UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER: 0-18267
NCT Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
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(410) 636-8700
(Registrant's telephone number, including area code)
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(In thousands except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ------------------------
1998 1999 1998 1999
----------- ----------- ---------- -----------
REVENUES:
<S> <C> <C> <C> <C>
Technology licensing fees and royalties $ 29 $ 8 $ 375 $ 3,509
Product sales, net 548 574 1,613 1,802
Engineering and development services 138 128 287 1,303
----------- ----------- ---------- -----------
Total revenues $ 715 $ 710 $ 2,275 $ 6,614
----------- ----------- ---------- -----------
COSTS AND EXPENSES:
Cost of product sales $ 383 $ 634 $ 1,252 $ 1,717
Cost of engineering and development services 65 761 193 1,664
Selling, general and administrative 3,159 2,318 7,613 7,981
Research and development 1,430 1,644 4,727 5,102
Other (income)/expense (Note 5) 38 2,292 (3,344) 2,599
Write down of investment inunconsolidated
affiliate (Note 5) - - - 2,385
Interest (income)/expense (114) 16 (326) (41)
----------- ----------- ---------- -----------
Total costs and expenses $ 4,961 $ 7,665 $ 10,115 $ 21,407
----------- ----------- ---------- -----------
NET LOSS $ (4,246) $ (6,955) $ (7,840) $ (14,793)
=========== =========== ========== ===========
Preferred stock dividend requirement $ 723 $ 5,327 $ 2,413 $ 10,567
Accretion of difference between carrying amount
and redemption amount of redeemable
preferred stock 699 131 1,183 315
----------- ----------- ---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (5,668) $ (12,413) $ (11,436) $ (25,675)
=========== =========== ========== ===========
Basic and diluted loss per share $ (0.04) $ (0.06) $ (0.08) $ (0.14)
=========== =========== ========== ===========
Weighted average common shares
outstanding - basic and diluted 151,740 188,009 140,906 173,453
=========== =========== ========== ===========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(in thousands, unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ------------------------
1998 1999 1998 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET LOSS $ (4,246) $ (6,955) $ (7,840) $ (14,793)
Other comprehensive income/(loss):
Currency translation adjustment (65) 9 (78) 30
----------- ----------- ---------- -----------
COMPREHENSIVE LOSS $ (4,311) $ (6,946) $ (7,918) $ (14,763)
=========== =========== ========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1) (in thousands of dollars)
December 31, September 30,
1998 1999
------------ -------------
ASSETS: (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 529 $ 547
Restricted cash (Note 7) - 847
Accounts receivable, net of reserves (Note 2) 716 825
Inventories, net of reserves (Note 3) 3,320 2,860
Other current assets 185 152
------------ -------------
Total current assets $ 4,750 $ 5,231
Property and equipment, net 997 633
Goodwill, net 1,506 4,411
Patent rights and other intangibles, net (Note 6) 2,881 3,305
Other assets (Note 5) 5,331 1,715
------------ -------------
$ 15,465 $ 15,295
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,226 3,602
Accrued expenses 1,714 2,248
Accrued payroll, taxes and related expenses 241 320
Other liabilities (Note 6) 756 769
Customers' advances - 23
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Total current liabilities $ 5,937 $ 6,962
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Long term liabilities:
Convertible notes and accrued interest (Note 7) $ - $ 3,864
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Total long term liabilities $ - $ 3,864
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Commitments and contingencies
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Common stock subject to resale guarantee (Note 9) $ - $ 1,756
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Minority interest in consolidated subsidiary
Preferred stock in subsidiary, $.10 par value, 1,000 shares authorized,
issued and outstanding, 60 and 3 shares, respectively (redemption amount
$6,102,110 and $314,138, respectively) $ 6,102 $ 314
------------ -------------
Stockholders' equity (Note 4)
Preferred stock, $.10 par value, 10,000,000 shares authorized
Series C preferred stock, 700 shares issued and outstanding
(redemption amount $731,222 and $752,164, respectively) $ 702 $ 723
Series D preferred stock, issued and outstanding, 6,000 and 0 shares,
respectively (redemption amount $6,102,110 and $0, respectively) 5,240 -
Series E preferred stock, issued and outstanding, 10,580 and 5,171
shares, respectively (redemption amount $10,582,319 and $5,326,870,
respectively) 3,298 3,062
Series F preferred stock, issued and outstanding, 0 and 8,500 shares,
respectively (redemption amount $0 and $8,546,575 respectively) - 4,970
Common stock, $.01 par value, authorized 255,000,000 and 325,000,000 shares,
respectively; issued 156,337,316 and 217,893,010 shares, respectively 1,563 2,179
Additional paid-in-capital 107,483 124,089
Unearned portion of compensatory stock, warrants and (238) (104)
Expenses to be paid with common stock - (2,285)
Accumulated deficit (107,704) (122,497)
Cumulative translation adjustment 45 75
Stock subscriptions receivable (4,000) (4,000)
Treasury stock (6,078,065 shares of common stock , 0 shares of preferred
stock and 6,078,065 shares of common stock, 1,726 shares of Series E
preferred stock, respectively) (2,963) (3,813)
------------ ------------
Total stockholders' equity $ 3,426 $ 2,399
------------ ------------
$ 15,465 $ 15,295
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited) (in thousands of dollars)
Nine months ended September 30,
-------------------------------
1998 1999
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $ (7,840) $ (14,793)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 805 1,389
Common stock options and warrants issued as consideration for:
Compensation 213 167
Patent rights 446 -
Provision for tooling costs 39 69
Provision for doubtful accounts 62 92
Loss on disposition of fixed assets 35 -
Write down of investment in unconsolidated affiliate (Note 5) - 2,385
Preferred stock received for license fees (Note 9) - (850)
Reserve for note receivable (Note 5) - 1,624
Beneficial conversion feature on convertible note (Note 7) - 204
Amortization of debt discount (Note 7) - 47
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (195) 64
(Increase) decrease in license fees receivable 200 (265)
(Increase) decrease in inventories, net (2,583) 460
(Increase) decrease in other assets (524) 37
Increase in accounts payable and accrued expenses 843 2,351
Increase (decrease) in other liabilities (514) 453
----------- -----------
Net cash (used in) operating activities $ (9,013) $ (6,566)
----------- -----------
Cash flows from investing activities:
Capital expenditures $ (462) $ (136)
Acquisition of patent rights (Note 6) (200) (900)
Sale of fixed assets 44 -
Acquisition of affiliates (Note 5) (4,900) -
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Net cash (used in) investing activities $ (5,518) $ (1,036)
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Cash flows from financing activities:
Proceeds from:
Convertible notes (net) (Note 7) $ - $ 4,000
Sale of preferred stock (net) (Note 9) 10,292 4,435
Sale of common stock (net) 352 1
Purchase of treasury shares (3,078) -
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Net cash provided by financing activities $ 7,566 $ 8,436
----------- -----------
Effect of exchange rate changes on cash $ (90) $ 31
----------- -----------
Net increase (decrease) in cash and cash equivalents $ (7,055) $ 865
Cash and cash equivalents - beginning of period 12,604 529
----------- -----------
Cash and cash equivalents - end of period $ 5,549 $ 1,394
=========== ===========
Cash paid for interest $ 1 $ 1
=========== ===========
Non-cash transactions:
Common stock subject to resale guarantee $ - $ 1,756
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to instructions and rules of the
Securities and Exchange Commission (the "Commission"). Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and certain
adjustments to reserves and allowances) considered necessary for a fair
presentation have been included. Operating results for the three months and the
nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the NCT Group, Inc. (the "Company" or "NCT") Annual Report
on Form 10-K, for the year ended December 31, 1998, filed on March 31, 1999 as
amended by Amendment No. 1 thereto filed on May 3, 1999 and Amendment No. 2
thereto filed on May 3, 1999.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $122.5 million on a
cumulative basis through September 30, 1999. These losses, which include the
cost for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) technology licensing fees, (4) royalties, (5) product sales
and (6) engineering and development funds received from strategic partners and
customers.
Cash, cash equivalents and short-term investments amounted to $1.4 million
at September 30, 1999, increasing from $0.5 million at December 31, 1998.
Management believes that currently available funds will not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the exercise of warrants and options and the funding derived from
technology licensing fees, royalties, product sales and engineering development
revenue. Reducing operating expenses and capital expenditures alone will not be
sufficient and continuation as a going concern is dependent upon the level of
realization of funding from technology licensing fees, royalties, product sales
and engineering and development revenue, all of which are presently uncertain.
In the event that anticipated technology licensing fees, royalties, product
sales and engineering and development services are not realized, management
believes additional working capital financing must be obtained. There is no
assurance any such financing is or would become available.
On January 25, 1999, the Company granted DistributedMedia.com, Inc.
("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.
On February 9, 1999, NCT Audio Products, Inc. ("NCT Audio") and New
Transducers Ltd. ("NXT") expanded the Cross License Agreement dated September
27, 1997 to increase NXT's fields of use to include aftermarket ground based
vehicles and aircraft sound systems. The expanded agreement also increased the
royalties due NCT Audio from NXT to 10% from 6% and increased the royalties due
NXT from NCT Audio to 7% from 6%. In consideration for granting NXT these
expanded license rights, NCT Audio received licensing fees of $0.5 million. Also
on February 9, 1999, NCT Audio and NXT amended the Master License Agreement to
include a minimum royalty payment of $160,000 in 1999, to be paid by NCT Audio
to NXT in equal quarterly installments. The Company has recorded a liability of
$0.1 million at September 30, 1999.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. 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 obligations of $0.5 million and filed a
Form S-1 resale registration statement with the Commission covering such shares.
The current obligations of $1.8 million are reflected as common stock subject to
resale guarantee. On October 27, 1999, the Company issued an additional
1,148,973 shares of common stock to suppliers and consultants to settle future
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, as amended, also included
those shares of the Company's common stock that were issued in exchange for NCT
Audio common stock to Balmore (as defined on page 12). The registration
statement (File No. 333-87757) was declared effective by the Commission on
November 2, 1999.
<PAGE>
On June 24, 1999, NCT Hearing Products, Inc. ("NCT Hearing"), a wholly
owned subsidiary of the Company, signed a letter of intent to acquire sixty
percent (60%) of the common stock of Pro Tech Communications, Inc. ("Pro Tech")
in exchange for rights to certain NCT Hearing technology. Consummation of the
transaction is contingent upon NCT Hearing raising $2.0 million of equity
financing.
On August 16, 1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. The Company reduced its
worldwide work force by approximately 25%. Charges related to this amount to
$0.1 million and were recorded in the third quarter of 1999.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described above raise substantial doubt at September 30, 1999,
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. Accounts Receivable:
Accounts receivable comprise the following:
(thousands of dollars)
December 31, September 30,
1998 1999
-------------- --------------
Technology license fees and royalties $ 192 $ 457
Engineering and development services 200 99
Other 552 444
Allowance for doubtful accounts (228) (175)
-------------- --------------
Accounts receivable, net of
reserves $ 716 $ 825
============== ==============
3. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, September 30,
1998 1999
-------------- --------------
Components $ 745 $ 588
Finished Goods 3,083 2,824
-------------- --------------
Gross Inventories $ 3,828 $ 3,412
Reserve for Obsolete & Slow Moving
Inventory (508) (552)
-------------- --------------
Inventories, Net of Reserves $ 3,320 $ 2,860
============== ==============
The reserve for obsolete and slow moving inventory at September 30, 1999
has increased to $0.6 million primarily due to a $0.3 million charge for slow
moving hearing product inventory during the first nine months of 1999 net of
applications of reserve.
<PAGE>
4. Stockholders' Equity:
The changes in stockholders' equity during the nine months ended September
30, 1999, were as follows:
<TABLE>
<CAPTION>
(in thousands)
-------------------------------------------------------------------------------------------------------------
Accre- Expenses
Exchange/ tion/ Net Unearned To Be
Conver- Dividend Sale Stock Compen- Paid Transla-
Balance sion of of of Subcrip- satory With tion Balance
at Preferred Preferred Common tion Options/ Net Common Adjust- at
12/31/98 Stock Stock Stock Receivable Warrants Loss Stock ment 9/30/99
-------------------------------------------------------------------------------------------------------------
Series C
Preferred
Stock:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares 1 - - - - - - - - 1
Amount $ 702 $ - $ 21 $ - $ - $ - $ - $ - $ - $ 723
Series D
Preferred
Stock:
Shares 6 (6) - - - - - - - -
Amount $ 5,240 $(5,273) $ 33 $ - $ - $ - $ - $ - $ - $ -
Series E
Preferred
Stock:
Shares 11 (6) - - - - - - - 5
Amount $ 3,298 $(3,438) $ 3,202 $ - $ - $ - $ - $ - $ - $ 3,062
Series F
Preferred
Stock:
Shares - 9 - - - - - - - 9
Amount $ - $ 4,924 $ 46 $ - $ - $ - $ - $ - $ - $ 4,970
Common
Stock:
Shares 156,337 49,549 - 5 - - - 12,007 - 217,898
Amount $ 1,563 $ 496 $ - $ - $ - $ - $ - $ 120 $ - $ 2,179
Treasury
Stock:
Shares 6,078 2 - - - - - - - 6,080
Amount $ (2,963) $ (850) $ - $ - $ - $ - $ - $ - $ - $ (3,813)
Additional
Paid-in
Capital $ 107,483 $13,577 $(3,366) $4,230 $ - $ - $ - $ 2,165 $ - $ 124,089
Accumulated
(Deficit) $(107,704) $ - $ - $ - $ - $ - $(14,793) $ - $ - $(122,497)
Cumulative
Translation
Adjustment $ 45 $ - $ - $ - $ - $ - $ - $ - $ 30 $ 75
Stock
Subscription
Receivable $ (4,000) $ - $ - $ - $ - $ - $ - $ - $ - $ (4,000)
Expenses
to be
Paid with
Common Stock $ - $ - $ - $ - $ - $ - $ - $(2,285) $ - $ (2,285)
Unearned
Compensatory
Stock Option $ (238) $ - $ - $ - $ - $ 134 $ - $ - $ - $ (104)
</TABLE>
<PAGE>
5. Other Assets:
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), an automotive audio system
supplier, for a purchase price of $10,000,000 and up to an additional $6,000,000
in possible future cash contingent payments. On June 11, 1998, NCT Audio paid a
non-refundable deposit of $1,450,000 towards the purchase price. The
shareholders of Top Source Technologies, Inc., TSA's parent company, approved
the transaction on December 15, 1998.
NCT Audio then paid Top Source Technologies ("TST"), Inc. $2,050,000 on
July 31, 1998. The money was held in escrow with all of the necessary securities
and documents to evidence ownership of 20% of the total equity rights and
interests in TSA. When Top Source Technologies, Inc.'s shareholders approved the
transaction, the $2,050,000 was delivered to TSA. In return, NCT Audio took
ownership of the documentation and securities held in escrow.
NCT Audio had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay Top Source Technologies, Inc. $6.5 million on or before
March 31, 1999 to complete the acquisition of TSA's assets. As consideration for
an extension of such exclusive right from March 31, 1999 to May 28, 1999, NCT
Audio agreed to pay Top Source Technologies, Inc. a fee of $350,000 consisting
of $20,685 in cash, $125,000 of NCT Audio's minority interest in TSA earnings,
and a $204,315 note payable, due April 16, 1999. If NCT Audio failed to pay the
note by April 16, 1999, (a) the note would begin to accrue interest on April 17,
1999 at the lower of the rate of two times the prime rate or the highest rate
allowable by law; and (b) the $20,685 and $125,000 portion of the extension fee
would no longer be credited toward the $6.5 million purchase consideration due
at closing. If NCT Audio failed to pay the note by April 30, 1999, the $204,315
portion of the extension fee would no longer be credited toward the $6.5 million
closing amount due. To date, NCT Audio has not paid the note. Further, if NCT
Audio failed to close the contemplated transaction by May 28, 1999, NCT Audio
would forfeit its minority earnings in TSA for the period June 1, 1999 through
May 30, 2000. In addition, due to NCT Audio's failure to close the transaction
by March 31, 1999, NCT Audio must pay a penalty premium of $100,000 of NCT
Audio's 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, primarily due to its
difficulty in raising the requisite cash consideration. As a result, NCT Audio
has reduced its net investment in TSA to $1.2 million, representing a 15%
minority interest (net of the above noted penalties and the minority interest in
TSA earnings), and recorded a $2.4 million write down to its estimated net
realizable value at September 30, 1999. On September 30, 1999, Onkyo America
purchased substantially all of the assets of TSA and certain assets of TST used
in the business of TSA. NCT Audio is seeking a minimum of its pro rata share
(15%) of such consideration less the above noted penalties.
On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC (doing business as Precision Power, Inc. or "PPI").
PPI supplies custom-made automotive audio systems. NCT Audio will acquire the
interest in exchange for shares of its common stock having an aggregate value of
$2,000,000. NCT Audio also agreed to retire $8.5 million of PPI debt, but NCT
Audio must obtain adequate financing before the transaction can be completed. In
addition, NCT Audio provided PPI a working capital loan on June 17, 1998 in the
amount of $500,000, which is evidenced by a demand promissory note. On August
18, 1998, NCT Audio provided PPI another working capital loan in the amount of
$1,000,000, which is also evidenced by a demand promissory note. The unpaid
principal balance of these notes bears interest at a rate equal to the prime
lending rate plus one percent (1.0%).
As noted, the transaction is contingent on NCT Audio obtaining outside
financing to retire the PPI debt. On January 6, 1999, the PPI members notified
NCT Audio that, while they remain willing to do the transaction, they may choose
at some point to abandon the transaction because NCT Audio has not obtained the
financing in a timely manner. They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock, they would insist that NCT Audio pay them
that amount in cash at any closing. To date, NCT Audio has not been able to
obtain the financing to consummate this transaction, and PPI is currently
experiencing significant organizational changes which have resulted in
cancellation of the agreement for NCT Audio to acquire the members' interest in
PPI. During the third quarter of 1999, NCT Audio fully reserved the promissory
note plus interest due from PPI ($1.6 million) but continues seeking repayment
of the note. NCT Audio is currently seeking a substitute acquisition.
6. Other Liabilities:
On June 5, 1998, Interactive Products, Inc. ("IPI") entered into an
agreement with the Company granting the Company a license to, and an option to
purchase, a joint ownership interest in patents and patents pending which relate
to IPI's speech recognition, speech compression and speech identification and
verification technologies. The aggregate value of the patented technologies is
$1,250,000, which was paid by a $150,000 cash payment and delivery of 1,250,000
shares of the Company's common stock. 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. IPI received $596,000 from the
proceeds of the sale of the Company's shares. The Company has recorded a
liability of $454,000 at September 30, 1999.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hasupie Speech Products N.V. ("L&H"). The agreement provides the Company with a
worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. The Company recorded a $0.9 million
patent technology right.
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. 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, L&H and the Company agreed to offset the
balances due each other. Consequently, the Company's balance due L&H at
September 30, 1999 is $0.1 million.
7. Convertible Notes:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. A secured convertible note (the "Note") for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in The Wall Street Journal from the issue date until the Note becomes
due and payable. The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time, all or from time to time,
any part of the outstanding and unpaid amount of the Note into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price, as amended by the parties on September 19, 1999, on the
notes and any future notes, shall be the lesser of (i) the lowest closing
transaction price for the common stock on the securities market on which the
common stock is being traded, at any time during September 1999; (ii) the
average of the closing bid prices for the common stock on the securities market
on which the common stock is being traded for five (5) consecutive trading days
prior to the date of conversion; or (iii) the fixed conversion price of $0.17.
In no event will the conversion price be less than $0.12 per share. The Company
and Holder have agreed to extend the date for the purchase of the remaining
installments of secured convertible notes to December 1, 1999. 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. The Company recorded a $0.2 million non-cash interest expense
for the period ended September 30, 1999 in connection with the secured
convertible notes.
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 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 equal to either (i) the number of shares of the Company's
common stock which may be purchased for an aggregate purchase price of
$1,250,000 at the fair market value on July 19, 1999 or (ii) the number of
shares representing five percent of the fully paid non-assessable shares of
common stock of DMC at the purchase price per share equal to either (x) if a DMC
qualified sale (a sale in one transaction in which the aggregate sales proceeds
to DMC equal or exceed $5,000,000) has closed on or before December 31, 1999,
the purchase price per share determined by multiplying the price per share of
DMC common stock or security convertible into DMC common stock by seventy-five
percent (75%) or (y) if a DMC qualified sale has not closed on or before
December 31, 1999, at an aggregate price of $1,250,000. The Company allocated a
portion of the proceeds to the warrant, which is being treated as debt discount
($0.4 million) and amortized over the period of the note. The Company recorded a
$47,000 non-cash interest expense for the period ended September 30, 1999 in
connection with the PRG Note.
<PAGE>
8. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. Reference is made to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as amended, for
a discussion of this suit. On May 4, 1999, the Company's Italian law firm
informed the Company that the Tribunal of Milan had verbally granted the
Company's objection to lack of venue and had consequently rejected Mr. Valerio's
claim and awarded the Company expenses in the amount of approximately $7,000.
The Company is awaiting receipt of the official text of the judgement.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, as amended, for a discussion of this
matter. There were no material developments in this matter during the period
covered by this report.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott &
Co., Inc. and the Company in the United States District Court, Southern District
of New York. Reference is made to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, as amended. There were no material
developments in this matter during the period covered by this report.
On November 17, 1998, the Company and NCT Hearing filed suit against
Andrea Electronics Corporation in the United States District Court, Eastern
District of New York. Reference is made to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, as amended. There were no
material developments in this matter during the period covered by this report.
On December 15, 1998, Balmore Funds, S.A. and Austost Anstalt Schaan
("Balmore") filed suit against the Company's subsidiary, NCT Audio, and the
Company in the Supreme Court of the State of New York, County of New York.
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, as amended, for a discussion of this matter.
On October 9, 1999, the Company, NCT Audio, Balmore, and LH Financial
agreed, in principle, to settle all legal charges, claims and counterclaims
which have individually or jointly been asserted against the parties. On October
9, 1999, pursuant to the NCT Audio stock agreement, the Company, NCT Audio and
Balmore also agreed to exchange 532 shares of NCT Audio common stock held by
Balmore into 17,333,334 shares of common stock of the Company. The issuance of
such shares of common stock was ratified by the Board of Directors on October
22, 1999.
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 March
2000 for an arbitration hearing. Discovery is currently taking place in the
action.
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.
The Company believes there are no other patent infringement litigations,
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on the financial position and results of
operations.
<PAGE>
9. Common Stock:
For the nine-month period ended September 30, 1999, the Company issued
12,273,685 shares of the Company's common stock in connection with the
conversion of the Company's Series D Convertible Preferred Stock ("Series D
Preferred Stock") issued in the third quarter of 1998 in a private placement
exempt from registration pursuant to Regulation D of the Securities Act of 1933
(the "Securities Act"). Reference is made to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, as amended, for further
discussion.
For the nine-month period ended September 30, 1999, 57 shares of NCT Audio
Series A Convertible Preferred Stock, issued in the third quarter of 1998 in a
private placement exempt from registration pursuant to Regulation D of the
Securities Act, were exchanged for 5,700 shares of Series D Preferred Stock,
which were converted into 11,699,857 shares of the Company's common stock.
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, as amended, for further discussion.
During the nine-month period ended September 30, 1999, the Company
received gross proceeds of $4.0 million less expenses of $0.6 million in
connection with the Company's Series E Convertible Preferred Stock ("Series E
Preferred Stock") issued in the fourth quarter of 1998 in a private placement
exempt from registration pursuant to Regulation D of the Securities Act. As of
October 31, 1999, 3,827 shares of the Company's Series E Preferred Stock had
been converted into 26.6 million shares of the Company's common stock. Reference
is made to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, as amended, for further discussion.
On March 31, 1999, the Company signed a license agreement to exchange
3,600 shares of Series E Preferred Stock for four (4) 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 DMC, a
wholly-owned subsidiary of the Company. DMC was incorporated to develop, install
and provide an audio/visual advertising medium within commercial/professional
settings. DBSS schedules advertisers' customized broadcast messages, which are
downloaded via the internet with the respective music genre of choice to the
commercial/professional establishments.
The Company anticipates the sale of such licenses to approximate $1.0
million each based on regional and commercial/professional settings. The Company
has developed standard license agreements to coincide with its current business
plan and delineate the extent and nature of the rights and duties of the Company
and its licensees. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized $2.0 million on the
issuance of such licenses in consideration of the receipt of 3,600 shares of its
Series E Preferred Stock in a related party transaction. During the three months
ended June 30, 1999, the Company adjusted such revenue to $0.9 million based
upon the valuation of additional shares of Series E Preferred Stock issued
during the three months ended June 30, 1999. As a result, realization of revenue
was limited to the related party's consideration representing the Series E
Preferred Stock.
On April 13, 1999, the Board of Directors granted options to purchase 8.6
million shares of the Company's common stock to certain officers, other
employees and consultants of the Company. Options to purchase 1.8 million of
such shares vest immediately. Options to purchase 6.8 million of such shares
will not become vested or exercisable until the satisfaction of additional
vesting requirements based on the passage of time. The foregoing options were
granted with the exercise price equal to the fair value of the Company's common
stock on April 13, 1999, or $0.41 per share, as determined from the closing bid
price as reported by the NASDAQ OTC Bulletin Board.
At the annual meeting of stockholders of the Company on June 24, 1999, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 255,000,000 to 325,000,000. This
amendment became effective on July 29, 1999, when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. 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 obligations of $0.5 million. The current
obligations of $1.8 million are reflected as common stock subject to resale
guarantee. On October 27, 1999, the Company issued an additional 1,148,973
shares of common stock to suppliers and consultants to settle future 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, as amended, also included those
shares of the Company's common stock that were issued in exchange for NCT Audio
common stock to Balmore (as defined on page 15). The registration statement
(File No. 333-87757) was declared effective by the Commission on November 2,
1999.
<PAGE>
On August 10, 1999, the Company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F Convertible Preferred Stock (the
"Series F Preferred Stock"), in a private placement pursuant to Regulation D of
the Securities Act, to five unrelated accredited investors through one dealer
(the "1999 Series F Preferred Stock Private Placement"). On August 10, 1999, the
Company received $1.0 million for the sale of 8,500 shares of Series F Preferred
Stock having an aggregate stated value of $8.5 million. At the Company's
election, the investors may invest up to an additional $4.0 million in cash or
in kind at a future date. Each share of the Series F Preferred Stock has a par
value of $.10 per share and a stated value of one thousand dollars ($1,000) with
an accretion rate of four percent (4%) per annum on the stated value. Each share
of Series F Preferred Stock is convertible into fully paid and non-assessable
shares of the Company's common stock, subject to certain limitations. Under the
terms of the Series F Subscription Agreement, the Company was required to file a
registration statement on Form S-1 on or prior to a date which is no more than
forty-five (45) days from the date that the Company has issued a total of 1,000
shares of Series F Preferred Stock, covering the resale of all of the
registrable securities (the "Series F Closing Date"). The shares of Series F
Preferred Stock become convertible into shares of common stock at any time
commencing after the earlier of (i) forty-five (45) days after the Series F
Closing Date; (ii) five (5) days after the Company receives a "no review" status
from the SEC in connection with the Series F registration statement; or (iii)
the effective date of the Series F registration statement. Each share of Series
F Preferred Stock is convertible into a number of shares of common stock of the
Company as determined in accordance with a formula (the "Series F Conversion
Formula"), as defined in the agreement. The conversion formula provides that the
stated value of the preferred stock plus 4% accretion thereon for the number of
days between (i) the Series F Closing Date and (ii) the conversion date be
divided by the amount obtained by multiplying the 80% times the average market
price for the Company's common stock for the five (5) consecutive trading days
immediately preceding such date. The conversion terms of the Series F Preferred
Stock also provide that in no event shall the Company be obligated to issue more
than 35,000,000 shares of its common stock in the aggregate in connection with
the conversion of up to 12,500 shares of Series F Preferred Stock. 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.
At September 30, 1999, the aggregate number of shares of common stock
required to be reserved for issuance upon the exercise of all outstanding
options and warrants was 38.6 million shares, and the aggregate number of shares
of common stock required to be reserved for issuance upon conversion of issued
and outstanding shares of the remaining Series C Convertible Preferred Stock was
1.5 million shares. The Company has also reserved 24.8 million shares of common
stock for issuance to certain holders of NCT Audio common stock upon their
exercise of certain rights to exchange their shares of NCT Audio common stock
for shares of the Company's common stock, 0.7 million shares of common stock
reserved for the issuance upon exchange of the remaining Series A Preferred
Stock for Series D Preferred Stock, 0.2 million shares of common stock reserved
for the issuance upon conversion of Series E Preferred Stock, 25.7 million
shares of common stock reserved for the issuance upon conversion of Series F
Preferred Stock and 24.3 million shares of common stock reserved for the
issuance upon conversion of the secured convertible notes. At September 30,
1999, the number of shares available for the exercise of options and warrants
was 39.2 million and of the outstanding options and warrants, options and
warrants to purchase 24.7 million shares were currently exercisable. Common
shares issued and issuable exceed the number of shares authorized at September
30, 1999. However, should shares of common stock issued reach the authorized
limit, shares in excess of the limit will be borrowed from the 1992 Plan.
<PAGE>
10. Business Segment Information:
During 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information" ("SFAS No. 131"). The
provisions of SFAS No. 131 require the Company to disclose the following
information for each reporting segment: general information about factors used
to identify reportable segments, the basis of organization, and the sources of
revenues; information about reported profit or loss and segment assets; and
reconciliations of certain reported segment information to consolidated amounts.
<TABLE>
<CAPTION>
(In thousands of dollars)
Segment
--------------------------------------------------------------------------------------------
Advancel
Communi- Logic Total Grand
Audio Hearing cations Europe DMC Corp Segments Other Total
--------------------------------------------------------------------------------------------
For the nine months ended
September 30, 1999:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales - External $ 627 $ 549 $ 850 $ 3 $ - $ 1,070 $ 3,099 $ 6 $ 3,105
Net Sales - Other Operating
Segments 11 - - 650 - - 661 (661) -
License Fees and Royalties 504 156 863 - 850 1,100 3,473 36 3,509
Write down of investment in
Unconsolidated subsidiary (2,385) - - - - - (2,385) - (2,385)
Interest Income, net 127 - - 1 - - 128 (87) 41
Depreciation/Amortization 9 - - 33 - 12 54 1,335 1,389
Operating Income (Loss) (8,628) (2,390) (1,996) 52 (1,414) (397) (14,773) (20) (14,793)
Segment Assets 2,580 2,147 171 186 935 1,360 7,379 7,916 15,295
Capital Expenditures - - 1 5 11 35 52 84 136
For the nine months ended
September 30, 1998:
Net Sales - External $ 185 $ 960 $ 616 $ 16 $ - $ 72 $ 1,849 $ 51 $ 1,900
Net Sales - Other Operating
Segments 1 22 5 693 - - 721 (721) -
License Fees and Royalties 275 59 9 - - - 343 32 375
Equity in net loss of
Unconsolidated affiliates -
net of amortizations - - - - - - - - -
Interest Income, net 52 - - 11 - - 63 263 326
Depreciation/Amortization - - - 40 - - 40 765 805
Operating Income (Loss) (2,594) (2,297) (3,201) (93) - (35) (8,220) 380 (7,840)
Segment Assets 8,414 3,013 365 226 - 686 12,704 7,688 20,392
Capital Expenditures 168 - 18 83 - - 269 193 462
</TABLE>
Audio:
NCT Audio is engaged in the design, development and marketing of products,
that utilize innovative flat panel transducer technology. The products available
from NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM) printed
grille collection. The Gekko(TM) flat speaker is marketed primarily to the home
audio market, with potential in many other markets, including the professional
audio systems market, the automotive audio aftermarket, the aircraft industry,
other transportation markets and multimedia markets. The principal customers are
end-users, automotive original equipment manufacturers ("OEMs") and
manufacturers of integrated cabin management systems.
Hearing:
NCT Hearing designs, develops and markets active noise reduction ("ANR")
headset products to the communications headset market and the telephony headset
market. The product lines include the NoiseBuster(R) product line and the
ProActive(R) product line. The NoiseBuster(R) products consist of the
NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a headset used for
in-flight passenger entertainment systems and communications headsets for
cellular, multimedia and telephony. The ProActive(R) products consist of noise
reduction headsets and communications headsets for noisy industrial
environments. The majority of NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
Communications:
The Communications division of the Company focuses on the
telecommunications market and in particular the hands-free market. The
Communications technology includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression. ClearSpeech(R)-Acoustic Echo Cancellation removes
acoustic echoes in hands-free full-duplex communication systems. Applications
for this technology are cellular telephony, audio and video teleconferencing,
computer telephony and gaming and voice recognition. ClearSpeech(R)-Compression
maximizes bandwidth efficiency in wireless, satellite and intra- and internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. Applications for this technology are intranet and internet
telephony, audio and video conferencing, PC voice and music, telephone answering
devices, real-time multimedia multitasking, toys and games and playback devices.
The Communications products include the ClearSpeech(R)-Microphone and the
ClearSpeech(R)-Speaker. The majority of Communications' sales are in North
America. Principal markets for Communications are the telecommunications
industries and principal customers are OEMs, system integrators and end-users.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
Company. NCT Europe provides research and engineering to Audio, Hearing and
Communications as needed. NCT Europe also provides a marketing and sales support
service to the Company for European sales.
DMC:
DMC develops, installs and provides an audio/visual advertising medium within
commercial/professional settings. DMC currently has outsourced the installation
of flat panel transducer-based speakers, a personal computer containing DMC's
Sight and Sound DBSS software, telephone access to the internet, amplifiers and
related components. The DBSS software schedules advertisers' customized
broadcast messages, which are downloaded via the internet, with the respective
music genre choice to the commercial/professional establishments. DMC has
focused on four vertical markets for initial network development: health,
fitness, education and hospitality. DMC will also develop private networks for
large customers with multiple outlets such as large fast food chains and retail
chains.
Advancel Logic Corporation:
Advancel , acquired by the Company on September 4, 1998, is a participant
in the native Java(TM) (Java(TM) is a trademark of Sun Microsystems, Inc.)
embedded microprocessor market. The purpose of the Java(TM) platform is to
simplify application development by providing a platform for the same software
to run on many different kinds of computers and other smart devices. Advancel
has been developing a family of processor cores, which will execute instructions
written in both Java bytecode and C/C++ significantly enhancing the rate of
instruction execution, which opens up many new applications. The potential for
applications consists of the next generation home appliances and automotive
applications, smartcards for a variety of applications, hearing aids and mobile
communications devices.
Other:
The Net Sales - Other Operating Segments primarily consists of
inter-company sales and items eliminated in consolidation. Segment assets
consist primarily of corporate assets.
11. Revision of Statements of Operations
The Company reported final 1999 results, which included a
recharacterization of $4.0 million of third quarter revenue from license fee to
equity and a corresponding reduction in current assets and equity. In addition,
the loss per share for the third quarter, as previously reported on November 15,
1999, remains unchanged.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Forward-Looking Statements
Statements in this report which are not historical facts are
forward-looking statements under provisions of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. The Company wishes to caution readers that the important factors
listed below, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause its actual results in
fiscal 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems for Active Wave Management; produce a cost
effective product that will gain acceptance in relevant consumer and other
product markets; increase revenues from products; realize funding from
technology licensing fees, royalties, product sales, and engineering and
development revenues to sustain the Company's current level of operation; timely
introduce new products; continue its current level of operations to support the
fees associated with the Company's patent portfolio; maintain satisfactory
relations with its five customers that accounted for 34% of the Company's
revenues in 1998; 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.
GENERAL BUSINESS ENVIRONMENT
The Company is focused on the commercialization of its technology through
technology licensing fees, royalties and product sales. In prior years, 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, as well as
from technology licensing fees paid by such companies. The Company's strategy
generally has been to obtain technology licensing fees when initiating joint
ventures and alliances with new strategic partners. This is reflected in the
first nine months of 1999, where 53% of the Company's revenue has been from
licensing fees and royalties, 27% from product sales and 20% from engineering
and development services. There can be no assurance that technology licensing
fees will continue at that level.
Note 1 to the accompanying condensed consolidated financial statements and
the liquidity and capital resources section which follow describe the current
status of the Company's available cash resources.
In late 1995 the Company redefined its corporate mission to be the
worldwide leader in the advancement and commercialization of Active Wave
Management technology. Active Wave Management is the electronic and/or
mechanical manipulation of sound or signal waves to reduce noise, improve
signal-to-noise ratios and/or enhance sound quality. This redefinition is the
result of the development of new technologies, which the Company believes can
produce products for fields beyond noise and vibration reduction and control.
These technologies and products are consistent with shifting the Company's focus
to technology licensing and product marketing in more innovative industries
having greater potential for near term revenue generation.
As distribution channels are established and as product sales and market
acceptance of the commercial applications of the Company's technologies build as
anticipated by management, revenues from technology licensing fees, royalties
and product sales are forecasted to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding. The beginning of
this process is shown in the shifting percentages of operating revenue discussed
below.
From the Company's inception through September 30, 1999, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 26% in
product sales, 40% in engineering and development services and 34% in technology
licensing fees and royalties.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and manufacturing operations. While
the Company works with these firms on product testing and integration, it is not
always able to influence how quickly this process can be completed.
The Company continues to sell and ship NoiseBuster(R) headsets,
Clearspeech(R) products and the Gekko(TM) flat speakers in 1999. The Company
presently sells products through four of its alliances: Walker Electronic
Silencing, Inc. ("Walker") is manufacturing and selling industrial silencers;
Siemens Medical Systems, Inc. ("Siemens") is buying and contracting with the
Company to install quieting headsets for patient use in Siemens' MRI machines;
Ultra Electronics, Limited ("Ultra") is installing aircraft cabin quieting
systems in turboprop aircraft; and Oki Electric Industry Co., Ltd. ("Oki") has
incorporated the Company's Clearspeech(R) noise cancellation algorithm for
integration into large-scale integrated circuits for communications products.
The Company is entitled to receive royalties from Walker on its sales of
industrial silencers, from Ultra on its sales of aircraft cabin quieting systems
and from Oki on its sales of communications products. The Company also is
entitled to receive direct product sales revenue from Siemens' purchase of
headsets. In addition, the Company is entitled to royalties from NXT on its sale
of certain audio products and from suppliers to United Airlines and other major
carriers for integrated noise cancellation active-ready passenger headsets.
Product revenues for the nine months ended September 30, 1998 and 1999
were:
<TABLE>
<CAPTION>
PRODUCT REVENUES
(thousands of dollars)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
Amount As a % of Total Amount As a % of Total
------------- --------------- ------------- ---------------
Product 1998 1999 1998 1999 1998 1999 1998 1999
------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Headsets $216 $116 39.4% 20.2% $ 977 $ 524 60.6% 29.1%
Communications 215 184 39.4% 32.1% 428 647 26.5% 35.9%
Audio 101 282 18.4% 49.1% 186 637 11.5% 35.3%
Other 16 (8) 2.8% (1.4%) 22 (6) 1.4% (0.3%)
---- ---- ----- ----- ------ ------ ----- -----
Total $548 $574 100.0% 100.0% $1,613 $1,802 100.0% 100.0%
==== ==== ===== ===== ====== ====== ===== =====
</TABLE>
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 its intellectual property portfolio and
improvement in the functionality, speed and cost of components and products.
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 expanded
agreement also increased the royalties due NCT Audio from NXT to 10% from 6% and
increased the royalties due NXT from NCT Audio to 7% from 6%. In consideration
for granting NXT these expanded licensing rights, NCT Audio received licensing
fees of $0.5 million. Also on February 9, 1999, NCT Audio and NXT amended the
Master License Agreement to include a minimum royalty payment of $160,000 in
1999, to be paid by NCT Audio to NXT in equal quarterly installments. The
Company's liability to NXT was $0.1 million at September 30, 1999.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hasupie Speech Products N.V. ("L&H"). The agreement provides the Company with a
worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. The Company recorded a $0.9 million
patent technology right.
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.
On August 16, 1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. The Company reduced its
worldwide work force by approximately 25%. Charges related to this amount to
$0.1 million and were recorded in the third quarter of 1999.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, 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 revenue, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales, and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
(Refer to "Liquidity and Capital Resources" below and to Note 1 - "Notes to the
Condensed Consolidated Financial Statements" above for a further discussion
relating to continuity of operations.)
RESULTS OF OPERATIONS
Total revenues for the first nine months of 1999 were $6.6 million compared
to $2.3 million for the same period in 1998, an increase of $4.3 million or
191%. The increase is attributable to total revenue recognized from
STMicroelectronics S.A. ("ST") of $2.2 million.
Consistent with the Company's objectives, technology licensing fees and
royalties increased to $3.5 million in the first nine months of 1999 from $0.4
million for the same period in 1998, an increase of $3.1 million, primarily due
to a $0.9 million prepaid royalty and a $0.2 million license fee from ST and
$0.9 million of DBSS license fees. The DBSS license includes the rights to
exploit the DBSS technology in a specific geographical area within one of four
networks. The technology includes hardware, software, rights to practice the
intellectual property and the license to deliver music along with advertising
content. The Company anticipates the sale of such licenses to approximate $1.0
million each based on regional and commercial/professional settings. During the
three months ended March 31, 1999, the Company, in accordance with its revenue
recognition policy, realized only $2.0 million on the issuance of such licenses
in consideration of the receipt of 3,600 shares of its Series E Preferred Stock.
During the three months ended June 30, 1999, the Company adjusted such revenue
to $0.9 million, due to the valuation of additional shares of Series E Preferred
Stock issued during the period.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
Product sales increased to $1.8 million for the first nine months of 1999
from $1.6 million for the same period in 1998, an increase of $0.2 million or
12%, primarily reflecting increased sales of ClearSpeech(R) and Gekko(TM) flat
speakers. Primarily due to an agreement with ST, engineering and development
services have increased to $1.3 million compared to $0.3 million for the same
period in 1998.
Cost of product sales was $1.7 million for the first nine months of 1999
versus $1.3 million for the same period in 1998, an increase of $0.4 million or
37%. The increase in 1999 was primarily due to a reserve of $0.3 million for
slow moving hearing product inventory, a reserve of $0.1 million for tooling
used in the production of NCT Audio's subwoofers and royalty expense of $0.3
million. Product margin was 5% for the first nine months of 1999 versus 22%
during the same period in 1998 due to the above noted inventory reserve and
royalty expenses. Cost of engineering and development services increased to $1.7
million for the first nine months of 1999 versus $0.2 million for the same
period in 1998, due to the agreement with ST. The gross margin on engineering
and development services was a loss of (28%) for the first nine months of 1999
compared to 33% during the same period in 1998 due to the recording of a reserve
for estimated expenses to complete the ST project.
Selling, general and administrative expenses for the first nine months of
1999 were $8.0 million versus $7.6 million for the same period in 1998, an
increase of $0.4 million or 5%, primarily due to an increase in litigation and
patent expenses.
Research and development expenditures for the first nine months of 1999
were $5.1 million versus $4.7 million for the same period in 1998, an increase
of $0.4 million or 8%, primarily due to costs attributable to Advancel, a
subsidiary of the Company acquired in September 1998. The Company continues to
focus on products utilizing its hearing, audio, communications and microphone
technologies, products which have been developed within a short time period and
are targeted for rapidly emerging markets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $122.5 million on a
cumulative basis through September 30, 1999. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) technology licensing fees, (4) royalties, (5) product sales,
and (6) engineering and development funds received from strategic partners and
customers.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties
product sales and engineering and development services, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development revenue.
In that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise substantial doubt at September 30, 1999, about the
Company's ability to continue as a going concern.
At September 30, 1999, cash was $1.4 million. Restricted cash of $0.8
million was attributed to the proceeds from the PRG Note, which is restricted to
rental and installation costs of DBSS Systems. The remaining resources were
invested in interest bearing money market accounts. The Company's investment
objective is preservation of capital while earning a moderate rate of return.
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 Company's deficit in working capital increased to $(1.7) million at
September 30, 1999, from $(1.2) million at December 31, 1998. This $0.5 million
deterioration was primarily due to a decrease in cash and cash equivalents due
to increasing efforts to develop and introduce new product lines and to fund
operations for the period.
During the first nine months of 1999, the net cash used in operating
activities was $6.6 million, compared to $9.0 million used in operating
activities during the same period of 1998. The decrease of $2.4 million 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 and an increase in
accrued legal expenses.
Net inventory decreased during the first nine months of 1999 by $0.5
million, primarily due to a $0.3 million increase in reserves for slow moving
hearing product inventory.
The net cash provided by financing activities amounted to $8.4 million,
primarily due to the $4.0 million convertible notes (see Note 7 - "Notes to the
Condensed Consolidated Financial Statements" for further details) and $4.4
million net proceeds from the Series E Preferred Stock financing and the Series
F Preferred Stock financing (see Note 9 - "Notes to the Condensed Consolidated
Financial Statements" for further details).
The Company has no lines of credit with banks or other lending
institutions and therefore has no unused borrowing capacity.
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
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company to
integrate its active technology into products with limited capital investment in
production facilities and manufacturing personnel; and (iii) access to
well-established channels of distribution and marketing capability of leaders in
several market segments.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
Other than as noted in Note 5 - "Notes to the Condensed Consolidated
Financial Statements", there were no material commitments for capital
expenditures as of September 30, 1999, and no other material commitments are
anticipated in the near future.
YEAR 2000 COMPLIANCE
The Company believes the cost of administrating its Year 2000 Compliance
program will not have a material adverse impact on future earnings. However, the
potential costs and uncertainties associated with any Year 2000 Compliance
program will depend on a number of factors, including software, hardware and the
nature of the industry in which the Company, its subsidiaries, suppliers and
customers operate. In addition, companies must coordinate with other entities
with which they electronically interact, such as customers, suppliers, financial
institutions, etc. The Company estimates that potential costs will not exceed
$0.1 million.
Although the Company's evaluation of its systems is still in process,
there has been no indication that the Year 2000 Compliance issue, as it relates
to internal systems, will have a material impact on future earnings. After a
survey of its suppliers, the Company has determined that there are no material
Year 2000 Compliance supplier issues. The Company is currently conducting a
survey of its customers to determine if material Year 2000 Compliance issues
exist. Although unlikely, such potential problems remain a possibility and could
have a material adverse impact on the Company's future results. The Company
estimates completion of the evaluation process by December 1, 1999.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 8 - "Notes to the Condensed
Consolidated Financial Statements" which is included herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
(a) Securities Sold. On August 10, 1999, the Company entered into a
subscription agreement to sell an aggregate stated value of up to
$12,500,000 (12,500 shares) of Series F Preferred Stock. On August 10,
1999, the Company issued and sold 8,500 shares of Series F Preferred Stock
having an aggregate stated value of $8,500,000.
(b) Purchasers. The purchasers of the 8,500 shares of Series F Preferred
Stock were:
Sovereign Partners, LP
Dominion Capital Fund, Ltd.
Atlantis Capital Fund, Ltd.
Canadian Advantage, Limited Partnership
The Endeavour Capital Fund, S.A.
The placement agent for the transaction was J.P. Carey, Inc.
(c) Consideration. The aggregate offering price for 8,500 shares of Series
F Preferred Stock having an aggregate stated value of $8,500,000 was
$1,000,000.
(d) Exemption from Registration Claimed. Exemption from registration is
claimed under Regulation D promulgated under the Securities Act. To the
best of the Company's knowledge and belief and in accordance with
representations and warranties made by the purchasers of Series F
Preferred Stock, each of the five purchasers is an "accredited investor"
as defined under Regulation D.
(e) Terms of Conversion. The shares of Series F Preferred Stock became
convertible into shares of common stock of the Company on September 24,
1999. Each share of Series F Convertible Preferred Stock is convertible
into a number of shares of common stock of the Company as determined in
accordance with the following formula (the "Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
-----------------------------------
Conversion Price
where
N = the number of days between (i) the Closing Date, and
(ii) the conversion date.
Conversion
Price = the amount obtained by multiplying the Conversion
Percentage (which means 80% reduced by an additional 2%
for every 30 days beyond 60 days from the issuance that
the Registration Statement has not been filed by the
Filing Date) in effect as of the conversion date times
the average market price for the Company's common stock
for the (5) consecutive trading days immediately
preceding such date.
The "Registration Statement" referred to in the foregoing formula was
filed prior to the "Filing Date" as those terms are defined in the
conversion terms of the Series F Preferred Stock.
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.
<PAGE>
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 4(i) Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock of NCT Group,
Inc. filed on September 8, 1999 in the Office of the
Secretary of State of the State of Delaware incorporated
by reference to Exhibit 4(i) of the Company's
Registration Statement on Form S-1 (Registration No.
333-87757) filed on September 24, 1999, as amended by
Amendment No. 1 thereto filed on October 28, 1999.
Exhibit 4(j) Term Sheet - Share Exchange, incorporated by
reference to Exhibit 4(j) of the Company's Registration
Statement on Form S-1 (Registration No. 333-87757) filed
on September 24, 1999, as amended by Amendment No. 1
thereto filed on October 28, 1999.
Exhibit 10 License Agreement dated January 25, 1999, between NCT
Group, Inc. and DistributedMedia.com, Inc.
Exhibit 27 Financial Data Schedule.
Exhibit 99(h) Term Sheet - Litigation Settlement, incorporated
by reference to Exhibit 99(h) of the Company's
Registration Statement on Form S-1 (Registration No.
333-87757) filed on September 24, 1999, as amended by
Amendment No. 1 thereto filed on October 28, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella
President and Chief Executive Officer
By: /s/ CY E. HAMMOND
-----------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: April 14, 2000
Exhibit 10
LICENSE AGREEMENT
License Agreement made this 25th day of January, 1999 by and between
DistributedMedia.com, Inc., a Delaware corporation with offices at One Dock
Street, Suite 300, Stamford, Connecticut, 06902 USA, hereinafter referred to as
("Licensee" or "DMC") and NCT Group, Inc., a Delaware corporation with offices
at 1025 West Nursery Road, Linthicum, Maryland 21090, USA, ("NCT").
WHEREAS Licensee is engaged in the design, development, manufacture and
marketing of audio and video digital broadcasting systems together with
programming for such systems for various markets around the world; and
WHEREAS NCT is engaged in the development of Active Wave Management and related
technologies including but not limited to, flat panel transducer based audio
speaker technologies that have been applied to various fields and industries,
and is the owner of certain United States and foreign patents covering various
aspects of such technologies, which both parties believe can be applied to
digital broadcasting systems; and
WHEREAS Licensee is desirous of obtaining a license from NCT to develop, make,
use, and sell digital broadcasting systems incorporating NCT technology;
NOW THEREFORE, in consideration of the mutual covenants contained herein, as
well as other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
ARTICLE 1. DEFINITIONS
As used herein, the terms described below have the following meanings.
1.1 "Affiliate" shall mean any legal entity which directly or indirectly, is
controlled by, is in control of, or under common control with the legal
entity with reference to which the term "Affiliate" is used.
1.2 "Confidential Information" shall mean the information described in Article
5 below and shall include any and all samples, models, prototypes,
drawings, specifications, formulas, algorithms, software, operating
techniques, processes, data, technical and other information, including
any information relating to the status of research or other investigations
being conducted, whether given in writing, orally, or in magnetic or other
electronic processing form to the extent that such information is not in
the public domain through other than a breach of this Agreement.
1.3 "DMC Product" shall mean a DMC designed audio and/or video digital
broadcasting system including DMC designed subsystems, components and
programming therefor.
1.4 "Improvement" shall mean any improvement, further invention, enhancement,
derivative product, technology, software, firmware, mask work, trade
secret, know-how, patent, patent application or other intellectual
property making use of, extending, based upon or relating to: (a) the
Licensed Patents or other NCT patents, the Licensed Technology or other
NCT technology or any combination thereof (hereinafter "NCT Improvements")
or (b) Licensee Technology (hereinafter "Licensee Improvements") provided
however, that no Sponsor Technology shall be deemed an Improvement.
1.5 The uncapitalized term "know-how", in general, shall have its usual and
accepted meaning, that is, inter alia, all factual knowledge and
information not capable of precise, separate description but which, in an
accumulated form, after being acquired as the result of trial and error,
gives to the one acquiring it an ability to produce and market something
which one otherwise would not have known how to produce and market with
the same accuracy or precision necessary for commercial success.
1.6 "Licensed Patents" shall mean all those patents and patent applications
owned by or licensed to NCT described in Exhibit A hereto and licensed to
Licensee under Article 2 below including any continuations,
continuations-in-part, divisions, extensions, reissues, re-examinations or
renewals of any of the foregoing.
1.7 "Licensed Product" shall mean a specific DMC Product embodying, employing,
based on or derived from all or part of the Licensed Patents and/or the
Licensed Technology.
1.8 "Licensed Technology" shall mean that unpatented technology owned by or
licensed to NCT described in Exhibit B hereto and licensed to Licensee
under Article 2 below.
1.9 "Licensee Technology" shall mean any and all existing and future
technology, now or hereinafter owned or licensed by or to Licensee and/or
its Affiliates (other than Licensed Patents and Licensed Technology),
including without limitation all know-how, trade secrets, methods,
operating techniques, processes, software, materials, technical data,
engineering information, formulas, specifications, drawings, machinery and
apparatus, patents, patent applications, copyrights and other intellectual
property relating thereto.
1.10 "Market" shall mean the worldwide market for DMC Products but excluding
those markets, if any, licensed to others on an exclusive basis by NCT
prior to the date hereof.
1.11 "NCT Technology License" shall mean the license to the Licensed Patents
and the Licensed Technology granted by NCT to Licensee under Article 2 of
this Agreement.
1.12 "Net Revenues" means the actual revenues received by Licensee from its
sale, lease or distribution of Licensed Products minus allowances for
commissions and trade discounts.
1.13 "Sponsor Technology" shall mean with respect to a party hereto (i) all
existing and future technology owned or licensed by or to a party and/or
its Affiliates which, by virtue of contract restrictions binding on such
party, cannot be disclosed or transferred to the other party hereto on the
same terms and conditions as Licensed Technology or Licensee Technology,
as the case may be; and (ii) all existing and future technology which
results from the combination of a party's technology and a third party's
technology, and which by virtue of contract restrictions binding on the
party in question, cannot be disclosed or transferred to the other party
hereto on the same terms and conditions as Licensed Technology or Licensee
Technology, as the case may be.
1.14 "Technical Information" shall mean technical, design, engineering, and
manufacturing information and data pertaining to the design, manufacture,
commercial production and distribution of Licensed Products and components
and parts thereof in the form of designs, prints, plans, material lists,
drawings, specifications, instructions, reports, records, manuals, other
written materials, computer programs and software and other forms or media
relating thereto.
1.15 The uncapitalized term "technology", in general, shall have its usual and
accepted meaning and shall include without limitation all know-how, trade
secrets, methods, operating techniques, processes, software, materials,
technical data, engineering information, formulas, specifications,
drawings, machinery and apparatus, patents, patent applications,
copyrights and other intellectual property relating thereto.
1.16 "Third Party Rights" shall mean rights in, to or under the Licensed
Patents and the Licensed Technology heretofore granted by NCT to third
parties and the rights thereto of their respective permitted sublicensees,
assigns and successors.
ARTICLE 2. The NCT Technology LICENSE
2.1 License to NCT Patents and NCT Technology. Subject to the terms and
conditions of this Agreement, NCT hereby grants to Licensee a license to
make, have made, use, sell and/or have sold Licensed Products which
incorporate or embody, or are covered or claimed by, or are based on one
or more of the Licensed Patents and/or Licensed Technology.
2.2 Limitations. The NCT Technology License shall be exclusive as against all
others for the manufacture, use and sale of Licensed Products in the
Market throughout the World subject to the Third Party Rights. Said
License is limited to: (a) the manufacture, use and sale of Licensed
Products and (b) the Market and NCT retains the unrestricted right to
manufacture, use and sell Licensed Products and to license others to do so
provided, that neither NCT nor any such licensee shall have any right to
sell Licensed Products in the Market. NCT also retains the right to
manufacture, use and sell products other than Licensed Products in the
Market and to license others to do so.
2.3 Sublicensing. The rights and licenses granted hereunder may be
sublicensed, by Licensee to any third party provided any such sublicense
prohibits further sublicensing without NCT's prior written consent in each
instance. Licensee also shall have the right to have Licensed Products
manufactured for it by others but only under nondisclosure agreements
implemented in accordance with the provisions of Articles 4 and 5 hereof.
2.4 Acceptance. Licensee hereby (i) accepts the rights under the NCT
Technology License granted to it by NCT under this Article 2, and (ii)
acknowledges that the rights that NCT has granted to Licensee hereunder
are limited to the manufacture, use and sale of Licensed Products in the
Market and are subject to the further limitations that may be described
elsewhere in this Agreement.
2.5 Patent and Copyright Notices. Licensee shall mark each Licensed Product
sold, leased, distributed or otherwise transferred and shall cause all
licenses, contracts and agreements with other parties for the sale, lease,
distribution, use or other disposition of Licensed Products to contain a
provision requiring, if feasible, such other parties to mark each Licensed
Product with a suitable legend identifying the Licensed Patents and
Licensed Technology with the appropriate patent or copyright notice, as
the case may be. If the Licensed Product is too small to have a legend
placed on it, Licensee will use all reasonable efforts to have a legend
placed on the software and/or packaging.
2.6 Product Marking. Licensee shall prominently mark each Licensed Product
sold, leased, distributed or otherwise transferred and shall cause all
licenses, contracts and agreements with other parties for the sale, lease,
distribution, use or other disposition of Licensed Products to contain a
provision requiring, if feasible, such other parties to prominently mark
each Licensed Product with a suitable legend identifying the Licensed
Product as being a product which incorporates NCT's technology and
including such words and logos as NCT may reasonably request. If the
Licensed Product is too small to have such a legend placed on it, Licensee
will use all reasonable efforts to have such a legend placed on the
software and/or packaging.
ARTICLE 3. LICENSE FEE AND ROYALTIES
3.1 License Fee. Upon the execution of this Agreement, Licensee shall pay NCT
$3,000,000 as a non-refundable license fee in partial consideration of the
rights granted hereunder.
3.2 Unit Royalties. Licensee shall pay NCT the royalties listed on Schedule C
with respect to Licensee's sale, lease, distribution or other transfer of
Licensed Products.
3.3 Sublicensing Royalties. Licensee shall pay NCT the royalties listed on
Schedule C with respect to sublicenses granted by Licensee for the
manufacture, use, sale, lease or other disposition or distribution of
Licensed Products.
3.4 Payment. Royalties payable under Sections 3.2 and 3.3 above shall be paid
to NCT within thirty (30) days from the end of the quarter of each
calendar year as provided in Article 7. Licensee agrees that NCT may
inspect its royalty/revenue records once a year upon thirty (30) days
notice, at NCT's own expense.
ARTICLE 4. DISCLOSURE OF INFORMATION, DATA AND KNOW-HOW
4.1 Disclosure. The parties shall disclose to each other such appropriate
Technical Information as may be reasonably required to accomplish the
purposes of this Agreement. It is agreed, however, that neither party
shall be obligated to disclose information, the disclosure of which has
been restricted by a third party, provided, however, if such information
is required in order to achieve the purposes of this Agreement, the party
which holds such information shall inform the other and use its best
efforts to obtain permission, which may consist of a license, from the
applicable third party to use such information for such purposes.
4.2 Treatment. All disclosed Technical Information which is Confidential
Information (as defined in Article 5 below) shall be kept confidential by
the receiving party in accordance with the further provisions of Article 5
below and will remain the property of the disclosing party.
ARTICLE 5. CONFIDENTIALITY
5.1 Definitions. Each party possesses and will continue to possess
confidential information relating to its business and technology which it
believes has substantial commercial and scientific value in the business
in which it is engaged ("Confidential Information"). Subject to Section
5.4, Confidential Information includes, but is not limited to, Technical
Information, trade secrets, processes, formulas, data, know-how,
discoveries, developments, designs, improvements, inventions, techniques,
marketing plans, strategies, forecasts, new products, software
documentation, unpublished financial statements, budgets, projections,
licenses, prices, costs, customer lists, supplier lists and any other
material regarded by the party possessing it to be confidential,
proprietary or a trade secret. In order to be afforded protection under
this Article 5 tangible forms of Confidential Information must be
identified as such at the time of disclosure and marked "Confidential
Information", "Proprietary Information" or in some other reasonable manner
to indicate it is confidential. Any Confidential Information disclosed
between the parties hereto orally or visually, in order to be subject to
this Agreement, shall be so identified to the receiving party at the time
of disclosure and confirmed in a written summary appropriately marked as
herein provided within ten (10) days after such oral or visual disclosure.
5.2 Treatment. Each party shall during the term of this Agreement and for a
period of five (5) years thereafter, hold in confidence and not disclose
to third parties except as specifically permitted under this Section 5.2
and Section 5.4 below any and all Confidential Information of the other
party disclosed directly or indirectly to it by the other party.
Each party shall take the following minimum safeguards with respect to the
Confidential Information of the other party:
(a) only those of its employees who need to receive the other party's
Confidential Information in order to carry out the purposes of this
Agreement shall have access to such information and such access shall
be limited to only so much of such information as is necessary for the
particular employee to properly perform his or her functions;
(b) all documents, drawings, writings and other embodiments which contain
Confidential Information of the other party shall be maintained in a
prudent manner in a secure fashion separate and apart from other
information in its possession and shall be removed therefrom only as
needed to carry out the purposes of this Agreement;
(c) all documents, drawings, writings and other embodiments of information
the security or safekeeping of which are subject to governmental
regulations shall be kept in accordance with those regulations;
(d) in no event shall a party receiving Confidential Information of the
other party disassemble, reverse engineer, re-engineer, redesign,
modify or alter any Confidential Information which it has received
from the other party or attempt any of the foregoing without first
obtaining the written consent of such other party in each instance.
(e) all employees and contractors who shall have access to Confidential
Information of the other party shall be under written obligation to
it; (i) to hold in confidence and not disclose all Confidential
Information made available to them in the course of their employment
in a manner equivalent to that set forth herein; (ii) to use such
Confidential Information only in the course of performing their
employment duties; and (iii) to assign to their employer or the party
retaining them all inventions or improvements relating to their
employer's business and conceived while in their employer's employ
unless such assignment is prohibited by applicable law.
Notwithstanding the foregoing, a party receiving Confidential Information
of the other party may disclose to its subcontractors and material and
component suppliers so much of such Confidential Information as is
necessary to enable such party to perform its duties and obligations
related to the accomplishment of the purposes of this Agreement provided
that such subcontractors and suppliers are obligated to such party in
writing; (i) to hold in confidence and not disclose such information in a
manner equivalent to that set forth herein; and (ii) not to use such
information except as authorized by such party.
In no event shall the party receiving Confidential Information of the
other party disassemble, reverse engineer, re-engineer, redesign, decrypt,
decipher, reconstruct, re-orient, modify or alter any Confidential
Information of the disclosing party or any circuit design, algorithm,
logic or program code in any of the disclosing party's products, models or
prototypes which contain Confidential Information or attempt any of the
foregoing without first obtaining written consent of the disclosing party
in each instance.
5.3 Return. All documents, drawings, writings and other embodiments of a
party's Confidential Information, as well as those produced, created or
derived from the disclosing party's Confidential Information which
incorporate the disclosing party's Confidential Information and all copies
thereof shall be returned promptly to it by the other party upon the
termination of this Agreement provided that the parties shall continue to
be bound by the provisions of Section 5.2 above.
5.4 Exclusions. Confidential Information shall not include information that;
(a) was at the time of disclosure in the public domain through no fault of
the party receiving it;
(b) becomes part of the public domain after disclosure to the party
receiving it through no fault of such party;
(c) was in the possession of the party receiving it (as evidenced by
written records) at the time of disclosure and was not acquired
directly or indirectly from the other party, or a third party, as the
case may be, under a continuing obligation of confidence of which the
party receiving it was aware;
(d) was received by the party receiving it (as evidenced by written
records) after the time of disclosure hereunder from a third party who
did not require it to be held in confidence and who did not acquire it
directly or indirectly from the other party under a continuing
obligation of confidence of which the party receiving it was aware;
(e) required by law or the rules of any relevant securities exchange to be
disclosed, but only to the extent of such required disclosure;
provided, that a party required to so disclose Confidential
Information shall use best efforts to notify the other party of such
potential disclosure so that such party may seek a protective order or
other remedies to maintain in confidence any such Confidential
Information; or
(f) was developed independently by the receiving party and without the use
of any Confidential Information received from the disclosing party
under this Agreement.
(g) is Confidential Information of the disclosing party which the
disclosing party has disclosed to third parties without restrictions
on use and disclosure comparable to those contained in this Article 5.
<PAGE>
ARTICLE 6. IMPROVEMENTS
6.1 NCT Improvements. In the event that Licensee individually or together with
NCT discovers, develops or creates any NCT Improvements during the term of
this Agreement, Licensee promptly shall grant and assign, on a quitclaim
basis, all of its rights of ownership in such NCT Improvements to NCT,
whether such NCT Improvements are patentable or non-patentable under the
laws of any country, subject to any governmental approvals that may be
required for such grant back and assignment, it being understood that any
such NCT Improvements that are not made the subject of a patent shall
constitute part of the Licensed Technology licensed to Licensee hereunder
and that any such NCT Improvements that are made the subject of a patent
shall constitute one of the Licensed Patents licensed to Licensee
hereunder.
In the event that NCT individually discovers, develops or creates any NCT
Improvements during the term of this Agreement which make use of, extend,
are based upon or relate to the Licensed Patents or the Licensed
Technology, then any such NCT Improvement that is not made subject of a
patent shall constitute part of the Licensed Technology licensed hereunder
and any such NCT Improvement that is made the subject of a patent shall
constitute a Licensed Patent licensed hereunder.
6.2 Licensee Improvements. In the event that NCT individually or together with
Licensee discovers, develops or creates any Licensee Improvements during
the term of this Agreement, NCT promptly shall grant and assign, on a
quitclaim basis, a fifty (50%) percent interest in and to all of its
rights of ownership in such Licensee Improvements to Licensee, whether
such Licensee Improvements are patentable or non-patentable under the laws
of any country, subject to any governmental approvals that may be required
for such grant back and assignment and thereafter all rights and interests
in and to such Licensee Improvement shall be owned equally by Licensee and
NCT and each party hereby grants to the other a royalty free, perpetual,
irrevocable license to use and exploit such Licensee Improvement.
In the event Licensee individually discovers, develops or creates any
Licensee Improvements during the term of this Agreement, Licensee shall be
the sole owner thereof. However, Licensee will promptly inform NCT of the
nature and scope of all such Improvements.
6.3 Joint Discoveries. In the event that Licensee and NCT jointly discover,
develop or create any intellectual property whether patentable or
non-patentable that is not an Improvement or is an Improvement not covered
by either Section 6.1 or 6.2 above, all rights and interest in and to such
intellectual property shall be owned equally by Licensee and NCT and each
party hereby grants to the other a royalty free, perpetual, irrevocable
license to use and exploit any such intellectual property.
6.4 Dual Improvements. In the event Licensee and NCT jointly discover, develop
or create any intellectual property whether patentable or non-patentable
that is or could be an Improvement under both Sections 6.1 and 6.2 above,
all rights and interest in and to such intellectual property shall be
owned equally by Licensee and NCT and each party hereby grants to the
other a royalty free, perpetual, irrevocable license to use and exploit
any such intellectual property.
6.5 Individual Discoveries. In the event that either Licensee or NCT
individually discover, develop or create any intellectual property whether
patentable or non-patentable, that is not an Improvement or is an
Improvement not covered by either Section 6.1 or 6.2 above, all rights and
interest in and to such intellectual property shall be owned by the party
discovering, developing or creating the same.
6.6 Further Assurances. The parties shall take all action legally permitted
that may be necessary or appropriate to assure full compliance with the
provisions of this Article 6 notwithstanding the fact that intellectual
property covered by this Article 6 may be discovered, developed or created
by an employee of one of the parties hereto.
ARTICLE 7. PAYMENTS, REPORTS AND RECORDS
Royalties shall be due and payable in U.S. dollars in immediately available New
York, New York funds within thirty (30) days after the last business day of each
March, June, September and December of each calendar year during the term of
this Agreement. If requested by NCT, Licensee shall direct its independent
certified public accountants at Licensee's expense to provide NCT with a
certified written royalty report (the "Royalty Report") for each calendar year
of this Agreement within sixty (60) days of the end of each calendar year of
this Agreement. Such Royalty Reports shall be prepared in accordance with the
standard reporting procedures of such independent certified public accountants
applied in a consistent manner. A similar Royalty Report shall be rendered and
royalty payment shall be made within sixty (60) days after termination of this
Agreement.
<PAGE>
ARTICLE 8. TERM
The term of this Agreement shall begin on the date hereof and, unless extended
or earlier terminated by the written agreement of the parties or the provisions
of Article 9 below, shall expire immediately upon either: (i) with respect to
rights granted under any patent hereunder, the expiration of that patent under
applicable law; or (ii) with respect to the other rights granted hereunder, upon
the expiration of the last to expire of the patents licensed hereunder.
ARTICLE 9. TERMINATION
9.1 General. This Agreement may be terminated prior to the end of the term
provided in Article 8 above under any of the following provisions of this
Article.
9.2 Breach. In the event of a material breach of this Agreement, if the
defaulting party fails to cure the breach within thirty (30) days, in the
case of a breach involving non-payment of amounts to be paid hereunder, or
sixty (60) days, in the case of any other kind of breach following its
receipt of written notice from the non-defaulting party specifying the
nature of the breach and the corrective action to be taken, then the
non-defaulting party may terminate this Agreement forthwith by delivering
its written declaration to the defaulting party that this Agreement is
terminated; provided any payment default will require the defaulting party
to pay interest in order to cover the default at the rate of the then
current prime rate at The Chase Manhattan Bank N.A.
9.3 Insolvency. If one of the parties becomes bankrupt or insolvent, or files
a petition therefor, or makes a general assignment for the benefit of
creditors, or otherwise seeks protection under any bankruptcy or
insolvency law, or upon the appointment of a receiver of the assets of a
party ("defaulting party") then the other party shall have the right to
immediately terminate this Agreement upon written notice to the defaulting
party provided, in any such instance, that said right of termination shall
be postponed for as long as the defaulting party continues to conduct its
business in the ordinary course.
9.4 Survival. Notwithstanding the termination of this Agreement under any of
the provisions of this Article 9, the terms and conditions of Articles 4
and 5, and those pertaining to the ownership of rights acquired under
Article 6 shall survive termination of this Agreement and shall continue
to be applicable and govern the parties with respect to the subject matter
thereof.
9.5 Document Return. Each party shall return to the other party within thirty
(30) days of the date of termination under either Article 8 or this
Article 9 all of the Technical Information and other Confidential
Information, received pursuant to this Agreement together with all other
tangible property received for the implementation of this Agreement.
ARTICLE 10. FORCE MAJEURE
In the event of enforced delay in the performance by either party of obligations
under this Agreement due to unforeseeable causes beyond its reasonable control
and without its fault or negligence, including, but not limited to, acts of God,
acts of the government, acts of the other party, fires, floods, strikes, freight
embargoes, unusually severe weather, or delays of subcontractors due to such
causes (an "Event of Force Majeure"), the time for performance of such
obligations shall be extended for the period of the enforced delay; provided
that the party seeking the benefit of the provisions of this paragraph shall,
within ten (10) days after the beginning of any such enforced delay, have first
notified the other party in writing of the causes and requested an extension for
the period of the enforced delay and shall use all reasonable endeavors to
minimize the effects of any Event of Force Majeure.
ARTICLE 11. APPLICABLE LAW
The terms and conditions of this Agreement and the performance thereof shall be
interpreted in accordance with and governed by the laws of the State of Delaware
and the United States of America.
ARTICLE 12. DISPUTE RESOLUTION
The parties agree to attempt in good faith to resolve any dispute arising out of
or in connection with the performance, operation or interpretation of this
Agreement promptly by negotiation between the authorized contacts of the
parties. If a dispute should arise, the authorized contacts will meet at least
once and will attempt to resolve the matter. Either authorized contact may
request the other to meet within fourteen (14) days, at a mutually agreed time
and place. If the matter has not been resolved within thirty (30) days of a
request being made for such a meeting, the authorized contacts shall refer the
matter to the representatives of the parties who are responsible for matters at
the policy or strategic level who shall meet within fourteen (14) days of the
end of the thirty (30) day period referred to above, at a mutually agreed time
and place.
<PAGE>
If the matter has not been resolved within thirty (30) days of a request being
made for this meeting, the parties shall proceed as follows:
(a) Any action, suit or proceeding where the amount in controversy as to
at least one party, exclusive of the interest and costs, exceeds one
million dollars (a "Summary Proceeding"), arising out of or relating
to this Agreement or the breach, termination or validity thereof,
shall be litigated exclusively in the Superior Court of the State of
Delaware (the "Delaware Superior Court") as a summary proceeding
pursuant to Rules 124-131 of the Delaware Superior Court, or any
successor rules (the "Summary Proceeding Rules"). Each of the parties
hereto hereby irrevocably and unconditionally (i) submits to the
jurisdiction of the Delaware Superior Court for any Summary
Proceeding, (ii) agrees not to commence any Summary Proceeding except
in the Delaware Superior Court, (iii) waives, and agrees not to plead
or to make, any objection to the venue of any Summary Proceeding in
the Delaware Superior Court, (iv) waives, and agrees not to plead or
to make, any claim that any Summary Proceeding brought in the Delaware
Superior Court has been brought in an improper or otherwise
inconvenient forum, (v) waives, and agrees not to plead or to make,
any claim that the Delaware Superior Court lacks personal jurisdiction
over it, (vi) waives its right to remove any Summary Proceeding to the
federal courts except where such courts are vested with sole and
exclusive jurisdiction by statute and (vii) understands and agrees
that it shall not seek a jury trial or punitive damages in any Summary
Proceeding based upon or arising out of or otherwise related to this
Agreement and waives any and all rights to any such jury trial or to
seek punitive damages.
(b) In the event any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs,
does not exceed One Million Dollars (a "Proceeding"), arising out of
or relating to this Agreement or the breach, termination or validity
thereof is brought, the parties to such Proceeding agree to make
application to the Delaware Superior Court to proceed under the
Summary Proceeding Rules. Until such time as such application is
rejected, such Proceeding shall be treated as a Summary Proceeding and
all of the foregoing provisions of this Section relating to Summary
Proceedings shall apply to such Proceeding.
(c) In the event a Summary Proceeding is not available to resolve any
dispute hereunder, the controversy or claim shall be settled by
arbitration conducted on a confidential basis, under the U.S.
Arbitration Act, if applicable, and the then current Commercial
Arbitration Rules of the American Arbitration Association
("Association") strictly in accordance with the terms of this
Agreement and the substantive law of the State of Delaware. The
arbitration shall be conducted at the Association's regional office
located closest to Licensee's principal place of business by three
arbitrators, at least one of whom shall be knowledgeable in Active
Technology and one of whom shall be an attorney. Judgment upon the
arbitrators' award may be entered and enforced in any court of
competent jurisdiction. Neither party shall institute a proceeding
hereunder unless at least sixty (60) days prior thereto such party
shall have given written notice to the other party of its intent to do
so. Neither party shall be precluded hereby from securing equitable
remedies in courts of any jurisdiction, including, but not limited to,
temporary restraining orders and preliminary injunctions to protect
its rights and interests but such shall not be sought as a means to
avoid or stay arbitration.
(d) Licensee hereby designates and appoints The Corporation Trust Company
with offices on the date hereof at 1209 Orange Street, Wilmington, DE
19801, as its agent to receive service of process in any Proceeding or
Summary Proceeding. NCT hereby designates and appoints Corporation
Service Company with offices on the date hereof at 1013 Centre Road,
Wilmington, DE 19805, as its agent to receive such service. Each of
the parties hereto further covenants and agrees that, so long as this
Agreement shall be in effect, each such party shall maintain a duly
appointed agent for the service of summonses and other legal processes
in the State of Delaware and will notify the other parties hereto of
the name and address of such agent if it is no longer the entity
identified in this article.
ARTICLE 13. ANNOUNCEMENTS AND PUBLICITY; INDEPENDENT CONTRACTORS
Except for any disclosure which may be required by law, including appropriate
filings with the Securities Exchange Commission, neither party may use the
other's name or disclose the terms of this Agreement without the consent of the
other, which consent shall not be unreasonably withheld.
Each party to this Agreement is an independent contractor and neither shall be
considered the partner, employer, agent or representative of the other.
<PAGE>
ARTICLE 14. SEVERABILITY
If any part of this Agreement for any reason shall be declared invalid or
unenforceable, such decision shall not affect the validity or enforceability of
any remaining portion, which shall remain in full force and effect; provided,
however, that in the event a part of this Agreement is declared invalid and the
invalidity or enforceability of such part has the effect of materially altering
the obligations of any party under this Agreement, the parties agree, promptly
upon such declaration being made, to negotiate in good faith to amend this
Agreement so as to put such party in a position substantially similar to the
position such party was in prior to such declaration.
ARTICLE 15. RIGHTS OF ASSIGNMENT; SUCCESSORS AND ASSIGNS
Neither NCT nor Licensee shall have any right to assign this Agreement or any of
their respective rights or obligations under this Agreement to any third party
except by operation of law or with the prior written consent of the other party.
In the event Licensee wishes to assign any of its rights or obligations under
this Agreement to an Affiliate of Licensee, NCT's consent will not be
unreasonably withheld. In the event NCT wishes to assign any of its rights or
obligations under this Agreement to an Affiliate of NCT, Licensee's consent will
not be unreasonably withheld. The provisions of this Agreement shall inure to
the benefit of, or be binding upon, the successors and assigns of each party
hereto.
ARTICLE 16. NOTICES
Any notices under this Agreement shall be in writing and shall be deemed
delivered if delivered by personal service, or sent by telecopy or by first
class registered or certified mail, or same day or overnight courier service
with postage or charges prepaid. Unless subsequently notified in writing in
accordance with this Section by the other party, any notice or communication
hereunder shall be addressed to NCT as follows:
Noise Cancellation Technologies, Inc.
1025 West Nursery Road
Linthicum, Maryland 21090
Attention: President
Telecopy No: (410) 636-5989
to Licensee as follows:
DistributedMedia.com, Inc.
One Dock Street
Suite 300
Stamford, CT 06902
Attn: President
Telecopy no. (203) 348-4106
ARTICLE 17. TAXES
Licensee shall be solely responsible for any sales, use, occupational or
privilege taxes, duties, fees or other similar charges imposed by any
governmental authority in connection with the manufacture, sale, lease,
distribution, use or other disposition by Licensee of Licensed Products or the
Licenses granted hereunder. Any other taxes, including income taxes based on
royalties and other payments to NCT, shall be the responsibility of NCT.
ARTICLE 18. INDEMNIFICATION
Each of NCT and Licensee agrees to indemnify, defend, and hold harmless the
other party and each of its officers, directors, employees, agents, successors
and assigns (hereinafter referred to in the aggregate in this section as "the
Indemnified Party") against any and all losses, claims, damages, liabilities,
costs and expenses (including without limitation, reasonable attorneys' fees and
other costs of defense of every kind whatsoever and the aggregate amount of
reasonable settlement of any suit, claim or proceeding) which the Indemnified
Party may incur or for which the Indemnified Party may become liable on account
of any suit, claim or proceeding purporting to be based upon a failure to
perform obligations under this Agreement to be performed by the other party
(hereafter the "Indemnifying Party") and its employees or agents. The
Indemnified Party shall promptly advise the Indemnifying Party of any such suit,
claim or proceeding and shall cooperate with the Indemnifying Party in the
defense or settlement of such suit, claim or proceedings providing no settlement
shall be made without the consent of the Indemnified Party, which consent shall
not be unreasonably withheld. In any event, the Indemnified Party shall furnish
to the Indemnifying Party such information relating to such suit, claim or
proceeding as the Indemnifying Party shall reasonably request for use in
defending the same.
<PAGE>
ARTICLE 19. MAINTENANCE AND DEFENSE OF LICENSED PATENTS
Throughout the term of this Agreement, NCT shall maintain in force the Licensed
Patents. In this connection, NCT shall promptly pay all costs of any and all
continuations, continuations-in-part, divisions, extensions, reissues,
re-examinations, or renewals of the Licensed Patents, including, without
limitation, the costs and expenses of any and all attorneys, experts or other
professionals engaged in connection with any of the foregoing. In addition, NCT
shall actively protect the Licensed Patents and shall institute all such suits,
actions or proceedings for infringement of any of the Licensed Patents as may be
necessary in this regard and shall defend and save harmless Licensee against any
suit, damage claim or demand, and any loss, cost or expense suffered as a result
thereof (including reasonable attorneys fees), based on actual or alleged
infringement of any patent or trademark or any unfair trade practice resulting
from the exercise or use of any right or license granted under this Agreement.
Unless NCT shall have received the advice of counsel that success on the merits
is reasonably certain, NCT shall be excused from its duty to commence and/or may
withdraw from any enforcement action under the Licensed Patents and Licensee
shall then be free to pursue enforcement of the Licensed Patents in its own name
and at its sole expense and risk, but only to the extent such infringement
occurs in the Market. In the event NCT fails to protect the Licensed Patents as
aforesaid after notice of possible infringement from Licensee, Licensee shall be
entitled by itself to take proceedings in the name of and with the cooperation
of NCT to restrain any such infringement at Licensee's expense and for
Licensee's benefit. In the event NCT fails to defend and save harmless Licensee
as herein provided, Licensee shall be entitled by itself to take all action
necessary or advisable for its defense and shall be entitled to deduct all costs
and expenses incurred in such defense from the amount of any royalties payable
under this Agreement to the extent the same have not been covered by any amounts
awarded to Licensee under a settlement of or judgment rendered in such
proceeding. NCT shall take all such action as may be reasonably requested by
Licensee to assist Licensee in the proper prosecution of its defense. Where
Licensee proceeds alone and achieves an award from the official enforcement
forum in such an action brought by it, Licensee shall be entitled to retain such
award. However, any compromise of such enforcement action or concession of
invalidity or priority of invention of any patent whether in connection with an
enforcement action or any other proceeding shall require NCT's participation and
express prior written approval. If NCT has elected to participate in and share
in the expense of any such enforcement action, any award shall be shared equally
by NCT and Licensee.
Notwithstanding the foregoing, NCT shall have no liability to defend or pay
damages or costs to Licensee with respect to any claim of infringement which is
based on an implementation not designed by NCT or that is modified by others, or
used or combined in a manner not contemplated by the transfer of NCT Technology.
ARTICLE 20. WARRANTIES
NCT represents and warrants that it has the right, power and authority to enter
into this Agreement and to grant the licenses and other rights contained herein
to Licensee as herein provided and that none of the same will breach or be in
violation of any agreement, license, or grant made with or to any other party by
NCT and that to the best of NCT's knowledge and belief the Licensed Patents are
valid and do not infringe any other patent issued prior to the date hereof.
ARTICLE 21. DISCLAIMER
EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, NCT HEREBY DISCLAIMS ANY
EXPRESS OR IMPLIED WARRANTY OF THE ACCURACY, RELIABILITY, TITLE, TECHNOLOGICAL
OR COMMERCIAL VALUE, COMPREHENSIVENESS OR MERCHANTABILITY OF THE LICENSED
PATENTS, THE LICENSED TECHNOLOGY, OR THE LICENSED PRODUCTS, OR THEIR SUITABILITY
OR FITNESS FOR ANY PURPOSE WHATSOEVER. NCT DISCLAIMS ALL OTHER WARRANTIES OR
WHATEVER NATURE, EXPRESS OR IMPLIED. NCT DISCLAIMS ALL LIABILITY FOR ANY LOSS OR
DAMAGE RESULTING, DIRECTLY OR INDIRECTLY, FROM THE USE OF THE LICENSED PATENTS,
THE LICENSED TECHNOLOGY, OR THE LICENSED PRODUCTS, OTHER THAN THOSE ARISING FROM
CLAIMS OF INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES; WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, THIS DISCLAIMER EMBRACES CONSEQUENTIAL
DAMAGES, LOSS OF PROFITS OR GOOD WILL, EXPENSES FOR DOWNTIME OR FOR MAKING UP
DOWNTIME, DAMAGES FOR WHICH LICENSEE MAY BE LIABLE TO OTHER PERSONS, DAMAGES TO
PROPERTY, AND INJURY TO OR DEATH OF ANY PERSONS.
ARTICLE 22. SCOPE OF THE AGREEMENT
This Agreement constitutes the entire agreement between the parties with respect
to the subject matter hereof and supersedes all prior oral or written agreements
or understandings of the parties with regard to the subject matter hereof. No
interpretation, change, termination or waiver of any provision hereof shall be
binding upon a party unless in writing and executed by the other party. No
modification, waiver, termination, recession, discharge or cancellation of any
right or claim under this Agreement shall affect the right of any party hereto
to enforce any other claim or right hereunder.
<PAGE>
IN WITNESS THEREOF, Licensee and NCT have executed this Agreement effective as
of the date first written above.
DISTRIBUTEDMEDIA.COM, INC.
By: /s/ JAMES McMANUS
-----------------------
Title: President
Date: January 25, 1999
NCT GROUP, INC.
By: /s/ MICHAEL J. PARRELLA
-----------------------
Title: President
Date: January 25, 1999
[Page Break]
Exhibit A
NCT Patents
Licensed Patents
Patents
[To be added by supplement]
Patents Pending Under Filed Applications
Patents Pending
[To be added by supplement]
[Page Break]
Exhibit B
Licensed Technology
1. The unpatented technology contained in the patent applications filed or to
be filed and listed on Schedule A hereto.
2. The unpatented technology contained in the following disclosures for which
patent applications are to be field:
1. Multimedia Broadcast Network;
2. Multimedia Broadcast Station; and
3. Method for Administering a Multimedia Broadcast Station.
3. The unpatented technology in NCT's possession which NCT is free to
disclose and which supports, amplifies, explains or enables the design or
manufacture of products embodying any of the claims of the Licensed
Patents.
[Page Break]
Exhibit C
Royalties
Unit Royalties (Article 3.2) shall be at the rate of 6%.
Sublicensing Royalties (Article 3.3) shall be at the rate of 20%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AND NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1998, FILED ON MARCH 31, 1999, AS AMENDED
MAY 3, 1999 (AMENDMENTS NOS. 1 AND 2).
</LEGEND>
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<NAME> NCT GROUP, INC.
<MULTIPLIER> 1000
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<CASH> 1,394
<SECURITIES> 0
<RECEIVABLES> 1,000
<ALLOWANCES> 175
<INVENTORY> 2,860
<CURRENT-ASSETS> 5,231
<PP&E> 12,394
<DEPRECIATION> 8,456
<TOTAL-ASSETS> 15,295
<CURRENT-LIABILITIES> 6,962
<BONDS> 0
0
8,755
<COMMON> 2,179
<OTHER-SE> (8,535)
<TOTAL-LIABILITY-AND-EQUITY> 15,295
<SALES> 1,802
<TOTAL-REVENUES> 6,614
<CGS> 1,717
<TOTAL-COSTS> 3,381
<OTHER-EXPENSES> 18,026
<LOSS-PROVISION> 92
<INTEREST-EXPENSE> 340
<INCOME-PRETAX> (14,793)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,793)
<DISCONTINUED> 0
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