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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2000
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Commission File Number: 0-18267
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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 or
incorporation organization) Identification No.)
20 Ketchum Street, Westport, 06880
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(Address of principal executive offices) (Zip Code)
(203) 226-4447
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.01
par value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes /_/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /_/
The aggregate market value of the Registrant's voting stock held by
nonaffiliates of the Registrant was $49.4 million as of April 9, 2001.
The number of shares outstanding of the Registrant's common stock is 358,062,122
as of April 9, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting of
Stockholders of Registrant to be filed with the Securities and Exchange
Commission on or before April 30, 2001, is incorporated by reference
into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
A. General Development of Business
NCT Group, Inc. is a leading technology developer with an extensive
portfolio of proprietary algorithms and a wide variety of product offerings for
consumer, commercial and industrial applications. "Company", "NCT", "we" and
"our" refer to NCT Group, Inc. and its subsidiaries. We specialize in the
utilization of sound and signal waves to reduce noise, improve signal-to-noise
ratio and enhance sound quality. Commercial application of our technologies is
comprised of a number of product offerings, including NoiseBuster(R) consumer
and communications active noise reduction headsets, also known as ANR headsets;
ProActive(R) ANR industrial earmuffs and headsets; Gekko(TM) flat speakers; and
ClearSpeech(R) microphones, speakers and other products. In addition to
products, the company's innovative algorithms are available for licensing to
manufacturers for use in commercial and consumer products.
During 2000, NCT's efforts were devoted to consummating several
acquisitions, including Midcore Software, Inc., known as MSI or Midcore, Theater
Radio Network, Inc., known as TRN, and Pro Tech Communications, Inc., known as
Pro Tech, and continuing its efforts on the development of DistributedMedia
Corporation ("DMC") (formerly known as DistributedMedia.com, Inc.). DMC is a
wholly owned subsidiary of the company, which was formed in November 1998. DMC
is a microbroadcasting media company that delivers licensed CD-quality music as
well as on-air and billboard advertising to out-of-home commercial and
professional venues via a digital network of place-based microbroadcasting
stations, called Sight & Sound(TM). The Sight & Sound(TM) system consists of a
central control network that communicates to a digital broadcast station, which
plays music selections and advertisements through flat panel speakers. The
speaker grilles double as visual billboards. The speakers will be provided by
NCT Audio Products, Inc. (known as NCT Audio), a majority owned subsidiary of
the company.
As of December 31, 2000, NCT and its business units held 585 patents and
related rights worldwide and an extensive library of know-how and other
proprietary technology. These patents allow the company to develop major product
lines, which include:
o NoiseBuster(R) ANR communications headsets
o NoiseBuster(R) ANR consumer headphones
o ProActive(R) industrial/commercial ANR headsets
o Gekko(TM) flat speakers, frames, prints and subwoofers
o ClearSpeech(R) microphones, speakers and other products
o ClearSpeech(R) corporate intranet telephone software
The company also markets its technologies through licensing to third
parties for fees and royalties. During 2000, the company entered into several
new technology license agreements and continues to receive royalties pursuant to
certain of its technology license agreements.
The company's operating revenues are comprised of technology licensing fees
and royalties, product sales, advertising and engineering and development
services. Historically, the company derived the majority of its revenues from
engineering and development services and technology licensing fees. As
distribution channels are established and as product sales, market acceptance
and awareness of the commercial applications of the company's technologies
build, revenues from technology licensing fees, royalties and product sales are
projected to fund an increasing share of the company's requirements. The
revenues from these sources, if realized, will reduce the company's dependence
on revenues from engineering and development services. Total revenues for 2000
consisted of approximately 15.6% in product sales, 0.6% in engineering and
development services, 6.5% in advertising/media revenue and 77.3% in technology
licensing fees and royalties
The company has entered into a number of strategic supply, manufacturing
and marketing alliances with leading global companies to commercialize its
technology. These strategic alliances historically have funded a majority of the
company's research and development and provided the company with reliable
sources of components, manufacturing expertise and capacity, as well as
extensive marketing and distribution capabilities. The company has continuing
relationships with Walker Manufacturing Company (a division of Tennessee Gas
Pipeline Company, a wholly owned subsidiary of Tenneco, Inc.), AB Electrolux,
Ultra Electronics Ltd., The Charles Stark Draper Laboratory, Inc., Oki Electric
Industry Co., Ltd. and New Transducers Ltd., among others, in order to penetrate
major markets more rapidly and efficiently, while minimizing the company's own
capital expenditures. See G. "Strategic Alliances" and Note 5 - notes to the
consolidated financial statements for further details.
An important factor for our continuing development of technology is our
ability to recruit and retain key personnel. As of March 31, 2001, we had 138
employees.
The company's executive offices and corporate headquarters are located at
20 Ketchum Street, Westport, Connecticut 06880; telephone number (203) 226-4447.
Our research and product development facility is located in Linthicum, Maryland;
telephone number (410) 636-8700. Our European operations are conducted through
our product development and marketing facility in Cambridge, England. The
company also maintains a presence in the Pacific Rim. DMC's and Advancel Logic
Corporation's (known as Advancel) operations are located in Westport,
Connecticut. The company's subsidiaries, Pro Tech, Midcore, and DMC Cinema,
Inc., known as DMC Cinema, conduct operations from offices located in Ft.
Pierce, Florida; Middlebury, Connecticut and as of April 1, 2001 Westport,
Connecticut, respectively.
NCT is organized into strategic business units which in May 2000, were
realigned to comprise three groups: media, communications and technology. Each
of the strategic business units is targeted to the commercialization of its own
products in specific markets. The media group currently consists of DMC; DMC's
subsidiaries, DMC Cinema and DMC HealthMedia, Inc.; and NCT Audio. The
communications group currently includes NCT Hearing Products, Inc. (known as NCT
Hearing); NCT Hearing's subsidiaries Pro Tech and NCT Medical Systems, Inc.;
Midcore and its subsidiary, Midcore Software Limited; and ConnectClearly.com,
Inc. The technology group currently consists of Noise Cancellation Technologies
(Europe) Ltd.; Advancel; and certain other assets and operations held directly
by the company. (See Note 19 - notes to the consolidated financial statements
for further details about our business segments.)
B. Business Strategy
Our strategy is to leverage off our existing base of proprietary technology
by expanding into areas outside of traditional active noise control such as
communications, audio and microbroadcasting media. Our acquisition of certain
assets and all of the intellectual property of Active Noise and Vibration
Technologies, Inc., or ANVT, in 1994 expanded our portfolio of intellectual
property and allowed us to license certain, formerly restricted, jointly-held
patents to unaffiliated third parties.
We anticipate that as we establish distribution channels and as consumer
awareness of our products increases, so, too, will product sales and revenues
from licensing fees and royalties. The funds derived from these revenue sources
will enable us to become less dependent on revenues derived from research,
development and engineering. At the same time, we continue to strive to lower
the cost of our products and enhance their technological performance.
C. Technology
Active Noise Reduction. ANR systems are particularly effective at reducing
low frequency noise. ANR creates sound waves that are equal in frequency but
opposite in phase to the noise. The illustration that follows shows the
relationship, in time, of a noise signal, an anti-noise signal and the residual
noise that results when they meet.
ACTIVE NOISE REDUCTION
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[GRAPHIC OMITTED]
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Signal Enhancement. The company's technology also can be used to attenuate
unwanted signals that enter into a communications network, as when background
noise enters telecommunications or radio systems from a telephone receiver or
microphone. We have developed patented technology that will attenuate the
background noise in-wire, so that the signals carried by the communications
network include less of the unwanted noise, allowing the speaker to be heard
more clearly over the network. An application of this technology is in-wire
attenuation of siren noise over two-way radio communications between emergency
vehicles and dispatchers at hospitals and police or fire stations.
Silicon Micromachined Microphone. In 1994, the company purchased the
exclusive rights to manufacture and commercialize a SMM as a technically
superior and less expensive alternative to currently available electret
microphones. The SMM has potential applications not only in the audible range of
frequencies, but in the ultrasonic range as well.
ClearSpeech(R) Adaptive Speech Filter. The ClearSpeech(R) algorithm removes
noise from voice transmissions. ASF is effective against a variety of stationary
noises whose amplitude and pitch change slowly compared to the spectral
variations characteristic of human speech. ASF applications include
teleconferencing systems, cellular telephones and airphones, telephone switches,
echo cancellers, and communications systems in which background noise is
predominant. ASF is currently available for use on three hardware platforms
including personal computers and fixed and floating digital signal processors.
ClearSpeech(R)-Acoustic Echo Cancellation. AEC removes acoustic echoes in
hands-free full duplex communication systems. AEC is an adaptive,
frequency-based algorithm that continuously tracks and updates the changes in
the acoustic path between the loudspeaker and the microphone to eliminate the
acoustic echo. The algorithm can be changed to accommodate different audio
bandwidths and acoustic tail lengths for use in a variety of applications such
as cellular telephony, audio and video teleconferencing, computer telephony,
gaming and voice recognition.
ClearSpeech(R)-Reference Noise Filter. RNF isolates and removes interfering
signals, such as background radio, television, machine and siren noise, so
communications can be heard more clearly. RNF algorithm was designed to remove
interference from a desired signal in applications where a reference signal for
the interference is available.
Flat Panel Transducer. The company's patented FPT technology utilizes piezo
electric drivers mounted on flat rigid surfaces to create a unique wide
dispersion sound field. Unlike conventional speakers that deliver sound through
air in a pistonic fashion, the FPT design delivers sound throughout the surface
of the panel being driven. This distributed mode method of delivering wide
dispersion sound is what the company has termed Sweet Space(TM), which floods a
room with sound. Uses for FPT technology include home theatre, professional,
automotive and aircraft applications.
Digital Broadcasting Station System Software. DBSS software is being
utilized by DMC to deliver customized music programming to each site.
Advertising is scheduled and updated via a communications link such as the
Internet. The software also performs status checking, play log functions and
other diagnostic functions made available to the central control network.
MidPoint(R) Software. MidCore's Midpoint Software manages the Internet
access of any small to medium sized office, educational institution or residence
with usage control and accounting, faster performance, greater reliability and
total security. Its unique combination of features such as routing, firewall,
email server, caching, site blocking and more result in unparalleled performance
for Internet access, regardless of the type of connections available.
Development is currently underway to incorporate office-to-office connectivity
(such as VPN and secure email), audio and speech technologies (including
Voice-Over-IP, POTS gateways, and NCT's proprietary speech-processing
algorithms), and unique performance-enhancing capabilities for large enterprises
and ISP's.
Telephone Amplifier Technology. Pro Tech has been awarded a patent
entitled, "Linearization of FET Channel Impedence for Small Signal Applications"
which covers the semiconductor technology used in the Pro Tech's two-prong and
tabletop telephone amplifiers for call centers. This technology facilitates a
higher level of signal processing quality at a significantly lower price than
conventional semiconductor solutions.
D. NCT Proprietary Rights and Protection
The company holds a large number of patents and patent applications. Our
intellectual property strategy has been to build upon our base of core
technology patents with newer advanced technology patents developed by,
purchased by or exclusively licensed to us. In many instances, we have
incorporated the technology embodied in our core patents into patents covering
specific product applications, including the products' design and packaging. We
believe this building-block approach provides greater protection to us than
relying solely on the original core patents. As its patent holdings increase, we
believe the importance of our core patents will diminish from a competitive
viewpoint.
We purchased certain assets of ANVT in 1994, which included all of ANVT's
intellectual property rights. Among the ANVT intellectual property rights were
ANVT's interest in the ten basic Chaplin Patents which are now solely owned by
the company as the sole shareholder of Chaplin Patents Holding Co., Inc.,
formerly a joint venture with ANVT. These patents cover inventions made by
Professor G.B.B. Chaplin in the late 1970s and early 1980s, some of which have
now expired.
The Chaplin Patents form only one group of core patents upon which the
company's technology is based. In March 1990, we acquired exclusive ownership of
10 patents developed under the auspices of the National Research Development
Corporation, also known as NRDC, an organization sponsored by the British
Government. Among other things, the NRDC patents, of which the Swinbanks and
Ross patents are the most important, utilize the adaptive feed forward approach
to active noise control. The Swinbanks patent covers an improved method of
analyzing the incoming noise or vibration through the use of a "frequency
domain" adaptive filter that splits the incoming noise into different frequency
bands for analysis and recombines the data to generate the anti-noise signal.
The Ross patent covers the use of a "time domain" filter, which uses input and
error signals to enhance a system's ability to compensate for feedback from
actuators to sensors. Without this filter, the system will detect and begin
canceling its own self-generated anti-noise.
As part of the purchase of certain ANVT assets, we acquired all the rights
to nine inventions previously belonging to the Topexpress Group in the United
Kingdom. The international patent coverage of these inventions varies but all
nine have been granted patent protection in various countries. Among the other
intellectual property acquired from ANVT are patents relating to active auto
mufflers and noise suppression headrests, several patent applications on
advanced algorithms, active noise headsets and many related disclosures and
various disclosures in other areas of active attenuation of noise and vibration.
In addition, we acquired the rights to three basic inventions known as the
Warnaka patents.
The company has built upon these core patents with a number of advanced
patents and patent applications. These include the Digital Virtual Earth patent,
which covers digital feedback control, and patents on multi-channel noise
control. We have also has applied for patents on combined feedforward and
feedback control, control using harmonic filters, filters for signal enhancement
and speech filtering, control systems for noise shaping and others.
In 1994, we obtained a license for the exclusive rights to the SMM
technology developed by Draper in Cambridge, Massachusetts. At this time, four
patents describing the basic technology have been issued.
In 1995, we acquired several U.S. patents dealing with ASF which are used
in our ClearSpeech(R) product line.
Since 1996, we have been granted 409 new patents.
We hold or have rights to 318 inventions as of March 31, 2001, including
121 United States patents and over 483 corresponding foreign patents for a total
of 604 patents and related rights. We have pending 130 U.S. and foreign patent
applications. The company's engineers have made 156 invention disclosures for
which we are in the process of preparing patent applications. Our patents have
expiration dates ranging from 2000 through 2016, with the majority occurring
during or after 2009.
The company has been granted the following trademarks:
Mark Field of Use
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NCT logo Company logo
NoiseBuster(R) headsets
NoiseEater(R) HVAC systems
ClearSpeech(R) adaptive speech filter products
VariActive(R) headsets
ProActive(R) headsets
Noisebuster Extreme!(R) headsets
The company has also applied for 12 trademarks including:
Mark Field of Use
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Gekko(TM) flat audio speakers
ArtGekko(TM) flat audio speakers
Sweet Space(TM) flat audio speakers
Sight & Sound(TM) microbroadcasting
The Gekko(TM) and Art Gekko(TM) trademark applications have been challenged
by another trademark holder on the grounds of similarity and confusion in a
proceeding currently pending before the U.S. Trademark Office.
No assurance can be given as to the range or degree of protection any
patent or trademark issued to, or licensed by, the company will afford or that
such patents, trademarks or licenses will provide protection that has commercial
significance or will provide competitive advantages for our products. No
assurance can be given that the company's owned or licensed patents or
trademarks will afford protection against competitors with similar patents,
products or trademarks. No assurance exists that the company's owned or licensed
patents or trademarks will not be challenged by third parties, invalidated, or
rendered unenforceable. Furthermore, there can be no assurance that any pending
patent or trademark applications or applications filed in the future will result
in the issuance of a patent or trademark. The invalidation, abandonment or
expiration of patents or trademarks owned or licensed by us which we believe to
be commercially significant could permit increased competition, with potential
adverse effects on the company and its business prospects.
We have conducted only limited patent and trademark searches and no
assurances can be given that patents or trademarks do not exist or will not be
issued in the future that would have an adverse effect on our ability to market
our products or maintain our competitive position with respect to our products.
Substantial resources may be required to obtain and defend patent and trademark
rights of the company.
Our policy is to enter into confidentiality agreements with all of our
executive officers, key technical personnel and advisors, but no assurances can
be made that the company know-how, inventions and other secret or unprotected
intellectual property will not be disclosed to third parties by such persons.
Finally, it should be noted that annuities and maintenance fees for our
extensive patent portfolio are a significant portion of our annual expenses. If,
for the reasons described in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," it becomes necessary for the company to reduce its level of
operations, we will not be able to continue to meet the extensive monetary
outlay for annuities and maintenance fees to keep all the patents and
applications from becoming abandoned, the company then will have to prioritize
its portfolio accordingly.
E. Existing Products
NCT Hearing Products
NoiseBuster(R). NCT is currently marketing its NoiseBuster(R) personal
active noise reduction headphone for consumers at a suggested retail price of
$39. This active headphone selectively reduces unwanted noise generated by
aircraft engines, lawnmowers, street traffic, household appliances and other
annoying noise sources, while permitting the user to hear desired sounds, such
as human conversation, warning signals or music. The product can also be used
with an aircraft's in-flight entertainment system or a portable audio device.
NCT is marketing the NoiseBuster(R) through distribution channels, including
electronics retail stores, specialty catalogues and directly through a toll-free
"800" number and on the Internet. Initial product shipments of the original
NoiseBuster(R) were made in September 1993. Product shipments of the current
NoiseBuster(R) began during the first quarter of 1997.
The NoiseBuster(R) line has been expanded to include communications
headsets for cellular, multimedia and telephony. The products are the first ANR
offerings for these applications and improve speech intelligibility in the
presence of background noise. Product shipments began during the first quarter
of 1998.
NB-PCU. NCT along with a leading manufacturer and supplier of aircraft
cabin products has integrated NCT's active noise control technology into
in-flight passenger entertainment systems. As a component of the system, NCT
also has developed a low-cost headset specifically for in-flight use to be used
in conjunction with the integrated electronics. NCT's technology electronically
reduces aircraft engine noise while enhancing the audibility of desired sounds
like speech, music and warning signals. Lowering the engine drone also can help
alleviate the anxiety and fatigue often associated with flying. While the system
is in use, passengers inside an aircraft cabin can carry on conversations at a
comfortable level or hear in-flight movies and music without over amplification
and distortion. The system is currently being installed in first and business
class cabins on new United Airlines aircraft and in cabins of five other
airlines.
Pro Tech Communications, Inc.
In September 2000, NCT Hearing licensed certain technologies to Pro Tech in
exchange for approximately an 83% interest in Pro Tech. Pro Tech currently sells
high quality, lightweight headsets to high-profile users, among them the NASA
space program and McDonald's. Pro Tech, with its current innovative product
offerings and planned products incorporating NCT's advanced technologies, is
targeting the call center and wireless communications markets. The following are
products sold by Pro Tech:
The ProCom. Pro Tech's initial entry into the lightweight fast-food headset
market is the "ProCom." Weighing less than 2 ounces, the ProCom is worn by users
over the head by means of a springsteel wire headband and a cushioned earphone.
Attached to the earphone, which may be worn over either ear, is an adjustable
boom, which connects to the ProCom's microphone. The ProCom headset connects to
the wireless belt-pack system with the use of various plug types offered by the
wireless belt-pack providers sold in many fast-food franchises around the world.
The ProCom is presently selling to distributors at prices ranging from $20.00 to
$49.00 per headset, and the product is sold by Pro Tech to retailers for $54.00
per headset.
The Freedom. The Freedom is an adaptation of the ProCom headset to allow
for it to be worn without a headband and is currently being sold in the
fast-food market. Through the use of Pro Tech's engineered clip, this headset
attaches to the standard hat or visor being worn in the fast-food franchise. The
electronics in the Freedom are virtually the same as the ProCom headset
providing the same market acceptance. Through its own research, Pro Tech found
the need for user comfort from the use of headsets over very long time periods.
Pro Tech introduced this product in April 1998.
The Manager's Headset. The manager's headset is a lightweight over-the-ear
fast-food headset, which provides improved comfort to the fast-food store
manager monitoring drive-thru activity. It was introduced and favorably received
in February of 2000 and Pro Tech will continue to offer this headset in its
fast-food product line for the year 2001. This product is sold in a range from
$24.50 to $46.00 depending on volumes purchased.
The APEX. Pro Tech introduced the APEX headset for sale in 1999. After
conducting its own market research, it was determined that there is a demand for
a headset which combines both over-the-head and over-the-ear features. As a
result the APEX was designed to incorporate both of these features, which should
enhance Pro Tech's ability to market the product to cellular, personal computer
and small office telephone users. The APEX is a commercial adaptation of the
headset that Pro Tech has designed for use by the National Aeronautics and Space
Administration ("NASA"). Boeing Defense and Space Group ("Boeing") is a prime
contractor for NASA, and as such has the responsibility to choose certain
components and products used in NASA's space program. The APEX is a smaller
design of the Trinity, with components reduced by 20% in order to create a
lightweight headset. The speaker and microphone positioning can be easily
adjusted by the user for the headset thereby allowing the product to fit
numerous head and ear sizes. In addition, the APEX has a detachable headband
allowing the users the choice of wearing the headset over the head or over the
ear. The APEX is presently sold to distributors at prices ranging from $40.00 to
$62.00 per headset. The APEX is being sold by distributors and directly by Pro
Tech to end-users for $99.00 per headset.
The ASTRA. The Astra headset is a variation of the Apex headset in that it
has been adapted for use directly in non-amplified phone systems. A preamplifier
circuit has been inserted inside the headset to allow for a direct connection
into an automatic call distributor (ACD) or phone system that provides this
required configuration headset.
The A-10 Amplifier. The A-10 amplifier is the first in a series of
multi-line amplifiers being offered with each of Pro Tech's headsets. It is
designed for the SOHO market (small office/home office) and has been engineered
to work with over 90% of all existing phone systems in the world. The size is
very small and engineered to plug and play with most phone systems.
The A-27 Amplifier. The A-27 amplifier is the first in a series of
amplifiers specifically designed for automatic control distributors (ACD) or
phone systems which use the standard PJ-237 2-prong plug as their interface.
This amplifier will employ noise suppression technology designed by Pro Tech.
Three patent applications were filed in 2000. The A-27 was introduced into the
call-center market in the 2000. Pro Tech presently sells the A-27 Amplifier to
distributors at prices ranging from $67.00 to $89.00 per amplifier. The A-27
Amplifier is being sold by distributors and directly by Pro Tech to end-users
for $127.00 per amplifier.
The Active Series Headset. The Active Series Headset was introduced in
2000. These headsets are designed for the mobile headset user. Cellular phone
users and automobile hands-free kits will be the primary market focus of this
product. Pro Tech presently sells the Active Series Headset to distributors at
prices ranging from $8.00 to $20.00 per headset. The Active Series headset is
being sold by distributors and directly by Pro Tech to end-users for $25.00 per
headset.
The Trinity. The Trinity has been designed for users in noisy environments.
Pro Tech completed the development of this product early in 2000. Unlike other
headsets currently available, the Trinity will employ a light (1/2-ounce)
"acoustical ear cup" which completely surrounds the user's ear. The perimeter of
this cup rests lightly in a broad area of contact around the ear, rather than
against or in the ear itself, which will allow the user to wear the Trinity in
comfort for extended periods. Moreover, by enclosing the ear, the acoustical ear
cup reduces background noise, thereby significantly improving the clarity and
strength of reception from the earphone. The Trinity has been designed as a
comfortable and lightweight alternative to the bulky commercial sound
suppressant headsets, which are presently the only headsets available to users
operating in noisy office environments. The Trinity headset can be worn in a
single ear cup version or dual ear cup version. Like the ProCom, the Trinity
will be produced with a choice of adapters capable of interfacing with the
electronic amplifiers and telephone systems of most major manufacturers. Pro
Tech presently sells the Trinity to distributors at prices ranging from $42.00
to $54.00 per headset, and sells the product to retailers for $118.00 per
headset.
The disparity in price between the cost to distributors and retailers for
each product described in this section is primarily a result of a shifting of
direct selling expenses from Pro Tech to distributors. Distributors in return
for a lower average purchase price have accepted these expenses, averaging
approximately $11.23 of the individual unit retail price. Pro Tech offers lower
prices for its products to distributors who purchase certain quantities of
products to increase sales and gain market share for its products.
NCT Communications Products
ClearSpeech(R)-Mic. This is the first digital noise reduction microphone
system for use with hands-free car kits. The product substantially reduces
background road, tire, wind, engine and traffic noise from hands-free calls,
allowing the person receiving the call to hear voice more clearly and with less
frustration and anxiety.
ClearSpeech(R)-Speaker. This product cleans background noise from the
incoming speech signal over a two-way or mobile radio for the utmost in
intelligibility. The system is suitable for use with mobile radios, fleet
communication systems, marine radios and many other communication systems.
ClearSpeech(R)-PCB Boards. These boards are currently being sold for
incorporation into communication systems at drive through fast food restaurants.
They allow the system to filter background car noise so that only the voice
comes through, cutting down on errors in the order process.
NCT Audio Products
Gekko(TM) flat speaker. In 1998, NCT Audio launched the Gekko(TM) flat
speakers and ArtGekko(TM) printed grille collection. This was the first product
launched by NCT Audio to the consumer audio market utilizing our patented FPT
technology. With this technology, these products deliver Sweet Space(TM) sound
that floods the room with sound as opposed to conventional speakers which
deliver sound like a spotlight. The Gekko(TM) flat speakers are thin wall
hanging speakers that are designed to accept high quality reproductions of the
world's most popular artwork, which is the ArtGekko(TM) line of replacement
prints and decorative frames. The art is printed on acoustically transparent
material, which allows all sound from the flat speaker to pass freely. NCT Audio
also provides flat speakers for Distributed Media Corporation's Sight &
Sound(TM) microbroadcasting system. Sight & Sound is a new advertising medium
that delivers place-based audio and billboard advertising messages integrated
with CD-quality music.
NCT Internet Protocol Products
MidPoint(R) Software. In September 2000, NCT acquired MidCore Software,
Inc., the maker of MidPoint(R) Internet connectivity software. MidPoint(R) is a
cost-effective, feature-packed Internet connection solution for small to
medium-sized organizations. With one installation of MidPoint, any network of up
to 250 users can share a single Internet connection and ISP account, offering
tremendous long-term savings over the cost of multiple phone lines and monthly
ISP charges or expensive high-speed dedicated connections. In addition, the
package includes many features to make Internet access more efficient and
productive; such as high-performance shared cache, scheduled retrievals, content
control and usage accounting. Midpoint also features a powerful integrated
e-mail server and management function, which allows complete local control of
e-mail.
Revenues
Product Revenues
The following table sets forth the percentage contribution of the separate
classes of NCT's products to NCT's product revenues for the year ended December
31, 2000 (in thousands).
Year ended
December 31, 2000
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As a %
Products Amount of Total
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Hearing Products $ 1,125 56.2%
Communications 462 23.1%
Audio Products 318 15.9%
Software Products 96 4.8%
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Total $ 2,001 100.0%
========= =========
Product revenues were approximately 15.6% of total revenues for the year
ended December 31, 2000.
Technology Licensing Fees and Royalty Revenues
The following table sets forth the percentage contribution of the separate
business segments of NCT's technology to NCT's technology licensing and royalty
revenue for the year ended December 31, 2000 (in thousands).
Year ended
December 31, 2000
------------------------
As a %
Amount of Total
----------- -----------
Technology $ 3,550 35.8%
Communications 2,988 30.1%
Media 2,065 20.8%
Other 1,325 13.3%
----------- -----------
Total $ 9,928 100.0%
=========== ===========
Technology licensing fees and royalties were approximately 77.3% of total
revenues for the year ended December 31, 2000. Such 2000 revenue was
predominantly due to the revenue recognized from the license to Infinite
Technology Corporation of $3.6 million, license to Pro Tech of $2.4 million,
license to Vidikron of America, Inc., known as Vidikron, of $2.0 million,
license to Teltran International Group, Inc. of $0.4 million and site license
revenue of approximately $1.1 million as explained in "Management's Discussion
and Analysis of Financial Conditions and Results of Operations."
Advertising Revenues
Advertising revenues totaling $0.8 million represented approximately 6.5%
of total revenues for the year ended December 31, 2000. Such 2000 revenue was
comprised of $0.7 million recognized from entertainment audio programming
supplied to multiplex cinemas and $0.1 million generated from broadcast and
billboard advertising through its network of Sight and Sound(TM) systems.
F. Products Under Development
SMM
Silicon Micromachined Microphone. The ability to integrate additional
circuitry on the SMM chip has proven attractive to potential users. The SMM's
low noise floor and adjustable sensitivity improve voice recognition in high
ambient noise environments. NCT is working with voice processing and computer
hardware companies to utilize the SMM to enhance the performance of their
systems. In the first quarter of 1996, NCT released initial prototypes of the
devices. In December 1997, we announced that Siemens Semiconductors of Siemens
AG, now Infineon, had licensed our SMM technology and that Infineon would
develop, manufacture and market the SMM. Prototype samples were received. Full
production is scheduled to commence in 2001.
NCT Communications
ClearSpeech(R) Product Line. NCT is continuously improving the quality and
functionality of the ClearSpeech(R) Microphone and ClearSpeech(R) Speaker
products to improve market penetration. NCT has both noise and echo cancellation
on a variety of DSPs including Analog-Devices' and Texas Instruments' general
purpose DSPs so that third party developers may integrate the technology into
their applications. NCT also has extended the availability of PC development
tools by creating software developer's kits for noise and echo cancellation and
speech compression.
G. Strategic Alliances
The company's transition from a firm primarily engaged in research and
development to one engaged in the licensing, production, marketing and sale of
technologies and applications has been facilitated by the establishment and
maintenance of strategic alliances with major domestic and international
business concerns. In exchange for the benefits to such concerns' own products
offered by our technology, these alliances under the terms of their joint
venture agreements or licenses provide marketing, distribution and manufacturing
capabilities for our products and enable us to limit the expense of our own
research and development activities. In order to ensure dependable sources of
supply and to maintain quality control and cost effectiveness for components and
integrated circuits incorporated in our applications and products, an important
element of our strategy has been to identify and enter into alliances with
integrated circuit manufacturers that will develop and produce custom-made chips
for NCT product applications, and with manufacturers of components that will
supply and integrate components for NCT technologies. The following summarizes
NCT's key alliances:
- -------------------------------------------------------------------------------
Date Initial
Relationship
Key Strategic Alliances Established Applications
- --------------------------------- --------------- -----------------------------
Walker Manufacturing Company Nov. 1989 Mufflers, Industrial
(a division of Tennessee Gas Silencers and Other
Pipeline Company) Vehicular Applications
AB Electrolux Oct. 1990 Consumer Appliances
Ultra Electronics Ltd. June 1991 Aircraft Cabin Quieting
Systems
The Charles Stark Draper July 1994 Microphones
Laboratory, Inc.
New Transducers Ltd. Mar. 1997 Flat Panel Transducers
Oki Electric Industry Co., Oct. 1997 Communications
Ltd.
Infineon Technologies AG I Gr. Dec. 1997 Microphones
(formerly Siemens AG)
VLSI Technology, Inc. Feb. 1998 Communications
STMicroelectronics SA & Nov. 1998 Java(TM)platform
STMicroelectronics S.r.l.
Lernout & Hauspie Speech Mar. 1999 Communications
Products N.V.
Delphi Automotive Systems May 2000 Communications
- -------------------------------------------------------------------------------
Walker Manufacturing Company (a division of Tennessee Gas Pipeline Company,
a wholly-owned subsidiary of Tenneco, Inc.) (U.S.) and Walker Electronic
Mufflers, Inc. (a wholly-owned subsidiary of Tennessee Gas Pipeline
Company, a wholly-owned subsidiary of Tenneco, Inc.) (U.S.)
In November 1989, NCT signed its strategic alliance with Walker, a
world-leading manufacturer of automotive parts and mufflers. The alliance
consisted of a Joint Venture and Partnership Agreement with ownership in the
resulting joint venture, Walker Noise Cancellation Technologies, or WNCT, shared
equally between NCT Muffler, Inc., a wholly-owned subsidiary of the company and
WEM. On November 15, 1995, NCT and Walker executed a series of related
agreements (the "Restructuring Agreements") regarding our commitment to help
fund $4.0 million of product and technology development work and the transfer of
our 50% interest in WNCT to Walker. The Restructuring Agreements provided for
the transfer of our interest in WNCT to Walker, the elimination of our
previously expensed obligation to fund the remaining $2.4 million of product and
technology development work, the transfer to Walker of certain company owned
tangible assets related to the business of WNCT, the expansion of certain
existing technology licenses and our performance of certain future research and
development activities for Walker at Walker's expense.
AB Electrolux (Sweden)
NCT's relationship with Electrolux, one of the world's leading producers of
white goods, was initiated in October 1990. NCT signed its current agreement
with Electrolux, a Joint Development and Supply Agreement, in June 1991. This
agreement provides for NCT to design, develop and supply active systems for
quieting Electrolux products. Electrolux has agreed to purchase the electronic
components for its active noise control products exclusively from NCT, provided
NCT and its supply joint ventures are price and quality competitive. To date,
NCT has completed development of two household appliance products for
Electrolux. No date has been established for product introduction.
Ultra Electronics Ltd. (U.K.)
Since 1991, NCT and Ultra (and Ultra's predecessor, part of the Dowty
Group), have been designing and developing systems to enhance passenger comfort
by quieting aircraft passenger compartments in certain propeller-driven
aircraft, which Ultra sells to the worldwide turbo-prop aircraft market. In May
1993, Ultra and NCT signed a teaming agreement to produce and install the NCT
cabin quieting system on the SAAB 340 aircraft. Deliveries under this agreement
began in 1994. In March 1995, NCT and Ultra amended the teaming agreement and
concluded a licensing and royalty agreement for $2.6 million. Under this
agreement, Ultra will pay NCT a royalty of 1.5% of sales of products
incorporating NCT technology beginning in 1998 (see Note 5 - notes to the
consolidated financial statements for further details).
The Charles Stark Draper Laboratory, Inc. (U.S.)
In July 1994, NCT and Draper of Cambridge, Massachusetts entered into an
agreement whereby NCT became the exclusive licensee to a new silicon
micromachined microphone developed by Draper. Under the terms of the agreement
and subsequent agreements, Draper will perform engineering services for NCT to
further develop the technology. The SMM technology can be used in a wide variety
of applications within the acoustic and communications fields.
New Transducers Ltd. (U.K.)
New Transducers Ltd. (U.K.), known as NXT, and NCT executed a
cross-licensing agreement on March 28, 1997. Under the terms of the Cross
License, we licensed patents and patents pending which relate to FPT technology
to NXT, and NXT licensed patents and patents pending which relate to parallel
technology to NCT. In consideration of the license, during the first quarter
1997 NCT recorded a $3.0 million license fee from NXT, and NCT will receive
royalties on future NXT licensing and product revenue. On April 15, 1997, NXT
plc, a publicly registered company in England and Wales, and its wholly owned
subsidiary, NXT and NCT executed several agreements and other documents, which
terminated the Cross License, and certain related agreements and replaced them
with a new cross license, and new related agreements. The material changes
effected by the New Agreements included the inclusion of NXT plc as a party
along with its wholly-owned subsidiary NXT and provided that the license fee
payable to NCT could be paid in ordinary shares of stock. The subject license
fee was paid to NCT in ordinary shares of NXT plc stock, which were subsequently
sold by NCT.
On September 27, 1997, NXT plc, NXT, NCT Audio and NCT executed several
agreements and other documents, terminating the New Cross License and a related
security deed and replacing them with new agreements. The material changes
effected by these agreements included an expansion of the fields of use
applicable to the exclusive licenses granted to NXT plc and NXT and an increase
in the royalties payable on future licensing and product revenues. On February
9, 1999, NCT Audio and NXT expanded the Cross License Agreement dated September
27, 1997 to increase NXT's fields of use to include aftermarket ground-based
vehicles and aircraft sound systems. The amendments also increased the royalties
due NCT Audio from NXT to 10% from 6% and increased the royalties due NXT from
NCT Audio to 7% from 6%. In consideration for granting these expanded licensing
rights, each party received a license fee (see Note 5 - Joint Ventures and
Other Strategic Alliances, and Note 21 - Subsequent Events, in the notes to the
consolidated financial statements for further details).
On March 30, 2001, we entered into a Framework Agreement with NXT plc and
NXT that provided for the termination of the various licenses and related
agreements entered into in 1997 and 1999. Under the Framework Agreement we
transferred our patents and related technology to NXT that pertain to FPT
Technology, and received back a non-exclusive license to use those patents and
related technology and NXT bought-out NCT Audio's right to a future royalty
stream in exchange for 2,000,000 shares of NXT plc. Our rights to sell the NXT
plc shares are limited by a six month lock-up agreement. We also acquired 533
shares of NCT Audio that were held by NXT plc and granted NXT plc a cashless
exercise of this warrant to purchase 3,850,000 shares of our common stock. NXT
is required to assist DMC in developing a new flat speaker with video display,
and we will pay royalties on products developed by NXT.
Oki Electric Industry Co., Ltd. (Japan)
In October 1997, NCT and Oki executed a license agreement. Under the terms
of the agreement, which included an up-front license fee and future per unit
royalties, Oki licensed NCT's ClearSpeech(R) noise cancellation algorithm for
integration into large-scale integrated circuits for communications
applications. NCT has granted Oki the right to manufacture, use and sell
products incorporating the algorithm. The algorithm is specifically designed to
remove background noise from speech and other transmitted signals, greatly
improving intelligibility and clarity of communications. NCT is currently
receiving royalties from OKI relating to the license agreement.
Infineon Technologies AG (formerly Siemens Semiconductors, Siemens AG)
(Germany)
In December 1997, NCT and Infineon executed a license agreement. Under the
terms of the agreement, which included an up-front license fee and future per
unit royalties, Infineon licensed NCT's SMM and will develop, manufacture and
market such microphones as surface mountable devices. The SMM technology
delivers microphone technology on a silicon chip, a breakthrough in the
microphone marketplace. Infineon and NCT have targeted the SMM to the
multimedia, cellular phone, wireless phone, voice recognition and other related
markets. The SMM's small chip dimensions of only 3 mm on each side make it
useful for packaging into products with tight size constraints, such as noise
canceling earplugs and hearing aids.
VLSI Technology, Inc. (France)
In February 1998, NCT and VLSI executed a license agreement. Under the
terms of the agreement, which included up-front development fees and future per
unit royalties, VLSI licensed our ClearSpeech(R) noise cancellation and echo
cancellation algorithms for use with VLSI's current and future integrated
circuits targeted to the digital cellular and personal communications systems
phone market, as well as emerging computer telephony markets. The noise
cancellation algorithm is specifically designed to remove background noise from
speech and other transmitted signals, greatly improving intelligibility and
clarity of communications. The echo cancellation algorithm cancels acoustical
echo for hands-free telephony operations including cellular and speakerphones.
STMicroelectronics SA & STMicroelectronics S.r.l (France and Italy)
In November 1998, Advancel and ST executed a license agreement. Under the
terms of the agreement, which included a license fee, a minimum royalty within
two years and future per unit royalties, ST licensed Advancel's tiny2J(TM) for
Java(TM) ("T2J-processor core") to combine it with its proven secure
architecture and advanced nonvolatile memory technology, to offer a new
generation of secure microcontrollers for smartcard applications. The
T2J-processor core is the ideal architecture to accelerate the execution of
Javacard(TM)-based smartcard applications such as electronic purse credit/debit
card functions, ID cards that provide authorized access to networks and
subscriber identification modules that secure certain PCS cellular phones
against fraud.
Lernout & Hauspie Speech Products N.V. (Belgium)
On March 31, 1999, NCT signed a license agreement with L&H. The agreement
provides NCT with a worldwide, non-exclusive, non-transferable license to
selected L&H technology for use in the company's ClearSpeech(R) products. NCT
recorded a prepaid royalty of $0.9 million. On April 12, 1999, NCT 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 grant of a license to L&H,
NCT recognized a non-refundable royalty fee of $0.8 million. During the third
quarter of 1999, NCT and L&H agreed to offset the balances owed each other. On
November 29, 2000, L&H filed a Chapter 11 petition for reorganization under the
U.S. bankruptcy laws. It is unclear at this time what effect, if any, L&H's
petition will have on our relationship.
Delphi Automotive Systems (United States)
On May 3, 2000, Delphi Automotive Systems licensed NCT's ClearSpeech(R)
noise, acoustic echo and live echo cancellation algorithms for use in their
Mobile Multi Media (MMM) Computing Platform for hands-free cellular
communications. NCT's patented ClearSpeech algorithm cancels 95% of background
road, tire, wind, engine and traffic noise from hands-free communications,
allowing the party receiving the communication to hear voice more clearly.
H. Marketing and Sales
In addition to marketing its technology through its strategic alliances as
described above, as of December 31, 2000, NCT had an internal sales and
marketing force of 18 employees, 5 independent sales representatives and its
executive officers and directors. The independent sales representatives may earn
commissions of generally up to 6% of revenues generated from sales of NCT
products to customers the sales representatives introduced to NCT and up to 5%
of research and development funding revenues provided by such customers.
Note 20 - notes to the consolidated financial statements sets forth
financial information relating to foreign and domestic operations and sales for
the years ended December 31, 1998, 1999 and 2000.
NCT does not have a significant foreign exchange transaction risk because
the majority of its non-U.S. revenue is denominated and settled in U.S. dollars.
The remaining inter-company revenue, eliminated in consolidation, is in British
pounds sterling and our underlying cost is also in pounds sterling, creating a
natural foreign exchange protection.
I. Concentrations of Credit Risk
NCT sells its products and services to OEMs, distributors and end users in
various industries worldwide. As outlined below, the company's two largest
product customers accounted for approximately 16.8% of product revenues during
2000 and 1.3% of gross accounts receivable at December 31, 2000.
(in thousands) As of December 31, 2000,
And for the year then ended
----------------------------
Accounts
Customer Receivable Revenue
- ----------------------------------- ------------ -------------
AM.com $ 32 $ 191
Sharper Image 41 145
All Others 5,480 1,665
------------ -------------
Total $ 5,553 $ 2,001
============ =============
As outlined below, the company's three largest technology licensing and
royalty customers accounted for approximately 80.4% of technology licensing and
royalty revenues during 2000. The transactions with Infinite Technology
Corporation and Pro Tech have been accounted for as nonmonetary transactions
with consideration being received by NCT in common stock of the entity. The
amount outstanding from Vidikron at December 31, 2000 represented approximately
36.0% of gross accounts receivable.
(in thousands) As of December 31, 2000,
And for the year then ended
----------------------------
Accounts
Customer Receivable Revenue
- ----------------------------------- ------------ -------------
Infinite Technology Corporation $ 0 $ 3,550
Pro Tech 0 2,433
Vidikron 2,000 2,000
All Others 3,553 1,945
------------ -------------
Total $ 5,553 $ 9,928
============ =============
The company does not require collateral or other security to support
customer receivables.
NCT regularly assesses the realizability of its accounts receivable and
performs a detailed analysis of its aged accounts receivable. When quantifying
the realizability of accounts receivable, NCT takes into consideration the value
of past due receivables and the collectibility of such receivables, based on
credit worthiness.
Financial instruments, which potentially subject NCT to concentration of
credit risk, consist principally of cash and cash equivalents and trade
receivables. NCT's cash equivalents consist of commercial paper and other
investments that are readily convertible into cash and have original maturities
of three months or less. NCT primarily maintains its cash and cash equivalents
in two banks.
J. Competition
We have a number of direct competitors. The company's principal competitors
in active control systems include Bose Corporation, Lord Corporation, Matsushita
Electric Industrial Co., Ltd., Sennheiser Electronic Corp. and Sony Corporation,
among others. The company's principal competitors in speech applications include
IBM Corporation, Lucent Technologies, Inc. and Texas Instruments, Incorporated.
To the company's knowledge, each of these entities is pursuing its own
technology, either on its own or in collaboration with others, and has commenced
attempts to commercially exploit such technology. NCT also believes that a
number of other large companies, such as the major domestic and foreign
communications, computer, automobile and appliance manufacturers, as well as
aircraft parts suppliers and manufacturers, have research and development
efforts underway that could be potentially competitive to NCT. These companies
are well established and have substantially greater management, technical,
financial, marketing and product development resources than NCT.
K. Government Contracts
The company has acted as a government subcontractor in connection with its
performance of certain engineering and development services. Government
contracts provide for cancellation at the government's sole discretion, in which
event the contractor or subcontractor may recover its actual costs up to the
date of cancellation, plus a specified profit percentage. Governmental
expenditures for defense are subject to the political process and to rapidly
changing world events, either or both of which may result in significant
reductions in such expenditures in the proximate future. Government contracts
are not viewed as a significant part of the company's business. No such
contracts were in effect during 2000.
L. Research and Development
Company-sponsored research and development expenses aggregated $7.2
million, $6.2 million and $4.4 million for the fiscal years ended December 31,
1998, 1999 and 2000, respectively.
M. Environmental Regulation Compliance
Compliance with Federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, does not have any material effect upon the
capital expenditures, earnings or competitive position of the company.
Compliance by existing and potential customers of the company with Federal,
state and local laws and regulations pertaining to maximum permissible noise
levels occurring from the operation of machinery or equipment or the conduct of
other activities could be beneficial to sellers of noise reduction products and
enhance demand for certain applications of the company's technology, as well as
products developed or to be developed by the company. At the present time, it is
premature to determine what quantitative effect such laws and regulations could
have on the sale of the company's products and technology.
N. Employees
The company had 138 employees as of March 31, 2001. None of such employees
is represented by a labor union. The company considers its relationships with
employees to be satisfactory.
O. Acquisitions
On August 18, 2000, the company acquired 100% of the outstanding capital
stock of Theater Radio Network, Inc. ("TRN"), a provider of entertainment audio
programming in multiplex cinemas nationwide, through a merger with DMC Cinema,
Inc. ("Cinema"), a newly formed subsidiary of the company's wholly-owned
subsidiary, DMC. The acquisition included the company's initial issuance of
7,405,214 restricted shares of its common stock based upon a trailing market
price (as defined in the stock purchase agreement) of $0.3376 per share, for a
total value of $2.5 million and a 7.5% equity interest in Cinema. In February
2001, due to a decline in the trailing market price prior to the effective
registration of shares of common stock, an additional 2,455,248 shares were
issued for the acquisition pursuant to a fill-up provision.
On August 29, 2000, the company acquired 100% of the outstanding capital
stock of Midcore Software, Inc. ("MSI"), provider of Internet infrastructure
software for business networks, through a merger with Midcore Software, Inc.
("Midcore") (f/k/a NCT Midcore, Inc.), a newly formed, wholly-owned subsidiary
of the company. In connection therewith, the company initially issued 13,913,355
restricted shares of its common stock based upon a 10-day weighted average
closing bid price of $0.34626 per share, for an aggregate value of $4.8 million.
In addition, the purchase consideration includes $1.7 million to be paid by the
company in cash based upon earned royalties, as defined in the merger agreement,
over 36 months. If after 36 months, the total royalty has not been earned then
the parties have the right to collect the remaining unpaid balance through the
issuance of the company's common stock. In February 2001 due to a decline in the
closing bid price of the company's common stock prior to the effective
registration of the stock, an additional 2,863,891 shares were issued pursuant
to a fill-up provision.
On September 12, 2000, NCT Hearing granted an exclusive license to Pro Tech
Communications, Inc. ("Pro Tech") for rights to certain NCT technologies for use
in light weight cellular, multimedia and telephony headsets. In consideration
for this license, NCT Hearing received 23.7 million shares of Pro Tech's common
stock representing approximately 84% of the common shares issued and
outstanding. Pro Tech sells high quality, lightweight headsets to high-profile
users, including the NASA space program and McDonald's. Pro Tech's common stock
currently trades under the symbol "PCTU" on the NASD's OTC Bulletin Board. As a
condition precedent to the transaction, NCT Hearing had arranged $1.5 million in
equity financing for Pro Tech in the form of convertible preferred stock of Pro
Tech. Such convertible preferred stock is convertible into shares of Pro Tech's
common stock or exchangeable for shares of NCT's common stock, at the investors'
election.
P. Business Segments
For a full discussion of business segments and geographic areas, see Note
19 -notes to the consolidated financial statements - "Business Segment
Information" and Note 20 - notes to the consolidated financial statements -
"Geographical Information."
Q. Available Information
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission. You may read and copy any
document we file at the SEC's public reference rooms in Washington, D.C. Call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public from the SEC's Website at
"http://www.sec.gov."
ITEM 2. PROPERTIES
Our principal executive office and corporate headquarters are located in
Westport, Connecticut where we lease approximately 18,700 square feet of space.
The lease expires in March 2010 and provides for monthly rental of approximately
$28,000 for the first five years and $31,000 per month for the next five years.
This facility also houses our subsidiaries, DMC and Advancel, and sales and
marketing offices, which were previously located in Stamford, Connecticut.
The company's research and technical support laboratory is located in
Linthicum, Maryland, where we lease approximately 40,000 square feet of space
under leases which expire in July 2003. The leases provide for current monthly
rentals of approximately $36,000, subject to annual inflationary adjustments.
Utilizing early partial termination features of the leases, the company is in
the process of downsizing its space in the Maryland facility to approximately
14,000 square feet.
Our majority owned subsidiary, Advancel, had maintained its research and
engineering facility in San Jose, California, where it leased approximately
6,000 square feet of space under a lease which expired in August 2000. The lease
provided for monthly rentals of approximately $13,000, subject to annual
inflationary adjustments. Effective August 31, 2000, Advancel closed the San
Jose, California facility and relocated its operations to our headquarters in
Westport, Connecticut.
Our European operations are conducted in Cambridge, England where we lease
4,000 square feet of space under a lease, which expires in April 2007, and
provides for a current monthly rental of approximately $4,000, subject to annual
inflationary adjustments.
Until July 2000, we maintained a sales and marketing office in Tokyo,
Japan, where we leased approximately 800 square feet of space under a lease
which expired in May 2000, and provided for a monthly rental of approximately
$3,000. Although we do not lease office space in Asia, we continue to operate
and maintain a presence in the Pacific Rim.
Pro Tech's executive, sales and manufacturing offices presently occupy
approximately 5,000 square feet of space located at 3309 and 3311 Industrial
25th Street, Fort Pierce, Florida, pursuant to three leases expiring on November
30, 2000. Pro Tech continues to lease its current facilities on a month to month
basis. Pro Tech has entered into a new five-year lease agreement effective April
1, 2001 for approximately 13,000 square feet at an average annual cost of
approximately $109,000.
Midcore's sales and product development offices presently occupy
approximately 1,600 square feet of space located at 900 Straits Turnpike, 2nd
Floor, Middlebury, Connecticut pursuant to a lease expiring on March 31, 2001.
Midcore has entered into a new 5-year lease agreement effective April 1, 2001
for approximately 6,100 square feet at an average annual cost of approximately
$93,000.
Effective March 31, 2001, Cinema closed its Clearwater, Florida facility
and relocated its operations to Westport, Connecticut. Previous to this, Cinema
occupied approximately 1,400 square feet of space located at 4900 Creekside Dr.,
Suite E, Clearwater, Florida 33760 pursuant to a month to month leasing
arrangement. In 2000, Cinema incurred lease costs of approximately $17,000. We
believe our facilities provide us with adequate space for the near term
consistent with our current business plans. We are not intending to lease
additional space during 2001.
ITEM 3. LEGAL PROCEEDINGS
AE Corp. Patent Litigation
By a letter dated September 9, 1997, counsel to competitor Andrea
Electronics Corporation ("AECorp.") informed the company that AECorp. believed
NCT was improperly using the term "ANR Ready" and infringing upon a trademark
owned by AECorp. Representatives of existing and/or potential customers also
have informed the company that AECorp. has made statements' claiming that the
company's manufacture and/or sale of certain in-flight entertainment system
products infringe a patent owned by the competitor. The company received a
notice dated March 24, 1998 from AECorp.'s intellectual property counsel
notifying the company of its concerns but did not confirm any intention to file
suit against NCT. The company, through special outside counsel, exchanged
correspondence with AECorp. but the parties could not come to any resolution.
The company was informed by representatives of existing and/or potential
customers that AECorp. was continuing to infer that the company was infringing.
On November 17, 1998, the company and NCT Hearing filed a complaint against
AECorp. in the U.S. District Court, Eastern District of New York. The complaint
requested that the court enter judgment in our favor as follows: (1) declare
that the two AECorp. patents at issue are invalid and unenforceable and that the
company's products do not infringe upon them; (2) declare that the two AECorp.
patents at issue are unenforceable due to misuse by AECorp.; (3) award the
company compensatory damages of no less than $5 million and punitive damages of
$50 million for AECorp.'s tortious interference with the company's prospective
contractual advantages; (4) enjoin AECorp. from stating or inferring that the
company's products or their use are infringing any AECorp.-owned patents; and
(5) award any other relief the court deems appropriate.
On or about December 30, 1998, AECorp. filed its answer to the company's
complaint. AECorp. generally denied the above allegations and brought
counterclaims against the company. These include claims that the company has:
infringed the two AECorp. patents at issue and the "ANR Ready" trademark;
violated the Lanham Act through NCT's use of the trademark; and unfairly
competed with AECorp. by using the trademark.
The company and NCT Hearing have since filed a Reply and requested that the
court dismiss the counterclaims and enter judgment in favor of the company and
NCT Hearing. The company also argued that AECorp. is prevented from recovering
under certain equitable theories and defenses. Discovery in this suit commenced
in mid-1999 and is continuing, although a trial date has not yet been set. In
the opinion of management, after consultation with outside counsel, resolution
of this suit should not have a material adverse effect on the company's
financial position or operations. However, in the event that the lawsuit does
result in a substantial final judgment against the company, said judgment could
have a material effect on quarterly or annual operating results.
Schwebel Capital Investments Litigation
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit in
a Maryland state court against the company and Michael J. Parrella, its Chief
Executive Officer and Director. The complaint alleges that the company breached,
and Mr. Parrella interfered with, a purported contract entered into "in 1996"
between the company and SCI. SCI claims that under the contract, the company
agreed to pay SCI commissions when NCT received capital from its investors. The
complaint further alleged that SCI is due commissions totaling $1.5 million
because the company refused to honor SCI's right of first refusal. SCI seeks
$1,673,000 in compensatory damages, $50,000 in punitive damages and $50,000 in
attorneys fees from the company. SCI also seeks $150,000 in compensatory
damages, $500,000 in punitive damages and $50,000 in attorneys' fees from Mr.
Parrella. The company has filed and the Court has granted two motions to strike
or dismiss some of the plaintiff's claims. The Court held a hearing in this
matter on April 9, 2001, and a pre-trial conference is scheduled for June 20,
2001. Management believes it has many meritorious defenses and intends to
conduct a vigorous defense. In the event the case results in a substantial
judgment against the company, however, the judgment could have a severe material
effect on quarterly or annual operating results.
Settlement of Mellon Litigation
On June 25, 1998, Mellon Bank FSB ("Mellon") filed suit against Alexander
Wescott & Co., Inc. ("AWC") and the company in a district court in the Southern
District of New York. Mellon alleged that either the company or AWC owe it
$326,000, a sum Mellon purportedly paid to both entities when it acted as escrow
agent for the company in a private placement of securities with certain
institutional investors. On or about July 27, 1998, AWC filed its answer,
counterclaim and cross-claim against Mellon and NCT. AWC specifically requested
that the court: (1) dismiss Mellon's amended complaint against AWC; (2) grant
AWC commissions totaling $688,000 owed to AWC by the company; (3) order the
company to issue 784,905 shares of its common stock; (4) declare that AWC is
entitled to keep the $326,000 sought by Mellon; and (5) order the delivery of a
warrant to purchase 461.13 shares of the common stock of NCT Audio. In March
2000, all parties reached a resolution of no material financial or other
consequence to the company, which has been subsequently approved by the court,
in which all matters have been resolved.
Settlement of Advancel Litigation
On September 16, 1999, certain former shareholders and optionees (the
"Claimants") of Advancel, a majority owned subsidiary of the company, filed a
Demand for Arbitration against the company with the American Arbitration
Association in San Francisco, CA. On April 25, 2000, both parties reached a
resolution of the matter. All parties withdrew all charges and claims with
exception to the following. Regarding the Stock Purchase Agreement, NCT and
Advancel did not release the Claimants from any claims arising out of or
relating to Claimants' use, misuse, destruction or theft of NCT and/or
Advancel's property, confidential information, trade secrets or intellectual
property or any claims arising out of or relating to the Proprietary Information
and Invention Agreements. Also, NCT and Advancel did not release Claimants from
any of their obligations under the Non-compete Covenants. NCT has no further
obligations to the Claimants under the Stock Purchase Agreement as a result of
the resolution of this matter, which was of no financial or other consequence to
the company.
NCT Audio Arbitration
On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against TST and TSA
(the "Respondents") alleging, among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio, breach of fiduciary
duty as a majority shareholder owed to NCT Audio which holds 15% of the
outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. NCT Audio seeks recision of the purchase agreement and recovery of
monies paid to TST for TSA's assets. Concurrently, NCT Audio commenced a
preliminary injunction proceeding in the Delaware Court of Chancery, seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration proceeding. NCT Audio subsequently withdrew such court action. On
December 8, 1999, Respondents filed an answer and counterclaim in connection
with the arbitration proceeding. Respondents asserted their counterclaim to
recover (1) the monies and stock owned under the extension agreements; (2) 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; (3) expenses associated with extending NCT Audio's time
to close the transaction; and (4) certain legal expenses incurred by
Respondents. There were no material developments in this matter during the
period covered by this report.
The company believes there are no other patent infringement claims,
litigation, matters or unasserted claims other than the matters discussed above
that could have a material adverse effect on financial position and results of
operations of the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Prior to the January 6, 1999 delisting of NCT's common stock from NASDAQ's
National Market System, the company's common stock was listed on the NASDAQ/NMS
under the symbol "NCTI". NCT's common stock currently trades on the NASDAQ OTC
Bulletin Board under the symbol "NCTI". High and low last sale information for
NCT's common stock for specified quarterly periods is set forth below:
1999 2000
----------------------------------------------
HIGH LOW HIGH LOW
---------- ---------- ---------- ----------
1st Quarter $0.440 $0.190 $1.700 $0.160
2nd Quarter $0.480 $0.230 $1.220 $0.360
3rd Quarter $0.285 $0.172 $0.515 $0.295
4th Quarter $0.225 $0.115 $0.405 $0.172
On April 9, 2001, the last reported sale of NCT's common stock as reported
by the NASDAQ OTC Bulletin Board was $0.138. As of April 9, 2001, there were
approximately 55,000 beneficial holders of record of NCT's common stock.
The company has neither declared nor paid any dividends on its shares of
common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the company and
such other factors as the Board of Directors deems relevant. The company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations, and has no intention of declaring dividends for the
foreseeable future.
See Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview" for a description of the company's sales
of unregistered securities during the year ended December 31, 2000.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below is derived from
the historical financial statements of the company. The data set forth below is
qualified in its entirety by and should be read in conjunction with Item 8 -
"Financial Statements and Supplementary Data" and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
are included elsewhere in this document.
(In thousands of dollars and shares, except per share amount)
Years Ended December 31,
------------------------------------------------------------
1996 1997 1998 1999 2000
- ------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
Product sales, net $ 1,379 $ 1,720 $ 2,097 $ 2,208 $ 2,001
Advertising/media revenue - - - - 828
Engineering and development services 547 368 425 1,303 83
Technology licensing fees and royalties 1,238 3,630 802 3,552 9,928
------------ --------- --------- --------- ----------
Total revenues $ 3,164 $ 5,718 $ 3,324 $ 7,063 $ 12,840
------------ --------- --------- --------- ----------
COSTS AND EXPENSES:
Cost of product sales $ 1,586 $ 2,271 $ 2,235 $ 2,767 $ 1,839
Royalty expense - - - - 288
Cost of advertising/media - - - - 814
Cost of engineering and development services 250 316 275 2,216 55
Selling, general and administrative 4,890 5,217 11,238 11,878 11,408
Research and development 6,974 6,235 7,220 6,223 4,412
Interest (income) expense, net 17 1,397(3) (429) 552 1,849
Equity in net (income) loss of unconsoldiated
Unconsolidated Affiliates 80 - - - -
Other (income) expense, net 192 130 (3,032)(4) 7,198(5) 2,499 (6)
------------ --------- --------- --------- ----------
Total costs and expenses $ 13,989 $ 15,566 $ 17,507 $ 30,834 $ 23,164
------------ --------- --------- --------- ----------
NET (LOSS) $ (10,825) $ (9,848) $(14,183) $(23,771) $ (10,324)
Less:
Preferred stock beneficial feature and
dividend requirement - 1,623 3,200 10,567 4,673
Accretion of difference betwen carrying
Amount and redemption amount of
Redeemable preferred stock - 285 485 494 113
------------ --------- --------- --------- ----------
Net (loss) attributable to
common stockholders $ (10,825) $(11,756) $(17,868) $(34,832) $ (15,110)
============ ========= ========= ========= ==========
Weighted average number of common
Shares outstanding(1) - basic and diluted 101,191 124,101 143,855 190,384 292,758
============ ========= ========= ========= ==========
NET (LOSS) $ (0.11) $ (0.09) $ (0.12) $ (0.18) $ (0.05)
============ ========= ========= ========= ==========
Years Ended December 31,
------------------------------------------------------------
1996 1997 1998 1999 2000
------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $ 5,881 $ 17,361 $ 15,465 $ 13,377 $ 39,382
Total current liabilities 3,271 2,984 5,937 7,728 23,386
Long-term debt - - - 4,107 3,761
Accumulated deficit (83,673) (93,521) (107,704) (131,475) (141,799)
Stockholders' equity (deficit)(2) 2,610 14,377 3,426 (367) 9,858
Working capital (deficiency) (1,312) 11,696 (1,187) (3,281) (9,727)
(1) Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible preferred stock, since their effect would be
antidilutive.
(2) The company has never declared nor paid cash dividends on its common stock.
(3) Includes interest expense of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997.
(4) Includes a $3.2 million gain from the exercise of an option received from
NXT in connection with the cross license agreement entered into by the
Company.
(5) Includes a $2.4 million charge in connection with the company's write down
of its investment in TSA to its estimated net realizable value; a $1.8
million reserve for promissory note and pre-acquisition costs related to
PPI; and a $3.1 million charge for the impairment of goodwill.
(6) Includes $3.1 million charge for the impairment of goodwill
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included herein.
A. Forward-Looking Statements
Statements in this Annual Report on Form 10-K, which are not historical
facts, are forward-looking statements, which involve risks and uncertainties. We
generally use the words "believes," "expects," "intends," "plans,"
"anticipates," "likely," "will" and similar expressions to identify forward -
looking statements. The company's actual results in fiscal 2001 and beyond may
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the company. Important factors that could cause actual
results to differ materially include but are not limited to the company's
ability to: achieve profitability; achieve a competitive position in design,
development, licensing, production and distribution of technologies and
electronic systems; produce a cost effective product that will gain acceptance
in relevant consumer and other product markets; increase revenues from products;
realize funding from technology licensing fees, royalties, product sales, and
engineering and development services to sustain the company's current level of
operation; timely introduce new products; continue its current level of
operations to support the fees associated with the company's patent portfolio;
maintain satisfactory relations with its customers; attract and retain key
personnel; prevent invalidation, abandonment or expiration of patents owned or
licensed by the company and expand its patent holdings to diminish reliance on
core patents; have its products utilized beyond noise attenuation and control;
maintain and expand its strategic alliances; and protect company know-how,
inventions and other secret or unprotected intellectual property.
B. Overview
NCT Group, Inc., which we refer to as NCT or the company, is a technology
developer with an extensive portfolio of proprietary algorithms and a variety of
product offerings for consumer, commercial and industrial applications. The
company specializes in the utilization of sound and signal waves to reduce
noise, improve signal-to-noise ratio and enhance sound quality. Commercial
application of the company's technologies is comprised of a number of product
offerings, including NoiseBuster(R) consumer and communications active noise
reduction, or ANR headsets; ProActive(R) ANR industrial earmuffs and headsets;
Gekko(TM) flat speakers; and ClearSpeech(R) microphones, speakers and other
products. In addition to products, NCT's algorithms are available for licensing
to manufacturers for use in commercial and consumer products.
During 2000, NCT focused its efforts on the development of Distributed
Media Corporation, or DMC, a wholly owned subsidiary of NCT, which was formed in
November 1998. DMC is a microbroadcasting media company that delivers licensed
CD-quality music as well as on-air and billboard advertising to out-of-home
commercial and professional venues via a digital network of place-based
micrbroadcasting stations, called Sight & Sound(TM). The Sight & Sound (TM)
system consists of a central control network that communicates to a digital
broadcast station, which plays music selections and advertisements through flat
panel speakers. The speaker grilles double as visual billboards. NCT Audio
Products, Inc will provide the speakers.
As of December 31, 2000, the company and its business units held 585
patents and related rights worldwide and an extensive portfolio of proprietary
algorithms, library of know-how and other unpatented technology. Management
believes that its intellectual property portfolio prevents other competitors and
potential competitors from participating in certain commercial areas without
licenses from the company. The company's intellectual property allows it to
develop its major product lines.
The company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products.
Management believes that the company's investment in its technology has resulted
in the expansion of the value of its intellectual property portfolio and
improvement in the functionality, speed and cost of components and products.
The company's operating revenues are comprised of technology licensing fees
and royalties, product sales, engineering and development services and
advertising media revenue. Operating revenues in 2000 consisted of approximately
15.6% in product sales, 0.6% in engineering and development services, 77.3% in
technology licensing fees and royalties and 6.5% in advertising media revenue.
The company continues its transition from a firm focused principally on research
and development of new technology to a firm focused on the commercialization of
its technology through technology licensing fees, royalties, product sales and
microbroadcasting media advertising. Historically, the company derived the
majority of its revenues from engineering and development funding provided by
established companies willing to assist the company in the development of its
active noise and vibration control technology, and from technology license fees
paid by such companies. Management expects that technology licensing fees,
royalties, product sales and microbroadcasting media advertising revenue will
become the principal sources of the company's revenue as the commercialization
of its technology proceeds. As distribution channels are established and as
product sales and market acceptance and awareness of the commercial applications
of the company's technologies build as anticipated by management, revenues from
technology licensing fees, royalties, product sales and microbroadcasting media
advertising revenue are forecasted to fund an increasing share of the company's
requirements. The generation of cash from these revenue sources, if realized,
will reduce the company's dependence on engineering and development funding.
The company continued its practice of marketing its technology through
licensing to third parties for fees, generally by obtaining technology license
fees when initiating joint ventures and alliances with new strategic partners,
and subsequent royalties. The company has entered into a number of alliances and
strategic relationships with established firms for the integration of its
technology into products. The speed with which the company can achieve the
commercialization of its technology depends in large part upon the time taken by
these firms and their customers for product testing and their assessment of how
best to integrate the company's technology into their products and manufacturing
operations. While the company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed.
Presently, the company is selling products through six of its alliances:
Walker is manufacturing and selling industrial silencers; Siemens is buying and
contracting with the company to install quieting headsets for patient use in
Siemens' magnetic resonance imaging machines; Ultra is installing production
model aircraft cabin quieting systems in the SAAB 340 turboprop aircraft; OKI is
integrating ClearSpeech(R) algorithm into large scale integrated circuits for
communications applications; and BE Aerospace and Long Prosper are providing
NoiseBuster(R) components for United Airlines' and five other international
carriers' comprehensive in-flight entertainment and information systems.
Management believes these developments, among others help demonstrate the range
of commercial potential for the company's technology and will contribute to the
company's transition from engineering and development to technology licensing
fees, royalties and product sales.
Through the September 2000 acquisition of Pro Tech, the company has
expanded its presence in the telecommunications headset market. Pro Tech is
currently expanding its headset product line for telephony, cellular and
multimedia communications and is positioning itself to increase market share in
the lightweight headset market.
The company is certified under the International Standards Organization
product quality program known as "ISO 9000", and continues to successfully
maintain its certification. The availability of high-quality, low-cost
electronic components for integration into the company's products also is
critical to the commercialization of the company's technology. The company is
working with its strategic partners and other suppliers to reduce the size and
cost of the company's systems, so that the company will be able to offer
low-cost electronics and other components suitable for high-volume production.
Since its inception, the company has incurred substantial losses from
operations which have been recurring and amounted to $141.8 million on a
cumulative basis through December 31, 2000. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock and or notes
convertible into common stock, (3) technology licensing fees, (4) royalties, (5)
product sales, (6) engineering and development funds received from strategic
partners and customers, and (7) advertising media revenues.
The company's internally generated funds in 2000 were not sufficient to
cover the operating costs of the company. The company was able to continue its
operations during 2000 by raising additional capital to fund its operations for
2000 and beyond. Refer to "Liquidity and Capital Resources" below and to Notes 1
and 13 - notes to the consolidated financial statements. The company's ability
of its revenue sources, especially its technology license fees, royalties,
product sales and microbroadcasting advertising revenue, to generate significant
cash for the company's operations is critical to the company's long term
success. The company cannot predict whether it will be successful in obtaining
market acceptance of its new products or in completing its current negotiations
with respect to licenses and royalty revenues.
In 2000, the company and its subsidiaries entered into certain
transactions, which provided additional funding. These transactions included the
issuance of secured convertible notes; the Series G Convertible Preferred Stock
private placement; the Pro Tech Series A Convertible Preferred Stock private
placement; issuance of shares of common stock in lieu of the cash owed to
suppliers and consultants to settle certain obligations of the company; and
private placements of shares of common stock. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources" and in
Note 13 - notes to the consolidated financial statements.
As of December 31, 2000, cash and cash equivalents amounted to $1.2 million
and working capital (deficit) was $(9.7) million. Management believes that
currently available funds will not be sufficient to sustain the company for the
next 12 months. Such funds consist of available cash and cash from the exercise
of warrants and options, the funding derived from technology licensing fees and
royalties and product sales and engineering development revenue. Reducing
operating expenses and capital expenditures alone may not be sufficient, and
continuation as a going concern is dependent upon the level of realization of
funding from technology licensing fees and royalties and product sales and
engineering and development revenue, all of which are presently uncertain. In
the event that technology licensing fees, royalties, product sales,
microbroadcasting advertising revenue and engineering and development revenue
are not realized as planned, then management believes additional working capital
financing must be obtained through the private placement of additional equity of
the company in the form of common stock, convertible preferred stock and/or
convertible debt. There is no assurance any such financing is or would become
available.
There can be no assurance that sufficient funding will be provided by
technology license fees, royalties, product sales, microbroadcasting advertising
revenue and engineering and development revenue. In that event, the company
would have to substantially reduce its level of operations. These reductions
could have an adverse effect on the company's relationships with its strategic
partners and customers. Uncertainty exists with respect to the adequacy of
current funds to support the company's activities until positive cash flow from
operations can be achieved, and with respect to the availability of financing
from other sources to fund any cash deficiencies.
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The propriety of using the going concern
basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private financings and other funding sources to meet its
obligations. The uncertainties described in the preceding paragraphs raise
substantial doubt at December 31, 2000 about the company's ability to continue
as a going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amount of liabilities that might result from the outcome
of these uncertainties.
C. Results of Operations
Year ended December 31, 2000 compared with year ended December 31, 1999.
Total revenues in 2000 increased by 80.3% to $12.8 million from $7.1
million in 1999 reflecting increases in each of the company's revenue sources.
Total costs and expenses during the same period decreased by 24.9%, or $7.7
million, primarily due to the write down of an investment in an unconsolidated
affiliate ($2.4 million) and a reserve for promissory notes and pre-acquisition
costs ($1.8 million) recorded in 1999.
Technology licensing fees and royalties increased by 175% or $6.3 million
to $9.9 million from $3.6 million in 1999. The technology licensing fees and
royalties for 2000 were primarily due to a $3.6 million technology license fee
from ITC, a $2.4 million technology license fee from Pro Tech, a $2.0 million
technology license fee from Vidikron of America, Inc., $1.1 million recognition
of deferred revenue with respect to two site licenses entered into in 2000 and
$0.5 million prepaid royalties.
Product sales decreased in 2000 by 9.1% to $2.0 million from $2.2 million
in 1999 reflecting the decreased sales of the Gekko(TM) flat speakers, the
NoiseBuster(R) product line and the ClearSpeech(R) product line.
Revenue from engineering and development services decreased in 2000 by
93.6% to $0.1 million from $1.3 million in 1999 primarily due to research and
development formerly conducted at Advancel was outsourced to ITC commencing in
the third quarter of 2000. The company continues to focus on products utilizing
its hearing, audio, communications and microphone technologies, products which
have been developed within a short time period and are targeted for rapidly
emerging markets. Cost of engineering and development services decreased in 2000
by 98% to $0.1 million primarily due to attrition of Advancel employees and
completion of certain on going contracts.
Cost of product sales decreased 35.7% to $1.8 million in 2000 from $2.8
million in 1999, the decrease was primarily due to a reduction of product sales
for the year ended December 31, 2000 as compared to the year ended December 31,
1999. The product gross profit margin improved to 8% from (25)% in 1999 due
primarily to the sale of product inventory and reduction of new product
manufacture.
Selling, general and administrative expenses for the year decreased by 3.3%
or $0.4 million to $11.4 million from $11.8 million in 1999 which was primarily
due to a decrease in litigation and patent expenses as well as a decrease in
selling and marketing related expenses, primarily advertising and headcount and
travel related expenses. At December 31, 2000, selling, general and
administrative expenses included an $0.8 million charge to bad debt expense
relating to the reduction in value, at December 31, 2000, of the marketable
securities included as consideration in the Teltran license transaction. Such
marketable securities were issued to the company in January 2001.
Research and development expenditures in 2000 decreased by 29.1% to $4.4
million from $6.2 million in 1999, primarily through attrition of Advancel
employees in 1999 and 2000. Commencing in the third quarter of 2000, research
and development formerly conducted at Advancel has been outsourced to ITC.
Included in the company's total expenses were non-cash expenditures for
depreciation and amortization of $2.0 million each for 2000 and 1999.
In each of 1999 and 2000, the company recorded a $3.1 million writedown for
the impairment of goodwill, related to the company's ownership of NCT Audio, and
results from conversions and exchanges of NCT Audio's common stock and preferred
stock for the company's common stock. Interest expense includes $0.3 million for
a beneficial conversion feature and non-cash interest charges related to the
convertible notes.
Interest expense increased to $1.9 million in 2000 from $0.6 million in
1999. The 2000 interest expense was primarily due to the recording of a
beneficial conversion feature of $1.0 million in connection with the March 27,
2000 convertible note, classified as interest expense and original issue
discount amounts of $0.1 million in connection with certain promissory notes
entered into in 2000.
The company has net operating loss carryforwards of $104.8 million and
research and development credit carryforwards of $2.0 million for federal income
tax purposes at December 31, 2000. No tax benefit for these operating losses has
been recorded in the company's financial statements. The company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
Year ended December 31, 1999 compared with year ended December 31, 1998.
Total revenues in 1999 increased by 112% to $7.1 million from $3.3 million
in 1998 reflecting increases in each of the company's revenue sources. Total
costs and expenses during the same period increased by 76% or $13.3 million,
primarily due to the write down of an investment in an unconsolidated affiliate
($2.4 million), the impairment of goodwill ($3.1 million) and a reserve for
promissory notes and pre-acquisition costs ($1.8 million). Further, 1998 other
income/expense included a $3.2 million gain from the sale of NXT stock.
Technology licensing fees and royalties increased by 343% or $2.8 million
to $3.6 million from $0.8 million in 1998. The technology licensing fees and
royalties for 1999 were primarily due to the $0.2 million technology license fee
and $0.9 million prepaid royalty from STMicroelectronics S.A. ("ST"), an $0.8
million license fee from L&H and other technology licensing fees and royalties
aggregating $1.7 million. (see Note 5 - notes to the financial statements for
further details).
Product sales increased in 1999 by 5% to $2.2 million from $2.1 million in
1998 reflecting the increased sales of the Gekko(TM) flat speakers, the
NoiseBuster(R) product line and the ClearSpeech(R) product line.
Revenue from engineering and development services increased in 1999 by 207%
to $1.3 million from $0.4 million in 1998 primarily due to the contract between
Advancel Logic Corporation ("Advancel") and ST. (see Note 5 - notes to the
financial statements for further details).
Cost of product sales increased 24% to $2.8 million in 1999 from $2.2
million in 1998 and the product margin deteriorated to (25)% from (7)% in 1998.
The negative margin of $0.6 million in 1999 was primarily due to charges of $0.4
million for slow movement of inventory and tooling obsolescence related to the
NoiseBuster(R) product lines and NCT Audio's subwoofers, $0.4 million for
royalty expense and $0.2 million for the write down of NCT Audio's raw
materials. The negative margin of $0.1 million in 1998 was primarily due to
reserves for slow moving inventory and charges for tooling obsolescence in the
amount of $0.5 million related to the NoiseBuster(R) product lines.
Cost of engineering and development services increased in 1999 by 706% to
$2.2 million primarily due to the contract between Advancel and ST. The gross
margin on engineering and development service was a loss of (70%) for 1999 due
to the recording of a reserve for estimated expenses to complete the ST project.
Selling, general and administrative expenses for the year increased by 5%
or $0.6 million to $11.8 million from $11.2 million in 1998 which was primarily
due to amortization of goodwill and increased legal expenses.
Research and development expenditures in 1999 decreased by 14% to $6.2
million from $7.2 million in 1998, primarily due to decreased spending on
research and development and the reduction in force in August 1999.
Included in the company's total expenses were non-cash expenditures for
depreciation and amortization of $2.0 million for 1999 and $1.0 million in 1998.
The company reduced its investment in an unconsolidated affiliate to 15% of
equity and recorded a $2.4 million charge for the write-down of its investment
to its estimated net realizable value.
In 1999, the company recorded $3.1 million for the impairment of goodwill.
The company also recorded a reserve of $1.8 million for the PPI promissory notes
including interest expense and pre-acquisition costs. Interest expense includes
$0.3 million for a beneficial conversion feature and non-cash interest charges
related to the convertible notes. The 1998 other income consists of the gain the
company realized upon the exercise of a stock option and the subsequent sale of
NXT plc ordinary shares. The option had been acquired by the company in
connection with a cross license agreement among the company, NXT plc and NXT.
In 1999, interest income decreased to less than $0.1 million from $0.4
million in 1998 principally due to lower cash resources. Interest expense
increased to $0.4 million in 1999 from less than $0.1 million in 1998, primarily
due to the issuance of convertible notes during 1999.
The company has net operating loss carryforwards of $101.2 million and
research and development credit carryforwards of $1.7 million for federal income
tax purposes at December 31, 1999. No tax benefit for these operating losses has
been recorded in the company's financial statements. The company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
D. Liquidity and Capital Resources
The company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $141.8 million on a
cumulative basis through December 31, 2000. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) convertible debt, (4) technology licensing fees, (5)
royalties, (6) product sales, (7) engineering and development funds received
from strategic partners and customers, and (8) advertising media revenues.
Management believes that currently available funds will not be sufficient
to sustain the company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees and royalties and product sales and engineering
development revenue. Reducing operating expenses and capital expenditures alone
may not be sufficient, and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties,
product sales, microbroadcasting advertising revenue and engineering and
development revenue are not realized as planned, then management believes
additional working capital financing must be obtained through the private
placement of additional equity of the company in the form of common stock,
convertible preferred stock and/or convertible debt. There is no assurance any
such financing is or would become available.
As previously noted, on January 6, 1999, NASDAQ notified the company that
the company's securities were delisted from the NASDAQ National Market effective
with the close of business on January 6, 1999. The company's common stock is
reported on the OTC Bulletin Board. While delisting of the company's common
stock has not had an adverse effect on the company's operations, it may make it
more difficult for the company to raise additional capital to fund future
operations.
There can be no assurance that sufficient funding will be provided by
technology license fees, royalties, product sales, and microbroadcasting
advertising revenue and engineering and development revenue. In that event, the
company would have to substantially reduce its level of operations. These
reductions could have an adverse effect on the company's relationships with its
strategic partners and customers. Uncertainty exists with respect to the
adequacy of current funds to support the company's activities until positive
cash flow from operations can be achieved, and with respect to the availability
of financing from other sources to fund any cash deficiencies.
At December 31, 2000, cash and cash equivalents were $1.2 million. Such
balance was invested in interest bearing money market accounts.
The company's working capital decreased to a deficit of $(9.7) million at
December 31, 2000, from a deficit of $(3.3) million at December 31, 1999. This
$6.4 million decrease was primarily due to additional DBSS installation related
expenses, which utilized the remainder of the restricted cash at December 31,
2000 and additional operating expenses incurred due to the three acquisitions
completed during 2000.
During 2000, the net cash used in operating activities was $10.5 million,
compared to $10.6 million used in operating activities during 1999, an decrease
of $0.1 million. The decrease in net cash used in operating activities for the
year ended December 31, 2000 is primarily due to the reduction of the net loss.
The net cash provided by financing activities amounted to $10.1 million,
primarily due to the additional $1.0 million secured convertible note (see Note
10 - "Notes to the Consolidated Financial Statements" for further details), net
proceeds of $2.0 million from the Series G Preferred Stock financing (see Note
13 - "Notes to the Consolidated Financial Statements" for further details), net
proceeds of $2.3 million from the sale of returnable shares (see Note 13 -
"Notes to the Consolidated Financial Statements" for further details), net
proceeds of $1.5 million from the sale of subsidiary Series A Preferred Stock
(see Note 13 - "Notes to the Consolidated Financial Statements" for further
details), collection of subscription receivable of $1.0 million and $1.0 million
proceeds from the sale subsidiary common stock (see Note 13 - "Notes to the
Consolidated Financial Statemnts" for further details).
The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
Because the company did not meet its revenue targets in either 1999 or
2000, it was necessary for the company to enter into certain transactions, which
provided additional funding as follows:
The Series F Convertible Preferred Stock
On January 27, 2000, the Series F Preferred Stock Certificate of
Designations was amended to obligate the company to issue up to seventy-seven
million shares of its common stock upon the conversion of the 12,500 designated
shares of Series F Preferred Stock, as noted above. Such increase in the number
of shares of common stock was made in the interest of investor relations of the
company.
Under the terms of the Series F Subscription Agreement entered into August
10, 1999 that the company would be required to make certain payments in the
event of its failure to effect conversion in a timely manner. In connection with
the Series F Preferred Stock, the company would be obligated to redeem the
excess of the stated value over the amount permitted to be converted into common
stock. Such additional amounts would be treated as obligations of the company.
At various dates through December 31, 2000 the other 7,526 shares of Series F
Preferred Stock have been converted into 48,776,638 shares of the company's
common stock. Presently, there are no shares of Series F Preferred Stock
outstanding.
Series G Convertible Preferred Stock
On January 25, 2000, the Board of Directors designated a new series of
preferred stock based upon a negotiated term sheet, the Series G Convertible
Preferred Stock ("Series G Preferred Stock"). The Series G Preferred Stock
consists of 5,000 designated shares, par value of $0.10 per share and a stated
value of one thousand dollars ($1,000) per share with a cumulative dividend of
four percent (4%) per annum on the stated value payable upon conversion in
either cash or common stock. On March 6, 2000, as amended March 10, 2000, the
company and an accredited investor entered into an agreement under which the
company sold an aggregate stated value of $2.0 million (2,004 shares) of Series
G Preferred Stock, in a private placement pursuant to Regulation D of the
Securities Act of 1933 (the "Securities Act") for an aggregate of $1.750
million. The company received proceeds, net of expenses, of $1.7 million. Each
share of Series G Preferred Stock is convertible into fully paid and
nonassessable shares of the company's common stock pursuant to a predetermined
conversion formula which provides that the conversion price will be the lesser
of (i) the average of the closing bid price for the common stock on the
securities market on which the common stock is being traded for five (5)
consecutive trading days prior to the date of conversion; or (ii) the fixed
conversion price of $0.71925. The company filed a registration statement on
April 20, 2000, (amended on June 13, 2000), to register such shares of common
stock for the conversion of the Series G Preferred Stock and the related
warrant. In connection with the Series G Preferred Stock transaction, on March
6, 2000, the company granted a warrant for 150,000 shares of the company's
common stock with an expiration date of March 31, 2005 and an exercise price of
$0.71925. In accordance with SFAS No. 123, the company estimated the fair market
value of this warrant to be $0.1 million, using the following assumptions in
applying the Black-Scholes valuation method: risk-free interest rates of 6.14%,
volatility of 1, and a term of three years. Such amount is included in the
preferred stock dividend requirement for the year ended December 31, 2000.
Secured Convertible Notes
In 1999 and 2000, the company received proceeds aggregating $4.0 million
from the issuance of secured convertible notes as described herein. Carole
Salkind, spouse of a former director and an accredited investor, subscribed and
agreed to purchase secured convertible notes of the company in an aggregate
principal amount of $4.0 million. A secured convertible note for $1.0 million
was signed on January 26, 1999, and proceeds were received on January 28, 1999.
The note matured on January 25, 2001 and earns interest at the prime rate as
published from time to time in The Wall Street Journal from the issue date until
the note becomes due and payable. NCT defaulted on that repayment. The Holder
has the right at any time on or prior to the day the note is paid in full, to
convert at any time, all or from time to time, any part of the outstanding and
unpaid amount of the note into fully paid and non-assessable shares of common
stock of the company at the conversion price. The conversion price, as amended
by the parties on September 19, 1999, of the notes and any future notes, shall
be the lesser of (1) 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; (2) the average of the closing bid price for the common
stock on the securities market on which the common stock is being traded, for
five consecutive trading days prior to the date of conversion; or (3) the fixed
conversion price of $0.17. In no event will the conversion price be less than
$0.12 per share. The Holder was obligated purchase the remaining $3.0 million
principal amount of the secured convertible notes on or before June 30, 1999.
The company agreed to extend such date for the purchase of remaining
installments of secured convertible notes to April 15, 2000. On various dates,
the Holder has purchased additional installments of the remaining $3.0 million
principal amount of the secured convertible notes. As of March 27, 2000, the
company had received proceeds aggregating $4.0 million from the Holder and had
issued secured convertible notes with the same terms and conditions of the note
described above.
On January 25, 2001, NCT defaulted on the repayment of $1.0 million of
secured convertible notes. Under the terms of the default provisions in the
note, the company may be obligated to issue 1,034,972 shares of common stock.
Supplier and Consultant Shares
During 2000 and 2001, the company issued 4,171,098 shares of its common
stock to pay current amounts due (approximately $0.7 million as of December 31,
2000) and future amounts due (approximately $0.8 million as of December 31,
2000) to certain consultants and suppliers. Such 4,171,098 shares of the
company's common stock were registered under Registration No. 333-47084.
In 1999, the company issued 13,154,820 shares of its common stock to settle
certain of its obligations to certain suppliers and consultants, of which
12,759,778 shares were registered under Registration Statement No. 333-87757.
The issuance of these shares of common stock of the company represented $2.5
million of obligations for which the company did not need to use its cash
resources. In June 2000, a consultant surrendered 776,316 of such NCT shares of
common stock to the company for failure to fulfill its performance obligations.
Private Placement of Common Stock
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties, product sales, engineering and development
revenue and advertising media revenues or additional capital. In that event, the
company would have to cut back its level of operations substantially in order to
conserve cash. These reductions could have an adverse effect on the company's
relations with its strategic partners and customers. (see Note 1 - "Notes to the
Consolidated Financial Statements" for further details).
The company believes that the level of financial resources available to it
may be a critical component in the company's ability to continue as a going
concern. The company may elect to raise additional capital, from time to time,
through equity or debt financing in order to capitalize on business
opportunities and market conditions.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 2000 about the company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
E. Capital Expenditures
The company intends to continue its business strategy of working with
supply, manufacturing, and distribution and marketing partners to commercialize
its technology. The benefits of this strategy include: (1) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies; (2)
utilization of the manufacturing capacity of the company's allies, enabling the
company to integrate its active technology into products with limited capital
investment; and (3) access to well-established channels of distribution and
marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of December
31, 2000, and other than the matter discussed above, no material commitments are
anticipated in the near future.
ITEM 7A. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The company's primary market risk exposures are fluctuations in interest
rates and foreign exchange rates. The company is exposed to short-term interest
rate risk on certain of its debts and trade accounts receivable sales. The
company does not use derivative financial instruments to hedge cash flows for
such obligations. In the normal course of business, the company employs
established policies and procedures to manage these risks.
Based upon a hypothetical 10 percent proportionate increase in interest
rates from the average level of interest rates during the last twelve months,
and taking into consideration expected investment positions, commissions paid to
selling agents, growth of new business and the expected borrowing level of
variable-rate debt the expected effect on net income related to our financial
instruments would be immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Reports of the Independent Auditors Goldstein Golub Kessler LLP,
Richard A. Eisner & Company, LLP and the financial statements and accompanying
notes are filed as part of this Annual Report on Form 10-K.
Page
-----
Independent Auditors' Report F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-3
Consolidated Statements of Operations and Consolidated
Statements of Comprehensive Loss for the years ended
December 31, 1998, 1999 and 2000 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 F-8
Notes to Consolidated Financial Statements F-9
Schedule 11 - Valuation and Qualifying Accounts For the years
ended December 31, 1998, 1999 and 2000 F-58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On July 17, 2000, the Company notified its independent accountants, Richard
A. Eisner & Co., LLP ("RAE") that the auditing services of RAE would no longer
be required. RAE's dismissal was approved by the registrant's Board of
Directors. RAE originally was selected as the company's independent accountants
in January, 1995 to audit the company's consolidated financial statements as of
and for the year ended December 31, 1994.
During the two fiscal years ended December 31, 1999, and during the
subsequent interim period preceding their dismissal as the company's independent
accountants, there were no disagreements with RAE on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of RAE,
would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report. RAE's reports on the company's
consolidated financial statements as of and for the years ended December 31,
1999 and December 31, 1998, did not contain any adverse opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
On July 17, 2000, the company engaged the accounting firm of Goldstein
Golub Kessler LLP ("GGK") as independent accountants to audit the consolidated
financial statements of the company for the fiscal year ending December 31,
2000. The engagement was authorized by the registrant's Board of Directors.
During the fiscal year ended December 31, 1999, and the subsequent period,
neither the company nor any person on the company's behalf consulted GGK
regarding either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the company's consolidated financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages, positions and the offices
held by each of the executive officers and directors of NCT as of March 31,
2001.
Name Age Positions and Offices
- ------ ---- ---------------------
Michael J. Parrella 53 Chairman of the Board of Directors and
Chief Executive Officer
Jay M. Haft 64 Director
John J. McCloy II 63 Director
Samuel A. Oolie 64 Director
Cy E. Hammond 46 Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
Irving M. Lebovics 50 Senior Vice President, Global Sales
James A. McManus 61 President and Chief Executive Officer of
Distributed Media Corporation
Irene Lebovics 48 President and Secretary
Michael A. Hayes, Ph.D. 48 Senior Vice President, Chief Technical
Officer
Jonathan M. Charry, Ph.D. 53 Senior Vice President, Corporate Development
Michael J. Parrella currently serves as Chairman of the Board of Directors
and Chief Executive Officer. Mr. Parrella was elected Chairman of the Board of
Directors on April 21, 2000, on which date he relinquished the position of
President. From November 1994 to July 1995, Mr. Parrella served as Executive
Vice President. Prior to that, from February 1988 until November 1994, he served
as President and Chief Operating Officer. He initially became a director in 1986
after evaluating the application potential of NCT's noise cancellation
technology. At that time, he formed an investment group to acquire control of
the Board of Directors and to raise new capital to restructure NCT and its
research and development efforts. Mr. Parrella also serves as Chief Executive
Officer and Acting President of NCT Audio a position to which he was elected on
September 4, 1997. He became a director of NCT Audio on August 25, 1998. On
January 5, 2000, Mr. Parrella was elected Acting Chief Executive Officer of
Advancel. Mr. Parrella is a director of Advancel, serves as Chairman of the
Board of DMC, and serves as Chairman of the Board of NCT Hearing.
Jay M. Haft currently serves as a director of NCT and had served as
Chairman of the Board of Directors until April 21, 2000. From November 1994 to
July 1995, he served as President. He also serves as a director of NCT's
subsidiaries, NCT Audio, DMC, Advancel and NCT Hearing. Mr. Haft is a strategic
and financial consultant for growth stage companies. He is currently of counsel
to Parker Duryee Rosoff & Haft, in New York. He was previously a senior
corporate partner of such firm (1989-1994) and prior to that, a founding partner
of Wofsey, Certilman, Haft et al (1966-1988). Mr. Haft is active in
international corporate finance, mergers and acquisitions, as well as in the
representation of emerging growth companies. He has actively participated in
strategic planning and fund raising for many high-tech companies, leading edge
medical technology companies and technical product, service and marketing
companies. He is a Managing General Partner of Gen Am "1" Venture Fund, an
international venture capital fund. Mr. Haft is a director of numerous public
and private corporations, including RVSI, Inc. (OTC), DCAP Group, Inc. (OTC),
Encore Medical Corporation (OTC), Viragen, Inc. (OTC), PC Service Source, Inc.
(OTC), DUSA Pharmaceuticals, Inc. (OTC), Oryx Technology Corp. (OTC), and Thrift
Management, Inc. (OTC). He served as a Commissioner on the Florida Commission
for Government Accountability to the People. Mr. Haft serves as Treasurer of the
Miami City Ballet and is a Trustee of Florida International University.
John J. McCloy II currently serves as a director of NCT. He served as Chief
Executive Officer from September 1987 to November 1994 and as Chairman of the
Board of Directors from September 1986 to November 1994. In addition, he served
as Chief Financial Officer from November 1990 to February 1993 and as its
Secretary-Treasurer from October 1986 to September 1987. Mr. McCloy was
appointed a director of NCT Audio on November 14, 1997. Since 1981, he has been
a private investor concentrating on venture capital and early stage investment
projects in a variety of industries. Mr. McCloy is the Chairman of Mondial Ltd.
and Unified Waste Services. He is a director of American University in Cairo and
the Sound Shore Fund, Inc.
Sam Oolie currently serves as a director of NCT. Since his appointment on
September 4, 1997, Mr. Oolie has also served as a director of NCT Audio. He is
Chairman of NoFire Technologies, Inc., a manufacturer of high-performance,
fire-retardant products, and has held that position since August 1995. Since
July 1985, he has also served as Chairman of Oolie Enterprises, an investment
company. Mr. Oolie currently serves as a director of Avesis, Inc. and Comverse
Technology, Inc. He served as a director of CFC Associates, a venture capital
partnership, from January 1984 to December 1999.
Cy E. Hammond currently serves as Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of NCT. He joined NCT as Controller
in January 1990 and was appointed a Vice President in February 1994. Mr. Hammond
also serves as Acting Chief Financial Officer and Treasurer of NCT Audio, a
position to which he was elected on September 4, 1997, and Acting Chief
Financial Officer, Treasurer and Assistant Secretary for Advancel, a position to
which he was elected on January 5, 2000. During 1989, he was Treasurer and
Director of Finance for Alcolac, Inc., a multinational specialty chemical
producer. Prior to 1989 and from 1973, Mr. Hammond served in several senior
finance positions at the Research Division of W.R. Grace & Co., the last of
which included management of the division's worldwide financial operations.
Irving M. Lebovics currently serves as Senior Vice President, Global Sales.
He joined NCT in February 1998 as Vice President, Worldwide Sales. From January
1996 to February 1998 Mr. Lebovics was a principal of Enhanced Signal
Processing, which exclusively sold NCT's technologies to large original
equipment manufacturers. From 1993 to 1996, Mr. Lebovics served as Vice
President of Sales for Kasten Chase Applied Research, a wide area network
hardware and software provider to companies such as Dow Jones and the Paris and
Madrid stock exchanges. From 1985 to 1993, Mr. Lebovics served as Vice President
of Sales for Relay Communications, a provider of PC-to-mainframe communications
software and Microcom, Inc. (which acquired Relay Communications), a leading
provider of modems and local area network equipment including bridges and
routers. Irving M. Lebovics is the spouse of Irene Lebovics, President of NCT.
James McManus currently serves as President and Chief Executive Officer of
DMC, a position he has held since March 1999. Prior to that and from April 1998,
he served as a consultant to DMC. He started his career as a Certified Public
Accountant in California. During the 10 years he spent with the Disney Company
in the financial area, Disney's activities included the development of
Audio-Animatronics, Walt Disney World, Disney Theme Hotels, the City Planning
Board for Lake Buena Vista, Florida, and Disney's joint venture with Florida
Telephone. Subsequent to Disney, he designed and executed a financial turnaround
plan for Great Adventure Park in New Jersey. Later, Mr. McManus ran his own
computer consulting firm for several years providing customized computer systems
for small and medium size businesses. He was a member of the Radio City Music
Hall management team that revitalized New York's famous landmark, first as Chief
Financial Officer and then for 10 years as President and CEO. Mr. McManus has
been active in the business community with involvement as Director, New York
Council of the Boy Scouts of America; Director, Hugh O'Brian Youth Organization;
Director, Association to Help Retarded Children; The Mayor's Summer Youth Jobs
Program and others.
Irene Lebovics currently serves as President and Secretary of NCT and
President of NCT Hearing. On January 5, 2000, Ms. Lebovics was elected Acting
Chief Marketing Officer and Secretary of Advancel. She joined NCT as Vice
President of NCT and President of NCT Medical Systems in July 1989. In January
1993, she was appointed Senior Vice President of the company. In November 1994,
Ms. Lebovics became President of NCT Hearing. From August 1, 1995, to May 1,
1996, she also served as Secretary of NCT. In 1999, Ms. Lebovics was appointed
as Executive Vice President. In April 2000, she became President of NCT. Ms.
Lebovics has held various positions in product marketing with Bristol-Myers, a
consumer products company, and in advertising with McCaffrey and McCall. Ms.
Lebovics is the spouse of Irving Lebovics NCT's Senior Vice President of Global
Sales.
Michael A. Hayes, Ph.D. currently serves as Senior Vice President, Chief
Technical Officer after joining NCT in 1996. On January 5, 2000, he was
appointed Acting Chief Technical Officer of Advancel. During 1995 and 1994, Dr.
Hayes served as Deputy Project Director, Research Support for Antarctic Support
Associates, with operations in Chile, New Zealand, Australia, and Antarctica.
From 1991 to 1994, he served as Deputy Program Manager, Special Payloads, for
Martin Marietta Government Services (formerly General Electric Government
Services) while directly managing critical spacecraft sub-system and instrument
development for Goddard Space Flight Center. Prior to 1991, Dr. Hayes served as
a research faculty member at Georgia Institute of Technology, and as a Senior
Process Engineer at Texas Instruments.
Jonathan M. Charry, Ph.D. currently serves as Senior Vice President of
Corporate Development. Dr. Charry was formerly Chairman and CEO of Digital Power
Networks, Inc. and Environmental Research Information, Inc. He has held
appointments as a Rockefeller Foundation Fellow and Assistant Professor at the
Rockefeller University, Adjunct Professor in Applied Social Psychology at New
York University, and Senior Research Scientist at the New York Institute of
Basic Research. He is a member of the American Psychological Association, The
Rockefeller University Chapter of Sigma Xi, the American Association for the
Advancement of Science, and the New York Academy of Sciences.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the company's officers and directors, and persons who own more than 10% of a
registered class of the company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10% stockholders are required by
regulations of the Securities and Exchange Commission to furnish the company
with copies of all such reports. Based solely on its review of the copies of
such reports received by it, or written representations from certain reporting
persons that no reports were required for those persons, the company believes
that, during the period from January 1, 2000 to December 31, 2000, all filing
requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with except that Jonathan Charry did not timely file
a Form 3 when he became Senior Vice President, Corporate Development but Mr.
Charry has subsequently filed a report on Form 5 to report his initial
beneficial ownership.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this item is contained in a proxy statement that
the Registrant will file on or before April 30, 2001, and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required under this item is contained in a proxy statement that
the Registrant will file on or before April 30, 2001, and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On January 26, 1999, Carole Salkind, an accredited investor and spouse of a
former director, subscribed and agreed to purchase secured convertible notes of
the company in an aggregate principal amount of $4.0 million. A secured
convertible note for $1.0 million was signed on January 26, 1999, and the
company received the proceeds on January 28, 1999. The note matured on January
25, 2001 and earns interest at the prime rate as published from time to time in
The Wall Street Journal from the issue date until the note becomes due and
payable. The Holder has the right at any time on or prior to the day the note is
paid in full, to convert at any time, all or from time to time, any part of the
outstanding and unpaid amount of the note into fully paid and non-assessable
shares of common stock of the company at the conversion price. The conversion
price, as amended by the parties on September 19, 1999, of the note and any
future notes, is the lesser of (i) the lowest closing transaction price for the
common stock on the securities market on which the common stock is being traded,
at any time during September 1999; (ii) the average of the closing bid price for
the common stock on the securities market on which the common stock is being
traded for five (5) consecutive trading days prior to the date of conversion; or
(iii) the fixed conversion price of $0.17. In no event will the conversion price
be less than $0.12 per share. The Holder agreed to purchase the remaining $3.0
million principal amount of the secured convertible notes on or before June 30,
1999. The company agreed to extend such date for the purchase of remaining
installments of secured convertible notes to April 15, 2000. On various dates
through March 22, 2000, the Holder purchased additional installments of the
remaining $3.0 million principal amount of the secured convertible notes and NCT
issued secured convertible notes with the same terms and conditions of the note
described above.
On January 25, 2001, NCT defaulted on the repayment of $1.0 million of
secured convertible notes. The default provisions in the note imposed a penalty,
the default amount, of $100,000 (10% of the principal payment in default).
Default interest from the date of default is due on the principal in default and
the default amount at the rate of 5% plus prime. We registered 1,034,972 shares
of common stock that we may be obligated to issue pursuant to the default
provisions in the note.
On February 13, 2001, the Holder and the company entered into an unsecured
promissory note in the amount of $0.5 million. Such principal amount and accrued
interest was due and payable on April 14, 2001. The promissory note bears
interest at the rate of 7% per annum and includes the issuance of warrants to
purchase $0.5 million worth of either NCT's common stock at $0.21 per share or
Pro Tech's common stock at $0.44 per share. In addition, the Holder can elect to
convert the principal and interest into either NCT's or Pro Tech's common stock
at the share price of the warrants. As of March 30, 2001, the company had
received proceeds aggregating $4.5 million from the Holder and had issued
secured and unsecured convertible notes as described above.
On various dates in 2000, the company's Senior Vice President, Corporate
Development, entered into several short-term promissory notes to borrow funds
from the company in anticipation of cash overrides due under the incentive
compensation arrangement described above. As of December 31, 2000, three
promissory notes were outstanding for an aggregate principal amount owed to the
company of $69,379. The notes bear interest at the prime lending rate as
published in The Wall Street Journal on the date of issuance of the notes plus
one percent, or an annual rate of 10.5% for the notes outstanding at December
31, 2000.
PART IV
ITEM 14. Exhibits, Financial Statements Schedules and
Reports on Form 8-K.
(a) (1) Financial Statements. The following financial statements are filed
as part of this Form 10-K.
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000.
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss for the years ended December 31, 1998, 1999 and 2000.
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1998, 1999 and 2000.
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1999 and 2000.
Notes to Consolidated Financial Statements.
(a) (2) Financial Statement Schedules.
Report of Independent Auditors with Respect to Schedule.
Schedule II. Valuation and Qualifying Accounts.
Other schedules have been omitted as they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
(a) (3) Exhibits. The exhibits listed on the accompanying Index to Exhibits
are filed as part of this Annual Report on Form 10-K.
(b) No report on Form 8-K was filed during the last quarter of the year covered
by this Annual Report on Form 10-K.
NCT Group, Inc.
Index to Exhibits
Item 14(a)(3)
Exhibit
Number Description of Exhibit
2(a) Stock Purchase Agreement dated August 21, 1998, among the Company,
Advancel Logic Corporation and the Holders of the Outstanding
Capital Stock of Advancel Logic Corporation, incorporated by
reference to Exhibit 2 of the Company's Registration Statement on
Form S-3 (Registration No. 333-64967) filed on September 30, 1998,
as amended by Amendment No. 1 thereto filed on October 30, 1998.
3(a) Restated Certificate of Incorporation of the Company filed in the
Office of the Secretary of State of the State of Delaware on
September 23, 1996, incorporated herein by reference to Exhibit 3(a)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
3(b) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
State of the State of Delaware on June 20, 1997, incorporated by
reference to Exhibit 3(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
* 3(c) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
State of the State of Delaware on October 21, 1998.
3(d) Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on October 29, 1997,
incorporated by reference to Exhibit 3(c) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
3(e) Certificate of Increase in the Number of Shares in the Series C
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on November 14,
1997, incorporated by reference to Exhibit 3(d) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
3(f) Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on July 24, 1998,
incorporated by reference to Exhibit 4 of the Company's Registration
Statement on Form S-3 (Registration No. 333-64967) filed on
September 30, 1998, as amended by Amendment No. 1 thereto filed on
October 20, 1998.
3(g) By-laws of the Company, incorporated herein by reference to Exhibit
3(b) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
3(h) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
the State of Delaware on July 29, 1999, incorporated herein by
reference to Exhibit 3(h) to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1999.
3(i) Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed in the Office of the Secretary of
the State of Delaware on July 18, 2000, incorporated by reference to
the Company's Registration Statement on Form S-8 filed on October
13, 2000.
4(a) Warrant to purchase 125,000 shares of common stock of the Company at
a purchase price of $.20 per share issued to John J. McCloy II,
incorporated herein by reference to Exhibit 4(a) to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of common stock of the
Company at a purchase price of $.75 per share issued to John J.
McCloy II, incorporated herein by reference to Exhibit 4(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(c) Warrant #BW-2-R to purchase 862,500 shares of common stock of the
Company at a purchase price of $.75 per share issued to Michael J.
Parrella, incorporated herein by reference to Exhibit 4(c) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(d) Warrant #BW-4-R to purchase 201,250 shares of common stock of the
Company at a purchase price of $.75 per share issued to Irene
Lebovics, incorporated herein by reference to Exhibit 4(d) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(e) Warrant #BW-9-R and #BW-46-R to purchase 218,500 shares of common
stock of the Company at a purchase price of $.75 per share issued to
Jay M. Haft, incorporated herein by reference to Exhibit 4(e) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4(f) Secretary's Certificate dated March 20, 1998, as to a two (2) year
extension of the expiration dates of the Warrants described in 4(b),
(c), (d) and (e) above, incorporated herein by reference to Exhibit
4(f) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
4(g) Warrant Agreement, dated as of January 20, 1988, between the Company
and American Stock Transfer Company, as Warrant Agent, relating to
certain warrants to purchase common stock of the Company at a price
of $.40 per share issued to Sam Oolie, Oolie Enterprises, John J.
McCloy II, and Michael J. Parrella, incorporated herein by reference
to Exhibit 4(g) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
* 4(h) Certificate of Designations, Preferences and Rights of Series E
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of State of the State of Delaware on December 24,
1998.
4(i) Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of the State of Delaware on September 8, 1999,
incorporated herein by reference to Exhibit 4(i) to Pre-effective
Amendment No. 1 to the Company's Registration Statement on Form S-1
(Registration No. 333-35210) filed on June 13, 2000.
4(j) Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series F Convertible Preferred Stock of the Company
filed in the Office of the Secretary of the State of Delaware on
January 27, 2000, incorporated herein by reference to Exhibit 4(j)
to Pre-effective Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-35210) filed on June 13,
2000.
4(k) Certificate of Designations, Preferences and Rights of Series G
Convertible Preferred Stock of the Company filed in the Office of
the Secretary of the State of Delaware on March 6, 2000,
incorporated herein by reference to Exhibit 4(k) to Pre-effective
Amendment No. 1 to the Company's Registration Statement on Form S-1
(Registration No. 333-35210) filed on June 13, 2000.
4(l) Corrected Certificate of Designations, Preferences and Rights of
Series G Convertible Preferred Stock of the Company filed in the
Office of the Secretary of the State of Delaware on March 10, 2000,
incorporated herein by reference to Exhibit 4(l) to Pre-effective
Amendment No. 1 to the Company's Registration Statement on Form S-1
(Registration No. 333-35210) filed on June 13, 2000.
4(m) Certificate of Amendment of the Certificate of Designations,
Preferences and Rights of Series G Convertible Preferred Stock of
the Company filed in the Office of the Secretary of the Sate of
Delaware on September 27, 2000, incorporated herein by reference to
Exhibit 4(m) of the Company's Pre-effective Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-47084)
filed on October 25, 2000.
** 10(a) 1987 Incentive Stock Option Plan, incorporated herein by reference
to Exhibit 10(b) to Amendment No. 1 on Form S-1 to the Company's
Registration Statement on Form S-8 (Registration No. 33-19926).
** 10(b) Stock Option Agreement, dated as of February 26, 1987, between
the Company and John J. McCloy II, incorporated herein by reference
to Exhibit 10(b) to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
** 10(c) Stock Option Agreement, dated as of February 26, 1987, between
the Company and Michael J. Parrella, incorporated herein by
reference to Exhibit 10(c) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
** 10(d) Stock Option Agreement, dated as of February 26, 1987, between
the Company and Sam Oolie, incorporated herein by reference to
Exhibit 10(d) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
** 10(e) Stock Option Agreement, dated as of June 17, 1987, between the
Company and John J. McCloy II, incorporated herein by reference to
Exhibit 10(f) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
** 10(f) Stock Option Agreement, dated as of March 29, 1990, between
the Company and Jay M. Haft, incorporated herein by reference to
Exhibit 10(m) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
10(k) Patent Assignment Agreement, dated as of June 21, 1989, among
George B.B. Chaplin, Sound Alternators Limited, the Company,
Active Noise and Vibration Technologies, Inc. and Chaplin Patents
Holding Co., Inc., incorporated herein by reference to Exhibit
10(aa) to Amendment No. 2 on Form S-1 to the Company's Registration
Statement (Registration No. 33-19926).
10(l) Joint Venture and Partnership Agreement, dated as of November 8,
1989, among the Company, Walker Manufacturing Company, a division of
Tenneco, Walker Electronic Mufflers, Inc. and NCT Muffler, Inc.,
incorporated herein by reference to Exhibit (c)(1) to the Company's
Current Report on Form 8-K, dated November 8, 1989, as amended on
Form 8, dated January 24, 1990.
10(l)(1) Letter Agreement between Tenneco Automotive, a division of Tennessee
Gas Pipeline Company, and the Company dated November 22, 1993,
incorporated herein by reference to Exhibit 10(a) to the Company's
Current Report on Form 8-K dated November 22, 1993.
10(l)(2) Stock Purchase Agreement between Tenneco Automotive, a division of
Tennessee Gas Pipeline Company, and the Company dated December 14,
1993, incorporated herein by reference to Exhibit 10(b) to the
Company's Current Report on Form 8-K dated November 24, 1993.
10(l)(3) Transfer Agreement among Walker Manufacturing Company a division
of Tennessee Gas Pipeline Company, Walker Electronic Mufflers,
Inc., the Company, NCT Muffler, Inc., Chaplin Patents Holding
Co., Inc. and Walker Noise Cancellation Technologies dated November
15, 1995, incorporated herein by reference to Exhibit 10(l)(3)
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995. ***
10(l)(4) License Agreement between Chaplin Patents Holding Co., Inc.
and Walker Electronic Mufflers, Inc. dated November 15, 1995,
incorporated herein by reference to Exhibit 10(l)(4) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. ***
10(l)(5) License Agreement between the Company and Walker Electronic
Mufflers, Inc. dated November 15, 1995, incorporated herein by
reference to Exhibit 10(l)(5) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995. ***
10(l)(6) Support, Research and Development Agreement among Walker Electronic
Mufflers, Inc., the Company, NCT Muffler, Inc. and Chaplin Patents
Holding Co., Inc. dated November 15, 1995, incorporated herein by
reference to Exhibit 10(l)(6) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995. ***
10(l)(7) Mutual Limited Release by (i) the Company, NCT Muffler, Inc. and
Chaplin Patent Holding Co., Inc. and (ii) Tennessee Gas Pipeline
Company and Walker Electronic Mufflers, Inc. dated November 15,
1995, incorporated herein by reference to Exhibit 10(l)(7) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. ***
10(m) Technical Assistance and License Agreement, dated March 25, 1991,
among the Company, Foster Electric Co., Ltd. and Foster/NCT Headsets
International Ltd., incorporated herein by reference to Exhibit
10(nn) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.***
10(m)(1) Amendment, dated April 16, 1991, to Technical Assistance and License
Agreement, dated March 25, 1991, among the Company, Foster
Electric Co., Ltd. and Foster/NCT Headsets International Ltd.,
incorporated herein by reference to Exhibit 10(nn)(1) to Amendment
No. 5 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991.
10(m)(2) Letter Agreement between Foster Electric Co., Ltd. and the
Company dated November 22, 1993, incorporated herein by reference
to Exhibit 10(b) to the Company's Current Report on Form 8-K dated
November 22, 1993.
10(m)(3) Letter agreement among Foster Electric Co., Ltd., Foster NCT
Headsets International, Ltd. and the Company dated July 28, 1995,
incorporated herein by reference to Exhibit 10(a) of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
10(n) Joint Development Cooperation Agreement, dated June 28, 1991,
between AB Electrolux and the Company, incorporated herein by
reference to Exhibit 10(oo) to Amendment No. 3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.***
10(n)(1) Amendments to the Joint Development Cooperation Agreement, dated
June 28, 1991, between AB Electrolux and the Company as set forth in
the First Amendment to Joint Development Cooperation Agreement,
dated September 1, 1993, between AB Electrolux and the Company,
incorporated herein by reference to Exhibit 10(z)(1) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.***
10(n)(2) Second Amendment to Joint Development Cooperation Agreement, dated
January, 1994 between AB Electrolux and the Company, incorporated
herein by reference to the Exhibit 10(z)(2) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
10(o) Letter Agreement, dated March 19, 1992, between Siemens Medical
Systems, Inc. and NCT Medical Systems, Inc., incorporated herein
by reference to Exhibit 10(pp) to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(o)(1) OEM Agreement between the Company and Siemens AG dated November 24,
1993, incorporated herein by reference to Exhibit 10(a) to the
Company's Current Report on Form 8-K dated November 24, 1993.
** 10(p) Noise Cancellation Technologies, Inc. Stock Incentive Plan (as
adopted April 14, 1993, and amended through August 16, 1996),
incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 filed with the Securities &
Exchange Commission on August 30, 1996 (Reg. No. 333-11213).
10(r) Asset Purchase Agreement, dated September 16, 1994, between Active
Noise and Vibration Technologies, Inc. and the Company, incorporated
herein by reference to Exhibit 2 to the Company's Current Report on
Form 8-K filed September 19, 1994.
** 10(s) Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors (as adopted November 15, 1994 and amended through August
16, 1996), incorporated herein by reference to Exhibit 4 to the
Company's Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on August 30, 1996
(Reg. No. 333-11209).
10(t) Variation of Teaming Agreement between Noise Cancellation
Technologies, Inc. and Ultra Electronics Limited dated April 6,
1995, incorporated herein by reference to Exhibit 10(c) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(1) Agreement for Sale and Purchase of Part of the Business and Certain
Assets among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited and Ultra Electronics Limited
dated April 6, 1995, incorporated herein by reference to Exhibit
10(d) of the Company's Current Report on Form 8-K filed August 4,
1995.
10(t)(2) Patent License Agreement among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated April 6, 1995, incorporated herein by
reference to Exhibit 10(e) of the Company's Current Report on Form
8-K filed August 4, 1995.
10(t)(3) License Agreement between Chaplin Patents Holding Co., Inc.
and Ultra Electronics Limited dated April 6, 1995, incorporated
herein by reference to Exhibit 10(f) of the Company's Current Report
on Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra
Electronics Limited dated May 15, 1995, incorporated herein by
reference to Exhibit 10(g) of the Company's Current Report on Form
8-K filed August 4, 1995.
** 10(u) Agreement among Noise Cancellation Technologies, Inc., Noise
Cancellation Technologies (UK) Limited, Dr. Andrew John Langley,
Dr. Graham Paul Eatwell and Dr. Colin Fraser Ross dated April 6,
1995, incorporated herein by reference to Exhibit 10(h) of the
Company's Current Report on Form 8-K filed August 4, 1995.
10(w)(1) Cross License Agreement dated April 15, 1997, among Verity Group
plc, New Transducers Limited and Noise Cancellation Technologies,
Inc., incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.***
10(w)(2) Security Deed dated April 14, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
10(w)(3) Common Stock Purchase Option dated April 15, 1997, from Noise
Cancellation Technologies, Inc. to Verity Group plc, incorporated by
reference to Exhibit 10(c) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
10(w)(4) Letter Agreement dated April 17, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
10(x)(1) New Cross License Agreement dated September 27, 1997, among Verity
Group plc, New Transducers Limited, Noise Cancellation
Technologies, Inc. and NCT Audio Products, Inc., incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10(x)(2) Master License Agreement dated September 27, 1997, between New
Transducers Limited and NCT Audio Products, Inc., incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
10(x)(3) Letter Agreement dated September 27, 1997, from Noise Cancellation
Technologies, Inc. to Verity Group plc, incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
10(x)(4) License Agreement dated September 4, 1997, between Noise
Cancellation Technologies, Inc. and NCT Audio Products, Inc.,
incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
10(y) License Agreement dated July 15, 1998, between the Company and NCT
Hearing Products, Inc., incorporated by reference to Exhibit 10 of
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
10(z) License Agreement dated January 25, 1999, between NCT Group, Inc.
and DistributedMedia.com, Inc., incorporated by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
10(aa) Securities Exchange Agreement, dated as of October 9, 1999, among
the Company, Austost Anstalt Schaan and Balmore Funds, S.A.
incorporated by reference to Exhibit 10(a) of the Company's Current
Report on Form 8-K filed on January 12, 2000.
10(ab) Registration Rights Agreement, dated as of October 9, 1999, among
the Company, Austost Anstalt Schaan and Balmore Funds, S.A.
incorporated by reference to Exhibit 10(b) of the Company's Current
Report on Form 8-K filed on January 12, 2000.
10(ac) Securities Purchase Agreement, dated as of December 27, 1999,
among the Company, Austost Anstalt Schaan, Balmore Funds, S.A.
and Nesher, Inc. incorporated by reference to Exhibit 10(c) of
the Company's Current Report on Form 8-K filed on January 12,
2000.
10(ad) Registration Rights Agreement, dated as of December 27, 1999,
among the Company, Austost Anstalt Schaan, Balmore Funds, S.A..
Nesher, Inc. and Libra Finance S.A. incorporated by reference to
Exhibit 10(d) of the Company's Current Report on Form 8-K filed
on January 12, 2000.
10(ae) Amendment No. 1 to the Securities Exchange Agreement, dated as of
March 7, 2000, among the Company, Austost Anstalt Schaan and
Balmore Funds, S.A., incorporated by reference to Exhibit 10(ae)
of the Company's Annual Report on Form 10-K filed on April 14,
2000.
10(af) Letter Agreements dated December 1, 1999, between the Company and
holders of Series F Preferred Stock: Atlantis Capital Fund;
Canadian Advantage Limited Partners; Dominion Capital Fund, Ltd.;
The Endeavour Capital Fund, S.A.; and Sovereign Partners, LP.
incorporated by reference to Exhibit 10(af) of the Company's
Registration Statement on Form S-1 (Registration No. 333-35210)
filed on April 20, 2000.
10(ag) Strategic Alliance and Technology License Agreement entered
into as of May 8, 2000 among NCT Group, Inc., Advancel Logic
Corporation and Infinite Technology Corporation, incorporated by
reference to Exhibit 10(ag) of the Company's Pre-effective
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 333-35210) filed on June 13, 2000.
10(ah) License Agreement Amendment dated effective June 30, 2000, between
NCT Group, Inc., Advancel Logic Corporation and Infinite Technology
Corporation, incorporated herein by reference to Exhibit 10 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2000.
10(ai) Agreement and Plan of Merger dated August 29, 2000, among NCT Group,
Inc, NCT Midcore, Inc. and Midcore Software, Inc., incorporated
herein by reference to Exhibit 2 of the Company's Current Report
on Form 8-K filed on September 13, 2000.
10(aj) Stock Purchase Agreement dated August 18, 2000 by and between NCT
Group, Inc., DistributedMedia.com, Inc., DMC Cinema, Inc. and
Jeff Arthur, LaJuanda Barrera, Robert Crisp, Steven Esrick and
Alan Martin, incorporated herein by reference to Exhibit 10(aj)
of the Company's Pre-effective Amendment No. 1 to Registration
Statement on Form S-1 (Registration No. 333-47084) filed on
October 25, 2000.
10(ak) Securities Purchase and Supplemental Exchange Rights Agreement dated
August 10, 2000 by and among ConnectClearly.com, Inc. NCT Group,
Inc. and Austost Anstalt Schaan, Balmore S.A. and Zakeni Limited,
incorporated herein by reference to Exhibit 10(ak) of the
Company's Pre-effective Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-47084) filed on October 25,
2000.
10(al) Strategic Alliance and Technology Development Amendment dated
effective June 20, 2000, between NCT Group, Inc., Advancel Logic
Corporation and Infinite Technology Corporation, incorporated
herein by reference to Exhibit 10(al) of the Company's
Pre-effective Amendment No. 1 to Registration Statement on Form
S-1 (Registration No. 333-47084) filed on October 25, 2000.
10(am) Securities Purchase and Supplemental Exchange Rights Agreement dated
September 29, 2000 by and among Pro Tech Communications, Inc.,
NCT Group, Inc., Austost Anstalt Schaan, Balmore S.A. and Zakeni
Limited, incorporated herein by reference to Exhibit 10(am) of
the Company's Pre-effective Amendment No. 1 to Registration
Statement on Form S-1 (Registration No. 333-47084) filed on
October 25, 2000.
10(an) Stock Purchase Agreement between NCT Hearing Products, Inc.
and Pro Tech Communications, Inc. dated as of September 13, 2000,
incorporated by reference to Exhibit 10(an) of the Company's
Pre-effective Amendment No. 2 to Registration Statement on Form
S-1 (Registration No. 333-47084) filed on December 12, 2000.
10(ao) License Agreement between NCT Hearing Products, Inc. and
Pro Tech Communications, Inc. dated September 12, 2000,
incorporated by reference to Exhibit 10(ao) of the Company's
Pre-effective Amendment No. 2 to Registration Statement on Form
S-1 (Registration No. 333-47084) filed on December 12, 2000.
10(ap) Subscription Agreement between NCT Networks, Inc. and Subscribers:
Austost Anstalt Schaan; Balmore, S.A.; Amro International, S.A.;
Nesher Ltd.; Talbiya B. Investments Ltd.; and The Gross
Foundation, Inc. (collectively, Holders of Convertible Notes of
NCT Networks, Inc.) dated January 9, 2001, incorporated herein by
reference to Exhibit 10(ap) of the Company's Pre-effective
Amendment No. 3 to Registration Statement on Form S-1
(Registration No. 333-47084) filed on January 26, 2001.
10(aq) Form of Convertible Note of NCT Networks, Inc. dated January
9, 2001, incorporated herein by reference to Exhibit 10(aq) of
the Company's Pre-effective Amendment No. 3 to Registration
Statement on Form S-1 (Registration No. 333-47084) filed on
January 26, 2001.
10(ar) Exchange Right Agreement among NCT Group, Inc. and Holders of
Convertible Notes of NCT Networks, Inc. dated January 9, 2001,
incorporated herein by reference to Exhibit 10(ar) of the
Company's Pre-effective Amendment No. 3 to Registration Statement
on Form S-1 (Registration No. 333-47084) filed on January 26,
2001.
10(as) Registration Rights Agreement among NCT Group, Inc. and Holders of
Convertible Notes of NCT Networks, Inc. dated January 9, 2001,
incorporated herein by reference to Exhibit 10(as) of the
Company's Pre-effective Amendment No. 3 to Registration Statement
on Form S-1 (Registration No. 333-47084) filed on January 26,
2001.
21 Subsidiaries
23(a) Consent of Goldstin Golub Kessler LLP
23(b) Consent of Richard A. Eisner & Company, LLP
23(b) Consent of Peters Elworthy & Moore, Chartered Accountants.
* 99(a) Letter from Peters Elworthy & Moore, Chartered Accountants, to
Noise Cancellation Technologies, Inc. regarding audited financial
statements of the Company's U.K. subsidiaries and reports of Peters
Elworthy & Moore, Chartered Accountants, on their audits of such
financial statements as at December 31, 1999 and for the year ended
December 31, 1999.
99(b) Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
Cancellation Technologies, Inc. regarding audited financial
statements of the Company's U.K. subsidiaries and reports of Peters
Elworthy & Moore, Chartered Accountants, on their audits of such
financial statements as at December 31, 1998 and for the year ended
December 31, 1998, incorporated by reference to Exhibit 99(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
99(c) Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
Cancellation Technologies, Inc. regarding audited financial
statements of the Company's U.K. subsidiaries and reports of Peters
Elworthy & Moore, Chartered Accountants, on their audits of such
financial statements as at December 31, 1997 and for the year ended
December 31, 1997, incorporated by reference to Exhibit 99(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
* 99(d) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Noise Cancellation Technologies, Inc. regarding confirmation
that the accounts of the Company's U.K. subsidiaries for the year
ended December 31, 1999 were audited under auditing standards
substantially similar to US General Accepted Auditing Standards.
99(e) Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
Cancellation Technologies, Inc. regarding confirmation that the
accounts of the Company's U.K. subsidiaries for the year ended
December 31, 1998 were audited under auditing standards
substantially similar to US General Accepted Auditing Standards,
incorporated by reference to Exhibit 99(d) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
** 99(f) Employment Agreement by and between the Company and Paul D.
Siomkos, dated February 26, 1998, incorporated by reference to
Exhibit 99 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998.
* Filed with the Company's Annual Report on Form 10-K for its fiscal
year ended December 31, 1999.
** Pertains to a management contract or compensation plan or
arrangement.
*** Confidential treatment requested for portions of this document. Such
portions have been omitted from the document and identified by
asterisks. Such portions also have been filed separately with the
Commission pursuant to the Company's application for confidential
treatment.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
NCT Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of NCT Group, Inc.
and Subsidiaries (the "Company") as of December 31, 2000, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the Unites States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NCT Group, Inc. and
Subsidiaries as of December 31, 2000 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficiency, and continues to be dependent on public and
private financing to support its business efforts. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan in regard to these matters is also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ GOLDSTEIN GOLUB KESSLER LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 9, 2001
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
NCT Group, Inc.
We have audited the accompanying consolidated balance sheet of NCT Group,
Inc. and subsidiaries (the "Company") as of December 31, 1999, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
and cash flows for each of the years in the two-year period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these financial
statements based on our audits. We did not audit the 1998 and 1999 financial
statements of the Company's two foreign subsidiaries. These subsidiaries
accounted for revenues of approximately $28,000 and $4,000 for the years ended
December 31, 1998 and 1999, respectively, and assets of approximately $218,000
and $164,000 as of December 31, 1998 and 1999, respectively. These statements
were audited by other auditors whose reports have been furnished to us, one of
which contained a paragraph on the subsidiary's dependence on NCT Group, Inc.
for continued financial support. Our opinion, insofar as it relates to the
amounts included for these entities, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
financial statements enumerated above present fairly, in all materials respects,
the consolidated financial position of NCT Group, Inc. and subsidiaries as of
December 31, 1999 and the consolidated results of their operations and their
consolidated cash flows for each of the years in the two-year period ended
December 31, 1999 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has not been able to generate sufficient cash
flow from operating activities to sustain its operations and since it has
incurred net losses since inception and has a working capital deficiency, it has
been and continues to be dependent on equity financing and joint venture
arrangements to support its business efforts. These factors raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
Richard A. Eisner & Company, LLP
New York, New York
February 25, 2000
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Note 3)
(in thousands)
December 31,
1999 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents (Note 3) $ 1,126 $ 1,167
Restricted cash 667 -
Accounts receivable, net of reserves (Note 6) 237 5,483
Inventories, net of reserves (Note 7) 2,265 2,184
Other current assets(Note 9) 152 4,825
----------- -----------
Total current assets 4,447 13,659
Property and equipment, net (Note 8) 449 688
Goodwill, net 3,497 11,711
Patent rights and other intangibles, net (Note 3) 2,296 5,330
Other assets (Note 9) 2,688 7,994
----------- -----------
$ 13,377 $ 39,382
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,647 $ 4,144
Accrued expenses 3,253 5,689
Current maturities of convertible notes (Note 10) - 3,975
Deferred income - 5,652
Other liabilities (Note 11) 828 3,222
Notes Payable - 704
----------- -----------
Total current liabilities 7,728 23,386
----------- -----------
Long term liabilities:
Deferred income - 1,611
Royalty payable (Note 11 ) - 1,150
Convertible notes (Note 10) 4,107 1,000
----------- -----------
Total long term liabilities 4,107 3,761
----------- -----------
Commitments and contingencies
Common stock subject to resale guarantee (Note 12) 1,592 191
----------- -----------
Minority interest in consolidated subsidiary - 2,186
----------- -----------
Preferred stock in subsidiary, $.10 par value, 1,000 shares authorized; issued
and outstanding, 60 and 0 shares, respectively (redemption amount $317,162 and
$0, respectively) 317 -
----------- -----------
Preferred stock in subsidiary, $.10 par value, 1,500 shares authorized; issued
and outstanding, 0 and 1,500 shares, respectively (redemption amount $0 and
$1,515,452, respectively) - -
Stockholders' equity(deficit) (Note 13):
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Series F preferred stock, issued and outstanding, 4,715 and 0 shares,
respectively (redemption amount $4,789,407 and $0, respectively) 2,790 -
Series G preferred stock, issued and outstanding, 0 and 924 shares, respectively
(redemption amount $0 and $783,409, respectively) - 574
Common stock, $.01 par value, authorized 325,000,000 and 450,000,000 shares, respectively;
issued 268,770,739 and 334,149,669 shares, respectively 2,688 3,341
Additional paid-in-capital 130,865 154,838
Unearned portion of compensatory stock, warrants and options (55) (37)
Accumulated other comprehensive income/(loss) 65 (3,321)
Expenses to be paid with common stock (1,282) (562)
Accumulated deficit (131,475) (141,799)
Stock subscriptions receivable (1,000) (213)
Treasury stock, at cost, 6,078,065 shares of common stock (2,963) (2,963)
----------- -----------
Total stockholders' equity(deficit) (367) 9,858
----------- -----------
$ 13,377 $ 39,382
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Note 3)
(In thousands, except per share amounts)
For the Years
Ended December 31,
--------------------------------
REVENUES: 1998 1999 2000
--------- --------- ----------
Technology licensing fees and royalties $ 802 $ 3,552 $ 9,928
Product sales, net 2,097 2,208 2,001
Advertising/media revenue - - 828
Engineering and development services 425 1,303 83
--------- --------- ----------
Total revenues 3,324 7,063 12,840
--------- --------- ----------
COSTS AND EXPENSES:
Cost of product sales 2,235 2,767 1,839
Royalty expense - - 288
Cost of advertising/media revenue - - 814
Cost of engineering and development services 275 2,216 55
Selling, general and administrative 11,238 11,801 11,383
Research and development 7,220 6,223 4,412
Other (income)/expense, net (3,264) (100) (574)
Provision for doubtful accounts 232 77 25
Reserve for promissory notes and preacquisition costs - 1,788 -
Impairment of goodwill - 3,125 3,073
Write down of investment in unconsolidated affiliate (Note 9) - 2,385 -
Interest expense (includes $204 and $1,000 of discounts on
beneficial conversion feature on convertible debt
in 1999 and 2000) 9 578 1,880
Interest income (438) (26) (31)
--------- --------- ----------
Total costs and expenses 17,507 30,834 23,164
--------- --------- ----------
NET (LOSS) (14,183) (23,771) (10,324)
Preferred stock beneficial conversion feature and
dividend requirement 3,200 10,567 4,673
Accretion of difference between carrying amount
and redemption amount of redeemable
preferred stock 485 494 113
--------- --------- ----------
NET (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $(17,868) $(34,832) $ (15,110)
========= ========= ==========
Basic and diluted Net (loss) per share $ (0.12) $ (0.18) $ (0.05)
========= ========= ==========
Weighted average common shares outstanding -
basic and diluted 143,855 190,384 292,758
========= ========= ==========
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
For the Years
Ended December 31,
--------------------------------
1998 1999 2000
--------- --------- ----------
NET (LOSS) $(14,183) $(23,771) $ (10,324)
Other comprehensive income/(loss):
Currency translation adjustment (74) 20 (7)
Unrealized loss on marketable securities - - (3,379)
--------- --------- ----------
COMPREHENSIVE (LOSS) $(14,257) $(23,751) $ (13,710)
========= ========= ==========
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (Note 1)
(in thousands)
Series C Series D Series E
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- ---------- -------- ----------
Balance at December 31, 1997 13 $ 10,458 - $ - - $ -
Shares issued in consideration for patent rights - - - - - -
Return of shares for subscription receivable - - - - - -
Conversion of Series C preferred stock, less expenses of $53 (12) (11,726) - - 2 1,577
Sale of preferred stock - - 6 5,138 9 4,735
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - 1,970 - 775 - 165
Discount on beneficial conversion price to preferred shareholders - - - (673) - (3,179)
Offering of Series A preferred stock in subsidiary - - - - - -
Discount on beneficial conversion price to preferred shareholders - - - - - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - - - - -
Exchange of subsidiary common stock for parent common stock - - - - - -
Payment of stock subscription receivable - - - - - -
Repurchase of common shares - - - - - -
Acquisition of Advancel, less expenses of $24 - - - - - -
Other - - - - - -
Net Loss - - - - - -
Currency translation adjustment - - - - - -
Restricted shares issued for compensation - - - - - -
Compensatory stock options and warrants - - - - - -
-------- ---------- -------- ---------- -------- ----------
Balance at December 31, 1998 1 $ 702 6 $ 5,240 11 $ 3,298
Sale of common stock, less expenses of $17 - - - - - -
Less common stock subject to resale - - - - - -
Conversion of preferred stock (1) (730) (6) (5,273) (4) (2,443)
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - 28 - 33 - 5,929
Discount on beneficial conversion price to preferred shareholders - - - - - (2,666)
Exchange of preferred stock for license fees - - - - (9) (3,631)
Exchange of Series A preferred stock in subsidiary - - - - - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - - - - -
Sale of preferred stock - - - - 2 (487)
Exchange of subsidiary common stock for parent common stock - - - - - -
Shares issued in consideration for patent rights - - - - - -
Shares issued for settlement obligations/prepayments - - - - - -
Less common stock subject to resale - - - - - -
Warrant issued in conjunction with convertible debt - - - - - -
Beneficial conversion feature on convertible note - - - - - -
Net loss - - - - - -
Currency translation adjustment - - - - - -
Shares issued upon exercise of warrants & options - - - - - -
Compensatory stock options and warrants - - - - - -
-------- ---------- -------- ---------- -------- ----------
Balance at December 31, 1999 - $ - - $ - - $ -
Sale of common stock, less expenses of $49 - - - - - -
Less common stock subject to resale - - - - - -
Sale of preferred stock
Conversion of preferred stock - - - - - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - - - - -
Discount on beneficial conversion price to preferred shareholders
Exchange of Series A preferred stock in subsidiary - - - - - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - - - - -
Exchange of subsidiary common stock for parent common stock - - - - - -
Shares issued in consideration for patent rights - - - - - -
Sale of returnable shares of common stock net of commissions of $156 - - - - - -
Shares issued for settlement obligations/prepayments - - - - - -
Less common stock subject to resale - - - - - -
Shares issued as deposit for acquisition - - - - - -
Shares issued for acquisition of subsidiaries - - - - - -
Sale of subsidiary stock in excess of net book value - - - - - -
Liability for make up of value on shares issued to ITC - - - - - -
Warrant issued in conjunction with convertible debt - - - - - -
Beneficial conversion feature on convertible note - - - - - -
Net loss - - - - - -
Currency translation adjustment - - - - - -
Shares issued upon exercise of warrants & options - - - - - -
Valuation of Available for Sale Marketable Securities - - - - - -
Compensatory stock options and warrants - - - - - -
-------- ---------- -------- ---------- -------- ----------
Balance at December 31, 2000 - $ - - $ - - $ -
======== ========== ======== ========== ======== ==========
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (Note 1)
(in thousands)
Series F Series G
Convertible Convertible
Preferred Stock Preferred Stock Common Stock Additional Accumu-
--------------- --------------- --------------- Paid-in lated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ -------- ------ -------- ------- -------- --------- ---------
Balance at December 31, 1997 - $ - - $ - 133,161 $ 1,332 $ 96,379 $ (93,521)
Shares issued in consideration for patent rights - - - - 1,250 12 494 -
Return of shares for subscription receivable - - - - - - - -
Conversion of Series C preferred stock, less expenses
of $53 - - - - 20,665 207 9,889 -
Sale of preferred stock - - - - - - - -
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - (2,910) -
Discount on beneficial conversion price to preferred
shareholders - - - - - - 3,852
Offering of Series A preferred stock in subsidiary - - - - - - (862) -
Discount on beneficial conversion price to preferred
shareholders - - - - - - 673 -
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - (775) -
Exchange of subsidiary common stock for parent common stock - - - - 1,135 11 545 -
Payment of stock subscription receivable - - - - - - - -
Repurchase of common shares - - - - - - - -
Acquisition of Advancel, less expenses of $24 - - - - - - (151) -
Other - - - - 1 - (48) -
Net Loss - - - - - - - (14,183)
Currency translation adjustment - - - - - - - -
Restricted shares issued for compensation - - - - 125 1 96 -
Compensatory stock options and warrants - - - - - - 301 -
------ -------- ------ -------- ------- -------- --------- -----------
Balance at December 31, 1998 - $ - - $ - 156,337 $ 1,563 107,483 $ (107,704)
Sale of common stock, less expenses of $17 - - - - 4,135 41 442 -
Less common stock subject to resale - - - - - - (600) -
Conversion of preferred stock (3) (1,652) - - 65,701 657 9,441 -
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - 5,004 - - - - (10,994) -
Discount on beneficial conversion price to preferred
shareholders - (4,884) - - - - 7,550
Exchange of preferred stock for license fees (1) (574) 3,355
Exchange of Series A preferred stock in subsidiary - - - - 11,700 117 9,189 -
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - (68) -
Sale of preferred stock 9 4,896 - - - - - -
Exchange of subsidiary common stock for parent common stock - - - - 17,738 178 2,454 -
Shares issued in consideration for patent rights - - - - - - 88 -
Shares issued for settlement obligations/prepayments - - - - 13,155 132 2,371 -
Less common stock subject to resale - - - - - - (537) -
Warrant issued in conjunction with convertible debt - - - - - - 446 -
Beneficial conversion feature on convertible note - - - - - - 204 -
Net loss - - - - - - - (23,771)
Currency translation adjustment - - - - - - - -
Shares issued upon exercise of warrants & options - - - - 5 - - -
Compensatory stock options and warrants - - - - - - 41 -
------ -------- ------ -------- ------- -------- --------- -----------
Balance at December 31, 1999 5 $ 2,790 - $ - 268,771 $ 2,688 130,865 $ (131,475)
Sale of common stock, less expenses of $49 - - - - 2,467 25 426 -
Less common stock subject to resale - - - - 600 -
Sale of preferred stock - (5) 2 1,698
Conversion of preferred stock (5) (2,865) (1) (1,159) 28,376 284 3,740 -
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - 80 - 412 - - (492) -
Discount on beneficial conversion price to preferred
shareholders - - - (377) - - 377 -
Exchange of Series A preferred stock in subsidiary - - - - 635 6 311 -
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - - -
Exchange of subsidiary common stock for parent common stock - - - - - - 3,124 -
Shares issued in consideration for patent rights - - - - - - - -
Sale of returnable shares of common stock net of
commissions of $156 - - - - - - 2,275 -
Shares issued for settlement obligations/prepayments - - - - 1,528 15 2,068 -
Less common stock subject to resale - - - -
Shares issued as deposit for acquisition - - - - 245 2 123 -
Shares issued for acquisition of subsidiaries - - - - 30,843 308 9,460 -
Sale of subsidiary stock in excess of net book value - - - - - - 950 -
Liability for make up of value on shares issued to ITC - - - - - - (812) -
Warrant issued in conjunction with convertible debt - - - - - - - -
Beneficial conversion feature on convertible note - - - - - - 1,000 -
Net loss - - - - - - - (10,324)
Currency translation adjustment - - - - - - -
Shares issued upon exercise of warrants & options - - - - 1,285 13 735 -
Valuation of Available for Sale Marketable Securities - - - - - - - -
Compensatory stock options and warrants - - - - - - 88 -
------ -------- ------ -------- ------- -------- --------- -----------
Balance at December 31, 2000 - $ - 1 $ 574 334,150 $ 3,341 $154,838 $ (141,799)
====== ======== ====== ======== ======= ======== ========= ===========
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (Note 1)
(in thousands)
Unearned
Portion of Expenses
Accumulated Stock Compen- to be Paid
Other Subscrip- satory with Treasury Stock
Comprehensive tion Option/ Common ----------------
Income/(Loss) Receivable Warrant Stock Shares Amount Total
-------------- ----------- ---------- --------- ------- -------- ---------
Balance at December 31, 1997 $ 119 $ (390) $ - $ - - $ - $ 14,377
Shares issued in consideration for patent rights - - - - - - 506
Return of shares for subscription receivable - 64 - - 158 (64) -
Conversion of Series C preferred stock, less
expenses of $53 - - - - - - (53)
Sale of preferred stock - (4,000) - - 2,100 (735) 5,138
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - -
Discount on beneficial conversion price to preferred
shareholders - - - - - -
Offering of Series A preferred stock in subsidiary - - - - - - (862)
Discount on beneficial conversion price to preferred
shareholders - - - - - - 673
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - (775)
Exchange of subsidiary common stock for parent
common stock - - - - - - 556
Payment of stock subscription receivable - 326 - - - - 326
Repurchase of common shares - - - - 5,607 (3,292) (3,292)
Acquisition of Advancel, less expenses of $24 - - (94) - (1,787) 1,128 883
Other - - - - - - (48)
Net Loss - - - - - - (14,183)
Currency translation adjustment (74) - - - - - (74)
Restricted shares issued for compensation - - - - - - 97
Compensatory stock options and warrants - - (144) - - - 157
-------------- ----------- ---------- --------- ------- -------- ---------
Balance at December 31, 1998 45 $ (4,000) $ (238) $ - 6,078 $(2,963) $ 3,426
Sale of common stock, less expenses of $17 - - - - - - 483
Less common stock subject to resale - - - - - - (600)
Conversion of preferred stock - - - - - - -
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - -
Discount on beneficial conversion price to
preferred shareholders - - - - - - -
Exchange of preferred stock for license fees - - - - - - (850)
Exchange of Series A preferred stock in subsidiary - - - - - - 9,306
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - (68)
Sale of preferred stock - 3,000 - - - - 7,409
Exchange of subsidiary common stock for parent
common stock - - - - - - 2,632
Shares issued in consideration for patent rights - - - - - - 88
Shares issued for settlement obligations/prepayments - - - (2,503) - - -
Less common stock subject to resale - - - 1,221 - - 684
Warrant issued in conjunction with convertible debt - - - - - - 446
Beneficial conversion feature on convertible note - - - - - - 204
Net loss - - - - - - (23,771)
Currency translation adjustment 20 - - - - - 20
Shares issued upon exercise of warrants & options - - - - - - -
Compensatory stock options and warrants - - 183 - - - 224
-------------- ----------- ---------- --------- ------- -------- ---------
Balance at December 31, 1999 65 $ (1,000) (55) $(1,282) 6,078 $(2,963) $ (367)
Sale of common stock, less expenses of $49 - - - - - - 451
Less common stock subject to resale - - - - - - 600
Sale of preferred stock - 1,000 - - - - 2,693
Conversion of preferred stock - - - - - - -
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - -
Discount on beneficial conversion price to
preferred shareholders - - - - - - -
Exchange of Series A preferred stock in subsidiary - - - - - - 317
Accretion and amortization of discount on beneficial
conversion price to preferred shareholders - - - - - - -
Exchange of subsidiary common stock for parent
common stock - - - - - - 3,124
Shares issued in consideration for patent rights - - - - - - -
Sale of returnable shares of common stock net of
commissions of $156 - - - - - - 2,275
Shares issued for settlement obligations/prepayments - - - (547) - - 1,536
Less common stock subject to resale - - - 1,267 - - 1,267
Shares issued as deposit for acquisition - - - - - - 125
Shares issued for acquisition of subsidiaries - (213) - - - - 9,555
Sale of subsidiary stock in excess of net book value - - - - - - 950
Liability for make up of value on shares issued to ITC - - - (812)
Warrant issued in conjunction with convertible debt - - - - - - -
Beneficial conversion feature on convertible note - - - - - - 1,000
Net loss - - - - - - (10,324)
Currency translation adjustment (7) - - - - - (7)
Shares issued upon exercise of warrants & options - - - - - - 748
Valuation of Available for Sale Marketable Securities (3,379) - - - - - (3,379)
Compensatory stock options and warrants - - 18 - - - 106
-------------- ----------- ---------- --------- ------- -------- ---------
Balance at December 31, 2000 $ (3,321) $ (213) $ (37) $ (562) $6,078 $(2,963) $ 9,858
============== =========== ========== ========= ======= ======== =========
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Years Ended December 31,
---------------------------------------------
1998 1999 2000
------------- ------------- --------------
Cash flows from operating activities:
Net loss $ (14,183) $ (23,771) $ (10,324)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,030 1,970 2,014
Common stock options and warrants issued as consideration for:
Compensation 301 224 106
Operating expenses - 401 497
Costs incurred related to convertible debt - 102
Provision for tooling costs 151 180 -
Provision for inventory - 199 100
Provision for doubtful accounts 232 77 803
(Gain) loss on disposition of fixed assets 34 - (12)
Write down of investment in unconsolidated affiliate (Note 7) - 2,385 -
Preferred stock received for license fees (850) -
Impairment of goodwill (Note 12) - 3,125 3,073
Reserve for promissory note and pre-acquisition costs - 1,788
Beneficial conversion feature on convertible note (Note 8) - 204 1,000
Common stock received for license fee - - (6,000)
Common stock and warrants to be received for license fee - - (384)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (193) 209 (4,624)
(Increase) decrease in license fees receivable 8 192 -
(Increase) decrease in inventories, net (1,986) 858 636
Increase in other assets (12) (1,168) (2,072)
Increase (decrease) in accounts payable and accrued expenses 1,816 2,851 (886)
Increase in other liabilities 48 427 5,562
------------- ------------- --------------
Net cash used in operating activities $ (12,754) $ (10,597) $ (10,511)
Cash flows from investing activities:
Capital expenditures $ (548) $ (51) $ (322)
Decrease in restricted cash - (667) 667
Acquisition of patent rights (822) - -
Acquisition of Advancel (net of $100 cash acquired) 40 - -
Sale of capital equipment 46 - 26
Cash and cash equivalents received from acquisitions - - 88
Acquisition and advances, including $135 of costs (5,134) - -
------------- ------------- --------------
Net cash provided by (used in) investing activities $ (6,418) $ (718) $ 459
------------- ------------- --------------
Cash flows from financing activities:
Proceeds from:
Convertible notes, net (Note8) $ - $ 4,000 $ 989
Advances payable - - 1,955
Sale of preferred stock, net (Note 12) 5,085 7,409 1,963
Sale of subsidiary Series A preferred stock (net) 5,138 - 1,500
Sale of subsidiary common stock (21) - 1,000
Sale of common stock, net (51) 483 500
Sale of returnable shares, net (Note 11) - - 2,275
Collection of subscription receivable 326 - 995
Purchase of treasury stock (3,292) - -
Exercise of stock options, net - - 748
Repayment of Promissory notes - - (1,825)
------------- ------------- --------------
Net cash provided by financing activities $ 7,185 $ 11,892 $ 10,100
------------- ------------- --------------
Effect of exchange rate changes on cash $ (88) $ 20 $ (7)
------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents $ (12,075) $ 597 $ 41
Cash and cash equivalents - beginning of year 12,604 529 1,126
------------- ------------- --------------
Cash and cash equivalents - end of year $ 529 $ 1,126 $ 1,167
============= ============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9 $ 4 $ 3
============= ============= ==============
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding loss on available-for-sale securities $ - $ - $ (3,379)
============= ============= ==============
Issuances of common stock for acquisition of Midcore Software, Inc $ - $ - $ 4,817
============= ============= ==============
Issuances of common stock for acquisition of Theater Radio Network $ - $ - $ 2,500
============= ============= ==============
Issuance of common stock in exchange for prepaid research and engineering expenses $ - $ - $ 3,000
============= ============= ==============
Issuance of common stock to suppliers and consultants $ - $ 2,000 $ 846
============= ============= ==============
Receipt of Pro Tech shaers as payment for license $ - $ - $ 2,430
============= ============= ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Background:
NCT Group, Inc. ("the company") is a technology developer with a portfolio
of proprietary algorithms and a wide variety of product offerings for consumer,
commercial and industrial applications. The company specializes in the
utilization of sound and signal waves to reduce noise, improve signal-to-noise
ratio and enhance sound quality. The company develops its technologies for
integration into a wide range of products for applications serving major markets
in the transportation, manufacturing, commercial, consumer products and
communications industries. The company designs some of its applications so that
other firms can integrate them with their own inventions and technologies to
develop such technology into commercial applications, to integrate the
applications into existing products and to distribute such technologies and
products into various industrial, commercial and consumer markets. The company
also markets its technologies through licensing to third parties for fees and
royalties. Commercial application of our technologies is comprised of a number
of product offerings, including NoiseBuster(R) consumer and communications
active noise reduction, also known as ANR headsets; ProActive(R) ANR industrial
earmuffs and headsets; Gekko(TM) flat speakers; and ClearSpeech(R) microphones,
speakers and other products. The company, through it's wholly-owned subsidiary
DistributedMedia Corporation ("DMC"), a microbroadcasting media company,
delivers licensed CD-quality music as well as on-air and billboard advertising
to out-of-home commercial and professional venues via a digital network of
place-based microbroadcasting stations, called Sight & Sound(TM). The Sight &
Sound(TM) system consists of a central control network that communicates to a
digital broadcast station, which plays music selections and advertisements
through flat panel speakers. The speaker grilles double as visual billboards.
The company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $141.8 million on a
cumulative basis through December 31, 2000. These losses, which include the cost
for development of products for commercial use, have been funded primarily from
(1) the sale of common stock, including the exercise of warrants or options to
purchase common stock, (2) the sale of preferred stock convertible into common
stock, (3) technology licensing fees, (4) royalties, (5) product sales, (6)
engineering and development funds received from strategic partners and customers
and (7) advertising/media revenue.
Cash and cash equivalents amounted to $1.2 million at December 31, 2000. In
addition, the company had $9.7 million negative working capital at December 31,
2000. Management believes that currently available funds will not be sufficient
to sustain the company at present levels for the next 12 months. The company's
ability to continue as a going concern is dependent on funding from several
sources, including available cash, cash from the exercise of warrants and
options, and cash inflows generated from the company's revenue sources:
technology licensing fees and royalties, product sales, and engineering and
development services. The level of realization of funding from the company's
revenue sources is presently uncertain. In the event that anticipated technology
licensing fees and royalties, product sales, and engineering and development
services do not generate sufficient cash, management believes additional working
capital financing must be obtained. There is no assurance any such financing is
or would become available.
In the event that funding from internal sources is insufficient, the
company would have to substantially cut back its level of spending which could
substantially curtail the company's operations. These reductions could have an
adverse effect on the company's relations with its strategic partners and
customers. Uncertainty exists about the adequacy of current funds to support the
company's activities until positive cash flow from operations can be achieved,
and uncertainty exists about the availability of financing from other sources to
fund any cash deficiencies. (see Note 13).
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The propriety of using the going concern
basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private financings and other funding sources to meet its
obligations. The uncertainties described in the preceding paragraphs raise
substantial doubt at December 31, 2000 about the company's ability to continue
as a going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of the
carrying amount of recorded assets or the amount and classification of
liabilities that might result should the company be unable to continue as a
going concern.
2. Acquisitions:
On August 18, 2000, the company acquired 100% of the outstanding capital
stock of Theater Radio Network, Inc. ("TRN"), a provider of entertainment audio
programming in multiplex cinemas nationwide, through a merger with DMC Cinema,
Inc. ("Cinema"), a newly formed subsidiary of the company's wholly- owned
subsidiary, DMC. The acquisition included the company's initial issuance of
7,405,214 restricted shares of its common stock based upon a trailing market
price (as defined in the stock purchase agreement) of $0.3376 per share, for a
total value of $2.5 million and a 7.5% equity interest in Cinema. The
acquisition was accounted for using the purchase method and resulted in goodwill
of approximately $2.8 million. Amounts allocated to goodwill are amortized over
20 years on a straight-line basis. In February 2001, due to a decline in the
trailing market price prior to the effective registration of shares of common
stock, an additional 2,455,248 shares were issued for the acquisition pursuant
to a fill-up provision. Additional NCT shares may be due June 2002 based upon
the trailing market price at that time.
On August 29, 2000, the company acquired 100% of the outstanding capital
stock of Midcore Software, Inc. ("MSI"), provider of Internet infrastructure
software for business networks, through a merger with Midcore Software, Inc.
("Midcore") (formerly known as NCT Midcore, Inc.), a newly formed, wholly-owned
subsidiary of the company. In connection therewith, the company initially issued
13,913,355 restricted shares of its common stock based upon a 10-day weighted
average closing bid price of $0.34626 per share, for an aggregate value of $4.8
million. In addition, the purchase consideration includes $1.7 million to be
paid by the company in cash based upon earned royalties, as defined in the
merger agreement, over 36 months. If after 36 months, the total royalty has not
been earned or if earned, not paid, then the parties shall be entitled to elect,
at the recipients discretion, upon written notice to the company either to (i)
continue to receive payment of the royalties in accordance with the merger
agreement, or (ii) receive the unpaid balance in the form of the company's
common stock, calculated as defined in the merger agreement. The acquisition was
accounted for using the purchase method, and the resulting goodwill of
approximately $6.4 million. Amounts allocated to goodwill are amortized over 20
years on a straight-line basis. In February 2001 due to a decline in the closing
bid price of the company's common stock prior to the effective registration of
the stock, an additional 2,863,891 shares were issued pursuant to a fill-up
provision.
On September 12, 2000, the company's wholly-owned subsidiary, NCT Hearing
Products, Inc. ("NCT Hearing") granted an exclusive license to Pro Tech
Communications, Inc. ("Pro Tech") for rights to certain NCT technologies for use
in light weight cellular, multimedia and telephony headsets. In consideration
for this license, NCT Hearing received 23.7 million shares of Pro Tech's common
stock representing approximately 83% of the common shares issued and
outstanding. The company recognized approximately $2.5 million of license fee
revenue with respect to this transaction. Such amount represents the license fee
revenue applicable to the minority interest shareholders. As a condition
precedent to the transaction, NCT Hearing had arranged $1.5 million in equity
financing for Pro Tech in the form of convertible preferred stock of Pro Tech.
Such convertible preferred stock is convertible into shares of Pro Tech's common
stock or exchangeable for shares of NCT's common stock, at the investors'
election. The acquisition was accounted for using the purchase method, resulting
in negative goodwill of approximately $0.1 million. Amounts allocated to
goodwill are amortized over 20 years on a straight-line basis.
The results of operations of the acquired entities are included in the
company's consolidated results of operations from the respective dates of
acquisition. The pro forma results listed below are unaudited and reflect
purchase accounting adjustments assuming the acquisitions occurred at the
beginning of each fiscal year presented. For years ended 1999 and 2000, pro
forma adjustments include additional amortization expense of $1.5 million and
$0.9 million, respectively. The pro forma results are presented for
informational purposes only and are not necessarily indicative of the future
results of operations of the company or the results of operations of the company
had the acquisitions occurred on January 1, 1999 and January 1, 2000 (in
thousands, except per share data):
Year Ended Year Ended
December 31, December 31,
1999 2000
(UNAUDITED)
------------ ------------
Net revenues $ 10,386 $ 15,834
Net loss $ (25,776) $ (11,431)
Net loss attributable to common shareholders $ (40,841) $ (16,262)
Net loss per common share--basic $ (0.19) $ (0.05)
Net loss per common share--diluted $ (0.19) $ (0.05)
A summary of the assets and liabilities acquired, at estimated fair market
value was as follows:
Assets acquired and liabilities assumed:
Current assets $ 1,484
Property, plant and equipment 272
Goodwill 9,100
Other assets 2,750
Current liabilities (2,726)
Long-term liabilities (1,350)
-----------
Fair market value of acquired entities $ 9,530
===========
3. Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements include the accounts of the company
and its majority-owned subsidiaries after elimination of all significant
inter-company transactions and accounts. Investments in less than majority-owned
affiliates are principally accounted for under the equity method. All other
investments in affiliates are carried at cost.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the financial statements. Actual
results could differ from those estimates.
Reclassifications:
Certain amounts in prior period financial statements have been reclassified
to conform to the current year's presentation.
Income Taxes:
Deferred income taxes are provided for the tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.
Cash and cash equivalents:
Cash and cash equivalents include all highly liquid investments with
original maturities of three months or less. Restricted cash consists of the
balance of an escrow account established in conjunction with the issuance of a
convertible promissory note (see Note 10).
Deferred Charges:
Deferred charges, included on the consolidated balance sheet in other
assets, represent expenses related to the installation of DBSS systems at
customer locations. Such installation expenses consist of labor costs
attributable to contractor installation and outside management fees. The company
amortizes such deferred charges over the five-year life of the customer site
location agreement. In the event a customer site location is de-installed the
unamortized deferred charges relating to that site are then expensed in full. In
2000, the company amortized approximately $0.1 million of deferred charges and
wrote off unamortized charges relating to de-installs of approximately $0.2
million.
Revenue Recognition:
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), which we adopted effective January 1, 2000. SAB 101 addresses, among other
items, when revenue relating to certain license fees should be recognized. The
company performs a detailed analysis of its license fee revenues and records
deferred revenues and associated expenses accordingly. These deferred amounts
are recognized over the life of each specific license.
Revenue, other than license fee revenue accounted for under SAB 101, is
recognized when earned. Revenue from product sales is recognized when the
product is shipped. Revenue from engineering and development services is
generally recognized and billed as the services are performed. However, for
certain engineering and development services contracts, revenue is recognized
using the percentage of completion method after 10% of the total estimated costs
have been incurred. Under the percentage of completion method, revenues and
gross profit are recognized as work is performed based on the relationship of
actual costs incurred to total estimated costs at completion. Estimated losses
are recorded when identified. Revenues recognized under the percentage of
completion method amounted to $0.1, $1.3 million and zero for the years ended
December 31, 1998, 1999 and 2000, respectively.
For technology licensing fees paid by joint venturers, co-venturers,
strategic partners or other licensees which are nonrefundable, revenue is
recognized upon execution of the license agreement unless it is subject to
completion of any performance criteria specified within the agreement, in which
case it is deferred until such performance criteria is met. Royalties are
frequently required pursuant to license agreements or may be the subject of
separately executed royalty agreements. Revenue from royalties is recognized
ratably over the royalty period based upon periodic reports submitted by the
royalty obligor or based on minimum royalty requirements.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
on an average cost basis. The company assesses the realizability of inventories
by periodically conducting a complete physical inventory and reviewing the
movement of inventory on an item-by-item basis to determine the value of items
which are slow moving and obsolete. The potential for near-term product
engineering changes and/or technological obsolescence and current realizability
are considered in determining the adequacy of inventory reserves. At December
31, 1999 and 2000, the company's inventory reserves were $0.5 million and $0.1
million, respectively.
Property and Equipment:
Property and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the depreciable assets using the straight-line
method. Leasehold improvements are amortized over the shorter of the useful
lives or the related lease term.
Software Costs:
It is our policy to capitalize certain costs incurred in connection with
developing or obtaining internal use software. Capitalized software costs are
included in property and equipment and are being amortized over three years.
During the year ended December 31, 2000, $0.1 million was capitalized.
Goodwill, Patent Rights and Other Intangible Assets:
The excess of the consideration paid over the fair value of net assets
acquired in business combinations is recorded as goodwill. Goodwill is also
recorded by the company on the acquisition of minority interests of a subsidiary
of the company for shares of the company's common stock. Goodwill is amortized
using the straight-line method, over periods generally ranging from five to
twenty years. Goodwill amortization expense was $0.1, $1.0 million and $1.0
million for 1998, 1999 and 2000, respectively. Accumulated goodwill amortization
was $4.2 million and $5.3 million at December 31, 1999 and 2000, respectively.
Patent rights and other intangible assets are stated at cost and are
amortized using the straight-line method, over the remaining useful lives,
ranging from one to fifteen years. Amortization expense was $0.5 million, $0.6
million and $0.7 million for 1998, 1999 and 2000, respectively. Accumulated
amortization was $2.9 million and $4.2 million at December 31, 1999 and 2000,
respectively.
At each balance sheet date, the Company evaluates the period of
amortization of intangible assets. The factors used in evaluating the period of
amortization include: (i) current operating results, (ii) project future
operating results, and (iii) any other material factors that effect the
continuity of the business.
The company recognized an impairment loss from goodwill of $3.1 million in
each of 1999 and 2000. No other events have been identified that would indicate
an impairment of the value of material intangible assets recorded in the
accompanying consolidated financial statements.
Advertising:
Advertising costs are expensed as incurred. Advertising expense for years
ended December 31, 1998, 1999 and 2000 was $1.7 million, $1.2 million and $0.3
million, respectively.
Foreign currency translation:
Local currencies are generally considered the functional currency for our
share of foreign investments. The company translates share of foreign assets and
liabilities at exchange rates in effect at the balance sheet dates. Revenues and
expenses are translated using average rates for the year. The resulting foreign
currency translation adjustments are included in other accumulated comprehensive
income/(loss) as a component of stockholders' equity. The currency transaction
gains and losses are included in the consolidated statements of operations and
were not material for any periods presented.
Loss per common share:
The company reports loss per common share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
Generally, the per share effects of potential common shares such as warrants,
options, convertible debt and convertible preferred stock have not been
included, as the effect would be antidilutive (see Notes 12, 13 and 14).
However, when preferred stock will be convertible to common stock at a
conversion rate that is at a discount from the common stock market price at the
time of issuance, the discounted amount is an assured incremental yield, the
"preferred stock dividend requirement," to the preferred shareholders and is
accounted for as an embedded dividend to preferred shareholders. In addition,
when warrants are issued, the fair value of warrants are determined by applying
the Black-Scholes valuation model using the factors in accordance with FAS No.
128. In accordance with EITF 96-13, as codified in EITF 00-19, these warrants
are considered permanent equity instruments since they may only be physically
settled with the issuance of the company's stock. The fair value is deemed to be
a "preferred stock beneficial conversion" feature and is in essence accounted
for as a component of additional paid-in capital.
The company has reflected such beneficial conversion feature and preferred
stock dividend requirement as a preferred stock dividend and as an adjustment to
the net loss attributable to common stockholders.
Concentrations of Credit Risk:
Financial instruments, which potentially subject the company to
concentration of credit risk, consist of cash and cash equivalents and trade
receivables. The company maintains cash and cash equivalents in accounts with
various financial institutions in amounts, which at times, may be in excess of
the FDIC insurance limit. The company has not experienced any losses on such
accounts and does not believe it is exposed to any significant risk with respect
to cash and cash equivalents.
The company sells its products and services to distributors and end users
in various industries worldwide. The company regularly assesses the
realizability of accounts receivable and takes into consideration the value of
past due receivables and the collectibility of such receivables, based on credit
worthiness. The company does not require collateral or other security to support
customer receivables.
Major Customers:
The company derived a significant protion of its revenues from two major
customers during 1999 and three major customers during 2000. For the year ending
1999 and 2000, the company recorded revenue of approximately $3.0 million and
$8.0 million, respectively from these customers. As of December 31, 1999 and
2000, the company had approximately $32,000 and $2.0 million of accounts
receivable resulting from revenue derived from these customers.
Fair Value of Financial Instruments:
The company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, other receivables, accounts
payable, accrued expenses, notes payable and other liabilities. At December 31,
1999 and 2000, the fair value of these instruments approximated their carrying
value. With respect to notes payable, because interest rates adjust with changes
in the prime rate, the fair value of the notes payable is equal to the carrying
amount.
Stock-Based Compensation:
The company has adopted the disclosure only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and continues to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its stock-based compensation plans. (See Note 14).
Comprehensive Loss:
The company reports comprehensive loss in accordance with SFAS No. 130,
Reporting Comprehensive Income ("SFAS 130"). The provisions for SFAS 130 require
the company to report the changes in stockholders' equity from all sources
during the period other than those resulting from investments by and
distributions to shareholders. Accordingly, the consolidated statements of
comprehensive loss are presented, while accumulated other comprehensive loss is
included on the balance sheet as a component of stockholders' equity. Due to
availability of net operating losses, there is no tax effect associated with any
component of other comprehensive loss. Comprehensive loss includes gains and
losses on foreign currency translation adjustments and unrealized losses on
marketable securities.
4. Recent Accounting Pronouncements:
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 138 ("SFAS 138"), Accounting for Certain Derivative Instruments - an
Amendment of FAS 133. SFAS 138 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives). SFAS 138 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management believes the adoption of SFAS 138 will not have a material impact on
the company's consolidated financial statements as the company currently does
not use derivative instruments.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB 25
("FIN 44"). This interpretation clarifies certain issues relating to stock
compensation. FIN 44 is effective July 1, 2000; however, certain conclusions in
this interpretation cover specific events that occurred prior to July 1, 2000.
FIN 44 did not have an impact on the company's consolidated financial
statements.
In September 2000, the FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of SFAS 125. This statement replaced SFAS 125 and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. SFAS 140 is effective for recognition and disclosures of certain
securitization transactions for fiscal years ending after December 15, 2000. As
of December 31, 2000, the company had no such transactions. The company does not
expect FAS 140 will have a significant impact on the company's consolidated
financial statements.
5. Joint Ventures and Other Strategic Alliances:
The company and certain of its majority-owned subsidiaries have entered
into agreements to establish joint ventures and other strategic alliances
related to the design, development, manufacture, marketing and distribution of
its technologies and products containing such technologies. These agreements
generally provide that the company license technology and contribute a nominal
amount of initial capital and that the other parties provide substantially all
of the funding to support the venture or alliance. This support funding often
includes amounts paid or services rendered for engineering and development. In
exchange for this funding, the other parties generally receive a preference in
the distribution of cash and/or profits from the joint ventures or royalties
from these alliances until such time that the support funding (plus an interest
factor in some instances) is recovered. At December 31, 2000, there were no
preferred distributions due to joint venture partners from future profits of the
joint ventures.
Certain of the joint ventures become suppliers to the company and to other
of the joint ventures and transfer products to the related entities based upon
pricing formulas established in the agreements. Such formulas are generally
based upon fully burdened cost, as defined in the agreements.
Technology licensing fees and engineering and development services paid by
joint ventures to the company are recorded as revenue consistent with the
company's revenue recognition policy. Total revenues recorded by the company
relating to the joint ventures and alliances, or their principals, for
technology licensing fees and royalties, engineering and development services
and product sales were as follows (in thousands):
Years ended December 31,
--------------------------------------
Joint Venture/Alliance 1998 1999 2000
- ---------------------------------------- ---------- ---------- -------------
Walker Noise Cancellation Technologies $ - $ - $ -
Ultra Electronics, Ltd. 68 40 49
Siemens Medical Systems, Inc. 102 14 -
AB Electrolux - - -
Oki Electric Industry Co., Ltd. 8 80 269
VLSI Technology, Inc. 285 -
-
STMicroelectronics S.A. &
STMicroelectronics S.r.l 246 2,156 -
Lernout & Hauspie Speech Products N.V. - 800 -
Infinite Technology Corporation - - 3,550
New Transducers Ltd. - 500 -
---------- ---------- ------=-------
Total $ 709 $ 3,590 $ 3,868
========== ========== ==============
Outlined below is a summary of the nature and terms of selected joint
ventures and other strategic alliances:
Ultra Electronics Ltd. ("Ultra") (formerly Dowty Maritime Limited) and the
company entered into a teaming agreement in May 1993 and subsequently amended
such agreement and entered into a licensing and royalty agreement commencing in
1998. Such teaming agreement calls for the collaboration on the design,
manufacture and installation of products to reduce noise in the cabins of
various types of aircraft. In accordance with the agreement, the company
provided informational and technical assistance relating to the aircraft
quieting system and Ultra reimbursed the company for expenses incurred in
connection with such assistance. Ultra was responsible for the marketing and
sales of the products. The company was to supply Ultra with electronic
components required for the aircraft quieting system, at a defined cost, to be
paid by Ultra. Such licensing and royalty agreement, among other things,
included a future royalty of 1.5% of sales commencing in 1998. Under the
agreement, Ultra also acquired the company's active aircraft quieting business
based in Cambridge, England, leased a portion of the Cambridge facility and
employed certain of the company's employees. The company recognized $68,000,
$40,000 and $49,000 in royalty revenue in 1998, 1999 and 2000, respectively.
New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT plc
(formerly, Verity Group plc) and the company executed a cross licensing
agreement (the "Cross License") on March 28, 1997. Under the terms of the Cross
License, the company licensed patents and patents pending which relate to FPTTM
technology to NXT, and NXT licensed patents and patents pending which relate to
parallel technology to the company. The company also executed a security deed
(the "Security Deed") in favor of NXT granting NXT a conditional assignment in
the patents and patents pending licensed to NXT under the Cross License in the
event a default in a certain payment to be made by the company under the Cross
License continued beyond fifteen days. Concurrently with the Cross License, the
company and NXT plc executed agreements granting each an option for a four year
period commencing on March 28, 1998, to acquire a specified number of shares of
common stock of the other, subject to certain conditions and restrictions. With
respect to the company's option to NXT plc (the "NXT plc Option"), 3.8 million
shares of common stock (approximately 3.4% of the then issued and outstanding
common stock) of the company were covered by such option and the company
executed a registration rights agreement (the "Registration Rights Agreement")
covering such shares. Five million ordinary shares (approximately 2.0% of the
then issued and outstanding ordinary shares) of NXT plc were covered by the
option granted by NXT plc to the company. The exercise price under each option
was the fair value of a share of the applicable stock on March 28, 1997, the
date of grant. On April 15, 1997, NXT plc, NXT and the company executed several
agreements and other documents (the "New Agreements") terminating the Cross
License, the Security Deed, the NXT plc Option and the Registration Rights
Agreement and replacing them with new agreements (respectively, the "New Cross
License," the "New Security Deed," the "New NXT plc Option" and the "New
Registration Rights Agreement"). The material changes effected by the New
Agreements were the inclusion of NXT plc as a party along with its wholly-owned
subsidiary NXT; providing that the license fee payable to NCT could be paid in
ordinary shares of NXT plc stock; and reducing the exercise price under the
option granted to NXT plc to purchase shares of the company's common stock to
$0.30 per share. The subject license fee was paid to the company in ordinary
shares of NXT plc stock which were subsequently sold by the company. On
September 27, 1997, NXT plc, NXT, NCT Audio and the company executed several
agreements and other documents, terminating the New Cross License and the New
Security Deed and replacing them with other agreements (respectively, the "Cross
License Agreement dated September 27, 1997" and the "Master License Agreement").
The material changes effected by these replacement agreements were an expansion
of the fields of use applicable to the exclusive licenses granted to NXT plc and
NXT, an increase in the royalties payable on future licensing and product
revenues, cancellation of the New Security Deed covering the patents licensed by
the company, and the acceleration of the date on which the parties could
exercise their respective stock purchase option to September 27, 1997.
On April 30, 1998, the company completed the sale of five million ordinary
shares of NXT plc acquired upon the company's exercise on April 7, 1998 of the
option (described above) it held to purchase such shares at a price of 50 pence
per share. The company realized a $3.2 million gain from the exercise and sale
of the shares under such option, which is included in other income in 1998.
On February 9, 1999, NCT Audio and NXT expanded the Cross License Agreement
dated September 27, 1997 to increase NXT's fields of use to include aftermarket
ground-based vehicles and aircraft sound systems and increased the royalties due
NCT Audio from NXT to 10% from 6% and increased the royalties due NXT from NCT
Audio to 7% from 6%. In consideration for granting NXT these expanded licensing
rights, NCT Audio received a $0.5 million license fee. Also on February 9, 1999,
NCT Audio and NXT amended the Master License Agreement to include a one time
minimum royalty payment of $160,000. NCT Audio recorded royalty expense of
$160,000 in 1999, and a liability of $64,000 ($160,000 royalty expense less
patent expense reimbursement of $96,000) at December 31, 1999. The liability
balance outstanding as of December 31, 2000 was $64,000 (see Note 21).
VLSI Technology, Inc. ("VLSI"). On February 5, 1998, the company entered
into a license, engineering and royalty agreement with VLSI. Under the terms of
the agreement, the company has granted a non-exclusive license to VLSI for
certain patents and patents pending which relate to the company's ClearSpeech(R)
technologies. In 1998, the company recorded $0.3 million in related engineering
services. The company will recognize royalties on future products sold by VLSI
incorporating the ClearSpeech(R) technology. The company recognized no royalty
revenue in 1999 and 2000.
STMicroelectronics SA & STMicroelectronics S.r.l ("ST"). On November 16,
1998, Advancel Logic Corporation ("Advancel"), a majority-owned subsidiary
acquired by the company in September 1998, and ST executed a license agreement.
Under the terms of the agreement, which included a license fee, a minimum
royalty within two years and future per unit royalties, ST licensed Advancel's
tiny2J(TM) for Java(TM) ("t2J-Processor Core") to combine it with its proven
secure architecture and advanced nonvolatile memory technology. Advancel
recorded a $0.2 million license fee in 1998. In 1999, Advancel recorded an
additional $0.2 million license fee, $0.9 million non-refundable royalty and
$1.1 million engineering and development services funding. The company recorded
no license, royalty or engineering revenue for 2000.
Lernout & Hauspie Speech Products N.V. ("L&H"). On March 31, 1999, the
company signed a license agreement with L&H. The agreement provides the company
with a worldwide, non-exclusive, non-transferable license to selected L&H
technology for use in NCT's ClearSpeech(R) products. The company recorded a
prepaid royalty of $0.9 million. On April 12, 1999, the company granted a
worldwide non-exclusive, non-transferable license to L&H. The agreement provides
L&H access to NCT's present and future noise and echo cancellation algorithms
for use in L&H's technology. In consideration of the company's grant of a
license to L&H, the company recognized a non-refundable royalty fee of $0.8
million. During 1999, the company and L&H agreed to offset the balances owed
each other. Consequently, the company's balance due L&H at December 31, 1999 and
2000 is $0.1 million.
Oki Electric Industry Co., Ltd. ("Oki"). In October 1997, the company and
Oki executed a license agreement. Under the terms of the agreement, which
included an up-front license fee and future per unit royalties, Oki licensed the
company's ClearSpeech(R) noise cancellation algorithm for integration into
large-scale integrated circuits for communications applications. The company has
granted Oki the right to manufacture, use and sell products incorporating the
algorithm. The algorithm is specifically designed to remove background noise
from speech and other transmitted signals, greatly improving intelligibility and
clarity of communications. The company recognized $0.1 million and $0.3 million
in royalty revenue in 1999 and 2000, respectively.
Infinite Technology Corporation ("ITC"). In 2000, Advancel entered into
license agreement with ITC. Under the agreement, Advancel, a majority owned
subsidiary of the company, granted ITC exclusive rights to create, make, market,
sell and license products and intellectual property based upon Advancel's Java
Turbo-J(TM) technology. Advancel also granted ITC non-exclusive rights to
Advancel's Java smartcard core. In consideration for this license, the company
received 1.2 million shares of ITC's common stock valued at $6.0 million and
on-going unit royalties. With the exception of certain rights granted to ST
Microelectronics in 1998, the license granted ITC an exclusive irrevocable
worldwide license to design, make, use, transfer, market and sell products and
intellectual property incorporating or based upon Advancel's TJ and T2J
technology.
In conjunction with this license agreement the company, Advancel and ITC
entered into a Strategic Alliance and Technology Development Amendment pursuant
to which the company will fund specific product application research and
engineering development related to microprocessor and semiconductor chips for
which the company will pay ITC $2.5 million. The company issued 9,523,810 shares
of its common stock having a market value of $3.0 million to ITC as prepaid
research and engineering costs. In the event ITC does not receive $2.5 million
in proceeds from the sale of the company shares, the company is required to make
up any shortfall in cash or return to ITC a sufficient number of ITC shares of
common stock received by the company as outlined above. Conversely, if ITC
receives $2.5 million in proceeds from the sale of the company shares and there
are company shares remaining, ITC must return the unsold share excess to the
company. Though the aforementioned license agreement and the Strategic Alliance
and Technology Development Amendment, both with ITC, are separate and unrelated
it has been determined that they should be accounted for as a single
transaction, thereby, both agreements are combined for financial reporting
purposes. At December 31, 2000 the company recognized $3.6 million of license
fee revenue which represents the net of the two transactions.
6. Accounts Receivable:
Accounts receivable comprise the following (in thousands):
December 31,
----------------------------
1999 2000
-------------- -----------
Technology license fees and royalties $ - $ 4,597
Joint ventures and affiliates 33 76
Other trade receivables 287 880
-------------- -----------
$ 320 $ 5,553
Allowance for doubtful accounts (83) (70)
-------------- -----------
Accounts receivable, net $ 237 $ 5,483
============== ===========
On March 7, 2000, DMC entered into a license agreement with Eagle Assets
Limited to develop a portion of the DMC affiliate network in the New York City
region. Eagle licensed the use of Digital Broadcasting Station Software systems
and related technology in two station areas in the New York geographic
territory. At December 31, 2000, the amount remaining in accounts receivable
totaled $1.5 million.
On March 30, 2000, the company and DMC signed an agreement to license the
use of DBSS systems and related technology in Israel to Brookepark Limited. The
amount of the license fee was $2.0 million of which approximately $1.5 million
has been deferred at December 31, 2000. At December 31, 2000, the amount
remaining in accounts receivable totaled $1.0 million.
On September 29, 2000, the company and DMC signed separate agreements to
license the use of certain technology for $1.0 million each with Vidikron of
America, Inc., known as Vidikron. The total amount of the license fees were $2.0
million and is included in accounts receivable at December 31, 2000.
7. Inventories:
Inventories comprise the following (in thousands):
December 31,
----------------------------
1999 2000
-------------- -----------
Components $ 360 $ 603
Finished goods 2,434 1,681
-------------- -----------
$ 2,794 $ 2,284
Reserve for obsolete & slow moving inventory (529) (100)
-------------- -----------
Inventories, net of reserves $ 2,265 $ 2,184
============== ===========
8. Property and Equipment:
Property and equipment comprise the following (in thousands):
Estimate December 31,
Useful Life ----------------------
(Years) 1999 2000
------------- --------- ----------
Machinery and equipment 3-5 $ 1,965 $ 2,018
Furniture and fixtures 3-5 1,070 1,257
Leasehold improvements 7-10 1,038 1,139
Tooling 1-3 - 462
Other 5-10 60 164
--------- ----------
$ 4,133 $ 5,040
Accumulated depreciation (3,684) (4,352)
--------- ----------
Property and equipment, net $ 449 $ 688
========= ==========
Depreciation expense for the years ended December 31, 1998, 1999 and 2000
was $ 0.5 million, $0.4 million and $0.3 million, respectively.
9. Other Assets - current and long-term:
Other assets primarily comprise the company's investment in affiliates and
notes receivable and interest thereon, as described herein.
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc., known as TSA, an automotive audio system
supplier. The total purchase price was $10.0 million and up to an additional
$6.0 million in possible future cash contingent payments. NCT Audio paid Top
Source Technologies, Inc., known as TST, $3.5 million. NCT Audio had an
exclusive right, as extended, to purchase the assets of TSA through July 15,
1999. Under the terms of the original agreement, NCT Audio was required to pay
TST $6.5 million on or before March 31, 1999 to complete the acquisition of
TSA's assets. As consideration for an extension of such exclusive right from
March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST a fee of $0.4
million, consisting of $20,685 in cash, $0.1 million of NCT Audio's minority
interest in TSA earnings, and a $0.2 million note payable due April 16, 1999.
Due to the non-payment of the note by April 30, 1999, (a) the note began to
accrue interest on April 17, 1999 at the lower of the rate of two times prime
rate or the highest rate allowable by law; (b) the $20,685 and $0.1 million
portion of the extension fee would no longer be credited toward the $6.5 million
purchase price due at closing; and (c) the $0.2 million portion of the extension
fee would no longer be credited toward the $6.5 million closing amount due. To
date, NCT Audio has not paid the note. In addition, due to NCT Audio's failure
to close the transaction by March 31, 1999, NCT Audio was required to pay a
penalty premium of $0.1 million of NCT Audio's preferred stock. Since NCT Audio
failed to close the contemplated transaction by May 28, 1999, NCT Audio has
forfeited its minority earnings in TSA for the period June 1, 1999 through May
30, 2000. In exchange for an extension from May 28, 1999 to July 15, 1999, NCT
Audio relinquished 25% of its minority equity ownership in TSA. As a result, NCT
Audio now has a 15% minority interest in TSA. On or about July 15, 1999, NCT
Audio determined it would not proceed with the purchase of the assets of TSA, as
structured, due primarily to its difficulty in raising the requisite cash
consideration. Consequently, NCT Audio reduced its net investment in TSA to $1.2
million, representing its 15% minority interest, net of the above
noted penalties, and recorded a $2.4 million charge in the quarter ended June
30, 1999 for the write-down of its investment to its estimated net realizable
value. On September 30, 1999, Onkyo America purchased substantially all of the
assets of TSA and certain assets of TST used in TSA's operations. NCT Audio is
claiming and seeks its pro rata share of the consideration paid by Onkyo
America, less the penalties described above. The amount which TST owes NCT Audio
is in dispute; consequently, receipt of the funds is contingent on the outcome
of the arbitration between the company, TST and TSA (see Note 17).
On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC, known as Precision Power, Inc. or PPI, a supplier
of custom-made automotive audio systems. NCT Audio intended to acquire such
interest in exchange for shares of its common stock having an aggregate value of
$2.0 million. NCT Audio also agreed to retire $8.5 million of PPI debt, but NCT
Audio needed to obtain adequate financing before the transaction could be
completed. NCT Audio provided PPI a working capital loan on June 17, 1998 in the
amount of $0.5 million, evidenced by a demand promissory note. On August 18,
1998, NCT Audio provided PPI a second working capital loan in the amount of
$1,000,000, also evidenced by a demand promissory note. The unpaid principal
balance of these notes bears interest at a rate equal to the prime lending rate
plus one percent (1.0%). As noted, the transaction was contingent on NCT Audio
obtaining outside financing to retire the PPI debt. On January 6, 1999, the PPI
members notified NCT Audio that, while they remained willing to do the
transaction, they may choose at some point to abandon the transaction because
NCT Audio had not obtained the financing in a timely manner. The company was not
able to obtain the financing to consummate this transaction, and PPI experienced
significant organizational changes which has resulted in abandonment of the
proposed acquisition. During the third quarter of 1999, the company fully
reserved the $1.5 million due from PPI plus interest and pre-acquisition costs
thereon amounting to $0.3 million. The company continues to seek repayment of
the notes. During the fourth quarter of 1999, NCT Audio suspended its
acquisition strategy.
On May 10, 2000, the company announced a license agreement with Infinite
Technology Corporation know as ITC. Under the agreement, Advancel granted ITC
exclusive rights to create, make, market, sell and license products and
intellectual property based upon Advancel's Java Turbo-J(TM) technology.
Advancel also granted ITC nonexclusive rights to Advancel's Java smartcard core.
In consideration for this license, the company received 1.2 million shares of
ITC's common stock valued at $6.0 million and on-going unit royalties. With the
exception of certain rights granted to ST Microelectronics in 1998, the license
granted ITC an exclusive irrevocable worldwide license to design, make, use,
transfer, market and sell products and intellectual property incorporating or
based upon Advancel's TJ and T2J technology. The company is accounting for its
investment in ITC's common stock as available-for -sale securities valued at
fair value, with unrealized gains and losses excluded from earnings but reported
in a separate component of stockholders' equity until they are sold. At the time
of sale, any gains or losses calculated by the specific identification method
will be recognized as a component of operating results. The securities had a
fair value of $5.1 million. At December 31, 2000 the company recorded an
unrealized loss of $0.9 million included on the consolidated balance sheet as
part of accumulated other comprehensive income/(loss).
On May 5, 2000 TRN entered into an advertising agreement with
Insiderstreet.com, Inc., known as the advertiser. The advertising agreement
calls for, among other things, for TRN to play the advertiser's commercials in a
minimum of 8,500 theater screens at a cost of $20.58 per theater screen per
month, as further described in the agreement. The term of the agreement is for
two years commencing on June 19, 2000. At date of acquisition of TRN by Cinema,
TRN had remaining 475,595 shares of the originally issued 575,595 shares of the
advertiser which were valued at $2.5 million. If the value of the original
shares issued is less than $2.0 million on May 10, 2001, the advertiser agrees
to deliver additional compensating shares of the advertiser to TRN on or before
May 31, 2001 to increase the total value of the transaction to $2.0 million at
that time. It was determined by both parties that the airtime purchased by the
advertiser had an actual value of $4.2 million. The agreement also calls for the
advertiser shares issued to TRN to be registered on or before April 30, 2001.
The company recorded a deferred liability of $2.9 million at the time of the
transaction and is recognizing revenue over a two year period. For the year
ended December 31, 2000 the company recognized $0.5 million in advertising/media
revenue with respect to this transaction. The company has been accounting for
its investment in the advertiser's common stock as available-for -sale
securities valued at fair value, with unrealized gains and losses excluded from
earnings but reported in a separate component of stockholders' equity until they
are sold. At December 31, 2000 the company recorded an unrealized loss of $2.5
million included on the consolidated balance sheet as part of accumulated other
comprehensive income/(loss).
On September 29, 2000, NCT Video Displays, Inc., known as NCT Video, a
newly formed, wholly-owned subsidiary of the company, entered into a product
development and license agreement with Advanced Display Technologies, LLP, known
as ADT. Under the agreement, NCT Video is granted by ADT exclusive right and
license to make, have made, use, sell, lease, license, or otherwise commercially
dispose of all Licensed Products and Components, as defined in the agreement.
Such Licensed Products are defined as ViewBeam(TM) Display(s), which employ the
Licensed Technology, as defined in the agreement. Such license is valued at $0.9
million and is being amortized over 9 years, the earliest date of patent
expiration. At December 31, 2000 the company recorded amortization expense of
approximately $35,000. In addition, as part of this agreement, NCT Video and ADT
have entered into a product development arrangement whereby work is to be
performed by ADT in developing the Prototype and production design for the
Licensed Products. In return, NCT Video agreed to pay a "development fee" of
$0.9 million for performing such development work. At December 31, 2000, such
$0.8 million was included in other current liabilities (see Note 11).
As described in Note 5, on October 23, 2000 Midcore executed a license
agreement with Teltran. As consideration for such license, Teltran agreed to
issue Midcore 2.8 million shares of Teltran common stock and a warrant to
purchase 6.0 million shares of Teltran common stock for $0.125 per share as a
non-refundable up-front license fee. Teltran agreed to register such issued
common stock and the common stock underlying the warrant within eight months of
the execution of the license agreement. Teltran is also required to pay an
ongoing, per unit royalty, as defined in the license agreement. At December 31,
2000 the company recognized $0.4 million of license fee revenue, deferred
revenue of $4.2 million and recorded, in other current assets, the value of the
2.8 million common shares to be received and the fair value of the warrant
aggregating $3.8 million. At December 31, 2000 the company recorded a bad debt
expense of $0.8 million with respect to the reduction in market value of the 2.8
million shares on that date. Effective January 10, 2001, the date the 2.8
million common shares were issued, the company will account for its investment
in Teltran's common stock, in accordance with FAS 115, Accounting for Certain
Investments in Debt and Equity Securities, as available-for -sale securities
valued at fair value, with unrealized gains and losses excluded from earnings
but reported in a separate component of stockholders' equity until they are
sold. At the time of sale, any gains or losses calculated by the specific
identification method, will be recognized as a component of operating results.
10. Convertible Notes:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed to and agreed to purchase secured
convertible notes of the company in an aggregate principal amount of $4.0
million. The company entered into secured convertible notes (the "Notes") for
$4.0 million between January 26, 1999 and March 27, 2000. The Notes mature two
years from their respective inception dates and earn interest at the prime rate
as published from day to day in The Wall Street Journal. The secured convertible
notes are collateralized by substantially all of the company's assets owned or
hereafter acquired. The Holder shall have the right at any time on or prior to
the day the Notes are 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
as defined in the notes. At December 31, 2000, $3.0 million was included in
current maturities of convertible notes with the balance of $1.0 million, due in
2002, included as part of the long-term portion of convertible notes. The
company recorded a beneficial conversion feature of $1.0 million in connection
with the March 27, 2000 convertible note recorded during the first quarter of
2000, classified as interest expense. On 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 beneficial conversion feature of $0.2 million in connection with the
convertible notes in 1999.
On January 25, 2001, NCT defaulted on the repayment of $1.0 million of the
Notes. The default provisions in the note imposed a penalty, the default amount,
of $100,000 (10% of the principal payment in default). Default interest from the
date of default is due on the principal in default and the default amount at the
rate of prime plus 5%. We registered 1,034,972 shares of common stock that we
may be obligated to issue pursuant to the default provisions in the note.
On February 13, 2001, the company issued a 60-day, $0.5 million promissory
note bearing interest at 7% per annum, to the holder of the Notes together with
a warrant to purchase either $500,000 of our common stock at $0.21 or Pro Tech's
common stock at $0.44. On April 14, 2001, NCT defaulted on the repayment of the
promissory note.
On July 19, 1999, DMC entered into a convertible guaranteed term promissory
note ("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. Of the $1.0 million note, $0.8 million was deposited into an escrow
account restricted in its use to pay rental and installation costs of DBSS
systems. Further, DMC had the right to draw an additional $0.1 million provided
that PRG continued to have a good faith belief that the Systems were functioning
properly and that DMC had obtained at least one network-wide advertising client
providing annual advertising revenues of at least $0.3 million. The balance in
the escrow account, classified as restricted cash, was $0.7 million and zero at
December 31, 1999 and 2000, respectively. The PRG Note matures on July 19, 2001
and earns interest at ten percent (10%) per annum. PRG may convert the PRG Note
in whole or in part at its election into shares of DMC's common stock, without
par value, at any time during the period commencing on the date of issuance and
ending on the maturity date. In connection with the PRG Note, PRG was granted a
common stock warrant. In accordance with SFAS 123, "Accounting for Stock-Based
Compensation", the company estimated the fair value of this warrant to be $0.8
million using the following assumptions in applying the Black-Scholes valuation
method: risk-free interest rates of 5.61%, volatility of 1%, and a term of three
years. Such amount is being amortized to interest expense over the two-year
period of the related promissory note. Amortization amounted to $0.1 million and
$0.2 million for the years ended December 31, 1999 and 2000, respectively.
Unamortized discount of $0.3 million and $0.1 million has been reflected as a
reduction of the notes payable amount in the accompanying December 31, 1999 and
2000 financial statements. Such note payable balance included as part of the
current portion of convertible notes was $0.8 million and $0.9 million at
December 31, 1999 and 2000, respectively (see Note 21).
11. Other Liabilities:
On June 5, 1998, Interactive Products, Inc. ("IPI") entered into an
agreement with the company granting the company a license to, and an option to
purchase a joint ownership interest in, patents and patents pending which relate
to IPI's speech recognition technologies, speech compression technologies and
speech identification and verification technology. The aggregate value of the
patented technology is $1.3 million, which was paid by a $0.2 million cash
payment and delivery of 1.3 million shares of the company's common stock valued
at $0.65625 per share on June 5, 1998. At such time as IPI sells any of such
shares, the proceeds thereof will be allocated towards a fully paid-up license
fee for the technology rights noted above. In the event that the proceeds from
the sale of shares are less than the $1.1 million, the company will record a
liability representing the cash payment due. On July 5, 1998, the company paid
IPI $50,000, which was held in escrow as security for the fulfillment of the
company's obligations, toward the liability. The company recorded a liability
representing the difference between the company's payment obligations and the
IPI net proceeds from its sale of shares of the company's common stock. Such
liability was $0.5 million at December 31, 1999 and 2000.
On September 4, 1998, the company acquired the issued and outstanding
common stock of Advancel, a Silicon Valley-based developer of microprocessor
cores that execute Sun Microsystems' Java(TM) code. The acquisition was pursuant
to a stock purchase agreement dated as of August 21, 1998 (the "Stock Purchase
Agreement") among the company, Advancel and certain shareholders of Advancel
(the "Advancel Shareholders"). The consideration for the acquisition of the
Advancel common stock consisted of an initial payment of $1.0 million payable by
the delivery of 1.8 million shares of the company's treasury stock (see Note 10)
together with future payments, payable in cash or in common stock of the company
at the election of the Advancel Shareholders (individually, an "earnout payment"
and collectively, the "earnout payments") based on Advancel's earnings before
interest, taxes, depreciation and amortization, as defined in the Stock Purchase
Agreement, for each of the calendar years 1999, 2000, 2001 and 2002
(individually, an "earnout year" and collectively, the "earnout years"). While
each earnout payment may not be less than $0.3 million in any earnout year,
there is no maximum earnout payment for any earnout year or for all earnout
years in the aggregate. In connection therewith, the company's liabilities
include an earnout obligation of $0.1 million and $0.2 million at December 31,
1998 and 1999, respectively (see Note 17). In addition, the company's
liabilities include a $0.1 million note payable to a former employee of Advancel
at December 31, 1999 and 2000. The note bears interest at a rate of 8.25%,
compounded annually and was due in two equal installments on December 1, 1998
and March 1, 1999. The note has not been paid.
In connection with the company's acquisition of 100% of the outstanding
capital stock of MSI, the company initially issued 13,913,355 restricted shares
of its common stock based upon a 10-day weighted average closing bid price of
$0.34626 per share, for an aggregate value of $4.8 million. In addition, the
purchase consideration includes $1.7 million to be paid by the company in cash
based upon earned royalties, as defined in the merger agreement, over 36 months.
If after 36 months, the total royalty has not been earned, then the parties have
the right to collect the remaining unpaid balance through the issuance of the
company's common stock. At December 31, 2000 other current liabilities includes
$0.6 million and other long-term liabilities includes $1.2 million with respect
to this contingent liability.
12. Common Stock Subject to Resale Guarantee:
On September 24, 1999, the company issued 12,005,847 shares of common stock
to suppliers and consultants to settle current obligations of $1.8 million and
future or anticipated obligations of $0.5 million. On October 27, 1999, the
company issued an additional 1,148,973 shares of common stock to suppliers and
consultants to settle obligations of $0.2 million. During the fourth quarter of
1999, suppliers and vendors sold $1.5 million of such shares and as a result the
company recorded $1.0 million common stock subject to resale guarantee. During
the year ended December 31, 2000, suppliers and vendors sold $0.9 million and
surrendered 776,316 previously issued shares.
During 2000, the company issued 2,304,571 shares of common stock to certain
consultants and suppliers to settle current obligations of $0.4 million and
future or anticipated obligations of $0.5 million due to them by the company.
Common stock subject to resale guarantee was $0.2 million at December 31,
2000, which represented the outstanding shares of common stock valued at the
date of issuance to suppliers and vendors. Common stock subject to resale
guarantee was $1.6 million at December 31, 1999, which represented the
outstanding shares of common stock valued at the date of issuance to suppliers
and consultants ($1.0 million) and the purchase price plus guaranteed return on
investment related to the Purchase Agreement ($0.6 million).
The company had certain contingent obligations under a securities purchase
agreement, dated as of December 27, 1999 (the "Purchase Agreement"), among the
company, Austost Anstalt Schaan ("Austost"), Balmore S.A. ("Balmore") and
Nesher, Inc. ("Nesher"). Based on an offer as of November 9, 1999, the company,
Austost, Balmore and Nesher entered into the Purchase Agreement whereby the
company, on December 28, 1999, issued a total of 3,846,155 shares (the "SPA
Shares") to Austost, Balmore and Nesher for a total purchase price of $500,000.
In addition, the company issued 288,461 shares of its common stock to the
placement agent for the transaction. The price of the SPA Shares was $0.13 per
share, which was $0.03, or 19%, less than the closing bid price of the company's
common stock as reported by the OTC Bulletin Board on November 8, 1999, and
$0.015, or 10%, less than the closing bid price of the company's common stock as
reported by the OTC Bulletin Board on December 27, 1999. This per share price
was subject to decrease upon the application of a reset provision contained in
the Purchase Agreement. Due to the provision, the company recorded the purchase
price ($500,000) plus the guaranteed return on investment of 20% ($100,000) as
common stock subject to resale. At December 31, 2000 the shares were no longer
subject to a resale guarantee provision.
Under a reset provision contained in the Purchase Agreement, on June 26,
2000, and again on September 25, 2000, the company might have been required to
issue additional shares to one or more of Austost, Balmore or Nesher if the sum
of certain items on those dates was less than 120% of the total purchase price
paid by Austost, Balmore and Nesher for the SPA Shares. Those items were: (i)
the aggregate market value of the SPA Shares held by Austost, Balmore and Nesher
(based on the per share closing bid price on those dates); (ii) the market value
of any SPA Shares transferred by Austost, Balmore and Nesher as permitted under
the Purchase Agreement (based on the per share closing bid price on the date of
transfer); and (iii) any amounts realized by Austost, Balmore and Nesher from
sales of any such shares prior to June 26, 2000 or September 25, 2000, as the
case may be. The number of additional shares of common stock that the company
would have been obligated to issue in such case would have been a number of
shares having an aggregate market value (based on the per share closing bid
price on such date) that, when added to the sum of items (i), (ii) and (iii) set
forth above, would equal 120% of the total purchase price paid for the SPA
Shares. The 20% of the total purchase price paid ($100,000) was deemed a
preferred return over the initial reset period. At both June 26 and September
25, 2000, no additional shares were required to be issued in accordance with
such reset provision and the 20% of the total purchase price paid ($100,000) is
no longer considered a preferred return.
13. Capital Stock:
Private Placements and Stock Issuances:
On January 25, 2000, the Board of Directors designated a new series of
preferred stock based upon a negotiated term sheet, the Series G Convertible
Preferred Stock ("Series G Preferred Stock"). The Series G Preferred Stock
consists of 5,000 designated shares, par value of $0.10 per share and a stated
value of one thousand dollars ($1,000) per share with a cumulative dividend of
four percent (4%) per annum on the stated value payable upon conversion in
either cash or common stock. On March 6, 2000, as amended March 10, 2000, the
company and an accredited investor entered into an agreement under which the
company sold an aggregate stated value of $2.0 million (2,004 shares) of Series
G Preferred Stock, in a private placement pursuant to Regulation D of the
Securities Act of 1933 (the "Securities Act") for an aggregate of $1.750
million. The company received proceeds, net of expenses, of $1.7 million. Each
share of Series G Preferred Stock is convertible into fully paid and
nonassessable shares of the company's common stock pursuant to a predetermined
conversion formula which provides that the conversion price will be the lesser
of (i) 20% below the five (5) day average closing bid price of common stock
immediately prior to the conversion date thereof; or (ii) the fixed conversion
price of $0.71925. The company filed a registration statement on April 20, 2000,
(amended on June 13, 2000), to register such shares of common stock for the
conversion of the Series G Preferred Stock and the related warrant. In
connection with the Series G Preferred Stock transaction, on March 6, 2000, the
company granted a warrant for 150,000 shares of the company's common stock with
an expiration date of March 31, 2005 and an exercise price of $0.71925. In
accordance with SFAS No. 123, the company estimated the fair market value of
this warrant to be $0.1 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 6.14%, volatility of
1, and a term of three years. Such amount is included in the preferred stock
dividend requirement for the year ended December 31, 2000. During the year ended
December 31, 2000, the company issued 4,906,595 shares of the company's common
stock in connection with the conversion of 1,237 shares of the company's Series
G Preferred Stock.
During the year ended December 31, 2000, the company issued 23,470,081
shares of the company's common stock in connection with the conversion of 4,715
shares of the company's Series F Convertible Preferred Stock ("Series F
Preferred Stock") which had been issued in the third quarter of 1999 in a
private placement exempt from registration pursuant to Regulation D of the
Securities Act. At December 31, 2000 all Series F Preferred Stock have been
converted to common shares of the company.
In March 2000, 3 shares of NCT Audio Series A Convertible Preferred Stock,
which had been issued in the third quarter of 1998 in a private placement exempt
from registration pursuant to Regulation D of the Securities Act, were exchanged
for 3,000 shares of the company's Series D Preferred Stock, which were converted
into 634,915 shares of the company's common stock. Subsequently, the company
recorded a one-time, non-cash charge of $0.2 million for the impairment of
goodwill based on the valuation of NCT Audio.
On March 7, 2000, the company, Balmore and Austost agreed to amend certain
of the terms and conditions of the exchange agreement. Under the exchange
agreement, Austost and Balmore were obligated to return to the company
13,671,362 shares of NCT common stock ("Returnable Shares"). This amendment was
agreed to in order to (1) allow Austost and Balmore to retain 3,611,111
Returnable Shares in exchange for an additional 533 shares of NCT Audio common
stock from a third party investor (the "Third Party Shares"), which Austost and
Balmore would deliver to NCT, and (2) substitute cash payments by Austost and
Balmore to the company in lieu of Austost's and Balmore's obligation to return
the remaining Returnable Shares to the company pursuant to the exchange
agreement. Austost and Balmore would agree to pay the company up to $10,000,000
in cash subject to monthly limitations from proceeds Austost and Balmore would
realize from their disposition of such remaining Returnable Shares. Balmore and
Austost would realize a 10% commission on the proceeds from the sale of shares.
Subsequently, the company recorded a one-time, non-cash charge of $2.9 million
for the impairment of goodwill based on the valuation of NCT Audio. During the
year ended December 31, 2000, the company sold approximately 4.2 million
Returnable Shares totaling $1.4 million of which $0.8 million was used to repay
three promissory notes and the balance of $0.6 million was used to meet working
capital requirements.
In connection with the above exchange of 533 NCT Audio shares, the 1999
exchange of 559 shares of NCT Audio common stock and the 1998 exchange of 296
shares of NCT Audio common stock into 17.7 million and 1.1 million shares of NCT
common stock, the company recorded goodwill of $0.6 million, $6.1 million, and
$2.9 million during 1998, 1999 and 2000, respectively. The Company recorded a
non-cash charge of $3.1 million in each of 1999 and 2000 for the impairment of
goodwill based on the valuation of NCT Audio.
On July 13, 2000 at the company's annual meeting of shareholders, the
stockholders approved an amendment to increase the number of shares of common
stock the company is authorized to issue from 325 million to 450 million. Such
amendment became effective on July 18, 2000 when the company filed a Certificate
of Amendment to its Restated Certificate of Incorporation with the Office of the
Secretary of State of Delaware to comply with applicable Delaware General
Corporation Law.
On August 10, 2000, the company entered into an agreement with three
accredited investors for the financing of its subsidiary, Connect Clearly.com,
Inc.("CCC"). In connection with the initial funding of CCC, the company issued
1,000 shares of CCC common stock to these investors in consideration for $0.5
million in cash and conversion of promissory notes payable, due to two of the
investors, totaling $0.5 million. These CCC common shares are exchangeable for
shares of NCT common stock. During the year ended December 31, 2000 no shares of
CCC were exchanged for shares of NCT common stock.
On August 18, 2000, the company acquired 100% of the outstanding capital
stock of TRN, through a merger with Cinema. In connection with this acquisition,
the company issued 7,405,214 restricted shares of its common stock based upon a
trailing market price (as defined in the stock purchase agreement) of $0.3376
per share, for a total value of $2.5 million and a 7.5% equity interest in
Cinema. In February 2001, due to a decline in the trailing market price prior to
the effective registration of shares of common stock, an additional 2,455,248
shares were issued for the acquisition pursuant to a fill-up provision. (see
Note 2).
On August 29, 2000, the company acquired all of the outstanding capital
stock of MSI through a merger with Midcore. In connection therewith, the company
issued 13,913,355 restricted shares of its common stock. In February 2001 due to
a decline in the closing bid price of the company's common stock prior to the
effective registration of the stock, an additional 2,863,891 shares were issued
pursuant to a fill-up provision (see Note 2).
On September 7, 2000, the company issued 9,523,810 shares of its common
stock having a market value of $3.0 million to ITC with respect to the Strategic
Alliance and Technology Development Amendment with ITC (see Note 5).
As described in Note 2, NCT Hearing had arranged $1.5 million in equity
financing for Pro Tech in the form of convertible preferred stock. Such
convertible preferred stock is convertible into shares of Pro Tech's common
stock or exchangeable for shares of NCT's common stock at the investors'
election.
On September 26, 2000, the company's Board of Directors approved an
amendment to the Series G Certificate of Designations, Rights and Preferences to
increase the maximum shares of common stock into which it converts from 10
million shares to 24 million shares. This action was considered in the best
interest of the company and its investor relationships. The amendment became
effective on September 27, 2000 when the company filed it with the Office of the
Secretary of State of Delaware.
On September 27, 2000, the company entered into a private equity line with
Crammer Road LLC ("Crammer"), pursuant to which the company may issue its common
stock to be sold by Crammer and Crammer would retain a portion of the proceeds
received for NCT common stock sold. In conjunction with this transaction, the
company issued Crammer a warrant for 250,000 shares of the company's common
stock. In accordance with SFAS No. 123, the company estimated the fair value of
this warrant to be $0.1 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 6.03%, volatility of
1, and a term of three years. The accounting for the fair value of this warrant
due not impact the consolidated statements of Equity at December 31, 2000. The
company and Crammer are currently in renegotiations regarding amendments to
certain details of the Private Equity Credit Agreement.
On September 29, 2000, Pro Tech entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with the company, Austost, Balmore and
Zakeni Limited (Austost, Balmore and Zakeni Limited collectively the "Pro Tech
Investors") to consummate the $1.5 million financing arranged by the company for
Pro Tech in connection with its sale of 1,500 shares of Pro Tech Series A
Convertible Preferred Stock ("Pro Tech Preferred") to the Pro Tech Investors.
The Pro Tech Preferred consists of 1,500 designated shares, par value $0.01 per
share and a stated value of one thousand dollars ($1,000) per share with an
accretion rate of four percent (4%) per annum on the stated value. Each share of
such stock, in addition to being exchangeable for shares of the company's common
stock, is convertible into fully paid and nonassessable shares of the Pro Tech's
common stock pursuant to a predetermined conversion formula. In connection with
the execution of the Securities Purchase and Supplemental Exchange Rights
Agreement, Pro Tech issued warrants to the Pro Tech Investors to acquire 4.5
million shares of Pro Tech's common stock. Such warrants are exercisable at
$0.50 per share and expire on October 28, 2003. In addition, Pro Tech has the
right to require the warrant holders to exercise upon a call from Pro Tech. In
accordance with SFAS No. 123, Pro Tech estimated the fair value of this warrant
to be $3.6 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 5.97%, volatility of
1, and a term of three years. In addition, the excess of the quoted market value
of the common stock assumed to be converted over the net proceeds received for
issuance of convertible preferred shares of $0.4 million is considered a
preferred dividend with this difference being accreted over the period beginning
with the issuance of the preferred stock to the date the shares are eligible for
conversion. The aggregate of $4.0 million is included in the calculation of loss
attibutable to common stockholders on the consolidated statements of operations
at December 31, 2000.
Pursuant to a consulting agreement dated as of March 15, 1999, as amended
as of June 1, 1999, and as modified as of July 29, 1999, between Pro Tech and
Union Atlantic LC ("UALC"), Pro Tech would be obligated to issue two percent
(2%) of its outstanding common stock to UALC upon the consummation of the Pro
Tech transaction with NCT Hearing. In order to comply with the consulting
agreement, Pro Tech agreed to issue 279,688 shares and NCT Hearing agreed to
issue 279,687 shares of Pro Tech's common stock to UALC, totaling an aggregate
of 559,375 shares in full settlement of all obligations under the consulting
agreement between Pro Tech and UALC.
On November 27, 2000 the company sold 2.5 million shares, in the aggregate,
of its common stock at a price of $0.202 per share in a private placement that
provided net proceeds to the company of $0.5 million.
On January 25, 1999, the company granted DMC an exclusive worldwide license
with respect to all of the company's relevant patented and unpatented technology
relating to DMC products 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.
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 million to 325 million. This
amendment became effective on July 29, 1999, when the company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the company's common stock to be used to settle certain
obligations of the company. In 1999, the company issued 13,154,820 shares of
common stock to suppliers and consultants to settle current obligations of $1.8
million and future or anticipated obligations of $0.7 million.
On August 10, 1999, the company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F 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. 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 terms of the Series F Preferred Stock also provide
that in no event shall the company be obligated to issue more than 35,000,000
shares of its common stock in the aggregate in connection with the conversion of
up to 12,500 shares of Series F Preferred Stock. In the interest of investor
relations of the company, the maximum number of conversion shares was increased
to 77 million shares of the company's common stock. The company is also
obligated to pay a 4% per annum accretion on the stated value of Series F
Preferred Stock in either cash or common stock, at the company's election. The
company registered an aggregate of 25,744,000 shares of common stock issuable
upon conversion and payment for accretion. In connection with the Series F
Preferred Stock, the company may be obligated to redeem the excess of the stated
value over the amount permitted to be converted into common stock. Such
additional amounts will be treated as obligations of the company. On September
10, 1999, the company received $4.0 million for four DMC network affiliate
licenses from four accredited investors. While the investors agreed upon the
exchange of 8,500 shares of Series F Preferred Stock having aggregate stated
value of $8.5 million, for consideration of $1.0 million, the company has
treated the additional $4.0 million for the DMC licenses as additional
consideration for the Series F Preferred Stock. On December 15, 1999, 974 shares
of the company's Series F Preferred Stock, together with 5,026 shares of the
company's Series E Preferred Stock, were exchanged for eight DMC network
affiliate licenses. As of December 31, 2000, 7,526 shares of Series F Preferred
Stock had been converted into 48,776,638 shares of the company's common stock.
The company has certain contingent obligations under a securities exchange
agreement, dated as of October 9, 1999 (the "Exchange Agreement"), among the
company, Austost and Balmore. Pursuant to the Exchange Agreement, on October 26,
1999 the company issued a total of 17,333,334 shares to Austost and Balmore (the
"Exchange Shares") in exchange for 532 shares of common stock of NCT Audio held
by Austost and Balmore. The effective per share price of the Exchange Shares
received by Austost and Balmore was $0.06 per share (representing the total
purchase price originally paid by Austost and Balmore for the NCT Audio shares
of $1.0 million divided by 17,333,334). This effective per share price was
$0.115, or 65.7%, less than the closing bid price of the company's common stock
as reported by the OTC Bulletin Board on October 25, 1999. This effective per
share price may be subject to increase upon the application of an exchange ratio
adjustment provision contained in the Exchange Agreement on February 15, 2000
(or an earlier date agreed to by all the parties) and may be subject to decrease
upon the application of a reset provision contained in the Exchange Agreement,
as described below.
On July 27, 1998, the company entered into subscription agreements (the
"Series D Subscription Agreements") to sell 6,000 shares of the company's Series
D Convertible Preferred Stock ("Series D Preferred Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act, to six unrelated accredited investors through one dealer
(the "1998 Series D Preferred Stock Private Placement"). $5.2 million net
proceeds were received by the company from the 1998 Series D Preferred Stock
Private Placement. Each share of the Series D Preferred Stock has a par value of
$.10 per share and a stated value of one thousand dollars ($1,000) with an
accretion rate of four percent (4%) per annum on the stated value. Each share of
Series D Preferred Stock is convertible into fully paid and non-assessable
shares of the company's common stock subject to certain limitations. The Series
D registration statement became effective on October 30, 1998, and shares of
Series D Preferred Stock became convertible on that date. Each share of Series D
Preferred Stock is convertible into a number of shares of common stock of the
company as determined in accordance with the Series D Conversion Formula as set
forth in the agreement. Including shares of common stock issued for accretion,
as of March 12, 1999, all shares of Series D Preferred Stock had been converted
into 12,273,685 shares of NCT common stock.
On July 27, 1998, NCT Audio entered into subscription agreements (the "NCT
Audio Subscription Agreements") to sell 60 shares of NCT Audio's Series A
Convertible Preferred Stock ("NCT Audio Series A Preferred Stock") having an
aggregate stated value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 NCT Audio Series A Preferred Stock Private
Placement"). NCT Audio received net proceeds of $5.2 million from the 1998 NCT
Audio Series A Preferred Stock Private Placement. Each share of the NCT Audio
Series A Preferred Stock has a par value of $.10 per share and a stated value of
one hundred thousand dollars ($100,000) with an accretion rate of four percent
(4%) per annum on the stated value. Each share of NCT Audio Series A Preferred
Stock is convertible into fully paid and non-assessable shares of NCT Audio's
common stock subject to certain limitations. Each share of Series A Preferred
Stock is convertible into a number of shares of common stock of NCT Audio as
determined in accordance with the Series A Conversion Formula as set forth in
the agreement. On March 30, 1999, holders of 57 shares of NCT Audio Series A
Preferred Stock exercised this election and converted their shares into
11,699,857 shares of the company's common stock. At December 31, 1999, 3 shares
of NCT Audio Series A Preferred Stock were outstanding. On January 10, 2000, the
remaining 3 shares of NCT Audio Series A Preferred Stock were converted into
634,915 shares of the company's common stock.
During 1998, the Board of Directors authorized the issuance of a total of
125,000 shares of the company's common stock to an employee, two directors and a
consultant in connection with their services to the company. The company valued
these shares at $97,000, representing the fair value on the date of issuance.
On July 15, 1998 the company transferred $5,000 and all of the business and
assets of its Hearing Products Division as then conducted by the company and as
reflected on the business books and records of the company to a newly
incorporated subsidiary company, NCT Hearing Products, Inc. ("NCT Hearing") in
consideration for 6,400 shares of NCT Hearing common stock whereupon NCT Hearing
became a wholly-owned subsidiary of the company. The company also granted NCT
Hearing an exclusive worldwide license with respect to all of the company's
relevant patented and unpatented technology relating to Hearing Products in
consideration for a license fee of $3.0 million, eliminated in consolidation, to
be paid when proceeds are available from the sale of NCT Hearing common stock
and running royalties payable with respect to NCT Hearing's sales of products
incorporating the licensed technology and its sublicensing of such technology.
It is anticipated that NCT Hearing will issue additional shares of its common
stock in transactions exempt from registration in order to raise additional
working capital.
On July 29, 1998, the company initiated a plan to repurchase from time to
time up to 10 million shares of the company's common stock in the open market
pursuant to Rule 10b-18 under the Exchange Act or through block trades. As of
December 31, 1998, the company had repurchased 5,607,100 shares of the company's
common stock at per share prices ranging from $0.3438 to $0.6563. The stock
repurchase program was terminated on December 30, 1998.
On September 4, 1998, the company acquired the issued and outstanding
common stock of Advancel. The acquisition was pursuant to the Stock Purchase
Agreement. The consideration for the acquisition of the Advancel common stock
consisted of an initial payment of $1.0 million payable by the delivery of
1,786,991 shares of the company's treasury stock together with future payments,
payable in cash or in common stock of the company at the election of the
Advancel Shareholders based on Advancel's earnings before interest, taxes,
depreciation and amortization for each of the calendar years 1999, 2000, 2001
and 2002. The acquisition was accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the accounts of Advancel
from the date of acquisition. The cost of the acquisition was allocated to the
assets acquired and liabilities assumed based on their fair value as follows:
Current asseets $ 368,109
Property and equipment 4,095
Goodwill 1,018,290
Other Assets 13,486
Current liabilities (485,040)
Unearned portion of compensatory stock 141,251
-------------
Cost of acquisition (including expenses of $60,191) $ 1,060,191
=============
At the annual meeting of Stockholders held on October 20, 1998, the
stockholders approved an amendment to the company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock from
185 million to 255 million shares. Such action was deemed by the Board of
Directors to be in the best interest of the company to make additional shares of
the company's common stock available for an increase in the number of shares of
common stock covered by the 1992 Plan (see Note 14) pursuant to an amendment of
the 1992 Plan approved by the stockholders at such annual meeting, and for
acquisitions, public or private financings involving common stock or preferred
stock or other securities convertible to common stock, stock splits and
dividends, present and future employee benefit programs and other corporate
purposes.
On November 24, 1998, the company paid $1,000 consideration for
incorporation of DMC which was formed to develop, install and provide an
audio/visual advertising medium within commercial/professional settings.
On December 30, 1998, the company entered into a series of subscription
agreements (the "Series E Subscription Agreements") to sell an aggregate stated
value of up to $8.2 million of Series E Convertible Preferred Stock (the "
Series E Preferred Stock") in consideration of $4.0 million, in a private
placement, pursuant to Regulation D of the Securities Act, to six accredited
investors through one dealer (the "1998 Series E Preferred Stock Private
Placement"). The $4.0 million subscription receivable at December 31, 1998
represents a receivable due from the Series E Subscription Agreements. In
addition to the above noted Series E Subscription Agreements, the company issued
and sold an aggregate amount of $1.7 million of Series E Preferred Stock to
three accredited investors through the above noted dealer, in exchange for an
aggregate stated value of $1.7 million of the company's Series C Preferred Stock
held by the three accredited investors. The company also issued and sold an
aggregate amount of $0.7 million of Series E Preferred Stock to four accredited
investors through the above noted dealer, in exchange and consideration for an
aggregate of 2.1 million shares of the company's common stock held by the four
accredited investors and received net proceeds of $1.8 million. On April 13,
1999, the company entered into a subscription agreement to sell 1,874 shares of
Series E Preferred Stock, with a stated value of up to $1.9 million in
consideration of $1.9 million to four accredited investors through one dealer.
Each share of the Series E Preferred Stock has a par value of $.10 per share and
a stated value of one thousand dollars ($1,000) with an accretion rate of four
percent (4%) per annum on the stated value. Each share of Series E Preferred
Stock is convertible into fully paid and non-assessable shares of the company's
common stock subject to certain limitations. Each share of Series E Preferred
Stock is convertible into a number of shares of common stock of the company as
determined in accordance with the Series E Conversion Formula as set forth in
the agreement. During 1999, holders of 3,828 shares of Series E Preferred Stock
elected to convert their shares into 26,608,942 shares of common stock of the
company. On March 31, 1999, the company signed a license agreement to exchange
3,600 shares of Series E Preferred Stock for four DMC network affiliate
licenses. During the three months ended March 31, 1999, the company, in
accordance with its revenue recognition policy, realized only $2.0 million on
the issuance of such licenses in consideration of the receipt of 3,600 shares of
its Series E Convertible Preferred Stock. Subsequently, during the three months
ended June 30, 1999, the company adjusted such revenue to $0.9 million due to
the valuation of additional shares of Series E Preferred Stock issued during the
period. On December 15, 1999, holders of the remaining 5,026 shares of the
company's Series E Preferred Stock and holders of 974 shares of the company's
Series F Preferred Stock (see below), an aggregate stated value of $6 million,
exchanged such shares for eight DMC network affiliate licenses. No shares of
Series E Preferred Stock were outstanding at December 31, 1999 and 2000.
Between October 28, 1997 and December 11, 1997, the company entered into a
series of subscription agreements (the "Series C Subscription Agreements") to
sell an aggregate amount of $13.3 million of Series C Convertible Preferred
Stock (the "Series C Preferred Stock") in a private placement, pursuant to
Regulation D of the Securities Act, to 32 unrelated accredited investors through
two dealers (the "1997 Series C Preferred Stock Private Placement"). The total
1997 Series C Preferred Stock Private Placement was completed on December 11,
1997. The aggregate net proceeds to the company of the 1997 Series C Preferred
Stock Private Placement were $11.9 million. Each share of the Series C Preferred
Stock has a par value of $.10 per share and a stated value of one thousand
dollars ($1,000) with an accretion rate of four percent (4%) per annum on the
stated value. convertible into a number of shares of common stock of the company
as determined in accordance with the Series D Conversion Formula as set forth in
the agreement. On December 30, 1998, 1,700 shares of the Series C Preferred
Stock were exchanged for the company's Series E Preferred Stock. At December 31,
1998, 10,850 shares of Series C Preferred Stock had been converted into
20,665,000 shares of NCT common stock. The 700 remaining Series C Preferred
Stock shares were subject to mandatory conversion as of November 30, 1999. As
such, on November 30, 1999, these 700 shares were converted to 1,512,000 shares
of common stock of the company. At December 31, 1999 and 2000, there were no
outstanding shares of Series C Preferred Stock.
Common shares available for common stock options, warrants and convertible
securities:
At December 31, 2000, the number of shares required to be reserved for the
exercise of options and warrants was 67.7 million. The aggregate number of
shares of common stock required to be reserved for issuance upon the exercise of
all outstanding options and warrants granted was 67.4 million shares, of which
options and warrants to purchase 52.6 million shares were currently exercisable.
These aggregate reserves exclude the PRG Warrant for 6,666,667 shares (see Note
12). Certain of the company's required reserves are a function of the price of
the company's common stock. The following reserve requirements have been
calculated at an assumed $0.25 common stock price or the discount therefrom as
allowed under the exchange or conversion agreements. The aggregate number of
shares of common stock required to be reserved for issuance upon conversion of
issued and outstanding shares of Series G Preferred Stock was 3.8 million. The
company has reserved 7.1 million shares of common stock for issuance to certain
holders of NCT Audio common stock upon exchange of their shares of NCT Audio
common stock for shares of the company's common stock. The company also reserved
27.1 million shares of common stock for issuance upon conversion of the notes
and accrued interest thereon. The reserve requirement for exchange of
outstanding shares of common stock of ConnectClearly was 5.8 million NCT shares
and for exchange of Pro Tech convertible preferred stock was 7.6 million NCT
shares. Pursuant to stock purchase agreements, the company had a contingent
fill-up obligation to the former shareholders of the Theater Radio Network and
Midcore Software (see Note 2). Common shares issued and required to be reserved
for issuance exceeded the number of shares authorized at December 31, 2000 at
the actual year-end common stock price of $0.172.
14. Common Stock Options and Warrants:
The company applies APB 25 in accounting for its various employee stock
option incentive plans and warrants and, accordingly, recognizes compensation
expense as the difference, if any, between the market price of the underlying
common stock and the exercise price of the option on the date of grant. The
effect of applying SFAS No. 123 on 1998, 1999 and 2000 pro forma net loss as
stated above is not necessarily representative of the effects on reported net
loss for future periods due to, among other factors, (i) the vesting period of
the stock options, and (ii) the fair value of additional stock option grants in
future periods. If compensation expense for the company's stock option plans and
warrants had been determined based on the fair value of the options or warrants
at the grant date for awards under the plans in accordance with SFAS No. 123,
the company's net loss would have been $19.0 million, $27.4 million and $17.7
million, or $(0.16), $(0.20) and $(0.08) per share in 1998, 1999 and 2000,
respectively. The fair value of the options and warrants granted in 1998, 1999
and 2000 are estimated in the range of $0.24 to $0.81, $0.26 to $0.64, and $0.16
to $1.28 per share, respectively, on the date of grant using the Black-Scholes
option-pricing model utilizing the following assumptions: dividend yield 0%;
volatility of 1.307, 1.0 and 1.0 to 1.29 in 1998, 1999 and 2000, respectively;
risk free interest rates in the range of 5.28% to 5.55%, 4.56% to 6.14%, and
4.56% to 6.56% for 1998, 1999 and 2000, respectively; and expected life of 3
years. The weighted average fair value of options and warrants granted during
1998, 1999 and 2000 are estimated in the range of $0.53, $0.28 to $0.48, and
$0.22 to $0.27 per share, respectively, also using the Black-Scholes
option-pricing model.
Stock Options:
The company's 1987 Stock Option Plan (the "1987 Plan") provides for the
granting of up to 4 million shares of common stock as either incentive stock
options or nonstatutory stock options. Options to purchase shares may be granted
under the 1987 Plan to persons who, in the case of incentive stock options, are
full-time employees (including officers and directors) of the company; or, in
the case of nonstatutory stock options, are employees or non-employee directors
of the company. The exercise price of all incentive stock options must be at
least equal to the fair market value of such shares on the date of the grant and
may be exercisable over a ten-year period. The exercise price and duration of
the nonstatutory stock options are to be determined by the Board of Directors.
Options granted under the 1987 Plan generally vest 20% upon grant and 20% per
annum thereafter as determined by the Board of Directors.
1987 Plan activity is summarized as follows:
Years Ended December 31,
----------------------------------------------------------------------------
1998 1999 2000
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------- ------------- --------- ------------- ---------
Outstanding at beginning of year 1,350,000 $ 0.51 1,350,000 $ 0.51 1,350,000 $ 0.51
Options granted - - 1,350,000 $ 0.51 - $ -
Options exercised - - - - - -
Options canceled, expired or forfeited - - (1,350,000) $ 0.51 - $ -
------------ ------------- -------------
Outstanding at end of year 1,350,000 $ 0.51 1,350,000 $ 0.51 1,350,000 $ 0.51
============ ============= =============
Options exercisable at year-end 1,350,000 $ 0.51 1,350,000 $ 0.51 1,350,000 $ 0.51
============ ============= =============
In 2000, the Board determined that no future grants of options for the
purchase of shares would be made under the 1987 Plan. Thus, as of December 31,
2000, no options for the purchase of shares were available for future grant
under the 1987 Plan.
The company's non-plan options are granted from time to time at the
discretion of the Board of Directors. The exercise price of all non-plan options
generally must be at least equal to the fair market value of such shares on the
date of grant and generally are exercisable over a five to ten year period as
determined by the Board of Directors. Vesting of non-plan options varies from
(i) fully vested at the date of grant to (ii) multiple year apportionment of
vesting as determined by the Board of Directors.
Non-plan stock option activity is summarized as follows:
Years Ended December 31,
----------------------------------------------------------------------------
1998 1999 2000
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------- ------------- --------- ------------- ---------
Outstanding at beginning of year 4,319,449 $ 0.36 4,319,449 $ 0.36 4,284,000 $ 0.33
Options granted - - - - - -
Options exercised - - - - - -
Options canceled, expired or forfeited - - (35,449) $ 4.86 (259,000) $ 0.70
------------ ------------- -------------
Outstanding at end of year 4,319,449 $ 0.36 4,284,000 $ 0.33 4,025,000 $ 0.30
============ ============= =============
Options exercisable at year-end 4,319,449 $ 0.36 4,284,000 $ 0.33 4,025,000 $ 0.30
============ ============= =============
On October 6, 1992, the company adopted a stock option plan (as amended,
the "1992 Plan") for the granting of options to purchase up to 10,000,000 shares
of common stock to officers, employees, certain consultants and certain
directors. The exercise price of all 1992 Plan options must be at least equal to
the fair market value of such shares on the date of the grant and 1992 Plan
options are generally exercisable over a five to ten year period as determined
by the Board of Directors. Vesting of 1992 Plan options varies from (i) fully
vested at the date of grant to (ii) multiple year apportionment of vesting as
determined by the Board of Directors. On October 20, 1998, the stockholders
approved an amendment to the 1992 Plan to increase the aggregate number of
shares of common stock reserved for grants of restricted stock and grants of
options to purchase shares of common stock to 30,000,000 shares. The 1992 Plan
was also amended to eliminate the automatic grant of 75,000 shares of the
company's common stock upon a new director's initial election to the Board of
Directors and to eliminate the automatic grant of 5,000 shares of the company's
common stock to each non-employee director for services as a director of the
company for each subsequent election. On January 19, 2000, the Board of
Directors amended the 1992 Plan, subject to stockholder approval, to increase
the aggregate number of shares of the company's common stock reserved for
issuance upon the exercise of stock options granted under the 1992 Plan from
30,000,000 shares to 50,000,000 shares. Such amendment was approved by the
stockholders at the company's annual meeting on July 13, 2000.
In January 2000, the Board of Directors granted options to purchase shares
of the company's common stock to certain officers and employees, new employees
and certain consultants of the company for services rendered to the company,
subject to the approval by the company's stockholders of an increase in the
number of shares authorized and subject to the approval by the company's
stockholders of an increase in the number of shares covered by the 1992 Plan.
Such options were granted at or above the fair market value of the company's
common stock on the date of grant. The fair value of the option granted to
consultants amounted to $0.1 million and is included in selling, general and
administrative expenses on the consolidated statements of operations at December
31, 2000.
On April 21, 2000, the Board of Directors approved the re-granting of
replacement grants for forfeit options that would otherwise expire in 2000. Such
replacement grants under the 1992 Plan totaled approximately 315,000 options.
There was no financial statement impact with respect to the re-granting of these
options.
In July 2000, the Board of Directors cancelled certain options it had
granted in January 2000. The Board granted new options at the then fair market
value of the common stock, a higher exercise price than had been in effect in
January 2000. There was no financial statement impact with respect to the
re-granting of these options.
In December 2000, the Board of Directors granted options to directors and
employees to acquire 11,325,000 shares of common stock subject to sufficient
remaining shares under the 1992 Plan and subject to shareholder approval. These
grants exceeded the number of shares available under the 1992 Plan by 2,824,505.
As such, the grant to the company's Chief Executive Officer and Chairman of the
Board of Directors was reduced by this amount, but this award remains an
obligation pending future availability under the 1992 Plan or adoption of a new
stock option plan.
1992 Plan activity is summarized as follows:
Years Ended December 31,
----------------------------------------------------------------------------
1998 1999 2000
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------- ------------- --------- ------------- ---------
Outstanding at beginning of year 9,029,936 $ 0.72 19,831,821 $ 0.52 28,024,237 $ 0.47
Options granted 21,989,000 $ 0.69 9,398,538 $ 0.43 35,377,071 $ 0.42
Options exercised (1,561) $ 0.27 (5,000) $ 0.27 (1,284,907) $ 0.58
Options canceled, expired or forfeited (11,185,554) $ 1.03 (1,201,122) $ 0.60 (12,234,206) $ 0.49
Board action - $ - - $ - (2,824,505) $ 0.33
------------ ------------- -------------
Outstanding at end of year 19,831,821 $ 0.52 28,024,237 $ 0.47 47,057,690 $ 0.43
============ ============= =============
Options exercisable at year-end 12,053,571 $ 0.60 14,751,044 $ 0.55 32,330,873 $ 0.47
============ ============= =============
As of December 31, 2000, no options for the purchase of shares were
available for future grants of restricted stock awards and for options to
purchase common stock under the 1992 Plan.
On November 15, 1994, the Board of Directors adopted the NCT Group, Inc.
Option Plan for Certain Directors (as amended, the "Directors Plan"). Under the
Directors Plan, 821,000 shares have been approved by the Board of Directors for
issuance. The options granted under the Directors Plan have exercise prices
equal to the fair market value of the common stock on the grant dates and expire
five years from date of grant. Options granted under the Directors Plan are
fully vested at the grant date.
Directors Plan activity is summarized as follows:
Years Ended December 31,
----------------------------------------------------------------------------
1998 1999 2000
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------- ------------- --------- ------------- ---------
Outstanding at beginning of year 746,000 $ 0.73 746,000 $ 0.73 538,000 $ 0.73
Options granted - - 538,500 $ 0.73 - $ -
Options exercised - - - - - -
Options canceled, expired or forfeited - - (746,000) $ 0.73 - $ -
------------ ------------- -------------
Outstanding at end of year 746,000 $ 0.73 538,500 $ 0.73 538,500 $ 0.73
============ ============= =============
Options exercisable at year-end 746,000 $ 0.73 538,500 $ 0.73 538,500 $ 0.73
============ ============= =============
As of December 31, 2000, there were 282,500 options for the purchase of
shares available for future grants under the Directors Plan.
The following summarizes information about the Company's stock options
outstanding and exercisable at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Plan Exercise Price Outstanding (In Years) Price Exercisable Price
- ----------------- --------------- ------------- ------------ ------------ ------------- -----------
1987 Plan $0.50 to $0.63 1,350,000 3.09 $ 0.51 1,350,000 $ 0.51
============= =============
Non-Plan $0.27 to $0.50 4,025,000 1.28 $ 0.30 4,025,000 $ 0.30
============= =============
1992 Plan $0.16 to $0.27 6,373,678 5.89 $ 0.22 3,228,118 $ 0.23
$0.31 to $0.44 22,576,542 7.79 $ 0.38 13,236,274 $ 0.37
$0.50 to $2.88 18,107,470 2.75 $ 0.58 15,866,481 $ 0.59
------------- -------------
Total 1992 Plan 47,057,690 32,330,873
============= =============
Director's Plan $0.66 to $0.75 538,500 3.09 $ 0.73 538,500 $ 0.73
============= =============
Warrants:
The company's warrants are granted from time to time at the discretion of
the Board of Directors. The exercise price of all warrants generally must be at
least equal to the fair market value of such shares on the date of grant.
Generally, warrants are exercisable over a three to seven year period as
determined by the Board of Directors and vest on the grant date.
In July 1999, in connection with the PRG Note, PRG was granted a common
stock warrant equal to either (i) the number of shares of the company's common
stock (6,666,667) which may be purchased for an aggregate purchase price of
$1,250,000 at the fair market value on July 19, 1999 or (ii) the number of
shares representing five percent of the fully paid non-assessable shares of
common stock of DMC at the purchase price per share equal to either (x) if a DMC
qualified sale (a sale in one transaction in which the aggregate sales proceeds
to DMC equal or exceed $5,000,000) had closed on or before December 31, 1999,
the purchase price per share determined by multiplying the price per share of
DMC common stock or security convertible into DMC common stock by seventy-five
percent (75%) or (y) if a DMC qualified sale had not closed on or before
December 31, 1999, at an aggregate price of $1,250,000. Such warrant expires (1)
eighteen months after the date of the DMC qualified sale or (2) in all other
cases on July 19, 2004.
During 2000, warrants were issued to the principals of a placement agency
that had assisted in financing transactions for NCT Audio in 1997. These
warrants replaced warrants that had been issued to and canceled by the placement
agent. Warrants to acquire 167,500 shares were issued in connection with the
Series G Preferred Stock transaction (see Note 13). Warrants to acquire 100,000
shares of common stock were issued to an outside consultant in 2000. In
September 2000, the company issued warrants for 10 million shares of common
stock to the placement agent for certain of the company's recent financing
transactions. Effective January 11, 2001, the holder has agreed to stand down
his right to such shares subject to an increase in authorized common shares
approved by the company's shareholders.
On September 27, 2000, in connection with the execution of a private equity
credit agreement the company issued a warrant for 250,000 shares of the
company's common stock. The fair value of this warrant did not impact the
consolidated statements of equity at December 31, 2000. The company is currently
in renegotiations regarding amendments to certain details of the Private Equity
Credit Agreement.
Warrant activity is summarized as follows:
Years Ended December 31,
----------------------------------------------------------------------------
1998 1999 2000
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------- ------------- --------- ------------- ---------
Outstanding at beginning of year 3,146,920 $ 0.81 4,372,684 $ 0.82 3,735,414 $ 0.77
Warrants granted 1,588,164 $ 0.92 2,587,875 $ 0.75 10,979,875 $ 0.34
Warrants exercised - - - - - -
Warrants canceled, expired or forfeited (362,400) $ 1.16 (3,225,145) $ 0.82 (333,625) $ 0.89
------------ ------------- -------------
Outstanding at end of year 4,372,684 $ 0.82 3,735,414 $ 0.77 14,381,664 $ 0.44
============ ============= =============
Warrants exercisable at year-end 4,172,684 $ 0.86 3,735,414 $ 0.77 14,381,664 $ 0.44
============ ============= =============
The following table summarizes information about warrants outstanding at
December 31, 2000 except the PRG Warrant described above:
Warrants Outstanding Warrants Exercisable
----------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (In Years) Price Exercisable Price
--------------- ------------- ------------ ------------ ------------- -----------
$0.32 to $0.34 10,250,000 2.68 $ 0.32 10,250,000 $ 0.32
$0.46 to $1.66 4,131,664 3.23 $ 0.74 4,131,664 $ 0.74
15. Related Parties:
Between 1993 and 1994, the company entered into five agreements with Quiet
Power Systems, Inc. ("QSI"). Environmental Research Information, Inc. ("ERI")
owns 33% of QSI and Jay M. Haft, a director of the company and former Chairman
of the Board of Directors, owns another 2% of QSI. Michael J. Parrella, Chief
Executive Officer of the company and Chairman of the Board of Directors, owns
12% of the outstanding capital of ERI and shares investment control over an
additional 24% of its outstanding capital. Jonathan M. Charry, the company's
Senior Vice President, Corporate Development, hired in January 2000, owns 20% of
the outstanding capital stock of ERI and 3% of the outstanding capital stock of
QSI. In March 1995, the company entered into a master agreement with QSI which
granted QSI an exclusive worldwide license to market, sell and distribute
various quieting products in the utility industry. Subsequently, the company and
QSI executed four letter agreements, primarily revising payment terms. On
December 24, 1999, the company executed a final agreement with QSI in which the
company agreed to write-off $0.2 million of indebtedness owed by QSI in exchange
for the return by QSI to the company of its exclusive license to use NCT
technology in various quieting products in the utility industry. Such amount,
originally due on January 1, 1998, had been fully reserved by the company.
The company's former Chairman of the Board of Directors, who has continued
as a director, received compensation from the company in 1998, 1999 and 2000 of
$96,000, $86,000 and $64,500, respectively.
The company's Chief Executive Officer, who, at December 31, 2000, holds
options and warrants for the right to acquire an aggregate of 26,577,129 shares
of the company's common stock, received an incentive bonus equal to a 1% cash
override on all the cash and cash equivalents received by the company upon the
execution of agreements or other documentation evidencing transactions with
unaffiliated parties. For the year ended December 31, 1998, 1999 and 2000,
approximately $206,000, $169,000 and $363,000 was paid by the company in
connection with this arrangement.
The company's Senior Vice President Chief Financial Officer, who at
December 31, 2000 holds options and warrants for the right to acquire an
aggregate of 1,533,742 shares of the company's common stock, through November
30, 2000 had an incentive bonus arrangement equal to 1/2% cash override on cash
received from certain transactions entered into by the company, with
unaffiliated parties, in which the Chief Financial Officer was directly
involved. Effective December 1, 2000, such bonus arrangement was modified to
include all cash and cash equivalent transactions entered into by the company
with unaffiliated parties. Under this arrangement, the company paid
approximately $134,000 for the year ended December 31, 2000.
The company's Senior Vice President, Corporate Development, who at December
31, 2000 holds options for the right to acquire an aggregate of 1,378,049 shares
of the company's common stock, has an incentive bonus arrangement under which he
receives cash compensation for completion of specified events and receives a
cash override equal to 1% of the value of certain subsidiary financing
transactions and 1/2% of the value of licensing agreements and joint venture
alliances in which he was directly involved. Under this arrangement, the company
paid $35,000 in the year ended December 31, 2000.
On various dates in 2000, the company's Senior Vice President, Corporate
Development, entered into several short-term promissory notes to borrow funds
from the company in anticipation of cash overrides due under the incentive
compensation arrangement described above. As of December 31, 2000, three
promissory notes were outstanding for an aggregate principal amount owed to the
company of $69,379. The notes bear interest at the prime lending rate as
published in The Wall Street Journal on the date of issuance of the notes plus
one percent, or an annual rate of 10.5% for the notes outstanding at December
31, 2000.
During 1998, 1999 and 2000, the company purchased $0.2 million, zero and
zero, respectively, of products from its various manufacturing joint venture
entities.
16. Income Taxes:
The company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Accordingly, deferred tax assets and liabilities are established for temporary
differences between tax and financial reporting bases of assets and liabilities.
A valuation allowance is established when the company determines that it is more
likely than not that a deferred tax asset will not be realized. The company's
temporary differences primarily result from depreciation related to machinery
and equipment and compensation expense related to warrants, options and
reserves.
The company files consolidated federal tax returns and separate state tax
returns. At December 31, 2000, the company had available net operating loss
carry forwards of approximately $104.8 million and research and development
credit carryforwards of $2.0 million for federal income tax purposes of which
$10.5 million expire within the five years ended December 31, 2005 and $94.3
million expire at various dates December 31, 2006 through December 31, 2020.
These net operating losses include $6.6 million of net operating losses of NCT
Audio Products, Inc. during a period of time when NCT Audio Products, Inc. was
not part of the consolidated group for tax purposes. The company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
In addition, the net operating losses of acquired companies prior to their
related acquisitions by the company have not been included above. These net
operating losses would be limited under Section 382 of the Internal Revenue
Code.
The difference between the statutory tax rate of 34% and the company's
effective tax rate of 0% is due to the increase in the valuation allowance of
$1.4 million and $3.3 million in 1998 and 1999, respectively. In 2000, the
difference is as follows:
Statutory rate (34.0)%
State tax net of federal effect (5.6)
Permanent differences 15.9
Effect of adjustments to prior
year net operating loss carryforwards (35.5)
Other 2.0
Increase in valuation allowance 57.2
--------
-%
========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
December 31,
-------------------------
1999 2000
----------- ----------
Accounts receivable $ 13 $ 24
Inventory 180 34
Property and equipment 82 68
Accrued expenses 58 170
Stock compensation 2,924 3,129
Other 414 541
----------- ----------
Total temporary differences $ 3,671 $ 3,996
Federal net operating losses 30,285 35,639
Federal research and development credits 1,747 2,006
----------- ----------
$ 35,703 $ 41,611
Less: Valuation allowance (35,703) (41,611)
----------- ----------
Deferred taxes $ - $ -
=========== ==========
17. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. Mr. Valerio alleged that (1) the Company is
guilty of breach of contract; (2) certain amounts and commissions are allegedly
owed to him; and (3) he had suffered damage to his image and reputation among
other injuries alleged. The Company retained an Italian law firm specializing in
litigation and, through its counsel, filed a reply brief responding to Mr.
Valerio's allegations. The Company argued that even if the Tribunal were the
appropriate forum for the suit, Mr. Valerio's claim is groundless because a
valid contract was never formed. Further, the Company argued that Mr. Valerio is
not enrolled in the official Register of Agents and, thus, under applicable
Italian law is not entitled to any compensation. The Tribunal of Milan, sitting
in full bench, heard the case on September 22, 1998. On May 4, 1999, the
Company's Italian law firm informed the Company that the Tribunal of Milan had
granted the Company's objection to lack of venue and had consequently rejected
Mr. Valerio's claim and awarded the Company expenses in the amount of
approximately $6,000.
By a letter dated September 9, 1997, counsel to competitor Andrea
Electronics Corporation ("AECorp.") informed the company that AECorp. believed
NCT was improperly using the term "ANR Ready" and infringing upon a trademark
owned by AECorp. Representatives of existing and/or potential customers also
have informed the company that AECorp. has made statements claiming that the
company's manufacture and/or sale of certain in-flight entertainment system
products infringe a patent owned by the competitor. The company received a
notice dated March 24, 1998 from AECorp.'s intellectual property counsel
notifying the company of its concerns but did not confirm any intention to file
suit against NCT. The company, through special outside counsel, exchanged
correspondence with AECorp. but the parties could not come to any resolution.
The company was informed by representatives of existing and/or potential
customers that AECorp. was continuing to infer that the company was infringing.
On October 9, 1998, the company's Board of Directors authorized litigation
against AECorp. On November 17, 1998, the company and NCT Hearing filed a
complaint against AECorp. in the U.S. District Court, Eastern District of New
York. The complaint requested that the court enter judgment in our favor as
follows: (1) declare that the two AECorp. patents at issue are invalid and
unenforceable and that the company's products do not infringe upon them; (2)
declare that the two AECorp. patents at issue are unenforceable due to misuse by
AECorp.; (3) award the company compensatory damages of no less than $5 million
and punitive damages of $50 million for AECorp.'s tortious interference with the
company's prospective contractual advantages; (4) enjoin AECorp. from stating or
inferring that the company's products or their use are infringing any
AECorp.-owned patents; and (5) award any other relief the court deems
appropriate.
On or about December 30, 1998, AECorp. filed its answer to the company's
complaint. AECorp. generally denied the above allegations and brought
counterclaims against the Company. These include claims that the company has:
infringed the two AECorp. patents at issue and the "ANR Ready" trademark;
violated the Lanham Act through NCT's use of the trademark, and unfairly,
competed with AECorp. by using the trademark.
The company and NCT Hearing have since filed a Reply and requested that the
court dismiss the counterclaims and enter judgment in favor of the company and
NCT Hearing. The company also argued that AECorp. is prevented from recovering
under certain equitable theories and defenses. Discovery in this suit commenced
in mid-1999 and is continuing, although a trial date has not yet been set. In
the opinion of management, after consultation with outside counsel, resolution
of this suit should not have a material adverse effect on the company's
financial position or operations. However, in the event that the lawsuit does
result in a substantial final judgment against the company, said judgment could
have a material effect on quarterly or annual operating results.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit in
a Maryland state court against the company and Michael J. Parrella, its Chief
Executive Officer and Director. The complaint alleges that the company breached,
and Mr. Parrella interfered with, a purported contract entered into "in 1996"
between the company and SCI. SCI claims that under the contract, the company
agreed to pay SCI commissions when NCT received capital from its investors. The
complaint further alleged that SCI is due commissions totaling $1.5 million
because the company refused to honor SCI's right of first refusal. SCI seeks
$1,673,000 in compensatory damages, $50,000 in punitive damages and $50,000 in
attorneys' fees from the company. SCI also seeks $150,000 in compensatory
damages, $500,000 in punitive damages and $50,000 in attorneys' fees from Mr.
Parrella. The company has filed and the court has granted two motions to strike
or dismiss some of the plaintiff's claims. The company has filed for dismissal
of case with prejudice due to plantiff's failure to respond to request of
production of documents. On April 2, 2001 the court ruled in favor of the
plantiff setting aside the company's motion to dismiss with prejudice. A
mediator is to be assigned to the case and a hearing in this matter has been
scheduled for June 20, 2001. Management believes it has many meritorious
defenses and intends to conduct a vigorous defense. In the event the case
results in a substantial judgment against the company, however, the judgment
could have a severe material effect on quarterly or annual operating results.
On June 25, 1998, Mellon Bank FSB ("Mellon") filed suit against Alexander
Wescott & Co., Inc. ("AWC") and the company in a district court in the Southern
District of New York. Mellon alleged that either the company or AWC owe it
$326,000, a sum Mellon purportedly paid to both entities when it acted as escrow
agent for the company in a private placement of securities with certain
institutional investors. The company retained counsel and on or about July 27,
1998, AWC filed its answer, counterclaim and cross-claim against Mellon and NCT.
AWC specifically requested that the court: (1) dismiss Mellon's amended
complaint against AWC; (2) grant AWC commissions totaling $688,000 owed to AWC
by the company; (3) order the company to issue 784,905 shares of its common
stock; (4) declare that AWC is entitled to keep the $326,000 sought by Mellon;
and (5) order the delivery of a warrant to purchase 461.13 shares of the common
stock of NCT Audio. In March 2000, all parties reached a resolution of no
material financial or other consequence to the company, which has been
subsequently approved by the court, in which all matters have been resolved.
On December 15, 1998, Balmore Funds, S.A. ("Balmore") and Austost Anstalt
Schaan ("Austost") 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.
On October 9, 1999, the company, NCT Audio, Balmore, Austost and LH Financial
agreed, in principle, to settle all legal charges, claims and counterclaims
which have individually or jointly been asserted against the parties. In April
2000, all parties reached a resolution of no financial or other consequence to
the company which has been subsequently approved by the court, in which all
matters have been resolved.
On September 16, 1999, certain former shareholders and optionees (the
"Claimants") of Advancel, a majority-owned subsidiary of the company, filed a
Demand for Arbitration against the company with the American Arbitration
Association in San Francisco, CA. On April 25, 2000, both parties reached a
resolution of the matter. All parties withdrew all charges and claims with
exception to the following. Regarding the Stock Purchase Agreement, NCT and
Advancel did not release the Claimants from any claims arising out of or
relating to Claimants' use, misuse, destruction or theft of NCT and/or
Advancel's property, confidential information, trade secrets or intellectual
property or any claims arising out of or relating to the Proprietary Information
and Invention Agreements. Also, NCT and Advancel did not release Claimants from
any of their obligations under the Non-compete Covenants. NCT has no further
obligations to the Claimants under the Stock Purchase Agreement as a result of
the resolution of this matter which was of no financial or other consequence to
the company.
On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against TST and TSA
(the "Respondents") alleging, among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio, breach of fiduciary
duty as a majority shareholder owed to NCT Audio which holds 15% of the
outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. NCT Audio seeks recision of the purchase agreement and recovery of
monies paid to TST for TSA's assets. Concurrently, NCT Audio commenced a
preliminary injunction proceeding in the Delaware Court of Chancery, seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration proceeding. Such court action was subsequently withdrawn by NCT
Audio. On December 8, 1999, Respondents filed an answer and counterclaim in
connection with the arbitration proceeding. Respondents asserted their
counterclaim to recover (i) the monies and stock owned under the extension
agreements; (ii) the $1 million differential between the $9 million purchase
price paid by Onkyo America for TSA's assets and the $10 million purchase price
that NCT Audio had been obligated to pay; (iii) expenses associated with
extending NCT Audio's time to close the transaction; and (iv) certain legal
expenses incurred by Respondents. There is a preliminary schedule of arbitration
for May 2001.
The company believes there are no other patent infringement claims,
litigation, matters or unasserted claims other than the matters discussed above
that could have a material adverse effect on financial position and results of
operations of the company.
18. Commitments and Contingencies:
Leases:
The company is obligated for minimum annual rentals under operating leases
for offices, warehouse space and laboratory space, expiring through March 2010
with various renewal options, as follows (in thousands):
Year Ending
December 31, Amount
----------------------- -----------
2001 $ 1,138
2002 1,147
2003 1,002
2004 739
2005 747
Thereafter 3,341
-----------
Total $ 8,114
===========
Rent expense (net of sublease income) was $0.6 million, $0.6 million and
$1.1 million for the years ended December 31, 1998, 1999 and 2000, respectively.
Benefit Plan Liability:
In April 1996, the company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, certain
health care benefits to employees and directors of the company's United States
operations. The company administers this modified self-insured Benefit Plan
through a commercial third-party administrative health care provider. The
company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million, while combined individual and family benefit exposure
in each Benefit Plan fiscal year is limited to $40,000. Benefit claims in excess
of these individual or maximum aggregate stop loss limits are covered by a
commercial insurance provider to which the company pays a nominal premium for
such stop loss coverage. The company records benefit claim expense in the period
in which the benefit claim is incurred. As of April 9, 2001, the company was not
aware of any material benefit claim liability.
Employment Contracts:
In connection with the acquisition of MIS by Midcore, the company entered
into employment agreements (the "agreements") with Jerry Metcoff, David Wilson
and Barry Marshall-Johnson, the principal shareholders of MSI. The agreements
are each for a term of three years. Compensation and benefits called for in the
agreements for Jerry Metcoff and David Wilson are an annual base salary of
$100,000, an annual bonus of at least $50,000, subject to the achievement of
certain bonus criteria and at the discretion of the board of directors of NCT,
granting of incentive stock options to purchase common shares of NCT.
Compensation and benefits called for in the agreement for Barry Marshall-Johnson
include an annual base salary of (pound) 52,236, commissions of 5% of the face
amount of purchase orders for Midcore's or affiliates' products or services
derived from a predetermined territory and at the discretion of the board of
directors of NCT, and granting of incentive stock options to purchase common
shares of NCT.
In connection with the acquisition of TRN, on August 24, 2000, the company
entered into separate employment agreements (the "TRN agreements") with Allan
Martin, former CEO and shareholder of TRN, as CEO of DMC Cinema, Inc. and Robert
Crisp, former President and shareholder of TRN, as President of DMC Cinema and
Executive V.P. Sales of DMC and subsidiaries. The TRN agreements shall have a
term expiring on June 30, 2003. For Mr. Martin, compensation called for in the
TRN agreements is an annual base salary of $135,000, with an incentive cash
award of up to 75% of his salary based upon the satisfaction of targets
established by management and approved by the DMC board of directors on or
before January 31 of each year for such year. For Mr. Crisp, compensation called
for in the TRN agreements is an annual base salary of $120,000, with an
incentive cash award to be further negotiated during the second quarter of 2001.
Mr. Crisp shall also receive as additional compensation, sales commissions on
gross advertising revenue as follows; (a) 5% of the gross amount of all
advertising procured by Mr. Crisp and (b) 3% of the gross amount of all other
advertising sales with respect to the business of DMC and subsidiaries.. In
addition, in exchange for industry knowledge, DMC granted "Founder's" stock
equal to 4 1/16% of DMC Cinema's fully paid and non-assessable voting common
stock to each. Benefits granted to each include medical benefits in accordance
with NCT corporate policy, a monthly automobile allowance of $450.00 and four
(4) weeks, paid vacation, accrued in accordance with the provisions of the TRN
agreements. The TRN agreements also state that DMC stock options shall be
granted at the discretion of the board of directors of DMC to purchase common
shares of DMC.
Minimum Royalty Commitments:
As of December 31, 2000, the company is obligated under various agreements
for minimum royalty payments of $60,000 for each of the years ended December 31,
2001, 2002, 2003 and 2004.
19.Business Segment Information:
(In thousands of dollars)
Segment
----------------------------------------------------------------------------------
Total Grand
Media Communications Technology Segments Other Total
----------------------------------------------------------------------------------
For the year ended
December 31, 2000:
Net Sales - External $ 1,145 $ 1,255 $ - $ 2,400 $ 512 $ 2,912
Net Sales - Other Operating
Segments 331 887 - 1,218 (1,218) -
License Fees and Royalties 2,065 2,988 3,550 8,603 1,325 9,928
Interest Income/(Expense), net (286) (52) (27) (365) (1,484) (1,849)
Depreciation/Amortization 203 277 17 497 1,517 2,014
Operating Income (Loss) (3,333) (2,740) 2,986 (3,087) (7,237) (10,324)
Segment Assets 12,786 19,218 5,743 37,747 1,635 39,382
Capital Expenditures 27 75 - 102 220 322
For the year ended
December 31, 1999:
Net Sales - External $ 856 $ 712 $ 1,069 $ 2,637 $ 874 $ 3,511
Net Sales - Other Operating
Segments 4 866 - 870 (870) -
License Fees and Royalties 1,356 157 1,100 2,613 939 3,552
Interest Income, net 167 1 - 168 (142) 26
Depreciation/Amortization 14 43 16 73 1,897 1,970
Operating Income (Loss) (13,418) (3,328) (1,453) (18,199) (5,572) (23,771)
Segment Assets 3,191 1,955 728 5,874 7,503 13,377
Capital Expenditures 26 4 3 33 18 51
For the year ended
December 31, 1998:
Net Sales - External $ 383 $ 1,219 $ 69 $ 1,671 $ 851 $ 2,522
Net Sales - Other Operating
Segments 2 1,136 - 1,138 (1,138) -
License Fees and Royalties 350 86 200 636 166 802
Interest Income, net 110 15 - 125 313 438
Depreciation/Amortization 5 38 8 51 979 1,030
Operating Income (Loss) (4,359) (3,709) (658) (8,726) (5,457) (14,183)
Segment Assets 6,752 2,667 922 10,341 5,124 15,465
Capital Expenditures 33 110 34 177 371 548
MEDIA:
NCT Audio:
NCT Audio is engaged in the design, development and marketing of products,
which utilize innovative flat panel transducer technology. The products
available from NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM)
printed grille collection. The Gekko(TM) flat speaker is marketed primarily to
the home audio market, with potential in other markets, including the
professional audio systems market, the automotive audio aftermarket, the
aircraft industry, other transportation markets and multimedia markets. The
principal customers are DMC, end-users, automotive original equipment
manufacturers ("OEMs") and manufacturers of integrated cabin management systems.
DMC:
DMC provides place-based broadcast and billboard advertising through a
microbroadcasting network of Sight and Sound(TM) systems within
commercial/professional settings. The Sight and Sound(TM) systems consist of
flat panel transducer-based speakers (provided by NCT Audio), a personal
computer containing DMC's Sight and Sound DBSS software, telephone access to the
Internet, amplifiers and related components. The DBSS software schedules
advertisers' customized broadcast messages, which are downloaded via the
Internet, with the respective music genre choice to the commercial/professional
establishments. DMC will develop private networks for large customers with
multiple outlets such as large fast food chains and retail chains.
Cinema:
Cinema provides entertainment audio programming in multiplex cinemas
nationwide All programming now being delivered to each theater will be converted
to the Sight and Sound system which allows for remote delivery of programming
and advertising to all sites, improving efficiency and enabling the quick
execution of programming changes. The Sight and Sound system also continually
adjusts volume based on background noise so that the audio is always maintained
at a foreground level.
COMMUNICATIONS:
NCT Hearing:
NCT Hearing designs, develops and markets active noise reduction ("ANR")
headset products to the communications headset market and the telephony headset
market. The product lines include the NoiseBuster(R) product line and the
ProActive(R) product line. The NoiseBuster(R) products consist of the
NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a headset used for
in-flight passenger entertainment systems; and communications headsets for
cellular, multimedia and telephony. The ProActive(R) products consist of noise
reduction headsets and communications headsets for noisy industrial
environments. The majority of NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
Pro Tech:
The principal activity of Pro Tech is the design, development and
manufacture of light-weight telecommunications headsets and new audio
technologies for applications in fast-food, telephone and other commercial
applications. It currently has marketing agreements with major companies in the
fast food industry and catalog and Internet site distributors of telephone
equipment, primarily in North America.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
company. NCT Europe provides research and engineering to NCT Audio, NCT Hearing,
DMC and other business units as needed. NCT Europe also provides a marketing and
sales support service to the company for European sales.
Midcore:
The principal activity of Midcore is as a developer of innovative software
based solutions that address the multitude of challenges facing businesses
implementing Internet strategies. Midcore is the provider of MidPoint Internet
infrastructure software that allows multiple users to share one Internet
connection without degrading efficiency and provides on-demand connections, a
software router, a high-performance shared cache, content control, scheduled
retrieval of information and e-mail and usage accounting. Midcore sales are
derived from North America and Europe.
ConnectClearly:
CCC was established for the purpose of focusing on the telecommunications
market and in particular the hands-free market. The technology includes
ClearSpeech(R)-Acoustic Echo Cancellation and ClearSpeech(R)-Compression and
Turbo Compression and ClearSpeech(R) Adaptive Speech Filter(R).
ClearSpeech(R)-Acoustic Echo Cancellation removes acoustic echoes in hands-free
full-duplex communication systems. Applications for this technology are cellular
telephony, audio and video teleconferencing, computer telephony and gaming and
voice recognition. ClearSpeech(R)-Compression maximizes bandwidth efficiency in
wireless, satellite and intra- and Internet transmissions and creates smaller,
more efficient voice files while maintaining speech quality. Applications for
this technology are intranet and internet telephony, audio and video
conferencing, PC voice and music, telephone answering devices, real-time
multimedia multitasking, toys and games and playback devices. CCC products
include the ClearSpeech(R)-Microphone and the ClearSpeech(R)-Speaker. The
majority of CCC's sales are in North America. Principal markets for CCC are the
telecommunications industries and principal customers are OEMs, system
integrators and end-users.
TECHNOLOGY:
Advancel Logic Corporation:
Advancel is a participant in the native Java(TM) (Java(TM) is a trademark
of Sun Microsystems, Inc.) embedded microprocessor market. The purpose of the
Java(TM) platform is to simplify application development by providing a platform
for the same software to run on many different kinds of computers and other
smart devices. Advancel has been developing a family of processor cores, which
will execute instructions written in both Java bytecode and C/C++ significantly
enhancing the rate of instruction execution, which opens up many new
applications. The potential for applications consists of the next generation
home appliances and automotive applications, smartcards for a variety of
applications, hearing aids and mobile communications devices.
Other:
The Net Sales - Other Operating Segments primarily consist of intercompany
sales and items eliminated in consolidation. Other also includes the
telecommunications market and in particular the hands-free market. The
communications technology includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression.
Certain items are maintained at the company's corporate headquarters
(Corporate) and are not allocated to the segments. They primarily include most
of the company's debt and related cash and equivalents and related net interest
expense, certain litigation liabilities and certain non operating fixed assets.
With respect to depreciation and amortization the differences between the
segment totals and consolidated totals relates to assets maintained at
corporate.
20. Geographical Information (by country of origin) -
Total Segments (in thousands):
December 31,
-------------------------------------------
1998 1999 2000
------------ ------------ -------------
Revenues
United States $ 3,209 $ 3,174 $ 11,322
Europe 71 3,755 1,250
Far East 44 134 268
------------ ------------ -------------
Total $ 3,324 $ 7,063 $ 12,840
============ ============ =============
Net (Income) Loss
United States $ 13,728 $ 23,353 $ 10,133
Europe 12 (86) (117)
Far East 443 504 308
------------ ------------ -------------
Total $ 14,183 $ 23,771 $ 10,324
============ ============ =============
Identifiable Assets
United States $ 15,166 $ 13,174 $ 39,237
Europe 218 164 145
Far East 81 39 -
------------ ------------ -------------
Total $ 15,465 $ 13,377 $ 39,382
============ ============ =============
21. Subsequent Events (unaudited):
On January 9, 2001, our subsidiary, Artera Group, Inc., formerly known as
NCT Networks, Inc., entered into a subscription agreement with six accredited
investors pursuant to a private placement of $5.0 million of its convertible
notes. Artera plans to use the proceeds from the issuance of the notes for
working capital purposes. The consideration from investors for the convertible
notes aggregated approximately $2.5 million and consisted of cash, nonrecourse
notes secured by Teltran common stock and 1,190,476 shares of Pro Tech common
stock. The Artera convertible notes mature January 9, 2002 and bear interest at
6% per annum, payable at maturity. Such convertible notes are convertible into
shares of Artera common stock by dividing the principal to be converted by 100%
of the average of the three lowest closing bid prices for the Artera common
stock on the principal market or exchange where the Artera common stock is
listed or traded for the 10 trading days prior to the conversion. Pursuant to an
exchange rights agreement entered into by NCT and the holders of the Artera
convertible notes, such notes are exchangeable for shares of NCT common stock
from and after May 9, 2001 at an exchange price per share of 100% of the average
closing bid price of NCT common stock for the five trading days prior to the
exchange. NCT registered 20 million shares of common stock that NCT may be
obligated to issue upon the exchange of the Artera convertible notes.
On January 23, 2001, Artera entered into an agreement with Teltran to
acquire all of the capital stock of Teltran's subsidiary, the Web Factory,
Limited, a U.K. based company involved in Internet-based communications for
small companies, and certain other assets. Artera agreed to pay Teltran and its
investors up to $0.4 million in cash and up to 4,940,000 stated value in pounds
sterling of Artera's Series A Convertible Preferred Stock. Artera completed its
acquisition of the Web Factory in March 2001.
On January 25, 2001, NCT defaulted on the repayment of $1.0 million of
secured convertible notes. Under the terms of default provision of the note the
company may be obligated to issue 1,034,972 shares of common stock (see Note
10).
On April 14, 2001, NCT defaulted on the repayment of the $0.5 million
promissory note entered into on February 13, 2000 (see Note 10).
On January 11, 2001, the company, DMC and PRG entered into a resolution
agreement, known as the Agreement, to exercise the NCT warrant issued pursuant
to the warrant agreement as modified, and to exchange common stock in NCT
("Warrant Stock") in exchange therefore: (i) the terms under which NCT will
register the stock received upon the exercise of such warrant for sale, (ii) the
terms under which PRG will purchase 4% of the common stock of DMC for the
consideration provided herein, (iii) the terms under which the parties will
settle certain invoices and (iv) the terms under which NCT will purchase the
equipment covered by the lease agreement. NCT will file to register the Warrant
Stock as provided in the agreement and PRG or the escrow agent will sell such
stock with proceeds to be distributed as provided (1) DMC shall pay PRG on or
before May 31, 2001 $0.9 million in satisfaction of the Promissory Note dated
November 30, 2000. (2) DMC shall pay PRG $0.1 million for the documented
invoices ("invoices") in excess of the $0.9 million satisfied in (1) above. DMC
shall pay PRG $0.8 million for the purchase of 105 DBS Systems and 680 speakers
currently under lease. Provided that PRG receives at least one-third of the
total amount payable no later than each of January 31, 2001, March 31, 2001 and
May 31, 2001 lease payments will continue through January 31, 2001 at the
current rates provided under the lease agreement and will terminate at such
time. Such payments will be applied first to the equipment purchase, next to the
lease payments through January 31, 2001 (or subsequent thereto if NCT defaults
on its obligation hereunder) next to the payment of invoices, next to the
payment of interest and principal on the convertible note. Finally, to the
amount, if any, due with respect to the warrant shares residual value. Upon
satisfaction of all the terms of the resolution agreement, PRG releases NCT and
DMC from any and all obligations including but not limited to exclusivity of
service and source requirements and all agreements between the parties will be
terminated. Upon completion of payments provided within the agreement, the
warrant stock shall be deemed to be cancelled and PRG's rights thereunder shall
have no further effect. The company has not paid the January 31, 2001 and March
31, 2001 installments and is currently in default of the Agreement.
On February 5, 2001, a former shareholder of TRN filed suit against TRN's
former Chief Executive Officer and President and TRN in the Circuit Court of the
Sixth Judicial District for Pinellas County, Florida. The plaintiff's complaint
alleges that TRN breached an alleged oral escrow agreement arising out of the
sale of TRN stock to Cinema by TRN's shareholders to the plantiff and seeks
unspecified damages. On March 7, 2001, TRN filed a motion to provide additional
time to respond to the complaint through April 6, 2001, which was granted by the
court on March 13, 2001. On April 4, 2001 the company filed for dismissal of
case with prejudice due to plantiff's failure to state a claim upon which relief
may be granted. TRN denies the material allegations of the complaint and intends
to vigorously defend the action.
On January 29, 2001, NCT Video received formal written notice of default
from ADT of a material obligation with respect to the product development and
license agreement, known as the agreement, entered into on September 28, 2000,
by the two companies. Upon receipt of this notice of default, NCT Video has
sixty (60) days to cure its default as described in the agreement. In the event
NCT Video fails to cure the default, the agreement and the letter addendum
thereto will automatically terminate upon the conclusion of the sixtieth (60)
day, and ADT shall have no further obligations thereunder. As part of the
company's effort to cure the default, on February 20, 2001 the company agreed to
issue 187,500 shares of Pro Tech common stock in payment of $75,000. Such amount
represents one-half of the initial installment of the development fee due to
ADT.
On March 30, 2001, NCT and NXT plc ("NXT"), a fully listed company on the
London Stock Exchange, entered into an agreement to reorganize the existing
cross license agreements between the two companies. The agreements, that began
in 1997, relate to flat panel speaker technology. Under the new agreements, NCT
will receive 2 million ordinary NXT shares in consideration for the cancellation
of the 6% royalty payable by NXT to NCT Audio Products. The NXT shares to be
issued have a value of approximately $9.2 million. Additionally, ownership of
certain intellectual property, the rights to which were previously granted NXT,
has been transferred to NXT. NXT has licensed NCT and its subsidiaries with
certain NXT and all NCT developed intellectual property. NXT will design a
low-cost flat panel speaker for use by Distributed Media Corporation
International, Ltd. (DMCI) a wholly-owned subsidiary of DMC formed in 2001. Also
under the new agreements, NXT will transfer its 4.8% equity holding in NCT Audio
to NCT in settlement of the exercise price otherwise payable on the exercise of
the option NXT has on 3.9 million shares of NCT's common stock (see Note 5).
On April 12, 2001, the company entered into certain agreements with
Crammer. The private equity credit agreement and associated warrant dated
September 27, 2001 (see Note 13), were cancelled and replaced by a private
equity credit agreement and warrant with terms similar to those of the September
27, 2001 agreement. The company's obligation to issue its common stock under the
new private equity credit agreement is subject to stockholder approval of an
increase in the number of authorized shares of the company's common stock
issuable. The company also entered into (1) an exchange agreement and a
securities purchase agreement to acquire from Crammer $4.0 million of the common
stock of DMC New York, Inc., known as DMC-NY, in exchange for $1.0 million in
cash, approximately 13.3 million shares of the comapny's common stock, and a
$1.0 million convertible note payable to Crammer, and (2) two registration
rights agreements, one relating to the private equity credit agreement and the
other relating to to the exchange agreement and the shares of the company's
common stock which may be issued in payment of the above mentioned convertible
note. The company has also agreed to acquire from Crammer in July 2001 an
additional $1.0 million of common stock of DMC-NY for $1.0 million in cash or
other marketable securities. Furthermore, NCT Video Displays, Inc., known as NCT
Video, has issued a $0.5 million note payable to Crammer in consideration of
$0.5 million in cash previously received from Crammer. The NCT Video note is
convertible into the common stock of NCT Video or exchangeable into the
company's common stock pursuant to the provisions of the note and a related
exchange rights agreement.
22. Selected Quarterly Financial Data (Unaudited):
The following tables contain selected quarterly financial data for each
quarter of 1999 and 2000. The company believes that the following information
reflects all normal recurring adjustments necessary for a fair presentation of
the information for the periods presented. The operating results for any quarter
are not necessarily indicative of results for any future periods.
Year Ended December 31, 2000
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ------------ ------------ ------------- ----------
Net revenue $ 568 $ 835 $ 8,009 $ 3,428 $ 12,840
Gross profit (loss) (55) 467 7,127 2,305 9,844
Net loss attributable to common stockholders (7,211) (3,284) (319) (4,296) (15,110)
Loss attributable to common stockholders per basic/diluted share $ (0.03) $ (0.01) $ (0.00) $ (0.01) $ (0.05)
Year Ended December 31, 1999
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ------------ ------------ ------------- ----------
Net revenue $ 4,183 $ 1,721 $ 710 $ 449 $ 7,063
Gross profit (loss) 3,241 677 (685) (1,153) 2,080
Net loss attributable to common stockholders (7,256) (6,461) (12,413) (8,702) (34,832)
Loss attributable to common stockholders per basic/diluted share $ (0.05) $ (0.04) $ (0.06) $ (0.03) $ (0.18)
INDEPENDENT AUDITORS' REPORT ON SCHEDULE II
Board of Directors
NCT Group, Inc.
We have audited the basic consolidated financial statements of NCT Group, Inc.
and Subsidiaries for the year ended December 31, 2000. Our audit was conducted
for the purpose of forming an opinion on those financial statements taken as a
whole. The information included on Schedule II is the responsibility of
management, and although not considered necessary for a fair presentation of
financial position, results of operations, and cash flows is presented for
additional analysis and has been subjected to the auditing procedures applied in
the audit of the basic consolidated financial statements. In our opinion, the
information included on Schedule II relating to the year ended December 31, 2000
is fairly stated in all material respects, in relation to the basic consolidated
financial statements taken as a whole. Also, such schedule presents fairly the
information set forth therein in compliance with the applicable accounting
regulations of the Securities and Exchange Commission.
/s/ GOLDSTEIN GOLUB KESSLER LLP
- --------------------------------
Goldstein Golub Kessler LLP
New York, New York
April 9, 2001
INDEPENDENT AUDITORS' REPORT ON SCHEDULE II
Board of Directors and Stockholders of
NCT Group, Inc.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements of NCT Group, Inc. as of December 31, 1999 and
for each of the years in the two-year period ended December 31, 1999 taken as a
whole. The information included on Schedule II is presented for purposes of
additional analysis and is not a required part of the basic consolidated
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.
/s/ RICHARD A. EISNER & COMPANY, LLP
- ------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
February 25, 2000
SCHEDULE II
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of
dollars)
- -----------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------
Charged Charged to
Balance at in costs other Balance at
beginning and accounts- Deductions- end of
Description of period expenses describe describe period
- ------------------------------------ ----------- --------- ------------- ------------ ------------
Year ended December 31, 1998 $ 38 $ 232 $ (42) (2) $ - $ 228
Year ended December 31, 1999 228 77 (83) (2) (139) 83
Year ended December 31, 2000 102(7) 25 (22) (2) (35) (3) 70
Allowance for doubtful accounts
Year ended December 31, 1998 $ 472 $ 365 $ (329) (1) $ - $ 508
Year ended December 31, 1999 508 21 - (1) - 529
Year ended December 31, 2000 529 100 (529) (6) - 100
Allowance for inventory obsolescence
Year ended December 31, 1998 $ 3,447 $ 482 $ - $ (655) (4) $ 3,274
Year ended December 31, 1999 3,274 410 - - 3,684
Year ended December 31, 2000 4,042(7) 334 - (24) (8) 4,352
Accumulated depreciation
Year ended December 31, 1998 $ - $ 68 $ - $ - $ 68
Year ended December 31, 1999 68 970 3,125 (5) - 4,163
Year ended December 31, 2000 4,163 1,019 - - 5,182
Accumulated Amortization of goodwill
Year ended December 31, 1998 $ 1,813 $ 480 $ - $ - $ 2,293
Year ended December 31, 1999 2,293 585 - - 2,878
Year ended December 31, 2000 2,878 658 - - 3,536
Accumulated Amortization of patents
Attention is directed to the foregoing accountants' reports and to the
accompanying Notes to Financial Statements.
(1) To write off reserves applied to prior year-end inventory.
(2) To write off fully reserved accounts receivable deemed uncollectible.
(3) To reduce reserve for accounts collected.
(4) To write off tooling against reserve.
(5) To write down goodwill to estimated net realizable value.
(6) To apply to specific prior year-end inventory items.
(7) Increase from year-end due to acquisitions.
(8) To write off fixed asset dispositions against reserve.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /s/ MICHAEL J. PARRELLA Date: April 16, 2001
-------------------------------
Michael J. Parrella,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
-------------------------------------------------------------------------
/s/ MICHAEL J. PARRELLA Chairman of the Board April 16, 2001
- ------------------------------ of Directors and Chief
Michael J. Parrella Executive Officer
Director (Principal
Executive Officer)
/s/ IRENE LEBOVICS President and Secretary April 16, 2001
-----------------------------
Irene Lebovics
/s/ CY E. HAMMOND Senior Vice President April 16, 2001
----------------------------- and Chief Financial
Cy E. Hammond Officer (Principal
Financial and
Accounting Officer)
/s/ JAY M. HAFT Director April 16, 2001
-----------------------------
Jay M. Haft
/s/ JOHN J. McCLOY II Director April 16, 2001
-----------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director April 16, 2001
-----------------------------
Samuel A. Oolie