
financing activities:
Unrealized holding loss on available-for-sale
securities $ - $ (398)
=============== ==============
Issuances of common stock for acquisition of
Midcore Sofware, Inc. $ - $ 4,817
=============== ==============
Issuances of common stock for acquisition of
DMC Cinema, Inc. $ - $ 2,500
=============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to instructions and rules of the
Securities and Exchange Commission (the "SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and certain adjustments to
reserves and allowances) considered necessary for a fair presentation have been
included. Operating results for the three months and nine months ended September
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the NCT
Group, Inc. (the "Company" or "NCT") Annual Report on Form 10-K, for the year
ended December 31, 1999, filed on April 14, 2000.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $137.2 million on a
cumulative basis through September 30, 2000. These losses, which include the
cost 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.
During the second quarter of 2000, retroactive to January 1, 2000, the
Company adopted the accounting policies of SEC Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101"). Adopting SAB 101
effective January 1, 2000, required the Company to restate its first quarter
2000 revenues, deferring recognition of $3.9 million of previously recognized
license fees. Such deferred revenue will be amortized over the next three years
in accordance with the Company's interpretation of SAB 101.
Cash, cash equivalents and short-term investments amounted to $0.4 million
at September 30, 2000, decreasing from $1.1 million 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
Internal 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.
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 Notes 8, 11 and 12 with respect to recent
financing.
The accompanying condensed 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 financing and other funding sources to meet its
obligations. The uncertainties described above raise substantial doubt at
September 30, 2000, about the Company's ability to continue as a going concern.
The accompanying condensed 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.
2. Acquisitions:
On August 18, 2000, the Company acquired 100% of the outstanding capital
stock of Theater Radio Network, Inc. ("TRN"), a provider of entertainment audio
programming in multiplex cinemas nationwide, through a merger with DMC Cinema,
Inc. ("Cinema"), a newly formed subsidiary of the Company's wholly- owned
subsidiary, Distributed Media Corporation ("DMC"). The acquisition included the
Company's issuance of 7,405,214 restricted shares of its common stock based upon
a trailing market price (as defined in the stock purchase agreement) of $0.3376
per share, for a total value of $2.5 million and a 7.5% equity interest in
Cinema. The acquisition was accounted for using the purchase method and resulted
in goodwill of approximately $2.8 million which is being amortized over 20 years
on a straight-line basis. Cinema produces a radio show that is broadcast in
movie theaters nationwide. Theaters that are part of the Cinema network include
Sony, Loews, Cineplex Odeon, Regal, United Artists and others. Advertisers
include America Online, ABC Television, DreamWorks, Warner Bros., IBM, and
Amoco, among others.
On August 29, 2000, the Company acquired 100% of the outstanding capital
stock of Midcore Software, Inc. ("MSI"), provider of Internet infrastructure
software for business networks, through a merger with NCT Midcore, Inc., a newly
formed, wholly-owned subsidiary of the Company, and now known as Midcore
Software, Inc. ("Midcore"). In connection therewith, the Company issued
13,913,355 restricted shares of its common stock based upon a 10-day weighted
average closing bid price of $0.34626 per share, for an aggregate value of $4.8
million. In addition, the purchase consideration includes $1.7 million to be
paid by the Company in cash based upon earned royalties, as defined in the
merger agreement, over 36 months. If after 36 months, the total royalty has not
been earned then the parties have the right to collect the remaining unpaid
balance through the issuance of the Company's common stock. The acquisition was
accounted for using the purchase method, and the resulting goodwill of
approximately $6.4 million is being amortized over 20 years on a straight-line
basis. Midcore is a developer of innovative software-based solutions that
address the multitude of challenges facing businesses implementing Internet
strategies. Its MidPoint product is a single, scalable software package that
provides on-demand Internet connections, a software router, a high performance
shared cache, content control, scheduled retrieval of information and e-mail and
usage accounting, among other features.
On September 12, 2000, the Company's wholly-owned subsidiary, NCT Hearing
Products, Inc. ("NCT Hearing"), granted an exclusive license to Pro Tech
Communications, Inc. ("Pro Tech") for rights to certain NCT technologies for use
in light weight cellular, multimedia and telephony headsets. In consideration
for this license, NCT Hearing received 23.4 million shares of Pro Tech's common
stock representing approximately 84% of the common shares issued and
outstanding. During the quarter ended September 30, 2000, the Company recognized
approximately $2.5 million of license fee revenue with respect to this
transaction. Such amount represents the license fee revenue applicable to the
minority interest shareholders. As a condition precedent to the transaction, NCT
Hearing had arranged $1.5 million in equity financing for Pro Tech in the form
of convertible preferred stock of Pro Tech. Such convertible preferred stock is
convertible into shares of Pro Tech's common stock or exchangeable for shares of
NCT's common stock, at the investors' election. The acquisition was accounted
for using the purchase method and the resulting negative goodwill of
approximately $0.1 million is being amortized over 20 years on a straight-line
basis.
The operating results of these acquired businesses have been included in
the Condensed Consolidated Statement of Operations from the dates of
acquisition. All material intercompany balances have been eliminated.
<PAGE>
3. Accounts Receivable:
Accounts receivable comprise the following:
(thousands of dollars)
December 31, September 30,
1999 2000
-------------- --------------
Technology license fees and royalties $ - $ 4,633
Advertising - 160
Engineering and development services 33 8
Trade 287 1,107
Allowance for doubtful accounts (83) (73)
-------------- --------------
Accounts receivable, net $ 237 $ 5,835
============== ==============
On March 7, 2000, the Company and DMC signed an agreement to license the
use of Digital Broadcasting Station Software ("DBSS") systems and related
technology in two station areas in the New York DMA territory to Eagle Assets
Limited. The total amount of the license fee was $2.0 million of which
approximately $1.6 million has been deferred at September 30, 2000. At September
30, 2000, the amount remaining in accounts receivable totaled $1.5 million.
On March 30, 2000, the Company and DMC signed an agreement to license the
use of DBSS systems and related technology in Israel to Brookepark Limited. The
amount of the license fee was $2.0 million of which approximately $1.6 million
has been deferred at September 30, 2000. At September 30, 2000, the amount
remaining in accounts receivable totaled $1.0 million.
On September 29, 2000, the Company and DMC signed separate agreements to
license the use of certain technology for $1.0 million each with Vidikron of
America, Inc. ("Vidikron"). The total amount of the license fees were $2.0
million and is included in accounts receivable at September 30, 2000. The
License fee revenue recognized was limited to $1.0 million due to the Company's
compliance with EITF 86-29 "NonMonetary Tranactions: Magnitude of Boot and the
Exceptions to the use of the Fair Value".
<PAGE>
4. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, September 30,
1999 2000
-------------- --------------
Components $ 360 $ 491
Finished goods 2,434 2,416
-------------- --------------
Gross inventories $ 2,794 $ 2,907
Reserve for obsolete & slow moving inventory (529) (598)
-------------- --------------
Inventories, net of reserves $ 2,265 $ 2,309
============== ==============
The reserve for obsolete and slow moving inventory at September 30, 2000
has increased to $0.6 million primarily due to a $0.3 million charge for slow
moving hearing product inventory recorded during the first nine months of 2000,
net of applications of reserve.
5. Recent Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133"). As amended by SFAS No. 137, the
Company is required to adopt SFAS 133 for the year ending December 31, 2001.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
SFAS 133 is expected to have no material impact on the Company's financial
condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. In March 2000, the SEC issued
SAB No. 101A to defer for one quarter the effective date of implementation of
SAB 101 and in June 2000, issued SAB 101B to further defer its implementation
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999 with earlier application encouraged. As noted in Note 1, the
Company elected early application of SAB 101 in the quarter ended March 2000.
The effect of the adoption of SAB 101 in the first quarter of 2000 was a
reduction of revenue and net income of $3.9 million and a corresponding increase
in deferred revenue.
6. Stockholders' Equity:
The changes in stockholders' equity during the nine months ended September
30, 2000, were as follows:
<TABLE>
<CAPTION>
(in thousands)
Unearned Expenses
Accretion Net Compen- To be Trans-
Balance Sale of Exchange/ Dividend of Sale of Stock satory paid with lation Balance
at Preferred Conversion of Preferred Common Subscription Options/ Net Common Adjust- At
12/31/99 Stock Preferred Stock Stock Stock Receivable Warrants Loss Stock ment 9/30/00
---------- --------- --------------- ----------- -------- ------------ -------- -------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series F
Preferred:
Stock:
Shares 5 - (5) -
Amount $ 2,790 $ - $ (2,871) $ 81 $ - $ - $ - $ - $ - $ - $ -
Series G
Preferred:
Stock:
Shares - 2 (1) - - - - - - 1
Amount - $ 1,709 (985) 21 - - - - - - 745
Common Stock:
Shares 268,771 - - - 60,650 - - - - - 329,421
Amount $ 2,688 - - - 607 - - - - - $ 3,294
Treasury Stock:
Shares 6,078 - - - - - - - - - 6,078
Amount $ (2,963) - - - - - - - - - $ (2,963)
Additional
Paid in
Capital $ 130,865 - 3,886 (101) 17,872 - - - 600 - $ 153,122
Accumulated
(Deficit) $(131,475) - - - - - - (5,766) - - $(137,241)
Cumulative
Translation
Adjustment $ 65 - - - - - - - - 3 $ 68
Stock
Subscription
Receivable $ (1,000) - - - - (962) - - - - $ (1,962)
Expenses to be
Paid with
Common Stock $ (1,282) - - - - - - - 708 - $ (574)
Unearned
Compensatory
Stock Option $ (55) - - - - - 14 - - - $ (41)
</TABLE>
<PAGE>
7. Other Assets:
On August 14, 1998, NCT Audio Products, Inc. ("NCT Audio") agreed to
acquire substantially all of the assets of Top Source Automotive, Inc. ("TSA"),
an automotive audio system supplier. In 1998, NCT Audio had paid deposits of
$3.5 million towards the purchase price. 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 investment in TSA to $1.5
million, representing its 15% minority interest. In addition the Company
recorded a penalty premium of $0.1 million, and a note payable of $0.2 million,
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. The $0.1
million is included on the balance sheet at September 30, 2000 in accrued
expenses and the $0.2 million is included in notes payable.
On May 10, 2000, the Company announced a license agreement with Infinite
Technology Corporation ("ITC"). Under the agreement, Advancel Logic Corporation
("Advancel"), a majority owned subsidiary of the Company, granted ITC exclusive
rights to create, make, market, sell and license products and intellectual
property based upon Advancel's Java Turbo-J(TM) technology. Advancel also
granted ITC non-exclusive rights to Advancel's Java smartcard core. In
consideration for this license, the Company received 1.2 million shares of ITC's
common stock valued at $6.0 million and on-going unit royalties. With the
exception of certain rights granted to ST Microelectronics in 1998, the license
granted ITC an exclusive irrevocable worldwide license to design, make, use,
transfer, market and sell products and intellectual property incorporating or
based upon Advancel's TJ and T2J technology.
Effective June 30, 2000, the Company, Advancel and ITC entered into a
Strategic Alliance and Technology Development Amendment pursuant to which the
Company will fund specific product application research and engineering
development related to microprocessor and semiconductor chips for which the
Company will pay ITC $2.5 million. On September 7, 2000, the Company issued
9,523,810 shares of its common stock having a market value of $3.0 million to
ITC as prepaid research and engineering costs. In the event ITC does not receive
$2.5 million in proceeds from the sale of the Company shares, the Company is
required to make up any shortfall in cash or return to ITC a sufficient number
of ITC shares of common stock received by the Company as outlined above.
Conversely, if ITC receives $2.5 million in proceeds from the sale of the
Company shares and there are Company shares remaining, ITC must return the
unsold share excess to the Company. Though the forementioned license agreement
and the Strategic Alliance and Technology Development Amendment, both with ITC,
are separate and unrelated it has been determined that they should be accounted
for as a single transaction, thereby, both agreements are combined for financial
reporting purposes. At September 30, 2000 the Company recognized $3.6 million of
license fee revenue which represents the net of the two transactions and $0.5
million as amounts due from ITC.
On September 29, 2000, NCT Video Displays, Inc. ("NCT Video"), a newly
formed, wholly-owned subsidiary of the Company, entered into a product
development and license agreement with Advanced Display Technologies, LLP
("ADT"). Under the agreement, NCT Video is granted by ADT exclusive right and
license to make, have made, use, sell, lease, license, or otherwise commercially
dispose of all Licensed Products and Components, as defined in the agreement.
Such Licensed Products are defined as ViewBeam(TM) Display(s), which employ the
Licensed Technology, as defined in the agreement. In addition, as part of this
agreement, NCT Video and ADT have entered into a product development arrangement
whereby work is to be performed by ADT in developing the Prototype and
production design for the Licensed Products. In return, NCT Video agreed to pay
a "development fee" of $0.9 million for performing such development work. At
September 30, 2000, such $0.9 million was included in other current liabilities.
8. Convertible Notes:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed to and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. The Company entered into secured convertible notes (the "Notes") for
$4.0 million between January 26, 1999 and March 27, 2000. The Notes mature two
years from their respective inception dates and earn interest at the prime rate
as published from day to day in The Wall Street Journal. At September 30, 2000,
$1.5 million was included in current maturities of convertible notes with the
balance of $2.5 million included as part of the long-term portion of convertible
notes. The Company recorded a beneficial conversion feature of $1.0 million in
connection with the March 27, 2000 convertible note recorded during the first
quarter of 2000, classified as interest expense.
On July 19, 1999, DMC entered into a convertible guaranteed term promissory
note ("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. Of the $1.0 million note, $750,000 was deposited into an escrow account
restricted in its use to pay rental and installation costs of DBSS systems. At
September 30, 2000, the balance in the escrow account, classified as restricted
cash, was $0. 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. In connection with the PRG Note, PRG was granted a common stock warrant.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"("FAS
123"), the Company estimated the fair value of this warrant to be $0.4 million.
Such amount is being amortized to interest expense over the two-year period of
the related promissory note. Amortization amounted to $0.2 million for the nine
months ended September 30, 2000. Unamortized discount of $0.2 million has been
reflected as a reduction of the related note payable amount in the accompanying
September 30, 2000 condensed consolidated financial statements. Such note
payable balance included as part of the current portion of convertible notes at
September 30, 2000 was $0.8 million.
9. Commitments:
In connection with the acquisition of MIS by Midcore, the Company entered
into employment agreements ("the agreements") with Jerry Metcoff, David Wilson
and Barry Marshall-Johnson, the principal shareholders of MSI. The agreements
are each for a term of three years. Compensation and benefits called for in the
agreements for Jerry Metcoff and David Wilson are an annual base salary of
$100,000, an annual bonus of at least $50,000, subject to the achievement of
certain bonus criteria and at the discretion of the board of directors of NCT,
granting of incentive stock options to purchase common shares of NCT.
Compensation and benefits called for in the agreement for Barry Marshall-Johnson
include an annual base salary of (pound)52,236, commissions of 5% of the face
amount of purchase orders for Midcore's or affiliates' products or services
derived from a predetermined territory and at the discretion of the board of
directors of NCT, and granting of incentive stock options to purchase common
shares of NCT.
10. Litigation:
Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, for a discussion of the following matters:
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, then the President, Chief Executive
Officer and a Director of the Company, in the Circuit Court for Anne Arundel
County, Maryland. During the second quarter of 2000, the Company and SCI have
had verbal discussions regarding a settlement. The Court has scheduled a
pre-trial conference in this case for March 2001. Aside from such verbal
settlement discussions, there were no material developments in this matter
during the period covered by this report.
On November 17, 1998, the Company and NCT Hearing filed suit against Andrea
Electronics Corporation in the United States District Court, Eastern District of
New York. There were no material developments in this matter during the period
covered by this report.
On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against Top Source
Technologies, Inc. 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 to a majority shareholder, NCT Audio, which
holds 15% of the outstanding stock of TSA, and breach of obligation of good
faith and fair dealing. There were no material developments in this matter
during the period covered by this report.
The Company believes there are no other patent infringement litigation
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on the consolidated financial position and
consolidated results of operations.
11. Common Stock Subject to Resale Guarantee:
During 2000, the Company issued 912,674 shares of common stock to certain
consultants and suppliers to settle current obligations of $0.1 million and
future or anticipated obligations of $0.3 million due to them by the Company.
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. During 1999, suppliers and
vendors sold $1.5 million of such shares. During the nine months ended September
30, 2000, suppliers and vendors sold $0.9 million and surrendered 776,316
previously issued shares. At September 30, 2000, common stock subject to resale
guarantee included $0.1 million for suppliers and vendors.
The Company had certain contingent obligations under a securities purchase
agreement, dated as of December 27, 1999 (the "Purchase Agreement"), among the
Company, Austost Anstalt Schaan("Austost"), Balmore S.A.("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. In addition,
the Company issued 288,461 shares of its common stock to the placement agent for
the transaction. 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. At September 30, 2000 the shares were no
longer subject to a resale quarantee provision.
Under a reset provision contained in the Purchase Agreement, on June 26,
2000, and again on September 25, 2000, the Company might have been required to
issue additional shares to one or more of Austost, Balmore or Nesher if the sum
of certain items on those dates was less than 120% of the total purchase price
paid by Austost, Balmore and Nesher for the SPA Shares. Those items were: (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 have been obligated to issue in such case would have been 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) was deemed a
preferred return over the initial reset period. At both June 26 and September
25, 2000, no additional shares were required to be issued in accordance with
such reset provision and the 20% of the total purchase price paid ($100,000) is
no longer considered a preferred return.
Common stock subject to resale guarantee was $0.2 million at September 30,
2000, which represented the outstanding shares of common stock valued at the
date of issuance to suppliers and vendors.
12. Capital Stock:
On January 19, 2000, the Board of Directors amended the NCT Group, Inc.
Stock Incentive Plan (the "1992 Plan"), subject to stockholder approval, to
increase the aggregate number of shares of the Company's common stock reserved
for issuance upon the exercise of stock options granted under the 1992 Plan from
30,000,000 shares to 50,000,000 shares (the "1992 Plan Amendment"). At the
annual meeting of stockholders held on July 13, 2000, the stockholders approved
such amendment.
On January 19, 2000, the Board of Directors granted options to purchase 9.9
million shares of the Company's common stock to certain officers and employees
of the Company, subject to the approval by the Company's stockholders of an
increase in the number of shares authorized and subject to the approval by the
Company's stockholders of an increase in the number of shares covered by the
1992 Plan. Such increases were approved by the Stockholders at the Company's
annual meeting on July 13, 2000. Options to purchase 3.9 million of such shares
vest upon approval by the stockholders of the above noted increases. Options to
purchase 6.0 million of such shares will not become vested or exercisable until
the satisfaction of additional vesting requirements based on profitability of
the Company or the passage of time. The foregoing options were granted with the
exercise price equal to the fair market value of the Company's common stock on
January 18, 2000, or $0.41 per share, as determined from the last sale price as
reported by the NASDAQ OTC Bulletin Board.
During the first quarter of 2000, the Board of Directors also granted
options to purchase 2.9 million shares of the Company's common stock to certain
new employees and consultants of the Company for services rendered to the
Company, subject to the approval by the Company's stockholders of an increase in
the number of shares authorized and subject to the approval by the Company's
stockholders of an increase in the number of shares covered by the 1992 Plan.
Such options were granted at or above the fair market value of the Company's
common stock on the date of grant.
On January 25, 2000, the Board of Directors designated a new series of
preferred stock based upon a negotiated term sheet, the Series G Convertible
Preferred Stock ("Series G Preferred Stock"). 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, as amended March 10, 2000, the
Company and an accredited investor entered into an agreement under which the
Company sold an aggregate stated value of $2.0 million (2,004 shares) of Series
G Preferred Stock, in a private placement pursuant to Regulation D of the
Securities Act of 1933 (the "Securities Act") for an aggregate of $1.750
million. The Company received proceeds, net of expenses, of $1.7 million. 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 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 $0.71925. The Company filed a registration statement on
April 20, 2000, (amended on June 13, 2000), to register such shares of common
stock for the conversion of the Series G Preferred Stock and the related
warrant. In connection with the Series G Preferred Stock transaction, on March
6, 2000, the Company granted a warrant for 150,000 shares of the Company's
common stock with an expiration date of March 31, 2005 and an exercise price of
$0.71925. In accordance with SFAS No. 123, the Company estimated the fair market
value of this warrant to be $0.1 million, using the following assumptions in
applying the Black-Scholes valuation method: risk-free interest rates of 6.14%,
volatility of 1, and a term of three years. Such amount is included in the
preferred stock dividend requirement for the nine months ended September 30,
2000.
During the nine months ended September 30, 2000, the Company issued
23,470,081 shares of the Company's common stock in connection with the
conversion of 4,715 shares of the Company's Series F Convertible Preferred Stock
("Series F Preferred Stock") which had been issued in the third quarter of 1999
in a private placement exempt from registration pursuant to Regulation D of the
Securities Act. At September 30, 2000 all Series F Preferred Stock have been
converted to common shares of the Company. . In March 2000, 3 shares of NCT
Audio Series A Convertible Preferred Stock, which had been issued in the third
quarter of 1998 in a private placement exempt from registration pursuant to
Regulation D of the Securities Act, were exchanged for 3,000 shares of the
Company's Series D Preferred Stock, which were converted into 634,915 shares of
the Company's common stock. Subsequently, the Company recorded a one-time,
non-cash charge of $0.2 million for the impairment of goodwill based on the
valuation of NCT Audio, which is included in other expense.
On March 7, 2000, the Company, Balmore and Austost agreed to amend certain
of the terms and conditions of the exchange agreement. Under the exchange
agreement, Austost and Balmore were obligated to return to the Company
13,671,362 shares of NCT common stock ("Returnable Shares"). This amendment was
agreed to in order to (1) allow Austost and Balmore to retain 3,611,111
Returnable Shares in exchange for an additional 533 shares of NCT Audio common
stock from a third party investor (the "Third Party Shares"), which Austost and
Balmore would 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. Austost and Balmore 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 would realize a 10% commission on the proceeds from the sale of shares.
Subsequently, the Company recorded a one-time, non-cash charge of $2.9 million
for the impairment of goodwill based on the valuation of NCT Audio, which is
included in other expense. During the quarter ending September 30, 2000, the
Company sold approximately 4.2 million Returnable Shares totaling $1.4 million
of which $0.8 million was used to repay three promissory notes and the balance
of $0.6 million was used to meet working capital requirements.
On April 21, 2000, the Board of Directors approved the re-granting of
replacement grants for forfeit options that would otherwise expire in 2000. Such
replacement grants totaled approximately 565,000 options.
On June 2, 2000, the Company granted a common stock warrant to Roth Bros,
Inc. ("Roth") to purchase 0.3 million shares of the Company's common stock in
connection with the installation of DBSS systems for DMC by Roth. In accordance
with SFAS No. 123, the Company estimated the fair value of this warrant to be
$0.1 million. Such amount is being amortized to interest expense over the
three-year period of the related work agreement between Roth and DMC.
Amortization amounted to approximately $10,000 for the nine months ended
September 30, 2000.
On July 13, 2000 at the Company's annual meeting of shareholders, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 325 million to 450 million. Such
amendment became effective on July 18, 2000 when the Company filed a Certificate
of Amendment to its Restated Certificate of Incorporation with the Office of the
Secretary of State of Delaware to comply with applicable Delaware General
Corporation Law.
Also on July 13, 2000, the Company's stockholders approved an amendment to
the 1992 Plan to increase the number of shares thereunder from 30 million to 50
million.
On August 10, 2000, the Company entered into an agreement with three
accredited investors for the financing of its subsidiary, Connect Clearly.com,
Inc.("CCC"). In connection with the initial funding of CCC, the Company issued
1,000 shares of CCC common stock to these investors in consideration for $0.5
million in cash and conversion of promissory notes payable, due to two of the
investors, totaling $0.5 million. These investors have agreed to acquire 1,000
additional shares of CCC common stock for another $1.0 million in August 2001.
These CCC common shares are exchangeable for shares of NCT common stock.
On August 18, 2000, the Company acquired 100% of the outstanding capital
stock of TRN, through a merger with Cinema. In connection with this acquisition,
the Company issued 7,405,214 restricted shares of its common stock based upon a
trailing market price (as defined in the stock purchase agreement) of $0.3376
per share, for a total value of $2.5 million and a 7.5% equity interest in
Cinema. (see Note 2 to the Condensed Consolidated Financial Statements for
further details).
On August 29, 2000, the Company acquired all of the outstanding capital
stock of MSI through a merger with Midcore. In connection therewith, the Company
issued 13,913,355 restricted shares of its common stock. (See Note 2 to the
Condensed Consolidated Financial Statements for further details).
On September 7, 2000, the Company issued 9,523,810 shares of its common
stock having a market value of $3.0 million to ITC with respect to the Strategic
Alliance and Technology Development Amendment with ITC. Such shares are subject
to adjustment as outlined in Note 8 to these Condensed Consolidated Financial
Statements.
As described in Note 2, NCT Hearing had arranged $1.5 million in equity
financing for Pro Tech in the form of convertible preferred stock. Such
convertible preferred stock is convertible into shares of Pro Tech's common
stock or exchangeable for shares of NCT's common stock, at the investors'
election.
On September 26, 2000, the Company's Board of Directors approved an
amendment to the Series G Certificate of Designations, Rights and Preferences to
increase the maximum share issuance amounts thereunder from 10 million shares to
24 million shares. This action was considered in the best interest of the
Company and its investor relationships. The amendment became effective on
September 27, 2000 when the Company filed it with the Office of the Secretary of
State of Delaware.
On September 27, 2000, the Company entered into a private equity line with
Crammer Road LLC ("Crammer"), pursuant to which the Company may issue its common
stock to be sold by Crammer and Crammer would retain a portion of the proceeds
received for NCT common stock sold. In conjunction with this transaction, the
Company issued Crammer a warrant for 250,000 shares of the Company's common
stock. In accordance with SFAS No. 123, the Company estimated the fair value of
this warrant to be $0.1 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 6.03%, volatility of
1, and a term of three years. The Company and Crammer are currently in
renegotiations regarding amendments to certain details of the Private Equity
Credit Agreement.
On September 29, 2000, Pro Tech entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with the Company, Austost, Balmore and
Zakeni Limited, (Austost, Balmore and Zakeni Limited collectively the "Pro Tech
Investors") to consummate the $1.5 million financing arranged by the Company for
Pro Tech in connection with its sale of 1,500 shares of Pro Tech Series A
Convertible Preferred Stock ("Pro Tech Preferred") to the Pro Tech Investors.
The Pro Tech Preferred consists of 1,500 designated shares, par value $0.01 per
share and a stated value of one thousand dollars ($1,000) per share with an
accretion rate of four percent (4%) per annum on the stated value. Each share of
such stock, in addition to being exchangeable for shares of the Company's common
stock, is convertible into fully paid and nonassessable shares of the Pro Tech's
common stock pursuant to a predetermined conversion formula. In connection with
the execution of the Securities Purchase and Supplemental Exchange Rights
Agreement, Pro Tech issued warrants to the Pro Tech Investors to acquire 4.5
million shares of Pro Tech's common stock. Such warrants are exercisable at
$0.50 per share and expire on October 28, 2003. In addition, Pro Tech has the
right to require the warrant holders to exercise upon a call from Pro Tech. In
accordance with SFAS No. 123, Pro Tech estimated the fair value of this warrant
to be $3.6 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 5.97%, volatility of
1, and a term of three years. Such amount is included in the preferred stock
beneficial conversion feature at September 30, 2000.
Pursuant to a consulting agreement dated as of March 15, 1999, as amended
as of June 1, 1999, and as modified as of July 29, 1999, between Pro Tech and
Union Atlantic LC("UALC"), Pro Tech would be obligated to issue two percent (2%)
of its outstanding common stock to UALC upon the consummation of the Pro Tech
transaction with NCT Hearing. In order to comply with the consulting agreement,
Pro Tech agreed to issue 279,688 shares and NCT Hearing agreed to issue 279,687
shares of Pro Tech's common stock to UALC, totaling an aggregate of 559,375
shares in full settlement of all obligations under the consulting agreement
between Pro Tech and UALC.
At September 30, 2000, the number of shares required to be reserved for the
exercise of options and warrants was 60.1 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 59.6 million shares, of which
options and warrants to purchase 41.1 million shares were currently exercisable.
The aggregate number of shares of common stock required to be reserved for
issuance upon conversion of issued and outstanding shares of Series G Preferred
Stock was 3.8 million. The Company has reserved 5.9 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 also reserved 32.1 million shares of common stock for issuance upon
conversion of the Notes. Common shares issued and required to be reserved for
issuance exceed the number of shares authorized at September 30, 2000. Pro Tech
has reserved 5.5 million shares of common stock for issuance upon the exercise
of all-outstanding options and warrants granted, of which options and warrants
to purchase 5.5 million shares were currently exercisable.
In September 2000, the Company issued warrants for 10 million shares of
common stock to the placement agent for certain of the Company's recent
financing transactions.
13. Business Segment Information:
During 1998, the Company adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS No. 131"). The provisions of
SFAS No. 131 require the Company to disclose the following information for each
reporting segment: general information about factors used to identify reportable
segments, the basis of organization, and the sources of revenues; information
about reported profit or loss and segment assets; and reconciliation of certain
reported segment information to consolidated amounts.
<PAGE>
Segment Information follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
Segment
--------------------------------------------------------------------
Total Grand
Media Communication Technolgy Segments Other Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the nine months ended
September 30, 2000:
Net Sales - External $ 533 $ 850 $ - $ 1,383 $ 123 $ 1,506
Net Sales - Other Operating
Segments 131 434 - 565 (565) -
License Fees and Royalti1ties 1,724 2,851 3,550 8,125 (219) 7,906
Interest Income/(Expense) net (258) (5) (115) (378) (1,277) (1,655)
Depreciation/Amortization (18) (55) (17) (90) (1,233) (1,321)
Operating Income (Loss) (4,024) (2,864) 3,349 (3,539) (2,227) (5,766)
Segment Assets 11,921 17,645 6,644 36,210 1,726 37,936
Capital Expenditures 17 - - 17 91 108
For the nine months ended
September 30, 1999:
Net Sales - External $ 627 $ 1,402 $ 1,070 $ 3,099 $ 6 $ 3,105
Net Sales - Other Operating
Segments 11 650 - 661 (661) -
License Fees and Royalties 1,354 1,019 1,100 3,473 36 3,509
Write down of Investment in
Unconsolidated Subsidiary (2,385) - - (2,385) - (2,385)
Interest Income, net 127 1 - 128 (87) 41
Depreciation/Amortization 9 33 12 54 1,335 1,389
Operating Income (Loss) (10,042) (4,334) (397) (14,773) (20) (14,793)
Segment Assets 7,515 2,504 1,360 11,379 7,916 19,295
Capital Expenditures 11 6 35 52 84 136
</TABLE>
<PAGE>
MEDIA:
NCT Audio:
NCT Audio is engaged in the design, development and marketing of products,
which utilize innovative flat panel transducer technology. The products
available from NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM)
printed grille collection. The Gekko(TM) flat speaker is marketed primarily to
the home audio market, with potential in other markets, including the
professional audio systems market, the automotive audio aftermarket, the
aircraft industry, other transportation markets and multimedia markets. The
principal customers are DMC, end-users, automotive original equipment
manufacturers ("OEMs") and manufacturers of integrated cabin management systems.
DMC:
DMC provides place-based broadcast and billboard advertising through a
microbroadcasting network of Sight and Sound(TM) systems within
commercial/professional settings. The Sight and Sound(TM) systems consist of
flat panel transducer-based speakers (provided by NCT Audio), a personal
computer containing DMC's Sight and Sound DBSS software, telephone access to the
Internet, amplifiers and related components. The DBSS software schedules
advertisers' customized broadcast messages, which are downloaded via the
Internet, with the respective music genre choice to the commercial/professional
establishments. DMC will develop private networks for large customers with
multiple outlets such as large fast food chains and retail chains.
Cinema:
Cinema provides entertainment audio programming in multiplex cinemas
nationwide All programming now being delivered to each theater will be converted
to the Sigh and Sound system which allows for remote delivery of programming and
advertising to all sites, improving efficiency and enabling the quick execution
of programming changes. The Site and Sound system also continually adjusts
volume based on background noise so that the audio is always maintained at a
foreground level.
COMMUNICATIONS:
NCT Hearing:
NCT Hearing designs, develops and markets active noise reduction ("ANR")
headset products to the communications headset market and the telephony headset
market. The product lines include the NoiseBuster(R) product line and the
ProActive(R) product line. The NoiseBuster(R) products consist of the
NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a headset used for
in-flight passenger entertainment systems and communications headsets for
cellular, multimedia and telephony. The ProActive(R) products consist of noise
reduction headsets and communications headsets for noisy industrial
environments. The majority of NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
Pro Tech:
The principal activity of Pro Tech is the design, development and
manufacture of light-weight telecommunications headsets and new audio
technologies for applications in fast food, telephone and other commercial
applications. It currently has marketing agreements with major companies in the
fast food industry and catalog and Internet site distributors of telephone
equipment, primarily in North America.
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 NCT Audio, NCT Hearing,
DMC and other business units as needed. NCT Europe also provides a marketing and
sales support service to the Company for European sales.
Midcore:
The principal activity of Midcore is as a developer of innovative software
based solutions that address the multitude of challenges facing businesses
implementing Internet strategies. Midcore is the provider of MidPoint Internet
infrastructure software that allows multiple users to share one Internet
connection without degrading efficiency and provides on-demand connections, a
software router, a high-performance shared cache, content control, scheduled
retrieval of information and e-mail and usage accounting. Midcore sales are
derived from North America and Europe.
ConnectClearly:
CCC was established for the purpose of focusing on the telecommunications
market and in particular the hands-free market. The technology includes
ClearSpeech(R)-Acoustic Echo Cancellation and ClearSpeech(R)-Compression and
Turbo Compression and ClearSpeech(R) Adaptive Speech Filter(R).
ClearSpeech(R)-Acoustic Echo Cancellation removes acoustic echoes in hands-free
full-duplex communication systems. Applications for this technology are cellular
telephony, audio and video teleconferencing, computer telephony and gaming and
voice recognition. ClearSpeech(R)-Compression maximizes bandwidth efficiency in
wireless, satellite and intra- and Internet transmissions and creates smaller,
more efficient voice files while maintaining speech quality. Applications for
this technology are intranet and internet telephony, audio and video
conferencing, PC voice and music, telephone answering devices, real-time
multimedia multitasking, toys and games and playback devices. CCC products
include the ClearSpeech(R)-Microphone and the ClearSpeech(R)-Speaker. The
majority of CCC's sales are in North America. Principal markets for CCC are the
telecommunications industries and principal customers are OEMs, system
integrators and end-users.
TECHNOLOGY:
Advancel Logic Corporation:
Advancel is a participant in the native Java(TM) (Java(TM) is a trademark
of Sun Microsystems, Inc.) embedded microprocessor market. The purpose of the
Java(TM) platform is to simplify application development by providing a platform
for the same software to run on many different kinds of computers and other
smart devices. Advancel has been developing a family of processor cores, which
will execute instructions written in both Java bytecode and C/C++ significantly
enhancing the rate of instruction execution, which opens up many new
applications. The potential for applications consists of the next generation
home appliances and automotive applications, smartcards for a variety of
applications, hearing aids and mobile communications devices. (See Note 6 -
Notes to the Condensed Consolidated Financial Statements above for further
details.)
Other:
The Net Sales - Other Operating Segments primarily consist of inter-company
sales and items eliminated in consolidation.
Certian items are maintained at the Company's corporate headquarters
(Corporate) and are not allocated to the segments. They primarily include most
of the Company's debt and related cash and equivalants and related net interest
expense, certain litigation liabilities and certain non operating fixed assets.
With respect to depreciation and amortization the differneces between the
segment totals and consolidated totals relates to assets maintained at
corporate.
<PAGE>
UNDERTAKINGS
(a) Rule 415 Offering. Registrant hereby undertakes:
(1) To file, during any period in which offers securities or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or together, represent a fundamental
change in the information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) adopted under the Securities Act if, in the
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for determining liability under the Securities Act, each
post-effective amendment shall be deemed to be a new registration statement of
the securities offered herein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities being registered that remain unsold at the end of the offering.
(h) Request for acceleration of effective date. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of competent jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Westport, Connecticut, on this 12th day of December, 2000.
NCT GROUP, INC.
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
----------------------------------------------------------------------------
/s/ MICHAEL J. PARRELLA Chairman of the Board of December 12, 2000
-----------------------------
Michael J. Parrella Directors and
Chief Executive Officer
(Principal Executive
Officer)
/s/ CY E. HAMMOND Senior Vice President and December 12, 2000
-----------------------------
Cy E. Hammond Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Director December 12, 2000
-----------------------------
Jay M. Haft
/s/ JOHN J. MCCLOY Director December 12, 2000
-----------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director December 12, 2000
-----------------------------
Samuel A. Oolie
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE II
Board of Directors and Stockholders of
NCT Group, Inc.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements of NCT Group, Inc. 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.
/s/ Richard A. Eisner & Company, LLP
New York, New York
February 25, 2000
<PAGE>
SCHEDULE II
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of
dollars)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------------------------------------------------------------------------------------------------------
(1) (2)
Charged to
Balance at Charged in other Balance at
beginning costs and accounts- Deductions- end of
Description of period expenses describe describe period
---------------------------------- ----------- ---------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <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.
