<PAGE> 1
As filed with the Securities and Exchange Commission on April 20, 2000
Registration No. _____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM S-1 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
NCT GROUP, INC.
(FORMERLY NOISE CANCELLATION TECHNOLOGIES, INC.)
(Exact name of Registrant as specified in Charter)
Delaware 59-2501025
(State or Other Jurisdiction (I.R.S. Employer
Of Incorporation or Identification No.)
Organization)
1025 West Nursery Road, Linthicum, Maryland 21090
(410) 636-8700
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
CY E. HAMMOND
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
NCT GROUP, INC.
1025 WEST NURSERY ROAD, SUITE 120
LINTHICUM, MARYLAND 21090
(410) 636-8700
(Name and Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Copies of all communications and notices to:
WILLIAM P. O'NEILL, ESQ.
CROWELL & MORING LLP
1001 PENNSYLVANIA AVE, NW
WASHINGTON, DC 20004
(202) 624-2500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of 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. [ ]
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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>
COMMON STOCK 37,435,048 SHARES $0.75 (2) $28,076,286 (2) $7,412.14 (2)
</TABLE>
(1) In accordance with Rule 416 promulgated under the Securities Act of 1933,
this registration statement also covers such indeterminate number of
additional shares of common stock as may become issuable upon conversion
of the Company's Series F Convertible Preferred Stock and the Company's
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 NASDAQ OTC Bulletin Board on April 18, 2000. The fees noted above were
paid by the registrant in connection with the filing of this registration
statement; $4,871.54 was paid on February 1, 2000, and the balance was
paid on April 19, 2000.
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> 3
PROSPECTUS
NCT GROUP, INC.
37,435,048 SHARES OF COMMON STOCK FOR RESALE
BY SELLING STOCKHOLDERS
NCT GROUP, INC. WE DESIGN AND DEVELOP PRODUCTS AND
1025 WEST NURSERY ROAD LICENSE TECHNOLOGIES WHICH PERMIT THE
SUITE 120 MANIPULATION OF SOUND AND SIGNAL WAVES
LINTHICUM, MARYLAND 21090 TO ENHANCE SIGNALS AND REDUCE NOISE.
Certain existing shareholders of NCT Group, Inc. (the "Selling Stockholders")
are offering 37,435,048 shares of the Company's common stock for sale at
prevailing market prices. The Company's common stock currently trades under
the symbol "NCTI" on NASDAQ's OTC Bulletin Board. The Company will not
receive any of the proceeds of the resales, which consist of:
- 28,560,000 shares of common stock of the Company that the Company
may issue upon the conversion of issued and outstanding shares of
our Series F Convertible Preferred Stock in accordance with the
Series F Certificate of Designations, as amended;
- 4,134,616 shares of common stock of the Company that the Company
issued to three accredited investors and the placement agent
therefor;
- 404,612 shares of common stock of the Company that the Company
issued in exchange for 27 shares of common stock of NCT Audio
Products, Inc. held by an investor;
- 4,008,000 shares of common stock of the Company that the Company
may issue upon the conversion shares of our Series G Convertible
Preferred Stock in accordance with the Series G Certificate of
Designations;
- 160,320 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 our Series G Convertible Preferred Stock;
and
- 167,500 shares of common stock of the Company that the Company
may issue upon the exercise of warrants the Company issued to the
Series G Convertible Preferred Stock placement agent and
attorneys thereof.
------------------------------------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
SHARES ONLY AFTER CAREFULLY CONSIDERING THE RISKS DESCRIBED IN
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 12.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION 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 April 20, 2000.
<PAGE> 4
TABLE OF CONTENTS
PAGE
Prospectus Summary Information 1
The Company 1
Recent Developments 3
Risk Factors 12
Use of Proceeds 34
Selling Security Holders 35
Plan of Distribution 36
Description of Securities to be Registered 36
Interests of Named Experts and Counsel 37
The Business 38
Properties 57
Legal Proceedings 58
Market Price of and Dividends on Common Equity 63
Description of Securities 63
Selected Financial Data 65
Management's Discussion and Analysis 66
Changes in and Disagreements with Accountants 79
Directors and Executive Officers 80
Executive Compensation 83
Security Ownership 92
Certain Relationships and Related Transactions 93
Other Expenses of Issuance and Distribution 94
Indemnification of Directors and Officers 95
Recent Sales of Unregistered Securities 96
Exhibits and Financial Statements 97
Undertakings 110
Signatures 112
---------------
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> 5
PROSPECTUS SUMMARY INFORMATION
This summary section briefly describes the key aspects of both the
Company and the offering covered by this prospectus. This section is a summary
only and refers to more specific and comprehensive information found in
subsequent sections. Investors should refer to these individual sections for a
more detailed explanation of each topic.
Whenever possible, the Company has provided definitions of noise
cancellation technologies within the text. Also note that market data presented
in this prospectus are based on management's estimates, in reliance on
third-party sources where possible. While our management believes these
estimates are reliable and reasonable, in certain cases such estimates cannot
be verified by information from or analysis by independent sources.
Accordingly, the Company cannot give assurances that such market data are
accurate in all material respects.
THE COMPANY
NCT Group, Inc. (formerly Noise Cancellation Technologies, Inc.)
("NCT" or the "Company") designs and 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. These include
its subsidiaries, NCT Audio Products, Inc. ("NCT Audio"), NCT Hearing Products,
Inc. ("NCT Hearing"), Advancel Logic Corporation ("Advancel"),
ConnectClearly.com, Inc. ("CCC"), and DistributedMedia.com, Inc. ("DMC"). The
Company also operates a division, NCT Communications. Each of the Company's
strategic business units is targeted to the commercialization of its own
products in specific markets.
The Company and its business units currently hold 503 patents and
related rights worldwide and an extensive library of know-how and other
unpatented technology. These patents allow us to develop our major product
lines which include:
- NoiseBuster(R) communications headsets,
- NoiseBuster Extreme!(TM) consumer headsets,
- Gekko(TM) flat speakers, frames, prints and subwoofers,
- 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,"
- quieting headsets for patient use in magnetic resonance imaging
machines,
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- an aircraft cabin quieting system, and
- ClearSpeech(TM) corporate intranet telephone 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 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.
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. in 1994 expanded our portfolio of
intellectual property and allowed the Company to license certain, formerly
restricted jointly-held patents to unaffiliated third parties. Such licensing
power is expected to contribute further to our generation of fees and
royalties.
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 December 31,
1999, the Company had 75 employees, including 37 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,
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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., and (5) New Transducers Ltd. See Item 1. - "The
Business" - Section G. - "Strategic Alliances" for further information.
RECENT DEVELOPMENTS
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. The shareholders of Top Source Technologies, Inc. ("TST"),
TSA's parent company, approved the transaction on December 15, 1998. NCT Audio
then paid TST $2,050,000 on July 31, 1998. The money was held in escrow with
all of the necessary securities and documents to evidence ownership of 20% of
the total equity rights and interests in TSA. When TST's shareholders approved
the transaction, the $2,050,000 was delivered to 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. 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 due
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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 "Risk Factors - Litigation"
and "Item 3. - 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. The
unpaid principal balance of these notes bears 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.
In 1999, the Company received the funding from its Series E
Convertible Preferred Stock ("Series E Preferred Stock") private 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, 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 of 1933, as amended (the "Securities Act"). In 1999, the Company
received net proceeds of $3.5 million from the Series E Preferred Stock
placement. In addition to the transactions described above, the Company issued
and sold an aggregate amount of $1.7 million of Series E Preferred Stock to
three accredited investors through the same dealer in exchange for $1.7 million
of the Company's Series C Preferred Stock (as described below) held by the
three investors. The Company also issued and sold an aggregate amount of $0.7
million of Series E Preferred Stock (735 shares) to four accredited investors,
in exchange and consideration for an aggregate of 2.1 million shares of the
Company's common stock held by the four investors. Each share of Series E
Preferred Stock is convertible into common stock of the Company according to
the conversion formula described in the subscription agreements. As of the date
hereof, no shares of Series E Preferred Stock are outstanding. For a more
detailed discussion of the Series E Preferred Stock, see "Risk Factors -
Possible Future Dilution."
On January 25, 1999, the Company granted DMC an exclusive worldwide
license with respect to all of the Company's relevant patented and unpatented
technology relating to DMC products. NCT received a license fee of $3.0 million
(eliminated in consolidation) as consideration for the license. DMC is
obligated to pay the license fee when proceeds are available from the sale of
DMC's common stock. In addition, running royalties will be payable to the
Company with respect to (1) DMC's sale of products incorporating the licensed
technology, and (2) its sublicensing of such technology. NCT anticipates that
DMC will issue
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shares of its common stock in transactions exempt from registration in order to
raise additional working capital.
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 recent amendment, see "Risk Factors - Possible Future
Dilution."
On February 9, 1999, NCT Audio and NXT expanded a cross licensing
agreement dated September 27, 1997 to increase NXT's fields of use, increase
the royalties due NCT Audio from NXT and increase the royalties due NXT from
NCT Audio. In consideration for granting these expanded licensing rights, each
party received license fees. See Note 3 - "Notes to Financial Statements -
Joint Ventures and Other Strategic Alliances."
On March 31, 1999, the Company signed a license agreement to exchange
3,600 shares of Series E Preferred Stock for four DMC network affiliate
licenses incorporating the Digital Broadcasting Station System ("DBSS"). The
exchange of shares of Series E Preferred Stock was in lieu of cash
consideration. The DBSS technology was developed by the Company for DMC, a
wholly-owned subsidiary of the Company. DMC was incorporated to develop,
install and provide an audio/visual advertising medium within
commercial/professional settings. DBSS schedules advertisers' customized
broadcast messages, which are downloaded via the Internet with the respective
music genre of choice to the commercial/professional establishments. During
1999, DMC did not recognize any advertising revenue.
The Company anticipates the sale of such licenses to generate revenues
of approximately $1.0 million each based on regional and
commercial/professional settings. The Company has developed standard license
agreements to coincide with its current business plan and delineate the extent
and nature of the rights and duties of the Company and its licensees. During
the three months ended March 31, 1999, the Company, in accordance with its
revenue recognition policy, recognized revenue of $2.0 million on the issuance
of such licenses in consideration of the receipt of 3,600 shares of its Series
E Preferred Stock. Subsequently, during the three months ended June 30, 1999,
the Company adjusted such revenue to $0.9 million due to the valuation of
additional shares of Series E Preferred Stock issued during the period.
On March 31, 1999, the Company signed a license agreement with Lernout
& Hauspie Speech Products N.V. ("L&H"). The agreement provides the Company with
a worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. Further, on April 12, 1999, the
Company granted a worldwide, non-exclusive, non-transferable license to L&H.
The agreement provides L&H access to NCT's noise and echo cancellation
algorithms for use in L&H's technology. During the third quarter of 1999, the
Company and L&H agreed to offset the balances owed each other.
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At the annual meeting of stockholders of the Company on June 24, 1999,
the stockholders approved an amendment to increase the number of shares of
common stock the Company is authorized to issue from 255,000,000 to
325,000,000. This amendment became effective on July 29, 1999 when the Company
filed the appropriate amendment to its Certificate of Incorporation with the
Office of the Secretary of State of Delaware to comply with applicable Delaware
General Corporation Law.
On June 24, 1999, the Board of Directors approved the issuance of up
to 15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In connection therewith, management negotiated with
certain vendors and creditors and 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.
On June 24, 1999, NCT Hearing, a wholly-owned subsidiary of the
Company, signed a letter of intent to acquire sixty percent (60%) of the common
stock of Pro Tech Communications, Inc. ("Pro Tech") in exchange for rights to
certain NCT Hearing technology. The acquisition is contingent on NCT Hearing
raising $2.0 million of equity financing.
On July 19, 1999, DMC signed a convertible guaranteed term promissory
note ("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. PRG will provide lease financing to DMC for its Sight and Sound(TM)
systems (the "Systems") and will provide integration, installation and
maintenance services to DMC. DMC received a portion of the PRG Note ($125,000)
on July 22, 1999. Of the total amount, $750,000 has been deposited into an
escrow account and will be used to pay rental and installation costs due from
DMC with respect to the Systems. Further, DMC may draw an additional $125,000,
provided that PRG continues to have a good faith belief that the Systems are
functioning properly and that DMC has obtained at least one network-wide
advertising client providing annual advertising revenues of at least $250,000.
The PRG Note matures on July 19, 2001 and earns interest at ten percent (10%)
per annum. PRG may convert the PRG Note in whole or in part, at 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 its technology and
economics and the likelihood of its continued success. In connection with the
PRG Note, PRG was granted a common stock warrant equal to, at PRG's election,
either (i) the number of shares of the Company's common stock which may be
purchased for an aggregate purchase price of $1,250,000 at the fair market
value on July 19, 1999; or (ii) the number of shares representing five percent
of the fully paid non-assessable shares of common stock of DMC at the purchase
price per share equal to either (x) if a DMC qualified sale (a sale in one
transaction in which the aggregate sales proceeds to DMC equal or exceed
$5,000,000) has closed on or before December 31, 1999, the purchase price per
share determined by multiplying the price per share of DMC common stock or
security convertible
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into DMC common stock by seventy-five percent (75%) or (y) if a DMC qualified
sale has not closed on or before December 31, 1999, at an aggregate price of
$1,250,000.
On August 10, 1999, the Company entered into a subscription agreement
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. Each share of the Series F Preferred Stock has a par value of $.10
per share and a stated value of one thousand dollars ($1,000), with an
accretion rate of four percent (4%) per annum on the stated value. Each share
of Series F Preferred Stock is convertible into fully paid and nonassessable
shares of the Company's common stock, subject to certain limitations, as
amended in January 2000. See "Risk Factors - Possible Future Dilution" for a
more detailed discussion of the Series F Preferred Stock Placement.
On August 16, 1999, the Company executed a plan to outsource logistics
and downsize its audio, hearing and product support groups. Consequently, the
Company reduced its worldwide work force by approximately 25%.
On September 10, 1999, NCT executed subscription agreements in the
amount of $4 million for four DMC network affiliate licenses incorporating
DBSS. As of March 31, 2000, the Company had received an aggregate of $3.0
million. 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.
On September 15, 1999, certain former shareholders and optionees of
Advancel, a majority owned subsidiary acquired by the Company on September 4,
1998, filed a Demand for Arbitration against the Company with the American
Arbitration Association. For a more detailed discussion see "Risk Factors -
Litigation" and "Item 3 - Legal Proceedings."
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 "Risk Factors
- - Litigation" and "Item 3 - Legal Proceedings." Such litigation settlement is
contingent upon the approval of the court.
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
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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 from
325,000,000. The amendment requires the affirmative vote of a majority of the
outstanding shares of common stock of the Company. Holders of the common stock
of the Company will be asked to approve the amendment at the annual meeting of
shareholders to be held in 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 are being registered under this registration
statement and prospectus. See "Risk Factors - Possible Future Dilution" for a
more detailed discussion of certain contingent obligations under this
securities purchase agreement.
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. This
registration statement and prospectus includes 28,560,000 shares of common
stock of the Company that the Company may issue upon the conversion of shares
of our Series F Preferred Stock in accordance with the amended Certificate of
Designations.
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 Preferred Stock, an aggregate stated value of $6 million, exchanged
such shares for eight DMC network affiliate licenses.
In 1999, DMC has (1) secured $10.0 million of equipment financing and
a $1.0 million equity investment from PRG, as noted above; (2) secured Compaq
Computer Corporation as a charter DMC advertiser and an official supplier of
customized components for the Sight & Sound(TM) system; (3) signed Trans World
Entertainment for the retail installation of 1,750 Sight & Sound(TM) systems;
(4) signed Wherehouse Entertainment, Inc. for the retail installation of 1,446
Sight & Sound(TM) systems; (5) signed The Wiz for the retail installation of
multiple Sight & Sound(TM) systems in 41 stores; (6) signed Barnes & Noble
College Bookstores for the retail
8
<PAGE> 13
installation of multiple Sight & Sound(TM) systems in their entire network of
380 college bookstores; and (7) signed but not announced three other retailers
for the installation of additional Sight & Sound(TM) systems. In January 2000,
DMC announced the appointment of Interep Nontraditional Media ("Interep") as
DMC's advertising sales representative. The appointment of Interep as DMC's
advertising sales representative is a crucial 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 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 $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 $1.75 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.
This registration statement and prospectus includes 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. In addition, warrants for 167,500 shares which were
issued in conjunction with the Series G Preferred Stock transaction are
included in this registration statement and prospectus. 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 exchange agreement in order to (i)
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,
which Austost and Balmore shall deliver to NCT; and (ii) 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 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. Balmore and Austost will
realize a 10% commission on the proceeds from the sale of shares.
9
<PAGE> 14
On March 27, 2000, the Company's subsidiary, DMC, 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 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 April 3, 2000, the Company's subsidiary, DMC, entered into a
license agreement for $2.0 million to develop a portion of the DMC affiliate
network in the New York region.
10
<PAGE> 15
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below is derived
from the historical financial statements of the Company. The data set forth
below is qualified in its entirety by and should be read in conjunction with
the Company's consolidated "Financial Statements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that are
included elsewhere in this registration statement and prospectus.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS AND SHARES, EXCEPT PER SHARE AMOUNT)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
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)
============= ============ ========== ========== ============
Weighted average number of common
Shares outstanding(1) - basic and
diluted 87,921 101,191 124,101 143,855 190,384
============= ============ ========== ========== ============
Basic and Diluted Net loss per share $ (0.05) $(0.11) $(0.09) $(0.12) $(0.18)
============= ============ ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $9,583 $5,881 $17,361 $15,465 $13,377
Total current liabilities 2,699 3,271 2,984 5,937 7,728
Long-term debt 105 -- -- -- 4,107
Accumulated deficit (72,848) (83,673) (93,521) (107,704) (131,475)
Stockholders' equity (deficit)(2) 6,884 2,610 14,377 3,426 (367)
Working capital (deficiency) 1,734 (1,312) 11,696 (1,187) (3,281)
</TABLE>
(1) Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible preferred stock, since their effect would be
antidilutive.
(2) The Company has never declared nor paid cash dividends on its common
stock.
(3) Includes interest expense of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
(4) Includes a $3.2 million gain from the exercise of an option received from
NXT in connection with the cross license agreement entered into by the
Company.
(5) Includes a $2.4 million charge in connection with the Company's write down
of its investment in TSA to its estimated net realizable value; a $1.8
million reserve for promissory notes and pre-acquisition costs related to
PPI; and a $3.1 million charge for the impairment of goodwill.
11
<PAGE> 16
EXECUTIVE OFFICES
Our principal executive office is located at 1025 West Nursery Road,
Suite 120, Linthicum, Maryland 21090. The telephone number is (410) 636-8700.
NCT also maintains sales and marketing offices at One Dock Street, Suite 300,
Stamford, Connecticut, 06902. The telephone number is (203) 961-0500.
RISK FACTORS
The shares of common stock covered by this registration statement and
prospectus represent a speculative investment and entail elements of risk.
Investors should carefully consider the following risk factors before making a
decision to invest in the Company. Investors also should examine the
information included in subsequent sections of and as exhibits to this
registration statement and prospectus.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" - those
which are not historical facts but rather estimates made by Company management.
All forward-looking statements involve risks and uncertainties. The Company
wishes to caution investors that the important factors discussed below have, or
could, both (1) affect the Company's actual performance, and (2) cause actual
performance to differ materially from our predictions.
The Company believes that the assumptions underlying such forward
looking statements are reasonable. At the same time, it would be prudent to
remember that our assumptions could be inaccurate. Therefore, we cannot give
any assurances that these statements will, in fact, be correct.
OUR CURRENT FINANCIAL CONDITION
As of December 31, 1999, NCT had cash and cash equivalents amounting
to $1.1 million, increasing from $0.5 million at December 31, 1998. 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:
- technology licensing fees and royalties,
- product sales, and
- 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.
12
<PAGE> 17
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 contains an explanatory paragraph. This paragraph notes that
certain factors raise substantial doubt as to our ability to continue as a
going concern. Investors should read the auditors' report and examine the
Company's financial statements.
NO HISTORY OF DIVIDENDS
The Company has never declared or paid dividends on its common stock.
We have no present intent to pay dividends on our common stock. The Company
has, from time to time, fulfilled its dividend (or payment in kind) obligation
on its preferred stock. See "Possible Future Dilution" below.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company has incurred substantial losses from operations since its
inception. These losses have been recurring and amounted to $131.5 million on a
cumulative basis through December 31, 1999. The Company has funded these losses
primarily from the sale of its common stock, including the exercise of warrants
and options to purchase common stock. The Company also offsets its losses with
technology licensing fees and the engineering and development funds we receive
from our joint venture and strategic alliance partners.
The Company incurred a net loss of $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.
To make a profit, NCT must independently and with our 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.
13
<PAGE> 18
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:
- $ 9.0 million from the sale of products,
- $15.8 million from technology licenses and royalties, and
- $ 4.9 million from engineering and development services.
Despite the Company's growing sales of active wave attenuation and
other products in a limited number of applications, significant further
development will be necessary before many of our potential products will
achieve expected commercial end-use applications.
POSSIBLE FUTURE DILUTION
The following sections discuss the risks associated with investing in
the Company's common stock given that future dilution is possible.
Specifically, these sections outline the myriad circumstances which could lead
to a possible negative effect on the value per share of our common stock should
holders of the Company's convertible securities, convertible notes, 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 have 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. The Company will seek the approval of its
shareholders to increase the authorized number of shares of common stock in
part to restore the required reserves, as needed, at its annual meeting to be
held in 2000.
THE 1987 PLAN
In 1987, the Company adopted the 1987 Stock Option Plan (the "1987
Plan"), which provides for the grant of up to 4,000,000 shares of common stock
as either incentive or nonstatutory stock options. The 1987 Plan allows for the
grant of incentive stock options to full-time employees, including directors
and officers. It further allows for the grant of nonstatutory stock options to
employees and non-employee directors of the Company. See Note 12 - "Notes to
Financial Statements - Common Stock Options and Warrants" for a more detailed
description of the 1987 Plan. At December 31, 1999, the Company had outstanding
options to purchase 1,350,000 shares of common stock under its 1987 Plan. All
of such options are exercisable.
14
<PAGE> 19
THE 1992 PLAN
At the 1993 annual stockholders meeting, the Company's shareholders
approved a stock option plan previously adopted in October 1992 by the Board of
Directors covering 6.0 million shares of the Company's common stock (the "1992
Plan"). The 1992 Plan provides for the grant of options to purchase common
stock and awards of restricted common stock to employees, officers and
directors of the Company. At the 1996 annual stockholders meeting, shareholders
approved an amendment to the 1992 Plan, increasing the number of shares covered
to 10.0 million. The shareholders also approved the addition of active
consultants as persons eligible to participate. At the 1998 annual stockholders
meeting, shareholders again approved an amendment to the 1992 Plan, increasing
the number of shares covered to 30.0 million and permitting outside directors
to participate. The amendment also (1) deleted the formula for grants of awards
of restricted common stock and options to purchase common stock to outside
directors, and (2) directed that the Company's Board of Directors, or a
committee appointed by the Board consisting of at least two outside directors,
administer the 1992 Plan.
The Company is required to reserve 30.0 million shares of common stock
for issuance in the event that option holders exercise their options to
purchase shares or that the Company grants restricted stock under the 1992
Plan. All of these 30.0 million shares have been registered under the
Securities Act. As of December 31, 1999, the Company had outstanding options to
purchase 28,024,237 shares of common stock under the 1992 Plan. Of those
shares, 14,751,044 are currently exercisable and the balance will become
exercisable in increments through April 13, 2004. As of December 31, 1999, the
Company also had granted 240,000 shares of restricted stock under the 1992
Plan.
THE DIRECTORS' PLAN
In 1994, the Company adopted (and has since amended twice) an option
plan for certain directors (the "Directors' Plan"). At the 1995 annual
stockholders meeting, shareholders approved the grant to two directors of the
option to purchase a total of 725,000 shares of NCT common stock. The
shareholders, at the 1996 annual meeting, approved an increase in the number of
shares to 821,000 and made minor changes concerning the Directors' Plan's
administration. The Company has reserved 821,000 shares of common stock for
issuance upon the directors' exercise of their options. All of the shares are
registered under the Securities Act. As of December 31, 1999, the Company had
granted options to purchase 538,500 shares of common stock, which are currently
exercisable under the Directors' Plan.
THE PRG WARRANT
As noted in "Recent Developments," 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
15
<PAGE> 20
determined by multiplying the price per share of DMC common stock or security
convertible into DMC common stock by seventy-five percent (75%) or (y) if a DMC
qualified sale has not closed on or before December 31, 1999, at an aggregate
price of $1,250,000. 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 December 31, 1999, the Company had reserved 378,984 additional
shares of common stock for issuance upon the exercise of warrants and options;
these warrants and options are not included in the above plans. The Company
also has reserved 1,429,414 shares for issuance upon the exercise of warrants
earlier granted to:
- an investor in an early 1997 private placement pursuant to
Regulation S (the "Investor Warrant"),
- three placement agents in partial consideration for services
rendered in connection with the 1997 and 1998 preferred stock
placements described below,
- one financial consultant for services rendered in connection with
another financing completed by the Company, and
- 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.
The aggregate outstanding amount of non-plan stock options and
warrants at December 31, 1999, excluding the PRG Warrant noted above, was
8,019,414, all of which are exercisable.
As of December 31, 1999, the weighted average exercise prices for all
currently exercisable options and warrants (excluding the PRG warrant) were
$0.45 and $0.77, respectively. Options granted in 1999 were granted with an
exercise price of $0.41, the fair market value of the Company's common stock on
the date of grant.
THE NCT AUDIO INITIAL FINANCING
Between October 10, 1997 and December 4, 1997, NCT Audio sold 2,145
common shares for approximately $4.0 million in a private placement under
Regulation D of the Securities Act (the "NCT Audio Initial Financing"). The
terms of the sale allow the purchasers of NCT Audio's common stock to exchange
their shares for an equally valued amount of the Company's common stock at a
predetermined exchange ratio. The purchasers could not, however, exercise their
exchange right if NCT Audio filed a registration statement for an initial
public offering with the Securities and Exchange Commission ("SEC") within 90
days. If the registration statement did not become effective within 180 days,
the exchange right was renewed. Purchasers of a total of $1.7 million of NCT
Audio common stock later agreed to extend the former period from 90 days to 150
days and the latter period from 180 days to 240
16
<PAGE> 21
days. NCT Audio, however, failed to file a registration statement within the
extended 150 day period. At the same time, the Company is under no obligation
to register any of its shares of common stock which may be issued in connection
with the above exchange right.
To date, the Company has issued 18,873,488 shares of its common stock
in exchange for 855 shares of NCT Audio common stock. Of such shares, 404,612
are being registered under this registration statement and prospectus,
17,333,334 were registered under Registration Statement No. 333-87757 and
1,000,000 shares were registered under Registration Statement No. 333-64967. It
is not possible at this time to determine the maximum number of shares of
common stock the Company would have to issue if the remaining purchasers of NCT
Audio common stock were to exercise their exchange right.
THE SERIES C CONVERTIBLE PREFERRED STOCK
Between October 28, 1997 and December 11, 1997, the Company issued and
sold 13,250 shares of its Series C Convertible Preferred Stock ("Series C
Preferred Stock") in a private placement under Regulation D of the Securities
Act. The Series C Preferred Stock is convertible into shares of the Company's
common stock in accordance with a predetermined conversion formula. The
conversion terms also provide that (1) in no event shall the average closing
bid price be less than $0.625 per share, and (2) under no circumstances shall
the Company be obligated to issue more than 26 million shares of its common
stock in the aggregate in connection with the conversion. The Company
registered such 26 million shares under Registration Statement No. 333-43387
dated December 29, 1997, as amended May 8, 1998, July 2, 1998, and June 16,
1999. Through November 29, 1999, 10,850 shares of the Series C Preferred Stock
had been converted to 20,655,000 shares of common stock and 1,700 shares had
been exchanged for the Company's Series E Preferred Stock. The 700 remaining
outstanding 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. There
are no outstanding shares of Series C Preferred Stock.
THE SERIES D CONVERTIBLE PREFERRED STOCK
Between July 27, 1998 and August 4, 1998, the Company issued and sold
6,000 shares of its Series D Convertible Preferred Stock ("Series D Preferred
Stock") in a private placement pursuant to Regulation D of the Securities Act.
Upon approval at the October 20, 1998 annual stockholders meeting by the
Company's shareholders of an increase in the authorized common stock of the
Company from 185,000,000 to 225,000,000 shares, the Series D Preferred Stock
became convertible into shares of the Company's common stock according to the
conversion formula described in the issuance's subscription agreement.
The conversion terms of this placement provide that in no event shall
the conversion price be less than $0.50 per share. Further, the conversion
terms provide that under no circumstances shall the Company be obligated to
issue more than 12,000,000 shares of common stock in the aggregate in
connection with the conversion, or more than 12,000,000 additional shares of
common stock in the aggregate in connection with the conversion of 6,000 shares
of Series D Preferred Stock issuable upon the exchange of the NCT Series A
Preferred Stock
17
<PAGE> 22
described below. The Company also is obligated to pay a 4% per annum accretion
on the stated value of the 6,000 shares of Series D Preferred Stock and has the
right to chose to pay the accretion in either cash or common stock.
Accordingly, the Company registered such 12,000,000 shares, together with an
additional 500,000 shares the Company may issue to pay the accretion under
Registration Statement No. 333-64967. The Company also may redeem the Series D
Preferred Stock in cash or common stock. In connection with the conversion of
the 6,000 shares of Series D Preferred Stock during the first quarter of 1999,
the Company issued 12,273,685 shares of the Company's common stock. There are
no outstanding shares of Series D Preferred Stock.
THE SERIES A CONVERTIBLE PREFERRED STOCK OF NCT AUDIO
Between July 27, 1998 and August 4, 1998, NCT Audio issued and sold 60
shares of its Series A Preferred Stock (the "NCT Audio Series A Preferred
Stock") in a private placement pursuant to Regulation D of the Securities Act.
The subscription agreement requires NCT Audio to file a registration statement
covering the resale of all shares of its common stock issuable upon conversion
of the preferred stock then outstanding. NCT Audio must do so no later than
thirty (30) days after it becomes a "reporting company" under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). .
The NCT Audio Series A Preferred Stock becomes convertible into common
stock of NCT Audio any time after the business unit becomes a reporting
company. If, by December 31, 1998, NCT Audio either failed to become a
reporting company or the SEC did not declare the registration statement
effective, holders became entitled to exchange each share of NCT Audio Series A
Preferred Stock into 100 shares of the Company's Series D Preferred Stock.
Holders who elected to do so would then be holders of the Company's Series D
Preferred Stock, with all of the rights and privileges discussed above.
Thus, if the holders of all 60 shares of the NCT Audio Series A
Preferred Stock exchanged them for 6,000 shares of the Company's Series D
Preferred Stock and then converted the Series D Preferred Stock for common
stock (as described above), anywhere up to an additional 12,000,000 shares of
the Company's common stock would become issuable. The issuance of an additional
500,000 shares enables the Company to pay the 4% per annum accretion payable on
the stated value of the 6,000 shares of Series D Preferred Stock. The Company
is given the right to chose to pay the accretion in either cash or common
stock. Accordingly, the Company registered such 12,000,000 shares, together
with an additional 500,000 shares the Company may issue to pay the 4% per annum
accretion on the NCT Audio Series A Preferred Stock, under Registration
Statement No. 333-64967. The Company also may redeem the Series D Preferred
Stock in cash or common stock. On March 30, 1999, holders of 57 shares of NCT
Audio Series A Preferred Stock exercised this election and converted their
shares into 11.7 million shares of the Company's common stock. 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. Thus, no shares of
NCT Audio Series A Preferred Stock are outstanding.
18
<PAGE> 23
THE ADVANCEL LOGIC CORPORATION ACQUISITION
On September 4, 1998, the Company acquired all of the common stock of
Advancel. The Company initially paid $1,000,000, payable by the delivery of
1,786,991 authorized shares of its common stock held as treasury stock. The
purchase agreement provided that Advancel's former shareholders may elect to
receive the future payments in cash or additional shares of the Company's
common stock. The future payments would be based on Advancel's earnings before
interest, taxes, depreciation and amortization for each of the next four years.
The future payments could not be less than $250,000 in any year, and there was
neither a maximum payment for any one year nor an aggregate maximum amount. If
Advancel's shareholders elected to take payment in the form of shares of the
Company's common stock, a formula was established to determine the number of
shares issuable. The foregoing obligation of the Company to issue additional
shares to Advancel shareholders is subject to the outcome of arbitration
between the parties - see "Litigation" below. If the Company had been unable to
maintain an effective registration statement for the resale of the initial
1,786,991 shares for at least thirty (30) days, each Advancel shareholder had
the right, until April 15, 1999, to require the Company to redeem up to
one-third of the initial payment shares for a predetermined cash amount. The
Company registered such shares under Registration Statement No. 333-64967 dated
September 30, 1998, as amended on October 29, 1998 and May 7, 1999.
THE SERIES E CONVERTIBLE PREFERRED STOCK
On December 30, 1998, the Company entered into a series of
subscription agreements to sell 8,145 shares of Series E Preferred Stock, with
a stated value of up to $8.2 million in consideration of approximately $4.0
million, to six accredited investors through one dealer. The sale of the shares
occurred in a private placement pursuant to Regulation D of the Securities Act.
In 1999, the Company received net proceeds of $3.5 million from the Series E
Preferred Stock placement. In addition to the transactions described above, the
Company issued and sold an aggregate amount of $1.7 million of Series E
Preferred Stock to three accredited investors through the same dealer in
exchange for $1.7 million of the Company's Series C Preferred Stock held by the
three investors. The Company also issued and sold an aggregate amount of $0.7
million of Series E Preferred Stock to four accredited investors, in exchange
and consideration for an aggregate 2.1 million shares of the Company's common
stock held by the four investors.
Each share of Series E Preferred Stock is convertible into common
stock of the Company according to the conversion formula described in the
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
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which have been designated. Based upon the shares of Series E Preferred Stock
issued and outstanding, 25,108,696 shares of the Company's common stock were
registered under a registration statement and prospectus, together with
1,540,000 shares of common stock which may be issued on Registration Statement
No. 333-82359. The issuance of the additional 1,540,000 shares will enable the
Company to pay the 4% per annum accretion on the stated value of the 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 the date hereof, holders of 3,828 shares of Series E
Preferred Stock have elected to convert their shares into 26,608,942 shares of
common stock of the Company. See Item 7 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" for further discussion of the Series E Preferred Stock Placement.
On March 31, 1999, the Company signed a license agreement to exchange
3,600 shares of Series E Preferred Stock for four DMC network affiliate
licenses incorporating DBSS. The exchange of shares of Series E Preferred Stock
is in lieu of cash consideration. The DBSS technology was developed by the
Company for DMC. DMC was incorporated to develop, install and provide an
audio/visual advertising medium within commercial/professional settings. DBSS
schedules advertisers' customized broadcast messages, which are downloaded via
the Internet with the respective music genre of choice to the
commercial/professional establishments.
The Company anticipates the sale of such licenses to generate revenues
of approximately $1.0 million each based on regional and
commercial/professional settings. The Company has developed standard license
agreements to coincide with its current business plan and delineate the extent
and nature of the rights and duties of the Company and its licensees. During
the three months ended March 31, 1999, the Company, in accordance with its
revenue recognition policy, realized only $2.0 million on the issuance of such
licenses in consideration of the receipt of 3,600 shares of its Series E
Convertible Preferred Stock. Subsequently, during the three months ended June
30, 1999, the Company adjusted such revenue to $0.9 million due to the
valuation of additional shares of Series E Preferred Stock issued during the
period.
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 million, exchanged
such shares for eight DMC network affiliate licenses. No shares of Series E
Preferred Stock are presently outstanding.
SECURED CONVERTIBLE NOTES
Carole Salkind, spouse of a former director and an accredited
investor, subscribed and agreed to purchase secured convertible notes of the
Company in an aggregate principal amount of $4.0 million. A secured convertible
note (the "Note") for $1.0 million was signed on January 26, 1999, and proceeds
were received on January 28, 1999. The Note is to mature on January 25, 2001
and earn interest at the prime rate as published from 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
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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. The Holder is required to purchase the remaining $3.0 million
principal amount of the secured convertible notes on or before June 30, 1999.
The Company has agreed to extend such date for the purchase of remaining
installments of secured convertible notes to April 15, 2000. On various dates,
the Holder has purchased additional installments of the remaining $3.0 million
principal amount of the secured convertible notes. 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.
THE SERIES F CONVERTIBLE PREFERRED STOCK
On August 10, 1999, the Company entered into a subscription agreement
(the "Series F Subscription Agreement") to sell an aggregate stated value of up
to $12.5 million (12,500 shares) of Series F Preferred Stock, in a private
placement pursuant to Regulation D of the Securities Act, to five unrelated
accredited investors through one dealer. The Company received $1.0 million for
the sale of 8,500 shares of Series F Preferred Stock having an aggregate stated
value of $8.5 million. At the Company's election, the investors may invest up
to an additional $4.0 million (4,000 shares) in cash or in kind, at a future
date. Each share of the Series F Preferred Stock has a par value of $.10 per
share and a stated value of one thousand dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value. Each share of Series F
Preferred Stock is convertible into fully paid and nonassessable shares of the
Company's common stock, subject to certain limitations.
Under the terms of the Series F Subscription Agreement, the Company is
required to file a registration statement ("the Series F Registration
Statement") on Form S-1 on or prior to a date which is no more than forty-five
(45) days from the date that the Company has issued a total of 1,000 shares of
Series F Preferred Stock, covering the resale of all of the registrable
securities (the "Series F Closing Date"). The shares of Series F Preferred
Stock become convertible into shares of common stock at any time commencing
after the earlier of (i) forty-five (45) days after the Series F Closing Date;
(ii) five (5) days after the Company receives a "no review" status from the SEC
in connection with the Series F Registration Statement; or (iii) the effective
date of the Series F Registration Statement. Each share of Series F Preferred
Stock is convertible into a number of shares of common stock of the Company
pursuant to a predetermined conversion formula.
The conversion terms of the Series F Preferred Stock also provided
that in no event shall the Company be obligated to issue more than 35,000,000
shares of its common stock in the aggregate in connection with the conversion
of the 12,500 shares of Series F Preferred Stock.
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Effective December 1, 1999, the maximum number of conversion shares was
increased to 77,000,000 shares of NCT common stock. The pro rata portion of the
shares of common stock issuable upon conversion of the 8,500 shares of Series F
Preferred Stock issued and outstanding, or 23,800,000 shares of the Company's
common stock, were registered together with 1,944,000 shares of common stock
which may be issued, under Registration Statement No. 333-87757. The issuance
of the additional 1,944,000 shares will enable the Company to pay the 4% per
annum accretion on the stated value of the issued and outstanding shares of
Series F Preferred Stock. The Company is given the right to pay the accretion
in either cash or common stock.
The Series F Subscription Agreement also provides that the Company
will be required to make certain payments in the event of its failure to effect
conversion in a timely manner. In connection with the Series F Preferred Stock,
the Company may be obligated to redeem the excess of the stated value over the
amount permitted to be converted into common stock. Such additional amounts
will be treated as obligations of the Company. As of March 31, 2000, 4,016
shares of Series F Preferred Stock have been converted into 36.1 million shares
of the Company's common stock. 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. There
are 3,510 shares of Series F Preferred Stock outstanding as of the date hereof.
On January 27, 2000, the Series F Preferred Stock Certificate of
Designations was amended to obligate the Company to issue up to 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. This registration statement and prospectus includes 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.
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 $2.004 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 $1.75 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. This registration statement and
prospectus includes 4,008,000 shares of the
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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. In addition, warrants for 167,500 shares which were issued
in conjunction with the Series G Preferred Stock transaction are included in
this registration statement and prospectus. The warrants are exercisable at
$0.71925 per share and expire on March 31, 2005.
SUPPLIER AND CONSULTANT SHARES
As noted in "Recent Developments," the Company has 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 have an immediate, dilutive effect on existing
holders of the Company's common stock.
EXCHANGE SHARES
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,
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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 a non-cash charge, an impairment loss from
goodwill, of approximately $3.1 million in the fourth quarter of 1999 in
connection with this transaction.
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 NCT Audio common stock from a third party investor,
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 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. Balmore and Austost will
realize a 10% commission on the proceeds from the sale of shares.
RESET PROVISION 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.
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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 possibility of sale of the shares of common stock described in
this "Possible Future Dilution" section, all of which are already registered or
which the Company plans to register under this registration statement and
prospectus, may adversely affect the market price of the common stock. This
does not, however, include: (1) the shares issuable upon the exercise of the
PRG Warrant, (2) the shares issuable upon the exercise of other investors
warrants and options, (3) the shares relating to NCT Audio's Initial Financing,
(4) shares of common stock in excess of 1,944,000 which the Company may elect
to issue to pay the 4% accretion in conjunction with conversion of the Series F
Preferred Stock, and (5) shares of common stock in excess of 160,320 which the
Company may elect to issue to pay the dividend in connection with conversion of
the Series G Preferred Stock.
MATERIAL DEPENDENCE ON CERTAIN PATENT AND TRADEMARK RIGHTS
The Company and its subsidiaries currently hold 503 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:
- the range or degree of protection provided by any of its patents
or trademarks,
- that such patents, trademarks or licenses will provide
protection that has any commercial significance or any
competitive advantage,
- that such patents, trademarks or licenses will provide
protection against competitors with similar technology or
trademarks,
- that others will not obtain patents claiming aspects similar to
those covered by the Company's owned or licensed patents or
patent applications,
- that third parties will not challenge the Company's owned or
licensed patents or patent applications, or
- that regulatory authorities will grant any pending patent or
trademark application.
The Company also believes that increased competition could result
should its present, commercially significant patents or trademarks be
invalidated or expire. This increased competition could have a material adverse
effect on the Company's business prospects. While the Company intends to file
extensions for certain patents, it further cannot make any assurances that
patent authorities will grant those extensions.
The Company has conducted only limited patent and trademark searches.
Thus, patents or trademarks superior to those held by the Company could already
exist or be issued in the future to our competitors. This, too, could have a
material adverse impact on the Company's business prospects. Further, the
Company would have to expend substantial resources in obtaining and defending
its patent and trademark rights to protect the present and future technology of
NCT.
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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 "Item 3 - Legal Proceedings" for further discussion.
Competitors have filed notices of opposition with respect to two of
NCT Audio's applications for trademarks. The Company and NCT Audio believe
these claims are without merit and NCT Audio intends to prosecute its
applications zealously. However, if authorities deny NCT Audio's applications,
NCT could be required to (1) obtain a license to use the subject trademarks, or
(2) refrain from using the trademarks and adopt others. Either of these options
could involve significant expense, although neither should have a long-term,
material adverse effect on the operating results of NCT Audio or the Company.
The Company's policy is to enter into confidentiality agreements with
all of its executive officers, key technical personnel and advisors. At the
same time, we cannot give any assurances that such persons will not disclose
Company know-how, inventions and other secret or unprotected intellectual
property to third parties, whether in violation of those agreements or
otherwise.
Finally, it should be noted that annuities and maintenance fees for
the Company's extensive patent portfolio are a significant portion of the
Company's annual expenses. If, for the reasons described in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources", it becomes necessary for the
Company to reduce its level of operations, the Company will not be able to
continue to meet the extensive monetary outlay for annuities and maintenance
fees to keep all the patents and applications from becoming abandoned. 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
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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 December 31, 1999, however, there were no preferred distributions
due to joint venture partners.
The Company markets its products by identifying potential markets and
teaming up with major domestic and international businesses to support product
development, manufacturing and distribution. Our ability to enter and succeed
in new markets is dependent on these companies' assessment of the Company and
its products' profitability. Success also depends on end-users' acceptance of
our products. For example, from 1995 through 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.
CUMULATIVE LOSSES IN JOINT VENTURES
When the Company's share of losses in an alliance is greater than its
investment, the Company has no obligation to fund such additional losses. When
this occurs, the Company suspends applying the equity method of accounting for
its investment in the alliance. The Company estimates no material aggregate
losses in its strategic alliances in excess of its investments which have not
been recorded at December 31, 1999. NCT will not be able to record any equity
income with respect to an entity until its share of future profits is large
enough to recover any losses that have not yet been recorded.
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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, 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 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
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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:
- send buyers an SEC-prepared disclosure schedule before completing
the sale,
- disclose his commissions and current quotations for the security,
- disclose whether the broker-dealer is the sole market maker for
the penny stock and, if so, his control over the market, and
- 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.
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<PAGE> 34
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 4,715 shares of preferred
stock issued and outstanding at December 31, 1999. If the Company were to issue
preferred stock in the future, it could discourage or impede a tender offer,
proxy contest or other similar transaction involving a change in control. Other
shareholders may favor such a transaction. Management is not aware of any
effort at present, however, to acquire or take control of the Company.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to identify the applicable year and is an
issue which exists for all companies that rely on computers. The failure to
correct any such programs may result in incorrect results when computers
perform arithmetic operations, comparisons of data or field sorting and some
non-information systems functions that rely on computers making calculations.
The Company's cost of administering its Year 2000 Compliance Program
was minimal (less than $100,000) and did not have a material adverse impact on
its business. There has been no indication, to date, that the Year 2000 issue
has had a material impact on future earnings. Yet, the Company can make no
assurances that our customers and suppliers have in place adequate systems to
resolve their own Year 2000 problems. Such potential problems remain a
possibility and could have an adverse impact on our future results.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). The provisions of SFAS No. 131 require the
Company to disclose the following information for each reporting segment:
general information about factors used to identify reportable segments, the
basis of organization, and the sources of revenues; information about reported
profit or loss and segment assets; and reconciliations of certain reported
segment information to consolidated amounts.
During 1998, the Company also adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires the Company to report the change in the Company's
equity during the period from transactions and events other than those
resulting from investments by and distributions to the shareholders.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
This pronouncement replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share exclude any
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<PAGE> 35
dilutive effect of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share. The Company adopted SFAS No. 128 and has retroactively
applied its effects for all periods presented. The impact on our previously
reported per share amounts was insignificant. The effects of potential common
shares such as warrants, options and convertible preferred stock has not been
included, as the effect would be antidilutive.
LITIGATION
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:
- declare that the two AECorp. patents at issue are invalid and
unenforceable and that the Company's products do not infringe
upon them;
- declare that the two AECorp. patents at issue are unenforceable
due to misuse by AECorp.;
- 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;
- enjoin AECorp. from stating or inferring that the Company's
products or their use are infringing any AECorp.-owned patents;
and
- 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.
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<PAGE> 36
The Company and NCT Hearing have since filed a Reply and requested
that the court dismiss the counterclaims and enter judgment in favor of the
Company and NCT Hearing. We also argued that AECorp. is prevented from
recovering under certain equitable theories and defenses. In the opinion of
management, after consultation with outside counsel, resolution of this suit
should not have a material adverse effect on the Company's financial position
or operations. However, in the event that the lawsuit does result in a
substantial final judgment against the Company, said judgment could have a
material effect on quarterly or annual operating results.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed
suit in a Maryland 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.
On June 25, 1998, Mellon Bank FSB ("Mellon") filed suit against
Alexander Wescott & Co., Inc. ("AWC") and the Company in a district court in
the Southern District of New York. Mellon alleged that the Company and/or AWC
owe it $326,000, sums Mellon purportedly paid to both entities when it acted as
escrow agent for the Company in a private placement of securities with certain
institutional investors. The Company retained counsel and on or about July 27,
1998, AWC filed its answer, counterclaim and cross-claim against Mellon and
NCT. AWC specifically requested that the court:
- dismiss Mellon's amended complaint against AWC;
- grant AWC commissions totaling $688,000 owed to AWC by the
Company;
- order the Company to issue 784,905 shares of its common stock;
- declare that AWC is entitled to keep the $326,000 sought by
Mellon; and
- 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 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.
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<PAGE> 37
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.
On September 16, 1999, certain former shareholders and optionees (the
"Claimants") of Advancel filed a Demand for Arbitration against the Company
with the American Arbitration Association in San Francisco, California. The
primary remedy the Claimants seek is recision of the Stock Purchase Agreement,
the return of the Advancel stock surrendered in conjunction with the purchase
of Advancel by the Company and damages to be determined by arbitration. The
Company filed a response and counterclaim on October 13, 1999. After
consultation with outside legal counsel, management recognizes that the Company
may lose some or all of its claims, encountering significant liability. In the
event this Demand for Arbitration does result in a substantial judgment against
the Company, said judgment could have a material effect on the Company's
quarterly or annual operating results. Outside legal counsel has indicated that
it is impossible to estimate a range of potential liability at this early stage
with any degree of certainty. The parties have agreed on an arbitrator who has
scheduled late May 2000 for an arbitration hearing. Discovery is scheduled to
take place in the action.
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<PAGE> 38
On September 16, 1999, the Company 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, breach of fiduciary duty as a majority shareholder
and breach of obligation of good faith and fair dealing. The Company seeks
recission 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; (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 will not receive any of the proceeds from
their sale. The Company estimates that expenses payable in connection with this
registration statement will be approximately $30,000. There are no other
material incremental expenses attributable solely to the issuance and
distribution of the above-described shares.
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<PAGE> 39
SELLING SECURITY HOLDERS
The following table sets forth certain information with respect to the
Selling Stockholders. The shares of common stock set forth therein have been
included in the registration statement of which this prospectus forms a part
pursuant to registration commitments afforded to the Selling Stockholders by
contractual obligations. The Company will not receive any proceeds from the
sale of the shares by the Selling Stockholders.
<TABLE>
<CAPTION>
Beneficial
Ownership
of Shares
Beneficial of Common
Ownership Number of Stock
of Shares Shares of After
of Common Common Giving
Relationship Stock at Stock Effect to
With March 31, Offered Proposed
Name of Selling Stockholder The Company 2000 For Sale Sale
- ------------------------------- ---------------------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Atlantis Capital Fund, Ltd. 9,580,081 (1) 7,005,600 (1) 2,574,481 *
Austost Anstalt Schaan 6,592,879 1,538,462 5,054,417 (3)
Balmore Funds S.A. 6,535,379 1,538,462 4,996,917 (3)
Canadian Advantage Limited
Partnership 3,922,752 (1) 2,892,960 (1) 1,029,792 *
Dominion Capital Fund, Ltd. 9,590,161 (1) 7,015,680 (1) 2,574,481 *
The Endeavour Capital Fund,
S.A. 4,453,920 (1) (2) 4,453,920 (1) (2) -- *
Endeavour Management, Inc. 150,000 150,000 -- *
Samuel Krieger 8,750 8,750 -- *
Libra Finance S.A. 288,461 288,461 -- *
Nesher, Inc. 769,231 769,231 -- *
Ronald Nussbaum 8,750 8,750 -- *
Sage Capital Investments
Limited 404,612 404,612 -- *
Sovereign Partners, LP 15,522,238 (1) 11,360,160(1) 4,162,078 (4)
-------------- ---------- -----------
TOTAL 57,827,214 37,435,048 20,392,166
============== ========== ===========
</TABLE>
* Less than one percent (1%).
(1) Includes each Selling Stockholder's pro rata share of the maximum number
of shares of common stock which the Company is obligated to issue upon
conversion of the Company's Series F Preferred Stock under the Series F
Certificate of Designations, as amended. Such pro rata share has been
determined for each Selling Stockholder by dividing the number of shares
of Series F Preferred Stock acquired by such Selling Stockholder by the
total designated number of shares of Series F Preferred Stock times the
amended increment in the maximum conversion share amounts. The number of
shares of Preferred Stock issued upon conversion to any particular Selling
Stockholder may be more or less than the amount shown depending on (i) the
length of time the Series F Preferred Stock is held, (ii) the conversion
price as determined under the Series F Conversion Formula, and (iii) the
application of the 77,000,000 amended share limit on the Company's
obligation to issue shares of common stock upon conversion of the Series F
Preferred Stock.
(2) Includes Selling Stockholder's pro rata share of the maximum number of
shares of common stock which the Company is obligated to issue upon
conversion of the Company's Series G Preferred Stock. Such pro rata share
was determined by
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<PAGE> 40
dividing the number of shares of Series G Preferred Stock acquired (2,004)
by the total designated number of shares of Series G Preferred Stock
(5,000) times the maximum conversion share amount of 10,000,000. Also
includes 160,320 shares of common stock that the Company may issue to pay
the cumulative dividend on the Series G Preferred Stock.
(3) Upon completion of the offering, the Selling Stockholder will own 1.8% of
the Company's issued and outstanding common stock.
(4) Upon completion of the offering, the Selling Shareholder will own 1.5% of
the Company's issued and outstanding common stock.
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Stockholders that there
are no underwriting arrangements with respect to the sale of the shares, that
such shares will be sold from time to time in the over-the-counter market at
then prevailing prices or at prices related to the then current market price or
in private transactions at negotiated prices. The shares offered hereby may be
sold by one or more of the following methods, without limitation: (a) a block
trade in which a broker or dealer so engaged will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchase by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this prospectus;
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and (d) face-to-face transactions between sellers and
purchasers without a broker-dealer. In effecting sales, brokers and dealers
engaged by the Selling Stockholders may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive commissions or discounts from
Selling Stockholders in amounts to be negotiated. Such brokers and dealers and
any other participating brokers and dealers may be deemed to be "underwriters"
within the meaning of the Securities Act, in connection with such sales. Shares
of common stock offered hereby may be used to cover short sales or other
hedging transactions. From time to time, one or more of the Selling
Stockholders herein may pledge, hypothecate or grant a security interest in
some or all of the shares owned by them, and the pledgees, secured parties or
persons to whom such securities have been hypothecated shall, upon foreclosure
in the event of default, be deemed Selling Stockholders for purposes thereof.
DESCRIPTION OF SECURITIES TO BE REGISTERED
This offering consists of 28,560,000 shares of common stock of the
Company which may be issued upon the conversion of issued and outstanding
shares of the Company's Series F Preferred Stock pursuant to the Series F
Certificate of Designations, as amended. The Company originally issued the
Series F Preferred Stock in a private placement exempt from registration under
Regulation D of the Securities Act to persons not deemed "affiliates" as that
term is defined under the Securities Act.
In addition, this offering consists of 4,134,616 shares of common
stock of the Company that the Company issued to three accredited investors and
as a commission to their placement agent.
This offering also includes 404,612 shares of the Company's common
stock which the Company issued in exchange for 27 shares of common stock of NCT
Audio held by an investor.
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<PAGE> 41
In addition, this offering consists of 4,008,000 shares of common
stock of the Company which may be issued upon the conversion of shares of the
Company's Series G Preferred Stock. The Company originally issued the Series G
Preferred Stock in a private placement exempt from registration under
Regulation D of the Securities Act to persons not deemed "affiliates" as that
term is defined under the Securities Act.
This offering also includes 160,320 shares of our common stock that
the Company may issue to pay the cumulative dividend on the stated value of the
issued and outstanding shares of our Series G Preferred Stock.
In addition, this offering consists of 167,500 shares of common stock
of the Company that the Company may issue upon the exercise of warrants the
Company issued to the placement agent and the placement agent's attorneys in
connection with the Series G Preferred Stock transaction.
All of the foregoing shares of common stock of the Company may be
offered for sale by the Selling Stockholders. The Company will not receive any
of the proceeds from the sale of such shares.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Matters relating to the legality of 37,435,048 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 into this
prospectus and as exhibits have been audited by Peters Elworthy & Moore,
Chartered Accountants, as set forth in their report included therein (which
contains a paragraph on the dependence on NCT Group, Inc. for continued
financial support) and have been so incorporated in reliance upon such report
given upon the authority of such firm as experts in auditing and accounting.
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<PAGE> 42
INFORMATION WITH RESPECT TO THE REGISTRANT
ITEM 1. 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
DistributedMedia.com, Inc. DMC is a wholly-owned subsidiary of NCT which was
formed in November 1998. DMC is a new microbroadcasting media company that
delivers licensed CD-quality music as well as on-air and billboard advertising
to out-of-home commercial and professional venues via a digital network of
place-based micrbroadcasting stations, called Sight & Sound(TM). The Sight &
Sound (TM) system consists of a central control network that communicates to a
digital broadcast station, which plays music selections and advertisements
through flat panel speakers. The speaker grilles double as visual billboards.
The speakers will be provided by NCT Audio Products, Inc.
As of December 31, 1999, the Company and its business units currently
hold 503 patents and related rights worldwide and an extensive library of
know-how and other proprietary technology. These patents allow the Company to
develop major product lines, which include:
- NoiseBuster(R) ANR communications headsets
- NoiseBuster(R) ANR consumer headphones
- ProActive(R) industrial/commercial ANR headsets
- Gekko(TM) flat speakers, frames, prints and subwoofers
- ClearSpeech(R) microphones, speakers and other products
- ClearSpeech(R) corporate intranet telephone software
The Company also markets its technologies through licensing to third
parties for fees and royalties. During 1999, the Company entered into a new
technology license agreement with Lernout & Hauspie Speech Products N.V.
("L&H"), has expanded its cross-license agreement with New Transducers Ltd. and
has received royalties pursuant to several of its technology license
agreements.
The Company's operating revenues are comprised of technology licensing
fees and royalties, product sales and engineering and development services.
Historically, the Company derived the majority of its revenues from engineering
and development services and technology
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<PAGE> 43
licensing fees. As distribution channels are established and as product sales,
market acceptance and awareness of the commercial applications of the Company's
technologies build, revenues from technology licensing fees, royalties and
product sales are projected to fund an increasing share of the Company's
requirements. The revenues from these sources, if realized, will reduce the
Company's dependence on revenues from engineering and development services.
Total revenues for 1999 consisted of approximately 31% in product sales, 19% in
engineering and development services and 50% in technology licensing fees and
royalties.
The Company has entered into a number of strategic supply,
manufacturing and marketing alliances with leading global companies to
commercialize its technology. These strategic alliances historically have
funded a majority of the Company's research and development and provided the
Company with reliable sources of components, manufacturing expertise and
capacity, as well as extensive marketing and distribution capabilities. NCT has
continuing relationships with Walker Manufacturing Company ("Walker") (a
division of Tennessee Gas Pipeline Company, a wholly owned subsidiary of
Tenneco, Inc.), AB Electrolux ("Electrolux"), Ultra Electronics Ltd. ("Ultra"),
The Charles Stark Draper Laboratory, Inc. ("Draper"), Oki Electric Industry
Co., Ltd. ("Oki") and New Transducers Ltd., among others, in order to penetrate
major markets more rapidly and efficiently, while minimizing the Company's own
capital expenditures. See G. "Strategic Alliances" and Note 3 - "Notes to
Financial Statements" for further discussion.
An important factor for the Company's continuing development of its
technology is its ability to recruit and retain key personnel. As of December
31, 1999, the Company had 75 employees, including 37 engineers and associated
technical staff members.
The Company was incorporated in Nevada on May 24, 1983. In April 1985,
the Company moved its corporate domicile to Florida and assumed its former
name, Noise Cancellation Technologies, Inc. In January 1987, following the
assumption of control of the Company by the present management, the Company's
state of incorporation was changed to Delaware. At the annual meeting of
stockholders of the Company on October 20, 1998, the stockholders approved
changing the name of the Company from Noise Cancellation Technologies, Inc. to
NCT Group, Inc. effective October 21, 1998.
NCT's executive offices, research and product development facility are
located at 1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090;
telephone number (410) 636-8700. NCT maintains sales and marketing offices at
One Dock Street, Suite 300, Stamford, Connecticut 06902; telephone number (203)
961-0500. The Company's European operations are conducted through its product
development and marketing facility in Cambridge, England. NCT also maintains a
marketing facility in Tokyo, Japan. The Company's Advancel operations are
conducted in San Jose, California. The Company's DMC operations are located in
Stamford, Connecticut.
The Company is organized into strategic business units, each of which
is targeted to the commercialization of its own products in specific markets.
These include its subsidiaries, NCT Audio Products, Inc., NCT Hearing Products,
Inc., Advancel Logic Corporation, ConnectClearly.com, Inc. and
DistributedMedia.com, Inc. The Company also operates a
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<PAGE> 44
division, NCT Communications. Refer to Note 17 - "Notes to Financial
Statements" for further information about the Company's business segments.
B. BUSINESS STRATEGY
The Company's strategy is to leverage off its existing base of
proprietary technology by expanding into areas outside of traditional active
noise and vibration control to reach markets having greater opportunities such
as communications, audio and microbroadcasting media. The acquisition of
certain assets and all of the intellectual property of Active Noise and
Vibration Technologies, Inc. ("ANVT") in 1994 broadened the Company's portfolio
of intellectual property and removed restrictions on the Company regarding
licensing a series of patents developed by Professor G.B.B. Chaplin relating to
active noise cancellation technology (the "Chaplin Patents") to unaffiliated
third parties (see C. "Technology"). The Company can license the Chaplin
Patents directly to unaffiliated third parties, which provides the Company with
a greater ability to earn technology licensing fees and royalties from such
patents. Thus, while the Company continues to focus on products that the
Company believes will generate near term revenue, it is increasing its emphasis
on technology licensing fees and royalties. Further, the Company is working
continuously to lower the cost of its products and improve their technological
performance.
C. TECHNOLOGY
Active Noise Reduction ("ANR"). Active noise reduction systems are
particularly effective at reducing low frequency noise. As opposed to a passive
noise control system that is designed to mask a noise, ANR removes a
significant portion of the noise energy from the environment by creating sound
waves that are equal in frequency but opposite in phase. The illustration which
follows shows the relationship, in time, of a noise signal, an anti-noise
signal and the residual noise that results when they meet.
ACTIVE NOISE REDUCTION
[GRAPHIC]
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Active Wave Management. Active Wave Management is the combination of
active noise reduction technology and certain other technologies which results
in the electronic and/or mechanical manipulation of sound or signal waves to
reduce noise, improve signal-to-noise ratio and/or enhance sound quality.
Signal Enhancement. 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 ("ClearSpeech(R)" and "ASF").
The ClearSpeech(R) algorithm removes noise from voice transmissions.
ClearSpeech(R) parameters can be adjusted to optimize performance for a
particular noise, or can be set to provide noise reduction across a wide range
of noises. ClearSpeech(R) applications include teleconferencing systems,
cellular telephones and "airphones," telephone switches, echo cancellers, and
communications systems in which background noise is predominant. ClearSpeech(R)
is currently available for use on three hardware platforms. The Company has
added an acoustic echo cancellation algorithm, which runs on various platforms
including personal computers ("PCs") and fixed floating digital signal
processors ("DSP").
ClearSpeech(R)-Acoustic Echo Cancellation ("AEC"). AEC removes
acoustic echoes in hands-free full duplex communication systems. AEC is an
adaptive, frequency-based algorithm that continuously tracks and updates the
changes in the acoustic path between the loudspeaker and the microphone to
eliminate the acoustic echo at the source. The algorithm can be changed to
accommodate different audio bandwidths and acoustic tail lengths for use in a
variety of applications such as cellular telephony, audio and video
teleconferencing, computer telephony, gaming and voice recognition.
ClearSpeech(R)-Compression and TurboCompression ("CTC"). CTC maximizes
bandwidth efficiency in wireless, satellite and intra- and Internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. The compression can be combined with ASF technology to further
improve the compression rate and voice quality. CTC comes in two versions and
can be implemented as either a fixed or variable-rate speech coder. CTC has
many applications such as: intranet and Internet telephony, audio and video
conferencing, PC voice and music, telephone answering devices, real-time
multimedia multitasking, toys and games, and playback devices such as a
personal digital assistant ("PDA") and global positioning satellite ("GPS")
navigation systems.
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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. ("CPH"), formerly a joint venture with ANVT. These patents cover
inventions made by Professor G.B.B. Chaplin in the late 1970s and early 1980s
(some of which have now expired).
The Chaplin Patents form only one group of core patents upon which
NCT's technology is based. In March 1990, the Company acquired exclusive
ownership of 10 patents developed under the auspices of the National Research
Development Corporation ("NRDC"), an
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organization sponsored by the British Government. Among other things, the NRDC
patents, of which the Swinbanks and Ross patents are the most important,
utilize the adaptive feed forward approach to active noise control. The
Swinbanks patent covers an improved method of analyzing the incoming noise or
vibration through the use of a "frequency domain" adaptive filter which splits
the incoming noise into different frequency bands for analysis and recombines
the data to generate the anti-noise signal. The Ross patent covers the use of a
"time domain" filter which uses input and error signals to enhance a system's
ability to compensate for feedback from actuators to sensors. Without this
filter, the system will detect and begin canceling its own self-generated
anti-noise.
As part of the purchase of certain ANVT assets, the Company acquired
all the rights to nine inventions previously belonging to the Topexpress Group
in the United Kingdom. The international patent coverage of these inventions
varies but eight have been granted patent protection with numerous counterpart
foreign applications still pending. Among the other intellectual property
acquired from ANVT are patents relating to active auto mufflers and noise
suppression headrests, several patent applications on advanced algorithms,
active noise headsets and many related disclosures and various disclosures in
other areas of active attenuation of noise and vibration. In addition, the
Company acquired the rights to three basic inventions known as the Warnaka
patents.
The Company has built upon these core patents with a number of
advanced patents and patent applications. These include the Digital Virtual
Earth(TM) patent, which covers digital feedback control, and patents on
multi-channel noise control. The Company also has applied for patents on
combined feedforward and feedback control, control using harmonic filters,
filters for signal enhancement and speech filtering, control systems for noise
shaping and others.
In 1994, the Company obtained a license for the exclusive rights to
the SMM technology developed by Draper in Cambridge, Massachusetts. At this
time, four patents describing the basic technology have been issued.
In 1995, the Company acquired several U.S. patents dealing with ASF
which are used in the Company's ClearSpeech(R) product line.
Since 1996, the Company has been granted 311 new patents.
The Company holds or has rights to 313 inventions as of December 31,
1999, including 113 United States patents and over 390 corresponding foreign
patents for a total of 503 patents and related rights. The Company has pending
166 U.S. and foreign patent applications. NCT's engineers have made 151
invention disclosures for which the Company is in the process of preparing
patent applications. The Company's patents have expiration dates ranging from
2000 through 2016, with the majority occurring during or after 2009.
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The Company has been granted the following trademarks:
<TABLE>
<CAPTION>
MARK FIELD OF USE
---- ------------
<S> <C>
NCT logo Company logo
NoiseBuster(R) headsets
NoiseEater(R) HVAC systems
ClearSpeech(R) adaptive speech filter products
VariActive(R) headsets
ProActive(R) headsets
</TABLE>
The Company has also applied for 12 trademarks including:
<TABLE>
<CAPTION>
MARK FIELD OF USE
---- ------------
<S> <C>
Gekko(TM) flat audio speakers
ArtGekko(TM) flat audio speakers
Sweet Space(TM) flat audio speakers
Top Down Surround Sound(TM) vehicular audio speakers
Sight & Sound(TM) microbroadcasting
</TABLE>
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 Item
7.--"Management's Discussion and Analysis of Financial Condition
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and Results of Operations -- Liquidity and Capital Resources," it becomes
necessary for the Company to reduce its level of operations, the Company will
not be able to continue to meet the extensive monetary outlay for annuities and
maintenance fees to keep all the patents and applications from becoming
abandoned, NCT then will have to prioritize its portfolio accordingly.
E. EXISTING PRODUCTS
NCT HEARING PRODUCTS
NoiseBuster(R). NCT is currently marketing its NoiseBuster(R) personal
active noise reduction headphone for consumers at a suggested retail price of
$49. This active headphone selectively reduces unwanted noise generated by
aircraft engines, lawnmowers, street traffic, household appliances and other
annoying noise sources, while permitting the user to hear desired sounds, such
as human conversation, warning signals or music. The product can also be used
with an aircraft's in-flight entertainment system or a portable audio device.
The Company is marketing the NoiseBuster(R) through distribution channels,
including electronics retail stores, specialty catalogues and directly through
a toll-free "800" number and on the Internet. Initial product shipments of the
original NoiseBuster(R) were made in September 1993. Product shipments of the
current NoiseBuster(R) began during the first quarter of 1997.
The NoiseBuster(R) line has been expanded to include communications
headsets for cellular, multimedia and telephony. The products are the first ANR
offerings for these applications and improve speech intelligibility in the
presence of background noise. Product shipments began during the first quarter
of 1998.
ProActive(R). In 1995, the Company introduced its ProActive(R) line of
active noise reduction headsets for use in commercial and industrial settings.
The line includes a high performance earmuff and headset which combine NCT's
active noise cancellation technology for reduction of 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.
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<PAGE> 50
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.
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).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
----------------------------
AS A %
PRODUCTS AMOUNT OF TOTAL
-------- ------------ ------------
<S> <C> <C>
Hearing Products $ 682 30.9%
Communications 670 30.3%
Audio Products 856 38.8%
------------ ------------
Total $ 2,208 100.0%
============ ============
</TABLE>
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TECHNOLOGY LICENSING FEES AND ROYALTY REVENUES
The following table sets forth the percentage contribution of the
separate classes of the Company's technology to the Company's technology
licensing and royalty revenue for the year ended December 31, 1999 (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------------------------
AS A %
TECHNOLOGY AMOUNT OF TOTAL
---------- ------ --------
<S> <C> <C>
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%
=============== ===============
</TABLE>
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 the third quarter of 2000.
NCT COMMUNICATIONS
ClearSpeech(R) Product Line. NCT is continuously improving the quality
and functionality of the ClearSpeech(R) Microphone and ClearSpeech(R) Speaker
products to improve market penetration. NCT has both noise and echo cancellation
on a variety of DSPs including Analog-Devices' and Texas Instruments' general
purpose DSPs so that third party developers may integrate the technology into
their applications. NCT also has extended the availability of
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<PAGE> 52
PC development tools by creating software developer's kits for noise and echo
cancellation and speech compression.
NCT AUDIO
FPT-based products. NCT Audio is developing new, lower-cost products
for the consumer market by exploring new printing processes and alternatives to
the current electronics. NCT Audio will continue this development in 2000.
G. STRATEGIC ALLIANCES
The Company's transition from a firm primarily engaged in research and
development to one engaged in the licensing, production, marketing and sale of
technologies and applications has been facilitated by the establishment and
maintenance of strategic alliances with major domestic and international
business concerns. In exchange for the benefits to such concerns' own products
offered by the Company's technology, these alliances under the terms of their
joint venture agreements or licenses provide marketing, distribution and
manufacturing capabilities for the Company's products and enable the Company to
limit the expense of its own research and development activities. In order to
ensure dependable sources of supply and to maintain quality control and cost
effectiveness for components and integrated circuits incorporated in the
Company's applications and products, an important element of the Company's
strategy has been to identify and enter into alliances with integrated circuit
manufacturers that will develop and produce custom-made chips for NCT product
applications, and with manufacturers of components that will supply and
integrate components for NCT technologies. The following summarizes the
Company's key alliances:
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<PAGE> 53
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
DATE INITIAL
RELATIONSHIP
KEY STRATEGIC ALLIANCES ESTABLISHED APPLICATIONS
- -------------------------------------------- --------------------- -------------------------------
<S> <C> <C>
Walker Manufacturing Company (a division Nov. 1989 Mufflers, Industrial
of Tennessee Gas Pipeline Company) Silencers and Other Vehicular
Applications
AB Electrolux Oct. 1990 Consumer Appliances
Ultra Electronics Ltd. June 1991 Aircraft Cabin Quieting
Systems
The Charles Stark Draper Laboratory, Inc. July 1994 Microphones
New Transducers Ltd. Mar. 1997 Flat Panel Transducers
Oki Electric Industry Co., Ltd. Oct. 1997 Communications
Infineon Technologies AG I Gr. Dec. 1997 Microphones
(formerly Siemens AG)
VLSI Technology, Inc. Feb. 1998 Communications
STMicroelectronics SA & Nov. 1998 Java(TM) platform
STMicroelectronics S.r.l.
Lernout & Hauspie Speech Products N.V. Mar. 1999 Communications
- ----------------------------------------------------------------------------------------------------
</TABLE>
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
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<PAGE> 54
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.
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
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<PAGE> 55
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.
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<PAGE> 56
VLSI TECHNOLOGY, INC. (FRANCE) ("VLSI")
In February 1998, the Company and VLSI executed a license agreement.
Under the terms of the agreement, which included up-front development fees and
future per unit royalties, VLSI licensed the Company's ClearSpeech(R) noise
cancellation and echo cancellation algorithms for use with VLSI's current and
future integrated circuits targeted to the digital cellular and personal
communications systems ("PCS") phone market, as well as emerging computer
telephony markets. The noise cancellation algorithm is specifically designed to
remove background noise from speech and other transmitted signals, greatly
improving intelligibility and clarity of communications. The echo cancellation
algorithm cancels acoustical echo for hands-free telephony operations including
cellular and speaker phones.
STMICROELECTRONICS SA & STMICROELECTRONICS S.R.L (FRANCE AND ITALY)
("ST")
In November 1998, Advancel and ST executed a license agreement. Under
the terms of the agreement, which included a license fee, a minimum royalty
within two years and future per unit royalties, ST licensed Advancel's
tiny(2)J(TM) for Java(TM) ("T(2)J-processor core") to combine it with its proven
secure architecture and advanced nonvolatile memory technology, to offer a new
generation of secure microcontrollers for smartcard applications. The
T(2)J-processor core is the ideal architecture to accelerate the execution of
Javacard(TM)-based smartcard applications such as electronic purse credit/debit
card functions, ID cards that provide authorized access to networks and
subscriber identification modules that secure certain PCS cellular phones
against fraud.
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. (BELGIUM) ("L&H")
On March 31, 1999, the Company signed a license agreement with L&H. The
agreement provides the Company with a worldwide, non-exclusive, non-transferable
license to selected L&H technology for use in NCT's ClearSpeech(R) products. The
Company recorded a prepaid royalty of $0.9 million. On April 12, 1999, the
Company granted a worldwide non-exclusive, non-transferable license to L&H. The
agreement provides L&H access to NCT's present and future noise and echo
cancellation algorithms for use in L&H's technology. In consideration of the
Company's grant of a license to L&H, the Company recognized a non-refundable
royalty fee of $0.8 million. During the third quarter of 1999, the Company and
L&H agreed to offset the balances owed each other.
H. MARKETING AND SALES
In addition to marketing its technology through its strategic alliances
as described above, as of December 31, 1999, the Company has an internal sales
and marketing force of 15 employees, 6 independent sales representatives and its
executive officers and directors. The independent sales representatives may earn
commissions of generally up to 6% of revenues generated from sales of NCT
products to customers the sales representatives introduced to NCT and up to 5%
of research and development funding revenues provided by such customers.
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.
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The Company does not have a significant foreign exchange transaction
risk because the majority of its non-U.S. revenue is denominated and settled in
U.S. dollars. The remaining inter-company revenue, eliminated in consolidation,
is in British pounds sterling and the Company's underlying cost is also in
pounds sterling, creating a natural foreign exchange protection.
I. CONCENTRATIONS OF CREDIT RISK
The Company sells its products and services to OEMs, distributors and
end users in various industries worldwide. As outlined below, the Company's two
largest customers accounted for approximately 42% of revenues during 1999 and
10% of gross accounts receivable at December 31, 1999. The Company does not
require collateral or other security to support customer receivables.
<TABLE>
<CAPTION>
(in thousands)
AS OF DECEMBER 31, 1999,
AND FOR THE YEAR THEN ENDED
----------------------------------------
ACCOUNTS
CUSTOMER RECEIVABLE REVENUES
- -------------------------------------------------- --------------- -------------
<S> <C> <C>
STMicroelectronics SA and
STMicroelectronics S.r.l $ 33 $ 2,156
Lernout & Hauspie Speech Products N.V. - 800
All Other 204 4,107
--------------- -------------
Total $ 237 $ 7,063
=============== =============
</TABLE>
The Company regularly assesses the realizability of its accounts
receivable and performs a detailed analysis of its aged accounts receivable.
When quantifying the realizability of accounts receivable, the Company takes
into consideration the value of past due receivables and the collectibility of
such receivables, based on credit worthiness.
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company's cash equivalents consist of commercial
paper and other investments that are readily convertible into cash and have
original maturities of three months or less. The Company primarily maintains its
cash and cash equivalents in two banks.
J. COMPETITION
The Company is aware of a number of direct competitors. The Company's
principal competitors in active control systems include Bose Corporation, Lord
Corporation, Matsushita Electric Industrial Co., Ltd., Sennheiser Electronic
Corp. and Sony Corporation, among others. The Company's principal competitors in
speech applications include IBM Corporation, Lucent Technologies, Inc. and Texas
Instruments, Incorporated. To the Company's knowledge, each of such entities is
pursuing its own technology, either on its own or in collaboration with others,
and 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,
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computer, automobile and appliance manufacturers, as well as aircraft parts
suppliers and manufacturers, have research and development efforts underway that
could be potentially competitive to NCT. These companies are well established
and have substantially greater management, technical, financial, marketing and
product development resources than NCT.
K. GOVERNMENT CONTRACTS
The Company has acted as a government subcontractor in connection with
its performance of certain engineering and development services. Government
contracts provide for cancellation at the government's sole discretion, in which
event the contractor or subcontractor may recover its actual costs up to the
date of cancellation, plus a specified profit percentage. Governmental
expenditures for defense are subject to the political process and to rapidly
changing world events, either or both of which may result in significant
reductions in such expenditures in the proximate future. Government contracts
are not viewed as a significant part of the Company's business. No such
contracts were in effect during 1999.
L. RESEARCH AND DEVELOPMENT
Company-sponsored research and development expenses aggregated $6.2
million, $7.2 million and $6.2 million for the fiscal years ended December 31,
1997, 1998 and 1999, respectively.
M. ENVIRONMENTAL REGULATION COMPLIANCE
Compliance with Federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, does not have any material effect upon the
capital expenditures, earnings or competitive position of the Company.
Compliance by existing and potential customers of the Company with
Federal, state and local laws and regulations pertaining to maximum permissible
noise levels occurring from the operation of machinery or equipment or the
conduct of other activities could be beneficial to sellers of noise reduction
products and enhance demand for certain applications of the Company's
technology, as well as products developed or to be developed by the Company. At
the present time, it is premature to determine what quantitative effect such
laws and regulations could have on the sale of the Company's products and
technology.
N. EMPLOYEES
The Company had 75 employees as of December 31, 1999. None of such
employees is represented by a labor union. The Company considers its
relationships with employees to be satisfactory.
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O. ACQUISITIONS AND PROPOSED TRANSACTIONS
NCT Audio had actively pursued an acquisition strategy until the fourth
quarter of 1999. During 1998, NCT Audio had signed three letters of intent, an
agreement to purchase, and one definitive purchase agreement (now expired)
pursuant to which it would acquire 100% of the stock or assets of certain
companies. By acquiring companies that specialize in different segments of the
audio market in various locations around the world, management believed it could
improve profitability of the combined companies by sharing some resources,
eliminating redundant expenses and increasing revenue by leveraging each
company's distribution channels. Some of the synergistic opportunities that
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. ("TSA"), a wholly owned subsidiary of
Top Source Technologies, Inc ("TST"). TSA, located in Troy, Michigan,
specializes in the design and manufacture of speaker enclosures that maximize
audio output for automotive OEMs, Tier One suppliers, and key aftermarket
accounts. TSA's systems are factory installed on Chrysler Corporation's Wrangler
model line and are also offered as dealer installed accessory packages. Earlier
on June 11, 1998, NCT Audio had paid a non-refundable deposit of $1,450,000
towards the purchase price. The total purchase price was $10,000,000 with up to
an additional $6,000,000 in possible future cash contingent payments. The
shareholders of TST approved the transaction on December 15, 1998.
NCT Audio then paid TST $2,050,000 on July 31, 1998. The money was held
in escrow with all of the necessary securities and documents to evidence
ownership of 20% of the total equity rights and interests in TSA by TST. When
TST's shareholders approved the transaction, the $2,050,000 was delivered to
TST. In return, NCT Audio took ownership of the documentation and securities.
NCT Audio had an exclusive right, as extended, to purchase the assets
of TSA through July 15, 1999. Under the terms of the original agreement, NCT
Audio was required to pay TST $6.5 million on or before March 31, 1999 to
complete the acquisition of TSA's assets. As consideration for an extension of
such exclusive right from March 31, 1999 to May 28, 1999, NCT Audio agreed to
pay TST a fee of $350,000, consisting of $20,685 in cash, $125,000 of NCT
Audio's minority interest in TSA earnings, and a $204,315 note payable due April
16, 1999. If NCT Audio failed to pay the note by April 16, 1999, (a) the note
would begin to accrue interest on April 17, 1999 at the lower of the rate of two
times prime rate or the highest rate allowable by law; and (b) the $20,685 and
$125,000 portion of the extension fee would no longer be credited toward the
$6.5 million purchase price due at closing. If NCT Audio failed to pay the note
by April 30, 1999, the $204,315 portion of the extension fee would no longer be
credited toward the $6.5 million closing amount due. To date, NCT Audio has not
paid the note. Further, if NCT Audio failed to close the contemplated
transaction by May 28, 1999, NCT Audio would forfeit its minority earnings in
TSA for the period June 1, 1999 through May 30, 2000. In
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addition, due to NCT Audio's failure to close the transaction by March 31, 1999,
NCT Audio was required to pay a penalty premium of $100,000 of NCT Audio's
preferred stock. In exchange for an extension from May 28, 1999 to July 15,
1999, NCT Audio relinquished 25% of its minority equity ownership in TSA, or 5%
of TSA's outstanding stock. As a result, NCT Audio now has a 15% minority
interest in TSA.
On or about July 15, 1999, NCT Audio determined it would not proceed
with the purchase of the assets of TSA, as structured, due primarily to its
difficulty in raising the requisite cash consideration. Consequently, NCT Audio
reduced its net investment in TSA to $1.2 million, representing its 15% minority
interest, net of the above noted penalties, and recorded a $2.4 million charge
in the quarter ended September 30, 1999 for the write-down of its investment to
its estimated net realizable value. On September 30, 1999, Onkyo America
purchased substantially all of the assets of TSA and certain assets of TST used
in TSA's operations. NCT Audio is due and seeks its pro rata share of the
consideration paid by Onkyo America, less the penalties described above. The
amount which TST owes NCT Audio is in dispute; consequently, receipt of the
funds is contingent on the outcome of the arbitration between the Company, TST
and TSA. See "Item 3 - Legal Proceedings."
On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC ("PPI"). PPI, located in Phoenix, Arizona, designs
and manufactures high performance amplifiers, preamplifiers, subwoofers, signal
processors and speakers for the automotive audio aftermarket. PPI has a network
of over 600 dealers for its products throughout the U.S. NCT Audio would acquire
the interest in exchange for shares of its common stock having an aggregate
value of $2,000,000. NCT Audio had also agreed to retire approximately $8.5
million of PPI debt, but NCT Audio had to obtain adequate financing before the
transaction could have been completed. In addition, NCT Audio provided PPI a
working capital loan on June 17, 1998 in the amount of $500,000, which is
evidenced by a demand promissory note. On August 18, 1998, NCT Audio provided
PPI a second working capital loan in the amount of $1,000,000, which is also
evidenced by a demand promissory note. The unpaid principal balance of these
notes bears interest at a rate equal to the prime lending rate plus one percent
(1.0%).
As noted, the transaction was contingent on NCT Audio obtaining outside
financing to retire the PPI debt. On January 6, 1999, the PPI members notified
NCT Audio that, while they remain willing to do the transaction, they may choose
at some point to abandon the transaction because NCT Audio had not obtained the
financing in a timely manner. They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock, they would insist that NCT Audio pay them
that amount in cash at any closing. PPI has experienced significant
organizational changes which has resulted in abandonment of the proposed
acquisition. During the third quarter of 1999, the Company fully reserved the
$1.5 million due from PPI plus interest thereon but continues to seek repayment
of the notes. During the fourth quarter of 1999, NCT Audio suspended activities
associated with execution of its acquisition strategy, including the previously
intended plan to acquire PPI.
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,
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NCT Audio suspended its acquisition strategy and therefore, decided not to enter
into binding agreements to consummate the Third Acquisition.
On June 22, 1999, NCT Hearing signed a letter of intent to acquire
sixty percent (60%) of the common stock of Pro Tech Communications, Inc.
("PCTU") in exchange for rights to certain NCT Hearing technology, contingent
upon obtaining equity financing for PCTU. The Company is negotiating with
accredited investors for a $1.5 million investment in convertible preferred
stock of PCTU, convertible into shares of PCTU or exchangeable into NCT common
stock at their election.
P. BUSINESS SEGMENTS
For a full discussion of business segments and geographic areas, see
Note 17. - Notes to Financial Statements - "Business Segment Information" and
Note 18. - Notes to Financial Statements - "Geographical Information."
Q. AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities Exchange Commission ("SEC"). You may read
and copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's Website at
"http://www.sec.gov."
ITEM 2. PROPERTIES
The Company's executive office is located at the site of its research
and technical support laboratory in Linthicum, Maryland, where it leases
approximately 40,000 square feet of space under leases which expire in July
2003. The leases provide for current monthly rentals of approximately $36,000,
subject to annual inflationary adjustments.
The Company's majority owned subsidiary, Advancel, maintains its
research and engineering facility in San Jose, California, where it leases
approximately 6,000 square feet of space under a lease which expires in August
2000. The lease provides for current monthly rentals of approximately $13,000,
subject to annual inflationary adjustments.
The Company maintains a sales and marketing office in Stamford,
Connecticut where it leases approximately 6,400 square feet of space under a
lease which expires in February 2001 and provides for a current monthly rental
of approximately $9,000, subject to annual inflationary adjustments.
In March 2000, the Company signed a lease for approximately 18,700
square feet of space in Westport, Connecticut. The lease expires in March 2010
and provides for monthly
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rental of approximately $28,000 for the first five years and approximately
$31,000 per month for the next five years.
The Company's European operations are conducted in Cambridge, England
where it leases 4,000 square feet of space under a lease which expires in April
2007, and provides for a current monthly rental of approximately $4,000, subject
to annual inflationary adjustments.
The Company maintains a sales and marketing office in Tokyo, Japan,
where it leases approximately 800 square feet of space under a lease which
expires in May 2000, and provides for a current monthly rental of approximately
$3,000.
ITEM 3. LEGAL PROCEEDINGS
On or about June 15, 1995, Guido Valerio filed suit against the Company
in the Tribunale di Milano, Milano, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
Company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira; and (vi) order the Company to pay
damages for the harm done to Mr. Valerio's image for an amount such as the judge
shall deem equitable. The Company retained the Italian law firm Verusio e
Cosmelli, Giovanni Verusio, Esq., a member of that firm, as special litigation
counsel to the Company in its defense of this suit. On March 6, 1996, the
Company, through its Italian counsel, filed a brief of reply with the Tribunal
of Milan setting forth the Company's position that: (i) the Civil Tribunal of
Milan is not the proper venue for the suit; (ii) Mr. Valerio's claim is
groundless since the parties never entered into an agreement; and (iii) because
Mr. Valerio is not enrolled in the official Register of Agents, under applicable
Italian law Mr. Valerio is not entitled to any compensation for his alleged
activities.
A preliminary hearing before the Tribunal was held on May 30, 1996,
certain pretrial discovery has been completed and a hearing before a Discovery
Judge was held on October 17, 1996. Submission of the parties' final pleadings
were to be made in connection with the next hearing, which was scheduled for
April 3, 1997. On April 3, 1997, the Discovery Judge postponed this hearing to
May 19, 1998, due to a reorganization of all proceedings before the Tribunal of
Milan. At the hearing on May 19, 1998, the Discovery Judge established dates for
the parties to submit final pleadings and set September 22, 1998 as the date to
send the case
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before the Tribunal of Milan sitting in full bench. On May 4, 1999, the
Company's Italian law firm informed the Company that the Tribunal of Milan had
granted the Company's objection to lack of venue and had consequently rejected
Mr. Valerio's claim and awarded the Company expenses in the amount of
approximately $7,000.
By a letter dated September 9, 1997, outside counsel to Andrea
Electronics Corporation ("AECorp.") notified the Company that AECorp. believed
the Company's use of the term "ANR READY" constituted the use of a trademark
owned by AECorp. The Company has also been informed by representatives of
existing and/or potential customers that AECorp. made statements claiming the
Company's manufacture and/or sale of certain in-flight entertainment system
products may infringe a patent owned by AECorp. On March 25, 1998, the Company
received from AECorp.'s intellectual property counsel a letter dated March 24,
1998, announcing and notifying the Company of the issuance of U.S. patent Number
5,732,143 to AECorp. and enclosing a copy of the patent. The subject letter
appears to be one of notice and information and did not contain any claim of
infringement. Following that date, additional correspondence was exchanged
between Company counsel and counsel to AECorp. The Company again was informed by
representatives of existing and/or potential customers that AECorp. was
continuing to make statements inferring that the Company's manufacture and/or
sale of certain in-flight entertainment system products may infringe patents
owned by AECorp.
On October 9, 1998, the Board of Directors of the Company authorized
the commencement of litigation against AECorp. On November 17, 1998, the Company
and NCT Hearing filed a complaint in the United States District Court, Eastern
District of New York against AECorp. requesting that the Court enter judgment in
their favor as follows: (i) declare that the two subject AECorp. patents and all
claims thereof are invalid and unenforceable and that the Company's products do
not infringe any valid claim of the subject AECorp. patents; (ii) declare that
the subject AECorp. patents are unenforceable due to their misuse by AECorp.;
(iii) award compensatory damages in an amount of not less than $5,000,000 as
determined at trial and punitive damages of $50,000,000 for AECorp.'s tortious
interference with prospective contractual advantages of the Company; (iv) enjoin
AECorp. from stating in any manner that the Company's products, or the use of
the Company's products, infringe on any claims of the subject AECorp. patents;
and (v) award such other and further relief as the Court may deem just and
proper.
On or about December 30, 1998, AECorp. filed its Answer and
Counterclaims against the Company and NCT Hearing. In its answer, AECorp.
generally denies the Company's and NCT Hearing's allegations, asserts certain
procedural affirmative defenses and brings counterclaims against the Company and
NCT Hearing alleging that the Company has: (i) infringed the two subject AECorp.
patents and AECorp.'s "ANR Ready" mark; (ii) violated the Lanham Act through the
Company's use of such mark; and (iii) unfairly competed with AECorp. through the
use of such mark. On or about January 26, 1999, the Company and NCT Hearing
filed a Reply to AECorp.'s counterclaims generally denying AECorp.'s
counterclaims, asserting certain affirmative defenses to AECorp.'s counterclaims
and requesting that: (i) the counterclaims be dismissed with prejudice; (ii) the
Court enter judgment that the term "ANR Ready" is not a valid 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
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the Company and NCT Hearing have not engaged in any form of federal or state
statutory or common law unfair competition; (v) the Court enter judgment that
AECorp. is precluded from recovery of any claim of right to the term "ANR Ready"
by the equitable doctrine of estoppel; (vi) the Court enter judgment that
AECorp. is precluded from recovering any damages from the Company and NCT
Hearing by the equitable doctrine of laches; (vii) the Court award the Company
and NCT Hearing their costs and reasonable attorneys' fees; and (viii) the Court
enter judgment granting the relief requested in the Company's and NCT Hearing's
complaint as well as such other and further relief as the Court deems just and
proper. Discovery in this suit commenced in mid-1999 and is continuing, although
a trial date has not been set. In the opinion of management, after consultation
with outside counsel, resolution of this suit should not have a material adverse
effect on the Company's financial position or operations. However, in the event
that the lawsuit does result in a substantial final judgment against the
Company, said judgment could have a material effect on quarterly or annual
operating results.
On June 10, 1998, Schwebel Capital Investments, Inc. filed suit against
the Company and Michael J. Parrella, President, Chief Executive Officer and a
Director of the Company, in the Circuit Court for Anne Arundel County, Maryland.
The summons and complaint alleged the Company breached, and Mr. Parrella
interfered with, a purported contract entered into "in 1996" between the Company
and SCI under which SCI was to be paid commissions by the Company when the
Company received capital from investors who purchased debentures or convertible
preferred stock of the Company during a period presumably commencing on the date
of the alleged contract and allegedly extending at least to May 1, 1998. In this
regard, the complaint alleged that SCI by virtue of a purported right of first
refusal that the Company did not honor, is entitled to commissions totaling
$1,500,000 in connection with the Company's sale of $13,300,000 of preferred
stock and a subsidiary of the Company's sale of $4,000,000 of stock convertible
into stock of the Company. In the complaint SCI demands judgment against the
Company for compensatory damages of $1,673,000, punitive damages of $50,000 and
attorneys' fees of $50,000 and demands judgment against Mr. Parrella for
compensatory damages of $150,000, punitive damages of $500,000 and attorneys'
fees of $50,000 as well as unspecified other appropriate relief. On July 23,
1998, the Company and Mr. Parrella filed a motion to strike the complaint or, in
the alternative, to dismiss the tortious interference with contract claim and
the punitive damages claim. On or about August 26, 1998 plaintiffs filed an
amended complaint and a response to the Company's and Mr. Parrella's motion to
strike. On September 15, 1998, the Company and Mr. Parrella filed a motion to
strike the amended complaint. On or about September 25, 1998, the Company and
Mr. Parrella served the plaintiff with their first request for the production of
documents. On November 12, 1998, the Court granted the Company's and Mr.
Parrella's motion to dismiss the tortious interference with contracts claim and
the punitive damages claim. On or about November 25, 1998, SCI filed a second
amended complaint, which abandoned the punitive damages claim and the claim
against Mr. Parrella. Since then, there have been no further developments in
this suit. In the opinion of management, after consultation with outside
counsel, resolution of this suit should not have a material adverse effect on
the Company's financial position or operations. However, in the event that the
lawsuit does result in a substantial final judgment against the Company, said
judgment could have a material effect on quarterly or annual operating results.
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On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott
& Co., Inc. and the Company in the United States District Court, Southern
District of New York. In the complaint, Mellon demands judgment against AWC and
the Company in the amount of $326,000 by reason of its having paid each of AWC
and the Company such sum when acting as escrow agent for the Company's private
placement of securities with certain institutional investors identified to the
Company by AWC. On or about July 27, 1998, AWC filed its Answer, Counterclaim
and Cross-claim requesting: (i) dismissal of Mellon's Amended Complaint against
AWC; (ii) commissions in the amount of $688,000 to be paid by the Company to
AWC; (iii) issuance to AWC of 784,905 shares of the Company's common stock
registered for resale under the Securities Act; (iv) a declaration that AWC is
entitled to retain the $326,000 sought by Mellon; and (v) delivery of a warrant
to purchase 461.13 shares of common stock of NCT Audio. On or about August 20,
1998, the Company filed its reply to AWC's cross-claims. Discovery is scheduled
to take place in this action. In the opinion of management, after consultation
with outside counsel, resolution of this suit should not have a material adverse
effect on the Company's financial position or operations. However, in the event
that the lawsuit does result in a substantial final judgment against the
Company, said judgment would not have a severe material effect on quarterly
operating results.
On December 15, 1998, Balmore Funds S.A. ("Balmore") and Austost
Anstalt Schaan ("Austost") filed suit against the Company's majority owned
subsidiary, NCT Audio, and the Company in the Supreme Court of the State of New
York County of New York. The complaint alleged an action for breach of contract,
common law fraud, negligent misrepresentation, deceptive trade practices under
Section 349 of the General Business Law of the State of New York, and money had
and received, all arising out of NCT Audio's and the Company's alleged unlawful
conduct in connection with an agreement entered into with plaintiffs for the
sale of shares of common stock of NCT Audio to the plaintiffs in a private
placement in December 1997. In this regard, the complaint alleged that: (i) NCT
Audio breached an alleged agreement with plaintiffs to register shares of NCT
Audio's common stock purchased by plaintiffs or, in the alternative, shares of
the Company's common stock exchangeable for such shares of NCT Audio's common
stock under certain circumstances and to pay penalties set forth in the alleged
agreement; (ii) that NCT Audio made representations that were materially false
and misleading through its facsimiles of non-negotiated agreements as
substitutions for the alleged contract between the parties; (iii) that NCT Audio
and the Company acted negligently and violated duties of full, fair and complete
disclosure to the plaintiffs; (iv) that NCT Audio and the Company engaged in
deceptive trade practices under Section 349 of the New York General Business
Law; and (v) that as a result thereof, NCT Audio and the Company possess money
that in equity and good conscience should not to be retained by NCT Audio and
the Company. In the complaint the plaintiffs demand judgment against NCT Audio
and the Company: (i) for damages in an amount to be determined but not less than
$1,819,000; (ii) for punitive damages in the amount of $3,000,000; (iii)
requiring NCT Audio and the Company to register the shares of common stock of
NCT Audio held by the plaintiffs; (iv) alternatively, rescission with the return
of plaintiffs' $1,000,000 plus interest; (v) for treble damages, reasonable
attorney's fees and costs pursuant to Section 349 and 350 of the New York
General Business Law; and (vi) such other and further relief as the Court may
deem just and proper. On January 14, 1999, NCT Audio and the Company filed
removal papers to move the suit to the United States District Court for the
Southern District of New York and on January 22, 1999, NCT Audio and the Company
filed
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with that Court Defendants' Answer, Affirmative Defenses, Counterclaims and
Third-Party Complaint. On October 9, 1999, the Company, Balmore and Austost
agreed, in principle, on a mutual release and settlement, subject to court
approval, whereby all charges, claims and counterclaims which have been
individually or jointly asserted against the parties will be dropped. Court
approval is pending.
On September 16, 1999, certain former shareholders and optionees of
Advancel filed a Demand for Arbitration against the Company with the American
Arbitration Association in San Francisco, California. The primary remedy the
claimants seek is recision of the Stock Purchase Agreement, the return of the
Advancel stock surrendered in conjunction with the purchase of Advancel by the
Company and damages to be determined by arbitration. The Company filed a
response and counterclaim on October 13, 1999. After consultation with outside
legal counsel, management recognizes that the Company may lose some or all of
its claims, encountering significant liability. In the event this Demand for
Arbitration does result in a substantial judgment against the Company, said
judgment could have a material effect on the Company's quarterly or annual
operating results. Outside legal counsel has indicated that it is impossible to
estimate a range of potential liability at this early stage with any degree of
certainty. The parties have agreed on an arbitrator who has scheduled late May
2000 for an arbitration hearing. Discovery is scheduled to take place in the
action.
On September 16, 1999, NCT Audio filed a Demand for Arbitration before
the American Arbitration Association in Wilmington, Delaware, against TST and
TSA (the "Respondents") alleging, among other things, breach of the asset
purchase agreement by which TSA was to sell its assets to NCT Audio, breach of
fiduciary duty as a majority shareholder owed to NCT Audio which holds 15% of
the outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. NCT Audio seeks recision of the purchase agreement and recovery of
monies paid to TST for TSA's assets. Concurrently, NCT Audio commenced a
preliminary injunction proceeding in the Delaware Court of Chancery, seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration proceeding. Such court action was subsequently withdrawn by the
Company.
On December 8, 1999, Respondents filed an answer and counterclaim in
connection with the arbitration proceeding. Respondents asserted their
counterclaim to recover (i) the monies and stock owned under the extension
agreements; (ii) the $1 million differential between the $9 million purchase
price paid by Onkyo America for TSA's assets and the $10 million purchase price
that NCT Audio had been obligated to pay under the asset purchase agreement;
(iii) expenses associated with extending NCT Audio's time to close the
transaction; and (iv) certain legal expenses incurred by Respondents.
Management believes its position has substantial merit. However, in the
event the Demand for Arbitration does result in a substantial judgment against
the Company, said judgment could have a material effect on the Company's
financial position and quarterly or annual operating results.
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The Company believes there are no other material patent infringement
claims, litigation matters or unasserted claims other than the matters discussed
above that could have a material adverse effect on the financial position and
results of operations of the Company.
ITEM 4. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the January 6, 1999 delisting of the Company's common stock
from NASDAQ's National Market System, the Company's common stock was listed on
the NASDAQ/NMS under the symbol "NCTI". ". See "Risk Factors - Delisting from
NASDAQ National Market System." The Company's common stock currently trades on
the NASDAQ OTC Bulletin Board under the symbol "NCTI". High and low last sale
information for the Company's common stock for specified quarterly periods is
set forth below:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------
HIGH LOW HIGH LOW
------------- ---------------------------- -------------
<S> <C> <C> <C> <C>
1st Quarter $0.440 $0.190 $0.938 $0.875
2nd Quarter $0.480 $0.230 $0.719 $0.656
3rd Quarter $0.290 $0.172 $0.563 $0.531
4th Quarter $0.197 $0.172 $0.344 $0.281
</TABLE>
On April 17, 2000, the last reported sale of the Company's common stock
as reported by the NASDAQ OTC Bulletin Board was $0.73. As of March 31, 2000,
there were approximately 40,000 holders of record of the Company's common stock.
The Company has neither declared nor paid any dividends on its shares
of common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations, and has no intention of declaring dividends for the
foreseeable future.
See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations Overview" for a description of the Company's
sales of unregistered securities during the year ended December 31, 1999.
ITEM 5 DESCRIPTION OF SECURITIES
This offering consists of 28,560,000 shares of common stock of the
Company which may be issued upon the conversion of issued and outstanding shares
of the Company's Series F Preferred Stock pursuant to the Series F Certificate
of Designations, as amended. The Company originally issued the Series F
Preferred Stock in a private placement exempt from registration under Regulation
D of the Securities Act to persons not deemed "affiliates" as that term is
defined under the Securities Act.
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In addition, this offering consists of 4,134,616 shares of common stock
of the Company that the Company issued to three accredited investors and as a
commission to the placement agent.
This offering also includes 404,612 shares of the Company's common
stock which the Company issued in exchange for 27 shares of common of NCT Audio
held by an investor.
In addition, this offering consists of 4,008,000 shares of common stock
of the Company which may be issued upon the conversion of shares of the
Company's Series G Preferred Stock. The Company originally issued the Series G
Preferred Stock in a private placement exempt from registration under Regulation
D of the Securities Act to persons not deemed "affiliates" as that term is
defined under the Securities Act.
This offering also includes 160,320 shares of our common stock that the
Company may issue to pay the cumulative dividend on the stated value of the
issued and outstanding shares of our Series G Preferred Stock.
In addition, this offering consists of 167,500 shares of common stock
of the Company that the Company may issue upon the exercise of warrants the
Company issued to the placement agent and the placement agent's attorneys in
connection with the Series G Preferred Stock transaction.
All of the foregoing shares of common stock of the Company may be
offered for sale by the Selling Stockholders. The Company will not receive any
of the proceeds from the sale of such shares.
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ITEM 6 SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below is derived
from the historical financial statements of the Company. The data set forth
below is qualified in its entirety by and should be read in conjunction with the
Company's "Financial Statements" and Item 7 -"Management's Discussion and
Analysis of Financial Condition and Results of Operations" that are included
elsewhere in this registration statement and prospectus.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS AND SHARES, EXCEPT PER SHARE AMOUNT)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
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)
======== ========= ========= ========= =========
Weighted average number of common
Shares outstanding(1) - basic and
diluted 87,921 101,191 124,101 143,855 190,384
====== ======= ======= ======= =======
Basic and Diluted Net loss per share $(0.05) $(0.11) $(0.09) $(0.12) $(0.18)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $9,583 $5,881 $17,361 $15,465 $13,377
Total current liabilities 2,699 3,271 2,984 5,937 7,728
Long-term debt 105 -- -- -- 4,107
Accumulated deficit (72,848) (83,673) (93,521) (107,704) (131,475)
Stockholders' equity (deficit)(2) 6,884 2,610 14,377 3,426 (367)
Working capital (deficiency) 1,734 (1,312) 11,696 (1,187) (3,281)
</TABLE>
(1) Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible preferred stock, since their effect would be
antidilutive.
(2) The Company has never declared nor paid cash dividends on its common stock.
(3) Includes interest expense of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
(4) Includes a $3.2 million gain from the exercise of an option received from
NXT in connection with the cross license agreement entered into by the
Company.
(5) Includes a $2.4 million charge in connection with the Company's write down
of its investment in TSA to its estimated net realizable value; a $1.8
million reserve for promissory notes and pre-acquisition costs related to
PPI; and a $3.1 million charge for the impairment of goodwill.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included herein.
A. FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K which are not historical
facts are forward-looking statements which involve risks and uncertainties. The
Company's actual results in fiscal 2000 and beyond may differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company. Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of technologies and electronic systems; produce a cost effective
product that will gain acceptance in relevant consumer and other product
markets; increase revenues from products; realize funding from technology
licensing fees, royalties, product sales, and engineering and development
services to sustain the Company's current level of operation; timely introduce
new products; continue its current level of operations to support the fees
associated with the Company's patent portfolio; maintain satisfactory relations
with its customers; attract and retain key personnel; prevent invalidation,
abandonment or expiration of patents owned or licensed by the Company and expand
its patent holdings to diminish reliance on core patents; have its products
utilized beyond noise attenuation and control; maintain and expand its strategic
alliances; and protect Company know-how, inventions and other secret or
unprotected intellectual property.
B. OVERVIEW
NCT Group, Inc. ("NCT" or the "Company") is a technology developer with
an extensive portfolio of proprietary algorithms and a variety of product
offerings for consumer, commercial and industrial applications. The Company
specializes in the utilization of sound and signal waves to reduce noise,
improve signal-to-noise ratio and enhance sound quality. Commercial application
of the Company's technologies is comprised of a number of product offerings,
including NoiseBuster(R) consumer and communications active noise reduction
("ANR") headsets; ProActive(R) ANR industrial earmuffs and headsets; Gekko(TM)
flat speakers; and ClearSpeech(R) microphones, speakers and other products. In
addition to products, NCT's algorithms are available for licensing to
manufacturers for use in commercial and consumer products.
During 1999, the Company focused its efforts on the development of
DistributedMedia.com, Inc. ("DMC"), a wholly owned subsidiary of NCT which was
formed in November 1998. DMC is a microbroadcasting media company that delivers
licensed CD-quality music as well as on-air and billboard advertising to
out-of-home commercial and professional venues via a digital network of
place-based micrbroadcasting stations, called Sight & Sound(TM). The Sight &
Sound (TM) system consists of a central control network that communicates to a
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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. ("NCT Audio").
The Company and its business units currently hold 503 patents and
related rights worldwide and an extensive portfolio of proprietary algorithms,
library of know-how and other unpatented technology. Management believes that
its intellectual property portfolio prevents other competitors and potential
competitors from participating in certain commercial areas without licenses from
the Company. Our intellectual property allows the Company to develop its major
product lines which include: NoiseBuster(R) consumer and communications ANR
headsets; ProActive(R) ANR industrial earmuffs and headsets; Gekko(TM) flat
speakers; and ClearSpeech(R) microphones, speakers and other products.
The Company has continued to make substantial investments in its
technology and intellectual property and has incurred development costs for
engineering prototypes, pre-production models and field testing of several
products. Management believes that the Company's investment in its technology
has resulted in the expansion of the value of its intellectual property
portfolio and improvement in the functionality, speed and cost of components and
products.
The Company's operating revenues are comprised of technology licensing
fees and royalties, product sales and engineering and development services.
Operating revenues in 1999 consisted of approximately 31% in product sales, 19%
in engineering and development services and 50% in technology licensing fees and
royalties. The Company continues its transition from a firm focused principally
on research and development of new technology to a firm focused on the
commercialization of its technology through technology licensing fees, royalties
and product sales. Historically, the Company derived the majority of its
revenues from engineering and development funding provided by established
companies willing to assist the Company in the development of its active noise
and vibration control technology, and from technology license fees paid by such
companies. Management expects that technology licensing fees, royalties and
product sales will become the principal source of the Company's revenue as the
commercialization of its technology proceeds. As distribution channels are
established and as product sales and market acceptance and awareness of the
commercial applications of the Company's technologies build as anticipated by
management, revenues from technology licensing fees, royalties and product sales
are forecasted to fund an increasing share of the Company's requirements. The
generation of cash from these revenue sources, if realized, will reduce the
Company's dependence on engineering and development funding.
The Company continued its practice of marketing its technology through
licensing to third parties for fees, generally by obtaining technology license
fees when initiating joint ventures and alliances with new strategic partners,
and subsequent royalties. The Company has entered into a number of alliances and
strategic relationships with established firms for the integration of its
technology into products. The speed with which the Company can achieve the
commercialization of its technology depends in large part upon the time taken by
these firms and their customers for product testing and their assessment of how
best to integrate the Company's technology into their products and manufacturing
operations. While the Company works with
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these firms on product testing and integration, it is not always able to
influence how quickly this process can be completed.
On February 9, 1999, NCT Audio and New Transducers Ltd. ("NXT")
expanded the Cross License Agreement dated September 27, 1997 to increase NXT's
fields of use to include aftermarket ground-based vehicles and aircraft sound
systems and increased the royalties due NCT Audio from NXT to 10% from 6% and
increased the royalties due NXT from NCT Audio to 7% from 6%. In consideration
for granting NXT these expanded licensing rights, NCT Audio received a $0.5
million license fee. Also on February 9, 1999, NCT Audio and NXT amended the
Master License Agreement to include a minimum royalty payment of $160,000.
On March 31, 1999, the Company signed a license agreement with Lernout
& Hauspie Speech Products N.V. ("L&H"). The agreement provides the Company with
a worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. Further, on April 12, 1999, the
Company granted a worldwide, non-exclusive, non-transferable license to L&H. The
agreement provides L&H access to NCT's noise and echo cancellation algorithms
for use in L&H's technology.
Presently, the Company is selling products through six of its
alliances: Walker is manufacturing and selling industrial silencers; Siemens is
buying and contracting with the Company to install quieting headsets for patient
use in Siemens' magnetic resonance imaging machines; Ultra is installing
production model aircraft cabin quieting systems in the SAAB 340 turboprop
aircraft; OKI is integrating ClearSpeech(R) algorithm into large scale
integrated circuits for communications applications; and BE Aerospace and Long
Prosper are providing NoiseBuster(R) components for United Airlines' and five
other international carriers' comprehensive in-flight entertainment and
information systems. Management believes these developments and others
previously disclosed help demonstrate the range of commercial potential for the
Company's technology and will contribute to the Company's transition from
engineering and development to technology licensing fees, royalties and product
sales.
The Company is certified under the International Standards Organization
product quality program known as "ISO 9000", and continues to successfully
maintain its certification. The availability of high-quality, low-cost
electronic components for integration into the Company's products also is
critical to the commercialization of the Company's technology. The Company is
working with its strategic partners and other suppliers to reduce the size and
cost of the Company's systems, so that the Company will be able to offer
low-cost electronics and other components suitable for high-volume production.
Since its inception, the Company has incurred substantial losses from
operations which have been recurring and amounted to $131.5 million on a
cumulative basis through December 31, 1999. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) technology licensing fees, (4) royalties, (5) product sales,
and (6) engineering and development funds received from strategic partners and
customers.
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The Company's internally generated funds in 1999 were not sufficient to
cover the operating costs of the Company. The Company was able to continue its
operations during 1999 by raising additional capital to fund its operations for
1999 and beyond. In addition, on August 16, 1999, the Company executed a plan to
outsource logistics and downsize its audio, hearing and product support groups,
thereby reducing its worldwide workforce by approximately 25%. Refer to
"Liquidity and Capital Resources" below and to Notes 1 and 11 - "Notes to the
Financial Statements." The Company's ability of its revenue sources, especially
its technology license fees, royalties and product sales, to generate
significant cash for the Company's operations is critical to the Company's long
term success. The Company cannot predict whether it will be successful in
obtaining market acceptance of its new products or in completing its current
negotiations with respect to licenses and royalty revenues.
In 1999, the Company entered into certain transactions which provided
additional funding. These transactions included the issuance of secured
convertible notes; the Series E and Series F Convertible Preferred Stock private
placements; issuance of shares of common stock, in lieu of the cash owed to
suppliers and consultants, to settle certain obligations of the Company; and a
private placement of shares of common stock. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources" and in
Note 11 in the "Notes to the Financial Statements."
As of December 31, 1999, cash and cash equivalents amounted to $1.1
million and working capital (deficit) was $(3.3) million. Management believes
that currently available funds will not be sufficient to sustain the Company for
the next 12 months. Such funds consist of available cash and cash from the
exercise of warrants and options, the funding derived from technology licensing
fees and royalties and product sales and engineering development revenue.
Reducing operating expenses and capital expenditures alone may not be
sufficient, and continuation as a going concern is dependent upon the level of
realization of funding from technology licensing fees and royalties and product
sales and engineering and development revenue, all of which are presently
uncertain. In the event that technology licensing fees, royalties and product
sales, and engineering and development revenue are not realized as planned, then
management believes additional working capital financing must be obtained
through the private placement of additional equity of the Company in the form of
common stock, convertible preferred stock and/or convertible debt. There is no
assurance any such financing is or would become available.
There can be no assurance that sufficient funding will be provided by
technology license fees, royalties and product sales and engineering and
development revenue. In that event, the Company would have to substantially
reduce its level of operations. These reductions could have an adverse effect on
the Company's relationships with its strategic partners and customers.
Uncertainty exists with respect to the adequacy of current funds to support the
Company's activities until positive cash flow from operations can be achieved,
and with respect to the availability of financing from other sources to fund any
cash deficiencies.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The
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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 of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
C. RESULTS OF OPERATIONS
Year ended December 31, 1999 compared with year ended December 31, 1998.
Total revenues in 1999 increased by 112% to $7.1 million from $3.3
million in 1998 reflecting increases in each of the Company's revenue sources.
Total costs and expenses during the same period increased by 76% or $13.3
million, primarily due to the write down of an investment in an unconsolidated
affiliate ($2.4 million), the impairment of goodwill ($3.1 million) and a
reserve for promissory notes and pre-acquisition costs ($1.8 million). Further,
1998 other income/expense included a $3.2 million gain from the sale of NXT
stock.
Technology licensing fees and royalties increased by 343% or $2.8
million to $3.6 million from $0.8 million in 1998. The technology licensing fees
and royalties for 1999 were primarily due to the $0.2 million technology license
fee and $0.9 million prepaid royalty from STMicroelectronics S.A. ("ST"), an
$0.8 million license fee from L&H and other technology licensing fees and
royalties aggregating $1.7 million. (See Note 3 "Notes to Financial
Statements").
Product sales increased in 1999 by 5% to $2.2 million from $2.1 million
in 1998 reflecting the increased sales of the Gekko(TM) flat speakers, the
NoiseBuster(R) product line and the ClearSpeech(R) product line.
Revenue from engineering and development services increased in 1999 by
207% to $1.3 million from $0.4 million in 1998 primarily due to the contract
between Advancel Logic Corporation ("Advancel") and ST. (See Note 3 - "Notes to
the Financial Statements".)
Cost of product sales increased 24% to $2.8 million in 1999 from $2.2
million in 1998 and the product margin deteriorated to (25)% from (7)% in 1998.
The negative margin of $0.6 million in 1999 was primarily due to charges of $0.4
million for slow movement of inventory and tooling obsolescence related to the
NoiseBuster(R) product lines and NCT Audio's subwoofers, $0.4 million for
royalty expense and $0.2 million for the write down of NCT Audio's raw
materials. The negative margin of $0.1 million in 1998 was primarily due to
reserves for slow moving inventory and charges for tooling obsolescence in the
amount of $0.5 million related to the NoiseBuster(R) product lines.
Cost of engineering and development services increased in 1999 by 706%
to $2.2 million primarily due to the contract between Advancel and ST. The gross
margin on engineering and
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development service was a loss of (70%) for 1999 due to the recording of a
reserve for estimated expenses to complete the ST project.
Selling, general and administrative expenses for the year increased by
5% or $0.6 million to $11.8 million from $11.2 million in 1998 which was
primarily due to amortization of goodwill and increased legal expenses (please
refer to Item 3. "Legal Proceedings").
Research and development expenditures in 1999 decreased by 14% to $6.2
million from $7.2 million in 1998, primarily due to decreased spending on
research and development and the reduction in force in August 1999 (please refer
to Item 3. "Legal Proceedings").
Included in the Company's total expenses were non-cash expenditures for
depreciation and amortization of $2.0 million for 1999 and $1.0 million in 1998.
The Company reduced its investment in an unconsolidated affiliate to
15% of equity and recorded a $2.4 million charge for the write-down of its
investment to its estimated net realizable value.
In 1999, the Company recorded $3.1 million for the impairment of
goodwill. The Company also recorded a reserve of $1.8 million for the PPI
promissory notes including interest expense and pre-acquisition costs. Interest
expense includes $0.3 million for a beneficial conversion feature and non-cash
interest charges related to the convertible notes. The 1998 other income
consists of the gain the Company realized upon the exercise of a stock option
and the subsequent sale of NXT plc ordinary shares. The option had been acquired
by the Company in connection with a cross license agreement among the Company,
NXT plc and NXT.
In 1999, interest income decreased to less than $0.1 million from $0.4
million in 1998 principally due to lower cash resources. Interest expense
increased to $0.4 million in 1999 from less than $0.1 million in 1998, primarily
due to the issuance of convertible notes during 1999.
The Company has net operating loss carryforwards of $101.2 million and
research and development credit carryforwards of $1.7 million for federal income
tax purposes at December 31, 1999. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
Year ended December 31, 1998 compared with year ended December 31, 1997.
Total revenues in 1998 decreased by 42% to $3.3 million from $5.7
million in 1997. Total expenses during the same period increased by 12% or $1.9
million, primarily reflecting the increasing efforts in sales and marketing to
introduce new products.
Technology licensing fees and royalties decreased by 78% or $2.8
million to $0.8 million from $3.6 million in 1997. The 1997 amount is primarily
due to the $3.0 million technology license fee from Verity and other technology
licensing fees aggregating $0.6 million. See Note 3 - "Notes to Financial
Statements".
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Product sales increased in 1998 by 22% to $2.1 million from $1.7
million in 1997 reflecting the introduction of the Gekko(TM) flat speakers and
increased sales in the NoiseBuster(R) product line and the ClearSpeech(R)
product line.
Revenue from engineering and development services remained constant at
$0.4 million primarily due to the de-emphasis of engineering development funding
as a primary source of revenue for the Company.
Cost of product sales decreased 2% to $2.2 million from $2.3 million in
1997 and the product margin increased to (7)% from (32)% in 1997. The negative
margin of $0.1 million and $0.6 million in 1998 and 1997, respectively, were
primarily due to reserves for slow moving inventory and tooling obsolescence in
the amount of $0.5 million and $0.7 million in 1998 and 1997, respectively,
related to the aviation and industrial headset product lines.
Cost of engineering and development services remained constant at $0.3
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company as noted above.
Selling, general and administrative expenses for the year increased by
115% or $6.0 million to $11.2 million from $5.2 million for 1997 which was
primarily due to increased efforts in sales and marketing to introduce new
products. Sales and marketing personnel increased by 43% from 1997. In addition,
there has been an increase in consultants for the Company's focus on
international sales. Advertising increased by 227% or $1.2 million to $1.7
million from $0.5 million primarily due to the introduction of new products
through catalogs, mailings and increased participation in trade shows.
Research and development expenditures for 1998 increased by 16% to $7.2
million from $6.2 million in 1997, primarily due to the acquisition of Advancel.
Included in the Company's total expenses were non-cash expenditures for
depreciation and amortization of $1.0 million for 1998 and $0.9 million in 1997.
Other income in 1998 was $3.3 million compared to zero in 1997. The
1998 other income consists of the gain the Company realized upon the exercise of
a stock option and the subsequent sale of NXT plc ordinary shares. The option
had been acquired by the Company in connection with a cross license agreement
among the Company, NXT plc and NXT.
In 1998, interest income increased to $0.4 million from $0.1 million in
1997 principally from funds on hand at the end of 1997.
The Company has net operating loss carryforwards of $85.8 million and
research and development credit carryforwards of $1.6 million for federal income
tax purposes at December 31, 1998. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
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D. LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $131.5 million on a
cumulative basis through December 31, 1999. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) convertible debt, (4) technology licensing fees, (5)
royalties, (6) product sales, and (7) engineering and development funds received
from strategic partners and customers.
Management believes that currently available funds will not be
sufficient to sustain the Company for the next 12 months. Such funds consist of
available cash and cash from the exercise of warrants and options, the funding
derived from technology licensing fees, royalties, product sales and engineering
and development revenue. Reducing operating expenses and capital expenditures
alone will not be sufficient and continuation as a going concern is dependent
upon the level of realization of funding from technology licensing fees,
royalties product sales and engineering and development services, all of which
are presently uncertain. In the event that anticipated technology licensing
fees, royalties, product sales and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
As previously noted, on January 6, 1999, NASDAQ notified the Company
that the Company's securities were delisted from the NASDAQ National Market
effective with the close of business on January 6, 1999. The Company's common
stock is now reported on the OTC Bulletin Board. While delisting of the
Company's common stock has not had an adverse effect on the Company's
operations, it may make it more difficult for the Company to raise additional
capital to fund future operations.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development services.
In that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise substantial doubt at December 31, 1999 about the
Company's ability to continue as a going concern.
At December 31, 1999, cash and cash equivalents were $1.1 million. Such
balance was invested in interest bearing money market accounts. Restricted cash
of $0.7 million was attributed to the proceeds from the PRG Note, which is
restricted to rental and installation costs of DBSS Systems.
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The Company's working capital decreased to a deficit of $(3.3) million
at December 31, 1999, from a deficit of $(1.2) million at December 31, 1998.
This $2.1 million decrease was primarily due to the increase in accrued legal
fees and to fund operations for the period.
During 1999, the net cash used in operating activities was $10.6
million, compared to $12.8 million used in operating activities during 1998, a
decrease of $2.2 million. The $10.6 million net cash used in operating
activities was primarily due to the write down of the estimated net realizable
investment in TSA, the reserve recorded on the promissory note due from PPI, an
increase in accrued legal expenses and a charge for the impairment of goodwill.
Net inventory decreased during 1999 by $1.0 million, primarily due to
the availability of inventory on hand in the beginning of 1999, resulting in
little or no purchases of finished goods during 1999.
The net cash provided by financing activities was $11.9 million in
1999, primarily due to the $4.0 million convertible notes (see Note 8 - "Notes
to the Financial Statements" for further details) and $7.4 million net proceeds
from the Series E and the Series F Preferred Stock financings (see Note 11 -
"Notes to the Financial Statements" for further details).
The Company has no lines of credit with banks or other lending
institutions and therefore has no unused borrowing capacity.
Because the Company did not meet its revenue targets for 1999, it was
necessary for the Company to enter into certain transactions, which provided
additional funding as follows:
FUNDING FROM THE SERIES E CONVERTIBLE PREFERRED STOCK
In 1999, the Company received net proceeds of $3.5 million from the
Series E Preferred Stock placement. On December 30, 1998, the Company entered
into a series of subscription agreements to sell 8,145 shares of Series E
Preferred Stock, with a stated value of up to $8.2 million in consideration of
$2.1 million, to six accredited investors through one dealer. The sale of the
shares occurred in a private placement pursuant to Regulation D of the
Securities Act. The Company also issued and sold 1,700 shares of Series E
Preferred Stock, an aggregate amount of $1.7 million of Series E Preferred Stock
to three accredited investors through the same dealer in exchange for $1.7
million of the Company's Series C Preferred Stock held by the three investors.
The Company also issued and sold 735 shares of Series E Preferred Stock, an
aggregate amount of $0.7 million of Series E Preferred Stock to four accredited
investors, in exchange and consideration for an aggregate 2.1 million shares of
the Company's common stock held by the four investors.
In March 1999, the Company signed a license agreement to exchange 3,600
shares of Series E Preferred Stock for four DMC network affiliate licenses. The
Company, in accordance with its revenue recognition policy, realized only $0.9
million on the issuance of such licenses in consideration of receipt of 3,600
shares of Series E Convertible Preferred Stock.
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In April 1999, the Company entered into a subscription agreement to
sell 1,874 shares of Series E Preferred Stock, with a stated value of up to $1.9
million in consideration of $1.9 million to four accredited investors through
one dealer.
Each share of Series E Preferred Stock is convertible into common stock
of the Company according to the conversion formula described in the subscription
agreements. The conversion terms of the placement require the Company to file a
registration statement on either (1) a Form S-3 under certain conditions, or (2)
a Form S-1 under other specified conditions. The shares of the Series E
Preferred Stock become convertible into common stock of NCT at any time
beginning at the earlier of (1) ninety days after the closing date of the
placement, (2) five days after the Company receives a "no review" status from
the SEC in connection with filing one of the above registration statements, or
(3) the effective date of any registration statement.
The conversion terms of the Series E Preferred Stock also provide that
in no event shall the Company be obligated to issue more than 30,000,000 shares
of its common stock in the aggregate in connection with the conversion of the
10,580 shares of Series E Preferred Stock which have been designated. The
Company registered an aggregate of 26,648,696 shares of common stock for the
conversion and payment of accretion of the Series E. The conversion terms
further provide that the Company will be required to make certain payments if it
fails to effect a conversion in a timely manner and may have to redeem the
excess of the stated value over the amount permitted to be converted into common
stock. As of the date hereof, holders of 3,828 shares of Series E Preferred
Stock have elected to convert their shares into 26,608,942 shares of common
stock of the Company.
In December 1999, holders of the remaining 5,026 shares of the
Company's Series E Preferred Stock and holders of 974 shares of the Company's
Series F Preferred Stock, an aggregate stated value of $6.0 million, exchanged
such shares for eight DMC network affiliate licenses. No shares of Series E
Preferred Stock are presently outstanding.
SECURED CONVERTIBLE NOTES
In 1999, the Company received proceeds aggregating $3.0 million from
the issuance of secured convertible notes as described herein. Carole Salkind
("Holder"), spouse of a former director and an accredited investor, subscribed
and agreed to purchase secured convertible notes of the Company in an aggregate
principal amount of $4.0 million. A secured convertible note (the "Note") for
$1.0 million was signed on January 26, 1999, and proceeds were received on
January 28, 1999. The Note is to mature on January 25, 2001 and earn interest at
the prime rate as published from time to time in The Wall Street Journal from
the issue date until the Note becomes due and payable. The Holder shall have the
right at any time on or prior to the day the Note is paid in full, to convert at
any time, all or from time to time, any part of the outstanding and unpaid
amount of the Note into fully paid and non-assessable shares of common stock of
the Company at the conversion price. The conversion price, as amended by the
parties on September 19, 1999, of the notes and any future notes, shall be the
lesser of (i) the lowest closing transaction price for the common stock on the
securities market on which the common stock is being traded, at any time during
September 1999; (ii) the average of the closing bid price for the common stock
on the securities market on which the common stock is being traded, for five (5)
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consecutive trading days prior to the date of conversion; or (iii) the fixed
conversion price of $0.17. In no event will the conversion price be less than
$0.12 per share. The Holder shall purchase the remaining $3.0 million principal
amount of the secured convertible notes on or before June 30, 1999. The Company
has agreed to extend such date for the purchase of remaining installments of
secured convertible notes to April 15, 2000. On various dates, the Holder has
purchased additional installments of the remaining $3.0 million principal amount
of the secured convertible notes. As of March 27, 2000, the Company had received
proceeds aggregating $4.0 million from the Holder and had issued secured
convertible notes with the same terms and conditions of the Note described
above.
THE SERIES F CONVERTIBLE PREFERRED STOCK
The Company received $1.0 million for the sale of shares of its Series
F Convertible Preferred Stock as outlined herein. On August 10, 1999, the
Company entered into a subscription agreement (the "Series F Subscription
Agreement") to sell an aggregate stated value of up to $12.5 million (12,500
shares) of Series F Preferred Stock, in a private placement pursuant to
Regulation D of the Securities Act, to five unrelated accredited investors
through one dealer. The Company received $1.0 million for the sale of 8,500
shares of Series F Preferred Stock having an aggregate stated value of $8.5
million. At the Company's election, the investors may invest up to an additional
$4.0 million (4,000 shares) in cash or in kind, at a future date. Each share of
the Series F Preferred Stock has a par value of $.10 per share and a stated
value of one thousand dollars ($1,000) with an accretion rate of four percent
(4%) per annum on the stated value. Each share of Series F Preferred Stock is
convertible into fully paid and nonassessable shares of the Company's common
stock, subject to certain limitations. On September 10, 1999, the Company
received subscription agreements from four of the accredited investors in the
amount of $4.0 million for four DMC network affiliate licenses. While the
investors agreed upon the exchange of 8,500 shares of Series F Preferred Stock
having aggregate stated value of $8.5 million, for consideration of $1.0
million, current accounting policy dictates that the additional $4.0 million for
the DMC licenses is to be considered as additional consideration for the Series
F Preferred Stock.
Under the terms of the Series F Subscription Agreement, the Company is
required to file a registration statement ("the Series F Registration
Statement") on Form S-1 on or prior to a date which is no more than forty-five
(45) days from the date that the Company has issued a total of 1,000 shares of
Series F Preferred Stock, covering the resale of all of the registrable
securities (the "Series F Closing Date"). The shares of Series F Preferred Stock
become convertible into shares of common stock at any time commencing after the
earlier of (i) forty-five (45) days after the Series F Closing Date; (ii) five
(5) days after the Company receives a "no review" status from the SEC in
connection with the Series F Registration Statement; or (iii) the effective date
of the Series F Registration Statement. Each share of Series F Preferred Stock
is convertible into a number of shares of common stock of the Company pursuant
to a predetermined conversion formula.
The conversion terms of the Series F Preferred Stock also provided that
in no event shall the Company be obligated to issue more than 35,000,000 shares
of its common stock in the aggregate in connection with the conversion of the
12,500 shares of Series F Preferred Stock. In
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<PAGE> 81
the interest of investor relations of the Company, the maximum number of
conversion shares was increased to 77,000,000 shares of NCT common stock. The
pro rata portion of the shares of common stock issuable upon conversion of the
8,500 shares of Series F Preferred Stock issued and outstanding, or 23,800,000
shares of the Company's common stock, were registered together with 1,944,000
shares of common stock which may be issued, under Registration Statement No.
333-87757. The issuance of the additional 1,944,000 shares will enable the
Company to pay the 4% per annum accretion on the stated value of the issued and
outstanding shares of Series F Preferred Stock. The Company is given the right
to pay the accretion in either cash or common stock.
The Series F Subscription Agreement also provides that the Company will
be required to make certain payments in the event of its failure to effect
conversion in a timely manner. In connection with the Series F Preferred Stock,
the Company may be obligated to redeem the excess of the stated value over the
amount permitted to be converted into common stock. Such additional amounts will
be treated as obligations of the Company. In December 1999, 974 shares of the
Company's Series F Preferred Stock, together with 5,026 shares of the Company's
Series E Preferred Stock, were exchanged for eight DMC network affiliate
licenses. As of January 10, 2000, 4,016 shares of Series F Preferred Stock have
been converted into 36.1 million shares of the Company's common stock. There are
3,510 shares of Series F Preferred Stock outstanding as of the date hereof.
On January 27, 2000, the Series F Preferred Stock Certificate of
Designations was amended to obligate the Company to issue up to seventy-seven
million shares of its common stock upon the conversion of the 12,500 designated
shares of Series F Preferred Stock, as noted above. Such increase in the number
of shares of common stock was made in the interest of investor relations of the
Company. This registration statement and prospectus includes 28,560,000 shares
of common stock for the conversion of the amended Series F Preferred Stock
Certificate of Designations.
SUPPLIER AND CONSULTANT SHARES
In 1999, the Company issued 13,154,820 shares of common stock of the
Company to settle certain of its obligations to certain suppliers and
consultants, of which 12,759,778 shares were registered under Registration
Statement No. 333-87757. The issuance of these shares of common stock of the
Company represented $2.5 million of obligations for which the Company did not
need to use its cash resources.
PRIVATE PLACEMENT OF COMMON STOCK
In 1999, the Company issued shares of its common stock for a total
purchase price of $500,000 in a private placement pursuant to Regulation D of
the Securities Exchange Act of 1933. The Company has certain contingent
obligations under a securities purchase agreement, dated as of December 27, 1999
(the "Purchase Agreement"), among the Company, Austost, Balmore and Nesher, Inc.
("Nesher"). Based on an offer as of November 9, 1999, the Company, Austost,
Balmore and Nesher entered into the Purchase Agreement whereby the Company, on
December 28, 1999, issued a total of 3,846,155 shares (the "SPA Shares") to
Austost, Balmore
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<PAGE> 82
and Nesher for a total purchase price of $500,000. The price of the SPA
Shares was $0.13 per share, which was $0.03, or 19%, less than the closing bid
price of the Company's common stock as reported by the OTC Bulletin Board on
November 8, 1999, and $0.015, or 10%, less than the closing bid price of the
Company's common stock as reported by the OTC Bulletin Board on December 27,
1999. This per share price may be subject to decrease upon the application of a
reset provision contained in the Purchase Agreement as described below.
Under the reset provision, on June 26, 2000, and again on September 25,
2000, the Company may be required to issue additional shares to one or more of
Austost, Balmore or Nesher if the sum of certain items on those dates is less
than 120% of the total purchase price paid by Austost, Balmore and Nesher for
the SPA Shares. Those items are: (i) the aggregate market value of the SPA
Shares held by Austost, Balmore and Nesher (based on the per share closing bid
price on those dates); (ii) the market value of any SPA Shares transferred by
Austost, Balmore and Nesher as permitted under the Purchase Agreement (based on
the per share closing bid price on the date of transfer); and (iii) any amounts
realized by Austost, Balmore and Nesher from sales of any such shares prior to
June 26, 2000 or September 25, 2000, as the case may be. The number of
additional shares of common stock that the Company would be obligated to issue
in such case would be a number of shares having an aggregate market value (based
on the per share closing bid price on such date) that, when added to the sum of
items (i), (ii) and (iii) set forth above, would equal 120% of the total
purchase price paid for the SPA Shares.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties and product sales and engineering and
development revenue or additional capital. In that event, the Company would have
to cut back its level of operations substantially in order to conserve cash.
These reductions could have an adverse effect on the Company's relations with
its strategic partners and customers. (See Note 1 "Notes to Financial
Statements".)
The Company believes that the level of financial resources available to
it may be a critical component in the Company's ability to continue as a going
concern. The Company may elect to raise additional capital, from time to time,
through equity or debt financing in order to capitalize on business
opportunities and market conditions.
The accompanying Financial Statements have been prepared assuming that
the Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 1999 about the Company's ability to continue as a going concern.
The accompanying Financial Statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
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E. CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with
supply, manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies;
(ii) utilization of the manufacturing capacity of the Company's allies, enabling
the Company to integrate its active technology into products with limited
capital investment; and (iii) access to well-established channels of
distribution and marketing capability of leaders in several market segments.
In March 2000, the Company signed a lease for approximately 18,700
square feet of space in Westport, Connecticut. The lease expires in March 2010
and provides for monthly rental of approximately $28,000 for the first five
years and approximately $31,000 per month for the next five years.
There were no material commitments for capital expenditures as of
December 31, 1999, and other than the matter discussed above, no material
commitments are anticipated in the near future.
F. YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to identify the applicable year and is an
issue which exists for all companies that rely on computers. The failure to
correct any such programs may result in incorrect results when computers perform
arithmetic operations, comparisons of data or field sorting and some
non-information systems functions that rely on computers making calculations.
The Company's cost of administering its Year 2000 Compliance Program
was minimal (less than $100,000) and did not have a material adverse impact on
its business. There has been no indication, to date, that the Year 2000 issue
will have a material impact on future earnings. Yet, the Company can make no
assurances that our customers and suppliers have in place adequate systems to
resolve their own Year 2000 problems. Such potential problems remain a
possibility and could have an adverse impact on our future results.
ITEM 8. 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.
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ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages, positions and the
offices held by each of the executive officers and directors of the Company as
of March 31, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
---- --- ---------------------
<S> <C> <C>
Jay M. Haft 64 Chairman of the Board of Directors
Michael J. Parrella 52 President, Chief Executive Officer and Director
John J. McCloy II 62 Director
Samuel A. Oolie 63 Director
Cy E. Hammond 45 Senior Vice President, Chief Financial Officer
Paul Siomkos, P.E. 53 Senior Vice President, Operations
Irving M. Lebovics 49 Senior Vice President, Global Sales
James A. McManus 60 President and Chief Executive Officer of DistributedMedia.com,
Inc.
Irene Lebovics 47 Executive Vice President, Marketing
Michael A. Hayes, Ph.D. 47 Senior Vice President, Chief Technical Officer
</TABLE>
JAY M. HAFT currently serves as Chairman of the Board of Directors of
the Company. From November 1994 to July 1995, he served as President of the
Company. Since August 25, 1997, he has also served as a director of the
Company's subsidiary, NCT Audio Products, Inc. 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.
MICHAEL J. PARRELLA currently serves as President, Chief Executive
Officer and director of the Company. 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
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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 Logic Corp. ("Advancel"), a subsidiary of the Company. Mr.
Parrella was Chairman of the Board of Environmental Research Information, Inc.,
a related party and an environmental consulting firm, from December 1987 to
March 1991.
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 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
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1996, Mr. Lebovics served as Vice President of Sales for Kasten Chase Applied
Research, a wide area network hardware and software provider to companies such
as Dow Jones and the Paris and Madrid stock exchanges. From 1985 to 1993, Mr.
Lebovics served as Vice President of Sales for Relay Communications, a provider
of PC-to-mainframe communications software and Microcom, Inc. (which acquired
Relay Communications), a leading provider of modems and local area network
equipment including bridges and routers. Irving M. Lebovics is the spouse of
Irene Lebovics, Executive Vice President of the Company.
JAMES MCMANUS currently serves as President and Chief Executive Officer
of DMC, a position he has held since March 1999. Prior to that and from April,
1998, he served as a consultant to DMC. He started his career as a Certified
Public Accountant in California. During the 10 years he spent with the Disney
Company in the financial area, the company's activities included the development
of Audio-Animatronics, Walt Disney World, Disney Theme Hotels, the City Planning
Board for Lake Buena Vista, Florida, and Disney's joint venture with Florida
Telephone. Subsequent to Disney, he designed and executed a financial turnaround
plan for Great Adventure Park in New Jersey. Later, Mr. McManus ran his own
computer consulting firm for several years providing customized computer systems
for small and medium size businesses. He was a member of the Radio City Music
Hall management team that revitalized New York's famous landmark, first as Chief
Financial Officer and then for 10 years as President and CEO. Mr. McManus has
always been active in the business community with involvement as Director, New
York Council of the Boy Scouts of America; Director, Hugh O'Brian Youth
Organization; Director, Association to Help Retarded Children; The Mayor's
Summer Youth Jobs Program and many others.
IRENE LEBOVICS currently serves as Executive Vice President and
Secretary, NCT Group, Inc., and President of NCT Hearing, a wholly-owned
subsidiary of the Company. On January 5, 2000, Ms. Lebovics was elected Acting
Chief Marketing Officer and Secretary of Advancel. She joined the Company as
Vice President of NCT and President of NCT Medical Systems (NCTM) in July 1989.
In March 1990, NCTM became part of NCT Personal Quieting and Ms. Lebovics served
as President. In January 1993, she was appointed Senior Vice President of the
Company. In November 1994, Ms. Lebovics became President of NCT Hearing. From
August 1, 1995, to May 1, 1996, she also served as Secretary of the Company. Ms.
Lebovics has held various positions in product marketing with Bristol-Myers, a
consumer products company, and in advertising with McCaffrey and McCall.
MICHAEL A. HAYES, PH.D., currently serves as Senior Vice President,
Chief Technical Officer after joining the Company in 1996. On January 5, 2000,
he was appointed Acting Chief Technical Officer of Advancel. During 1995 and
1994, Dr. Hayes served as Deputy Project Director, Research Support for
Antarctic Support Associates, with operations in Chile, New Zealand, Australia,
and Antarctica. From 1991 to 1994, he served as Deputy Program Manager, Special
Payloads, for Martin Marietta Government Services (formerly General Electric
Government Services) while directly managing critical spacecraft sub-system and
instrument development for Goddard Space Flight Center. Prior to 1991, Dr. Hayes
served as a research faculty member at Georgia Institute of Technology, and as a
Senior Process Engineer at Texas Instruments.
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ITEM 10 EXECUTIVE COMPENSATION
A. EXECUTIVE COMPENSATION AND SUMMARY COMPENSATION TABLE
Set forth below is certain information for the three fiscal years ended
December 31, 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>
Michael J. Parrella 1999 $120,000 $168,678 $22,008 6,812,500 (1) $ 6,418 (4)
President and 1998 120,000 205,889 20,615 12,000,000 (2) 5,918 (4)
Chief Executive 1997 120,000 243,058 15,348 3,062,500 (3) 5,218 (4)
Officer
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 1997 - - - - -
Irving M. Lebovics 1999 150,000 - 9,000 250,000 -
Senior Vice President, 1998 89,583 (8) - 27,917 600,000 (2) -
Global Sales 1997 - - - 100,000 (8) -
James A. McManus 1999 101,846 (9) 59,410(9) - 250,000 -
President and Chief 1998 - - - - -
Executive Officer, 1997 - - - - -
DistributedMedia.com,
Inc.
</TABLE>
(1) In addition to a grant under the 1992 Plan for the purchase of
5,000,000 shares, includes replacement grants of warrants and options
which would have otherwise expired in 1999. Includes a warrant to
purchase 862,500 shares of the Company's common stock and an option to
purchase 250,000 shares of the Company's common stock as new grants due
to the extension of the expiration dates 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 $0.3128 per share, the then fair market value of the stock.
83
<PAGE> 88
(3) Includes a warrant to purchase 862,500 shares of the Company's common
stock and an option to purchase 250,000 shares of the Company's common
stock as new grants due to the extension of the expiration dates for an
additional two years.
(4) Consists of annual premiums for a $2.0 million personal life insurance
policy paid by the Company on behalf of Mr. Parrella.
(5) 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 grant of
100,000 shares of the Company's common stock issued in connection with
his offer of employment.
(8) 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.
(9) Mr. McManus, President and Chief Executive Officer of the Company's
subsidiary, DistributedMedia.com, Inc., was hired effective February
23, 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.
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<PAGE> 89
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 EMPLOYEES PRICE EXPIRATION --------------------------
NAME GRANTED IN 1999 (2) PER SHARE DATE 5% 10%
- ------------------ --------------- -------------- --------- ---------- ------------ -----------
<S> <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.
85
<PAGE> 90
(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
UNDERLYING VALUE OF UNEXERCISED
NUMBER 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> <C>
Michael J. Parrella - $ - 7,037,000 8,200,000 $ - $ -
Cy E. Hammond - - 518,718 276,000 - -
Paul D. Siomkos - - 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 $0.24 on February 1, 1999,
the date of the new grant.
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<PAGE> 91
<TABLE>
<CAPTION>
NUMBER OF MARKET
SECURITIES PRICE OF EXERCISE LENGTH OF
UNDERLYING STOCK AT PRICE AT ORIGINAL
OPTIONS/ TIME OF TIME OF OPTION TERM
WARRANTS REPRICING REPRICING NEW REMAINING AT
REPRICED OR OR OR EXERCISE DATE OF
AMENDED AMENDMENT AMENDMENT PRICE REPRICING OR
NAME DATE (#) ($) ($) ($) AMENDMENT
- --------------------- -------- ------------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
87
<PAGE> 92
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 Item 12. -
"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 Item 12. - "Certain Relationships and Related Transactions" for
further information.
E. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Mr. Haft has served as Chairman of the Company's Board of Directors
since July 17, 1996 and has also served as Chairman of the Executive Committee
of the Board of Directors. 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,
88
<PAGE> 93
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.
89
<PAGE> 94
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
90
<PAGE> 95
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)
[GRAPH]
<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 Component
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.
91
<PAGE> 96
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of March 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.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF APPROXIMATE
BENEFICIAL PERCENTAGE
NAME OF BENEFICIAL OWNER OWNERSHIP (1) OF CLASS (1)
------------------------------------------- -------------------- ----------------
<S> <C> <C> <C>
Jay M. Haft 1,982,681 (2) *
Michael J. Parrella 7,645,888 (3) 2.6%
John J. McCloy 2,531,998 (4) *
Sam Oolie 999,813 (5) *
Cy E. Hammond 586,718 (6) *
Paul D. Siomkos 417,000 (7) *
Irving M. Lebovics 1,160,517 (8) *
James A. McManus 190,000 (9) *
All Executive Officers and Directors as a
Group (10 persons) 17,094,165 (10) 5.8%
Carole Salkind 33,934,805 (11) 11.1%
</TABLE>
* 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 218,500 shares issuable upon the exercise of currently
exercisable warrants, 10,000 shares from a stock award granted by the
Company and 1,653,500 shares issuable upon the exercise of currently
exercisable options.
(3) Includes 862,500 shares issuable upon the exercise of currently
exercisable warrants, 6,774,500 shares issuable upon the exercise of
currently exercisable options and 8,888 shares held in custody for Mr.
Parrella's dependent children.
(4) Includes 862,500 shares issuable upon the exercise of currently
exercisable warrants, 5,000 shares from a stock award granted by the
Company, 1,085,000 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,
660,000 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 586,718 shares issuable upon the exercise of
currently exercisable options.
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<PAGE> 97
(7) Includes 417,000 shares issuable upon the exercise of currently
exercisable options. In February 2000, Mr. Siomkos sold 100,000 shares
of the Company's common stock which had been granted to him by the
Company as a stock incentive award upon his employment in 1998.
(8) Includes 495,000 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 Executive Vice President and Secretary.
Mr. Lebovics disclaims beneficial ownership to the shares issuable to
Ms. Lebovics upon the exercise of currently exercisable warrants and
options.
(9) Includes 175,000 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, 13,275,018 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
11,637,500 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 convertible secured 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. 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.
ITEM 12. 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, Chairman of the Board of Directors of
the Company, owns another 2% of QSI. Michael J. Parrella, President 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. 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
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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.
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by the
registrant with respect to the offering described in this registration
statement:
<TABLE>
<CAPTION>
<S> <C> <C>
Securities and Exchange Commission
registration fee $ 7,412.14
Legal Fees and expenses 10,000.00*
Accounting fees and expenses 10,000.00*
Miscellaneous expenses 2,587.86*
-----------------
Total $30,000.00*
=================
</TABLE>
* Estimated
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ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IX of the Registrant's Certificate of Incorporation provides as
follows:
(a) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person of
whom he or she is the legal representative, is or was a director or
officer, of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall
be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such
amendment only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, the payment of such expenses
incurred by a director or officer in his or her capacity as a director
or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the
final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or
officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be
indemnified under this Section or otherwise. The Corporation may, by
action of its Board of Directors, provide indemnification to employees
and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(b) If a claim under paragraph (a) of this Section is not paid in full by
the Corporation within thirty days after a written claim has been
received by
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<PAGE> 100
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
See Item 7 - "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.
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ITEM 16. 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
(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.
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NCT GROUP, INC.
INDEX TO EXHIBITS
ITEM 14(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.
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<PAGE> 103
3(g) By-laws of the Company, incorporated herein by reference to
Exhibit 3(b) to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
3(h) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the
Secretary of the State of Delaware on July 29, 1999,
incorporated herein by reference to Exhibit 3(h) to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999.
4(a) Warrant to purchase 125,000 shares of common stock of the
Company at a purchase price of $.20 per share issued to John
J. McCloy II, incorporated herein by reference to Exhibit 4(a)
to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of common stock of
the Company at a purchase price of $.75 per share issued to
John J. McCloy II, incorporated herein by reference to Exhibit
4(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4(c) Warrant #BW-2-R to purchase 862,500 shares of common stock of
the Company at a purchase price of $.75 per share issued to
Michael J. Parrella, incorporated herein by reference to
Exhibit 4(c) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
4(d) Warrant #BW-4-R to purchase 201,250 shares of common stock of
the Company at a purchase price of $.75 per share issued to
Irene Lebovics, incorporated herein by reference to Exhibit
4(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4(e) Warrant #BW-9-R and #BW-46-R to purchase 218,500 shares of
common stock of the Company at a purchase price of $.75 per
share issued to Jay M. Haft, incorporated herein by reference
to Exhibit 4(e) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
4(f) Secretary's Certificate dated March 20, 1998, as to a two (2)
year extension of the expiration dates of the Warrants
described in 4(b), (c), (d) and (e) above, incorporated herein
by reference to Exhibit 4(f) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
4(g) Warrant Agreement, dated as of January 20, 1988, between the
Company and American Stock Transfer Company, as Warrant Agent,
relating to certain warrants to purchase common stock of the
Company at a price of $.40 per share issued to Sam Oolie,
Oolie Enterprises, John J. McCloy II, and Michael J. Parrella,
incorporated herein by reference to Exhibit 4(g) to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
* 4(h) Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock of the Company filed in
the Office of the Secretary of State of the State of Delaware
on December 24, 1998.
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<PAGE> 104
4(i) Certificate of Designations, Preferences and Rights of Series
F Convertible Preferred Stock of the Company filed in the
Office of the Secretary of the State of Delaware on September
8, 1999.
4(j) Certificate of Amendment of Certificate of Designations,
Preferences and Rights of Series F Convertible Preferred Stock
of the Company filed in the Office of the Secretary of the
State of Delaware on January 27, 2000.
4(k) Certificate of Designations, Preferences and Rights of Series
G Convertible Preferred Stock of the Company filed in the
Office of the Secretary of the State of Delaware on March 6,
2000.
4(l) Corrected Certificate of Designations, Preferences and Rights
of Series G Convertible Preferred Stock of the Company filed
in the Office of the Secretary of the State of Delaware on
March 10, 2000.
** 10(a) 1987 Incentive Stock Option Plan, incorporated herein by
reference to Exhibit 10(b) to Amendment No. 1 on Form S-1 to
the Company's Registration Statement on Form S-18
(Registration No. 33-19926).
** 10(b) Stock Option Agreement, dated as of February 26, 1987, between
the Company and John J. McCloy II, incorporated herein by
reference to Exhibit 10(b) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
** 10(c) Stock Option Agreement, dated as of February 26, 1987, between
the Company and Michael J. Parrella, incorporated herein by
reference to Exhibit 10(c) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
** 10(d) Stock Option Agreement, dated as of February 26, 1987, between
the Company and Sam Oolie, incorporated herein by reference to
Exhibit 10(d) to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991.
** 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.
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10(g) Lease, dated December 20, 1991, between West Nursery Land
Holding Limited Partnership ("West Nursery") and the Company,
as amended by a letter amendment, dated December 20, 1991,
between West Nursery and the Company, incorporated herein by
reference to Exhibit 10(u) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
10(h) Lease, dated February 26, 1991, between West Nursery and the
Company, as amended by a letter amendment, dated February 26,
1991, between West Nursery and the Company, incorporated
herein by reference to Exhibit 10(v) to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(i) Lease (undated), between West Nursery and the Company, as
amended by a letter amendment, dated April 23, 1990, between
West Nursery and the Company, incorporated herein by reference
to Exhibit 10(w) to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991;
10(j) Agreement, dated March 4, 1991, between West Nursery and the
Company as amended by the First Amendment of Agreement, dated
December 20, 1991, between West Nursery and the Company,
incorporated herein by reference to Exhibit 10(x) to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
10(k) Patent Assignment Agreement, dated as of June 21, 1989, among
George B.B. Chaplin, Sound Alternators Limited, the Company,
Active Noise and Vibration Technologies, Inc. and Chaplin
Patents Holding Co., Inc., incorporated herein by reference to
Exhibit 10(aa) to Amendment No. 2 on Form S-1 to the Company's
Registration Statement on Form S-18 (Registration No.
33-19926).
10(l) Joint Venture and Partnership Agreement, dated as of November
8, 1989, among the Company, Walker Manufacturing Company, a
division of Tenneco, Walker Electronic Mufflers, Inc. and NCT
Muffler, Inc., incorporated herein by reference to Exhibit
(c)(1) to the Company's Current Report on Form 8-K, dated
November 8, 1989, as amended on Form 8, dated January 24,
1990.
10(l)(1) Letter Agreement between Tenneco Automotive, a division of
Tennessee Gas Pipeline Company, and the Company dated November
22, 1993, incorporated herein by reference to Exhibit 10(a) to
the Company's Current Report on Form 8-K dated November 22,
1993.
10(l)(2) Stock Purchase Agreement between Tenneco Automotive, a
division of Tennessee Gas Pipeline Company, and the Company
dated December 14, 1993, incorporated herein by reference to
Exhibit 10(b) to the Company's Current Report on Form 8-K
dated November 24, 1993.
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<PAGE> 106
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.
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<PAGE> 107
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.
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10(r) Asset Purchase Agreement, dated September 16, 1994, between
Active Noise and Vibration Technologies, Inc. and the Company,
incorporated herein by reference to Exhibit 2 to the Company's
Current Report on Form 8-K filed September 19, 1994.
** 10(s) Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors (as adopted November 15, 1994 and amended through
August 16, 1996), incorporated herein by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on August 30, 1996
(Reg. No. 333-11209).
10(t) Variation of Teaming Agreement between Noise Cancellation
Technologies, Inc. and Ultra Electronics Limited dated April
6, 1995, incorporated herein by reference to Exhibit 10(c) of
the Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(1) Agreement for Sale and Purchase of Part of the Business and
Certain Assets among Noise Cancellation Technologies, Inc.,
Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated April 6, 1995, incorporated herein
by reference to Exhibit 10(d) of the Company's Current Report
on Form 8-K filed August 4, 1995.
10(t)(2) Patent License Agreement among Noise Cancellation
Technologies, Inc., Noise Cancellation Technologies (UK)
Limited and Ultra Electronics Limited dated April 6, 1995,
incorporated herein by reference to Exhibit 10(e) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(3) License Agreement between Chaplin Patents Holding Co., Inc.
and Ultra Electronics Limited dated April 6, 1995,
incorporated herein by reference to Exhibit 10(f) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among Noise Cancellation
Technologies, Inc., Noise Cancellation Technologies (UK)
Limited and Ultra Electronics Limited dated May 15, 1995,
incorporated herein by reference to Exhibit 10(g) of the
Company's Current Report on Form 8-K filed August 4, 1995.
** 10(u) Agreement among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited, Dr. Andrew John
Langley, Dr. Graham Paul Eatwell and Dr. Colin Fraser Ross
dated April 6, 1995, incorporated herein by reference to
Exhibit 10(h) of the Company's Current Report on Form 8-K
filed August 4, 1995.
10(v) Securities Purchase Agreement dated April 8, 1996, by and
among the Company and Kingdon Associates, L.P., Kingdon
Partners, L.P. and M. Kingdon Offshore NV, together with
Exhibit A-1 thereto, Form of Secured Convertible Note and
Exhibit A-2 thereto, Registration Rights Agreement,
incorporated herein by reference to Exhibit 10(a) of the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
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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.
105
<PAGE> 110
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.
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.
* 21 Subsidiaries
23(a) Consent of Richard A. Eisner & Company, LLP
23(b) Consent of Peters Elworthy & Moore, Chartered Accountants.
* 27 Financial Data Schedule.
106
<PAGE> 111
* 99(a) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding audited
financial statements of the Company's U.K. subsidiaries and
reports of Peters Elworthy & Moore, Chartered Accountants, on
their audits of such financial statements as at December 31,
1998 and for the year ended December 31, 1998.
99(b) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding audited
financial statements of the Company's U.K. subsidiaries and
reports of Peters Elworthy & Moore, Chartered Accountants, on
their audits of such financial statements as at December 31,
1997 and for the year ended December 31, 1997, incorporated by
reference to Exhibit 99(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
99(c) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding audited
financial statements of the Company's U.K. subsidiaries and
reports of Peters Elworthy & Moore, Chartered Accountants, on
their audits of such financial statements as at December 31,
1996 and for the year ended December 31, 1996, incorporated by
reference to Exhibit 99(b) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
* 99(d) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding confirmation
that the accounts of the Company's U.K. subsidiaries for the
year ended December 31, 1998 were audited under auditing
standards substantially similar to US General Accepted
Auditing Standards.
99(e) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding confirmation
that the accounts of the Company's U.K. subsidiaries for the
year ended December 31, 1997 were audited under auditing
standards substantially similar to US General Accepted
Auditing Standards, incorporated by reference to Exhibit 99(d)
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
99(f) Employment Agreement by and between the Company and Paul D.
Siomkos, dated February 26, 1998, incorporated by reference to
Exhibit 99 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998.
* 99(g) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. regarding
confirmation that the accounts for the year ended December 31,
1996 were audited under auditing standards substantially
similar to US General Accepted Auditing Standards.
99(h) Term Sheet Litigation Settlement dated as of October 9, 1999,
by and among NCT Group, Inc., NCT Audio Products, Inc.,
Austost Anstalt Schaan, Balmore Funds, S.A. and LH Financial.
107
<PAGE> 112
99(i) Term Sheet dated as of March 6, 2000, among NCT Group, Inc.,
NCT Hearing Products, Inc. and Pro Tech Communications, Inc.
- -----------------------
* 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.
108
<PAGE> 113
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
NCT Group, Inc.
We have audited the accompanying consolidated balance sheets of NCT Group, Inc.
and subsidiaries (the "Company") as of December 31, 1998 and 1999, and the
related consolidated statements of operations, comprehensive loss,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
1997, 1998 and 1999 financial statements of the Company's two foreign
subsidiaries. These subsidiaries accounted for revenues of approximately
$67,000, $28,000 and $4,000 for the years ended December 31, 1997, 1998 and
1999, respectively, and assets of approximately $301,000, $218,000 and $164,000
as of December 31, 1997, 1998 and 1999, respectively. These statements were
audited by other auditors whose reports have been furnished to us, one of which
contained a paragraph on the subsidiary's dependence on NCT Group, Inc. for
continued financial support. Our opinion, insofar as it relates to the amounts
included for these entities, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
financial statements enumerated above present fairly, in all material respects,
the consolidated financial position of NCT Group, Inc. and subsidiaries as of
December 31, 1998 and 1999 and the consolidated results of their operations and
their consolidated cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has not been able to generate sufficient
cash flow from operating activities to sustain its operations and since it has
incurred net losses since inception and has a working capital deficiency, it
has been and continues to be dependent on equity financing and joint venture
arrangements to support its business efforts. These factors raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
February 25, 2000
With respect to Note 11
March 7, 2000
F-1
<PAGE> 114
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
1998 1999
----------- ------------
ASSETS (Note 8)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 529 $ 1,126
Restricted cash - 667
Accounts receivable, net 716 237
Inventories, net of reserves 3,320 2,265
Other current assets 185 152
--------- ---------
Total current assets $ 4,750 $ 4,447
Property and equipment, net 997 449
Goodwill, net 1,506 3,497
Patent rights and other intangibles, net 2,881 2,296
Other assets 5,331 2,688
--------- ---------
15,465 $ 13,377
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,226 $ 3,647
Accrued expenses 1,714 3,189
Accrued payroll, taxes and related expenses 241 64
Customers' advances - 21
Other liabilities 756 807
--------- ---------
Total current liabilities $ 5,937 $ 7,728
--------- ---------
Convertible notes and accrued interest $ - $ 4,107
--------- ---------
Commitments and contingencies
Minority interest in consolidated subsidiary
Preferred stock, $.10 par value, 1,000 shares authorized; 60 and 3
shares issued and outstanding, respectively
(redemption amount $6,102,110 and $317,162, respectively) $ 6,102 $ 317
--------- ---------
Common stock subject to resale guarantee $ - $ 1,592
--------- ---------
Stockholders' equity:
Preferred stock, $.10 par value, 10,000,000 shares authorized
Series C issued and outstanding 700 and 0 shares, respectively
(redemption amount $731,222 and $0, respectively) $ 702 $ -
Series D issued and outstanding 6,000 and 0 shares, respectively
(redemption amount $6,102,110 and $0, respectively) 5,240 -
Series E issued and outstanding 10,580 and 0 shares, respectively
(redemption amount $10,582,319 and $0, respectively) 3,298 -
Series F issued and outstanding 0 and 4,715 shares respectively
(redemption amount $0 and $4,789,407, respectively) - 2,790
Common stock, $.01 par value, authorized: 255,000,000 and 325,000,000
shares, respectively; issued: 156,337,316 and 268,770,739 shares,
respectively 1,563 2,688
Additional paid-in-capital 107,483 130,865
Accumulated deficit (107,704) (131,475)
Other comprehensive loss:
Cumulative translation adjustment 45 65
Stock subscriptions receivable (4,000) (1,000)
Unearned portion of compensatory stock, warrants and options (238) (55)
Expenses to be paid with common stock - (1,282)
Treasury stock (6,078,065 shares of common stock) (2,963) (2,963)
--------- ---------
Total stockholders' equity $ 3,426 $ (367)
--------- ---------
$ 15,465 $ 13,377
========= =========
</TABLE>
See notes to Financial Statements.
F-2
<PAGE> 115
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
REVENUES:
Technology licensing fees and royalties $ 3,630 $ 802 $ 3,552
Product sales, net 1,720 2,097 2,208
Engineering and development services 368 425 1,303
------------ ------------ -----------
Total revenues $ 5,718 $ 3,324 $ 7,063
------------ ------------ -----------
COSTS AND EXPENSES:
Costs of product sales $ 2,271 $ 2,235 $ 2,767
Costs of engineering and development services 316 275 2,216
Selling, general and administrative 5,217 11,238 11,801
Research and development 6,235 7,220 6,223
Write down of investment in unconsolidated affiliate - - 2,385
Reserve for promissory notes and pre-acquisition costs - - 1,788
Impairment of goodwill - - 3,125
Provision for doubtful accounts 130 232 77
Other (income) expense - (3,264) (100)
Interest expense (includes $1,420 and $204 of discounts
on beneficial conversion feature on convertible debt
in 1997 and 1999) 1,514 9 578
Interest income (117) (438) (26)
------------ ------------ -----------
Total costs and expenses $ 15,566 $ 17,507 $ 30,834
------------ ------------ -----------
NET (LOSS) $ (9,848) $(14,183) $(23,771)
Preferred stock beneficial conversion feature 1,623 3,200 10,567
Accretion of difference between carrying amounts and
Redemption amount of redeemable preferred stock 285 485 494
------------ ------------ -----------
NET (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (11,756) $ (17,868) $(34,832)
============ ============ ===========
Weighted average number of common shares outstanding 124,101 143,855 190,384
============ ============ ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.09) $ (0.12) $ (0.18)
============ ============ ===========
</TABLE>
See notes to Financial Statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
NET (LOSS) $ (9,848) $ (14,183) $ (23,771)
Other comprehensive income/(loss)
Currency translation adjustment (23) (74) 20
------------ ------------ -----------
COMPREHENSIVE (LOSS) $ (9,871) $ (14,257) $ (23,751)
============ ============ ===========
See notes to Financial Statements.
</TABLE>
F-3
<PAGE> 116
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
<TABLE>
<CAPTION>
Series C Series D Series E
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
---------------------- ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount
-------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 - $ - - $ - - $ -
Sale of common stock - - - - - -
Shares issued upon exercise of warrants &
options - - - - - -
Sale of Series C preferred stock, less
expenses of $1,387 13 11,863 - - - -
Discount on beneficial corsion 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.
F-4
<PAGE> 117
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
<TABLE>
<CAPTION>
Series F Additional Accumu-
Convertible Paid-In lated
Preferred Stock Capital Deficit
-------- ---------
Common Stock
---------------------- ----------------------
Shares Amount Shares Amount
-------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 - $ - 111,615 $1,116 $85,025 $ (83,673)
Sale of common stock - - 2,857 29 471 -
Shares issued upon exercise of warrants &
options - - 1,996 20 1,115 -
Sale of Series C preferred stock, less
expenses of $1,387 - - - - - -
Discount on beneficial conversion price to
preferred shareholders - - - - 3,313 -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - (1,908) -
Sale of subsidiary common stock, less
expenses of $65 - - - - 3,573 -
Common stock issued upon conversion of
convertible debt less expenses of $168 - - 16,683 167 4,714 -
Net loss - - - - - (9,848)
Currency translation adjustment - - - - - -
Restricted shares issued for Directors'
compensation - - 10 - 2 -
Warrant issued in conjunction with
convertible debt - - - - 34 -
Compensatory stock options and warrants - - - - 40 -
-------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 - $ - 133,161 $1,332 $96,379 $ (93,521)
Shares issued in consideration for patent
rights - - 1,250 12 494 -
Return of shares for subscription
receivable - - - - - -
Conversion of Series C preferred stock,
less expenses 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
on beneficial conversion
price to preferred shareholders - - - - (28) -
Exchange of Series A preferred stock in
subsidiary - - 11,700 117 9,189 -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - (68) -
Conversion of Series D preferred stock - - 12,274 123 5,150 -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - (33) -
Sale of Series E preferred stock, less
expenses of $487 - - - - - -
Conversion of Series E preferred stock - - 26,609 266 2,177 -
Exchange of Series E preferred stock
for license fees - - - - 2,781 -
Discount on beneficial conversion price
to preferred shareholders - - - - 2,666 -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - (5,929) -
Sale of Series F preferred stock, less
expenses of $104 9 4,896 - - - -
Conversion of Series F preferred stock (3) (1,652) 25,306 253 1,399 -
Exchange of Series F preferred stock
for license fees (1) (574) - - 574 -
Discount on beneficial conversion price
to preferred shareholders - (4,884) - - 4,884 -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - 5,004 - - (5,004) -
Exchange of subsidiary common stock for
parent common 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.
F-5
<PAGE> 118
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of dollars and shares)
<TABLE>
<CAPTION>
Unearned Expenses
Portion of to be
Stock Compen- Paid
Cumulative Subscrip- satory with Treasury Stock
Translation tion Option/ Common --------------------
Adjustment Receivable Warrant Stock Shares Amount Total
------------------------------------------------ --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 142 $ - $ - $ - - $ - $ 2,610
Sale of common stock - - - - - - 500
Shares issued upon exercise of warrants &
options - (64) - - - - 1,071
Sale of Series C preferred stock, less
expenses of $1,387 - - - - - - 11,863
Discount on beneficial conversion price
to preferred shareholders - - - - - - -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - -
Sale of subsidiary common stock, less
expenses of $65 - (326) - - - - 3,247
Common stock issued upon conversion of
convertible debt
less expenses of $168 - - - - - - 4,881
Net loss - - - - - - (9,848)
Currency translation adjustment (23) - - - - - (23)
Restricted shares issued for Directors'
compensation - - - - - - 2
Warrant issued in conjunction with
convertible debt - - - - - - 34
Compensatory stock options and warrants - - - - - - 40
------------------------------------------------ -------------------- -----------
Balance at December 31, 1997 $ 119 $ (390) $ - $ - - $ - $ 14,377
Shares issued in consideration for patent
rights - - - - - - 506
Return of shares for subscription
receivable - 64 - - 158 (64) -
Conversion of Series C preferred stock,
less expenses of $53 - - - - - - (53)
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - -
Offering of Series A preferred stock in
subsidiary - - - - - - (862)
Discount on beneficial conversion
price to preferred shareholders - - - - - - 673
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - (775)
Sale of Series D preferred stock, less
expenses of $862 - - - - - - 5,138
Discount on beneficial conversion
price to preferred shareholders - - - - - - -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - -
Sale of Series E preferred stock - (4,000) - - 2,100 (735) -
Discount on beneficial conversion
price to preferred shareholders - - - - - - -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - -
Exchange of subsidiary common stock for
parent common stock - - - - - - 556
Payment of stock subscription receivable - 326 - - - - 326
Repurchase of common shares - - - - 5,607 (3,292) (3,292)
Acquisition of Advancel, less expenses of
$24 - - (94) - (1,787) 1,128 883
Other - - - - - - (48)
Net Loss - - - - - - (14,183)
Currency translation adjustment (74) - - - - - (74)
Restricted shares issued for compensation - - - - - - 97
Compensatory stock options and warrants - - (144) - - - 157
------------------------------------------------ -------------------- -----------
Balance at December 31, 1998 $ 45 $ (4,000) $ (238) $ - 6,078 $(2,963) $ 3,426
Sale of common stock, less expenses of $17 - - - - - - 483
Less common stock subject to resale - - - - - - (600)
Conversion of Series C preferred stock - - - - - - -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - -
Exchange of Series A preferred stock in
subsidiary - - - - - - 9,306
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - (68)
Conversion of Series D preferred stock - - - - - - -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - -
Sale of Series E preferred stock, less
expenses of $487 - 4,000 - - - - 3,513
Conversion of Series E preferred stock - - - - - - -
Exchange of Series E preferred stock
for license fees - - - - - - (850)
Discount on beneficial conversion
price to preferred shareholders - - - - - - -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - -
Sale of Series F preferred stock, less
expenses of $104 - (1,000) - - - - 3,896
Conversion of Series F preferred stock - - - - - - -
Exchange of Series F preferred stock
for license fees - - - - - - -
Discount on beneficial conversion
price to preferred shareholders - - - - - - -
Accretion and amortization of discount
on beneficial conversion
price to preferred shareholders - - - - - - -
Exchange of subsidiary common stock for
parent common stock - - - - - - 2,632
Shares issued in consideration for patent
rights - - - - - - 88
Shares issued for settlement
obligations/prepayments - - - (2,503) - - -
Less common stock subject to resale - - - 1,221 - - 684
Warrant issued in conjunction with
convertible debt - - - - - - 446
Beneficial conversion feature on
convertible note - - - - - - 204
Net loss - - - - - - (23,771)
Currency translation adjustment 20 - - - - - 20
Shares issued upon exercise of warrants &
options - - - - - - -
Compensatory stock options and warrants - - 183 - - - 224
================================================ ==================== ===========
Balance at December 31, 1999 $ 65 $ (1,000) $ (55) $ (1,282) 6,078 $(2,963) $(367)
================================================ ==================== ===========
</TABLE>
See notes to Financial Statements.
F-6
<PAGE> 119
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998 1999
---------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (9,848) $ (14,183) $ (23,771)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 899 1,030 1,970
Common stock options and warrants issued as consideration for:
Compensation 42 301 224
Interest on debentures 51 - -
Convertible debt 34 - -
Operating expenses - - 401
Costs incurred related to convertible debt 211 - 102
Write down of investment in unconsolidated affiliate - - 2,385
Discount on beneficial conversion feature on convertible debt 1,420 - 204
Provision for tooling costs and write off 515 151 180
Provision for inventory - - 199
Provision for doubtful accounts 130 232 77
Impairment of goodwill - - 3,125
Reserve for promissory note and pre-acquisition costs - - 1,788
Preferred stock received for license fee - - -850
(Gain) loss on disposition of fixed assets -4 34 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable -127 -193 209
(Increase) decrease in license fees receivable -50 8 192
(Increase) decrease in inventories, net of reserves -433 (1,986) 858
(Increase) in other assets -12 -12 (1,168)
Increase in accounts payable and accrued expenses 135 1,816 2,851
Increase (decrease) in other liabilities -414 48 427
---------- ------------ -----------
Net cash used in operating activities $ (7,451) $ (12,754) $ (10,597)
---------- ------------ -----------
Cash flows from investing activities:
Capital expenditures $ (244) $ (548) $ (51)
Increase in restricted cash - - -667
Acquisition of patent rights - -822 -
Acquisition of Advancel (net of $100 cash acquired) - 40 -
Acquisition and advances, including $135 of costs - (5,134) -
Sale of capital equipment 67 46 -
---------- ------------ -----------
Net cash used in investing activities $ (177) $ (6,418) $ (718)
---------- ------------ -----------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) $ 3,199 $ - $ 4,000
Sale of common stock (net) 500 -51 483
Sale of Series C preferred stock (net) 11,863 -53 -
Sale of Series D preferred stock (net) - 5,138 -
Sale of Series E preferred stock (net) - - 3,513
Sale of Series F preferred stock (net) - - 3,896
Sale of subsidiary Series A preferred stock (net) - 5,138 -
Sale of subsidiary common stock (net) 3,247 -21 -
Exercise of stock purchase warrants and options 1,071 - -
Collections on subscriptions receivable - 326 -
Purchase of treasury stock - (3,292) -
---------- ------------ -----------
Net cash provided by financing activities $ 19,880 $ 7,185 $ 11,892
---------- ------------ -----------
Effect of exchange rate changes on cash $ (16) $ (88) $ 20
Net increase (decrease) in cash and cash equivalents $ 12,236 $ (12,075) $ 597
Cash and cash equivalents - beginning of period 368 12,604 529
---------- ------------ -----------
Cash and cash equivalents - end of period $ 12,604 $ 529 $ 1,126
========== ============ ===========
Cash paid for interest $ 8 $ 9 $ 4
========== ============ ===========
</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.
F-7
<PAGE> 120
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
1. BACKGROUND:
NCT Group, Inc. ("NCT" or the "Company") designs, develops, licenses,
produces and distributes technologies and products based upon its extensive
portfolio of proprietary algorithms. The Company specializes in the utilization
of sound and signal waves to electronically reduce or eliminate noise and
vibration, improve signal-to-noise ratio and enhance sound quality. The Company
develops its technologies for integration into a wide range of products for
applications serving major markets in the transportation, manufacturing,
commercial, consumer products and communications industries. The Company
designs some of its applications so that other firms can integrate them with
their own inventions and technologies to develop such technology into
commercial applications, to integrate the applications into existing products
and to distribute such technologies and products into various industrial,
commercial and consumer markets. The Company also markets its technologies
through licensing to third parties for fees and royalties. Commercial
application of the Company's technologies is comprised of a number of product
lines, including NoiseBuster(R) communications headsets and NoiseBuster
Extreme!(TM) consumer headsets; Gekko(TM) flat speakers; flat panel transducers
("FPT"); ClearSpeech(R) microphones, speakers and other products; adaptive
speech filters; the ProActive(R) line of industrial/commercial active noise
reduction headsets; an aviation headset for pilots; an industrial muffler or
"silencer" for use with large vacuums and blowers; quieting headsets for
patient use in magnetic resonance imaging machines; and an aircraft cabin
quieting system.
The Company has incurred substantial losses from operations since its
inception, which have amounted to $131.5 million on a cumulative basis through
December 31, 1999. These losses, which include the costs for development of
products for commercial use, have been funded primarily from the sale of
preferred stock and common stock, including the exercise of warrants or options
to purchase common stock, and by technology licensing fees and royalties and
engineering and development funds received from joint venture and other
strategic partners.
Cash and cash equivalents amounted to $1.1 million at December 31,
1999. In addition, the Company had $3.3 million negative working capital at
December 31, 1999. Management believes that currently available funds will not
be sufficient to sustain the Company at present levels for the next 12 months.
The Company's ability to continue as a going concern is dependent on funding
from several sources, including available cash, cash from the exercise of
warrants and options, and cash inflows generated from the Company's revenue
sources: technology licensing fees and royalties, product sales, and
engineering and development services. The level of realization of funding from
the Company's revenue sources is presently uncertain. In the event that
anticipated technology licensing fees and royalties, product sales, and
engineering and development services do not generate sufficient cash,
management believes additional working capital financing must be obtained.
There is no assurance any such financing is or would become available.
F-8
<PAGE> 121
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
F-9
<PAGE> 122
agreement unless it is subject to completion of any performance criteria
specified within the agreement, in which case it is deferred until such
performance criteria is met. Royalties are frequently required pursuant to
license agreements or may be the subject of separately executed royalty
agreements. Revenue from royalties is recognized ratably over the royalty
period based upon periodic reports submitted by the royalty obligor or based on
minimum royalty requirements.
ADVERTISING:
Advertising costs are expensed as incurred. Advertising expense for
years ended December 31, 1997, 1998 and 1999 was $0.5 million, $1.7 million and
$1.2 million, respectively.
CASH AND CASH EQUIVALENTS:
Cash equivalents consist of commercial paper and other investments
that are readily convertible into cash and have original maturities of three
months or less. Restricted cash consists of the balance of an escrow account
established in conjunction with the issuance of a convertible promissory note
(see Note 8).
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is
determined on an average cost basis. The Company assesses the realizability of
inventories by periodically conducting a complete physical inventory and
reviewing the movement of inventory on an item-by-item basis to determine the
value of items which are slow moving and obsolete. The potential for near-term
product engineering changes and/or technological obsolescence and current
realizability are considered in determining the adequacy of inventory reserves.
At December 31, 1998 and 1999, the Company's inventory reserves were $0.5
million.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the depreciable assets using the
straight-line method. Leasehold improvements are amortized over the shorter of
the useful lives or the related lease term.
GOODWILL, PATENT RIGHTS AND OTHER INTANGIBLE ASSETS:
The excess of the cost over the fair value of net assets of purchased
businesses is recorded as goodwill. Goodwill is also recorded by the Company on
the acquisition of minority interests of a subsidiary of the Company for shares
of the Company's common stock. Goodwill is amortized on a straight-line basis
over five years. Goodwill amortization expense was $0, less than $0.1 million
and $1.0 million for 1997, 1998 and 1999, respectively. Accumulated goodwill
amortization was less than $0.1 million and $4.2 million at December 31, 1998
and 1999, respectively.
F-10
<PAGE> 123
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
F-11
<PAGE> 124
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
F-12
<PAGE> 125
organization, and the sources of revenues; information about reported profit or
loss and segment assets; and reconciliations of certain reported segment
information to consolidated amounts. (See Note 17.)
3. JOINT VENTURES AND OTHER STRATEGIC ALLIANCES:
The Company and certain of its majority-owned subsidiaries have
entered into agreements to establish joint ventures and other strategic
alliances related to the design, development, manufacture, marketing and
distribution of its technologies and products containing such technologies.
These agreements generally provide that the Company license technology and
contribute a nominal amount of initial capital and that the other parties
provide substantially all of the funding to support the venture or alliance.
This support funding often includes amounts paid or services rendered for
engineering and development. In exchange for this funding, the other parties
generally receive a preference in the distribution of cash and/or profits from
the joint ventures or royalties from these alliances until such time that the
support funding (plus an "interest" factor in some instances) is recovered. At
December 31, 1999, there were no preferred distributions due to joint venture
partners from future profits of the joint ventures.
When the Company's share of cumulative losses equals its investment
and the Company has no obligation or intention to fund such additional losses,
the Company suspends the equity method of accounting. The Company will not
resume the equity method of accounting until its share of future profits is
sufficient to recover any cumulative losses that have not previously been
recorded. At December 31, 1999, the aggregate amount of the Company's share of
losses in these joint ventures in excess of the Company's investments which has
not been recorded was zero.
Certain of the joint ventures become suppliers to the Company and to
other of the joint ventures and transfer products to the related entities based
upon pricing formulas established in the agreements. Such formulas are
generally based upon fully burdened cost, as defined in the agreements.
Technology licensing fees and engineering and development services
paid by joint ventures to the Company are recorded as revenue when there is no
recourse to the Company for these amounts or any commitment by the Company to
fund the obligations of the venture. Total revenues recorded by the Company
relating to the joint ventures and alliances, or their principals, for
technology licensing fees and royalties, engineering and development services
and product sales were as follows (in thousands):
F-13
<PAGE> 126
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
JOINT VENTURE/ALLIANCE 1997 1998 1999
- ---------------------------------------------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
Walker Noise Cancellation Technologies $ 61 $ - $ -
Ultra Electronics, Ltd. - 68 40
Siemens Medical Systems, Inc. 172 102 14
AB Electrolux 34 - -
Oki Electric Industry Co., Ltd. - 8 80
VLSI Technology, Inc. - 285 -
STMicroelectronics S.A. &
STMicroelectronics S.r.l - 246 2,156
Lernout & Hauspie Speech Products N.V. 800
New Transducers Ltd. 3,000 - 500
--------------- -------------- ---------------
Total $3,267 $709 $3,590
=============== ============== ===============
</TABLE>
Outlined below is a summary of the nature and terms of selected joint
ventures and other strategic alliances:
Ultra Electronics Ltd. ("Ultra") (formerly Dowty Maritime Limited) and
the Company entered into a teaming agreement in May 1993 to collaborate on the
design, manufacture and installation of products to reduce noise in the cabins
of various types of aircraft. In accordance with the agreement, the Company
provided informational and technical assistance relating to the aircraft
quieting system and Ultra reimbursed the Company for expenses incurred in
connection with such assistance. Ultra was responsible for the marketing and
sales of the products. The Company was to supply Ultra with electronic
components required for the aircraft quieting system, at a defined cost, to be
paid by Ultra. In March 1995, the Company and Ultra amended the teaming
agreement and concluded a licensing and royalty agreement for $2.6 million and
a future royalty of 1.5% of sales commencing in 1998. Such $2.6 million
technology license fee was recognized as revenue in 1995. Under the agreement,
Ultra also acquired the Company's active aircraft quieting business based in
Cambridge, England, leased a portion of the Cambridge facility and employed
certain of the Company's employees. The Company recognized $68,000 and $40,000
in royalty revenue in 1998 and 1999, respectively.
New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT plc
(formerly, Verity Group plc) and the Company executed a cross licensing
agreement (the "Cross License") on March 28, 1997. Under the terms of the Cross
License, the Company licensed patents and patents pending which relate to FPTTM
technology to NXT, and NXT licensed patents and patents pending which relate to
parallel technology to the Company. In consideration of the license, during the
first quarter 1997, NCT recorded a $3.0 million license fee receivable from NXT
and royalties on future licensing and product revenue. The Company also
executed a security deed (the "Security Deed") in favor of NXT granting NXT a
conditional assignment in the patents and patents pending licensed to NXT under
the Cross License in the event a default in a certain payment to be made by the
Company under the Cross License continued beyond fifteen days. Concurrently
with the Cross License, the Company and NXT plc executed agreements granting
each an option for a four year period commencing on March 28, 1998, to acquire
a
F-14
<PAGE> 127
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
F-15
<PAGE> 128
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.
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4. ACCOUNTS RECEIVABLE:
Accounts receivable comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1998 1999
------------------- ---------------
<S> <C> <C>
Technology license fees and royalties $ 192 $ -
Joint ventures and affiliates 33
Other trade receivables 691 287
Unbilled receivables 61 -
------------------- ---------------
$ 944 $ 320
Allowance for doubtful accounts (228) (83)
------------------- ---------------
Accounts receivable, net $ 716 $ 237
=================== ===============
</TABLE>
5. INVENTORIES:
Inventories comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1998 1999
------------------- ---------------
<S> <C> <C>
Components $ 745 $ 360
Finished goods 3,083 2,434
------------------- ---------------
$ 3,828 $ 2,794
Reserve for obsolete & slow moving inventory (508) (529)
------------------- ---------------
Inventories, net of reserves $ 3,320 $ 2,265
=================== ===============
</TABLE>
6. PROPERTY AND EQUIPMENT:
Property and equipment comprise the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31,
LIFE ---------------------------------
(YEARS) 1998 1999
------------------- --------------- ---------------
<S> <C> <C> <C>
Machinery and equipment 3-5 $ 1,935 $ 1,965
Furniture and fixtures 3-5 1,057 1,070
Leasehold improvements 7-10 1,038 1,038
Tooling 1-3 181 -
Other 5-10 60 60
--------------- ---------------
$ 4,271 $ 4,133
Accumulated depreciation (3,274) (3,684)
--------------- ---------------
Property and equipment, net $ 997 $ 449
=============== ===============
</TABLE>
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Depreciation expense for the years ended December 31, 1997, 1998 and
1999 was $ 0.6 million, $0.5 million and $0.4 million, respectively.
7. OTHER ASSETS:
Other assets primarily comprise the Company's investment in affiliates
and notes receivable and interest thereon, as described herein.
On August 14, 1998, NCT Audio agreed to acquire substantially all of
the assets of Top Source Automotive, Inc. ("TSA"), an automotive audio system
supplier. Earlier on June 11, 1998, NCT Audio had paid a non-refundable deposit
of $1,450,000 towards the purchase price. The total purchase price was
$10,000,000 and up to an additional $6,000,000 in possible future cash
contingent payments. NCT Audio then paid Top Source Technologies, Inc. ("TST")
$2,050,000 on July 31, 1998. The money was held in escrow with all of the
necessary securities and documents to evidence ownership of 20% of the total
equity rights and interests in TSA. When the shareholders of TST approved the
transaction on December 15, 1998, the $2,050,000 was delivered to TSA and NCT
Audio took ownership of the documentation and securities held in escrow. NCT
Audio had an exclusive right, as extended, to purchase the assets of TSA
through July 15, 1999. Under the terms of the original agreement, NCT Audio was
required to pay TST $6.5 million on or before March 31, 1999 to complete the
acquisition of TSA's assets. As consideration for an extension of such
exclusive right from March 31, 1999 to May 28, 1999, NCT Audio agreed to pay
TST a fee of $350,000, consisting of $20,685 in cash, $125,000 of NCT Audio's
minority interest in TSA earnings, and a $204,315 note payable due April 16,
1999. Due to the non-payment of the note by April 30, 1999, (a) the note would
begin to accrue interest on April 17, 1999 at the lower of the rate of two
times prime rate or the highest rate allowable by law; (b) the $20,685 and
$125,000 portion of the extension fee would no longer be credited toward the
$6.5 million purchase price due at closing; and (c) the $204,315 portion of the
extension fee would no longer be credited toward the $6.5 million closing
amount due. To date, NCT Audio has not paid the note. In addition, due to NCT
Audio's failure to close the transaction by March 31, 1999, NCT Audio was
required to pay a penalty premium of $100,000 of NCT Audio's preferred stock.
Since NCT Audio failed to close the contemplated transaction by May 28, 1999,
NCT Audio has forfeited its minority earnings in TSA for the period June 1,
1999 through May 30, 2000. In exchange for an extension from May 28, 1999 to
July 15, 1999, NCT Audio relinquished 25% of its minority equity ownership in
TSA. As a result, NCT Audio now has a 15% minority interest in TSA. On or about
July 15, 1999, NCT Audio determined it would not proceed with the purchase of
the assets of TSA, as structured, due primarily to its difficulty in raising
the requisite cash consideration. Consequently, NCT Audio reduced its net
investment in TSA to $1.2 million, representing its 15% minority interest, net
of the above noted penalties, and recorded a $2.4 million charge in the quarter
ended June 30, 1999 for the write-down of its investment to its estimated net
realizable value. On September 30, 1999, Onkyo America purchased substantially
all of the assets of TSA and certain assets of TST used in TSA's operations.
NCT Audio is claiming and seeks its pro rata share of the consideration paid by
Onkyo America, less the penalties described above. The amount which TST owes
NCT Audio is in dispute; consequently, receipt of the funds is contingent on
the outcome of the arbitration between the Company, TST and TSA. (See Note 15.)
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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
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<PAGE> 132
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
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<PAGE> 133
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
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<PAGE> 134
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.
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<PAGE> 135
On July 30, 1997 the Company sold 2.9 million shares, in the
aggregate, of its common stock at a price of $0.175 per share in a private
placement that provided net proceeds to the Company of $0.5 million.
On September 4, 1997, the Company transferred $5,000 cash and all of
the business and assets of its Audio Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated company, NCT Audio Products, Inc., in consideration for
5,867 shares of NCT Audio common stock whereupon NCT Audio became a
wholly-owned subsidiary of the Company. The Company also granted NCT Audio an
exclusive worldwide license with respect to all of the Company's relevant
patented and unpatented technology relating to FPT(TM) and FPT(TM)-based audio
speaker products for all markets for such products excluding (a) markets
licensed to or reserved by NXT plc and NXT under the Company's cross licensing
agreements with NXT plc and NXT, (b) all markets for hearing aids and other
hearing enhancing or assisting devices, and (c) all markets for headsets,
headphones and other products performing functions substantially the same as
those performed by such products in consideration for a license fee of $3.0
million (eliminated in consolidation) to be paid when proceeds are available
from the sale of NCT Audio common stock and on-going future royalties payable
by NCT Audio to the Company as provided in such license agreement. In addition,
the Company agreed to transfer all of its rights and obligations under its
cross licensing agreements with NXT plc and NXT to NCT Audio (see Note 3).
Between October 10, 1997 and December 4, 1997, NCT Audio issued 2,145
shares of its common stock (including 533 shares issued to NXT plc) for an
aggregate purchase price of $4.0 million in a private placement pursuant to
Regulation D under the Securities Act. NCT Audio has not met certain conditions
regarding the filing of a registration statement for NCT Audio common stock. As
such, holders of NCT Audio common stock have a right to exchange their NCT
Audio common stock into a sufficient number of restricted shares of NCT common
stock to equal their original cash investment in NCT Audio, plus a 20% discount
to market price at date of conversion. During 1998, two NCT Audio shareholders
exercised their right to exchange 296 shares of NCT Audio common stock into
1,135,542 shares of NCT common stock. During 1999, three NCT Audio shareholders
exercised their right to exchange 559 shares of NCT Audio common stock into
17.7 million shares of NCT common stock. In connection therewith the Company
recorded goodwill of $0.6 million and $6.1 million during 1998 and 1999,
respectively. The Company recorded a non-cash charge of $3.1 million in 1999 to
write down goodwill to its estimated realizable value.
Between October 28, 1997 and December 11, 1997, the Company entered
into a series of subscription agreements (the "Series C Subscription
Agreements") to sell an aggregate amount of $13.3 million of Series C
Convertible Preferred Stock (the "Series C Preferred Stock") in a private
placement, pursuant to Regulation D of the Securities Act, to 32 unrelated
accredited investors through two dealers (the "1997 Series C Preferred Stock
Private Placement"). The total 1997 Series C Preferred Stock Private Placement
was completed on December 11, 1997. The aggregate net proceeds to the Company
of the 1997 Series C Preferred Stock Private Placement were $11.9 million. Each
share of the Series C Preferred Stock has a par value of $.10 per share and a
stated value of one thousand dollars ($1,000) with an accretion rate of four
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<PAGE> 136
percent (4%) per annum on the stated value. Each share of Series C Preferred
Stock is convertible into fully paid and non-assessable shares of the Company's
common stock subject to certain limitations. The shares of Series C Preferred
Stock become convertible into shares of common stock at any time commencing
after the earlier of (i) the effective date of the Series C registration
statement; or (ii) ninety (90) days after the date of filing of the Series C
registration statement. Each share of Series C Preferred Stock is convertible
into a number of shares of common stock of the Company as determined in
accordance with the Series C Conversion Formula as set forth in the agreement
using a conversion price equal to the lesser of (x) 120% of the five (5) day
average closing bid price of common stock immediately prior to the closing date
of the Series C Preferred Stock being converted or (y) 20% below the five (5)
day average closing bid price of common stock immediately prior to the
conversion date thereof. The conversion terms of the Series C Preferred Stock
also provide that in no event shall the average closing bid price referred to
in the Series C Conversion Formula be less than $0.625 per share and in no
event shall the Company be obligated to issue more than 26.0 million shares of
its common stock in the aggregate in connection with the conversion of the
Series C Preferred Stock. Accordingly, 26.0 million shares of common stock have
been registered by the Company. Under the terms of the Series C Subscription
Agreements, the Company may be subject to a penalty if the Series C
registration statement is not declared effective within one hundred twenty
(120) days after the first closing of any incremental portion of the offering
of Series C Preferred Stock, such penalty to be in an amount equal to one and
one half percent (1.5%) per month of the aggregate amount of Series C Preferred
Stock sold in the offering up to a maximum of ten percent (10%) of such
aggregate amount. The Series C Subscription Agreements also provide that for a
period commencing on the date of the signing of the Series C Subscription
Agreements and ending ninety (90) days after the closing of the offering the
Company will be prohibited from issuing any debt or equity securities other
than Series C Preferred Stock, and that the Corporation will be required to
make certain payments in the event of its failure to effect conversion in a
timely manner or in the event it fails to reserve sufficient authorized but
unissued common stock for issuance upon conversion of the Series C Preferred
Stock. On December 30, 1998, 1,700 shares of the Series C Preferred Stock were
exchanged for the Company's Series E Preferred Stock. At December 31, 1998,
10,850 shares of Series C Preferred Stock had been converted into 20,665,000
shares of NCT common stock. The 700 remaining Series C Preferred Stock shares
were subject to mandatory conversion as of November 30, 1999. As such, on
November 30, 1999, these 700 shares were converted to 1,512,000 shares of
common stock of the Company. At December 31, 1999, there were no outstanding
shares of Series C Preferred Stock.
During 1998, the Board of Directors authorized the issuance of a total
of 125,000 shares of the Company's common stock to an employee, two directors
and a consultant in connection with their services to the Company. The Company
valued these shares at $97,000, representing the fair value on the date of
issuance.
On July 15, 1998 the Company transferred $5,000 and all of the
business and assets of its Hearing Products Division as then conducted by the
Company and as reflected on the business books and records of the Company to a
newly incorporated subsidiary company, NCT Hearing Products, Inc. ("NCT
Hearing") in consideration for 6,400 shares of NCT Hearing common stock
whereupon NCT Hearing became a wholly-owned subsidiary of the Company. The
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Company also granted NCT Hearing an exclusive worldwide license with respect to
all of the Company's relevant patented and unpatented technology relating to
Hearing Products in consideration for a license fee of $3.0 million, eliminated
in consolidation, to be paid when proceeds are available from the sale of NCT
Hearing common stock and running royalties payable with respect to NCT
Hearing's sales of products incorporating the licensed technology and its
sublicensing of such technology. It is anticipated that NCT Hearing will issue
additional shares of its common stock in transactions exempt from registration
in order to raise additional working capital.
On July 27, 1998, the Company entered into subscription agreements
(the "Series D Subscription Agreements") to sell 6,000 shares of the Company's
Series D Convertible Preferred Stock ("Series D Preferred Stock") having an
aggregate stated value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 Series D Preferred Stock Private Placement"). The
sale of 6,000 shares of Series D Preferred Stock having an aggregate $6.0
million stated value was completed on August 6, 1998. $5.2 million net proceeds
were received by the Company from the 1998 Series D Preferred Stock Private
Placement. Each share of the Series D Preferred Stock has a par value of $.10
per share and a stated value of one thousand dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value. Each share of Series D
Preferred Stock is convertible into fully paid and non-assessable shares of the
Company's common stock subject to certain limitations. Under the terms of the
Series D Subscription Agreements, the Company is required to file a
registration statement covering the resale of all shares of common stock of the
Company issuable upon conversion of the Series D Preferred Stock then
outstanding within sixty (60) days after the completion of the 1998 Series D
Preferred Stock Private Placement (respectively, the "Series D Filing Date" and
the "Series D Closing Date"). The shares of Series D Preferred Stock become
convertible into shares of common stock at any time commencing after the
earlier of (i) ninety (90) days after the Series D Closing Date; (ii) five (5)
days after the Company receives a "no review" status from the Securities and
Exchange Commission ("SEC") in connection with the Series D registration
statement; or (iii) the effective date of the Series D registration statement.
The Series D registration statement became effective on October 30, 1998, and
shares of Series D Preferred Stock became convertible on that date. Each share
of Series D Preferred Stock is convertible into a number of shares of common
stock of the Company as determined in accordance with the Series D Conversion
Formula as set forth in the agreement using a conversion price equal to the
lesser of (x) 120% of the five (5) day average closing bid price of common
stock immediately prior to the closing date of the Series D Preferred Stock
being converted or (y) 20% below the five (5) day average closing bid price of
common stock immediately prior to the conversion date thereof. The conversion
terms of the Series D Preferred Stock also provide that in no event shall the
conversion price referred to in the Series D Conversion Formula be less than
$0.50 per share and in no event shall the Company be obligated to issue more
than 12,000,000 shares of its common stock in the aggregate in connection with
the conversion of the 6,000 shares of Series D Preferred Stock issued under the
1998 Series D Preferred Stock Private Placement. The Series D Subscription
Agreements also provide that the Company will be required to make certain
payments in the event of its failure to effect conversion in a timely manner.
Including shares of common stock issued for accretion, as of March 12, 1999,
all shares of Series D Preferred Stock had been converted into 12,273,685
shares of NCT common stock.
F-25
<PAGE> 138
On July 27, 1998, NCT Audio entered into subscription agreements (the
"NCT Audio Subscription Agreements") to sell 60 shares of NCT Audio's Series A
Convertible Preferred Stock ("NCT Audio Series A Preferred Stock") having an
aggregate stated value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 NCT Audio Series A Preferred Stock Private
Placement"). The sale of 60 shares of NCT Audio Series A Preferred Stock having
an aggregate $6.0 million stated value was completed on August 17, 1998. NCT
Audio received net proceeds of $5.2 million from the 1998 NCT Audio Series A
Preferred Stock Private Placement. Each share of the NCT Audio Series A
Preferred Stock has a par value of $.10 per share and a stated value of one
hundred thousand dollars ($100,000) with an accretion rate of four percent (4%)
per annum on the stated value. Each share of NCT Audio Series A Preferred Stock
is convertible into fully paid and non-assessable shares of NCT Audio's common
stock subject to certain limitations. Under the terms of the NCT Audio
Subscription Agreements, NCT Audio is required to file a registration statement
covering the resale of all shares of common stock of NCT Audio issuable upon
conversion of the NCT Audio Series A Preferred Stock then outstanding by a date
(the "Series A Filing Deadline") which is not later than thirty (30) days after
the NCT Audio becomes a "reporting company" under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The shares of NCT Audio Series A
Preferred Stock become convertible into shares of NCT Audio common stock at any
time after the date the NCT Audio becomes a "reporting company" under the
Exchange Act. Each share of Series A Preferred Stock is convertible into a
number of shares of common stock of NCT Audio as determined in accordance with
the Series A Conversion Formula as set forth in the agreement using a
conversion price equal to the lesser of (x) 120% of the five (5) day average
closing bid price of common stock immediately prior to the closing date of the
Series A Preferred Stock being converted or (y) 20% below the five (5) day
average closing bid price of common stock immediately prior to the conversion
date thereof. The conversion terms of the NCT Audio Series A Preferred Stock
also provide that in the event that NCT Audio has not become a "reporting
company" under the Exchange Act by December 31, 1998, or the NCT Audio
registration statement has not been declared effective by the SEC by December
31, 1998, the holder shall be entitled to exchange each share of NCT Audio
Series A Preferred Stock for 100 shares of the Company's Series D Convertible
Preferred Stock and thereafter shall be entitled to all rights and privileges
of a holder of the Company's Series D Preferred Stock. As of December 31, 1998,
no NCT Audio Series A Preferred Stock shareholders had exercised their right to
exchange NCT Audio Series A Preferred Stock into the Company's Series D
Convertible Preferred Stock. On March 30, 1999, holders of 57 shares of NCT
Audio Series A Preferred Stock exercised this election and converted their
shares into 11,699,857 shares of the Company's common stock. At December 31,
1999, 3 shares of NCT Audio Series A Preferred Stock were outstanding. On
January 10, 2000, the remaining 3 shares of NCT Audio Series A Preferred Stock
were converted into 634,915 shares of the Company's common stock.
On July 29, 1998, the Company initiated a plan to repurchase from time
to time up to 10 million shares of the Company's common stock in the open
market pursuant to Rule 10b-18 under the Exchange Act or through block trades.
As of December 31, 1998, the Company had repurchased 5,607,100 shares of the
Company's common stock at per share prices ranging from $0.3438 to $0.6563. The
stock repurchase program was terminated on December 30, 1998.
F-26
<PAGE> 139
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:
<TABLE>
<S> <C>
Current assets $ 368,109
Property and equipment 4,095
Goodwill 1,018,290
Other assets 13,486
Current liabilities (485,040)
Unearned portion of compensatory stock 141,251
-----------
Cost of acquisition (including expenses of $60,191) $ 1,060,191
===========
</TABLE>
At the annual meeting of Stockholders held on October 20, 1998, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock from
185 million to 255 million shares. Such action was deemed by the Board of
Directors to be in the best interest of the Company to make additional shares
of the Company's common stock available for an increase in the number of shares
of common stock covered by the 1992 Plan (see Note 12) pursuant to an amendment
of the 1992 Plan approved by the stockholders at such annual meeting, and for
acquisitions, public or private financings involving common stock or preferred
stock or other securities convertible to common stock, stock splits and
dividends, present and future employee benefit programs and other corporate
purposes.
F-27
<PAGE> 140
On November 24, 1998, the Company paid $1,000 consideration for
incorporation of DMC which was formed to develop, install and provide an
audio/visual advertising medium within commercial/professional settings.
On December 30, 1998, the Company entered into a series of
subscription agreements (the "Series E Subscription Agreements") to sell an
aggregate stated value of up to $8.2 million of Series E Convertible Preferred
Stock (the " Series E Preferred Stock") in consideration of $4.0 million, in a
private placement, pursuant to Regulation D of the Securities Act, to six
accredited investors through one dealer (the "1998 Series E Preferred Stock
Private Placement"). The $4.0 million subscription receivable at December 31,
1998 represents a receivable due from the Series E Subscription Agreements. In
addition to the above noted Series E Subscription Agreements, the Company
issued and sold an aggregate amount of $1.7 million of Series E Preferred Stock
to three accredited investors through the above noted dealer, in exchange for
an aggregate stated value of $1.7 million of the Company's Series C Preferred
Stock held by the three accredited investors. The Company also issued and sold
an aggregate amount of $0.7 million of Series E Preferred Stock to four
accredited investors through the above noted dealer, in exchange and
consideration for an aggregate of 2.1 million shares of the Company's common
stock held by the four accredited investors and received net proceeds of $1.8
million. On April 13, 1999, the Company entered into a subscription agreement
to sell 1,874 shares of Series E Preferred Stock, with a stated value of up to
$1.9 million in consideration of $1.9 million to four accredited investors
through one dealer. Each share of the Series E Preferred Stock has a par value
of $.10 per share and a stated value of one thousand dollars ($1,000) with an
accretion rate of four percent (4%) per annum on the stated value. Each share
of Series E Preferred Stock is convertible into fully paid and non-assessable
shares of the Company's common stock subject to certain limitations. Under the
terms of the Series E Subscription Agreements, the Company is required to file
a registration statement on (i) Form S-3 on or prior to the date which is no
more than sixty (60) days from the date that the Company has issued a total of
7,438 shares of Series E Preferred Stock if filed or (ii) Form S-1 on or prior
to a date which is no more than ninety (90) days from the date that the Company
has issued a total of 7,438 shares of Series E Preferred Stock, covering the
resale of all of the registrable securities. The shares of Series E Preferred
Stock become convertible into shares of common stock at any time commencing
after the earlier of (i) ninety (90) days after the Series E Closing Date; (ii)
five (5) days after the Company receives a "no review" status from the SEC in
connection with the registration statement; or (iii) the effective date of the
Series E registration statement. Each share of Series E Preferred Stock is
convertible into a number of shares of common stock of the Company as
determined in accordance with the Series E Conversion Formula as set forth in
the agreement using a conversion price equal to the lesser of (x) 120% of the
five (5) day average closing bid price of common stock immediately prior to the
closing date of the Series E Preferred Stock being converted or (y) 20% below
the five (5) day average closing bid price of common stock immediately prior to
the conversion date thereof. The conversion terms of the Series E Preferred
Stock also provide that in no event shall the Company be obligated to issue
more than 30,000,000 shares of its common stock in the aggregate in connection
with the conversion of the 10,580 shares of Series E Preferred Stock issued
under the 1998 Series E Preferred Stock Private Placement. The Company may be
obligated to redeem the excess of the stated value over the amount permitted to
be converted into common stock. Such obligation would be triggered in the event
that the Company issues 30,000,000 shares on conversion of Series E Preferred
Stock. The
F-28
<PAGE> 141
Series E Subscription Agreements also provide that the Company will be required
to make certain payments in the event of its failure to effect conversion in a
timely manner. The Company registered an aggregate of 26,648,696 shares of the
Company's common stock for the conversion of the issued and outstanding shares
of Series E Preferred Stock. The Company is given the right to pay the
accretion in either cash or common stock. The conversion terms further provide
that the Company will be required to make certain payments if it fails to
effect a conversion in a timely manner and may have to redeem the excess of the
stated value over the amount permitted to be converted into common stock. As of
December 31, 1998, no shares of Series E Preferred Stock had been converted
into NCT common stock. During 1999, holders of 3,828 shares of Series E
Preferred Stock elected to convert their shares into 26,608,942 shares of
common stock of the Company. On March 31, 1999, the Company signed a license
agreement to exchange 3,600 shares of Series E Preferred Stock for four DMC
network affiliate licenses. During the three months ended March 31, 1999, the
Company, in accordance with its revenue recognition policy, realized only $2.0
million on the issuance of such licenses in consideration of the receipt of
3,600 shares of its Series E Convertible Preferred Stock. Subsequently, during
the three months ended June 30, 1999, the Company adjusted such revenue to $0.9
million due to the valuation of additional shares of Series E Preferred Stock
issued during the period. On December 15, 1999, holders of the remaining 5,026
shares of the Company's Series E Preferred Stock and holders of 974 shares of
the Company's Series F Convertible Preferred Stock (see below), an aggregate
stated value of $6 million, exchanged such shares for eight DMC network
affiliate licenses. No shares of Series E Preferred Stock were outstanding at
December 31, 1999.
On January 25, 1999, the Company granted DMC, a wholly owned
subsidiary of the Company formed on November 24, 1998, an exclusive worldwide
license with respect to all of the Company's relevant patented and unpatented
technology relating to DMC products in consideration for a license fee of $3.0
million (eliminated in consolidation). Such license fee is to be paid when
proceeds are available from the sale of DMC common stock. In addition, running
royalties will be payable to the Company with respect to DMC's sales of
products incorporating the licensed technology and its sublicensing of such
technology. It is anticipated that DMC will issue shares of its common stock in
transactions exempt from registration in order to raise additional working
capital.
At the annual meeting of stockholders of the Company on June 24, 1999,
the stockholders approved an amendment to increase the number of shares of
common stock the Company is authorized to issue from 255,000,000 to
325,000,000. This amendment became effective on July 29, 1999, when the Company
filed the appropriate amendment to its Certificate of Incorporation with the
Office of the Secretary of State of Delaware.
On June 24, 1999, the Board of Directors approved the issuance of up
to 15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In 1999, the Company issued 13,154,820 shares of
common stock to suppliers and consultants to settle current obligations of $1.8
million and future or anticipated obligations of $0.7 million.
On August 10, 1999, the Company entered into a subscription agreement
(the "Series F Subscription Agreement") to sell an aggregate stated value of up
to $12.5 million (12,500 shares) of Series F Convertible Preferred Stock (the
"Series F Preferred Stock"), in a private placement
F-29
<PAGE> 142
pursuant to Regulation D of the Securities Act, to five unrelated accredited
investors through one dealer (the "1999 Series F Preferred Stock Private
Placement"). On August 10, 1999, the Company received $1.0 million for the sale
of 8,500 shares of Series F Preferred Stock having an aggregate stated value of
$8.5 million. At the Company's election, the investors may invest up to an
additional $4.0 million in cash or in kind at a future date. Each share of the
Series F Preferred Stock has a par value of $.10 per share and a stated value
of one thousand dollars ($1,000) with an accretion rate of four percent (4%)
per annum on the stated value. Each share of Series F Preferred Stock is
convertible into fully paid and non-assessable shares of the Company's common
stock, subject to certain limitations. Under the terms of the Series F
Subscription Agreement, the Company was required to file a registration
statement on Form S-1 on or prior to a date which is no more than forty-five
(45) days from the date that the Company has issued a total of 1,000 shares of
Series F Preferred Stock, covering the resale of all of the registrable
securities (the "Series F Closing Date"). The shares of Series F Preferred
Stock become convertible into shares of common stock at any time commencing
after the earlier of (i) forty-five (45) days after the Series F Closing Date;
(ii) five (5) days after the Company receives a "no review" status from the SEC
in connection with the Series F registration statement; or (iii) the effective
date of the Series F registration statement. Each share of Series F Preferred
Stock is convertible into a number of shares of common stock of the Company as
determined in accordance with a formula (the "Series F Conversion Formula"), as
defined in the agreement. The conversion formula provides that the stated value
of the preferred stock plus 4% accretion thereon for the number of days between
(i) the Series F Closing Date and (ii) the conversion date be divided by the
amount obtained by multiplying the 80% times the average market price for the
Company's common stock for the five (5) consecutive trading days immediately
preceding such date. The conversion terms of the Series F Preferred Stock also
provide that in no event shall the Company be obligated to issue more than
35,000,000 shares of its common stock in the aggregate in connection with the
conversion of up to 12,500 shares of Series F Preferred Stock. In the interest
of investor relations of the Company, the maximum number of conversion shares
was increased to 77,000,000 shares of the Company's common stock. The Company
is also obligated to pay a 4% per annum accretion on the stated value of Series
F Preferred Stock in either cash or common stock, at the Company's election.
The Company registered an aggregate of 25,744,000 shares of common stock
issuable upon conversion and payment for accretion. In connection with the
Series F Preferred Stock, the Company may be obligated to redeem the excess of
the stated value over the amount permitted to be converted into common stock.
Such additional amounts will be treated as obligations of the Company. On
September 10, 1999, the Company received $4.0 million for four DMC network
affiliate licenses from four accredited investors. While the investors agreed
upon the exchange of 8,500 shares of Series F Preferred Stock having aggregate
stated value of $8.5 million, for consideration of $1.0 million, the Company
has treated the additional $4.0 million for the DMC licenses as additional
consideration for the Series F Preferred Stock. As of December 31, 1999, 2,811
shares of Series F Preferred Stock have been converted into 25,306,557 shares
of the Company's common stock. On December 15, 1999, 974 shares of the
Company's Series F Preferred Stock, together with 5,026 shares of the Company's
Series E Preferred Stock, were exchanged for eight DMC network affiliate
licenses. At December 31, 1999, there are 4,715 shares of Series F Preferred
Stock outstanding.
F-30
<PAGE> 143
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.
F-31
<PAGE> 144
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
F-32
<PAGE> 145
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.
F-33
<PAGE> 146
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
F-34
<PAGE> 147
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.
F-35
<PAGE> 148
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------
Weighted
Average
Remaining Weighted
Crantractual Average
Range of Number Life Exercise
Plan Exercise Price Outstanding (In Years) Price
- --------------------------------- ----------------------- ------------------ ---------------- --------------
<S> <C> <C> <C> <C>
1987 Plan $ 0.50 to $ 0.63 1,350,000 2.06 $ 0.51
==================
Non-Plan $ 0.27 to $ 3.69 4,284,000 2.16 $ 0.33
==================
1992 Plan $ 0.22 to $ 0.56 21,093,391 7.07 $ 0.35
$ 0.64 to $ 1.50 6,620,491 2.80 $ 0.71
$ 2.38 to $ 4.00 310,355 0.70 $ 3.01
------------------
Total 1992 Plan 28,024,237
==================
Director's Plan $ 0.66 to $ 0.75 538,500 0.53 $ 0.73
==================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------------------
Weighted
Average
Number Exercise
Plan Exercisable Price
- --------------------------------- ---------------- --------------
<S> <C> <C>
1987 Plan 1,350,000 $ 0.51
================
Non-Plan 4,284,000 $ 0.33
================
1992 Plan 7,927,698 $ 0.33
6,512,991 $ 0.71
310,355 $ 3.01
----------------
Total 1992 Plan 14,751,044
================
Director's Plan 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
----------------------------------- --------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 3,888,539 $ 0.72 3,146,920 0.81
Warrants granted 2,846,923 $ 0.76 1,588,164 0.92
Warrants exercised (854,119) $ 0.41 - -
Warrants canceled, expired or forfeited (2,734,423) $ 0.75 (362,400) 1.16
--------------- --------------
Outstanding at end of year 3,146,920 $ 0.81 4,372,684 0.82
=============== ==============
Warrants exercisable at year-end 3,146,920 $ 0.81 4,172,684 0.86
=============== ==============
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999
---------------------------------------
Weighted
Average
Exercise
Shares Price
--------------- ----------------
<S> <C> <C>
Outstanding at beginning of year 4,372,684 $ 0.82
Warrants granted 2,587,875 $ 0.75
Warrants exercised - -
Warrants canceled, expired or forfeited (3,225,145) $ 0.82
---------------
Outstanding at end of year 3,735,414 $ 0.77
===============
Warrants exercisable at year-end 3,735,414 $ 0.77
===============
</TABLE>
F-36
<PAGE> 149
The following table summarizes information about warrants outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
------------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (In Years) Price Exercisable Price
----------------- ------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$0.50 to $0.69 263,914 2.94 $0.62 263,914 $0.62
$0.75 to $1.66 3,471,500 2.32 $0.78 3,471,500 $0.78
</TABLE>
13. RELATED PARTIES:
Between 1993 and 1994, the Company entered into five agreements with
Quiet Power Systems, Inc. ("QSI"). Environmental Research Information, Inc.
("ERI") owns 33% of QSI and Jay M. Haft, Chairman of the Board of Directors of
the Company, owns another 2% of QSI. Michael J. Parrella, President of the
Company, owns 12% of the outstanding capital of ERI and shares investment
control over an additional 24% of its outstanding capital. In March 1995, the
Company entered into a master agreement with QSI which granted QSI an exclusive
worldwide license to market, sell and distribute various quieting products in
the utility industry. Subsequently, the Company and QSI executed four letter
agreements, primarily revising payment terms. On December 24, 1999, the Company
executed a final agreement with QSI in which the Company agreed to write-off
$239,000 of indebtedness owed by QSI in exchange for the return by QSI to the
Company of its exclusive license to use NCT technology in various quieting
products in the utility industry. Such amount, originally due on January 1,
1998, had been fully reserved by the Company.
The Company's President and Chief Executive Officer, who, at December
31, 1999, holds options and warrants for the right to acquire an aggregate of
15,237,000 shares of the Company's common stock, receives an incentive bonus
equal to 1% of the cash received by the Company upon the execution of
agreements or other documentation evidencing transactions with unaffiliated
parties. For the year ended December 31, 1997, 1998 and 1999, approximately
$243,000, $206,000 and $169,000 was incurred in connection with this
arrangement.
During 1997, 1998 and 1999, the Company purchased $0.7 million, $0.2
million and $0, respectively, of products from its various manufacturing joint
venture entities.
14. INCOME TAXES:
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Accordingly, deferred tax assets and liabilities are established for temporary
differences between tax and financial reporting bases of assets and
liabilities. A valuation allowance is established when the Company determines
that it is more likely than not that a deferred tax asset will not be realized.
The
F-37
<PAGE> 150
Company's temporary differences primarily result from depreciation related to
machinery and equipment and compensation expense related to warrants, options
and reserves.
At December 31, 1999, the Company had available net operating loss
carryforwards of approximately $101.2 million and research and development
credit carryforwards of $1.7 million for federal income tax purposes, which
expire as follows (in thousands):
<TABLE>
<CAPTION>
AND
NET DEVELOPMENT
YEAR LOSSES CREDITS
------------------ ---------------- -----------------
<S> <C> <C>
2000 $ 129 $ -
2001 787 -
2002 2,119 -
2003 1,974 -
2004 1,620 -
2005 3,870 141
2006 1,823 192
2007 6,866 118
2008 13,456 321
2009 16,293 413
2010 9,415 61
2011 9,051 67
2012 4,525 (1) 267
2018 14,183 (2) 167
2019 15,079 (3) -
---------------- -----------------
TOTAL $ 101,190 $ 1,747
================ =================
</TABLE>
(1) Includes approximately $1.2 million net operating loss relating to NCT
Audio Products, Inc.
(2) Includes approximately $4.4 million net operating loss relating to NCT
Audio Products, Inc.
(3) Includes approximately $6.5 million net operating loss relating to NCT
Audio Products, Inc.
The Company's ability to utilize its net operating loss carryforwards
may be subject to an annual limitation. The difference between the statutory
tax rate of 34% and the Company's effective tax rate of 0% is due to the
increase in the valuation allowance of $3.0 million, $1.4 million and $3.3
million in 1997, 1998 and 1999, respectively.
The types of temporary differences that give rise to significant
portions of the deferred tax assets and the federal and state tax effect of
those differences, as well as federal net operating loss and research and
development credit, at December 31, 1998 and 1999 were as follows (in
thousands):
F-38
<PAGE> 151
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
------------- --------------
<S> <C> <C>
Accounts receivable $ 157 $ 13
Inventory 173 180
Property and equipment 68 82
Accrued expenses 65 58
Stock compensation 2,711 2,924
Other 349 414
------------- --------------
Total temporary differences $ 3,523 $ 3,671
Federal net operating losses 27,258 30,285
Federal research and development credits 1,580 1,747
------------- --------------
$ 32,361 $ 35,703
Less: Valuation allowance (32,361) (35,703)
------------- --------------
Deferred taxes $ - $ -
============= --------------
</TABLE>
15. LITIGATION:
On or about June 15, 1995, Guido Valerio filed suit against the
Company in the Tribunal of Milan, Milan, Italy. Mr. Valerio alleged that (1)
the Company is guilty of breach of contract; (2) certain amounts and
commissions are allegedly owed to him; and (3) he had suffered damage to his
image and reputation among other injuries alleged. The Company retained an
Italian law firm specializing in litigation and, through its counsel, filed a
reply brief responding to Mr. Valerio's allegations. The Company argued that
even if the Tribunal were the appropriate forum for the suit, Mr. Valerio's
claim is groundless because a valid contract was never formed. Further, the
Company argued that Mr. Valerio is not enrolled in the official Register of
Agents and, thus, under applicable Italian law is not entitled to any
compensation. Since the submission, the Tribunal has held a pretrial discovery
hearing and a hearing before a Discovery Judge. The Discovery Judge held
another hearing on May 19, 1998 and established deadlines for final pleadings
and a trial date. The Tribunal of Milan, sitting in full bench, heard the case
on September 22, 1998. On May 4, 1999, the Company's Italian law firm informed
the Company that the Tribunal of Milan had granted the Company's objection to
lack of venue and had consequently rejected Mr. Valerio's claim and awarded the
Company expenses in the amount of approximately $7,000.
By a letter dated September 9, 1997, counsel to competitor Andrea
Electronics Corporation ("AECorp.") informed the Company that AECorp. believed
NCT was improperly using the term "ANR Ready" and infringing upon a trademark
owned by AECorp. Representatives of existing and/or potential customers also
have informed the Company that AECorp. has made statements claiming that the
Company's manufacture and/or sale of certain in-flight entertainment system
products infringe a patent owned by the competitor. The Company received a
notice dated March 24, 1998 from AECorp.'s intellectual property counsel
notifying the Company of its concerns but did not confirm any intention to file
suit against NCT. The Company, through special outside counsel, exchanged
correspondence with AECorp. but the parties could not come to any resolution.
The Company was informed by representatives of
F-39
<PAGE> 152
existing and/or potential customers that AECorp. was continuing to infer that
the Company was infringing.
On October 9, 1998, the Company's Board of Directors authorized
litigation against AECorp. On November 17, 1998, the Company and NCT Hearing
filed a complaint against AECorp. in the U.S. District Court, Eastern District
of New York. The complaint requested that the court enter judgment in our favor
as follows: (1) declare that the two AECorp. patents at issue are invalid and
unenforceable and that the Company's products do not infringe upon them; (2)
declare that the two AECorp. patents at issue are unenforceable due to misuse
by AECorp.; (3) award the Company compensatory damages of no less than $5
million and punitive damages of $50 million for AECorp.'s tortious interference
with the Company's prospective contractual advantages; (4) enjoin AECorp. from
stating or inferring that the Company's products or their use are infringing
any AECorp.-owned patents; and (5) award any other relief the court deems
appropriate.
On or about December 30, 1998, AECorp. filed its answer to the
Company's complaint. AECorp. generally denied the above allegations and brought
counterclaims against the Company. These include claims that the Company has:
infringed the two AECorp. patents at issue and the "ANR Ready" trademark;
violated the Lanham Act through NCT's use of the trademark; and unfairly
competed with AECorp. by using the trademark.
The Company and NCT Hearing have since filed a Reply and requested
that the court dismiss the counterclaims and enter judgment in favor of the
Company and NCT Hearing. The Company also argued that AECorp. is prevented from
recovering under certain equitable theories and defenses. Discovery in this
suit commenced in mid-1999 and is continuing, although a trial date has not yet
been set. In the opinion of management, after consultation with outside
counsel, resolution of this suit should not have a material adverse effect on
the Company's financial position or operations. However, in the event that the
lawsuit does result in a substantial final judgment against the Company, said
judgment could have a material effect on quarterly or annual operating results.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed
suit in a Maryland state court against the Company and Michael J. Parrella, its
Chief Executive Officer and Director. The complaint alleges that the Company
breached, and Mr. Parrella interfered with, a purported contract entered into
"in 1996" between the Company and SCI. SCI claims that under the contract, the
Company agreed to pay SCI commissions when NCT received capital from its
investors. The complaint further alleged that SCI is due commissions totaling
$1.5 million because the Company refused to honor SCI's right of first refusal.
SCI seeks $1,673,000 in compensatory damages, $50,000 in punitive damages and
$50,000 in attorneys fees from the Company. SCI also seeks $150,000 in
compensatory damages, $500,000 in punitive damages and $50,000 in attorneys
fees from Mr. Parrella. The Company has filed and the Court has granted two
motions to strike or dismiss some of the plaintiff's claims. No further
developments in this suit have occurred. Management believes it has many
meritorious defenses and intends to conduct a vigorous defense. In the event the
case results in a substantial judgment against the Company, however, the
judgment could have a severe material effect on quarterly or annual operating
results.
F-40
<PAGE> 153
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
F-41
<PAGE> 154
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 recision of the Stock Purchase Agreement,
the return of the Advancel stock surrendered in conjunction with the purchase
of Advancel by the Company and damages to be determined by arbitration. The
Company filed a response and counterclaim on October 13, 1999. After
consultation with outside legal counsel, management recognizes that the Company
may lose some or all of its claims, encountering significant liability. In the
event this Demand for Arbitration does result in a substantial judgment against
the Company, said judgment could have a material effect on the Company's
quarterly or annual operating results. Outside legal counsel has indicated that
it is impossible to estimate a range of potential liability at this early stage
with any degree of certainty. The parties have agreed on an arbitrator who has
scheduled late May 2000 for an arbitration hearing. Discovery is currently
scheduled to take place in the action.
On September 16, 1999, NCT Audio filed a Demand for Arbitration before
the American Arbitration Association in Wilmington, Delaware, against TST and
TSA (the "Respondents") alleging, among other things, breach of the asset
purchase agreement by which TSA was to sell its assets to NCT Audio, breach of
fiduciary duty as a majority shareholder owed to NCT Audio which holds 15% of
the outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. NCT Audio seeks recision of the purchase agreement and recovery of
monies paid to TST for TSA's assets. Concurrently, NCT Audio commenced a
preliminary injunction proceeding in the Delaware Court of Chancery, seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of
the arbitration proceeding. Such court action was subsequently withdrawn by NCT
Audio. On December 8, 1999, Respondents filed an answer and counterclaim in
connection with the arbitration proceeding. Respondents asserted their
counterclaim to recover (i) the monies and stock owned under the extension
agreements; (ii) the $1 million differential between the $9 million purchase
price paid by Onkyo America for TSA's assets and the $10 million purchase price
that NCT Audio had been obligated to pay; (iii) expenses associated with
extending NCT Audio's time to close the transaction; and (iv) certain legal
expenses incurred by Respondents.
The Company believes there are no other patent infringement claims,
litigation, matters or unasserted claims other than the matters discussed above
that could have a material adverse effect on financial position and results of
operations of the Company.
F-42
<PAGE> 155
16. COMMITMENTS AND CONTINGENCIES:
The Company is obligated for minimum annual rentals (net of sublease
income) under operating leases for offices, warehouse space and laboratory
space, expiring through March 2010 with various renewal options, as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
--------------------------------- ---------------
<S> <C> <C>
2000 $ 862
2001 841
2002 380
2003 380
2004 380
Thereafter 2,038
---------------
Total $ 4,881
===============
</TABLE>
Rent expense (net of sublease income) was $0.4 million, $0.6 million
and $0.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
In April 1996, the Company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, certain
health care benefits to employees and directors of the Company's United States
operations. The Company administers this modified self-insured Benefit Plan
through a commercial third-party administrative health care provider. The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year
is limited to $1.0 million, while combined individual and family benefit
exposure in each Benefit Plan fiscal year is limited to $40,000. Benefit claims
in excess of these individual or maximum aggregate stop loss limits are covered
by a commercial insurance provider to which the Company pays a nominal premium
for such stop loss coverage. The Company records benefit claim expense in the
period in which the benefit claim is incurred. As of February 25, 2000, the
Company was not aware of any material benefit claim liability.
As of December 31, 1999, the Company is obligated under various
agreements for minimum royalty payments as follows: $335,000, $220,000,
$240,000 and $60,000 for 2000, 2001, 2002 and 2003.
In connection with the acquisition of Advancel, the Company entered
into employment agreements with four employees. The Company is obligated under
these agreements for $471,500 per annum through 2002, subject to the outcome of
the arbitration between the parties (see Note 15).
F-43
<PAGE> 156
17.BUSINESS SEGMENT INFORMATION:
<TABLE>
<CAPTION>
(in thousands of dollars)
NCT NCT Communi- Advancel Total
Audio Hearing cations Europe DMC Logic Corp Segments Other Grand 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
F-44
<PAGE> 157
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.
F-45
<PAGE> 158
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):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues
United States $2,089 $3,209 $3,174
Europe 3,270 71 3,755
Far East 359 44 134
---------------- ---------------- ----------------
Total $5,718 $3,324 $7,063
================ ================ ================
Net (Income) Loss
United States $9,211 $13,728 $23,353
Europe 411 12 (86)
Far East 226 443 504
---------------- ---------------- ----------------
Total $9,848 $14,183 $23,771
================ ================ ================
Identifiable Assets
United States $17,060 $15,166 $13,174
Europe 301 218 164
Far East - 81 39
---------------- ---------------- ----------------
Total $17,361 $15,465 $13,377
================ ================ ================
</TABLE>
F-46
<PAGE> 159
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.
F-47
<PAGE> 160
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or event arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that the undertakings set forth in paragraphs (1)(i) and
(1)(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) That for purposes of determining any liability under the Securitie
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in this registration statement shall be
110
<PAGE> 161
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
111
<PAGE> 162
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Linthicum, Maryland, on this 20 day of April, 2000.
NCT GROUP, INC.
(formerly Noise Cancellation Technologies, Inc.)
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ MICHAEL J. PARRELLA President, Chief Executive April 20, 2000
- ----------------------------- Officer and Director
Michael J. Parrella (Principal Executive Officer)
/s/ CY E. HAMMOND Senior Vice President and April 20, 2000
- ----------------------------- Chief Financial Officer
Cy E. Hammond (Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Chairman of the Board April 20, 2000
- ------------------------------ of Directors and Director
Jay M. Haft
/s/ JOHN J. McCLOY II Director April 20, 2000
- ------------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director April 20, 2000
- ------------------------------
Samuel A. Oolie
</TABLE>
112
<PAGE> 163
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
113
<PAGE> 164
SCHEDULE II
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------
(1) (2)
Charged 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>
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.
114
<PAGE> 1
Exhibit 5
[Crowell & Moring LLP letterhead]
April 20, 2000
NCT Group, Inc.
1025 West Nursery Road
Linthicum, Maryland 21090
Re: Registration Statement on Form S-1
Gentlemen:
We serve as outside counsel to NCT Group, Inc., a Delaware corporation
(the "Company"), and have acted as counsel in connection with the preparation
and filing with the Securities and Exchange Commission of the Registration
Statement on Form S-1 that the Company is filing today under the Securities Act
of 1933, as amended, relating to the sale by certain Selling Stockholders, as
defined in such Registration Statement, of 37,435,048 shares of common stock of
the Company (the "Resale Shares").
With respect to the Registration Statement on Form S-1, we are of the
opinion that the Resale Shares have been duly authorized by the Company, have
been validly issued and are fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as Exhibit No. 5 to the Registration Statement on Form
S-1 referred to above and to the reference therein to our firm under the
caption "Interests of Named Experts and Counsel" in the Prospectus.
Respectfully submitted,
/s/ CROWELL & MORING LLP
Crowell & Moring LLP
115
<PAGE> 1
Exhibit 10 (af)
[NCT Group, Inc. letterhead]
December 1, 1999
Atlantis Capital Fund
c/o Thomson Kernaghan & Co., Ltd.
465 Bay Street, 10th Floor
Toronto, Ontario, Canada M5H 2V2
Letter Agreement Relating to and Modifying the
Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock of
NCT Group, Inc.
Gentlemen:
Reference is made to that certain Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock of NCT Group, Inc. (the
"Certificate of Designations"), whereby NCT Group, Inc., a Delaware corporation
(the "Company") established and set forth the powers, designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of its Series F Convertible
Preferred Stock (the "Series F Preferred Stock").
The Company acknowledges that it entered into the Securities Purchase Agreement,
dated as of August 6, 1999 (the "Purchase Agreement"), with each investor
listed on the Schedule of Buyers attached thereto (each, a "Buyer" and
collectively, the "Buyers"), pursuant to which the Company agreed to sell to
the Buyers, and the Buyers agreed to purchase, an aggregate amount of up to
Twelve Thousand Five Hundred (12,500) shares of the Series F Preferred Stock,
in accordance with the terms and conditions of the Certificate of Designations
filed by the Company with the Secretary of State of the State of Delaware on
September 8, 1999. The Company further acknowledges that it may exceed the
Maximum Share Issuance Amount, as that term is defined in Section 4(b) of the
Certificate of Designations, and, as such, would be obligated to immediately
notify Buyers and redeem all of the remaining shares of Series F Preferred
Stock then outstanding in accordance with the terms and conditions of Section
4(k) of the Certificate of Designations. Accordingly, the Company desires to
amend the Certificate of Designations, and the Buyers desire to consent to such
amendment, in accordance with the terms of this letter agreement (the "Letter
Agreement").
In order to facilitate the conversion of the outstanding shares of Series F
Preferred Stock into fully authorized and issued shares of common stock of the
Company, the Buyers hereby consent to the amendment of the Certificate of
Designations to increase the Maximum Share Issuance
116
<PAGE> 2
Amount from Thirty-five Million (35,000,000) shares of common stock of the
Company to Seventy-seven Million (77,000,000) shares of common stock of the
Company.
If you are in agreement with the foregoing, please execute this Letter
Agreement in the space provided below.
NCT GROUP, INC.
By: _____________________
Name:
Title:
Acknowledged and agreed to as of the date first written above:
ATLANTIS CAPITAL FUND
By: __________________________
Name:
Title:
117
<PAGE> 3
[NCT Group, Inc. letterhead]
December 1, 1999
Canadian Advantage Limited Partnership
c/o Thomson Kernaghan & Co., Ltd.
465 Bay Street, 10th Floor
Toronto, Ontario, Canada M5H 2V2
Letter Agreement Relating to and Modifying the
Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock of
NCT Group, Inc.
Gentlemen:
Reference is made to that certain Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock of NCT Group, Inc. (the
"Certificate of Designations"), whereby NCT Group, Inc., a Delaware corporation
(the "Company") established and set forth the powers, designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of its Series F Convertible
Preferred Stock (the "Series F Preferred Stock").
The Company acknowledges that it entered into the Securities Purchase Agreement,
dated as of August 6, 1999 (the "Purchase Agreement"), with each investor
listed on the Schedule of Buyers attached thereto (each, a "Buyer" and
collectively, the "Buyers"), pursuant to which the Company agreed to sell to
the Buyers, and the Buyers agreed to purchase, an aggregate amount of up to
Twelve Thousand Five Hundred (12,500) shares of the Series F Preferred Stock,
in accordance with the terms and conditions of the Certificate of Designations
filed by the Company with the Secretary of State of the State of Delaware on
September 8, 1999. The Company further acknowledges that it may exceed the
Maximum Share Issuance Amount, as that term is defined in Section 4(b) of the
Certificate of Designations, and, as such, would be obligated to immediately
notify Buyers and redeem all of the remaining shares of Series F Preferred
Stock then outstanding in accordance with the terms and conditions of Section
4(k) of the Certificate of Designations. Accordingly, the Company desires to
amend the Certificate of Designations, and the Buyers desire to consent to such
amendment, in accordance with the terms of this letter agreement (the "Letter
Agreement").
In order to facilitate the conversion of the outstanding shares of Series F
Preferred Stock into fully authorized and issued shares of common stock of the
Company, the Buyers hereby consent to the amendment of the Certificate of
Designations to increase the Maximum Share Issuance Amount from Thirty-five
Million (35,000,000) shares of common stock of the Company to Seventy-seven
Million (77,000,000) shares of common stock of the Company.
118
<PAGE> 4
If you are in agreement with the foregoing, please execute this Letter
Agreement in the space provided below.
NCT GROUP, INC.
By: _____________________
Name:
Title:
Acknowledged and agreed to as of the date first written above:
CANADIAN ADVANTAGE LIMITED PARTNERSHIP
By: __________________________
Name:
Title:
119
<PAGE> 5
[NCT Group, Inc. letterhead]
December 1, 1999
Dominion Capital Fund, Ltd.
c/o Thomson Kernaghan & Co., Ltd.
465 Bay Street, 10th Floor
Toronto, Ontario, Canada M5H 2V2
Letter Agreement Relating to and Modifying the
Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock of
NCT Group, Inc.
Gentlemen:
Reference is made to that certain Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock of NCT Group, Inc. (the
"Certificate of Designations"), whereby NCT Group, Inc., a Delaware corporation
(the "Company") established and set forth the powers, designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of its Series F Convertible
Preferred Stock (the "Series F Preferred Stock").
The Company acknowledges that it entered into the Securities Purchase Agreement
dated as of August 6, 1999 (the "Purchase Agreement"), with each investor
listed on the Schedule of Buyers attached thereto (each, a "Buyer" and
collectively, the "Buyers"), pursuant to which the Company agreed to sell to
the Buyers, and the Buyers agreed to purchase, an aggregate amount of up to
Twelve Thousand Five Hundred (12,500) shares of the Series F Preferred Stock,
in accordance with the terms and conditions of the Certificate of Designations
filed by the Company with the Secretary of State of the State of Delaware on
September 8, 1999. The Company further acknowledges that it may exceed the
Maximum Share Issuance Amount, as that term is defined in Section 4(b) of the
Certificate of Designations, and, as such, would be obligated to immediately
notify Buyers and redeem all of the remaining shares of Series F Preferred
Stock then outstanding in accordance with the terms and conditions of Section
4(k) of the Certificate of Designations. Accordingly, the Company desires to
amend the Certificate of Designations, and the Buyers desire to consent to such
amendment, in accordance with the terms of this letter agreement (the "Letter
Agreement").
In order to facilitate the conversion of the outstanding shares of Series F
Preferred Stock into fully authorized and issued shares of common stock of the
Company, the Buyers hereby consent to the amendment of the Certificate of
Designations to increase the Maximum Share Issuance Amount from Thirty-five
Million (35,000,000) shares of common stock of the Company to Seventy-seven
Million (77,000,000) shares of common stock of the Company.
120
<PAGE> 6
If you are in agreement with the foregoing, please execute this Letter Agreement
in the space provided below.
NCT GROUP, INC.
By: ____________________
Name:
Title:
Acknowledged and agreed to as of the date first written above:
DOMINION CAPITAL FUND, LTD.
By: /s/ DAVID SIMS
----------------
Name: David Sims
Title:
121
<PAGE> 7
[NCT Group, Inc. letterhead]
December 1, 1999
Endeavour Capital Fund S.A.
Attn.: Shmuli Margulies
14/14 Divrei Chaim Street
Jerusalem 94479 Israel
Letter Agreement Relating to and Modifying the
Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock of
NCT Group, Inc.
Gentlemen:
Reference is made to that certain Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock of NCT Group, Inc. (the
"Certificate of Designations"), whereby NCT Group, Inc., a Delaware corporation
(the "Company") established and set forth the powers, designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of its Series F Convertible
Preferred Stock (the "Series F Preferred Stock").
The Company acknowledges that it entered into the Securities Purchase Agreement,
dated as of August 6, 1999 (the "Purchase Agreement"), with each investor listed
on the Schedule of Buyers attached thereto (each, a "Buyer" and collectively,
the "Buyers"), pursuant to which the Company agreed to sell to the Buyers, and
the Buyers agreed to purchase, an aggregate amount of up to Twelve Thousand
Five Hundred (12,500) shares of the Series F Preferred Stock, in accordance
with the terms and conditions of the Certificate of Designations filed by the
Company with the Secretary of State of the State of Delaware on September 8,
1999. The Company further acknowledges that it may exceed the Maximum Share
Issuance Amount, as that term is defined in Section 4(b) of the Certificate of
Designations, and, as such, would be obligated to immediately notify Buyers and
redeem all of the remaining shares of Series F Preferred Stock then outstanding
in accordance with the terms and conditions of Section 4(k) of the Certificate
of Designations. Accordingly, the Company desires to amend the Certificate of
Designations, and the Buyers desire to consent to such amendment, in accordance
with the terms of this letter agreement (the "Letter Agreement").
In order to facilitate the conversion of the outstanding shares of Series F
Preferred Stock into fully authorized and issued shares of common stock of the
Company, the Buyers hereby consent to the amendment of the Certificate of
Designations to increase the Maximum Share Issuance Amount from Thirty-five
Million (35,000,000) shares of common stock of the Company to Seventy-seven
Million (77,000,000) shares of common stock of the Company.
122
<PAGE> 8
If you are in agreement with the foregoing, please execute this Letter
Agreement in the space provided below.
NCT GROUP, INC.
By: ____________________
Name:
Title:
Acknowledged and agreed to as of the date first written above:
ENDEAVOUR CAPITAL FUND S.A.
By: /s/ SHMULI MARGULIES
-----------------------
Name: Shmuli Margulies
Title:
123
<PAGE> 9
[NCT Group, Inc. letterhead]
December 1, 1999
Sovereign Partners, L.P.
c/o Thomson Kernaghan & Co., Ltd.
465 Bay Street, 10th Floor
Toronto, Ontario, Canada M5H 2V2
Letter Agreement Relating to and Modifying the
Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock of
NCT Group, Inc.
Gentlemen:
Reference is made to that certain Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock of NCT Group, Inc. (the
"Certificate of Designations"), whereby NCT Group, Inc., a Delaware corporation
(the "Company") established and set forth the powers, designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of its Series F Convertible
Preferred Stock (the "Series F Preferred Stock").
The Company acknowledges that it entered into the Securities Purchase
Agreement, dated as of August 6, 1999 (the "Purchase Agreement"), with each
investor listed on the Schedule of Buyers attached thereto (each, a "Buyer" and
collectively, the "Buyers"), pursuant to which the Company agreed to sell to
the Buyers, and the Buyers agreed to purchase, an aggregate amount of up to
Twelve Thousand Five Hundred (12,500) shares of the Series F Preferred Stock,
in accordance with the terms and conditions of the Certificate of Designations
filed by the Company with the Secretary of State of the State of Delaware on
September 8, 1999. The Company further acknowledges that it may exceed the
Maximum Share Issuance Amount, as that term is defined in Section 4(b) of the
Certificate of Designations, and, as such, would be obligated to immediately
notify Buyers and redeem all of the remaining shares of Series F Preferred
Stock then outstanding in accordance with the terms and conditions of Section
4(k) of the Certificate of Designations. Accordingly, the Company desires to
amend the Certificate of Designations, and the Buyers desire to consent to such
amendment, in accordance with the terms of this letter agreement (the "Letter
Agreement").
In order to facilitate the conversion of the outstanding shares of Series F
Preferred Stock into fully authorized and issued shares of common stock of the
Company, the Buyers hereby consent to the amendment of the Certificate of
Designations to increase the Maximum Share Issuance Amount from Thirty-five
Million (35,000,000) shares of common stock of the Company to Seventy-seven
Million (77,000,000) shares of common stock of the Company.
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<PAGE> 10
If you are in agreement with the foregoing, please execute this Letter
Agreement in the space provided below.
NCT GROUP, INC.
By: ____________________
Name:
Title:
Acknowledged and agreed to as of the date first written above:
SOVEREIGN PARTNERS, L.P.
By: /s/ STEVE HICKS
---------------
Name: Steve Hicks
Title:
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<PAGE> 1
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in the Registration Statement on Form S-1 of our
report dated February 25, 2000 (with respect to Note 11, March 7, 2000), on
our audits of the consolidated financial statements and schedules of NCT Group,
Inc. as of December 31, 1999 and 1998 and for each of the years in the three
year period ended December 31, 1999, and to the reference to our firm under
the caption "Interests of Named Experts and Counsel" included in the Prospectus.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
April 19, 2000
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<PAGE> 1
Exhibit 23(b)
[Peters Elworthy & Moore letterhead]
NCT Group, Inc.
1025 West Nursery Road
Suite 120 Our Ref: PRC/J
Linthicum
Maryland 21090 Date: April 20, 2000
USA
Dear Sirs
We consent to the incorporation by reference to the Registration Statement on
Form S-1 of our report dated February 17, 2000, on the financial statements and
schedule of Noise Cancellation Technologies (Europe) Limited as at December 31,
1999 and December 31, 1998 and for each of the years in the three year period
ended December 31, 1999, included in NCT Group, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1999, and to the reference to the firm
under the caption "Experts" included in the Prospectus.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
127
