SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-18267
NCT Group, Inc.
(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 Identification No.)
incorporation or organization)
20 Ketchum Street, Westport, Connecticut 06880
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(Address of principal executive offices) (Zip Code)
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(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, $0.01
par value (Title of Class)
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 $45,724,237 million as of April 26, 2002.
The number of shares outstanding of the registrant's common stock is
434,737,308 as of April 26, 2002.
PART I
ITEM 1. BUSINESS.
A. General Development of Business
Overview
NCT Group, Inc. (OTCBB: NCTI) is a high-tech, intellectual property
development company with over 600 patents and patents pending in its portfolio.
Originally a developer of active noise reduction technology and products, the
company over time transitioned to the development of speech and communications
applications integrating noise and echo cancellation. NCT's strong technology
base of using sound and signal waves to electronically reduce noise and improve
signal-to-noise ratio led to a focus on telecommunications. "NCT," "company,"
"we," "our," and "us" refer to NCT Group, Inc. and its subsidiaries.
NCT's operating revenues are comprised of technology licensing fees and
royalties, product sales, advertising and engineering and development services.
Our total revenues for 2001 consisted of approximately 53.1% in technology
licensing fees and royalties, 43.1% in product sales, 2.6% in advertising/media
and 1.2% in engineering and development services. Total revenues for 2000
consisted of approximately 77.3% in technology licensing fees and royalties,
15.6% in product sales, 6.5% in advertising/media and 0.6% in engineering and
development services.
As of December 31, 2001, NCT held 644 patents and related rights and an
extensive library of know-how and other non-patented technology. The revenue
contribution by our business segments for 1999, 2000 and 2001 is outlined below
in E. Existing Products and in Note 22 - notes to our consolidated financial
statements. Our patents allow us and our subsidiaries and licensees to develop
product lines which include those listed below by our business segments.
Media
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o Sight & Sound(TM)place-based audio and billboard media,
o Gekko(TM)flat speakers, frames, prints and subwoofers,
Communications
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o NoiseBuster Extreme!(R)consumer headsets,
o ClearSpeech(R)microphones, speakers, adaptive speech filters
and other products,
o an aviation headset for pilots,
o an aircraft cabin quieting system,
o ClearSpeech(R)corporate intranet telephone software,
o voice communication web phone for integration into web sites,
o MidPoint(R)Internet software, and
Technology
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o Java(TM)- language based microprocessor cores.
NCT also licenses its proprietary technology to third parties for fees and
royalties. For example, of the product lines outlined above, the aircraft cabin
quieting system is manufactured, marketed and distributed by one of NCT's
licensees. Various NCT technologies are available for licensing including:
active noise reduction; ClearSpeech(R) noise and echo cancellation algorithms;
microbroadcasting technology; MidPoint(R) software; Java(TM) chip technology;
and Artera Turbo(TM) technology.
Business Segments
We operate our business ventures out of separate subsidiaries, organized
into three strategic business segments: media, communications and technology.
Each of our strategic business segments is targeted to the commercialization of
its own products in specific markets. The following table summarizes our
business segments and our ownership of the subsidiaries and other entities in
those segments as of December 31, 2001.
1
NCT Group, Inc.
50% or Greater Ownership
Business Segment % Ownership
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Actual Fully Diluted (a)
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Media Group
Distributed Media Corporation International Limited ("DMCI") (c) 100 100 (b)
Distributed Media Corporation ("DMC") 93 93
DMC Cinema, Inc. 84 84
DMC HealthMedia Inc. 100 100
NCT Audio Products, Inc. ("NCT Audio") 98 98
NCT Video Displays, Inc. ("NCT Video") 100 100
Communications Group
NCT Hearing Products, Inc. 100 100
Pro Tech Communications, Inc. ("Pro Tech") 82 17
NCT Medical Systems, Inc. 90 90
Noise Cancellation Technologies (Europe) Ltd. ("NCT Europe") (c) 100 100
Midcore Software, Inc. ("Midcore") 100 100
Midcore Software Limited (c) 100 100
Artera Group, Inc. ("Artera") 100 50 (d)
Artera Group International Limited ("Artera International") (c) 100 100 (e)
ConnectClearly.com, Inc. ("ConnectClearly") 99 94
Technology Group/Other
Advancel Logic Corporation ("Advancel") 99 99
NCT Muffler, Inc. 100 100
Chaplin Patents Holding Company, Inc. 100 100
NCT Far East, Inc. 100 100
2020 Science Limited (c) 100 100
Footnotes:
(a) In addition to all of the potential dilutions described in this table, under
a December 20, 2001 promissory note of NCT Group, Inc. in the principal amount
of $2,014,270, if any subsidiary of NCT makes a public offering of its common
stock, the holder of the note, Carole Salkind, has the right to exchange all or
any part of the principal amount of the note into that publicly offered common
stock, at the initial public offering price thereof. No provision has been made
for this exchange right in any of the subsidiaries listed, except Pro Tech
Communications, Inc.
(b) Agreements exist for Distributed Media Corporation International Limited to
issue an aggregate of $4,075,000 stated value of its convertible preferred
stock. As of March 31, 2002, none of that preferred stock has been issued
pending agreement by the parties on the terms of conversion into DMCI common
stock and on the other rights of holders of the preferred stock.
(c) Denotes foreign subsidiaries.
(d) Assumes a $1.00 per share price for the Artera Group, Inc. common stock into
which the outstanding Artera Group, Inc. series A preferred stock is
convertible. An assumption is necessary because the conversion formula for the
Artera preferred stock is based primarily on the price of Artera common stock on
a public trading market, and no such market yet exists. For more about the
Artera preferred stock, see "Business - O. Acquisitions and Acquisition
Efforts."
(e) In settlement of its obligations to the previous owner of a portion of its
business, Artera Group International Limited had expected to issue approximately
1,700,000 British pounds sterling stated value of its series A preferred stock.
That stock would have been convertible into Artera International's common stock
at a 20% discount to any initial listing price of the common stock. However,
none of that preferred stock was issued and no agreement was reached with that
previous owner regarding the precise terms of the preferred stock. On April 5,
2002, Artera International ceased its Internet service provider operations, and
it is expected to be liquidated. For more about Artera International, see Note 2
- - notes to our consolidated financial statements.
2
Business operations for NCT's material business units during fiscal 2001
include the following:
Distributed Media Corporation:
Distributed Media Corporation is a media and technology company that uses
proprietary digital technology in combination with advanced information
technology and Internet protocol capabilities to deliver audio advertising
messages integrated with CD-quality music to a variety of out-of-home and
professional venues such as retail stores and hospitals. DMC provides
place-based broadcast and billboard advertising through a microbroadcasting
network of Sight & Sound systems. The Sight & Sound systems consist of flat
panel transducer-based speakers (provided by NCT Audio) which serve as printed
billboards, a personal computer containing DMC's Sight & Sound software,
telephone access to the Internet, amplifiers and related components. The
software schedules advertisers' customized broadcast messages, which are
downloaded via the Internet, with the music genre chosen by the commercial or
professional venue owner. DMC will develop private networks for large customers
with multiple outlets such as large fast-food chains and retail chains and plans
to deploy its Sight & Sound microbroadcasting systems through its subsidiaries
and through joint ventures. DMC generates revenue from advertising sales and
licensing activities.
DMC HealthMedia Inc., a subsidiary of DMC, was formed in May 2000 for
developing Sight & Sound networks in hospitals and other health care venues. To
date, DMC HealthMedia has signed contracts and letters of intent with several
hospital partners in New York City and has completed an installation at Jamaica
Hospital Medical Center. DMC continues to seek financing sources to provide
financing for the installation of Sight & Sound systems in several North
American hospitals.
As a way of accelerating the growth of DMC and delivering expanded reach to
its advertisers, DMC is supplementing its national account efforts by licensing
Sight & Sound technology in designated market area territories nationwide to
support the deployment of systems to smaller chains as well as independent
retail outlets. (These smaller chains are those with fewer than 15 outlets
contained within a designated market area.) DMC plans to license up to 210
designated market areas (in groups or separately).
DMC has another subsidiary, DMC Cinema, Inc., which was acquired in August
2000 under the name of Theater Radio Network. DMC Cinema provided audio
programming in cinemas, producing and distributing a content mix of music,
trivia, public service announcements and advertisements. However, on February
28, 2002, DMC Cinema ceased business operations. For more about DMC Cinema, see
Note 2 - notes to our consolidated financial statements.
NCT Audio Products, Inc.:
NCT Audio is engaged in the design, development and marketing of products,
which utilize innovative flat panel transducer technology. The products offered
by NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM) printed grille
collection. The Gekko 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 include
Distributed Media Corporation and end-users.
NCT Hearing Products, Inc.:
NCT Hearing designs, develops and markets active noise reduction headset
products to the communications headset and telephony headset markets. Its
product lines include the NoiseBuster(R) and ProActive(R) product lines. The
NoiseBuster 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
functions. The ProActive 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, original equipment manufacturers and the airline industry.
Pro Tech Communications, Inc.:
Pro Tech Communications, Inc., an 82%-owned subsidiary of NCT Hearing
Products, Inc. acquired in September 2000, is a provider of proprietary products
and services to call centers. The principal activity of Pro
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Tech is the design, development and manufacture of lightweight
telecommunications headsets and new audio technologies for applications in
fast-food, telephone and other commercial settings. It currently has marketing
agreements with major companies in the fast-food industry and with catalog and
Internet site distributors of telephone equipment, primarily in North America.
Pro Tech is comprised of three business units. The headset products segment
develops, manufactures and distributes headsets and other communications
products to the call center market and fast-food markets. Pro Tech received an
exclusive license from NCT Hearing for active noise reduction technology as well
as ClearSpeech noise and echo cancellation technologies for use in lightweight
cellular, multimedia and telephony headsets. This technology will provide
differentiation for Pro Tech products. Pro Tech's telecommunication system
integration segment sells and installs analog, digital and Internet protocol
phone systems to call centers as well as to small and medium-sized businesses.
Its call center operation runs a full service call center utilizing the latest
customer relationship management technology.
Noise Cancellation Technologies (Europe) Ltd.:
The principal activity of Noise Cancellation Technologies (Europe) Ltd. is
the provision of research and engineering services to the company in the field
of active sound control technology. NCT Europe provides research and engineering
to NCT Audio, NCT Hearing, DMC and other NCT business units as needed. NCT
Europe also provides a marketing and sales support service to the company for
European sales.
Midcore Software, Inc.:
Midcore Software, Inc., a wholly-owned subsidiary of NCT acquired in August
2000, is 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 which
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. Midcore sells the MidPoint product through a network
of resellers as well as on the Internet. The latest version of the product,
MidPoint 5.0, has been enhanced with an integrated ultra-secure firewall,
SoftHost(TM) distributed web hosting, major additions to its integrated e-mail
server and management features, improved support for broadband connections,
failed line detection with automatic backup, support for Microsoft's virtual
private network, enhanced connection management for digital, analog, cable, T1
and E1 lines, enhanced content control/site blocking and many more useful
features.
Artera Group, Inc.:
Artera Group, Inc.'s Artera Turbo service optimizes last mile performance,
providing high-speed Internet usage to small and medium businesses over any
connection, including dial-up lines. The service includes all other features
necessary for optimal Internet usage-ultra-secure firewall, content control,
e-mail, usage accounting and much more.
Artera Group, Inc. had a U.K.-based information technology subsidiary known
as Artera Group International Limited. That subsidiary offered voice and data
services to the business community. On December 18, 2001, the Board of Directors
of Artera Group International Limited decided to suspend under-performing
operations and reduce employees. On March 21, 2002, the Board decided to cease
all operations. Cessation occurred on April 5, 2002. Artera Group International
Limited is expected to enter liquidation proceedings.
ConnectClearly.com, Inc.:
ConnectClearly was established for the purpose of developing technology for
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-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-Compression maximizes
bandwidth efficiency in wireless, satellite and intranet and Internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. Applications for this technology are intranet and Internet
telephony, audio and video conferencing, personal computer voice and music,
telephone answering devices, real-time multimedia multitasking, toys and games
and playback devices. ConnectClearly products include the ClearSpeech-Microphone
and the ClearSpeech-Speaker. The majority of ConnectClearly's sales are in North
America. Principal markets for
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ConnectClearly are the telecommunications industries and principal customers are
original equipment manufacturers, system integrators and end-users.
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(TM) bytecode and the C/C++
computer language, significantly enhancing the rate of instruction execution,
which opens up many new applications. Potential applications consist of the next
generation home appliances and automotive applications, smartcards for a variety
of applications, hearing aids and mobile communications devices.
On May 10, 2000, Advancel Logic Corp. entered into a license agreement with
Infinite Technology Corporation whereby Infinite Technology Corporation was
granted exclusive rights to create, make, market, sell and license products and
intellectual property based upon Advancel's Java(TM) Turbo-J(TM) technology. The
agreement also granted non-exclusive rights to Advancel's Java(TM) smart card
core.
B. Business Strategy
We sell ownership interests in NCT and our subsidiaries to acquire assets
and funds needed to operate and finance our ventures. Our strategy is to
leverage off our existing base of proprietary technology in order to expand into
industries outside of traditional active noise control such as communications,
audio and microbroadcasting media. Our acquisition of specified assets and all
of the intellectual property of Active Noise and Vibration Technologies, Inc. in
1994 expanded our portfolio of intellectual property and allowed us to license
specific, 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. 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. Active noise reduction systems are particularly
effective at reducing low frequency acoustical noise, or rumbling sounds. Active
noise reduction creates sound waves that are equal in frequency but opposite in
phase to the noise, which is any unwanted acoustical signal. The effect of the
anti-noise signal on the noise signal is the cancellation of the unwanted noise
signal. The illustration that follows shows three sound waves: On the top is the
noise wave, on the bottom is the anti-noise wave created by active noise
reduction, and in the middle is the resulting residual wave that occurs when the
noise wave and the anti-noise wave meet. As can be seen, the residual wave is
nearly flat, meaning that the unwanted noise has been nearly cancelled.
ACTIVE NOISE REDUCTION
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[GRAPHIC OMITTED]
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Signal Enhancement. Our 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
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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 example of 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, NCT purchased the exclusive
rights to manufacture and commercialize a silicon micromachined microphone. The
silicon micromachined microphone 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. The filter is effective against a variety of
stationary noises whose amplitude and pitch change slowly compared to the
spectral variations characteristic of human speech. Adaptive speech filter
applications include teleconferencing systems, cellular telephones and
airphones, telephone switches, echo cancellers, and communications systems in
which background noise is predominant. Adaptive speech filter is currently
available for use on three hardware platforms including personal computers and
fixed and floating digital signal processors.
ClearSpeech(R)-Acoustic Echo Cancellation. Acoustic echo cancellation
removes acoustic echoes in hands-free full duplex communication systems.
Acoustic echo cancellation 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 maximum echo 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. Reference noise filter isolates and
removes interfering signals, such as background radio, television, machine and
siren noise, so communications can be heard more clearly. Reference noise filter
algorithm was designed to remove interference from a desired signal in
applications where a reference signal for the interference is available.
Flat Panel Transducer. Our patented flat panel transducer technology
utilizes ceramic actuators 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 flat panel transducer 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 flat panel transducer
technology include home theatre, professional, automotive and aircraft
applications.
Digital Broadcasting Station System Software. Digital broadcasting station
system 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,
e-mail 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 Virtual Private Network and secure e-mail), audio and
speech technologies (including voice transmission over the Internet, ordinary
telephony, and NCT's proprietary speech-processing algorithms), and unique
performance-enhancing capabilities for large enterprises and Internet service
providers.
Telephone Amplifier Technology. Pro Tech has been awarded a patent
entitled, "Linearization of FET Channel Impedance 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.
Artera Turbo(TM). NCT subsidiary Artera Group's patent-pending technology,
Artera Turbo(TM), produces effective Internet broadband speeds over traditional
56k telephone lines without costly infrastructure upgrades. Artera Turbo solves
the problem of lack of DSL availability and long installation wait times by
enabling businesses to use their existing dial-up connections to achieve speeds
comparable to, or even faster than, DSL.
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ViewBeam(TM) Flat Display Technology. NCT subsidiary NCT Video Displays,
Inc. has acquired the exclusive, worldwide rights to a breakthrough, low-cost,
flat panel video display technology for use in out-of-home and place-based media
markets. In addition, NCT Video has acquired the exclusive rights to manufacture
and distribute televisions utilizing the technology in China. The technology,
protected by six patents pending, is remarkably low cost--only one-tenth that of
flat plasma displays--and will be available in two sizes, 42" diagonal and 70"
diagonal. The display is lightweight and seamless allowing for many panels to be
stacked together to create video walls, or backlit billboards, of virtually any
size. Unlike competition, the panel does not burn in, allowing for the display
of static as well as moving images, and it lasts for 100,000 hours as opposed to
10,000 hours typical of gas plasma displays. NCT Video believes that this
technology will revolutionize the media and television markets.
D. NCT Proprietary Rights and Protection
NCT 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 our patent holdings increase, we
believe the importance of our core patents will diminish from a competitive
viewpoint.
We purchased assets of Active Noise and Vibration Technologies, Inc. in
1994, which included all of Active Noise and Vibration Technologies'
intellectual property rights. Among the material Active Noise and Vibration
Technologies intellectual property rights were its interest in the ten basic
Chaplin Patents which are now solely owned by NCT as the sole shareholder of
Chaplin Patents Holding Co., Inc., formerly a joint venture with Active Noise
and Vibration Technologies. These patents cover inventions made by Professor
G.B.B. Chaplin in the late 1970s and early 1980s, three of which have expired
and the remaining of which expire through the end of 2005. The expiration of
these patents is not expected to have a material impact on our revenue.
The Chaplin Patents form only one group of core patents (active noise
control patents used for headsets) upon which NCT'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. Four NRDC patents have expired, including the Swinbanks patent. The
remaining NRDC patents, including Ross, expire through the end of 2005. The
expiration of these patents is not expected to have a material effect on our
revenue.
As part of the purchase of Active Noise and Vibration Technologies' assets,
we acquired all the rights to nine inventions previously belonging to the
Topexpress Group in the United Kingdom, active noise and vibration control
patents used in headsets, cabin quieting and vibration isolation. 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 Active Noise and Vibration Technologies 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 Topexpress patents expire 2005
through 2012. Other Active Noise and Vibration Technologies patents related to
active auto mufflers, noise suppression headrests, advance algorithms and active
noise headsets have expiration dates ranging from 2004 through 2015 in the U.S.
and 2011 through 2014 for foreign patents. The Warnaka patents expire through
the end of 2003 and their expiration is not expected to have a material impact
on our revenue.
NCT 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 applied for patents on combined feedforward and feedback control,
control using harmonic filters, filters for signal enhancement and speech
filtering, control systems for noise shaping and others.
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In 1994, we obtained a license for the exclusive rights to the silicon
micromachined microphone technology developed by Draper in Cambridge,
Massachusetts. At this time, four patents describing the basic technology have
been issued and expire in 2009, 2010 and 2014 (two patents). In 1995, we
acquired several U.S. patents dealing with adaptive speech filter which were
used in our ClearSpeech(R) product line but which have now expired. However,
there are other patents covering the ClearSpeech technology which expire 2015
and 2018. NCT has patents covering flat panel transducer technology and our
Gekko products expiring 2015 through 2019. A Sight & Sound patent regarding the
method and apparatus for covering audiovisual information expires in 2018. We
have further headset patents expiring 2004 through 2017. Since 1996, we have
been granted 449 new patents.
We hold or have rights to 323 inventions as of December 31, 2001, including
124 United States patents and over 520 corresponding foreign patents for a total
over 644 patents and related rights. We have pending 120 U.S. and foreign patent
applications. Our engineers have made 156 invention disclosures for which we are
in the process of preparing patent applications. Our patents have expiration
dates ranging from 2002 through 2019, with the majority occurring during or
after 2011.
NCT has been granted the following trademark registrations:
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
Sight & Sound(R) microbroadcasting
We have also applied for 14 trademark registrations 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
Artera(TM) high speed Internet connection
Artera Turbo(TM) high speed Internet connection
The Gekko(TM) and ArtGekko(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. Patent and Trademark Office.
No assurance can be given as to the range or degree of protection any
patent or trademark issued to, or licensed by, NCT 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 NCT's owned or licensed patents or trademarks will
afford protection against competitors with similar patents, products or
trademarks. No assurance exists that NCT'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 NCT 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 NCT.
8
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 NCT's 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.
Maintenance fees are charged to maintain granted U.S. patents in force; foreign
patents and applications are subject to an annuity fee in order to maintain the
patents and the pendancy of the applications. If, due to financial constraints,
it becomes necessary for NCT 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, we then will have to prioritize our portfolio accordingly.
E. Existing Products
Introduction
NCT's manufacturing and assembly operations are primarily outsourced and
handled through contracts with key suppliers and partners. Typically we purchase
complete products from these sub-contractors built to our specifications.
Products are then shipped either directly to our customers or to our third-party
warehousing and order fulfillment service provider.
Our warehousing and order fulfillment service provider is responsible for
the receiving, stocking, cycle-counting, shipping and handling of most of our
products. On occasion we may require that some modifications or value-added
service be performed in-house or at a third party contractor.
Each of the existing products we discuss below are produced by NCT and its
subsidiaries rather than our licensees. Revenues recognized for our product
lines based upon our technologies are classified in our statements of operations
as technology licensing fees and royalties, product sales and engineering and
development services. Our product lines that comprised more than 15% of our
consolidated revenue in any one of the last three years are as follows: o
GekkoTM flat speakers, frames, ArtGekkoTM prints and ancillary products
comprised 19.1%, 1.2% and 0.7% of consolidated revenues in 1999, 2000 and 2001,
respectively. o ClearSpeech(R) microphones, speakers and related products
comprised approximately 24.1%, 27.7% and 5.2% of our consolidated revenue in
1999, 2000 and 2001, respectively. o JavaTM microprocessor cores comprised
approximately 30.7%, 27.6% and 9.7% of our consolidated revenue in 1999, 2000
and 2001, respectively. o Pro Tech Communications' product revenue was 4.5% and
20.5% of our consolidated 2000 and 2001 revenue, respectively, and was zero for
1999.
Our marketing activities over the last three years for our products and
services include the following:
o Gekko flat speakers - Gekko products are currently sold through retail
audio stores and direct from NCT. The target is consumers who are
interested in home theater surround sound without bulky box speakers
filling the room.
o Pro Tech headsets - These products are currently sold through a network of
sales reps as well as directly from Pro Tech. The two main targets are
fast-food restaurants and call centers.
o MidPoint software - MidPoint software is sold directly via a website as
well as through a network of sales reps and resellers. The target market is
small to medium-sized businesses.
o Artera Group services - These Internet provider services are sold to small
and medium businesses through a sales rep network.
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
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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
active noise reduction 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 overamplification
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
In September 2000, NCT Hearing licensed technologies to Pro Tech in
exchange for approximately an 80% equity interest in Pro Tech. Pro Tech
currently sells high quality, lightweight headsets to high-profile users, among
them the Boeing Defense and Space Group (prime contractor for the National
Aeronautics and Space Administration space program) and McDonald's, significant
customers to Pro Tech's business. Boeing is a significant customer because,
although the dollar value of the business is small, being a provider to the NASA
space program enhances Pro Tech's technical and engineering prestige which can
translate into sales opportunities with other customers. McDonald's is a
significant customer because of the actual and future potential revenues it
represents, approximately 9% and 12% of Pro Tech's revenues in 2001 and 2000,
respectively. In addition, Pro Tech's arrangement with McDonald's authorizes Pro
Tech to compete for business at McDonald's restaurants worldwide and attend
McDonald's annual international conventions at which new business relationships
may be developed. 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 Apollo. The Apollo headset is Pro Tech's most advanced, lightweight
headset design sold for use with telephone users in the call center and small
office market. It incorporates the use of the most advanced microphone and
speaker components and is designed for durability and comfort over long periods.
The Apollo headset was announced on August 1, 2001 and since its introduction
has been sold directly through Pro Tech's sales force and the internet. It has
also been sold indirectly through our established distributor base in the United
States, Canada and Europe.
The Apollo Freedom Series Headset. A headset with the exact form factor of
the Apollo headset, the Apollo Freedom Series is made to plug directly into
phone systems that already have amplification built into their existing handset.
Through the use of advanced circuitry, many new phone systems have built-in the
added feature of amplification of sound inside each handset phone, therefore not
requiring another amplifier in order to use a headset with the phone system. The
Apollo Freedom Series headset adapts to all of these newer design phone systems
using sophisticated microphone technology and a direct connect phone cord.
The Gemini Amplifier. Introduced in August 2001, the Gemini amplifier is
our latest amplifier. It is a full feature unit designed to be used in nearly
all phone and/or PC phone configurations in the call center and small office
market. The user has full control of receive and transmit sound levels in
addition to being able to work directly with the latest multi-media
configurations employing analog or digital technologies. This amplifier's
circuitry has been awarded a patent by the United States Patent and Trademark
Office. The Gemini amplifier was
10
awarded "Best of Show" in the category Best Desktop/Agent Productivity Tools at
the 12th Annual Call Center & CRM Solutions 2002 Conference & Exposition held
during the week of February 11, 2002.
The USB Adapter. The USB adapter is an adapter that allows the use of an
amplifier and headset in PC phone installations. Several new applications such
as Internet Protocol (IP) telephony, voice recognition and auto attendant allow
for the use of telephone headsets which in most cases improve the performance of
the application. The USB adapter allows the use of our headsets and amplifiers
in these new market niches.
The DSP Intelligent Microphone. The DSP Intelligent microphone is designed
to serve those market niches where the use of a headset is not wanted although
the user still requires the need for headset functionality such as speech
recognition and speech enabling input/output PC gaming applications. This
product allows for the receiving of sound to be very focused in addition to
eliminating all background noise. Pro Tech is currently directing our sales and
marketing efforts towards these emerging PC markets.
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. Pro Tech continues to offer this headset in its fast-food
product line in 2002.
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. Boeing Defense and Space Group is a prime contractor
for NASA and has the responsibility to choose 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 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 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 small office and home office markets 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 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, and we received patent approval for this
technology in 2001. The A-27 was introduced into the call-center market in 2000.
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 are the primary market focus of this
product.
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 employs 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 we believe 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
11
Trinity headset can be worn in a single ear cup version or dual ear cup version.
Like the ProCom, the Trinity is produced with a choice of adapters capable of
interfacing with the electronic amplifiers and telephone systems of most major
manufacturers.
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.
DMC Sight & Sound(TM) Services
DMC, formed as a Delaware corporation in 1998, is a media company that uses
advanced information technology capabilities to deliver place-based billboard
and audio advertising messages integrated with CD-quality music via Sight &
Sound. Using a proprietary digital network of local microbroadcasting systems,
Sight & Sound is an advertising medium with flexibility in linking advertising
messages to precisely targeted demographics. Sight & Sound provides advertisers
with a place-based medium in out-of-home commercial and professional venues
which is comprised of a stationary billboard format and broadcast music and
advertisements. The source of the sound of the DMC system is our digital
broadcast system which contains a computer with a hard drive, an amplifier,
sound compression unit and other electronic devices. The music is downloaded
from the DMC home office to the hard drive through the Internet and then played
through flat panel speakers we have installed in the store. The viability of
this business is dependent on advertising placements. DMC pays the Sight & Sound
locations a percentage of the advertising revenue generated by the installed
location. To date, our advertising placements have been limited.
A key aspect of DMC's business is its ability to deliver demographically
targeted advertising to consumers. DMC is deploying Sight & Sound nationwide
through several large retail chains and expects to have a national presence by
the end of 2002. The locations for Sight & Sound installations include music,
entertainment, retail, and healthcare venues, among others in the U.S. DMC will
prioritize the installation of its Sight & Sound systems in the top designated
market areas in order to optimize advertising sales. Sight & Sound is now being
deployed by DMC in retail stores pursuant to five-year contracts with Barnes &
Noble College Bookstores and Wherehouse Entertainment. These represent
significant venues to DMC as they are attractive to advertisers. The audio
portion of the advertising is downloaded electronically while the print aspect
of our advertisements are sent to independent agents who place the
advertisements in the venues. Typically, the term of an agreement with a retail
chain is an initial 60-day test period for the retail chain followed by a
five-year, automatically renewing contract unless terminated in writing 30 days
prior to the expiration of each five-year term. Barnes & Noble and Wherehouse
Music have completed the 60-day test. DMC at its own cost and expense installs
the Digital Broadcast System equipment in locations selected by the store chain
owner and reasonably approved by DMC. DMC has several supplier sources for the
equipment comprising the Sight & Sound unit. DMC pays to the Sight & Sound
location a
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percentage of advertising revenues, which DMC receives from advertisers, and
which is attributable to the premises' participation as a Sight & Sound
location. DMC will provide music to each Sight & Sound location during normal
business hours at no cost to the location. DMC is dependent on advertising
placements to achieve revenues. As of December 31, 2001, DMC has executed
contracts providing for the placement of our Sight & Sound system in up to
approximately 1,900 retail store locations throughout the U.S. and has entered
into an agreement with Interep, the largest U.S.-based broadcast media sales
firm, to sell advertising into these sites. The retail store locations are under
five-year contracts with three retailers. The parties to the Barnes & Noble
College Bookstores contract are DMC and Barnes & Noble College Bookstores. The
number of Barnes & Noble College Bookstore locations is approximately 340 and
the geographic reach is the U.S. The timetable for installation of the Sight &
Sound systems is in discussion between the contract parties. The contract does
not require annual minimums for shared revenue payments and does not contain
cancellation provisions relating to annual revenue minimums. As of December 31,
2001, 63 locations are currently operating systems of which 38 are Barnes &
Noble College Bookstores and 21 are Wherehouse Entertainment Stores. Of such
locations, 3 were installed in 1999, 52 were installed in 2000 and 8 were
installed in 2001. Our installation process is contingent on having adequate
cash resources and has progressed slowly due to our financial constraints. The
operating systems are geographically dispersed throughout the U.S. including 16
sites in California, 8 sites in Massachusetts, 9 sites in New York, 4 sites in
Illinois, 3 sites in each of Michigan and Pennsylvania, four states with 2 sites
and 12 other states with one site each.
As a way of accelerating the growth of DMC and delivering expanded reach to
its advertisers, DMC is forming national and international affiliate networks.
DMC enters into licensing agreements whereby it grants exclusive licenses to
third parties to use our digital broadcast system and related intellectual
property within a limited geographic area used to characterize regions,
population demographics, reach and so forth for advertisers, known in the
industry as a designated market areas, or DMA, or within a specified retail
chain. We do not sell franchises to any of the licensees of our technology. As
such, we do not believe that federal or state franchising laws have any
relevance in connection with our licensing agreements. National accounts in the
U.S. are large retail chains and national franchises. DMC plans to deploy its
systems to smaller chains as well as independent retail outlets through
licensing to DMA partners. DMC will establish its nationwide network of DMA
partners through the licensing of up to 210 DMAs. DMC has licensed the New York
DMA to DMC New York, Inc. ("DMC NY") and expects to complete licensing of the
Los Angeles DMA in 2002. Please refer to "Certain Relationships and Related
Transactions" for a description of our reacquisition of licenses from DMC NY. We
plan to reacquire the license issued in March 2000 to Eagle Assets Limited to
develop a portion of the New York microbroadcasting region and have accrued $2.0
million for such reacquisition currently being negotiated. We incurred a charge
of $0.6 million (net of $1.3 million reduction of deferred revenue) for this
reacquisition included in write downs of investment and repurchased licenses in
our consolidated statement of operations for the year ended December 31, 2001.
13
Outside of the U.S., DMC is pursuing a similar territory licensing
strategy. On March 30, 2000, DMC licensed Sight & Sound distribution rights in
Israel to Brookepark Limited for $2 million ($1.65 million was collected in cash
and $0.35 million was settled by payment in Pro Tech common stock).
Subsequently, in March 2001, DMC agreed to reacquire this license for $2 million
upon the determination by our Board of Directors that the license was worth at
least that much, and possibly more. We did not obtain a valuation from an
outside firm. The reacquisition was to be 50% from Brookepark Limited and 25%
from each of two transferees from Brookepark: Austost Anstalt Schaan and Balmore
S.A. The aggregate consideration for this reacquisition is proposed to be $2
million which we have accrued in our consolidated financial statements. We
incurred a charge of $0.6 million (net of $1.4 million reduction of deferred
revenue) for this reacquisition included in write downs of investment and
repurchased licenses in our consolidated statement of operations for the year
ended December 31, 2001. As of April 12, 2002, this Israel license had not been
reacquired but terms are in negotiation. Other international licenses are in
negotiation.
Aggregate license fees recognized for DMC were $850,000 in 1999, $2,056,000
in 2000 and $222,000 in 2001. The license fees were deferred in accordance with
our revenue recognition policy. Upon our decision to reacquire DMC licenses, we
reduced the remaining deferred revenue to zero. None of our DMC licensees has
generated any revenue with the technology DMC licensed to them. None of the
currently outstanding DMC licenses contain a performance standard, as such,
although each license requires that the Sight & Sound system be operated
substantially as described in DMC's business plan. The DMC licensees, including
DMC NY, have not used the DMC licenses to distribute the Sight & Sound systems.
No forfeiture provision exists for non-use under any of the outstanding DMC
licenses.
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 Internet service
provider account, offering tremendous long-term savings over the cost of
multiple phone lines and monthly Internet service provider charges or expensive
high-speed dedicated connections. Through September 30, 2001, approximately
3,800 units have been sold, representing up to a maximum of approximately 47,500
licensed individual end users. Customers may purchase MidPoint by acquiring a
software license - the customer pays a one-time fee for the software. The
customer may choose to purchase version upgrades (as new releases of the
software become available) and user upgrades (if the customer would like their
copy of the software to support more users on his local area network).
MidPoint has unique capabilities including Download DoublerTM which splits
a single request to download files or web page graphics into two requests, each
for half the requested file or graphic, thereby reducing the time it takes to
receive the download request. MidPoint also contains many other features such as
connection teaming (spreading Internet requests across two or more Internet
connections), SofthostTM distributed web hosting (creating and maintaining a
mirror image of a company's most heavily-used web sites on a local hard drive
which allows for rapid delivery to the user), global cache, ultra secure
firewall, integrated e-mail server and content control. In addition, the package
includes many features to make Internet access more efficient and productive,
including 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. It is
MidPoint's combination of all of these capabilities into a single, fully
integrated product that provides its competitive advantage over other products
which may offer only a few of these capabilities.
14
Artera Products
Artera Turbo is a new Internet access technology that improves the
effective performance of communication lines. It does this via a proprietary
series of optimization strategies that increase efficiencies in the movement and
storage of electronic data. We have six patents pending on these performance
enhancement techniques. The core of the Artera Turbo software is the MidPoint
technology which we acquired in August 2000. We then combined the MidPoint
technology with performance enhancing technologies we invented to create the
Artera Turbo product. With Artera Turbo, traditional dial-up connections perform
at broadband speeds of up to 8 times the normal speed of dial-up lines. The
performance of faster connections such as cable, DSL and ISDN is greatly
improved as well. The performance enhancements have been benchmarked in our
laboratories. We offer Artera Turbo on a subscription basis, as software alone
or as a hardware appliance with software embedded therein. Management believes
that, by offering faster effective speeds, Artera Turbo provides a competitive
advantage over other Internet service providers and Internet access products. As
a result, this should have a positive impact on our network services business.
We released Version 1 of Artera Turbo in January 2002.
Revenues
The following table sets forth the percentage contribution of each of our
business segments in relation to total revenues for the years ended December 31,
1999, 2000 and 2001.
(In thousands of dollars)
For the Years Ended December 31,
1999 2000 2001
------------------------------ --------------------------- -----------------------------
Amount % of Total Amount % of Total Amount % of Total
Media $ 2,212 31.3% $3,541 27.6% $2,612 24.6%
Communications 3,513 49.7% 5,911 46.0% 8,019 75.6%
Technology 2,174 30.8% 3,550 27.6% 1,028 9.7%
Other - corporate 4,093 57.9% 6,331 49.3% 10,165 95.8%
Other - consolidating (4,929) (69.7%) (6,493) (50.5%) (11,212) (105.7%)
----------- --------------- ---------- ------------- ----------- ---------------
$ 7,063 100.0% $12,840 100.0% $10,612 100.0%
=========== =============== ========== ============= =========== ===============
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 years ended December
31, 1999, 2000 and 2001.
(In thousands of dollars)
For the Years Ended December 31,
------------------------------------------------------------------------------------------------
1999 2000 2001
---------------------------- ------------------------------- ------------------------------
Products Amount % of Total Amount % of Total Amount % of Total
Hearing Products $ 682 30.9% $ 1,125 56.2% $ 2,582 56.5%
Communications 670 30.3% 462 23.1% 548 12.0%
Audio Products 856 38.8% 318 15.9% 58 1.3%
Software Products - - 96 4.8% 1,380 30.2%
------------- -------------- -------------- -------------- --------------- -----------
Total $ 2,208 100.0% $ 2,001 100.0% $ 4,568 100.0%
============= ============== ============== ============== =============== ===========
Product revenues were approximately 31.3%, 15.6% and 43.1% of total
revenues for the years ended December 31, 1999, 2000 and 2001, respectively.
15
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 years ended December 31, 1999, 2000 and 2001.
(In thousands of dollars)
For the Years Ended December 31,
1999 2000 2001
------------------------------ -------------------------- ------------------------------
Amount % of Total Amount %of Total Amount %of Total
Technology $ 1,100 31.0% $ 3,550 35.8% $ 1,028 18.3%
Communications 1,062 29.9% 3,257 32.8% 2,639 46.8%
Media 1,356 38.2% 2,065 20.8% 1,834 32.6%
Other 34 0.9% 1,056 10.6% 132 2.3%
------------- ------------- ---------- ------------- --------------- -----------
Total $ 3,552 100.0% $ 9,928 100.0% $ 5,633 100.0%
============= ============= ========== ============= =============== ===========
Technology licensing fees and royalties were approximately 50.3%, 77.3% and
53.1% of total revenues for the year ended December 31, 1999, 2000 and 2001,
respectively. Our 2001 technology licensing fees and royalties were primarily
attributable to recognition of deferred revenues of $1.6 million from the New
Transducer Ltd. license, $2.3 million from Teltran International Group, Inc.
license, $1.0 million from Infinite Technology Corporation license and
approximately $0.2 million from DMC licenses. Our 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. of $2.0 million, license to Teltran International
Group, Inc. of $0.4 million and DMC license revenue of approximately $1.1
million. Our 1999 revenue was primarily due to the revenue recognized from the
license to STMicroelectronics S.A. and STMicroelectronics S.r.l. of $2.2
million. See our explanations in "Management's Discussion and Analysis of
Financial Conditions and Results of Operations."
Advertising Revenues
Advertising revenues totaled $0.8 million and $0.3 million and represented
6.5% and 2.6% of total revenue for the year ended December 31, 2000 and 2001,
respectively. The advertising revenue is due to amounts recognized from
in-theater audio advertising supplied to multiplex cinemas ($0.7 million in 2000
and $0.2 million in 2001) and amounts generated from broadcast and billboard
advertising through DMC's network of Sight & Sound systems ($0.1 million in each
of 2000 and 2001).
F. Products Under Development
Silicon Micromachined Microphone
Silicon Micromachined Microphone. The ability to integrate additional
circuitry on the silicon micromachined microphone chip has proven attractive to
potential users. The silicon micromachined microphone'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 silicon micromachined microphone to enhance the
performance of their systems. In the first quarter of 1996, NCT released initial
prototypes of the devices. In December 1997, Siemens Semiconductors of Siemens
AG, now Infineon, licensed our silicon micromachined microphone technology and
agreed to develop, manufacture and market the silicon micromachined microphone.
Prototype samples were received which did not meet NCT's specifications and are
being reworked by Infineon.
NCT Communications
ClearSpeech(R) Product Line. NCT continues to enhance 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 digital signal processors including Analog-Devices' and Texas
Instruments' general purpose digital signal processors 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.
16
G. Strategic Relationships
NCT's establishment and maintenance of strategic relationships with major
domestic and international business concerns has facilitated the licensing and
sale of its technologies and applications. In exchange for the benefits to these
companies' own products offered by our technology, these relationships under the
terms of cooperation agreements or license agreements 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 incorporated in our applications and products, an
important element of our strategy has been to identify and enter into
relationships with manufacturers that will develop and produce custom-made items
for NCT product applications, and with manufacturers of components that will
supply and integrate components for NCT technologies. The following summarizes
NCT's key licensing relationships:
Date Initial
Relationship
Key Licensees Established Applications
- ------------- ------------ ------------
Ultra Electronics Ltd. June 1991 Aircraft Cabin
Quieting Systems
The Charles Stark Draper Laboratory, Inc. July 1994 Microphones
New Transducers Ltd. Mar. 1997 Flat Panel
Transducers
Oki Electric Industry Co., Ltd. Oct. 1997 Communications
Infineon Technologies AG Dec. 1997 Microphones
(formerly Siemens AG)
VLSI Technology, Inc. Feb. 1998 Communications
STMicroelectronics SA & Nov. 1998 Java(TM)platform
STMicroelectronics Srl
Delphi Automotive Systems May 2000 Communications
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 specified 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. The arrangement
with Ultra terminates upon the expiration of the last applicable patent or
rights. Under this agreement beginning in 1998 and continuing through 2013,
Ultra has or will pay NCT a royalty of 1.5% of sales of products incorporating
NCT technology (see Note 4 - notes to the consolidated financial statements for
further details).
17
The Charles Stark Draper Laboratory, Inc.
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 performed engineering services for NCT to
further develop the technology. The silicon micromachined microphone technology
can be used in a wide variety of applications within the acoustic and
communications fields. NCT has developed sub-patents which rely on this
technology as its basis. The patents under this license on average expire in
2009. The agreement terminates when the last of the licensed patents expire
under applicable law, unless earlier terminated by a written agreement of the
parties. This technology provides the basis of the technology that NCT has
licensed to Infineon Technologies AG outlined below.
New Transducers Ltd. (U.K.)
New Transducers Ltd. (U.K.) (known as NXT), its parent, NXT plc, a United
Kingdom company listed on the London Stock Exchange, and NCT executed a
cross-licensing agreement on March 28, 1997. The term of our license to NXT was
five years. Under the terms of the cross-license, we licensed patents and
patents pending which relate to flat panel transducer technology to NXT, and NXT
licensed to us, patents and patents pending which relate to similar technology.
We received the use of NXT's patents and patents pending and the benefit of
NXT's technology, which also involves the shaking of a flat panel to produce
sound. In consideration of the license, during the first quarter of 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 and its
wholly owned subsidiary, NXT, and NCT executed several agreements and other
documents, which terminated the cross-license, and various 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 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 amended 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 amendment 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.
On March 30, 2001, NCT and NXT entered into an arrangement to reorganize
the existing cross-license agreements between the companies. Under the new
agreements, we received 2 million ordinary NXT shares in consideration of the
cancellation of the royalty payable by NXT to NCT Audio under the 1997
cross-license agreement. The NXT shares, upon issuance, had a market value of
approximately $9.2 million. In addition, ownership of specified intellectual
property, the rights to which were previously licensed to NXT, were transferred
to NXT. NXT has licensed to NCT and its applicable subsidiaries the specified
NXT intellectual property and all of the NCT-developed intellectual property.
NXT will design a low-cost flat panel speaker for use by Distributed Media
Corporation International Ltd., a wholly-owned subsidiary of NCT formed in the
United Kingdom in 2001. Also under the new agreements, we acquired 533 shares of
NCT Audio that were held by NXT and allowed NXT a cashless exercise of an option
granted in 1997 to purchase 3,850,000 shares of our common stock. NXT is
required to assist Distributed Media in developing a new flat speaker, and we
will pay royalties on products developed by NXT and sold by us at the greater of
2% of net sales revenue or ten cents per product developed by NXT (see Notes 4,
14 and 15 - notes to the consolidated financial statements for further details).
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 (see Note 4 -
18
notes to consolidated financial statements). This agreement terminates upon the
expiration of the last applicable licensed patent, unless earlier terminated by
written agreement of the parties.
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 silicon micromachined microphone and
will develop, manufacture and market such microphones as surface mountable
devices. This agreement terminates upon the expiration of the last applicable
patent under the agreement or with three months notice if the product is not
developed. The silicon micromachined microphone technology delivers microphone
technology on a silicon chip, a breakthrough in the microphone marketplace.
Infineon and NCT have targeted the silicon micromachined microphone to the
multimedia, cellular phone, wireless phone, voice recognition and other related
markets. The silicon micromachined microphone'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. We anticipate
royalties from Infineon in the future.
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.
We expect that this agreement may generate royalty revenue in the future.
STMicroelectronics SA & STMicroelectronics Srl (France and Italy)
In November 1998, our subsidiary, Advancel, and STMicroelectronics SA
executed a license agreement. Under the terms of the agreement, which included
the payment of a license fee, a minimum royalty within two years and future per
unit royalties which continue for an unspecified term, STMicroelectronics SA
licensed Advancel's tiny2J(TM) for Java(TM) (the 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 designed to accelerate the execution of
Javacard(TM)-based smartcard applications such as electronic purse credit/debit
card functions, identification cards that provide authorized access to networks
and subscriber identification modules that secure various cellular phones
against fraud. This agreement resulted in a significant amount of revenue in
1998 and 1999 and we anticipate additional royalty revenue commencing in 2002.
Delphi Automotive Systems (U.S.)
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 multimedia computing platform for hands-free cellular communications.
NCT's patented ClearSpeech algorithm cancels approximately 95% of background
road, tire, wind, engine and traffic noise from hands-free communications,
allowing the party receiving the communication to hear speech more clearly.
Although NCT has not recognized any royalty revenue from Delphi to date, we
anticipate that this royalty source may be significant in the future.
H. Marketing and Sales
In addition to marketing our technology through strategic licensing
agreements as described above, as of March 31, 2002, we had an internal sales
and marketing force of 24 employees, 4 independent sales representatives and our
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.
Financial information relating to domestic and foreign sales and sales for
the years ended December 31, 1999, 2000 and 2001 is set forth in Note 23 of the
notes to the consolidated financial statements. NCT does not have a significant
foreign exchange transaction risk because the majority of its non-U.S. revenue
is denominated
19
and settled in U.S. dollars. The remaining intercompany 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 original equipment manufacturers,
distributors and end users in various industries worldwide. As outlined below,
our three largest product customers accounted for approximately 20.5% of product
revenues during 2001 and 6.9% of aggregate gross accounts receivable of $1.0
million at December 31, 2001.
(In thousands of dollars)
As of December 31, 2001
and For the Year then Ended
---------------------------------
Customer Receivable Revenue
------------------------------------ ------------- ----------------
Muzak $ 47 $ 521
AM-COM 4 231
McDonalds 18 185
Sharper Image 36 180
Clever Devices - 153
HM Electronics 25 86
All Others 563 3,212
------------- ----------------
Total product $ 693 $ 4,568
============= ================
As outlined below, our three largest technology licensing fees and royalty
customers accounted for approximately 87.7% of technology licensing and royalty
revenues during 2001.
(In thousands of dollars)
As of December 31, 2001
and For the Year then Ended
----------------------------
Customer Receivable Revenue
- --------------------------------------- ----------- ------------
Teltran International Inc. $ - $ 2,305
New Transducers Ltd. (NXT) - 1,605
Infinite Technology Corporation - 1,028
OKI Electronic Industry Co., Ltd. - 219
Ultra Electronics, Ltd. 37 115
Brookepark Ltd. - 111
Eagle Assets Ltd. 250 111
Sharp Corporation - 75
All Others 34 64
----------- ------------
Total licensing fees and royalties $ 321 $ 5,633
=========== ============
Our payment terms are dependent on the type of revenue. Generally, trade
receivables are due 30 to 60 days after the invoice date; joint venture,
technology and royalty receivables are due 30 days after they are earned; and
license receivables are due normally upon execution of the agreement.
NCT 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 the creditworthiness of the customer.
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 six banks.
20
J. Competition
We have a number of direct competitors. Our principal competitors in active
control systems include Bose Corporation, Lord Corporation, Matsushita Electric
Industrial Co., Ltd., Sennheiser Electronic Corp. and Sony Corporation, among
others. Our principal competitors in speech applications include IBM
Corporation, Lucent Technologies, Inc. and Texas Instruments, Incorporated. To
our 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.
Competition faced by our products includes:
Competitive
------------------------------------------------------------------
Product Competition Advantages Disadvantages
--------- ----------- ---------- -------------
NoiseBuster headphone Koss, Sony, Bose High performing active Name recognition; limited
noise reduction, low cost marketing
products
Gekko flat speakers Sony, Aiwa, Bose, and any other Flat wall-mounting design, Name recognition; limited
speaker manufacturer greater sound dispersion, marketing
wide choice of decorator facades
ClearSpeech noise cancellation Lucent, Texas Instruments, other High-quality noise cancellation, Name recognition; limited
algorithm large communications companies avoidance of voice marketing
quality degradation
ClearSpeech echo cancellation Lucent, Texas Instruments, other High-quality echo cancellation, Name recognition; limited
algorithm large communications companies avoidance of voice marketing
quality degradation
MidPoint software Hardware routers, freestanding Comprehensive software solution - Name recognition; limited
firewalls eliminates need to purchase various marketing
independent software and hardware
products and configure them to
work together
DMC's Sight & Sound system In-store music providers such as Ongoing cash incentives to site Name recognition; limited
Muzak: other advertising media owners, demographically targeted marketing
opportunity for advertisers
Artera Group's Artera Turbo Other Internet service providers Delivers broadband speeds from dial-up Name recognition; limited
technology lines and greatly improved speed marketing
from broadband connections such as
DSL and cable modem
K. Government Contracts
Prior to 1998, NCT acted as a government subcontractor in connection with
the performance of various 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 our business. No such contracts were in
effect during 1999, 2000 or 2001.
21
L. Research and Development
NCT-sponsored research and development expenses aggregated $6.2 million,
$4.4 million and $6.0 million for the years ended December 31, 1999, 2000 and
2001, respectively. The research and development services that had been conduced
at Advancel were outsourced to Infinite Technology Corporation commencing in the
third quarter of 2000. This arrangement provides for the development by Infinite
Technology Corporation of a JavaTM-based digital signal processor semiconductor
chip and the joint development of microprocessors or semiconductor chips in the
future. Our objective in outsourcing the engineering and development services
work previously performed at Advancel was to lower our costs in providing those
services while retaining the microprocessor design capabilities on an outsourced
basis. The development agreement does not have a definite expiration date;
however, the parties expect that the research and development work will be
performed by Infinite Technology Corporation within 24 months. The development
fee will be paid with shares of our common stock in lieu of cash payments. We
made an upfront payment with our shares of common stock to fund ITC's
development services because ITC was not willing to commit its own working
capital for the development work. See Notes 4 and 5 - notes to the consolidated
financial statements for further details.
Infinite Technology Corporation is the semiconductor original publishing
enterprise specializing in the design, manufacturing and marketing of digital
signal processing solutions to create system-on-chip products utilizing its
proprietary RADcore(TM) technology. Founded in 1991, Infinite Technology
Corporation also provides integrated circuit design services and software
development. In May 2000, NCT's subsidiary, Advancel Logic Corporation, entered
into a license agreement with Infinite Technology Corporation whereby Infinite
Technology Corporation was granted exclusive rights to create, make, market,
sell and license products and intellectual property based upon Advancel's
Java(TM) Turbo-J(TM) technology. The agreement also granted non-exclusive rights
to Advancel's Java(TM) smart card core.
Our key research and development activities over the last three years
include:
o improvement to our echo cancellation and noise filtering algorithms
including porting to specific hardware platforms and processor cores;
o development of various versions of our ClearSpeech microphone technology;
o improvements to the active noise cancellation technologies used in our
headset products;
o development of the piezoelectric flat panel transducer which forms the
basis for the Gekko line of speaker products;
o development of new algorithms and systems;
o development of advertisement play verification software;
o development of an ambient noise compensator for commercial speaker
applications; and
o development of our echo cancellation/noise filtering software module
appropriate for integration into an Internet telephony program.
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 our
capital expenditures, earnings or competitive position.
N. Employees
NCT had 87 employees as of March 31, 2002. The employees include 24 in
sales and marketing; 15 in executive and administrative roles; 15 in the areas
of finance, accounting, human resources, legal, information technology and
intellectual property; and 33 in engineering, operations and production. None of
our employees is represented by a labor union. NCT considers its relationships
with employees to be satisfactory.
O. Acquisitions and Acquisition Efforts
Please refer to Note 2 - notes to our consolidated financial statements for
further information about acquisitions in 2000 and 2001. In 2000, we acquired
Theater Radio Network, Inc., Midcore Software, Inc. and Pro Tech Communications,
Inc. In 2001, we acquired Artera Group International Limited and 25% of DMC New
York, Inc. Information about other acquisition efforts in 2001 follows.
22
On February 28, 2001, our subsidiary, Artera Group, Inc., and CompuHelp
Technologies, Inc., a national Internet service provider based in the New York
metropolitan area, entered into a letter of intent. By the terms of the letter
of intent, Artera would acquire CompuHelp by purchasing from CompuHelp's two
sole shareholders all of the outstanding capital stock of CompuHelp in
consideration for $500,000 in cash and $1,000,000 in aggregate stated value of
Artera convertible preferred stock. Artera would also agree to assume up to
$90,000 of CompuHelp's bank debt. In addition, if CompuHelp's Internet service
provider business reached revenue and gross margin targets in the eight quarters
following closing, up to an additional $2,000,000 of Artera convertible
preferred stock would be issuable to CompuHelp's two selling shareholders. The
letter of intent remained exclusive until April 30, 2001. In July 2001, Artera
abandoned its effort to acquire CompuHelp and let the letter of intent to
acquire CompuHelp expire.
In May 2001, we entered into a letter of intent to acquire 50% of the
capital stock of Digital Compact Classics, Inc. in exchange for our grant of a
license to Digital Compact Classics to offer Sight & Sound distributed media
service in the Los Angeles area. Under the letter of intent, Wells Investment
Group planned to lead a group of investors to contribute $12 million to Digital
Compact Classics to develop the Sight & Sound network in the Los Angeles
designated market area for Distributed Media Corporation in exchange for 40% of
Digital Compact Classic's equity. We abandoned our effort to acquire Digital
Compact Classic because it ceased to be a going concern. We have fully reserved
for approximately $0.2 million of short-term notes receivable with respect to
Digital Compact Classic.
P. Recent Financing Transactions
Our financing transactions during the year ended December 31, 2001 are
discussed in our consolidated financial statements. Those transactions and the
footnote reference to notes to our consolidated financial statements are
highlighted below:
6% Convertible Notes issued by Artera Group, Inc. Note 10
Private Equity Credit Agreement Notes 14 and 21
NCT Secured Convertible Notes Issued to Carole Salkind Note 10
Other NCT Group, Inc. Convertible Notes and Notes Payable Note 10
Convertible Note issued by NCT Video Displays, Inc. Note 14
Pro Tech Series B Preferred Stock Note 14
Subsequent to December 31, 2001, we have completed the financing
transactions described in Note 26 - notes to our consolidated financial
statements.
Q. Business Segments
For a full discussion of business segments and geographic areas, see Notes
22 and 23 - notes to the consolidated financial statements.
R. Available Information
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may review and copy
these reports at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, DC 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. 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
which is adequate for our purposes. The lease expires in March 2010 and provides
for monthly rental of approximately $28,000 for the first five years and $31,000
for the next five years. This facility also houses our subsidiaries, DMC and
Advancel, and DMC's subsidiary, DMC HealthMedia, and our sales and marketing
offices. The facility also housed the DMC Cinema subsidiary until that
subsidiary ceased operations on February 28, 2002.
23
Until January 15, 2002, NCT maintained a research and technical support
laboratory in Linthicum, Maryland, where we leased approximately 40,000 square
feet of space. The leases provided for monthly rentals of approximately $36,000,
subject to annual inflationary adjustments. The Linthicum facility has been
closed. Substantially all of its operations have been consolidated at our
Cambridge, England facility.
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. Effective January 15, 2002, we consolidated our former
Linthicum, MD research and technical support operations with the activities of
this facility. Until it ceased operations on April 5, 2002, Artera Group
International Limited conducted its operations in a 10,400 square foot rented
facility in Newcastle-under-Lyme, Staffordshire, England which required a
monthly rental of approximately $10,000.
Effective March 31, 2001, DMC Cinema closed its Clearwater, Florida
facility and relocated its operations to Westport, Connecticut. DMC Cinema
previously occupied approximately 1,400 square feet of space located at 4900
Creekside Dr., Suite E, Clearwater, Florida 33760 pursuant to a month to month
rental arrangement. Until its relocation, DMC Cinema incurred monthly lease
costs of approximately $1,400. Effective February 28, 2002, DMC Cinema ceased
operations. See "Business - A. General Development of Business."
Effective April 1, 2001, Pro Tech's executive, sales and manufacturing
offices occupy approximately 13,000 square feet of space located at 4492
Okeechobee Road, Fort Pierce, Florida pursuant to a five-year lease agreement
for a monthly rental of approximately $5,000 increasing to approximately $8,000
over the term.
Effective April 1, 2001, Midcore's sales and product development offices
occupy approximately 6,100 square feet of space located at 900 Straits Turnpike,
2nd Floor, Middlebury, Connecticut pursuant to a five-year lease agreement for
an average monthly rental of approximately $7,800.
Effective March 21, 2002, NCT entered into a lease for approximately 2,400
square feet of space located at 7525 Connelley Drive, Suite C, Hanover, Maryland
for a term of approximately three years at a monthly rental of $2,400.
We believe our facilities provide us with adequate space for the near term
consistent with our current business plans. We do not intend to lease additional
space during 2002.
ITEM 3. LEGAL PROCEEDINGS.
Andrea Electronics Corp. Patent and Trademark Litigation
By a letter dated September 9, 1997, our competitor, Andrea Electronics
Corporation, informed us that it believed NCT was improperly using the term "ANR
Ready" and infringing upon a trademark owned by Andrea. Representatives of
existing and/or potential customers also have informed us that Andrea has made
statements claiming that our manufacture and/or sale of specified in-flight
entertainment system products infringe a patent owned by the competitor. We
received a notice dated March 24, 1998 from Andrea notifying us of its concerns
but not confirming any intention to file suit against NCT. NCT exchanged
correspondence with Andrea, but we could not come to any resolution. NCT was
informed by representatives of existing and/or potential customers that Andrea
was continuing to state or imply that NCT was infringing.
On November 17, 1998, NCT and NCT Hearing filed a complaint against Andrea
in the U.S. District Court for the Eastern District of New York. Our complaint
requested that the court enter judgment in our favor as follows: (1) declare
that the two Andrea patents at issue are invalid and unenforceable and that our
products do not infringe upon them; (2) declare that the two Andrea patents at
issue are unenforceable due to misuse by Andrea; (3) award NCT compensatory
damages of no less than $5 million and punitive damages of $50 million for
Andrea's tortious interference with NCT's prospective contractual arrangements;
(4) enjoin Andrea from stating or implying that NCT's products or their use are
infringing any Andrea-owned patents; and (5) award any other relief the court
deems appropriate.
On or about December 30, 1998, Andrea filed its answer to our complaint.
Andrea generally denied the above allegations and brought counterclaims against
NCT and NCT Hearing. These include claims that NCT has infringed the two Andrea
patents at issue, that NCT's use of the "ANR Ready" trademark violated the
Lanham Act and that NCT unfairly competed with Andrea by using the trademark.
24
NCT and NCT Hearing have since filed a reply and requested that the court
dismiss the counterclaims and enter judgment in our favor. NCT also argued that
Andrea is prevented from recovering under various equitable theories and
defenses. Discovery in this suit commenced in mid-1999. No trial date has yet
been set. In January 2002, NCT's two co-counsel in this action withdrew from the
case because of NCT's untimely payments for legal services. NCT is seeking to
retain new counsel in the action.
Management cannot assess the likelihood that resolution of this suit will
or will not have a material adverse effect on NCT's financial position or
operations. Approximately 3% of our business depends on the patents in dispute.
However, in the event that the lawsuit does result in a substantial final
judgment against NCT, the judgment could have a material effect on our quarterly
or annual operating results.
Schwebel Capital Litigation
On June 10, 1998, Schwebel Capital Investments, Inc. filed suit in a
Maryland state court against NCT and Michael J. Parrella, our Chief Executive
Officer and Director. The complaint alleges that NCT breached, and Mr. Parrella
interfered with, a purported contract entered into in 1996 between NCT and
Schwebel Capital. Schwebel Capital claims that under the contract, NCT agreed to
pay Schwebel Capital commissions when NCT received capital from its investors.
The complaint further alleges that Schwebel Capital is due commissions totaling
$1.5 million because NCT refused to honor Schwebel Capital's right of first
refusal. Schwebel Capital's complaint sought $1,673,000 in compensatory damages,
$50,000 in punitive damages and $50,000 in attorneys' fees from NCT, as well as
$150,000 in compensatory damages, $500,000 in punitive damages and $50,000 in
attorneys' fees from Mr. Parrella. Subsequently, the court granted a motion to
dismiss the claims against Mr. Parrella. On August 8, 2001, NCT entered into a
settlement agreement with Schwebel Capital. NCT paid a nominal amount to settle
all remaining claims of Schwebel Capital against NCT. The settlement terminating
the litigation was approved by the court on or about September 7, 2001.
NCT Audio Arbitration
On September 16, 1999, NCT Audio filed a demand for arbitration before the
American Arbitration Association in Wilmington, Delaware, against Top Source
Technologies, Inc. and its subsidiary, Top Source Automotive, Inc., alleging,
among other things, breach of the asset purchase agreement by which TSA was to
sell its assets to NCT Audio, breach of fiduciary duties to a shareholder (NCT
Audio holds 15% of the outstanding stock of TSA), and breach of the obligations
of good faith and fair dealing. NCT Audio seeks rescission of the asset 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, TST and TSA filed an answer and
counterclaim in connection with the arbitration proceeding. They asserted the
counterclaim to recover (1) 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; (2) expenses associated
with extending NCT Audio's time to close the transaction; (3) the monies and
stock owed under the extension agreements; and (4) specific legal expenses
incurred by them.
The above arbitration arises out of an asset purchase agreement, dated
August 14, 1998, by and between NCT, TST and TSA, whereby NCT was granted the
exclusive option to purchase substantially all of the assets of TSA. Pursuant to
the asset purchase agreement, NCT became the owner of 20% of the shares of TSA
and TST owned the remaining 80% interest in TSA. The closing date of the asset
purchase agreement was extended on two occasions, March 30, 1999 and May 25,
1999, for substantial additional consideration paid by NCT, including NCT's
surrender of 5% of the shares of TSA. One day after the May 25th extension
agreement was executed, TST and TSA announced in a press release that they had
negotiated a competing transaction with Onkyo America, Inc. whereby Onkyo would
purchase substantially all of the assets of TSA in the event that NCT was unable
to close by the deadline of July 15, 1999.
As a direct result of the announcement of a competing transaction, NCT was
unable to obtain funding to close the transaction by July 15, 1999. NCT
attempted to enjoin the closing of the transaction with Onkyo by way of an
application for preliminary injunction or temporary restraining order brought in
the Delaware Chancery Court on September 16, 1999. This action sought to enjoin
TST and TSA from closing with Onkyo until a decision was rendered in connection
with our demand for Arbitration filed with the American Arbitration Association
on September 16, 1999. On September 17, 1999, prior to the scheduling of the
hearing regarding the application for
25
preliminary injunction or temporary restraining order, the attorney and agent of
TST and TSA orally represented to counsel for NCT that the Onkyo transaction was
not scheduled to close for at least a month. On that basis, NCT agreed not to
seek an immediate hearing on the application. Less than two weeks after that
representation, on October 1, 1999, TST and Onkyo closed their transaction
without any notice to NCT, a minority shareholder of TSA. Since the purpose of
the injunction was to prohibit the sale of TSA's assets to Onkyo, and that had
already occurred, NCT withdrew its application for injunctive relief and has
proceeded with the arbitration.
NCT's demand for arbitration sets forth several causes of action, including
breach of the duties of good faith and fair dealing in connection with the asset
purchase agreement, breach of the exclusive option provision of the asset
purchase agreement, breach of the payout provisions, fraudulent inducement
and/or fraudulent concealment in connection with the May 25, 1999 extension
agreement, negligent misrepresentation by failing to disclose the negotiation of
a competing transaction with Onkyo, and breach of the fiduciary duties owed to
minority shareholders. The demand for arbitration requests specific performance
or rescission of the asset purchase agreement, and further claims damages due to
TST's and TSA's breaches of the duties of good faith and fair dealing, breaches
of the fiduciary duties owed by the majority shareholders to minority
shareholders, and fraudulent misrepresentations in connection with the asset
purchase agreement and the amendments thereto. NCT seeks recovery of the $3.5
million invested in the asset purchase agreement, or recovery of its pro rata
share of the sales proceeds paid by Onkyo for TSA's assets.
On December 8, 1999, TST and TSA brought a counterclaim against NCT in the
arbitration action seeking the following: the sum of $204,315 allegedly due and
owing on a promissory note issued by NCT as consideration for the extension of
the closing date in the asset purchase agreement from March 31, 1999 to May 28,
1999; the monetary equivalent of $100,000 of NCT's convertible preferred stock
allegedly owed to TSA by NCT as consideration for extending the closing date to
May 28, 1999; the sum of $1,000,000, constituting the difference between the
price to be paid by NCT under the asset purchase agreement and the actual price
paid by Onkyo for TSA's assets; reimbursement of expenses incurred by TST and
TSA in connection with the failure to close the asset purchase agreement in
excess of $300,000; and recovery of legal fees in connection with the
arbitration and the application for a temporary injunction. NCT maintains that
the promissory note and stock were procured by fraud perpetrated by TST and/or
TSA and otherwise denies the allegations of the counterclaims. On July 17, 2000,
NCT Audio filed a revised demand for arbitration, which elaborated on the
claims, arguments and requests for relief of the original demand for
arbitration. On November 27, 2001, NCT Audio filed an amended arbitration claim,
which further expanded on the claims, arguments and requests for relief of the
original and revised demands for arbitration and which added a claim for breach
by TST and TSA of a confidentiality agreement entered into with NCT Audio in
connection with their August 14, 1998 asset purchase agreement.
On or about December 18, 2001, while the parties were completing discovery
with an arbitration hearing scheduled to begin on January 21, 2002, TST (under
its new name Global Technovations, Inc.) and TSA filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the
District of Delaware. Under federal law, those filings stayed NCT's arbitration
proceedings with TSA and TST. Shortly after the initial filings, the bankruptcy
case was transferred to the U.S. Bankruptcy Court for the Eastern District of
Michigan. NCT Audio was appointed to the creditors' committee in the bankruptcy
case. NCT will file a proof of claim in the bankruptcy case, for amounts owed to
it, and is considering whether any non-bankruptcy avenues of collection may
exist.
Theater Radio Network - InsiderStreet Litigation
On December 6, 2000, our subsidiary DMC Cinema (formerly known as Theater
Radio Network) filed suit against InsiderStreet.com, Inc. in the Circuit Court
of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The
complaint alleges that InsiderStreet breached a May 5, 2000 advertising
agreement with Theater Radio Network and seeks a declaratory judgment and
specific performance of the agreement. The agreement provided that, in exchange
for advertising services performed by Theater Radio Network, InsiderStreet would
deliver to Theater Radio Network $3 million in common stock of InsiderStreet,
with an adjustment in the number of shares to ensure that the total stock
delivered was worth at least $2,000,000 on May 10, 2001 and with registration of
all stock delivered. InsiderStreet has to date made only a partial delivery of
shares and has not registered any of the shares delivered. Discovery in this
litigation has begun. On October 23, 2001, Theater Radio Network terminated its
representation by outside counsel in this action due to a possible conflict of
interest. On March 26, 2002, Theater Radio Network retained new counsel to
continue this action. Management believes that at this early stage it cannot
assess the likelihood of a favorable outcome. Further, since the amount of
damages, if any, DMC Cinema may
26
recover cannot be quantified until the legal process is complete, no amount has
been recorded in the financial statements.
Theater Radio Network - Esrick Litigation
On February 5, 2001, Steven Esrick, a former shareholder of Theater Radio
Network, filed suit against DMC Cinema (formerly known as Theater Radio Network)
and Theater Radio Network's former Chief Executive Officer and President in the
Circuit Court of the Sixth Judicial Circuit for Pinellas County, Florida. The
plaintiff's original complaint claimed that Theater Radio Network breached an
alleged oral escrow agreement with the plaintiff arising out of the sale of
Theater Radio Network stock to DMC Cinema by Theater Radio Network's
shareholders and sought unspecified damages. DMC Cinema denied the material
allegations of this complaint and moved to dismiss the case against it. On
November 8, 2001, while DMC Cinema's motion to dismiss was pending, Esrick
amended his complaint, substituting for his original claim the claim that DMC
Cinema breached an alleged agreement to deliver to him 50,000 registered shares
of stock of InsiderStreet, Inc. On December 13, 2001, DMC Cinema filed an Answer
to the amended complaint in which it denied the material allegations of the
amended complaint. DMC Cinema intends to vigorously defend the action.
Currently, the parties are conducting discovery. Management, in consultation
with legal counsel, cannot at this stage determine the likelihood of an
unfavorable outcome.
Production Resource Group Litigation
On June 6, 2001, Production Resource Group began legal proceedings against
NCT and our subsidiary, Distributed Media Corporation, in the Superior Court for
the Judicial District of Fairfield County, Connecticut. Production Resource
Group's complaint alleges that NCT and DMC breached the terms of a July 19, 1999
lease, promissory note and warrant entered into in connection with the lease of
some DMC Sight & Sound(TM) equipment. The complaint also alleges that NCT and
DMC breached a January 11, 2001 resolution agreement designed to settle disputes
between the parties concerning the July 19, 1999 transactions, that we breached
a May 11, 2001 agreement designed to settle disputes between the parties
concerning the July 19, 1999 transactions and the January 11, 2001 resolution
agreement, and that we engaged in misrepresentations and fraud in connection
with these matters. The plaintiff filed an application for pre-judgment remedy
seeking to attach or garnish $2.25 million of our assets. On July 26, 2001, the
court returned an order for pre-judgment remedy having found probable cause to
sustain the validity of Production Resource Group's claim and gave Production
Resource Group the right to attach or garnish up to $2.1 million of specified
assets of NCT and Distributed Media Corporation. As of April 10, 2002,
approximately $78,000 in NCT's cash or cash equivalent assets have actually been
attached or garnished. On October 4, 2001, we filed an answer to the plaintiff's
complaint, generally denying the plaintiff's allegations, seeking dismissal of
the complaint and counterclaiming for breach of Production Resource Group's
obligation to deliver equipment.
On December 20, 2001, NCT and DMC accepted an Offer of Judgment requiring
NCT and DMC to pay Production Resource Group $2.0 million. That judgment was
entered on January 17, 2002. Production Resource Group is currently conducting
post-judgment discovery regarding enforcement of that judgment. To the extent
that payment of the judgment is in cash, such payment could be material to our
cash position. As of December 31, 2001, we have recorded all anticipated
liability related to this judgment.
On January 2, 2002, outside the scope of the judgment entered into with
NCT, Production Resource Group amended its complaint to allege that NCT's
Chairman and Chief Executive Officer Michael Parrella, in dealing with
Production Resource Group on behalf of NCT, committed unfair trade practices,
fraud and breaches of good faith and fair dealing. Mr. Parrella has told NCT
that he intends to deny the allegations. To the extent that NCT may ultimately
indemnify Mr. Parrella for any liabilities arising out of these allegations and
for related legal fees, we believe that our directors and officers
indemnification insurance (after payment of a $100,000 deductible) will be
adequate to cover such payments.
BMI Arbitrations
On January 11, 2002, Broadcast Music, Inc. ("BMI") commenced two
arbitration proceedings against Theater Radio Network with the American
Arbitration Association, for the respective amounts of $153,369.51 and
$62,101.93. These proceedings were brought under agreements with Theater Radio
Network dated December 11, 1998 (amended December 22, 1998) and June 29, 2001.
BMI's claims are for license fees arising out of the alleged
27
publication by Theater Radio Network of music in the BMI repertoire. Theater
Radio Network denied the allegations of BMI. No further actions have occurred in
these proceedings.
Maryland Lease Litigation
On or about January 31, 2002, an action was brought against NCT by West
Nursery Land Holding Limited Partnership in the District Court of Maryland for
Anne Arundel County. This action sought repossession of premises at 1025 West
Nursery Road, Linthicum, MD and an award of $88,654.26 in connection with NCT's
shutdown of its offices at, and abandonment of, such premises. On or about
February 7, 2002, judgment as requested in the complaint was entered by the
Court.
Mesa Partners Matter
On February 21, 2002, an action was brought by Mesa Partners, Inc. against
NCT and DMC in Supreme Court, New York, Suffolk County for breach of an alleged
contract for financial consulting services. The complaint seeks $429,576.27 plus
interest, attorneys' fees and costs. On April 22, 2002, NCT and DMC filed an
answer to the complaint in which they denied any liability. NCT and DMC intend
to defend this action vigorously. At this stage, management cannot yet determine
the likelihood of success of the claims.
NCT 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 our financial position and results of
operations. In the circumstances, based upon the information presently
available, management believes that adequate provisions have been estimated and
included in the consolidated financial statements for these matters.
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.
Our common stock currently trades on the NASD OTC Bulletin Board under the
symbol "NCTI". Prior to the January 6, 1999 delisting of NCT common stock from
NASDAQ's National Market System, our common stock was listed on the NASDAQ/NMS
under the symbol "NCTI". High and low closing bid price information for NCT's
common stock for specified quarterly periods is set forth below:
2000 2001
----------------------------- --------------------------
High Low High Low
------------ ------------ ------------ ---------
1st Quarter $1.700 $0.160 $0.265 $0.145
2nd Quarter $1.220 $0.360 $0.295 $0.1255
3rd Quarter $0.515 $0.295 $0.162 $0.093
4th Quarter $0.405 $0.172 $0.114 $0.071
On April 26, 2002, the last reported sale of NCT's common stock as reported
by the NASD OTC Bulletin was $0.11. As of December 31, 2001, there were
approximately 3,800 shareholders of record representing approximately 48,000
beneficial owners of NCT's common stock.
The company has neither declared nor paid any dividends on its shares of
common stock since inception. Any decision 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a description of
our sales of unregistered securities during the year ended December 31, 2001.
28
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below is derived from
the historical financial statements of NCT. The data set forth below is
qualified in its entirety by and should be read in conjunction with "Financial
Statements and Supplementary Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" that are included elsewhere in
this Form 10-K.
(In thousands of dollars, except per share amounts)
For the Year Ended
December 31,
---------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------- ------------ ------------- -------------
REVENUES:
Technology licensing fees and royalties $ 3,630 $ 802 $ 3,552 $ 9,928 $ 5,633
Product sales, net 1,720 2,097 2,208 2,001 4,568
Advertising/media - - - 828 279
Engineering and development services 368 425 1,303 83 132
------------ ------------- ------------ ------------- -------------
Total revenues $ 5,718 $ 3,324 $ 7,063 $ 12,840 $ 10,612
------------ ------------- ------------ ------------- -------------
COSTS, EXPENSES AND OTHER INCOME:
Cost of product sales $ 2,271 $ 2,235 $ 2,767 $ 2,127 $ 3,340
Cost of advertising/media - - - 814 332
Cost of engineering and development services 316 275 2,216 55 2
Selling, general and administrative 5,347 11,470 11,878 11,408 20,869
Research and development 6,235 7,220 6,223 4,412 5,966
Other operating (income) expense, net - (3,264) 7,032 (c) 2,661 (d) 33,955 (e)
------------ ------------- ------------ ------------- -------------
Operating costs, expenses and other income $ 14,169 $ 17,936 $ 30,116 $ 21,477 $ 64,464
------------ ------------- ------------ ------------- -------------
Non-operating items:
Other (income) expense, net - - 166 (162) 16,099 (f)
Interest (income) expense, net 1,397 (429) 552 1,849 6,127 (g)
------------ ------------- ------------ ------------- -------------
Total costs and expenses 15,566 17,507 30,834 23,164 86,690
NET LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (9,848) (14,183) (23,771) (10,324) (76,078)
Cumulative effect of change in
accounting principle - - - - (1,582)(h)
------------ ------------- ------------ ------------- -------------
NET LOSS $ (9,848) $ (14,183) $ (23,771) $ (10,324) $ (77,660)
Less:
Beneficial conversion features 1,623 3,200 10,567 4,673 392
Preferred stock dividends 285 485 494 113 1,252
------------ ------------- ------------ ------------- -------------
Loss attributable to
common stockholders $ (11,756) $ (17,868) $ (34,832) $ (15,110) $ (79,304)
============ ============= ============ ============= =============
Weighted average number
of common shares outstanding (a) 124,101 143,855 190,384 292,758 383,162
============ ============= ============ ============= =============
Basic and diluted net loss per share $ (0.09) $ (0.12) $ (0.18) $ (0.05) $ (0.21)
============ ============= ============ ============= =============
As of December 31,
---------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------- ------------ ------------- -------------
BALANCE SHEET DATA:
Total assets $ 17,361 $ 15,465 $ 13,377 $ 39,382 $ 20,009
Total current liabilities 2,984 5,937 7,728 23,386 56,959
Total long term liabilities - - 4,107 3,761 7,765
Accumulated deficit (93,521) (107,704) (131,475) (141,799) (219,459)
Stockholders' equity (capital deficit) (b) 14,377 3,426 (367) 9,858 (53,463)
Working capital (deficit) 11,696 (1,187) (3,281) (9,727) (52,636)
Footnotes:
(a) Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible preferred stock, since their effect would be
antidilutive.
(b) NCT has never declared nor paid cash dividends on its common stock.
(c) Includes a $2.4 million charge in connection with NCT's write down of its
investment in Top Source Automotive to its estimated net realizable value;
a $1.8 million reserve for an uncollectible promissory note and
pre-acquisition costs related to Precision Power, Inc.; and a $3.1 million
charge for the impairment of goodwill.
(d) Includes $3.1 million charge for the impairment of goodwill.
(e) Includes $2.2 million charge for costs of exiting activities attributable
to closing facilities and certain operations; $14.1 million charge for the
impairment of goodwill (net of $2.1 million reduction of deferred revenue),
$18.0 million write down for the acquisition of shares of DMC New York,
Inc. (repurchased licenses and accrual for obligation to acquire remaining
licenses); $1.3 million
29
(net of $2.7 million reduction of deferred revenue) for reacquisition of
two other DMC licenses and $1.5 million write down of investment in Top
Source Automotive.
(f) Other non-operating (income) expense includes $7.0 million for
other-than-temporary declines in value of available-for-sale securities;
$2.3 million for finance costs associated with non-registration of shares;
$2.3 million realized loss on sale of trading securities (NXT); $1.4
million decline in the fair value of a warrant; $1.2 million default
penalties on debt; and $1.0 million reserve for notes receivable.
(g) Interest (income) expense includes $3.3 million amortization of debt
discounts; $0.9 million relating to the beneficial conversion feature on
convertible debt; $0.7 million from debt issuance costs; and $1.2 million
interest charges on indebtedness.
(h) Upon adoption of SFAS No. 138 effective January 1, 2001, the reduction in
the fair value of derivatives, which consists of a warrant to purchase
common stock of a licensee, was reported as a cumulative effect of change
in accounting principle.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto included herein.
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This report on Form
10-K contains such "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may vary materially from those
in the forward-looking statements as a result of any number of factors, many of
which are beyond the control of management.
NCT operates in a highly competitive and rapidly changing environment and
business segments that are dependent on our ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of 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 revenues to sustain
our current level of operation; introduce, on a timely basis, new products;
continue its current level of operations to support the fees associated with
NCT's patent portfolio; maintain satisfactory relations with its customers;
attract and retain key personnel; maintain and expand our strategic alliances;
and protect our know-how, inventions and other secret or unprotected
intellectual property. NCT's actual results could differ materially from
management's expectations because of changes in these factors. New risk factors
can arise and it is not possible for management to predict all of these risk
factors, nor can it assess the impact of all of these risk factors on the
company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of
actual results.
Investors should also be aware that while NCT might, from time to time,
communicate with securities analysts, it is against our policy to disclose to
them any non-public information or other confidential commercial information.
Accordingly, investors should not assume that NCT agrees with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, NCT has a policy against issuing or confirming financial
forecasts or projections issued by others. Thus, to the extent that reports
issued by securities analysts or others contain any projections, forecasts or
opinions, such reports are not the responsibility of NCT. All references to
years, unless otherwise noted, refer to our fiscal year, which ends on December
31. All references to quarters, unless otherwise noted, refer to the quarters of
our fiscal year.
Overview
NCT's operating revenues are comprised of technology licensing fees and
royalties, product sales, advertising/media and engineering and development
services. Revenue is recognized when earned. Technology licensing fees are
generally recognized upon execution of the agreement but are deferred if subject
to completion of any performance criteria then recognized once the performance
criteria have been met. Revenue from royalties is
30
recognized ratably over the royalty period based upon periodic reports submitted
by the royalty obligor or based on minimum royalty requirements. Revenue from
product sales is recognized when the product is shipped. Revenue from
advertising sales is recognized when the advertisements are aired or displayed.
Revenue from engineering and development services is generally recognized and
billed as the services are performed. The mix of our revenue sources during any
reporting period may have a material impact on our results. In particular, our
execution of technology licensing agreements and the timing of the revenue
recognized therefrom has not been predictable. Operating revenues in 2001
consisted of approximately 53.1% in technology licensing fees and royalties,
43.1% in product sales, 2.6% in advertising/media and 1.2% in engineering and
development services.
NCT continued its practice of marketing its technology through licensing to
third parties for fees, generally by obtaining technology license fees when
initiating alliances with new partners, and subsequent royalties. We have
entered into a number of licensing relationships with established firms for the
integration of our technology into products. The speed with which we can achieve
the commercialization of our technology depends in large part upon the time
taken by these firms for product testing and their assessment of how best to
integrate our technology into their products and manufacturing operations. While
we work with these firms on product testing and integration, we are not always
able to influence how quickly this process can be completed.
Presently, we are selling products through several of our licensees,
including: 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.
The availability of high-quality, low-cost electronic components for
integration into our products also is critical to the commercialization of our
technology. NCT is working with its licensees and key suppliers to reduce the
size and cost of our systems, so that NCT will be able to offer low-cost
electronics and other components suitable for high-volume production.
Since its inception, NCT has incurred substantial losses from operations
which have been recurring and amounted to $219.5 million on a cumulative basis
through December 31, 2001. NCT's internally generated funds from its revenue
sources have not been sufficient to cover its operating costs. NCT has been able
to continue its operations by raising additional capital to fund its future
operations. Refer to "Liquidity and Capital Resources" below. The ability of our
revenue sources, especially technology license fees, royalties, product sales
and advertising/media, to generate significant cash for our operations is
critical to our long term success. We cannot predict whether we will be
successful in obtaining market acceptance of our new products or technologies or
in completing our current negotiations with respect to licenses and royalty
revenues.
As of December 31, 2001, cash and cash equivalents amounted to $0.6 million
and working capital (deficit) was $(52.6) million. Management believes that
currently available funds will not be sufficient to sustain NCT through the next
six months. Reducing operating expenses and capital expenditures alone may not
be sufficient, and continuation as a going concern is dependent upon the level
of funding realized from our revenue sources: technology licensing fees and
royalties, product sales, advertising/media revenue and engineering and
development services, all of which are presently uncertain. In the event that
cash from our revenue sources is not realized as planned, then management
believes additional working capital financing must be obtained through the
private placement of additional equity of NCT 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.
NCT's consolidated financial statements have been prepared assuming that
NCT 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, 2001 about NCT's ability to continue as a going concern. NCT's
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.
31
Results of Operations
Year ended December 31, 2001 compared to year ended December 31, 2000.
Total revenues in 2001 decreased by $2.2 million, or 17.2%, from $12.8
million in 2000 to $10.6 million in 2001 reflecting decreases in our technology
licensing fees and royalties and our advertising/media revenue sources. Total
costs and expenses during the same period increased by 274.2%, or $63.5 million,
primarily due to items recorded in 2001 for: a) the impairment of goodwill
related to Artera International ($9.8 million), DMC Cinema ($1.3 million net of
$2.1 million reduction in deferred revenue) NCT Audio ($2.1 million) and
ConnectClearly ($0.9 million) as outlined in Notes 3 and 14 to the consolidated
financial statements; b) costs to reacquire DMC New York and two DMC licenses
($19.3 million) and Top Source Automotive, Inc. ($1.5 million) included in write
downs of investment and repurchased licenses in our consolidated statement of
operations; and c) other-than-temporary losses on InsiderStreet ($2.5 million)
and Infinite Technology Corporation ($3.9 million) marketable securities.
Technology licensing fees and royalties decreased $4.3 million, or 43.4%,
from $9.9 million in 2000 to $5.6 million in 2001. The technology licensing fees
and royalties for 2001 were primarily due to recognition of deferred revenue of
$1.6 million license fee from NXT entered into in 2001, $2.3 million from
Teltran, $1.0 million from Infinite Technology Corporation, and $0.2 million
from two DMC licenses. The decrease compared to fiscal 2000 is attributable to
fewer technology license opportunities closed during 2001 and an increase in the
time period over which these licenses are recognized.
Product sales increased $2.6 million, or 130.0%, from $2.0 million in 2000
to $4.6 million in 2001 primarily due to the impact of acquisitions. Pro Tech
has been included for a full year as compared to approximately three months in
2000 and Artera International has been included for approximately ten months.
Excluding the effect of acquisitions, product sales decreased approximately $0.3
million, or 19.6%, due to declines in sales of communication products,
particularly the ClearSpeech(R) product line and sales of NCT Audio products,
particularly Gekko(TM) flat speakers. The decline in sales of communications
products is attributable to an economic downturn in that sector. The decrease in
speakers sold by NCT Audio was due to a lack of promotional effort and a change
in focus during the fourth quarter from product sales toward technology
licensing. Cost of product sales increased $1.2 million, or 57.1%, from $2.1
million in 2000 to $3.3 million in 2001, due to the impact of acquisitions.
Excluding the effect of acquisitions, cost of product sales decreased
approximately $0.3 million or 16.7%. The product gross profit margin improved to
26.9% in 2001 from (6.3)% in 2000. We expect this trend to continue.
Revenue from advertising/media decreased $0.5 million, or 62.5%, from $0.8
million in 2000 to $0.3 million in 2001. Advertising/media revenues are derived
from the sale of audio and visual advertising in the Sight & Sound(TM)
locations. Cost of advertising/media revenue decreased $0.5 million, or 62.5%
from $0.8 million in 2000 to $0.3 million in 2001. These costs include the
commissions paid to advertising representatives and agencies and communications
to the Sight & Sound(TM) locations. We anticipate DMC gross profit margins will
exceed 50% once the Sight & Sound network is fully installed in out-of-home
venues.
Revenue from engineering and development services was $0.1 million in 2001
and 2000, due to a continuation of our reduced emphasis on providing engineering
and development services as a primary revenue source. Cost of engineering and
development services was minimal.
Selling, general and administrative expenses in 2001 increased $7.3
million, or 64.0%, to $18.7 million from $11.4 million in 2000, primarily due to
higher compensation expenses, litigation and patent expenses, and depreciation,
amortization and costs attributable to acquired companies. Our selling, general
and administrative expenses include: compensation, which generally comprises
from 36% to 50% of the total; professional fees and expenses, including legal
services; non-cash depreciation and amortization; marketing and promotional
costs; and travel, among other costs. We expect 2002 selling, general and
administrative expenses to decrease as a result of exiting certain activities.
Research and development expenditures in 2001 increased $1.6 million or
36.4% to $6.0 million from $4.4 million in 2000, primarily due to research and
development expenses of $1.0 million under the Infinite Technology Corporation
agreement.
Included in NCT's total costs and expenses were non-cash expenditures
including depreciation and amortization of $3.0 million and $2.0 million in 2001
and 2000, respectively, impairment of goodwill of $14.1 million (net of
reduction in deferred revenue) and $3.1 million in 2001 and 2000, respectively,
realized loss on marketable securities deemed other-than-temporary of $7.0
million and zero in 2001 and 2000, respectively, and interest expense of $6.2
million in 2001 and $1.9 million in 2000 due to an increase in debt financing.
32
Interest expense increased by 226.3%, or $4.3 million, to $6.2 million in
2001 from $1.9 million in 2000. The 2001 interest expense was primarily due to
the increase in debt financing during 2001 (see Note 10 - notes to the
consolidated financial statements). Interest includes $3.3 million amortization
of original issue discount, $1.2 million of interest expense on debt, $0.9
million of amortization of beneficial conversion feature, and $0.7 million
amortization of debt issuance costs.
NCT had estimated net operating loss carryforwards of $119.3 million and
research and development credit carryforwards of approximately $2.4 million for
federal income tax purposes at December 31, 2001. No tax benefit for these
operating losses has been recorded in NCT's financial statements. Our ability to
utilize our net operating loss carryforwards may be subject to an annual
limitation.
Year ended December 31, 2000 compared to 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 our technology licensing fees and
royalties and our advertising/media revenue sources. Total costs and expenses
during the same period decreased by 24.9%, or $7.7 million, primarily due to
items recorded in 1999 for the write down of an investment in Top Source
Automotive, Inc. of $2.4 million (see note 9 to the consolidated financial
statements) and a reserve for promissory notes due from Precision Power, Inc.
and related pre-acquisition costs of $1.8 million.
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 Infinite Technology Corporation, 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 DMC licenses
entered into in 2000 and $0.4 million recognition of deferred revenue
attributable to the Teltran license entered into by Midcore in 2000. The
increase compared to 1999 is attributable to the value of licensing
opportunities closed in 2000. The ITC, Pro Tech and Vidikron license fees were
recognized in the third quarter of 2000 and comprised approximately 62% of total
revenues for 2000. In 1999, approximately 59% of total revenues were recognized
in the first quarter due primarily to the timing of entering into technology
licensing arrangements.
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, hearing
products, including the NoiseBuster(R) and ProActive(R) product lines, and
communication products including the ClearSpeech(R) product line, partially
offset by increases attributable to acquired companies, primarily Pro Tech. The
decline in our product sales in 2000 compared to 1999 was primarily attributable
to a decrease in speakers sold by NCT Audio due to a lack of promotional effort
and lack of availability of the appropriate product mix. Cost of product sales
decreased 25.0% to $2.1 million in 2000 from $2.8 million in 1999, due to a more
profitable mix of product sales in 2000 compared to 1999. The product gross
profit margin improved to (6.3)% from (25.3)% in 1999.
Advertising/media revenues were $0.8 million in 2000 compared to zero in
1999. Advertising/media revenues are derived from the sale of audio and visual
advertising in the Sight & Sound(TM) locations. Cost of advertising/media
revenue was $0.8 million in 2000 compared to zero in 1999. These costs include
the commissions paid to advertising representatives and agencies and
communications to the Sight & Sound(TM) locations.
Revenue from engineering and development services decreased in 2000 by
93.6% to $0.1 million from $1.3 million in 1999, in part due to research and
development previously conducted at Advancel being outsourced to ITC commencing
in the third quarter of 2000 and a continuation of our reduced emphasis on
providing engineering and development services as a primary revenue source. 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 ongoing
contracts. Our objective in outsourcing the engineering and development services
work previously performed at Advancel was to lower our costs while retaining the
microprocessor design capabilities on an outsourced basis.
Selling, general and administrative expenses in 2000 decreased by 3.3%, or
$0.4 million, to $11.4 million from $11.8 million in 1999, primarily due to
decreases in litigation and patent expenses and in selling and marketing related
expenses, partially offset by higher compensation expenses and depreciation,
amortization and
33
costs attributable to acquired companies. For the year ended 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 for the Teltran license
transaction (see Note 9 - notes to the consolidated financial statements). NCT
received the marketable securities in January 2001. Our selling, general and
administrative expenses include: compensation, which generally comprises from
36% to 50% of the total; professional fees and expenses, including legal
services; non-cash depreciation and amortization; marketing and promotional
costs; and travel, among other costs.
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 previously conducted at Advancel has been outsourced to Infinite
Technology Corporation. NCT issued shares of its common stock having a market
value of $3.0 million to Infinite Technology Corporation as prepaid research and
engineering costs during 2000. No expense for the outsourcing of research and
development was recorded for the year ended December 31, 2000 as Infinite
Technology Corporation had not advised us of the commencement of the research
and development under this agreement.
Included in NCT's total costs and expenses were non-cash expenditures
including depreciation and amortization of $2.0 million for each of 2000 and
1999, impairment of goodwill of $3.1 million in each of 2000 and 1999 and
interest expense of $1.0 million in 2000 and $0.2 million in 1999 due to a
beneficial conversion feature on our convertible notes. The impairment of
goodwill is attributable to continued losses of NCT's majority-owned subsidiary,
NCT Audio. In 1999, NCT Audio changed its business strategy to suspend its
acquisition efforts.
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 issued to Carole Salkind, classified as interest expense,
and original issue discount amounts of $0.1 million in connection with
promissory notes entered into during 2000.
NCT had 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 NCT's financial statements. Our ability to utilize our net operating
loss carryforwards may be subject to an annual limitation.
Liquidity and Capital Resources
NCT has incurred substantial losses from operations since its inception,
which have been recurring and amounted to $219.5 million on a cumulative basis
through December 31, 2001. These losses, which include the costs for development
of technologies and products for commercial use, have been funded primarily
from:
o the sale of our and our subsidiaries' common stock;
o the sale of our and our subsidiaries' preferred stock, convertible into
common stock;
o issuance of our and our subsidiaries' convertible debt;
o technology licensing fees;
o royalties;
o product sales;
o advertising/media revenues; and
o engineering and development services.
Management believes that currently available funds will not be sufficient
to sustain NCT through the next six months. Such funds consist of available
cash, marketable securities and the funding derived from our revenue sources:
technology licensing fees and royalties, product sales, advertising/media and
engineering and development services. Reducing operating expenses and capital
expenditures alone may not be sufficient, and continuation as a going concern is
dependent upon the level of funding realized from our revenue sources, all of
which are presently uncertain. In the event that funding from our revenues are
not realized as planned, then management believes additional working capital
financing must be obtained through the private placement or public offering of
additional equity of NCT or its subsidiaries in the form of common stock,
convertible preferred stock and/or convertible debt. Proceeds from sales of our
subsidiaries' securities are used for the benefit of the issuing subsidiary, and
there are generally contractual restrictions to that effect. There is no
assurance any such financing is or would become available.
34
In the event that external financing is not available or timely, NCT would
have to substantially reduce its level of operations. These reductions could
have an adverse effect on NCT's relationships with its customers and suppliers.
Uncertainty exists with respect to the adequacy of current funds and marketable
securities to support NCT's activities until positive cash flow from operations
can be achieved, and with respect to the availability of financing from other
sources to fund any cash deficiencies. These uncertainties raise substantial
doubt at December 31, 2001 about NCT's ability to continue as a going concern.
We recently entered into financing transactions because internally
generated funding sources were insufficient to maintain our operations. These
financing transactions are described in notes to our consolidated financial
statements and as outlined above at "The Business - P. Recent Financing
Transactions" include:
6% Convertible Notes issued by Artera Group, Inc.
Private Equity Credit Agreement
NCT Secured Convertible Notes Issued to Carole Salkind
Other NCT Group, Inc. Notes
Convertible Note issued by NCT Video
Pro Tech Series B Preferred Stock
At December 31, 2001, cash and cash equivalents were $0.6 million. NCT's
working capital deficit was $(52.6) million at December 31, 2001, compared to a
deficit of $(9.7) million at December 31, 2000. This $42.9 million increase was
primarily due to the license reacquisition liability ($18.0 million), the
issuance of short-term convertible notes and notes payable ($14.9 million
outstanding as of December 31, 2001) and the liabilities acquired from the
purchase of Artera Group International Limited ($4.0 million) in 2001.
Net cash used in operating activities for the year ended December 31, 2001
and 2000 was $12.0 million and $10.5 million, respectively.
Our net accounts receivable decreased to $0.7 million at December 31, 2001
from $5.4 million at December 31, 2000. This decrease was due to the collection
of amounts due under license agreements entered into in 2000 and a decline in
new technology license agreements entered into in 2001 compared to 2000.
Our net inventory level decreased to $1.4 million at December 31, 2001,
from $2.2 million at December 31, 2000. The decrease was due to product sales
and an increased inventory reserve.
Deferred revenue aggregated $9.4 million as of December 31, 2001 and 2000.
NCT does not expect to realize additional cash from deferred revenue.
To improve our future operating cash flow, we implemented substantial cost
reduction plans in late 2001. These plans included the consolidation of various
duplicate selling, general and administrative expenses due to the acquisitions
made in 2000 and reductions in the number of employees.
Net cash provided by investing activities was $4.4 million for the year
ended December 31, 2001 as compared to $0.5 million in net cash provided by
investing activities for the year ended December 31, 2000. The net cash provided
by investing activities for the year ended December 31, 2001 was primarily due
to proceeds received from dispositions of investments in marketable securities
of NXT, partially offset by capital expenditures and investments.
Capital expenditures in 2001 used $1.4 million compared to $0.3 million in
2000. The most significant capital expenditures related to the purchase of
property and equipment and leasehold improvements for Pro Tech and Artera
International of $1.0 million.
For the year ended December 31, 2001, NCT received $6.9 million in cash
proceeds from the sale of all of the NXT ordinary shares received in 2001, net
of fees and expenses (see Note 4 - notes to the consolidated financial
statements). The proceeds were used to fund working capital requirements. Under
the new NXT agreements, NCT had a requirement to apply at least 66% of the
proceeds received from the sale of these shares to the development of the
business of Distributed Media Corporation. We met this obligation. NCT realized
a loss of approximately $2.3 million from the sale of the NXT ordinary shares
which is included in other (income) expense in NCT's consolidated statement of
operations for the year ended December 31, 2001.
In addition to available cash and cash equivalents, our available-for-sale
securities are additional sources of liquidity. At December 31, 2001 and
December 31, 2000, our available-for-sale securities had approximate fair market
values of $2.1 million and $5.1 million, respectively (see Notes 5 and 9 - notes
to the consolidated financial statements). The majority of these securities
represent investments in technology companies and, accordingly, the
35
fair market values of these securities are subject to substantial price
volatility, and, in general, suffered a decline during 2001. In addition, the
realizable value of these securities is subject to market and other conditions.
Net cash provided from financing activities for the year ended December 31,
2001 was $7.0 million and was primarily attributable to the issuance of debt as
outlined in Note 10 - notes to the consolidated financial statements. At
December 31, 2001, NCT's debt (all classified as short-term) was $14.9 million,
net of original issue discounts of approximately $1.3 million (principally
comprised of $13.1 million of face value of outstanding convertible notes and
$3.2 million of outstanding notes payable) compared to $4.6 million of
short-term debt at December 31, 2000. The cash proceeds received from the
issuance of debt were used for general corporate purposes. The cash proceeds for
debt we issued during 2001 includes:
o On January 9, 2001, Artera received aggregate net proceeds of $0.4 million
from the issuance and sale of $5.0 million of 6% convertible notes due
January 9, 2002. In addition, during December 2000, we had received $0.6
million as an advance for these notes.
o On February 13, 2001, NCT received net proceeds of $0.5 million from the
issuance of a $0.5 million convertible note with an interest rate of prime
due May 14, 2001.
o On March 14, 2001, NCT received aggregate net proceeds of $0.3 million from
the issuance and sale of $0.3 million of 8% convertible notes due March 14,
2002.
o On April 4, 2001, Artera received aggregate net proceeds of $0.7 million
from the issuance and sale of $0.9 million of 6% convertible notes due
April 4, 2002.
o On April 12, 2001, NCT received aggregate net proceeds of $0.1 million from
the issuance and sale of $0.1 million of 8% convertible notes due April 12,
2002.
o On April 12, 2001, NCT Video issued a $0.5 million of 8% convertible note
due December 31, 2001. The $0.5 million had been advanced to NCT Video in
December 2000.
o On May 25, 2001, Artera received aggregate net proceeds of $0.3 million
from the issuance and sale of $0.4 million of 6% convertible notes due May
25, 2002.
o On June 29, 2001, Artera received aggregate net proceeds of $0.9 million in
cash from the issuance and sale of $1.25 million of 6% convertible notes
due June 29, 2002.
o On September 28, 2001, NCT received $1.0 million net proceeds from the
issuance of a $2.5 million convertible note with an interest rate of prime
plus two due September 28, 2002.
o On December 20, 2001, NCT received $1.0 million net proceeds from the
issuance of an 8% convertible note for $2.0 million due December 20, 2002.
o On December 2 7, 2001, NCT received $0.4 million net proceeds from the
issuance and sale of a 5% promissory note for $0.4 million due January 10,
2002.
From time to time in 2001, NCT defaulted on repayment of notes due Carole
Salkind when due because NCT did not have the funds for repayment. Several of
the defaulted notes were rolled into new short-term notes as further described
in Note 10 of the notes to the consolidated financial statements. At December
31, 2001, we are in default of $1.7 million of note principal issued to Carole
Salkind, $4.4 million of note principal on 6% notes issued to investors by
Artera Group, Inc. and $1.0 million of note principal issued to Crammer Road
LLC. No demand for payment has been made.
On July 30, 2001, Pro Tech received aggregate net proceeds of $0.4 million
in cash from the private placement of 500 shares of its series B convertible
preferred stock and issued warrants to purchase 1,000,000 shares of its common
stock. The proceeds were used by Pro Tech for general corporate purposes.
NCT expects that from time to time its outstanding short-term debt may be
replaced with new short-term debt or long-term borrowings. Although we believe
that we can continue to access the capital markets in 2002 on acceptable terms
and conditions, our flexibility with regard to long-term financing activity
could be limited by:
o the liquidity of our common stock on the open market;
o our current level of short-term debt; and
o our credit ratings.
In addition, many of the factors that affect NCT's ability to access the
capital markets, such as the liquidity of the overall capital markets and the
current state of the economy, are outside of NCT's control. There can be no
assurance that NCT will continue to have access to the capital markets on
favorable terms.
36
In April 2001, we finalized a private equity credit agreement, which may
provide us funds for operating purposes. See Notes 14 and 21 - notes to the
consolidated financial statements for further details.
From time to time, to provide needed cash that a warrant holder has
indicated it is willing to provide, we may reduce the exercise price of
outstanding warrants to a range that more closely approximates the then fair
value of our common stock. On October 25, 2001 and November 14, 2001, we reduced
the warrant exercise price for the acquisition of an aggregate of 10 million
shares of our common stock from $0.32 per share to $0.08 per share. On December
20, 2001, we reduced the warrant exercise prices for the acquisition of our
common stock from $0.13 to $0.071 (for 500,000 shares), from $0.093 to $0.071
(for 625,000 shares) and from $0.115 to $0.071 (for 1,000,000 shares). Also on
December 20, 2001, we reduced the warrant exercise prices for the acquisition of
$500,000 worth of our shares of common stock from $0.21 to $0.071 and for the
acquisition of $500,000 worth of shares of common stock of Pro Tech
Communications, Inc. from $0.44 to $0.06. These actions were not part of a plan
but were driven by our liquidity needs at the respective times of the
reductions.
NCT has no lines of credit with banks or other lending institutions and,
therefore, has no unused borrowing capacity.
Going Concern Risks
There can be no assurance that sufficient funding will be provided by
technology licensing fees, royalties, product sales, advertising/media revenues
and engineering and development revenue or additional capital. In that event,
NCT would have to cut back its level of operations substantially in order to
conserve cash. These reductions could have an adverse effect on NCT's relations
with its partners and customers (see Note 1 - notes to the consolidated
financial statements for further details).
NCT believes that the level of financial resources available to it is a
critical component in its ability to continue as a going concern. NCT 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. We
expect that outstanding short-term debt may be replaced with new short or
long-term borrowings from time to time. Although we believe that we can continue
to access the capital markets in 2002 on acceptable terms and conditions, our
flexibility with regard to long-term financing activity could be limited by the
liquidity of our common stock on the open market, our current level of
short-term debt, and our credit ratings. In addition, many of the factors that
affect NCT's ability to access the capital markets, such as the liquidity of the
overall capital markets and the current state of the economy, are outside of our
control. There can be no assurances that NCT will continue to have access to the
capital markets on favorable terms. NCT is in default of $7.1 million of its
convertible notes at December 31, 2001. We have not received a demand for
payment.
The accompanying financial statements have been prepared assuming that NCT
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,
2001 about NCT'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.
Capital Expenditures
NCT intends to continue its business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include:
o dependable sources of electronic and other components, which leverages on
their purchasing power, provides important cost savings and accesses the
most advanced technologies;
o utilization of the manufacturing capacity of our allies, enabling us to
integrate our technology into products with limited capital investment; and
o access to well-established channels of distribution and marketing
capability of leaders in several market segments.
37
There were no material commitments for capital expenditures as of December
31, 2001, and no material commitments are anticipated in the near future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NCT's primary market risk exposures include fluctuations in interest rates
and foreign exchange rates. NCT is exposed to short-term interest rate risk on
some of its obligations and trade accounts receivable sales. NCT does not use
derivative financial instruments to hedge cash flows for such obligations. In
the normal course of business, NCT employs established policies and procedures
to manage these risks.
Based upon a hypothetical 10% 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 Richard A. Eisner & Company, LLP
and Goldstein Golub Kessler LLP and the financial statements and accompanying
notes are filed as part of this Annual Report on Form 10-K. Please refer to the
index on page 56.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On February 12, 2002, NCT notified its principal independent accountant,
Goldstein Golub Kessler LLP ("GGK"), that the auditing services of GGK would no
longer be required. GGK's dismissal was approved by NCT's Board of Directors and
Audit Committee. GGK originally was selected as NCT's independent accountant in
July 2000 to audit NCT's consolidated financial statements as of and for the
year ended December 31, 2000.
During NCT's fiscal year ended December 31, 2001, and during the interim
period preceding its dismissal as NCT's independent accountant, there were no
disagreements with GGK 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 GGK, would have caused
it to make reference to the subject matter of the disagreement(s) in connection
with its report. The report of GGK, dated April 9, 2001, on NCT's consolidated
financial statements as of and for the year ended December 31, 2000 did not
contain an adverse opinion and was not qualified or modified as to audit scope
or accounting principles.
On February 12, 2002, NCT engaged the accounting firm of Richard A. Eisner
& Company, LLP ("RAE") as its principal independent accountant to audit the
consolidated financial statements of NCT for the fiscal year ending December 31,
2001. The engagement was authorized by NCT's Board of Directors and Audit
Committee. During the fiscal year ended December 31, 2001, and the subsequent
period, neither NCT nor any person on NCT's behalf consulted RAE 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 NCT's consolidated financial statements, except for consultations
regarding NCT's responses to comments from the Securities and Exchange
Commission with respect to the December 31, 1999 financial statements audited by
RAE included in prior filings with the Securities and Exchange Commission.
38
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,
2002.
Name Age Positions and Offices
- ---- --- ---------------------
Michael J. Parrella 54 Chairman of the Board of Directors and
Chief Executive Officer
Jay M. Haft 66 Director
John J. McCloy II 64 Director
Samuel A. Oolie 65 Director
Irene Lebovics 49 Director, President
Cy E. Hammond 47 Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
Jonathan M. Charry, Ph.D. 54 Senior Vice President, Corporate Development
Irving M. Lebovics 50 Senior Vice President, Global Sales
Mark Melnick 43 Vice President, General Counsel and
Secretary
Michael J. Parrella currently serves as Chief Executive Officer and
Chairman of the Board of Directors of NCT. Mr. Parrella was elected Chairman of
the Board of Directors of NCT on April 21, 2000, on which date he relinquished
the position of President. From August 1995 to April 21, 2000, Mr. Parrella
served as NCT's President and Chief Executive Officer. From November 1994 to
July 1995, Mr. Parrella served as Executive Vice President of NCT. Prior to
that, from February 1988 until November 1994, he served as President and Chief
Operating Officer of NCT. 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 Products, Inc., a subsidiary of NCT, a position to
which he was elected on September 4, 1997. He became a director of NCT Audio
Products, Inc. on August 25, 1998. On January 5, 2001, Mr. Parrella was elected
Acting Chief Executive Officer of Advancel Logic Corporation, a subsidiary of
NCT. Mr. Parrella is a director of Advancel Logic Corporation, serves as
Chairman of the Board of Distributed Media Corporation, a subsidiary of NCT, and
serves as Chairman of the Board of NCT Hearing Products, Inc., a subsidiary of
NCT. Mr. Parrella became a director of NCT subsidiaries acquired in 2000,
including Midcore Software, Inc. and Pro Tech Communications, Inc. In 2000 and
2001, he became a director of NCT subsidiaries formed in 2000 and 2001,
including DMC Cinema, Inc., NCT Video Displays, Inc., DMC New York, Inc.,
ConnectClearly.com, Inc., DMC HealthMedia Inc., Artera Group, Inc., Distributed
Media Corporation International Limited and Artera Group International Limited.
Jay M. Haft currently serves as a director of NCT and had served as
Chairman of the Board of Directors of NCT until April 21, 2000. From November
1994 to July 1995, he served as President of NCT. He also serves as a director
of our 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 Reed Smith. He was previously a senior corporate partner of Parker
Duryee Rosoff & Haft (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. Mr. Haft is a
director of numerous public and private corporations, including RVSI, Inc.
(OTC), DCAP Group, Inc. (OTC), Encore Medical Corporation (OTC), DUSA
Pharmaceuticals, Inc. (OTC), and Oryx Technology Corp. (OTC). Mr. Haft serves as
a Director of Florida International University.
John J. McCloy II currently serves as a director of NCT. He served as Chief
Executive Officer of NCT from September 1987 to November 1994 and as Chairman of
the Board of Directors of NCT from September 1986 to November 1994. In addition,
he served as NCT's Chief Financial Officer from November 1990 to February 1993
and as its Secretary-Treasurer from October 1986 to September 1987. Mr. McCloy
39
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 Comverse Technology, Inc.
Irene Lebovics currently serves as a director and President of NCT and
President of NCT Hearing Products, Inc. She served as Secretary of NCT from
February 1999 until September 2001. On April 25, 2001, Ms. Lebovics became a
director of NCT. On January 5, 2000, Ms. Lebovics was elected Acting Chief
Marketing Officer and Secretary of Advancel Logic Corporation. In July 1989, she
joined NCT as a Vice President and as President of NCT Medical Systems, Inc., a
subsidiary of NCT. In January 1993, she was appointed Senior Vice President of
NCT. In November 1994, Ms. Lebovics became President of NCT Hearing Products,
Inc. In 1999, Ms. Lebovics was appointed as Executive Vice President, and in
April 2000, she became President of NCT. She 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. Ms. Lebovics also serves
as director of various NCT subsidiaries, as follows: Distributed Media
Corporation, ConnectClearly.com, Inc., NCT Hearing Products, Inc., NCT Video
Displays, Inc., DMC New York, Inc., Artera Group, Inc., Artera Group
International Limited, Midcore Software, Inc., Advancel Logic Corporation, Pro
Tech Communications, Inc., Distributed Media Corporation International Limited,
DMC HealthMedia Inc. and DMC Cinema, Inc.
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. Mr.
Hammond is also a director of Pro Tech Communications, Inc., NCT Video Displays,
Inc., DMC New York, Inc., Artera Group International Limited, Noise Cancellation
Technologies (Europe), Inc. and ConnectClearly.com, Inc.
Jonathan M. Charry, Ph.D. currently serves as Senior Vice President of
Corporate Development, a position he has held since January 2000. Dr. Charry was
Chairman and Chief Executive Officer of Digital Power Networks, Inc. from 1992
to 1999 and Chairman and Chief Executive Officer of Environmental Research
Information, Inc. from 1984 to 1992. 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.
Irving M. Lebovics currently serves as Senior Vice President, Global Sales,
of NCT. 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.
Mark Melnick currently serves as Vice President, General Counsel and
Secretary of NCT Group, Inc., positions he has held since September 2001. He
also serves as Secretary of Distributed Media
40
Corporation, DMC Cinema, Inc., DMC HealthMedia Inc., NCT Audio Products, Inc.,
NCT Hearing Products, Inc., NCT Medical Systems, Inc., ConnectClearly.com, Inc.,
Midcore Software, Inc., Artera Group, Inc., Advancel Logic Corporation, NCT
Muffler, Inc., Chaplin Patents Holding Company, Inc., NCT Far East, Inc. and NCT
Video Displays, Inc. Effective January 1, 2002, Mr. Melnick was elected
Secretary of Pro Tech Communications, Inc. From 1989 to 2000, Mr. Melnick was
Counsel, Senior Counsel and then Assistant General Counsel of CBS Cable and its
predecessor-in-interest Group W Satellite Communications (a division of
Westinghouse Broadcasting Co.), in the cable television field. From 1984 to
1988, he was an associate at the law firm of Stults & Marshall (now known as
Balber Pickard Battistoni Maldonado & Van Der Tuin) in New York, NY. From 1982
to 1984, he was an associate at the law firm of Seyfarth, Shaw, Fairweather &
Geraldson in New York, NY.
Committees of the Board of Directors
Our Board of Directors has established a Compensation Committee and an
Audit Committee.
The Compensation Committee, which was appointed by the Board of Directors
on July 10, 2001, reviews and determines the compensation policies, programs and
procedures of the company as they relate to NCT's senior management and is
presently comprised of Messrs. McCloy and Oolie. The Compensation Committee
provides for the administration of stock option plans and addresses matters
relating to the grant of warrants or options to acquire shares of the company's
common stock and other securities.
The Audit Committee is responsible for the review of the activities of the
company's independent accountants. The Audit Committee is composed of Messrs.
McCloy and Oolie and held three meetings during the fiscal year ended December
31, 2001. Effective April 25, 2001, the Board of Directors adopted a written
charter for the Audit Committee. In addition, the Board of Directors determined
that all of the Audit Committee members are independent.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than 10% of a registered
class of our equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required by regulations of the SEC to furnish
us with copies of all such reports. Based solely on its review of the copies of
such reports received by it, or written representations from reporting persons
that no reports were required for those persons, NCT believes that all filing
requirements applicable to its officers, directors, and greater than 10%
shareholders were complied with during the period from January 1, 2001 to
December 31, 2001, except that grants of options made in September 2001 under
the 1992 Plan and the 2001 Plan to the following executive officers and
directors: Messrs. Parrella, Haft, McCloy, Oolie, Lebovics, Hammond and Charry,
and Ms. Lebovics, were not timely reported on Form 4 as required, but were
subsequently reported on Form 5.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation and Summary Compensation Table
Set forth below is information for the three fiscal years ended December
31, 2001, 2000 and 1999 relating to compensation received by: (1) NCT's Chief
Executive Officer; (2) the other four most highly compensated executive officers
of NCT whose total annual salary and bonus for the fiscal year ended December
31, 2001 exceeded $100,000 who were serving as executive officers at the end of
2001; and (3) two additional individuals for whom disclosures would have been
provided but for the fact that these individuals were not serving as executive
officers as of December 31, 2001 (collectively the "Named Executive Officers").
41
Securities
Other Annual Underlying All
Name and Principal Compensation Options/Warrants Other
Position Year Salary ($) Bonus ($) ($)(a) SARs (#) Compensation ($)
- ---------------------------------- -------- ----------- ------------ --------------- ----------------- -------------------
Michael J. Parrella 2001 $320,016 55,980 $20,688 5,324,505 (b) $ -
Chief Executive 2000 136,667 63,000 20,688 20,664,634 (c) 7,198 (e)
Officer and Chairman 1999 120,000 68,678 22,008 6,812,000 (d) 6,418 (e)
of the Board
Irene Lebovics 2001 200,000 78,390 12,000 800,000 (g) -
President and 2000 112,917 - 12,000 2,808,373 (h) -
Director 1999 105,000 - 12,000 250,000 (i) -
Cy E. Hammond 2001 180,000 24,685 12,000 760,000 (j) -
Senior Vice President, 2000 101,167 33,659 12,000 1,248,742 (k) -
Chief Financial Officer, 1999 94,000 92,941 12,000 175,000 (l) -
Treasurer
Jonathan M. Charry (m) 2001 200,000 32,170 - 400,000 -
Senior Vice President, 2000 200,000 34,539 - 1,378,049 -
Corporate Development
Irving M. Lebovics 2001 150,000 - 9,000 300,000 -
Senior Vice President, 2000 150,000 - 9,000 411,891 (f) -
Global Sales 1999 150,000 - 9,000 100,000 -
James A. McManus (n) 2001 206,894 - - 357,927 33,287 (o)
President and Chief 2000 197,917 - - 275,610 (f) -
Executive Officer, 1999 101,846 59,410 - 250,000 -
Distributed Media Corporation
Paul D. Siomkos (p) 2001 150,000 - 12,000 - -
Senior Vice President, 2000 150,000 - 12,000 169,207 (f) -
Operations 1999 150,000 - 12,000 150,000 -
Footnotes:
- ---------
(a) Other annual compensation is comprised of automotive lease payments or
automotive allowances paid to the Named Executive Officers.
(b) Includes 2,824,505 shares that remained an obligation of NCT from a grant
in 2000 as outlined in Note (c) below.
(c) Includes grants subsequently cancelled by the Board of Directors as
outlined in Note (f) below. In addition, due to an insufficient number of
shares available under the 1992 Plan in 2000, the Board of Directors
reduced the grant made in December 2000 to Mr. Parrella to acquire
6,000,000 shares of common stock by 2,824,505 shares but remained obligated
to provide such grant.
(d) In addition to a grant under the 1992 Plan for the purchase of 5,000,000
shares, includes replacement grants of warrants and options which would
have otherwise expired in 1999. Includes a warrant to purchase 862,500
shares of NCT's common stock and an option granted under the 1987 Plan to
purchase 250,000 shares of NCT's common stock as new grants due to the
extension of the expiration dates from 1999 to February 1, 2004. In
addition, includes various options under the 1992 Plan to acquire 699,500
shares of NCT's common stock as new grants due to the extension of
expiration dates from 1999 to February 1, 2004.
(e) Consists of annual premiums for a $2.0 million personal life insurance
policy paid by NCT on behalf of Mr. Parrella.
(f) Includes grants from January 2000 that were forfeited by the grantees on
July 13, 2000 as follows: Mr. Parrella, 6,500,000 shares; Ms. Lebovics,
750,000 shares; Mr. Hammond, 250,000 shares; Mr. Lebovics, 105,000 shares;
Mr. McManus, 100,000 shares and Mr. Siomkos, 75,000 shares. These options
had been granted in January 2000 at an exercise price of $0.41 per share,
subject to shareholder approval of an increase in the number of shares
available under the 1992 Plan. On July 13, 2000, the shareholders
42
approved the necessary increase in shares available under the 1992 Plan. On
that day, the price of NCT common stock was $0.515. The Board accepted the
forfeitures of the January grants and issued new grants on July 13, 2000 at
an exercise price of $0.515 per share with the number of new options
granted increased to an amount equal to the number of shares under the
January 2000 grant times a factor of 1.2561.
(g) Includes 50,000 shares under a replacement grant of an option which expired
in 2001. The expiration date of the new grant is February 11, 2004, and the
exercise price is $0.75, the exercise price of the expired option.
(h) In addition to a grant subsequently forfeited as outlined in Note (f)
above, includes 116,300 shares under replacement grants of options which
would have otherwise expired in 2000. The expiration dates of these new
grants are October 6, 2002 and July 15, 2003. These grants have an exercise
price of $0.75, the exercise price of the options which would have expired
in 2000.
(i) Includes a warrant to purchase 201,250 shares of NCT's common stock as a
new grant due to the extension of the expiration date from 1999 to February
1, 2004. The exercise price of this warrant is $0.75, the same exercise
price as the replaced warrant.
(j) Includes 10,000 shares under a replacement grant of an option which expired
in 2001. The expiration date of the new grant is February 11, 2004, and the
exercise price is $0.75, the exercise of the expired option.
(k) In addition to a grant subsequently forfeited as outlined in Note (f)
above, includes 184,718 shares under replacement grants of options which
would have otherwise expired in 2000. The expiration dates of these new
grants are October 6, 2002 and July 15, 2003. These grants have an exercise
price of $0.75, the exercise price of the options which would have expired
in 2000.
(l) Includes a warrant to purchase 25,000 shares of NCT's common stock as a new
grant due to the extension of the expiration date from 1999 to February 1,
2004. The exercise price of this warrant is $0.75, the same exercise price
as the replaced warrant.
(m) Dr. Charry, Senior Vice President, Corporate Development, was hired
effective January 3, 2000. In accordance with his letter of employment and
incentive bonus arrangement, Dr. Charry was granted an initial stock option
to acquire 500,000 shares at $0.16 per share. His salary is paid at the
rate of $150,000 per annum and a guaranteed draw against future commissions
of $50,000. In addition, Dr. Charry is eligible for an incentive bonus
based upon specified performance milestones and cash overrides on various
financings and licensing or strategic alliance agreements.
(n) On November 27, 2001, Mr. McManus resigned as President and Chief Executive
Officer of Distributed Media Corporation. Mr. McManus was employed by
Distributed Media Corporation effective March 1, 1999. Prior to that and
from May 1998, Mr. McManus served as a consultant to Distributed Media
Corporation. In accordance with his letter of employment, Mr. McManus was
paid a salary at the rate of $120,000 per annum and a guaranteed first-year
bonus of $70,000. His compensation was subject to 5% annual increases
thereafter. The 1999 amounts herein represent payments for the period
employed in 1999.
(o) Represents a stock award of 357,927 shares of NCT common stock to Mr.
McManus awarded on November 27, 2001, valued at $0.093 per share, the
closing bid price the day preceding the stock award.
(p) On January 30, 2001, Mr. Siomkos resigned as Senior Vice President,
Operations, a position he had held since his employment by NCT effective
March 23, 1998.
43
Stock Options and Warrants
The following table summarizes the Named Executive Officers' stock option
and warrant activity during 2001:
Options and Warrants Granted in 2001
Potential Realized Value
Shares Percent of at Assumed Annual
Underlying Total Options Rates of Stock Price
Options And Warrants Appreciation for Option
And Granted to Exercise and Warrant Term (b)
Warrants Employees Price Expiration -------------------------------
Name Granted in 2001 (a) Per Share Date 5% 10%
- ------------------------ ------------ ------------- ------------- ----------- ------------- ------------
Michael J. Parrella 824,505 (c) 55.6% $ 0.13 9/20/08 $ 51,176 $ 122,576
2,000,000 (c) 22.0% 0.13 9/20/08 124,138 297,333
2,500,000 (d) 27.5% 0.13 9/20/08 155,173 371,666
Irene Lebovics 50,000 (e) 74.1% 0.75 2/11/04 8,081 17,404
750,000 (f) 8.3% 0.13 9/20/08 46,552 111,500
Cy E. Hammond 10,000 (e) 14.8% 0.75 2/11/04 1,616 3,481
750,000 (f) 8.3% 0.13 9/20/08 46,552 111,500
Jonathan M. Charry 400,000 (f) 4.4% 0.13 9/20/08 24,825 59,467
Irving M. Lebovics 300,000 (f) 3.3% 0.13 9/20/08 18,621 44,600
James A. McManus (g) - - - - - -
Paul D. Siomkos (h) - - - - - -
Footnotes:
- ---------
(a) Percentages for the grants listed above are based upon the aggregate total
granted under the respective 1992 Plan or the 2001 Plan less amounts
granted to consultants and non-employee directors (i.e., directors other
than Messrs. Haft and Parrella and Ms. Lebovics) and amounts attributable
to replacement grants. Percentages for grants attributable to the
re-granting of options which had expired or would have otherwise expired in
2001 (see Note (e) below) are determined based upon the aggregate total
re-granted under the applicable plan less amounts granted to non-employee
directors and consultants.
(b) The dollar amounts on these columns are the result of calculations of the
respective exercise prices at the assumed 5% and 10% rates of appreciation
compounded annually through the applicable expiration date. Actual gains
realized, if any, on stock option exercises and common stock holdings are
dependent on the future performance of NCT's common stock and overall
market conditions.
(c) Options to acquire these shares represent an obligation by the Board of
Directors from December 2000 due to a reduction in Mr. Parrella's December
2000 grant because of an insufficient number of shares available for grant
under the 1992 Plan. 824,505 shares of this grant were under the 1992 Plan
and 2,000,000 were granted pursuant to the 2001 Plan. These options are
fully vested because of an acceleration by the Board of Directors due to
the execution of the licensing transaction with NXT plc and its subsidiary
New Transducers Ltd. and his formation of Artera Group, Inc., a subsidiary
of NCT, and conceptualization of its business strategy.
(d) Options to acquire these shares were granted pursuant to the 2001 Plan.
These options vest as follows: 1,000,000 shares on the date of grant
(September 20, 2001); and 1,500,000 shares on completion of fund raising,
provided, however, that all shares under this grant vest by the fifth
anniversary (September 20, 2006).
(e) Represent replacement grants under the 1992 Plan at the exercise price of
the expired grant. Expiration dates for re-granted options were extended to
expiration dates equal to the lesser of five years from the date re-granted
or ten years from the original grant date. These options are vested.
44
(f) Options to acquire these shares were granted pursuant to the 2001 Plan with
an exercise price of $0.13 per share, a value that was slightly higher than
the fair market value of NCT's common stock on the date of grant. These
options vest as follows: 40% on the date of grant (September 20, 2001) and
30% on each of the first and second anniversaries of the date of grant.
(g) Mr. McManus received 357,927 shares of NCT common stock as a stock award
under the 1992 Plan. That award represented 18.5% of options and stock
awards granted to employees in 2001 under the 1992 Plan. Such award was
granted November 27, 2001 in conjunction with Mr. McManus's employment
termination agreement. The value he received was $33,287.
(h) Per the employment termination agreement with Mr. Siomkos, options to
acquire 500,000 shares of NCT common stock at an exercise price of $0.3125
were fully vested as of January 30, 2001. The options expire April 19,
2008. Mr. Siomkos's right to other options that had been granted to him by
NCT expired in 2001.
2001 Aggregated Option and Warrant Exercises and
December 31, 2001 Option and Warrant Values
The following table sets forth information with respect to the exercise of
options and warrants to purchase common stock during the fiscal year ended
December 31, 2001, and the unexercised options and warrants held and the value
thereof at that date, by each of the Named Executive Officers.
Number of Shares
Number of Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired and Warrants at And Warrants at
On Value December 31, 2001 December 31, 2001
-------------------------------- ------------------------------
Name Exercise (#) Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
- -------------------- ------------- ------------- -------------- ---------------- --------------- ------------
Michael J. Parrella - $ - 30,401,634 1,500,000 $ - $ -
Irene Lebovics - - 3,434,623 1,100,000 - -
Cy E. Hammond - - 1,543,741 740,000 - -
Jonathan M. Charry - - 1,149,634 628,415 - -
Irving M. Lebovics - - 1,026,891 461,524 - -
James A. McManus (a) - - - - - -
Paul D. Siomkos - - 500,000 - - -
Footnote:
- --------
(a) Mr. McManus received 357,927 shares of NCT common stock as a stock award
under the 1992 Plan. Such award was granted November 27, 2001 in
conjunction with Mr. McManus's employment termination agreement. The value
he received was $33,287, calculated at $0.093 per share, the closing bid
price of NCT common stock on the day preceding the award.
Compensation Arrangements with Certain Officers and Directors
Mr. Haft, NCT's former Chairman of the Board of Directors, who continues as
a director, received cash compensation from the company in 2001, 2000 and 1999
aggregating $63,000, $64,500 and $85,000, respectively.
Certain of NCT's executive officers are eligible for an incentive bonus
consisting of a cash override on the value derived by NCT and its subsidiaries,
in cash or otherwise, upon the execution of transactions with unaffiliated
parties. Cash override refers to NCT's payment in cash to certain officers and
directors of amounts that represent a percentage of the transaction's value
attributed to NCT and its subsidiaries.
Mr. Parrella's incentive bonus consists of a cash override of 1.0% of the
value derived by NCT and its subsidiaries, in cash or otherwise, upon the
execution of transactions with unaffiliated parties. Such arrangement has been
in effect since the initial award by the Compensation Committee on February 1,
1996.
45
Effective December 1, 2000, the Compensation Committee determined that Mr.
Parrella's cash override would continue at the rate of 1% through May 2001 then
be reduced to a rate of 1/2% from June 2001. In April 2001, the Compensation
Committee postponed the reduction.
Effective January 1, 2001, Ms. Lebovics began participation in an incentive
bonus arrangement comprised of a cash override of 1/3% of the value NCT and its
subsidiaries derive upon execution of transactions with unaffiliated third
parties.
Mr. Hammond receives an incentive bonus comprised of a cash override of
1/2% of the value NCT and its subsidiaries derive upon execution of transactions
with unaffiliated third parties. Such arrangement has been in effect for Mr.
Hammond since September 4, 1997. Effective December 1, 2000, the Compensation
Committee determined that Mr. Hammond's cash override would continue at the rate
of 1/2% through May 2001 then be reduced to a rate of 1/4% from June 2001. In
April 2001, the Compensation Committee postponed the reduction.
Effective January 3, 2000, NCT hired Jonathan Charry, PhD. as its Senior
Vice President, Corporate Development. In connection therewith, NCT entered into
a letter of employment which provides for an annual base salary of $150,000 and
a $50,000 guaranteed draw against future commissions. Dr. Charry also has an
incentive bonus arrangement based on performance milestones and cash overrides
on specified financings and licensing or strategic alliance agreements.
Effective March 1, 1999, NCT hired James McManus as the President and Chief
Executive Officer of NCT's subsidiary, Distributed Media Corporation. In
conjunction therewith, NCT entered into a letter of employment which provided
for a base annual salary of $120,000, annual 5% increases of his base salary, a
guaranteed first year bonus of $70,000 and $50 per site installed with
Distributed Media Corporation's digital broadcasting station system during Mr.
McManus' first year of employment. Although Mr. McManus resigned effective
November 27, 2001, his compensation will continue through February 2002 at an
annual rate of $205,800. In addition, under an employment termination agreement,
NCT granted Mr. McManus a stock award of 357,927 shares of common stock under
the 1992 Plan, valued at $33,287 on the date of award. In addition, NCT agreed
to issue 2,142,073 shares of NCT common stock for the common shares of
Distributed Media Corporation that Mr. McManus obtained upon exercise of options
on September 17, 2001.
Effective March 23, 1998, NCT hired Paul Siomkos, its then new Senior Vice
President of Operations. The term of this employment agreement was four years.
Such agreement provided for a base salary of $150,000 and that the amount of any
incentive bonus be at the sole discretion of the company. Mr. Siomkos received
an automobile allowance of $1,000 per month. Although Mr. Siomkos resigned
effective January 30, 2001, his compensation will continue through July 2002 at
an annual rate of $162,000.
Compensation of Directors
None of our directors received fees, as such, for his or her services as a
director during 2001. Messrs. Haft and Parrella and Ms. Lebovics were paid
salaries in 2001 by NCT. See above at "Executive Compensation and Summary
Compensation Table" and "Compensation Arrangements with Certain Officers and
Directors."
During 2001, each director was granted options to acquire shares of NCT's
common stock under the 2001 Plan. The shares of common stock underlying options
granted in 2001 under the 2001 Plan were 300,000 for each of Messrs. Haft,
McCloy and Oolie; 4,500,000 for Mr. Parrella (2,000,000 of which partially
fulfilled an obligation from 2000); and 750,000 for Ms. Lebovics. In addition,
Mr. Parrella was granted an option to acquire 824,505 shares pursuant to the
1992 Plan to partially fulfill an obligation from 2000. A grant made in December
2000 under the 1992 Plan to Mr. Parrella, subject to a sufficient number of
shares available, was subsequently reduced by 2,824,505 shares due to an
insufficient number of shares available under the 1992 Plan. Such share award
remained an obligation to Mr. Parrella; the Board of Directors fulfilled such
obligation in 2001. The vesting schedule for the directors, other than Mr.
Parrella, is as follows: 40% vest on the date of grant and 30% upon the first
and second anniversaries of the date of grant. The options expire seven years
from the date of grant. The exercise price was $0.13 per share, a value slightly
higher than the closing bid price on the day preceding the date of grant.
Effective September 20, 2001, the Board of Directors accelerated the vesting for
Mr. Parrella's grant obligation of 6,000,000 shares from 2000 to 100% vested in
connection with completion by NCT of a new licensing transaction with NXT plc
and Mr. Parrella's formation of and
46
conceptualization of the strategy for Artera Group, Inc. The vesting of that
grant had been as follows: 40% on the date of grant (December 6, 2000) and 30%
on the first and second anniversaries of the date of grant. The vesting terms of
Mr. Parrella's 2001 grant are outlined above in footnotes to the table, "Options
and Warrants Granted in 2001."
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2001, John McCloy and Sam Oolie
served as members of the Compensation Committee of NCT's Board of Directors.
Messrs. McCloy and Oolie also served as members of the Board of Directors of NCT
Audio Products since their respective appointments in 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 2002, information
concerning the shares of common stock beneficially owned by (1) each person who,
to the knowledge of NCT, is the holder of 5% or more of the common stock of NCT;
(2) each person who presently serves as a director of NCT; (3) the five most
highly compensated executive officers of NCT (including NCT's Chief Executive
Officer) in the fiscal year ended December 31, 2001 who were executive officers
at the end of 2001 and (4) all executive officers and directors of NCT as a
group. Except as otherwise noted, each beneficial owner has sole investment and
voting power with respect to the listed shares.
Amount and
Nature of Approximate
Beneficial Percentage
Name of Beneficial Owner Ownership (a) Of Class (a)
- ---------------------------------------------- --------------------- -----------------
Michael J. Parrella 31,023,415 (b) 6.7%
Jay M. Haft 2,276,799 (c) *
John J. McCloy 2,951,906 (d) *
Sam Oolie 1,494,721 (e) *
Irene Lebovics 4,196,482 (f) 1.0%
Cy E. Hammond 1,759,507 (g) *
Jonathan M. Charry 1,149,634 (h) *
Irving M. Lebovics 1,617,408 (i) *
All Executive Officers and Directors
as a Group (9 persons) 45,954,355 (j) 9.6%
Carole Salkind 161,948,045 (k) 27.9%
Crammer Road LLC 247,530,882 (l) 37.3%
Alpha Capital Aktiengesellschaft 24,426,561 (m) 5.4%
Libra Finance S.A. 33,991,085 (n) 7.3%
* Less than one percent.
Footnotes:
- ---------
(a) Assumes the exercise of currently exercisable options or warrants to
purchase shares of common stock. The percentage of class ownership is
calculated separately for each person based on the assumption that the
person listed on the table has exercised all options and warrants currently
exercisable by that person, but that no other holder of options or warrants
has exercised such options or warrants.
(b) Mr. Parrella's business address is 20 Ketchum Street, Westport, Connecticut
06880. Includes 862,500 shares issuable upon the exercise of currently
exercisable warrants, 29,539,134 shares issuable upon the exercise of
currently exercisable options and 8,888 shares held in custody for Mr.
Parrella's dependent children. Also includes 612,893 shares of common stock
held by Mr. Parrella's spouse, shares as to which Mr. Parrella disclaims
beneficial ownership.
(c) Includes 218,500 shares issuable upon the exercise of currently exercisable
warrants, 10,000 shares from stock awards granted by NCT and 2,018,408
shares issuable upon the exercise of currently exercisable options.
47
(d) Includes 862,500 shares issuable upon the exercise of currently exercisable
warrants, 5,000 shares from a stock award granted by NCT, 1,504,908 shares
issuable upon the exercise of currently exercisable options and 300,000
shares held by the John J. McCloy II Family Trust for which the named
person's spouse serves as trustee, shares as to which Mr. McCloy has no
voting or investment power.
(e) Includes 20,000 shares from stock awards granted by NCT, 1,154,908 shares
issuable upon the exercise of currently exercisable options, 75,000 shares
owned by the named person's spouse, as to which Mr. Oolie has no voting or
investment power, 20,000 shares owned by Oolie Enterprises, and 44,313
shares held by the Oolie Family Support Foundation, shares as to which Mr.
Oolie has no voting or investment power.
(f) Includes 201,250 shares issuable upon the exercise of currently exercisable
warrants, 3,233,373 shares issuable upon the exercise of currently
exercisable options and 590,517 shares owned jointly with her spouse. Irene
Lebovics is married to Irving Lebovics who is also employed by NCT and
serves as its Senior Vice President, Global Sales. Mr. Lebovics holds
various options to acquire an aggregate of 1,488,415 shares of NCT common
stock, shares as to which Ms. Lebovics disclaims beneficial ownership.
(g) Includes 25,000 shares issuable upon the exercise of currently exercisable
warrants and 1,518,742 shares issuable upon the exercise of currently
exercisable options.
(h) Consists of 1,149,634 shares issuable upon the exercise of currently
exercisable options.
(i) Consists of 1,026,891 shares issuable upon the exercise of currently
exercisable options and 590,517 shares owned jointly with his spouse, Irene
Lebovics. Irene Lebovics is President and a director of NCT. Ms. Lebovics
holds options and warrants to acquire an aggregate of 4,534,623 shares of
NCT common stock, shares as to which Mr. Lebovics disclaims beneficial
ownership.
(j) Includes 2,169,750 shares issuable to 5 individuals (4 directors and 3
executive officers) of NCT upon the exercise of currently exercisable
warrants, 41,220,998 shares issuable to 9 persons upon the exercise of
currently exercisable options, and 35,000 shares from stock awards issued
by NCT to 3 directors. Excludes options to acquire 5,561,251 shares from
NCT which are not presently exercisable but become exercisable over time by
the 9 executive officers and directors of NCT as a group.
(k) Ms. Salkind's business address is c/o Sills, Cummis, Radin, Tischman,
Epstein & Gross, One Riverfront Plaza, Newark, New Jersey 07102. Includes
114,336,469 shares issuable upon the conversion of convertible secured
notes in aggregate principal amount of $9,608,416 and 3,871,009 shares for
interest thereon through March 31, 2002, calculated at a conversion price
of $0.093 on $2,535,469 of convertible secured notes, at a conversion price
of $0.12 on $1,000,000 of convertible secured notes, at a conversion price
of $0.071 on $2,014,270 of convertible secured notes, at a conversion price
of $0.079 on $3,408,677 of convertible notes and at a conversion price of
$0.09 on $650,000 of convertible notes. Includes 11,433,647 shares
representing the aggregate default penalty on the convertible notes. Also
includes 15,803,102 shares issuable to Ms. Salkind upon the exercise of
warrants. Also includes 5,000 shares owned by Morton Salkind, Ms. Salkind's
husband and a former director of NCT, as to which she has no voting or
investment power.
(l) Crammer Road LLC's business address is Corporate Center, West Bay Road,
Grand Cayman. David Sims of Navigator Management Ltd. has voting and
dispositive control of NCT's shares on behalf of Crammer Road LLC. Includes
214,255,954 shares issuable pursuant to the private equity credit agreement
minimum commitment amount of $17 million calculated at $0.12 less the
discount per the agreement, and assumes NCT commences its puts by May 1,
2002. Also includes 250,000 shares issuable under currently exercisable
warrants. Includes 10,344,232 shares issuable pursuant to a convertible
note in NCT along with accrued interest, calculated based upon a price of
$0.12. Also includes 3,333,334 shares that would be issuable pursuant to a
reset provision of an exchange agreement between NCT and Crammer Road.
Pursuant to a contractual restriction between NCT and Crammer Road, Crammer
Road is prohibited from holding in excess of 9.9% of our common stock at
any given time.
(m) Alpha Capital Aktiengesellschaft's business address is Pradafant 7, 9490
Furstentums, Vaduz, Lichtenstein. Konrad Ackermann, Director, has voting
and dispositive control of NCT's shares on behalf of Alpha Capital.
Includes 13,467,277 shares issuable upon exchange of various Artera Group,
Inc. convertible notes along with accrued interest and 5,347,602 shares
issuable upon exchange of series B
48
preferred stock of Pro Tech Communications, Inc. and accretion thereon, all
calculated at $0.12 less applicable discounts. Pursuant to contractual
restrictions between NCT and Alpha Capital Aktiengesellschaft, Alpha
Capital is prohibited from holding in excess of 9.99% of our common stock
at any given time.
(n) Libra Finance S.A.'s business address is c/o Trident Trust Company (BVI)
Limited, Trident Chambers, Box 146, Road Town, Tortorla, British Virgin
Islands. Seymour Braun has voting and dispositive control of NCT's shares
on behalf of Libra Finance. Includes currently exercisable warrants to
acquire 25,000,000 shares on NCT common stock, 8,695,890 shares issuable
upon exchange of Artera Group, Inc. series A preferred stock and accretion
thereon and 295,195 shares issuable upon conversion of NCT convertible
notes and interest thereon dated March 14, 2001 and April 12, 2001, all
calculated at $0.12 less applicable discounts.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Secured Convertible Notes Issued to Carole Salkind
Beginning in 1999, NCT has issued secured convertible notes to Carole
Salkind, an accredited investor and spouse of a former director of NCT. As of
March 31, 2002, the principal balance outstanding of these notes aggregated
approximately $9.6 million. The notes are secured by substantially all the
assets of NCT. At Ms. Salkind's election, the notes are convertible into shares
of our common stock and are exchangeable for shares of common stock of our
subsidiaries. The notes contain various events of default, the occurrence of any
one of which provides, at Ms. Salkind's election, that the outstanding
principal, unpaid interest and a penalty (10% of the principal in default)
become immediately due and payable. An event of default occurred on February 6,
2002 when a judgment in the amount of $2 million (in excess of the permitted
maximum of $250,000) was entered against NCT and its subsidiary Distributed
Media Corporation (and not vacated, bonded or stayed) in the action of
Production Resource Group, LLC v. NCT, Distributed Media Corporation and Michael
Parrella (Superior Court of Connecticut, Judicial District of Fairfield).
Consequently, the outstanding secured convertible notes and unpaid interest,
along with the 10% default penalty, are payable immediately upon demand. To
date, no such demand for payment has been made. The following outlines our
secured convertible note transactions with Carole Salkind:
On January 26, 1999, Carole Salkind agreed to purchase secured convertible
notes of NCT in an aggregate principal amount of $4.0 million. The initial
secured convertible note for $1.0 million was issued to Ms. Salkind on January
26, 1999. The note matured on January 25, 2001. The note bore interest at the
prime rate as published from time to time in The Wall Street Journal from the
issue date until the note was paid. Ms. Salkind had the right to convert the
outstanding amount of the note into shares of common stock of NCT at a
conversion price (as amended on September 19, 1999) of the note and any future
notes, the lesser of (1) the lowest closing price for the common stock during
September 1999 ($0.172); (2) the average of the closing bid price for the common
stock for five consecutive trading days prior to conversion; or (3) the fixed
conversion price of $0.17. In no event could the conversion price be less than
$0.12 per share. Prior to the amendment, the fixed conversion price was $0.237
per share, and in no event could the conversion price be less than $0.15 per
share. The amendment was entered into for the purpose of maintaining good
investor relations in a market in which NCT's stock price was declining. Ms.
Salkind purchased the remaining $3.0 million principal amount of secured
convertible notes on various dates through March 27, 2000, and NCT issued notes
with the same terms and conditions as the note described above.
On January 25, 2001, NCT defaulted on the repayment of the $1.0 million
secured convertible note issued to Ms. Salkind on January 26, 1999. The default
provisions in the note imposed a default penalty of $100,000 (10% of the
principal in default). Default interest from the date of default accrued on the
principal in default at the rate of prime plus 5%. On May 14, 2001, NCT cured
this default by canceling the $1.0 million note and issuing a new four-month
convertible note to Ms. Salkind for $1,361,615. Also on May 14, 2001, we granted
Ms. Salkind a five-year warrant for the purchase of 500,000 shares of our common
stock at $0.13 per share, the fair market value of NCT's common stock on the
date of grant. On December 20, 2001, we reduced the exercise price on that
warrant to $0.071 per share. The
49
May 14, 2001 note was convertible into shares of our common stock at $0.13
per share, shares of Pro Tech common stock at $0.22 per share, or shares of
Artera Group International Limited or shares of Distributed Media Corporation
International Limited at the respective initial public offering prices, at the
election of Ms. Salkind. NCT defaulted on repayment of the May 14, 2001 note.
The default provision in the note imposed a penalty of $136,161 (10% of the
principal in default). Default interest from the date of default was due on the
principal in default at the rate of prime plus 5%. Ms. Salkind agreed to fund
another $1,000,000 and to roll the amounts due under the note in default into a
new note, dated September 28, 2001, for an aggregate of $2,535,469. This note
matures on September 28, 2002 and bears interest at the prime rate. In
connection with this new note, we issued Ms. Salkind a five-year warrant to
acquire 1,000,000 shares of NCT common stock at an exercise price of $0.115 per
share. On December 20, 2001, we reduced the exercise price on that warrant to
$0.071 per share.
On February 13, 2001, NCT issued Ms. Salkind an unsecured promissory note
in the amount of $500,000 payable with accrued interest at 7% on April 14, 2001.
The principal and interest were convertible, at Ms. Salkind's election, into
NCT's common stock at a conversion price of $0.21 or exchangeable for Pro Tech's
common stock at an exchange price of $0.44. NCT defaulted on the repayment of
this note. In connection with this transaction, NCT issued Ms. Salkind a
five-year warrant to purchase $500,000 worth of either, at her election, NCT's
common stock at $0.21 per share or Pro Tech's common stock at $0.44 per share.
We reduced the exercise prices on this warrant on December 20, 2001 to $0.071
per share for NCT common stock and $0.06 per share for Pro Tech common stock.
The default provision in the note imposed a penalty of 10% of the principal in
default, or $50,000. On May 18, 2001, Ms. Salkind converted this $500,000 note
into 4,303,425 shares of our common stock at an agreed upon conversion price of
$0.13 per share, which approximated the market price of our common stock on the
conversion date.
NCT defaulted on repayment to Ms. Salkind of each of its convertible notes
dated June 4, 1999, June 11, 1999, July 2, 1999 and July 23, 1999, representing
an aggregate principal balance of $1,250,000. The default provisions in the
notes imposed an aggregate penalty of $125,000 (10% of principal in default).
Default interest from the dates of default was due on the principal in default
at the rate of prime plus 5%. On August 22, 2001, we cured these defaults by
canceling these notes aggregating $1,250,000 and issuing a new convertible note
to Ms. Salkind for $1,673,393. The August 22, 2001 note bore interest at the
prime rate and was due December 22, 2001. On August 22, 2001, we also granted
Ms. Salkind a five-year warrant to purchase 625,000 shares of NCT's common stock
at an exercise price of $0.093 per share. On December 20, 2001, we reduced the
exercise price on that warrant to $0.071 per share. We defaulted on the
repayment of the August 22, 2001 note and incurred a penalty (10% of the
principal in default) and accrued interest at the default rate (prime plus 5%).
We settled the amounts due along with an additional $350,000 received from Ms.
Salkind by issuing an 8% note on January 11, 2002 in the principal amount of
$2,231,265 due January 11, 2003. This note is convertible into shares of our
common stock (at $0.079) or exchangeable for shares of common stock of our
subsidiaries, Pro Tech (at $0.06), Artera Group International Limited (at the
initial public offering price) or Distributed Media Corporation International
Limited (at the initial public offering price). In addition, if any other
subsidiary of NCT makes a public offering of its common stock, Ms. Salkind has
the right to exchange the principal of the note and accrued interest into that
publicly offered common stock at the initial public offering price thereof. In
conjunction with the issuance of the January 11, 2002 note, we granted Ms.
Salkind a five-year warrant to acquire 2,789,082 shares of NCT common stock at
$0.079 per share and a five-year option to acquire a 10% equity interest in our
subsidiary, Artera Group, Inc. The option grants Ms. Salkind the right to
acquire that number of shares of Artera Group, Inc. that constitutes a 10%
equity interest in Artera Group, Inc. at an exercise price of 10% of the
pre-money enterprise value attributed to Artera Group, Inc. in the first
transaction following January 11, 2002 in which an unrelated investor commits to
purchase an equity interest in Artera Group, Inc. for payment of at least $5
million.
On December 20, 2001, we issued Ms. Salkind an 8% per annum $2,014,270
secured convertible note due December 20, 2002 and a five-year warrant to
purchase 1,250,000 shares of our common stock at $0.071 per share. The December
20, 2001 note includes $1,000,000 new funding from Ms. Salkind and the
settlement of two previous notes to Ms. Salkind, dated August 25, 1999 and
September 19, 1999 representing an aggregate principal balance of $750,000,
which were in default. The default provisions in these notes imposed a default
penalty aggregating $75,000 (10% of the principal in default). Default interest
from the dates of default was due on the principal in default at the rate of
prime plus 5%. The
50
principal amount of the December 20, 2001 note is convertible into shares of NCT
common stock at a conversion price of $0.071. The note is also exchangeable for
shares of common stock of Pro Tech at an exchange price of $0.06 per share or
for shares of common stock of Artera Group International Limited or Distributed
Media Corporation International Limited at the respective initial public
offering prices thereof. In addition, if any other subsidiary of NCT makes a
public offering of its common stock, Ms. Salkind has the right to exchange the
principal of the note and accrued interest into that publicly offered common
stock at the initial public offering price thereof.
Also on December 20, 2001 as indicated above, we amended the respective
exercise prices of Ms. Salkind's previously granted warrants to $0.071 per share
for the purchase of NCT common stock. Further, under her February 14, 2001
warrant, we reduced the exercise price for her purchase of shares of Pro Tech
common stock from $0.44 to $0.06.
On January 25, 2002, NCT issued Ms. Salkind two 8% per annum convertible
notes in the principal amounts of $650,000 (due January 25, 2003) and $250,000
(due February 8, 2002). On January 25, 2002, Ms. Salkind paid $250,000, for the
benefit of NCT, into an escrow account and NCT issued a secured convertible note
in the principal amount of $250,000. The escrow account was a part of another
transaction in which NCT engaged with an unrelated third party. The note matured
on February 8, 2002 and was settled on February 27, 2002 (see below). Ms.
Salkind paid NCT $650,000 on January 25, 2002. The $650,000 note may be
converted into shares of NCT common stock (at $0.09) and may be exchanged for
shares of common stock of Artera International (at the initial public offering
price), DMCI (at the initial public offering price) or any other subsidiary of
NCT thatmakes a public offering of its common stock (at the initial public
offering price thereof). On January 25, 2002, in conjunction with the issuance
of the notes, we granted Ms. Salkind two five-year warrants to acquire an
aggregate of 1,125,000 shares of NCT common stock at $0.09 per share.
The January 25, 2002 note for $250,000 (see above) was satisfied as to
principal by the release of $250,000 from escrow to Ms. Salkind. On February 27,
2002, a new note was issued by NCT to Ms. Salkind in the principal amount of
$827,412.26 for the default amount ($25,000) and accrued interest (less interest
credited on the escrow account) due on the $250,000 note along with $800,000
loaned to NCT by Ms. Salkind. This note bears interest at 8% per annum payable
at maturity. This note may be converted into common stock of NCT (at $0.079) and
may be exchanged for shares of common stock of Pro Tech (at $0.06), Artera
International (at the initial public offering price) DMCI (at the initial public
offering price) or any other subsidiary of NCT that makes a public offering of
its stock (at the public offering price thereof). Also on February 27, 2002 in
conjunction with the issuance of the note described above, we granted Ms.
Salkind a five-year warrant to acquire 1,034,266 shares of our common stock at
an exercise price of $0.079 per share.
On March 1, 2002, NCT issued Ms. Salkind a 8% per annum convertible note in
the principal amount of $350,000 due March 1, 2003 and a five-year warrant to
acquire 437,500 shares of NCT common stock at $0.079 per share. Ms. Salkind paid
NCT $350,000 on March 1, 2002. This note may be converted into common stock of
NCT (at $0.079) and may be exchanged for shares of common stock of Pro Tech (at
$0.06), Artera International (at the initial public offering price) DMCI (at the
initial public offering price) or any other subsidiary of NCT that makes a
public offering of its stock (at the public offering price thereof).
On March 27, 2002, we defaulted on repayment of the $1,000,000 note dated
March 27, 2000. We received $300,000 from Ms. Salkind on April 1, 2002 and
$350,000 from her on April 15, 2002. We expect that these proceeds will be
rolled into a new note along with the March 27, 2000 note, default penalty and
accrued interest thereon.
51
Summarized below are the convertible notes issued to Carole Salkind that
are outstanding as of March 31, 2002:
Conversion
Issue Date Due Date Principal Price
----------- -------- ---------- ----------
3/27/00 3/27/02 $ 1,000,000 $ 0.120
9/28/01 9/28/02 2,535,469 0.093
12/20/01 12/20/02 2,014,270 0.071
1/11/02 1/11/03 2,231,265 0.079
1/25/02 1/25/03 650,000 0.090
2/27/02 2/27/03 827,412 0.079
3/1/02 3/1/03 350,000 0.079
----------
$ 9,608,416
==========
In conjunction with the issuance of convertible notes to Ms. Salkind, NCT
granted Ms. Salkind warrants to acquire shares of our common stock. As noted
above, we amended the exercise prices on each of the warrants granted prior to
December 20, 2001 to $0.071. The warrants to purchase shares of NCT common stock
granted to Ms. Salkind as of March 31, 2002, as amended to reduce the exercise
prices, are as follows:
Shares
Grant Date Expiration Date Exercise Price Granted
---------- --------------- -------------- -------
2/13/01 2/13/06 $ 0.071 7,042,254 (a)
5/14/01 5/14/06 0.071 500,000
8/22/01 8/22/06 0.071 625,000
9/28/01 9/28/06 0.071 1,000,000
12/20/01 12/20/06 0.071 1,250,000
1/11/02 1/11/07 0.079 2,789,082
1/25/02 1/25/07 0.090 812,500
1/25/02 1/25/07 0.090 312,500
2/27/02 2/27/07 0.079 1,034,266
3/1/02 3/1/07 0.079 437,500
------------
15,803,102
============
Footnote:
- --------
(a) The February 13, 2001 warrant also grants Ms. Salkind, at her election, the
right to acquire 8,333,333 shares of Pro Tech common stock ($500,000 worth
at an amended exercise price of $0.06 per share).
Private Placement and Issuance of NCT Common Stock
On August 22, 2001, three individuals, NCT directors and officers, agreed
to purchase in a private placement an aggregate of 1,000,000 shares of
restricted common stock. The aggregate value of the shares was $93,000, or
$0.093 per share, the then fair market price of our common stock. Shares were
issued to NCT's Chairman of the Board of Directors and Chief Executive Officer,
Michael Parrella (612,893), to NCT's President and a director, Irene Lebovics
(171,342) and to NCT's Senior Vice President, Chief Financial Officer, Cy
Hammond (215,765).
On August 22, 2001, Carole Salkind agreed to purchase 1,000,000 shares of
NCT common stock for $93,000 in cash, or $0.093 per share, the then fair market
value based upon the closing bid price on August 21, 2001. On September 10,
2001, we received the funds from Ms. Salkind and issued the 1,000,000 shares of
common stock to her.
52
Indebtedness of Management
On various dates in 2000 and 2001, Jonathan M. Charry, Ph.D., NCT's Senior
Vice President, Corporate Development, entered into several short-term
promissory notes to borrow funds from NCT in anticipation of cash overrides due
him under his incentive compensation arrangement described above in
"Compensation Arrangements with Certain Officers and Directors." Effective
December 1, 2001, the borrowed funds had not been repaid but were consolidated
with interest into one outstanding promissory note due May 1, 2002 for an
aggregate principal amount owed to NCT of $105,301. The due date of this note
represents an extension from December 1, 2001which itself was a product of prior
extensions because Dr. Charry could not afford to repay NCT. NCT still believes
that incentive compensation that will be due him will offset some of the amounts
owed. The note bears interest at an annual rate of 6.0%.
Management Guarantee of Indebtedness
Michael Parrella, NCT's Chairman of the Board of Directors and Chief
Executive Officer, personally guaranteed the repayment of a $400,000 bridge
financing note issued by NCT to Alpha Capital Aktiengesellschaft on December 27,
2001. The guarantee was extinguished in conjunction with new financing completed
on January 10, 2002 ($550,000 convertible note issued to Alpha Capital).
DMC New York, Inc.
Pursuant to an April 12, 2001 exchange agreement and an April 12, 2001
securities purchase agreement, NCT acquired a 25% interest in DMC New York, Inc.
for $4.0 million from Crammer Road LLC, the sole stockholder of DMC NY. DMC NY
is the owner of 16 licenses previously purchased from our subsidiary,
Distributed Media Corporation. The acquisition resulted in a charge to our
consolidated statements of operations because DMC NY has not commenced
operations. DMC NY has not recorded any revenue, and apart from its New York
license rights, has no other assets or operations. The consideration consisted
of a $1.0 million convertible note due December 31, 2001 issued to Crammer Road
LLC, $1.0 million in cash and $2.0 million of our common stock (13,333,333
million shares). We intend to acquire the remaining 75% interest in DMC NY
pursuant to our private equity credit agreement with Crammer Road. As such, we
accrued $14.0 million, our cost of repurchasing the remaining 12 licenses under
the private equity credit agreement. Our 2001 financial statements include an
aggregate $18.0 million charge, included in write downs of investment and
repurchased licenses in our consolidated statement of operations, for the
acquisition of 4,000 shares of DMC NY and our obligation to acquire the
remaining 12 DMC licenses held by DMC NY. Under an April 12, 2001 private equity
credit agreement between Crammer Road and NCT, we will put shares of our common
stock to Crammer Road in exchange for a combination of cash and the remaining
shares of DMC NY common stock. We anticipate that, under the terms of the
private equity credit agreement, NCT will obtain a majority equity interest in
DMC NY by the end of 2002. Crammer Road obtained the 16 DMC licenses from other
investors in a private transaction. The investors who initially owned the 16 DMC
licenses had paid for them in 1999 with $4 million in cash and by surrendering
to NCT $9.6 million in stated value of NCT series E and F preferred stock (9,600
shares at the stated value of $1,000 per share). The holders of our series E and
F preferred stock were the original purchasers of the DMC licenses. These
investors were not under common control at the time of the 1999 transaction. We
recognized an aggregate of $850,000 revenue in 1999 from the sale of these 16
licenses. No other license fee revenue was recognized for this transaction. We
issued 12,454 shares of our series E preferred stock from December 30, 1998
through April 13, 1999 for approximately $1.8 million in cash, 1,700 shares of
our series C preferred stock and 2.1 million shares of our common stock. On
August 10, 1999, we issued 8,500 shares of our series F preferred stock for
approximately $1.0 million in cash. The purchasers of our series E and F
preferred stock (except one investor) were the same investors who contributed
the 16 licenses to Crammer Road. The purpose of the capital contribution of
licenses to Crammer Road was to provide for such contributors' undertakings in
respect of their investment in Crammer Road. In turn, Crammer Road's purpose for
contributing the 16 licenses to DMC NY was to provide a form of liquidity,
possibly through the acquisition of DMC NY by Distributed Media Corporation or
NCT. On September 27, 2000, DMC NY, pursuant to a license exchange agreement,
issued 16,000 shares of its common stock in exchange for 16 licenses held by
Crammer Road. Certain officers and directors of NCT comprise 100% of the Board
of Directors of DMC New York, specifically, Michael Parrella (NCT's Chairman of
the Board of Directors and Chief Executive Officer), Irene Lebovics (NCT's
President and a director of NCT) and Cy Hammond (NCT's Senior Vice President,
Chief Financial Officer). We are reacquiring our New York DMC licenses because
we believe that we are obtaining good value for an aggregate of $18 million ($1
million cash, shares of our common stock valued at $2 million, a $1 million note
and approximately $14 million under the private equity credit agreement). We
believe this
53
is a good value because it will result in our control of the number one
designated market area. We did not obtain a valuation from an outside firm.
Quiet Power Systems, Inc.
Between 1993 and 1994, NCT entered into five agreements with Quiet Power
Systems, Inc. Environmental Research Information, Inc. owns 33% of Quiet Power
Systems, and Jay Haft, a director of NCT and former Chairman of NCT's Board of
Directors, owns another 2% of Quiet Power Systems. Michael Parrella, Chief
Executive Officer and Chairman of the Board of Directors of NCT, owns 12% of
Environmental Research Information and shares investment control over an
additional 24% of it. Jonathan Charry, NCT's Senior Vice President, Corporate
Development, owns 20% of Environmental Research Information and 3% of Quiet
Power Systems. In March 1995, NCT entered into a master agreement with Quiet
Power Systems which granted Quiet Power Systems an exclusive worldwide license
to market, sell and distribute various quieting products in the utility
industry. Subsequently, NCT and Quiet Power Systems executed four letter
agreements for the primary purpose of revising payments terms. On December 24,
1999, NCT executed a final agreement with Quiet Power Systems in which NCT
agreed to write off $239,000 of indebtedness owed by Quiet Power Systems in
exchange for the return by Quiet Power Systems to NCT of its exclusive license
to use NCT technology in various quieting products in the utility industry. This
amount, originally due on January 1, 1998, had been fully reserved by NCT.
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
Item 14(a)(1) Financial Statements. The following financial statements are
filed as part of this Annual Report on Form 10-K.
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 2000 and December 31, 2001
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss for the years ended December 31, 1999, 2000 and 2001
Consolidated Statements of Stockholders' Equity (Capital Deficit) for the years
ended December 31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
2000 and 2001
Notes to the Consolidated Financial Statements
Item 14(a)(2) Financial Statement Schedules.
Reports of Independent Auditors with Respect to Schedule II
Schedule II. Valuation and Qualifying Accounts
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
consolidated financial statements filed or notes thereto.
Item 14(a)(3) Exhibits.
The exhibits listed on the accompanying Index to Exhibits are filed as part of
this Annual Report on Form 10-K.
Item 14(b)
Reports filed on Form 8-K:
On November 8, 2001, the company filed a report on Form 8K, dated November
7, 2001 announcing the issuance of a warrant dated October 25, 2001 and
amendment to the terms of a warrant dated October 26, 2000 to Libra Finance,
S.A.
On November 19, 2001, the company filed a report on Form 8K, dated November
19, 2001 announcing amendment to the terms of a warrant dated October 26, 2000
to Libra Finance S.A.
On February 14, 2002, the company filed a report on Form 8K, dated February
14, 2002 announcing a change in independent accountants.
55
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENT INDEX
Page
-------
Independent Auditors' Report (Richard A. Eisner & Company, LLP) F-1
Independent Auditor's Report (Goldstein Golub Kessler LLP) F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001 F-3
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss for the years ended December 31, 1999, 2000 and 2001 F-4
Consolidated Statements of Stockholders' Equity (Capital Deficit) for the years ended F-5
December 31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001 F-6
Notes to the Consolidated Financial Statements F-7
Independent Auditors' Report on Schedule II (Richard A. Eisner & Company, LLP) F-60
Independent Auditor's Report on Schedule II (Goldstein Golub Kessler LLP) F-61
Schedule II F-62
56
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, 2001, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
(capital deficit) and cash flows for each of the years ended December 31, 2001
and December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1999 financial
statements of the Company's foreign subsidiary. This subsidiary accounted for
revenue of approximately $4,000 for the year ended December 31, 1999, and assets
of approximately $164,000 at December 31, 1999. These statements were audited by
another auditor whose report has been furnished to us, and 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 this entity, is based solely on the report of the other auditor.
We conducted our audits in accordance with auditing standards generally accepted
in the United 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 audits and the report of
the other auditor provides a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor, the
financial statements enumerated above present fairly, in all material respects,
the consolidated financial position of NCT Group, Inc. and subsidiaries as of
December 31, 2001 and the consolidated results of their operations and their
consolidated cash flows for each of the years ended December 31, 2001 and
December 31, 1999 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's cash flows have been absorbed in operating
activities and it has incurred net losses from inception, has a working capital
deficiency and is in default of certain convertible notes payable. 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.
As discussed in Notes 3 and 9 to the financial statements, the Company changed
its method of accounting for derivatives in 2001.
/s/ RICHARD A. EISNER & COMPANY, LLP
- ------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
April 10, 2002
F-1
INDEPENDENT AUDITOR'S 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 United 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
F-2
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Note 3)
(in thousands, except share data)
December 31, December 31,
2000 2001
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,167 $ 567
Investment in marketable securities (Note 5) - 882
Accounts receivable, net (Note 6) 5,414 716
Inventories, net (Note 7) 2,184 1,385
Other current assets (Note 9) 4,894 773
--------------- ---------------
Total current assets 13,659 4,323
Property and equipment, net (Note 8) 688 1,844
Goodwill, net (Notes 2 and 3) 11,711 7,184
Patent rights and other intangibles, net (Note 3) 5,330 4,088
Other assets (Note 9) 7,994 2,570
--------------- ---------------
$ 39,382 $ 20,009
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current liabilities:
Accounts payable $ 4,144 $ 5,553
Accrued expenses 3,564 12,093
Notes payable (Note 10) 704 3,208
Current maturities of convertible notes (Note 10) 3,875 11,710
Deferred revenue (Note 11) 7,777 4,616
Other current liabilities (Note 12) 3,322 19,779
--------------- ---------------
Total current liabilities 23,386 56,959
--------------- ---------------
Long term liabilities:
Deferred revenue (Note 11) 1,611 4,815
Convertible notes (Note 10) 1,000 -
Other liabilities (Note 12) 1,150 2,950
--------------- ---------------
Total liabilities 3,761 7,765
--------------- ---------------
Commitments and contingencies (Note 21)
Common stock subject to resale guarantee (Note 13) 191 -
--------------- ---------------
Minority interest in consolidated subsidiaries 2,186 8,748
--------------- ---------------
Stockholders' equity (capital deficit) (Note 14):
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Series G preferred stock, issued and outstanding, 767 and 0 shares,
respectively (redemption amount $783,409 and $0, respectively) 574 -
Common stock, $.01 par value, authorized 450,000,000 and 645,000,000 shares,
respectively: issued 334,149,669 and 428,830,800 shares, respectively 3,341 4,288
Additional paid-in capital 154,838 164,621
Unearned portion of compensatory stock, warrants and options (37) -
Accumulated other comprehensive (loss) income (3,321) 50
Expenses to be paid with common stock (562) -
Accumulated deficit (141,799) (219,459)
Stock subscriptions receivable (213) -
Treasury stock, 6,078,065 shares of common stock, at cost (2,963) (2,963)
--------------- ---------------
Total stockholders' equity (capital deficit) 9,858 (53,463)
--------------- ---------------
$ 39,382 $ 20,009
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-3
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Note 3)
(In thousands, except per share amounts)
For the Years Ended December 31,
-----------------------------------------------------------
REVENUE: 1999 2000 2001
------------------ ---------------- --------------------
Technology licensing fees and royalties $ 3,552 $ 9,928 $ 5,633
Product sales, net 2,208 2,001 4,568
Advertising/media - 828 279
Engineering and development services 1,303 83 132
------------------ ---------------- --------------------
Total revenue 7,063 12,840 10,612
------------------ ---------------- --------------------
COSTS, EXPENSES AND OTHER INCOME:
Cost of product sales 2,767 2,127 3,340
Cost of advertising/media - 814 332
Cost of engineering and development services 2,216 55 2
Selling, general and administrative 11,801 11,383 18,734
Research and development 6,223 4,412 5,966
Provision for doubtful accounts 77 25 249
Reserve for promissory notes and preacquisition costs 1,788 - -
Impairment of goodwill, net (Notes 3 and 14) 3,125 3,073 14,114
Write downs of investment and repurchased licenses,
net (Notes 2, 9 and 11) 2,385 - 20,778
Costs of exiting activities (Note 25) - - 1,886
Other operating income, net (Note 16) (266) (412) (937)
------------------ ---------------- --------------------
Total operating costs, expenses and other income 30,116 21,477 64,464
------------------ ---------------- --------------------
Non-operating items:
Other (income) expense, net (Note 16) 166 (162) 16,099
Interest expense 578 1,880 6,170
Interest income (26) (31) (43)
------------------ ---------------- --------------------
Total costs and expenses 30,834 23,164 86,690
------------------ ---------------- --------------------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (23,771) (10,324) (76,078)
Cumulative effect of change in accounting principle (Note 9) - - (1,582)
------------------ ---------------- --------------------
NET LOSS $ (23,771) $ (10,324) $ (77,660)
Beneficial conversion features 10,567 4,673 392
Preferred stock dividends (including penalties of $660 in 2001) 494 113 969
------------------ ---------------- --------------------
LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (34,832) $ (15,110) $ (79,021)
================== ================ ====================
Loss per share -
Loss before cumulative effect of change
in accounting principle $ (0.18) $ (0.05) $ (0.20)
Cumulative effect of change in accounting principle - - (0.01)
------------------ ---------------- --------------------
Basic and diluted $ (0.18) $ (0.05) $ (0.21)
================== ================ ====================
Weighted average common shares outstanding -
basic and diluted 190,384 292,758 383,162
================== ================ ====================
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Note 3)
For the Years Ended December 31,
-----------------------------------------------------------
1999 2000 2001
------------------ ---------------- --------------------
NET LOSS $ (23,771) $ (10,324) $ (77,660)
Other comprehensive income (loss):
Currency translation adjustment 20 (7) (8)
Unrealized (loss)/adjustment of unrealized loss on
marketable securities - (3,379) 3,379
------------------ ---------------- --------------------
COMPREHENSIVE LOSS $ (23,751) $ (13,710) $ (74,289)
================== ================ ====================
The accompanying notes are an integral part of the consolidated financial statements.
F-4
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) (Note 3)
(in thousands)
Convertible Preferred Stock
--------------------------------------------------
Series C Series D
-------------------- ---------------------------
Shares Amount Shares Amount
-------------------- ---------------------------
Balance at December 31, 1998 1 $ 702 6 $ 5,240
Sale of common stock, less expenses of $17 - - - -
Common stock subject to reset provision - - - -
Conversion of preferred stock (1) (730) (6) (5,273)
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - 28 - 33
Discount on beneficial conversion price to preferred shareholders - - - -
Preferred stock exchanged for license fees - - - -
Exchange of Series A preferred stock in subsidiary - - - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - - -
Sale of preferred stock - - - -
Exchange of subsidiary common stock for NCT common stock - - - -
Shares issued in consideration for patent rights - - - -
Shares issued for settlement obligations/prepayments - - - -
Expenses to be paid with common stock - - - -
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 - - - -
Common stock subject to reset provision - - - -
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 - - - -
Exchange of subsidiary common stock for NCT common stock - - - -
Sale of excess exchange shares of common stock net of
Commissions of $156 - - - -
Shares issued for settlement obligations/prepayments - - - -
Expenses to be paid with common stock - - - -
Shares issued as deposit for acquisition - - - -
Shares issued for acquisition of subsidiaries - - - -
Shares issued for prepaid research and engineering costs - - - -
Sale of subsidiary stock in excess of net book value - - - -
Liability for make up of value on shares issued to ITC - - - -
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 - $ - - $ -
Sale of common stock - - - -
Conversion of preferred stock - - - -
Dividend and amortization of discount on beneficial conversion
price to preferred shareholders - - - -
Exchange of Series A preferred stock in subsidiary - - - -
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred and common shareholders - - - -
Exchange of subsidiary common stock for NCT common stock - - - -
Conversion of convertible debt plus inducement of $190 - - - -
Exchange of subsidiary convertible debt for common stock - - - -
Sale of excess exchange shares of common stock net of
Commissions of $36 - - - -
Shares issued for settlement obligations/prepayments - - - -
Expenses to be paid with common stock - - - -
Shares returned for deposit of acquisition - - - -
Shares issued for acquisition of subsidiaries, repurchased licenses
and exercise of option, less expenses of $237 - - - -
Liability for make up of value on shares issued to ITC - - - -
Warrants issued in conjunction with convertible debt - - - -
Beneficial conversion feature on convertible note - - - -
Net loss - - - -
Currency translation adjustment - - - -
Shares issued upon exercise of warrants - - - -
Valuation of available-for-sale marketable securities - - - -
Compensatory common stock grants - - - -
Compensatory stock options and warrants - - - -
-------------------- ------------------------
Balance at December 31, 2001 - $ - - $ -
==================== ========================
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) (Note 3)
(in thousands)
Convertible Preferred Stock
----------------------------------------------
Series E Series F
---------------------- -----------------------
Shares Amount Shares Amount
---------------------- -----------------------
Balance at December 31, 1998 11 $ 3,298 - $ -
Sale of common stock, less expenses of $17 - - - -
Common stock subject to reset provision - - - -
Conversion of preferred stock (4) (2,443) (3) (1,652)
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - 5,929 - 5,004
Discount on beneficial conversion price to preferred shareholders - (2,666) - (4,884)
Preferred stock exchanged for license fees (9) (3,631) (1) (574)
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) 9 4,896
Exchange of subsidiary common stock for NCT common stock - - - -
Shares issued in consideration for patent rights - - - -
Shares issued for settlement obligations/prepayments - - - -
Expenses to be paid with common stock - - - -
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 - $ - 5 $2,790
Sale of common stock, less expenses of $49 - - - -
Common stock subject to reset provision - - - -
Sale of preferred stock - - - (5)
Conversion of preferred stock - - (5) (2,865)
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - - 80
Discount on beneficial conversion price to preferred shareholders - - - -
Exchange of Series A preferred stock in subsidiary - - - -
Exchange of subsidiary common stock for NCT common stock - - - -
Sale of excess exchange shares of common stock net of
Commissions of $156 - - - -
Shares issued for settlement obligations/prepayments - - - -
Expenses to be paid with common stock - - - -
Shares issued as deposit for acquisition - - - -
Shares issued for acquisition of subsidiaries - - - -
Shares issued for prepaid research and engineering costs - - - -
Sale of subsidiary stock in excess of net book value - - - -
Liability for make up of value on shares issued to ITC - - - -
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 - $ - - $ -
Sale of common stock - - - -
Conversion of preferred stock - - - -
Dividend and amortization of discount on beneficial conversion
price to preferred shareholders - - - -
Exchange of Series A preferred stock in subsidiary - - - -
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred and common shareholders - - - -
Exchange of subsidiary common stock for NCT common stock - - - -
Conversion of convertible debt plus inducement of $190 - - - -
Exchange of subsidiary convertible debt for common stock - - - -
Sale of excess exchange shares of common stock net of
Commissions of $36 - - - -
Shares issued for settlement obligations/prepayments - - - -
Expenses to be paid with common stock - - - -
Shares returned for deposit of acquisition - - - -
Shares issued for acquisition of subsidiaries, repurchased licenses
and exercise of option, less expenses of $237 - - - -
Liability for make up of value on shares issued to ITC - - - -
Warrants issued in conjunction with convertible debt - - - -
Beneficial conversion feature on convertible note - - - -
Net loss - - - -
Currency translation adjustment - - - -
Shares issued upon exercise of warrants - - - -
Valuation of available-for-sale marketable securities - - - -
Compensatory common stock grants - - - -
Compensatory stock options and warrants - - - -
---------------------- ----------------------
Balance at December 31, 2001 - $ - - $ -
====================== =======================
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) (Note 3)
(in thousands)
Convertible Preferred Stock
-----------------------
Series G Common Stock
----------------------- ---------------------------
Shares Amount Shares Amount
----------------------- ---------------------------
Balance at December 31, 1998 - $ - 156,337 $ 1,563
Sale of common stock, less expenses of $17 - - 4,135 41
Common stock subject to reset provision - - - -
Conversion of preferred stock - - 65,701 657
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - - -
Discount on beneficial conversion price to preferred shareholders - - - -
Preferred stock exchanged for license fees - - - -
Exchange of Series A preferred stock in subsidiary - - 11,700 117
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - - -
Sale of preferred stock - - - -
Exchange of subsidiary common stock for NCT common stock - - 17,738 178
Shares issued in consideration for patent rights - - - -
Shares issued for settlement obligations/prepayments - - 13,155 132
Expenses to be paid with common stock - - - -
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 - - 5 -
Compensatory stock options and warrants - - - -
----------------------- ---------------------------
Balance at December 31, 1999 - $ - 268,771 $ 2,688
Sale of common stock, less expenses of $49 - - 2,467 25
Common stock subject to reset provision - - - -
Sale of preferred stock 2 1,698 - -
Conversion of preferred stock (1) (1,159) 28,376 284
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - 762 - -
Discount on beneficial conversion price to preferred shareholders - (727) - -
Exchange of Series A preferred stock in subsidiary - - 635 6
Exchange of subsidiary common stock for NCT common stock - - - -
Sale of excess exchange shares of common stock net of
Commissions of $156 - - - -
Shares issued for settlement obligations/prepayments - - 1,528 15
Expenses to be paid with common stock - - - -
Shares issued as deposit for acquisition - - 245 2
Shares issued for acquisition of subsidiaries - - 21,319 213
Shares issued for prepaid research and engineering costs - - 9,524 95
Sale of subsidiary stock in excess of net book value - - - -
Liability for make up of value on shares issued to ITC - - - -
Beneficial conversion feature on convertible note - - - -
Net loss - - - -
Currency translation adjustment - - - -
Shares issued upon exercise of warrants & options - - 1,285 13
Valuation of available-for-sale marketable securities - - - -
Compensatory stock options and warrants - - - -
----------------------- ---------------------------
Balance at December 31, 2000 1 $ 574 334,150 $ 3,341
Sale of common stock - - 2,000 20
Conversion of preferred stock (1) (582) 7,218 72
Dividend and amortization of discount on beneficial conversion
price to preferred shareholders - 8 - -
Exchange of Series A preferred stock in subsidiary - - 2,976 30
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred and common shareholders - - - -
Exchange of subsidiary common stock for NCT common stock - - 7,832 78
Conversion of convertible debt plus inducement of $190 - - 4,303 43
Exchange of subsidiary convertible debt for common stock - - 32,925 330
Sale of excess exchange shares of common stock net of
Commissions of $36 - - - -
Shares issued for settlement obligations/prepayments - - 3,838 38
Expenses to be paid with common stock - - - -
Shares returned for deposit of acquisition - - (245) (2)
Shares issued for acquisition of subsidiaries, repurchased licenses
and exercise of option, less expenses of $237 - - 23,476 234
Liability for make up of value on shares issued to ITC - - - -
Warrants issued in conjunction with convertible debt - - - -
Beneficial conversion feature on convertible note - - - -
Net loss - - - -
Currency translation adjustment - - - -
Shares issued upon exercise of warrants - - 10,000 100
Valuation of available-for-sale marketable securities - - - -
Compensatory common stock grants - - 358 4
Compensatory stock options and warrants - - - -
----------------------- ---------------------------
Balance at December 31, 2001 - $ - 428,831 $ 4,288
======================= ===========================
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) (Note 3)
(in thousands)
Accumulated
Additional Accumu- Other
Paid-in lated Comprehensive
Capital Deficit (Loss)/Income
------------- ------------- ------------------
Balance at December 31, 1998 $ 107,483 $(107,704) $ 45
Sale of common stock, less expenses of $17 442 - -
Common stock subject to reset provision (600) - -
Conversion of preferred stock 9,441 - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders (10,994) - -
Discount on beneficial conversion price to preferred shareholders 7,550 - -
Preferred stock exchanged for license fees 3,355 - -
Exchange of Series A preferred stock in subsidiary 9,189 - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders (68) - -
Sale of preferred stock - - -
Exchange of subsidiary common stock for NCT common stock 2,454 - -
Shares issued in consideration for patent rights 88 - -
Shares issued for settlement obligations/prepayments 2,371 - -
Expenses to be paid with common stock (537) - -
Warrant issued in conjunction with convertible debt 446 - -
Beneficial conversion feature on convertible note 204 - -
Net loss - (23,771) -
Currency translation adjustment - - 20
Shares issued upon exercise of warrants & options - - -
Compensatory stock options and warrants 41 - -
------------- ------------- ------------------
Balance at December 31, 1999 $ 130,865 $ (131,475) $ 65
Sale of common stock, less expenses of $49 426 - -
Common stock subject to reset provision 600 - -
Sale of preferred stock - - -
Conversion of preferred stock 3,740 - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders (842) - -
Discount on beneficial conversion price to preferred shareholders 727 - -
Exchange of Series A preferred stock in subsidiary 311 - -
Exchange of subsidiary common stock for NCT common stock 3,124 - -
Sale of excess exchange shares of common stock net of
Commissions of $156 2,275 - -
Shares issued for settlement obligations/prepayments 1,518 - -
Expenses to be paid with common stock - - -
Shares issued as deposit for acquisition 123 - -
Shares issued for acquisition of subsidiaries 7,105 - -
Shares issued for prepaid research and engineering costs 2,905 - -
Sale of subsidiary stock in excess of net book value 950 - -
Liability for make up of value on shares issued to ITC (812) - -
Beneficial conversion feature on convertible note 1,000 - -
Net loss - (10,324) -
Currency translation adjustment - - (7)
Shares issued upon exercise of warrants & options 735 - -
Valuation of available-for-sale marketable securities - - (3,379)
Compensatory stock options and warrants 88 - -
------------- ------------- ------------------
Balance at December 31, 2000 $ 154,838 $ (141,799) $ (3,321)
Sale of common stock 166 - -
Conversion of preferred stock 510 - -
Dividend and amortization of discount on beneficial conversion
price to preferred shareholders (8) - -
Exchange of Series A preferred stock in subsidiary 267 - -
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred and common shareholders (1,353) - -
Exchange of subsidiary common stock for NCT common stock 1,155 - -
Conversion of convertible debt plus inducement of $190 707 - -
Exchange of subsidiary convertible debt for common stock 3,329 - -
Sale of excess exchange shares of common stock net of
Commissions of $36 164 - -
Shares issued for settlement obligations/prepayments (221) - -
Expenses to be paid with common stock - - -
Shares returned for deposit of acquisition (123) - -
Shares issued for acquisition of subsidiaries, repurchased licenses
and exercise of option, less expenses of $237 2,138 - -
Liability for make up of value on shares issued to ITC (610) - -
Warrants issued in conjunction with convertible debt 747 - -
Beneficial conversion feature on convertible note 1,748 - -
Net loss - (77,660) -
Currency translation adjustment - - (8)
Shares issued upon exercise of warrants 700 - -
Valuation of available-for-sale marketable securities - - 3,379
Compensatory common stock grants 30 - -
Compensatory stock options and warrants 437 - -
---------------------------- ------------------
Balance at December 31, 2001 $ 164,621 $ (219,459) $ 50
============================ ==================
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) (Note 3)
(in thousands)
Unearned
Portion of Expenses
Stock Compensatory to be Paid
Subscriptions Stock, Warrants With Common
Receivable and Options Stock
---------------- ------------------ --------------
Balance at December 31, 1998 $ (4,000) $ (238) $ -
Sale of common stock, less expenses of $17 - - -
Common stock subject to reset provision - - -
Conversion of preferred stock - - -
Accretion and amortization of discount on beneficial conversion
price to preferred shareholders - - -
Discount on beneficial conversion price to preferred shareholders - - -
Preferred stock exchanged for license fees - - -
Exchange of Series A preferred stock in subsidiary - - -
Accretion and amortization of discount on beneficial conversion -
price to preferred shareholders - - -
Sale of preferred stock 3,000 - -
Exchange of subsidiary common stock for NCT common stock - - -
Shares issued in consideration for patent rights - - -
Shares issued for settlement obligations/prepayments - - (2,503)
Expenses to be paid with common stock - - 1,221
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 - 183 -
---------------- ------------------ --------------
Balance at December 31, 1999 $ (1,000) $ (55) $ (1,282)
Sale of common stock, less expenses of $49 - - -
Common stock subject to reset provision - - -
Sale of preferred stock 1,000 - -
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 - - -
Exchange of subsidiary common stock for NCT common stock - - -
Sale of excess exchange shares of common stock net of
Commissions of $156 - - -
Shares issued for settlement obligations/prepayments - - (547)
Expenses to be paid with common stock - - 1,267
Shares issued as deposit for acquisition - - -
Shares issued for acquisition of subsidiaries (213) - -
Shares issued for prepaid research and engineering costs - - -
Sale of subsidiary stock in excess of net book value - - -
Liability for make up of value on shares issued to ITC - - -
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 - 18 -
---------------- ------------------ --------------
Balance at December 31, 2000 $ (213) $ (37) $ (562)
Sale of common stock - - -
Conversion of preferred stock - - -
Dividend and amortization of discount on beneficial conversion
price to preferred shareholders - - -
Exchange of Series A preferred stock in subsidiary - - -
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred and common shareholders - - -
Exchange of subsidiary common stock for NCT common stock - - -
Conversion of convertible debt plus inducement of $190 - - -
Exchange of subsidiary convertible debt for common stock - - -
Sale of excess exchange shares of common stock net of
Commissions of $36 - - -
Shares issued for settlement obligations/prepayments - - -
Expenses to be paid with common stock - - 562
Shares returned for deposit of acquisition - - -
Shares issued for acquisition of subsidiaries, repurchased licenses
and exercise of option, less expenses of $237 213 - -
Liability for make up of value on shares issued to ITC - - -
Warrants issued in conjunction with convertible debt - - -
Beneficial conversion feature on convertible note - - -
Net loss - - -
Currency translation adjustment - - -
Shares issued upon exercise of warrants - - -
Valuation of available-for-sale marketable securities - - -
Compensatory common stock grants - - -
Compensatory stock options and warrants - 37 -
---------------- ------------------ --------------
Balance at December 31, 2001 $ (-) $ (-) $ (-)
================ ================== ==============
The accompanying notes are an integral part of the consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) (Note 3)
(in thousands)
Treasury Stock
-------------------------
Shares Amount Total
------------------------- -------------
Balance at December 31, 1998 6,078 $ (2,963) $ 3,426
Sale of common stock, less expenses of $17 - - 483
Common stock subject to reset provision - - (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 - - -
Preferred stock exchanged 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 - - 7,409
Exchange of subsidiary common stock for NCT common stock - - 2,632
Shares issued in consideration for patent rights - - 88
Shares issued for settlement obligations/prepayments - - -
Expenses to be paid with common stock - - 684
Warrant issued in conjunction with convertible debt - - 446
Beneficial conversion feature on convertible note - - 204
Net loss - - (23,771)
Currency translation adjustment - - 20
Shares issued upon exercise of warrants & options - - -
Compensatory stock options and warrants - - 224
------------------------- -------------
Balance at December 31, 1999 6,078 $ (2,963) $ (367)
Sale of common stock, less expenses of $49 - - 451
Common stock subject to reset provision - - 600
Sale of preferred stock - - 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
Exchange of subsidiary common stock for NCT common stock - - 3,124
Sale of excess exchange shares of common stock net of
Commissions of $156 - - 2,275
Shares issued for settlement obligations/prepayments - - 986
Expenses to be paid with common stock - - 1,267
Shares issued as deposit for acquisition - - 125
Shares issued for acquisition of subsidiaries - - 7,105
Shares issued for prepaid research and engineering costs - - 3,000
Sale of subsidiary stock in excess of net book value - - 950
Liability for make up of value on shares issued to ITC - - (812)
Beneficial conversion feature on convertible note - - 1,000
Net loss - - (10,324)
Currency translation adjustment - - (7)
Shares issued upon exercise of warrants & options - - 748
Valuation of available-for-sale marketable securities - - (3,379)
Compensatory stock options and warrants - - 106
------------------------- -------------
Balance at December 31, 2000 6,078 $ (2,963) $ 9,858
Sale of common stock - - 186
Conversion of preferred stock - - -
Dividend and amortization of discount on beneficial conversion
price to preferred shareholders - - -
Exchange of Series A preferred stock in subsidiary - - 297
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred and common shareholders - - (1,353)
Exchange of subsidiary common stock for NCT common stock - - 1,233
Conversion of convertible debt plus inducement of $190 - - 750
Exchange of subsidiary convertible debt for common stock - - 3,659
Sale of excess exchange shares of common stock net of
Commissions of $36 - - 164
Shares issued for settlement obligations/prepayments - - (183)
Expenses to be paid with common stock - - 562
Shares returned for deposit of acquisition - - (125)
Shares issued for acquisition of subsidiaries, repurchased licenses
and exercise of option, less expenses of $237 - - 2,585
Liability for make up of value on shares issued to ITC - - (610)
Warrants issued in conjunction with convertible debt - - 747
Beneficial conversion feature on convertible note - - 1,748
Net loss - - (77,660)
Currency translation adjustment - - (8)
Shares issued upon exercise of warrants - - 800
Valuation of available-for-sale marketable securities - - 3,379
Compensatory common stock grants - - 34
Compensatory stock options and warrants - - 474
------------------------- -------------
Balance at December 31, 2001 6,078 $ (2,963) $ (53,463)
========================= =============
The accompanying notes are an integral part of the consolidated financial statements.
F-5
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 3 and 17)
(In thousands)
For the Years Ended December 31,
---------------------------------------------------
1999 2000 2001
----------------- --------------- ----------------
Cash flows from operating activities:
Net loss $ (23,771) $ (10,324) $ (77,660)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 1,970 2,014 2,977
Common stock, warrants and options issued as consideration for:
Compensation 224 106 37
Operating expenses 401 497 637
Costs incurred related to convertible debt 102 - 5,364
Provision for tooling costs 180 - -
Provision for inventory 199 100 691
Provision for doubtful accounts and uncollectible amounts 77 803 1,249
(Gain) loss on disposition of fixed assets - (12) 30
Write downs of investment and repurchased licenses, net (Notes 2, 9 and 11) 2,385 - 20,778
Preferred stock received for license fees (850) - -
Impairment of goodwill, net (Notes 3 and 11) 3,125 3,073 14,114
Reserve for promissory note and pre-acquisition costs 1,788 - -
Costs of exiting activities (Note 25) - - 1,886
Beneficial conversion feature on convertible note (Note 10) 204 1,000 946
Common stock received for license fee - (6,000) -
Common stock and warrants to be received for license fee - (384) -
Convertible note induced conversion expense - - 190
Realized loss on available-for-sale securities (Note 5) - - 7,036
Realized loss on fair value of warrant (Note 5) - - 1,355
Cumulative effect of change in accounting principle (Note 5) - - 1,582
Loss on sale of NXT ordinary shares (Note 5) - - 2,301
Forgiveness of debt - - (67)
Amortization of debt discounts - - 3,348
Minority interest loss - - (473)
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable 401 (4,624) 2,432
(Increase) decrease in inventories 858 636 109
(Increase) decrease in other assets (1,168) (2,072) (680)
Increase (decrease) in accounts payable and accrued expenses 2,851 (886) 3,578
Increase (decrease) in other liabilities and deferred revenue 427 5,562 (3,784)
----------------- --------------- ---------------
Net cash used in operating activities $ (10,597) $ (10,511) $ (12,024)
----------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures $ (51) $ (322) $ (1,377)
Net cash paid for Artera Group International Limited acquisition - - (100)
(Increase) decrease in restricted cash (667) 667 -
Payment for shares of DMC New York (repurchased licenses) - - (1,000)
Proceeds from sale of capital equipment - 26 11
Proceeds from sale of NXT ordinary shares - - 6,858
Cash and cash equivalents received from acquisitions - 88 -
----------------- --------------- ---------------
Net cash (used in) provided by investing activities $ (718) $ 459 $ 4,392
----------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable (net) (Note 10) $ 4,000 $ 2,944 $ 5,695
Sale of preferred stock (net) 7,409 1,963 -
Sale of subsidiary preferred stock (net) - 1,500 418
Sale of subsidiary common stock - 1,000 -
Sale of excess exchange shares - 2,275 164
Sale of common stock 483 500 186
Collection of subscription receivable - 995 213
Exercise of stock options and warrants, net - 748 800
Repayment of notes - (1,825) (436)
----------------- --------------- ---------------
Net cash provided by financing activities $ 11,892 $ 10,100 $ 7,040
----------------- --------------- ---------------
Effect of exchange rate changes on cash $ 20 $ (7) $ (8)
----------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 597 41 (600)
Cash and cash equivalents - beginning of period 529 1,126 1,167
----------------- --------------- ---------------
Cash and cash equivalents - end of period $ 1,126 $ 1,167 $ 567
================= =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-6
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Background:
NCT Group, Inc. and subsidiaries (collectively referred to as the
"company," "NCT," "its," "we," "our" or "us") is a technology developer with a
portfolio of patents and related rights and other non-patented technology. We
specialize in the development of speech and communications applications
integrating noise and echo cancellation technologies that we market to various
industries, including telecommunications.
NCT has incurred substantial losses from operations since its inception
which cumulatively amounted to $219.5 million through December 31, 2001. Cash
and cash equivalents amounted to $0.6 million at December 31, 2001. A working
capital (deficit) of $(52.6) million exists at December 31, 2001. NCT is in
default of $7.1 million of its convertible notes at December 31, 2001.
Management believes that currently available funds will not be sufficient to
sustain NCT at present levels. NCT's ability to continue as a going concern is
dependent on funding from several sources, including available cash and cash
equivalents and cash inflows generated from its revenue sources, particularly
technology licensing fees and royalties and product sales. The level of
realization of funding from the company's revenue sources is presently
uncertain. If anticipated revenues do not generate sufficient cash, management
believes additional working capital financing must be obtained. We are
attempting to raise additional capital in order to fund operations (see Note
26). There is no assurance any such financing is or would become available.
In the event that funding from internal sources is insufficient, NCT would
have to substantially cut back its level of spending which could substantially
curtail its operations. These reductions could have an adverse effect on the
company's relations with its existing and prospective customers. Uncertainty
exists about the adequacy of current funds to support NCT's activities until
positive cash flow from operations can be achieved, and uncertainty exists about
the availability of external financing sources to fund any cash deficiencies
(see Note 14).
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, 2001 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:
2001 Acquisitions
Artera Group International Limited
Our wholly-owned subsidiary, Artera Group, Inc., entered into an agreement
with Teltran International, Inc. to acquire all of the capital stock of
Teltran's subsidiary, Teltran Web Factory Limited, and the communication
equipment assets of Teltran's subsidiary, Internet Protocol Ltd. The Web Factory
was a U.K.-based full service information technology solutions provider,
offering Internet provider services, web hosting, domain hosting, consulting,
web design and installation services to businesses. Artera completed its
acquisition of the Web Factory on March 2, 2001, and renamed the Web Factory,
Artera Group International Limited. The aggregate purchase price, as adjusted,
was $3.1 million comprised of $350,000 in cash and $3.3 million of Artera Group,
Inc. series A preferred stock with a stated value of $6.6 million (see Note 14).
This preferred stock was valued based upon 6% convertible notes issued in
January 2001 (see Note 10). The acquisition was accounted for as a purchase,
resulting in initial goodwill of approximately $6.2 million which was
subsequently written off (see Note 3). On June 29,
F-7
2001, the terms of the preferred stock were modified as to $4.3 million stated
value of this stock to allow conversion of the preferred stock into shares of
NCT. As a result, an additional $3.9 million of consideration and goodwill was
recorded as purchase price which was subsequently written off (see Note 3). A
summary of the assets acquired and liabilities assumed, at estimated fair market
value, is as follows:
(In thousands of dollars)
Current assets $ 484
Property, plant and equipment 467
Goodwill 10,095
Current liabilities (4,031)
Other liabilities (45)
-------------
Fair market value of acquired entity $ 6,970
=============
On December 18, 2001, the Board of Directors of Artera Group International
Limited decided to suspend under-performing operations and reduce employees.
Subsequent to December 31, 2001, the Board of Directors of Artera Group
International Limited determined to cease operations (see Note 25).
DMC New York, Inc.
On April 12, 2001, NCT acquired a 25% interest in DMC New York, Inc. for
$4.0 million from a stockholder. DMC New York is the owner of 16 licenses
previously purchased from us. The acquisition resulted in a charge to our
consolidated statements of operations (see Note 14) because DMC New York has not
commenced operations. The consideration consisted of a $1.0 million convertible
note due December 31, 2001 issued to Crammer Road LLC (see Note 14), $1.0
million cash and $2.0 million of our common stock (13.3 million shares) (see
Note 14). We intend to acquire the remaining 75% interest in DMC New York
pursuant to our private equity credit agreement (see Note 14). As such, we have
accrued $14.0 million, our cost of repurchasing the remaining 12 licenses under
the private equity credit agreement (see Notes 12 and 21) which resulted in a
charge included in write downs of investment and repurchased licenses in our
consolidated statement of operations. The Board of Directors of DMC New York is
comprised of NCT officers and directors (see Note 18). The company's acquisition
of DMC New York is summarized as follows:
DMC New York
Date Consideration Shares Acquired % Interest Expected Fair Value
---- ------------- --------------- ---------- -------------------
4/12/01 $1.0 million cash 1,000 6.25% $1.0 million
4/12/01 $1.0 million note 1,000 6.25% $1.0 million
4/12/01 13.3 million shares 2,000 12.5% $2.0 million
2000 Acquisitions
Theater Radio Network, Inc.
On August 18, 2000, we acquired from the five sole stockholders of Theater
Radio Network, Inc. 100% of the outstanding capital stock of Theater Radio
Network, a provider of in-theater audio advertising in multiplex cinemas
nationwide, through DMC Cinema, a newly formed subsidiary of NCT's subsidiary,
Distributed Media Corporation ("DMC"). The acquisition included our issuance of
restricted shares of NCT common stock and a 7.5% equity interest in DMC Cinema.
The purchase agreement provided that a specified amount of $2,395,000 in shares
of NCT common stock would be issued to the selling shareholders. NCT had an
obligation to register the shares represented by this specified amount. In the
event that NCT's trailing twenty-day closing bid price declined before NCT
requested effectiveness of its registration statement from the Securities and
Exchange Commission ("SEC"), NCT was required to issue additional shares to the
selling shareholders to provide them the specified amount. We refer to this
provision as the fill-up provision. We initially issued 7,405,214 shares of NCT
common stock based upon a trailing twenty-day closing bid price of $0.3376. Of
such shares, 311,019 shares were issued to the placement agent for the
transaction for services rendered, aggregating $105,000. The placement agent's
shares
F-8
were not subject to the fill-up provision. Due to the fill-up provision, in
February 2001, we issued 2,455,248 additional shares of NCT common stock to the
five selling shareholders based upon a trailing twenty-day closing bid price of
$0.2508 to make-up for the diminished value. The acquisition was accounted for
as a purchase and resulted in goodwill of approximately $2.8 million (see Note
3). The issuance of the additional shares did not affect the cost of the
acquired company.
Additional NCT shares may be required to be issued as an earnout based upon
cumulative revenue of Theater Radio Network (now DMC Cinema). The selling
shareholders have demand registration rights for these earnout shares. The
earnout provides that if DMC Cinema has accrued revenue of at least $3.3 million
between August 1, 2000 and December 31, 2001, a number of shares of NCT common
stock having a value of $1.25 million, based upon the trailing twenty-day
closing bid price on December 31, 2001, will be issued to the selling
shareholders and the placement agent. If the accrued revenue for this period is
less than $3.3 million, then the number of shares of NCT common stock to be
issued would be prorated to the number (based upon the trailing twenty-day
closing bid price on December 31, 2001) equal to the product of $1.25 million
multiplied by a fraction which is the actual accrued revenue for such period
divided by $3.3 million. Further, if DMC Cinema has accrued revenue of at least
$4.7 million between August 1, 2000 and June 30, 2002, an additional number of
shares of NCT common stock having a value of $1.25 million, based upon the
trailing twenty-day closing bid price on June 30, 2002, will be issued. If DMC
Cinema's accrued revenue for such period is less than $4.7 million, then the
number of shares to be issued will be prorated to that number of shares of NCT
common stock having a value (based upon the trailing twenty-day closing bid
price on June 30, 2002) equal to the product of $1.25 million multiplied by a
fraction which is the actual accrued revenue for such period divided by $4.7
million. The issuance of additional NCT shares of common stock pursuant to the
earnout provision would increase our cost of the acquisition. As of December 31,
2001, approximately $0.6 million was accrued for this earnout obligation which
is included in other liabilities (see Note 12). This accrual increased our cost
of the acquisition (see Note 3).
Midcore Software, Inc.
On August 29, 2000, NCT acquired 100% of the outstanding capital stock of
Midcore Software, Inc., a provider of Internet infrastructure software for
business networks, through a merger with Midcore Software, Inc., a newly formed,
wholly-owned subsidiary of NCT. In connection therewith, we initially issued to
Midcore's selling shareholders 13,913,355 restricted shares of our common stock
based upon a 10-day volume-weighted average closing bid price of $0.34626 per
share, for an aggregate value of $4.8 million. In addition, the purchase
consideration includes $1.8 million to be paid by NCT in cash, over 36 months,
the timing of which is based upon earned royalties. If after 36 months the total
royalty has not been earned, or if earned but not fully paid, then the
recipients may elect at their discretion either to continue to receive payment
of the royalties in accordance with the merger agreement, or receive the unpaid
balance in the form of NCT's common stock. We recorded the entire $1.8 million
obligation as a liability. To date, no royalties have been paid. We are
obligated to issue additional shares of common stock if the value of shares
issued at the closing which were not registered is less than $1.5 million on the
third anniversary of the closing. The acquisition was accounted for as a
purchase and resulted in goodwill of approximately $6.4 million.
The merger agreement provided that NCT had an obligation to register with
the SEC a specified amount of $2,467,639 in shares of NCT common stock issued to
the Midcore selling shareholders at closing. In the event that NCT's
volume-weighted, average trailing ten-day closing bid price declined before NCT
requested effectiveness of its registration statement, NCT was required to issue
additional shares to the selling shareholders to provide them the specified
amount. We refer to this price guaranty provision as the fill-up provision. Of
the shares initially issued, 7,126,548 shares of NCT common stock were to be
registered based upon a volume-weighted, average trailing ten-day closing bid
price of $0.34626. Due to the fill-up provision, on February 9, 2001, we issued
2,863,894 additional shares of NCT common stock to the selling shareholders
based upon the closing bid price of $0.2470 to make-up for the diminished value
of their shares. The issuance of the additional shares did not affect the cost
of the acquired company.
F-9
Pro Tech Communications, Inc.
On September 12, 2000, our wholly-owned subsidiary, NCT Hearing Products,
Inc., granted an exclusive license to Pro Tech Communications, Inc. for rights
to specified NCT technologies for use in lightweight cellular, multimedia and
telephony headsets. In exchange, NCT Hearing received 23.4 million shares of Pro
Tech's common stock, net of shares used to compensate an outside consultant,
representing approximately 83% of Pro Tech's common shares then issued and
outstanding. The acquisition was accounted for as a purchase and resulted in
negative goodwill of approximately $0.1 million. The purchase price was
approximately $2.6 million, determined by the market value of the shares of Pro
Tech common stock received by NCT Hearing. Pro Tech sells high quality,
lightweight headsets to high-profile users, including Muzak 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
identified, and introduced to Pro Tech, the investors who agreed to provide $1.5
million in equity financing to Pro Tech for 1,500 shares of series A convertible
preferred stock of Pro Tech (see Note 14). The investors paid $1.5 million in
cash which was used by Pro Tech for working capital.
Based upon our 2000 acquisitions of Theater Radio Network, Midcore and Pro
Tech, a summary of the assets acquired and liabilities assumed, at estimated
fair market value, is as follows:
(In thousands of dollars)
Current assets $ 1,484
Property, plant and equipment 272
Goodwill 9,100
Other assets 2,750
Current liabilities (2,726)
Other liabilities (1,350)
-----------
Fair market value of acquired entities $ 9,530
===========
The results of operations of the acquired entities are included in NCT's
consolidated statements of operations from the respective dates of acquisition.
The pro forma results listed below are unaudited and reflect purchase accounting
adjustments assuming the acquisitions had occurred at each of the beginning of
the year acquired and the beginning of the immediately preceding year. For the
years ended 1999, 2000 and 2001, pro forma adjustments include additional
amortization expense of $1.5 million, $1.4 million and $0.1 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, January 1, 2000 and January 1, 2001:
(Unaudited; in thousands, except per share data)
Years Ended December 31,
----------------------------------------------------
1999 (a) 2000 (a, b) 2001 (b)
------ ------ ------
Net revenues $ 10,386 $ 17,606 $ 10,859
Net loss (25,776) (17,984) (78,025)
Loss attributable to common shareholders (40,841) (22,815) (79,386)
Loss per common share-basic and diluted (0.19) (0.07) (0.21)
Footnotes:
(a) Includes Theater Radio Network, Midcore and Pro Tech acquisitions.
(b) Includes Artera Group International Limited acquisition.
F-10
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
intercompany transactions and accounts. Investments in less than majority-owned
affiliates over which we exercise significant influence are accounted for under
the equity method. All other investments in affiliates are carried at cost.
Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that
management make estimates and assumptions that affect reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates including assumptions used to calculate impairment of goodwill and
other intangible assets.
Reclassifications:
Some 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 at acquisition of three months or less.
Revenue Recognition:
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements, which we adopted effective January
1, 2000. The adoption of SAB 101 did not have a material effect on our financial
statements, and therefore, no cumulative effect of a change in accounting
principle has been recorded. SAB 101 addresses, among other items, when revenue
relating to various license fees should be recognized. The company performs a
detailed analysis of its license fee revenue and records deferred revenue and
associated expenses. These deferred amounts are recognized over the life of each
specific license when no other performance conditions exist.
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 and title has passed. Revenue from advertising sales is
recognized when the advertisements are aired and displayed. Revenue from
engineering and development services is generally recognized and billed as the
services are performed. However, for some 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 $1.3 million for the year
ended December 31, 1999, and zero for each of 2000 and 2001.
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
F-11
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.
Marketable Securities:
Marketable securities that are bought and held principally for the purpose
of selling them in the near-term are classified as trading securities. Trading
securities are recorded at fair value, with the change in market value during
the period included in the statements of operations.
Marketable debt securities that NCT has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and recorded at
amortized cost. Securities not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities. Available-for-sale
securities are recorded at market value except as described in Note 9, with the
change in market value during the period excluded from the statements of
operations unless it is occasioned by an other-than-temporary decline in value
and recorded net of income taxes as a separate component of stockholders' equity
(capital deficit). At December 31, 2000 and 2001, all of the company's
marketable securities have been deemed available-for-sale securities. At
December 31, 2000, these marketable securities are included in other assets (see
Note 5 and 9).
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
on an average cost basis. NCT assesses the realizability of inventories by
periodically conducting a physical inventory and reviewing the movement of
inventory 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, 2000 and 2001, the company's
inventory reserves were $0.1 million and $0.8 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.
Deferred Charges:
Deferred charges, included on the consolidated balance sheet in other
assets, primarily represent costs related to the installation of digital
broadcast station systems at customer locations. Such installation costs consist
of labor costs attributable to contractor installation and outside management
fees and benefit the future. The company amortizes such deferred charges over
the lesser of the estimated useful life or the five-year life of the site
agreement. In the event a site is removed, the unamortized deferred charges
relating to that site are then expensed in full. In each of 2000 and 2001, the
company amortized approximately $0.1 million of deferred charges and wrote off
unamortized charges relating to removals of approximately $0.2 million and zero,
respectively.
Software Costs:
It is our policy to capitalize 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
years ended December 31, 2000 and 2001, $0.1 million and $0.2 million,
respectively, 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 upon the acquisition of some or all of the stock
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held by minority stockholders of a subsidiary, except where such accounting is,
in substance, the purchase of licenses previously sold to such minority
stockholders or their affiliates. Goodwill is amortized using the straight-line
method over periods generally ranging from five to twenty years. Goodwill
amortization expense was $1.0 million, $1.0 million and $1.7 million for 1999,
2000 and 2001, respectively. Accumulated goodwill amortization was $5.2 million
and $1.1 million at December 31, 2000 and 2001, respectively.
Patent rights and other intangible assets, which includes the cost to
acquire rights to patents and other rights under licenses, are stated at cost
and are amortized using the straight-line method over the remaining useful
lives, ranging from one to seventeen years. Amortization expense was $0.6
million, $0.7 million and $0.4 million for 1999, 2000 and 2001, respectively.
Accumulated amortization of patent rights and other intangible assets was $3.5
million and $3.9 million at December 31, 2000 and 2001, respectively.
At each balance sheet date, NCT evaluates the period of amortization of
intangible assets. The factors used in evaluating the period of amortization
include: current operating results, projected future operating results, and any
other material factors that effect the continuity of the business. The company
recognized impairment loss from goodwill of $3.1 million, $3.1 million and $14.1
million (net of reduction in deferred revenue of $2.1 million) in 1999, 2000 and
2001, respectively. On June 29, 2001, in connection with additional rights
granted certain preferred shareholders of Artera Group, Inc., the preferred
stock was recorded at its stated value which resulted in additional goodwill of
$3.9 million. On December 18, 2001, the Board of Directors of Artera Group
International Limited decided to suspend under-performing operations and reduce
employees. Consequently, the $9.8 million carrying value of the goodwill as of
that date was considered fully impaired in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Further, in
December 2001, NCT decided to cease the operations of DMC Cinema due to its
inability to meet operating goals. Consequently, approximately $1.3 million
consisting of the carrying value of $3.4 million, net of reduction in deferred
revenue of $2.1 million, was fully impaired in accordance with SFAS 121. 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 include commissions paid to advertising representatives
and agencies and are expensed as incurred. Advertising expense for the years
ended December 31, 1999, 2000 and 2001 was $1.2 million, $0.3 million and $0.5
million, respectively.
Comprehensive Loss:
The company reports comprehensive loss in accordance with SFAS No. 130,
Reporting Comprehensive Income. The provisions for SFAS 130 require the company
to report the changes in stockholders' equity (capital deficit) 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 the caption "accumulated other
comprehensive (loss) income" is included on the consolidated balance sheets as a
component of stockholders' equity (capital deficit). Due to availability of net
operating losses, there is no tax effect associated with any component of other
comprehensive loss. Comprehensive loss is comprised of net loss and other
comprehensive (loss) income. Other comprehensive (loss) income includes certain
changes in stockholders' equity (capital deficit) that are excluded from net
income, including unrealized gains and losses on our available-for-sale
securities and foreign currency translation adjustments.
F-13
Foreign Currency Translation:
Local currencies are generally considered the functional currency for our
share of foreign investments. The company translates its 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 accumulated other
comprehensive (loss) income as a component of capital deficit. The foreign
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 SFAS No. 128,
Earnings Per Share. 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 Note 15).
However, when preferred stock is convertible into common stock at a
conversion rate that represents 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 is determined by applying
the Black-Scholes option pricing model. In accordance with Emerging Issues Task
Force ("EITF") Issue No. 96-13, as codified in EITF 00-19, these warrants are
considered permanent equity instruments since they may only be actually settled
with the issuance of the company's stock. The fair value is deemed to be a
"preferred stock beneficial conversion" feature and is 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 accounts receivable 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 portion of its revenues from three major
customers during 2000 and 2001. For the years ending December 31, 2000 and 2001,
the company recorded revenue of approximately $8.0 million and $4.9 million,
respectively, from these customers. As of December 31, 2000 and 2001, the
company had approximately $2.0 million and zero, respectively, 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,
2000 and 2001, the fair value of these instruments approximated their carrying
value (carried at cost) because of the short maturity of the instruments. Fair
values of other investments classified as available-for-sale were estimated
based on market prices, where available. The fair value of convertible notes
approximates the
F-14
carrying value based on interest rates that are currently available to the
company for issuance of debt with similar terms and remaining maturities.
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 ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock-based
compensation plans (see Note 15).
Recent Accounting Pronouncements:
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years, with
early application encouraged. Management has not determined the effect, if any,
to our financial position or results of operations upon adoption of SFAS 144.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The provisions of SFAS 143 are
effective for financial statements issued for fiscal years beginning after June
15, 2002. Management does not anticipate that adoption of SFAS 143 will have a
material impact on our financial position or results of operations as we
currently do not have any asset retirement obligations.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the
purchase method of accounting be used for all business combinations subsequent
to June 30, 2001 and specifies criteria for recognizing intangible assets
acquired in a business combination. Under SFAS 142, we will be required to
reassess the goodwill and other intangible assets previously recorded in
connection with prior acquisitions, as well as their useful lives. SFAS 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually.
Whenever there is an impairment indicator, all acquired goodwill must be
assigned to reporting units for purposes of impairment testing and segment
reporting. Effective January 1, 2002, goodwill will no longer be subject to
amortization. Intangible assets with definite useful lives will continue to be
amortized over their respective estimated useful lives. NCT adopted SFAS 141
effective July 1, 2001 and plans to adopt SFAS 142 effective January 1, 2002.
The adoption of SFAS 142 may improve our financial position and results of
operations on an ongoing basis due to the elimination of amortization of
goodwill. Conversely, the adoption of SFAS 142 may be detrimental to our
financial position and results of operations upon adoption because of a possible
finding of impaired goodwill. We are in the process of analyzing SFAS 142 and
its impact on the company and currently are unable to report the effect the
adoption will have on our financial position and results of operations.
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments - an Amendment of SFAS 133. SFAS 138 establishes
accounting and reporting standards for derivative instruments, including some
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. Derivatives must be reported at their fair values
at each reporting date with any gains or losses reported in the company's
statements of operations. Our adoption of SFAS 138 effective January 1, 2001
resulted in a $1.6 million charge which is reflected as cumulative effect of
change in accounting principle on the consolidated statements of operations. For
the year ended December 31, 2001, fair value charges of $1.4 million are
included in other (income) expense.
4. Strategic Relationships:
NCT has entered into agreements to establish joint ventures and strategic
alliances related to the design, development, manufacture, marketing and
distribution of its technologies and products containing such technologies.
These agreements generally provide that NCT 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.
F-15
The support funding may include 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 and 2001, there were no preferred distributions due to joint
venture partners from future profits of the joint ventures.
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 these strategic relationships for technology licensing fees and
royalties, engineering and development services and product sales were as
follows:
(In thousands of dollars)
For the Years Ended December 31,
-----------------------------------------------------
1999 2000 2001
--------------- -------------- --------------
Ultra Electronics, Ltd. $ 40 $ 49 $ 114
New Transducers Ltd. 500 - 1,605
STMicroelectronics S.A. &
STMicroelectronics S.r.l 2,156 - -
Lernout & Hauspie Speech Products N.V. 800 - -
Oki Electric Industry Co., Ltd 80 269 219
Infinite Technology Corporation - 3,550 1,028
--------------- -------------- --------------
Total $ 3,576 $ 3,868 $ 2,966
=============== ============== ==============
Outlined below is a summary of the nature and terms of selected strategic
relationships:
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 some of the company's employees. The company recognized $40,000,
$49,000 and $114,000 in royalty revenue in 1999, 2000 and 2001, respectively.
New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT plc
(formerly, Verity Group plc) and the company executed a cross licensing
agreement 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 in favor of NXT which
granted NXT a conditional assignment in the patents and patents pending licensed
to NXT under the cross-license in the event a default in a specified 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, 1997, to
acquire a specified number of shares of common stock of the other, subject to
some conditions and restrictions. NCT granted an option to NXT plc to acquire
3.8 million shares of NCT common stock (approximately 3.4% of the then issued
and outstanding common stock) and NCT executed a 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 NCT. The exercise price under each option was the
fair value of a share of the
F-16
applicable stock on March 28, 1997, the date of grant. On April 15, 1997, NXT
plc, NXT and the company executed several new agreements and other documents
terminating and replacing some of the old agreements. The material changes
effected by the new agreements were the inclusion of NXT plc as a party along
with 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 license fee was paid to NCT in ordinary shares of NXT plc
stock which NCT subsequently sold. On September 27, 1997, NXT plc, NXT, NCT
Audio and the company executed several agreements and other documents,
terminating and replacing some of the old agreements with other agreements. 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 security deed covering the patents licensed by NCT
and the acceleration of the date on which the parties could exercise their
respective stock options to September 27, 1997.
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 as of December 31, 2000 and 2001 was $64,000 and zero, respectively.
On March 30, 2001, NXT plc, NXT, NCT Audio and the company entered into
several agreements terminating the cross-license agreement dated September 27,
1997. Under the new agreements, NCT received 2.0 million ordinary NXT plc shares
in consideration for the cancellation of the 6% royalty payable by NXT to NCT
Audio. The NXT plc shares issued had a value of approximately $9.2 million.
Additionally, ownership of certain intellectual property, the rights to which
had been previously granted to NXT, were 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 DMCI, a
wholly owned subsidiary of NCT formed in 2001. In addition, NXT transferred its
4.8% equity holding in NCT Audio to NCT in settlement of the exercise price
otherwise payable upon exercise of the option that NXT had on 3.8 million shares
of our common stock (see Note 15). We sold the 2.0 million NXT plc shares during
the year ended December 31, 2001 for aggregate proceeds of $6.9 million and
realized a net loss of $2.3 million included in our statements of operations
(see Note 16).
STMicroelectronics SA & STMicroelectronics S.r.l ("ST"). On November 16,
1998, Advancel Logic Corporation, 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 processor core,
tiny2J(TM) for Java(TM) to combine it with its proven secure architecture and
advanced nonvolatile memory technology. Advancel recorded a $0.2 million license
fee in 1998 and recorded an additional $0.2 million license fee, $0.9 million
non-refundable royalty and $1.1 million engineering and development services
funding in 1999. No revenue related to this agreement was recognized in 2000 and
2001.
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 each of December 31,
2000 and 2001 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,
F-17
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, $0.3 million and $0.2 million in royalty revenue in 1999, 2000 and
2001, respectively.
Infinite Technology Corporation ("ITC"). On May 8, 2000, as amended
effective June 30, 2000, Advancel entered into a license agreement with 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(TM) Turbo-JTM technology. Advancel also granted ITC
non-exclusive rights to Advancel's Java(TM) smartcard core. In consideration for
this license, the company received 1.2 million shares of ITC's common stock
valued at $6.0 million determined using the quoted price of the stock on the
date the shares were received and on-going unit royalties. With the exception of
specific rights granted to STMicroelectronics in 1998, the license granted ITC
an exclusive, irrevocable worldwide license to design, make, use, transfer,
market and sell products and intellectual property incorporating or based upon
Advancel's TJ and t2J technology.
Effective June 30, 2000, in conjunction with this license agreement, NCT,
Advancel and ITC entered into a strategic alliance and technology development
amendment pursuant to which NCT 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 NCT shares, NCT is required to make up any
shortfall in cash or return to ITC a sufficient number of ITC shares of common
stock received by NCT as outlined above. The value NCT would receive upon return
of the ITC shares would be the agreed value of $5.00 per share, the market value
of the ITC shares when NCT received them. Conversely, if ITC receives $2.5
million in proceeds from the sale of NCT shares and there are NCT shares
remaining, ITC must return the unsold share excess to NCT. At December 31, 2000
and 2001, the shortfall based upon the current market value of our common stock
amounted to $0.8 million and $1.4 million, respectively, included in other
liabilities (see Note 12). Although the 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. Prepaid research and engineering costs will be recognized in expense
as these services are performed by ITC. These costs will be billed by ITC based
on the number of hours spent by ITC personnel developing this chip during each
period. In addition, the company will recognize license fee revenue, up to an
additional $2.4 million, in amounts to match the research and engineering
expense recognized. For the year ended December 31, 2000, the company recognized
$3.6 million of license fee revenue which represents the net of the two
transactions. For the year ended December 31, 2001, the company recognized $1.0
million of license fee revenue and $1.0 million of research and engineering
expenses which represents research and engineering performed by ITC. The
strategic alliance and technology development amendment does not have a
definitive expiration date. The parties anticipate that the research and
engineering work ITC will perform will be completed within 12 months.
5. Marketable Securities:
Investment in marketable securities includes available-for-sale securities
at fair value. These securities were included in other assets during the year
ended December 31, 2000 (because we did not have custody over the securities at
December 31, 2000) and in investment in marketable securities at December 31,
2001. The following table sets forth the fair value, cost basis, and realized
and unrealized gain/(loss) of our available-for-sale securities:
F-18
(In thousands of dollars)
December 31, 2000 December 31, 2001
--------------------------------------- ---------------------------------------------------------------
Cost Unrealized Market Cost Realized Unrealized Market
Basis Gain/(Loss) Value Basis Gain/(Loss) Gain/(Loss) Value
--------------------------------------- ---------------------------------------------------------------
Available-for-sale:
ITC $ 6,000 $ (900) $ 5,100 $ 4,696 $ (3,898) $ - $ 798
Teltran - - - 743 (659) - 84
InsiderStreet 2,479 (2,479) - 2,479 (2,479) - -
--------------------------------------- ---------------------------------------------------------------
Totals $ 8,479 $ (3,379) $ 5,100 $ 7,918 $ (7,036) $ - $ 882
======================================= ===============================================================
The company reviews declines in the value of its investment portfolio when
general market conditions change or specific information pertaining to an
industry or an individual company becomes available. NCT considers all available
evidence to evaluate the realizable value of its investments and to determine
whether the decline in realizable value may be other-than-temporary. For the
year ended December 31, 2001, the company recorded impairment charges of
approximately $7.0 million representing other-than-temporary declines in the
value of marketable securities (see Note 16).
In consideration of the license agreement with Infinite Technology
Corporation (see Note 4), the company received 1.2 million shares of ITC's
common stock valued at $6.0 million determined using the quoted price of the
stock on the date the shares were received ($5.00 per share). These securities,
at a fair value of $5.1 million, were included in other assets at December 31,
2000 because the securities were not in hand at that date. NCT recorded an
unrealized loss of $0.9 million at December 31, 2000 included on the
consolidated balance sheet in accumulated other comprehensive (loss) income. For
the year ended December 31, 2001, NCT recorded as other-than-temporary
unrealized loss of $3.9 million included in other (income) expense in the
consolidated statement of operations.
The company has been accounting for its investment in InsiderStreet.com,
Inc. stock (see Note 11) 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 (capital deficit) 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 (loss) income. The market price per share of InsiderStreet shares
on August 18, 2000 (date of acquisition of Theater Radio Network) was $8.125; at
December 31, 2000, the market price had decreased to $0.13 per share. At
December 31, 2000, the company considered whether this decline in the value of
its available-for-sale marketable securities was temporary or
other-than-temporary and concluded that the loss on InsiderStreet shares was
temporary at December 31, 2000 based upon information available at that time.
The InsiderStreet shares were not registered, nor was there a delivery of
compensating shares. For the year ended December 31, 2001, the unrealized loss
of $2.5 million was considered other-than-temporary and is included in other
(income) expense in the consolidated statement of operations.
6. Accounts Receivable:
(In thousands of dollars)
December 31,
----------------------------------------
2000 2001
-------------- -------------
Technology license fees and royalties $ 4,597 $ 287
Joint ventures and affiliates 76 34
Other receivables 811 693
-------------- -------------
$ 5,484 $ 1,014
Allowance for doubtful accounts (70) (298)
-------------- -------------
Accounts receivable, net $ 5,414 $ 716
============== =============
F-19
7. Inventories:
(In thousands of dollars)
December 31,
---------------------------
2000 2001
------------ -----------
Components $ 603 $ 427
Finished goods 1,681 1,749
------------ -----------
$ 2,284 $ 2,176
Reserve for obsolete & slow moving inventory (100) (791)
------------ -----------
Inventories, net $ 2,184 $ 1,385
============ ===========
8. Property and Equipment:
(In thousands of dollars)
December 31,
-------------------------
2000 2001
------------ -----------
Machinery and equipment $ 2,018 $ 3,798
Furniture and fixtures 1,257 623
Leasehold improvements 1,139 966
Tooling 462 619
Other 164 432
---------- ---------
$ 5,040 $ 6,438
Accumulated depreciation (4,352) (4,594)
---------- ---------
Property and equipment, net $ 688 $ 1,844
========== =========
Depreciation expense for the years ended December 31, 1999, 2000 and 2001
was $0.4 million, $0.3 million and $0.9 million, respectively.
F-20
9. Other Assets:
(In thousands of dollars)
December 31,
-------------------------
2000 2001
----------- -----------
Notes receivable $ - $ 1,000
Investment in warrant (Teltran) 3,089 152
Due from unaffiliated company 743 -
Due from officer (Note 18) 69 105
Other 993 516
----------- -----------
$ 4,894 $ 1,773
Reserve for uncollectible amounts - (1,000)
----------- -----------
Other current assets $ 4,894 $ 773
=========== ===========
Marketable ITC securities (Notes 4 and 5) (a) $ 5,100 $ 1,304
Investment in unconsolidated subsidiaries 1,500 -
Advances and deposits 663 651
Deferred charges 534 537
Other 197 78
----------- -----------
Other assets (classified as long term) $ 7,994 $ 2,570
=========== ===========
Footnote:
- --------
(a) Valued at agreed amount of $5.00 per share returnable to ITC in settlement
of obligation at December 31, 2001.
On October 26, 2000, Midcore executed a license agreement with Teltran. The
license agreement expires when patent or other rights expire under applicable
law unless terminated earlier by written agreement. As consideration for the
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. These shares
represent approximately 12% ownership interest in Teltran. The shares underlying
the warrant represent beneficial ownership of approximately 23%. The warrant was
valued using the Black-Scholes option pricing model resulting in an aggregate
fair value of $3.1 million. The Teltran shares were valued at market based upon
the October 26, 2000 agreement date, at an aggregate value of $1.5 million.
Teltran agreed to register the issued common stock and the common stock
underlying the warrant on or before June 26, 2001. As of December 31, 2001,
Teltran has not fulfilled its registration obligation. Teltran is also required
to pay an ongoing, per unit royalty. The adoption of SFAS 138 effective January
1, 2001, resulted in a reduction to the carrying value of this warrant of
approximately $1.6 million and that charge is classified as cumulative effect of
change in accounting principle on the consolidated statements of operations.
During the year ended December 31, 2001, the company recorded a loss of the
carrying amount of this derivative of $1.4 million (see Note 16). At December
31, 2000, NCT 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. At December
31, 2000, the value of the 2.8 million common shares to be received and the
original fair value of the warrant amounted to $3.8 million and was included in
other current assets. At December 31, 2000 and 2001, the company had deferred
revenue of $4.2 million and $1.9 million, respectively, and for the years then
ended, recognized $0.4 million and $2.3 million in technology licensing fee
revenue, respectively. The company does not expect to realize cash from the
deferred revenue. Effective January 10, 2001, the date the 2.8 million common
shares were issued, the company accounted for its investment in Teltran's common
stock in accordance with SFAS 115 as available-for-sale securities (see Note 5).
F-21
On January 9, 2001, Artera Group, Inc. accepted an aggregate of $1.0
million of non-recourse non-interest bearing notes receivable due January 2,
2002, as partial consideration for its January 9, 2001 convertible notes payable
to the same six accredited investors. As of December 31, 2001, the company has
fully reserved the amount collectible (see Notes 10 and 16).
On August 14, 1998, NCT Audio, a majority-owned subsidiary, agreed to
acquire substantially all of the assets of Top Source Automotive, Inc. ("TSA"),
an automotive audio system supplier and a subsidiary of Top Source Technologies,
Inc. ("TST"). 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 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
its 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 the 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. The outstanding balance of
$0.2 million is included in notes payable on the consolidated balance sheets. 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 resulting in 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 $1.5 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 defined 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 an arbitration proceeding between the company and TST (whose name is now
Global Technovations, Inc.) and TSA, and on the outcome of the pending
bankruptcy proceedings of TST and TSA (see Note 20). In December 2001, NCT
reduced its investment to zero as a result of the bankruptcy filing and recorded
a charge of $1.5 million which is included in write downs of investment and
repurchased licenses in the consolidated statements of operations.
F-22
10. Notes Payable and Convertible Notes:
Notes Payable:
(In thousands of dollars)
December 31,
-------------------
2000 2001
---- ----
Logical eBusiness Solutions Limited (f/k/a DataTec) $ - $ 2,184
Obligation of subsidiary to a prior owner of Web Factory;
due in two installments of 750 British pounds sterling on
August 31, 2000 and December 31, 2000; interest accrues at
4% above the base rate of National Westminister Bank plc
Bridge financing 250 465
$250 rolled into 8% convertible notes; $465 rolled into
financing completed in January 2002; notes bore interest at
rates ranging from 3% to 6%
Note from stockholder of subsidiary 150 237
Interest at 8.5% per annum payable at maturity;
matures March 27, 2002
Top Source Automotive 204 204
Default interest rate accrues at two times prime;
due April 16, 1999 (see Note 20)
Notes due former employees 100 118
$100 bears interest at 8.25%, compounded annually; due
in two equal installments on December 1, 1998 and March 1,
1999. $18 non-interest bearing due on demand.
------ --------
$ 704 $ 3,208
====== ========
F-23
Convertible Notes:
(In thousands of dollars)
December 31,
----------------------------
2000 2001
---- ----
Issued to Carole Salkind (a) $ 4,000 $ 7,222
Effective interest rate of 20.8%; secured by substantially all
of the assets of NCT; convertible into NCT common stock
at prices ranging from $0.071 - $0.12 or exchangeable for
common stock of NCT subsidiaries; due as follows:
December 22, 2001 $ 1,673
March 27, 2002 1,000
September 28, 2002 2,535
December 20, 2002 2,014
Issued to Crammer Road LLC (b) - 1,000
Accrues interest at 2% per month from May 27, 2001 payable
at maturity; convertible at 93.75% of average five-day closing
bid price for the five trading days preceding conversion;
due December 31, 2001 (see Note 14)
Issued to Production Resource Group, LLC 875 -
Accrues interest at 10% per annum payable at maturity; due
July 19, 2001; balance unpaid and included in accrued
expenses along with lease obligations and court costs
subsumed under a judgment against us (see Note 20)
8% Convertible Notes (c) - 401
Convertible into NCT common stock at 80% of the lowest
closing bid price for the five days preceding conversion; matures:
March 14, 2002 $267
April 12, 2002 134
6% Convertible Notes (d) - 4,428
Convertible into NCT common stock at 100% of the five-day
average closing bid price preceding conversion; matures:
January 9, 2002 $2,222
April 4, 2002 875
May 25, 2002 81
June 29, 2002 1,250
----------- ------------
$ 4,875 $ 13,051
Less: unamortized debt discounts - (1,341)
Less: amounts classified as long term (1,000) -
----------- ------------
$ 3,875 $ 11,710
=========== ============
Footnotes:
- ----------
(a) Beginning in 1999, NCT has issued secured convertible notes to Carole
Salkind, an accredited investor and spouse of a former director of NCT. We
defaulted on each of the two-year notes dated: January 25, 1999, June 4, 1999,
June 11, 1999, July 2, 1999, July 23, 1999, August 25, 1999 and September 19,
1999 for an aggregate of $3.0 million. The notes were rolled into new notes in
2001 along with default penalties aggregating $0.3 million (10% of the principal
in default), accrued interest and an aggregate of $2.5 million new funding from
Carole Salkind. In addition, we defaulted on notes rolled into short-term notes
during 2001 and not outstanding at December 31, 2001. We recorded a discount of
$0.7 million to the notes based upon the relative fair values of the debt and
warrants granted to Ms. Salkind (see Note 15). In addition, beneficial
conversion features totaling $1.5 million have been recorded as a discount to
the notes. For the year ended December 31, 2001, $1.1 million of amortization
related to these discounts is included in interest expense. The company recorded
beneficial conversion features of $0.2
F-24
million in connection with the 1999 notes and $1.0 million in connection with
the 2000 notes, classified is interest expense in our consolidated statements of
operations. The default provisions in these notes impose a penalty of 10% of the
principal payments in default and default interest from the date of default on
the principal in default at the rate of prime plus 5%. As of December 31, 2001,
NCT is in default of the note dated August 22, 2001 which matured December 22,
2001. On February 6, 2002, due to a judgment in an unrelated case having been
entered against NCT and DMC in excess of the permitted maximum of $250,000 (see
Notes 18 and 20), an event of default occurred with respect to the notes
outstanding as of that date. To date, demand for payment has not been made. In
addition, because NCT had defaulted on repayment of the notes as they matured
during 2001, an aggregate default penalty expense of $1.2 million has been
reflected in our statements of operations in other income (expense) (see Note
16). At December 31, 2001, $0.7 million of accrued default penalties are
included in the consolidated balance sheet, classified as accrued expenses.
(b) A beneficial conversion feature of $67,000 has been included in interest
expense in our consolidated statement of operations for the year ended December
31, 2001. The company did not repay this convertible note upon maturity. We are
obligated to register shares issuable upon conversion of this note. In 2001, we
incurred a charge of $0.2 million due to non-registration of the underlying
securities included in other (income) expense (see Note 16).
(c) Beneficial conversion features of $0.1 million have been included in
interest expense in our consolidated statement of operations for the year ended
December 31, 2001.
(d) The cash consideration for the 6% convertible notes issued to multiple
investors by Artera Group, Inc. aggregated $2.9 million, net of $0.1 million in
expenses, of which $0.6 million was received in 2000 (classified as accounts
payable at December 31, 2000). Other consideration consisted of Pro Tech common
stock valued at $0.5 million and non-recourse notes receivable of $1.0 million
(see Note 9). Original issue discounts aggregating $3.0 million due to the
difference between the face amount of the notes and the consideration received
were recorded as discounts to the notes. These discounts are being amortized to
interest expense over the term of the respective notes. Amortization of note
discounts amounted to $2.8 million during the year ended December 31, 2001.
Unamortized discounts of $0.2 million have been reflected as a reduction to the
convertible notes in our consolidated balance sheet as of December 31, 2001. We
were obligated to register additional shares at various dates during 2001, which
despite our best efforts we were unable to accomplish. As a result, we have
recorded charges of $1.6 million in finance costs included in other (income)
expense for the year ended December 31, 2001 (see Note 16). This failure also
triggered an event of default on the aggregate outstanding debt. We have not
received a demand for payment. The average effective interest rate on these
notes is 141.7% due to the amortization of original issue discounts and
conversions of principal during 2001.
11. Deferred Revenue:
(In thousands of dollars)
December 31,
------------------------------------
2000 2001
----------------- -----------------
NXT $ - $ 6,955
Teltran 4,226 1,921
InsiderStreet 2,125 -
Eagle Assets 1,500 -
Brookepark 1,445 -
Other 92 555
----------------- -----------------
$ 9,388 $ 9,431
Less: amount classified as current (7,777) (4,616)
----------------- -----------------
Deferred revenue (classified as long term) $ 1,611 $ 4,815
================= =================
As of December 31, 2001, NCT does not expect to realize any additional cash
from revenues that have been deferred.
F-25
In 2001, we decided to reacquire the DMC licenses held by Eagle Assets and
Brookepark. We accrued an aggregate of $4.0 million for this reacquisition cost
(see Note 12). As a result, we incurred an aggregate charge of $1.3 million, net
of $2.7 million reduction of deferred revenue to zero, included in write downs
of investment and repurchased licenses in our consolidated statement of
operations. Concurrently, we ceased recognition of revenue on these DMC
licenses.
On May 5, 2000, Theater Radio Network, Inc. (see Note 2) entered into an
advertising agreement with InsiderStreet.com, Inc. The advertising agreement
required, among other things, Theater Radio Network to play InsiderStreet'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 was two years commencing on June 19, 2000. At the date of acquisition
of Theater Radio Network by DMC Cinema, Theater Radio Network had remaining
475,595 shares of the originally issued 575,595 shares of InsiderStreet which
were valued at $2.5 million. Such value reflected a discount of approximately
35% against the gross market value of the shares because the InsiderStreet
shares were unregistered on the date of acquisition. InsiderStreet agreed that
if the value of the original shares issued were less than $2.0 million on May
10, 2001, InsiderStreet would deliver additional compensating shares to Theater
Radio Network on or before May 31, 2001 to increase the total value of the stock
received to $2.0 million at that time. It was determined by both parties that
the airtime purchased by InsiderStreet had an actual value of $4.2 million. The
agreement also required that the InsiderStreet shares issued to Theater Radio
Network be registered on or before April 30, 2001. At the time of the
transaction, approximately $2.9 million was recorded as deferred revenue that
was expected to be recognized as revenue over the two-year term of the
advertising agreement. For the years ended December 31, 2000 and 2001, the
company recognized $0.5 million and zero, respectively, in advertising/media
revenue with respect to this transaction. Subsequent to our acquisition of
Theater Radio Network, we received notification that InsiderStreet was canceling
the advertising arrangement. We continued providing services for a period of
time after the termination. InsiderStreet agreed that DMC Cinema could retain
the shares. For the year ended December 31, 2001, the company wrote off deferred
revenue of $2.1 million, presented as a reduction to the impairment of goodwill
(see Note 3) included in our consolidated statements of operations.
12. Other Liabilities:
(In thousands of dollars)
December 31,
----------------------------
2000 2001
------------- -------------
License reacquisition payable (Notes 2, 11, 14, and 21) $ - $ 18,000
Development fee payable 800 800
Due to ITC (Notes 4 and 9) 812 -
Royalty payable 575 766
Loan advance to NCT Video by investor 500 -
Due to IPI on stock settlement 455 -
Due to L&H 100 100
Other 80 113
------------- -------------
Other current liabilities $ 3,322 $ 19,779
============= =============
Due to ITC (Notes 4 and 9) $ - $ 1,422
Royalty payable 1,150 958
Due to selling shareholders of Theater Radio Network (Note 2) - 570
------------- -------------
Other liabilities (classified as long term) $ 1,150 $ 2,950
============= =============
License reacquisition payable at December 31, 2001 is comprised of $14.0
million required under the private equity credit agreement (see Note 21) and
$4.0 million for the cost of reacquiring other DMC licenses (see Note 11).
F-26
On September 29, 2000, NCT Video Displays, Inc. entered into a product
development and license agreement with Advanced Display Technologies, LLC
("ADT"). Under the agreement, NCT Video was 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. On May 4, 2001, NCT Video and
ADT (by then known as Viewbeam Technology, L.L.C.) entered into a product and
development agreement that modified the September 29, 2000 agreement. Some of
the provisions of the original agreement remain in effect. The agreement does
not materially modify or change the development fee to be paid by NCT Video but
does modify the specifications of the product design and the field of use to
which the September 28, 2000 exclusive license was granted. Such license was
valued at $0.9 million and $1.0 million at December 31, 2000 and 2001,
respectively. The amount represents our cost for ADT's completion of this
product development and resultant license rights and subsequent modification and
is being amortized over nine years, the earliest date of patent expiration. 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 and 2001, such $0.8 million was
included in other current 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 NCT common stock. In February 2001,
we issued 200,000 shares of NCT common stock to settle this obligation and
reduced the patent cost in an amount corresponding to our reduction of the
liability. Such liability was $0.5 million and zero at December 31, 2000 and
2001, respectively.
NCT had an earnout obligation under the 1999 stock purchase agreement by
which NCT acquired substantially all of the outstanding stock of Advancel Logic
Corporation. 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
recorded the minimum amounts of earnout obligations through December 31, 1999,
aggregating $0.3 million. Due to a settlement between NCT and the Advancel
shareholders (see Note 21), no earnout payments were or will be required to be
paid.
In connection with our acquisition of Midcore (see Note 2), we became
obligated to pay some selling shareholders $1.8 million in cash based upon
earned royalties, as defined in the Midcore merger agreement, over 36 months. If
after 36 months, the total royalty has not been earned, or if earned but not
paid, the recipients have the right to collect the remaining unpaid balance
through the issuance of NCT common stock. At December 31, 2000 and 2001, other
current liabilities includes $0.6 million and $0.8 million, respectively, and
other liabilities (long term) includes $1.2 million and $1.0 million,
respectively, for this obligation on our consolidated balance sheets.
13. Common Stock Subject to Resale Guarantee:
Vendor and Consultant Shares:
During the year ended December 31, 2001, NCT issued 1,013,868 shares of its
common stock, with a resale guarantee feature, to suppliers and consultants to
satisfy obligations totaling $604,683. In connection therewith, upon settlement
of accounts payable discharged at amounts less than we had recorded, we
recognized
F-27
miscellaneous income of approximately $0.1 million (see Note 16). During 2001,
suppliers and vendors sold common stock valued at time of issuance at $0.4
million and realized $0.2 million in proceeds.
During 2000, the company issued 2,304,571 shares of common stock to various
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.
During the year ended December 31, 2000, suppliers and vendors sold $0.9 million
of such shares and returned 776,316 previously issued shares to us.
Common stock subject to resale guarantee was zero at December 31, 2001. NCT
ceased entering into such agreements during 2001 (see Note 21). Common stock
subject to resale guarantee was $0.2 million at December 31, 2000, which
represented 2,258,272 outstanding shares of common stock valued at the date of
issuance to suppliers and vendors. The offset to the common stock subject to
resale guarantee is additional paid-in capital.
Private Placement Shares:
The company had some contingent obligations under a securities purchase
agreement, dated as of December 27, 1999, among the company, Austost Anstalt
Schaan ("Austost"), Balmore S.A. ("Balmore") and Nesher, Inc. ("Nesher"). On
December 28, 1999, we issued 3,846,155 shares of our common stock to Austost,
Balmore and Nesher for a total purchase price of $500,000. In addition, we
issued 288,461 shares of our common stock to the placement agent for the
transaction. The price of the shares was $0.13 per share, which was $0.03, or
19%, less than the closing bid price of our common stock as reported by the OTC
Bulletin Board on November 8, 1999 (the day preceding the investors' offer), and
$0.015, or 10%, less than the closing bid price of our 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, we recorded the purchase price ($500,000) plus
the guaranteed return on investment of 20% ($100,000) as common stock subject to
resale. 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 specific items on those dates was less than 120% of the total purchase price
paid by Austost, Balmore and Nesher for the shares. Those items were: (i) the
aggregate market value of the shares held by Austost, Balmore and Nesher (based
on the per share closing bid price on those dates); (ii) the market value of any
of these 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 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, 2000 and September 25,
2000, no additional shares were required to be issued in accordance with the
reset provision and the 20% of the total purchase price paid ($100,000) was no
longer considered a preferred return.
14. Capital Stock:
Authorized Capital Stock
NCT has 655 million shares authorized, 645 million shares of which are
$0.01 par value common stock. On July 10, 2001 at the NCT 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 450 million to
645 million. Such amendment became effective on July 12, 2001 when the company
filed a Certificate of Amendment to its Restated Certificate of Incorporation
with the Secretary of State of Delaware. 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 Secretary of State of Delaware. At the
annual meeting of stockholders of the company on June 24, 1999, the
F-28
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 a
Certificate of Amendment to its Certificate of Incorporation with the Secretary
of State of Delaware.
Common shares available for future issuance
At December 31, 2001, the shares of common stock required to be reserved
were as follows, calculated at the $0.085 common stock price on that date (or
the discount therefrom as allowed under the applicable exchange or conversion
agreements):
Stock options and warrants 103,085,251
NCT Secured Convertible Notes issued to Carole Salkind 85,771,392
8% Convertible Notes and Note issued to Crammer Road 25,767,134
NCT Audio Common Stock Exchange 4,411,765
ConnectClearly Common Stock Exchange 1,065,441
Pro Tech Preferred Stock Exchange 9,860,471
6% Convertible Notes Exchange 69,337,139
Artera Preferred Stock Exchange 67,597,875
Earnout and look back shares for Theater Radio Network
and Midcore Software acquisitions 20,014,054
DMC New York Reset Shares 3,333,334
Private Equity Credit Agreement 378,098,742
-------------
768,342,598
=============
At the December 31, 2001 common stock price of $0.085, our common shares
issued and required to be reserved for issuance exceeded the number of shares
authorized at that date. As such, NCT will seek shareholder approval of an
amendment to NCT's Second Restated Certificate of Incorporation to increase the
number of shares of common stock authorized for NCT.
Transactions with Crammer Road LLC
Private Equity Credit Agreement
On April 12, 2001, NCT and Crammer Road finalized a new equity credit
agreement and canceled their private equity credit agreement dated September 27,
2000. Under the new private equity credit agreement, we are required to put $17
million of our common stock to Crammer Road in exchange for 12,000 shares of DMC
New York and cash in the amount of approximately $3.0 million pursuant to
monthly notices. Our monthly put notices were required to commence no later than
October 1, 2001; however, we have not delivered any put notices to date (see
Note 21). In conjunction with this transaction, the company issued Crammer Road
a warrant for 250,000 shares of the company's common stock (see Note 15). We are
obligated to register shares of our common stock for the private equity credit
agreement.
We delivered a put notice to Crammer Road in November 2000 under the then
existing private equity credit agreement for $0.5 million and issued 2,810,304
shares of our common stock to Crammer Road, of which shares 343,604 were issued
in 2001.
DMC New York, Inc.
NCT acquired 25% of DMC New York in 2001 (see Note 2). We intend to acquire
the remaining 12,000 shares (75%) of DMC New York with NCT common stock shares
in accordance with our April 12, 2001 private equity credit agreement with
Crammer Road and have accrued the $14.0 million cost of repurchasing those
additional licenses (see Notes 12 and 21). DMC New York holds Distributed Media
Corporation licenses for operation of the Sight & Sound technology in the New
York designated market area. Our acquisition of 25% of DMC New York (see Note 2)
and accrual of $14.0 million for the remaining 75% of DMC New York resulted in
an $18.0 million charge included in write downs of investment and repurchased
licenses in our consolidated statements of operations. Our decision to write
down our investment was because DMC New York has not commenced operations.
Further justification for the charge is as follows: (1) we did not obtain an
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independent appraisal of DMC New York, but NCT's Board of Directors deemed the
value to be fair, (2) we are essentially acquiring our own technology, and (3)
the Board of Directors of DMC New York is 100% comprised of officers and
directors of NCT.
If a registration statement covering amounts pursuant to an exchange
agreement with Crammer Road were not in effect by July 1, 2001, we agreed to
acquire 1,000 shares of DMC New York common stock for $1.0 million in cash or
other marketable securities on July 1, 2001. We paid $100,000 to Crammer Road in
September 2001 toward this commitment which is classified in other current
assets.
Exchange Agreement and Reset Shares
On April 12, 2001, NCT entered into an exchange agreement with Crammer
Road. Pursuant to the exchange agreement, NCT issued to Crammer Road a $1.0
million convertible note in exchange for 1,000 shares of common stock of DMC New
York, Inc. (see Note 10). Further, pursuant to the exchange agreement, the
company issued to Crammer Road 13,333,333 shares of NCT common stock in exchange
for 2,000 shares of common stock of DMC New York, Inc. with an aggregate value
of $2.0 million. In accordance with the exchange agreement, NCT is also
obligated to issue Crammer Road additional NCT common shares (reset shares) if
the closing bid price of the NCT common stock for the five business days prior
to the day before we request acceleration of the effectiveness of the
registration statement covering those shares is less than $0.16 per share, up to
a maximum of 3,333,334 additional shares. We are obligated to register these
issued shares of common stock and the reset shares of common stock. We incurred
a charge of $0.5 million due to non-registration of these shares included in
other (income) expense in our consolidated statement of operations for the year
ended December 31, 2001 (see Note 16).
Convertible Note issued by NCT Video Displays, Inc.
On April 12, 2001, NCT Video, our wholly owned subsidiary, entered into a
subscription agreement with Crammer Road whereby NCT Video issued a $0.5 million
convertible note to Crammer Road for $0.5 million in cash. NCT Video received an
advance of this amount in December 2000 (see Note 12). The NCT Video note
matured on December 31, 2001 and bore interest at 8% per annum, payable at
maturity. Such convertible note was convertible into shares of NCT Video common
stock. Because NCT Video's common stock is not publicly tradable on any market
or exchange, NCT and Crammer Road entered into an exchange rights agreement
whereby the NCT Video note is exchangeable for shares of NCT common stock at an
exchange price per share of 93.75% of the average closing bid price of NCT
common stock for the five trading days prior to the exchange. In accordance with
EITF 98-5, as codified in EITF 00-27, we recorded a beneficial conversion
feature of $33,333 in connection with the April 12, 2001 convertible note during
the second quarter of 2001. The beneficial conversion feature is accounted for
as a discount to the note and is allocated to a component of additional paid-in
capital. The discount was recognized as interest expense in our consolidated
statement of operation for the year ended December 31, 2001. In October 2001,
Crammer Road exchanged the NCT Video note for 6,014,029 shares of our common
stock.
Shares Issued for Acquisitions
NCT issued shares of its common stock to consummate the acquisitions of
Theater Radio Network and Midcore Software (see Note 2). We issued an aggregate
of 21,318,569 shares upon the closings of these acquisitions in August 2000. In
February 2001, due to fill-up provisions, we issued an aggregate of 5,319,142
shares for these acquisitions. We have a contingent obligation to issue
additional shares of our common stock to satisfy an earnout provision for the
Theater Radio Network acquisition. Further, we may be required to issue
additional NCT shares if the value of 4,332,005 of the shares we issued at the
Midcore Software closing (look back shares) is less than $1.5 million on the
third anniversary of the closing.
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Shares Issued upon Conversion or Exchange of Indebtedness
As noted above, we issued Crammer Road shares of our common stock upon
Crammer Road's exchange of the NCT Video note.
During the year ended December 31, 2001, $2.5 million of the 6% convertible
notes issued by Artera Group, Inc. plus interest, was exchanged for 26,910,453
shares of NCT's common stock. At December 31, 2001, $4.4 million of the 6%
convertible note principal remained that could be exchanged for NCT common
stock.
On May 18, 2001, Carole Salkind converted a 60-day $500,000 note into
4,303,425 shares of our common stock at an agreed upon price of $0.13, a price
which approximated the market price of our common stock on the conversion date.
NCT had defaulted on the repayment of this note. NCT reduced the conversion
price from $0.21 to $0.13 to induce conversion of the note resulting in an
inducement charge of approximately $0.2 million included in other (income)
expense (see Note 16).
Shares Issued to Infinite Technology Corporation, Vendors and Others
During the year ended December 31, 2001, NCT issued an aggregate of
3,165,495 shares of its common stock to suppliers, consultants and an employee.
2,151,627 of these shares were issued without a resale guarantee feature, of
which 171,429 were for future obligations totaling $60,000 and 1,980,198 were
for current obligations totaling $200,000. 328,717 of such shares were issued to
an employee (see Note 18).
On September 7, 2000, the company issued 9,523,810 shares of its common
stock having a market value of $3.0 million to Infinite Technology Corporation
with respect to the strategic alliance and technology development amendment with
ITC (see Note 4).
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 some
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.
ConnectClearly.com, Inc. Initial Financing
On August 10, 2000, NCT entered into an agreement with three accredited
investors for the financing of NCT's majority-owned subsidiary,
ConnectClearly.com, Inc. In connection with the initial funding of
ConnectClearly, NCT issued 1,000 shares of ConnectClearly 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
ConnectClearly common shares are exchangeable for shares of NCT common stock any
time on or after the 180th day following issuance of the ConnectClearly common
stock at 80% of the five-day closing bid average of the NCT common stock for the
five-day period immediately preceding the exchange. During the year ended
December 31, 2000, no shares of ConnectClearly were exchanged for shares of NCT
common stock. During the year ended December 31, 2001, 937 shares of
ConnectClearly common stock were exchanged for 7,831,908 shares of NCT's common
stock. We incurred a $0.3 million charge to additional paid-in capital. This
amount is included in beneficial conversion features and in the calculation of
loss attributable to common stockholders for the year ended December 31, 2001.
Because NCT obtained the ConnectClearly common shares upon exchange, NCT
accounted for this as a step acquisition for which NCT recorded an increase to
its goodwill in ConnectClearly and an increase to its additional paid-in capital
of $0.9 million. At December 31, 2001, as a result of ConnectClearly's failure
to achieve operating objectives, goodwill was reduced to zero resulting in a
goodwill impairment charge of $0.9 million. At December 31, 2001, 63
ConnectClearly common shares are outstanding.
NCT Audio Products, Inc.
Initial Financing
In 1997, NCT Audio sold 2,145 common shares for approximately $4.0 million
in a private placement under Regulation D of the Securities Act of 1933 (the
"Securities Act"). The terms of the sale allow purchasers of NCT Audio's common
stock to exchange their shares for NCT common stock at 80% of the five-day
average
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closing bid price of NCT common stock for the five days immediately preceding
the exchange. The NCT share exchanges are accounted for as step acquisitions of
NCT Audio. Through the fourth quarter of 1999, we had pursued an acquisition
strategy for NCT Audio. In connection with financing efforts for that
acquisition strategy, we had access to an independent appraisal of NCT Audio
performed for a prospective lender. In 1999, we changed the business strategy to
suspend NCT Audio's acquisition effort. Based upon that change in strategy and
the then current valuation, we began impairing goodwill resulting from step
acquisitions. In 2001, due to the continuing inability of NCT Audio to generate
positive cash flows from operations, we reduced the NCT Audio goodwill balance
to zero (representing $1.5 million of the 2001 impairment to goodwill). Included
in impairment of goodwill in our consolidated statements of operations are
charges attributable to NCT Audio aggregating $3.1 million, $3.1 million and
$2.1 million, for the years ended December 31, 1999, 2000 and 2001,
respectively.
Through December 31, 2001, we have issued an aggregate of 27,315,198 shares
of our common stock in exchange for 1,985 shares of NCT Audio common stock.
During the years ended December 31, 1999, 2000 and 2001, 559, 533 and 597 shares
of NCT Audio common stock, respectively, were exchanged for shares of NCT common
stock. At December 31, 2001, 160 shares of NCT Audio common stock subject to
exchange are outstanding.
Shares Issued to NXT plc
On March 30, 2001, NCT issued 3,850,000 shares of its common stock to NXT
attributable to new agreements that reorganized existing cross-license
agreements between the companies (see Note 4). Under the new agreements, NXT
transferred its 533 shares of NCT Audio common stock to NCT in payment of the
exercise price for an option held by NXT to purchase 3,850,000 shares of NCT's
common stock (see Note 15). NXT had purchased those shares of NCT Audio common
stock in 1997 for $1.0 million.
Exchange Shares
The company had contingent obligations under a securities exchange
agreement, dated October 9, 1999 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 was
subject to increase upon the application of an exchange ratio adjustment
provision in the exchange agreement on February 15, 2000 (or an earlier date
agreed to by all the parties) and was subject to decrease upon the application
of a reset provision in the exchange agreement. Under the exchange ratio
adjustment provision and the reset provision, NCT could have received shares
back or had an obligation to issue additional shares if the value of the shares
issued to Austost and Balmore on the measurement date differed from $2.6
million. No adjustment to the number of shares was required. On March 7, 2000,
some terms and conditions of the exchange agreement were amended. Under the
exchange agreement, Austost and Balmore were obligated to return to NCT
13,671,362 shares of NCT common stock ("Excess Exchange Shares"). This amendment
was agreed to in order to (i) allow Austost and Balmore to retain 3,611,111
Excess Exchange Shares in exchange for an additional 533 shares of NCT Audio
common stock from a third party investor, which Austost and Balmore would
deliver to NCT, and (ii) substitute cash payments by Austost and Balmore to the
company in lieu of Austost's and Balmore's obligation to return the remaining
Excess Exchange Shares to the company pursuant to the exchange agreement.
Austost and Balmore would agree to pay the company up to $1.0 million in cash
subject to monthly limitations from proceeds Austost and Balmore would realize
from their disposition of such remaining Excess Exchange Shares. Austost and
Balmore would realize a 10% commission on the proceeds from the sale of NCT
shares. During the year ended December 31, 2000, the company received proceeds,
net of commissions, of $2.3 million for the sale of approximately 10 million
Excess Exchange Shares sold by Austost and Balmore, which funds were used to
repay notes payable ($0.8 million) and for working capital purposes. In 2001,
NCT received proceeds, net of commissions, of $0.2 million upon the sale of the
remaining Excess Exchange Shares.
F-32
Other Private Placements and Stock Issuances
On or about August 22, 2001, 2.0 million shares of NCT common stock issued
with a restrictive legend were sold in a private placement, at current market
value. The proceeds consisted of approximately $0.2 million in cash, including
approximately $0.1 million from certain NCT directors and officers (see Note
18).
Transactions Affecting Common Stock of Pro Tech Communications, Inc.
In 2001, we received 1,190,476 shares of Pro Tech common stock as partial
consideration for the January 9, 2001 6% convertible notes issued by Artera
Group, Inc. (see Note 10). We received an aggregate of 2,563,636 shares of Pro
Tech common stock valued at $1.4 million in partial payment of technology
license fees receivable from two DMC customers.
Pursuant to a consulting agreement, dated March 15, 1999, as amended June
1, 1999 and modified July 29, 1999, between Pro Tech and Union Atlantic LC
("UALC"), Pro Tech was obligated to issue 2% of its outstanding common stock to
UALC upon the consummation of the Pro Tech acquisition by our wholly-owned
subsidiary, NCT Hearing (see Note 2). As such, Pro Tech issued 279,688 shares
and NCT Hearing transferred 279,687 shares of its Pro Tech's common stock to
UALC (an aggregate of 559,375 shares) in full settlement of all obligations
under the consulting agreement. The shares were valued at the closing bid price
as of the date of issue. Pro Tech treated this as a charge against the stock
issued, and NCT Hearing recorded it as a reduction in its investment in Pro
Tech.
At December 31, 2001, NCT Hearing Products, Inc., had approximately 27.1
million shares of Pro Tech common stock, comprising approximately 82% of the
issued and outstanding shares of Pro Tech common stock.
NCT Group, Inc. Preferred Stock
Our Board of Directors is authorized to issue 10 million shares of
preferred stock, par value $0.10 per share. As of December 31, 2001, there are
no shares of NCT preferred stock issued and outstanding. Between 1986 and 2000,
NCT designated seven series of preferred stock, including series A, B, C, D, E,
F and G preferred stock. Series A and B were eliminated in 1992 without ever
having been issued. We have issued preferred stock under our series C, D, E, F
and G designations, none of which are outstanding as of December 31, 2001. In
November 2001, series C, D, E and F were eliminated.
Series C Convertible Preferred Stock
Between October 28, 1997 and December 11, 1997, the company entered into a
series of subscription agreements to sell an aggregate amount of $13.3 million
of series C convertible preferred stock in a private placement, pursuant to
Regulation D under the Securities Act, to 32 unrelated accredited investors. The
aggregate net proceeds to the company of the private placement were $11.9
million. Each share of the series C preferred stock had a par value of $0.10 and
a stated value of $1,000 with an accretion rate of 4% per annum on the stated
value. The series C preferred stock was convertible into shares of our common
stock at 80% of the five-day average closing bid price of our common stock. On
December 30, 1998, 1,700 shares of the series C preferred stock were exchanged
for our series E preferred stock. As of November 30, 1999, 10,850 shares of
series C preferred stock had been converted into 20,665,000 shares of NCT common
stock and the 700 remaining series C shares were subject to mandatory
conversion. As such, on November 30, 1999 (the mandatory conversion date), these
700 shares were converted to 1,512,000 shares of our common stock. At December
31, 2000 and 2001, there were no outstanding shares of series C preferred stock,
and the series C preferred stock was eliminated in 2001.
Series D Convertible Preferred Stock
On July 27, 1998, the company entered into subscription agreements to sell
6,000 shares of its series D convertible preferred stock having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D
under the Securities Act, to six unrelated accredited investors. Net proceeds of
$5.2 million were received by the company from its issuance of series D
preferred stock. Each share of the series D preferred stock had a par value of
$0.10 and a stated value of $1,000 with an accretion rate of 4% per annum on the
stated value.
F-33
Each share of series D preferred stock was convertible into shares of the
company's common stock, subject to specific limitations, as determined by a
formula set forth in the agreement. A registration statement relating to the
common stock underlying the series D preferred stock became effective on October
30, 1998, and shares of series D preferred stock became convertible on that
date. 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. At December 31, 2000 and 2001, there were no
outstanding shares of series D preferred stock, and the series D preferred stock
was eliminated in 2001.
Series E Convertible Preferred Stock
On December 30, 1998, the company entered into a series of subscription
agreements to sell an aggregate stated value of up to $8.2 million of series E
convertible preferred stock in consideration of $4.0 million in a private
placement, pursuant to Regulation D under the Securities Act, to six accredited
investors. In addition, the company issued and sold an aggregate amount of $1.7
million of series E preferred stock to three accredited investors 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 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. Each share of the series E preferred
stock had a par value of $0.10 and a stated value of $1,000 with an accretion
rate of 4% per annum on the stated value. Each share of series E preferred stock
was convertible into shares of the company's common stock, subject to
limitations, as determined by a formula 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, NCT signed an agreement that holders of 3,600 shares of
series E preferred stock could return those shares as consideration for four DMC
network affiliate licenses. In 1999, NCT recognized revenue of $0.9 million
based upon the valuation 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, an aggregate stated value of $6.0 million, exchanged such
shares for eight DMC network affiliate licenses. No shares of series E preferred
stock were outstanding at December 31, 2000 and 2001, and the series E preferred
stock was eliminated in 2001.
Series F Convertible Preferred Stock
On August 10, 1999, the company entered into a subscription agreement to
sell an aggregate stated value of up to $12.5 million (12,500 shares) of series
F preferred stock in a private placement, pursuant to Regulation D under the
Securities Act, to five unrelated accredited investors. 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 had a par
value of $0.10 and a stated value of $1,000 with an accretion rate of 4% per
annum on the stated value. Each share of series F preferred stock was
convertible into shares of the company's common stock, subject to specified
limitations, as determined by a formula in the agreement. The conversion terms
of the series F preferred stock also provided that in no event would the company
be obligated to issue more than 35 million 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 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 have been
obligated to redeem the excess of the stated value over the amount permitted to
be converted into common stock. Such additional amounts would have been 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 NCT's series F
F-34
preferred stock having aggregate stated value of $8.5 million, for consideration
of $1.0 million, the company has treated the $4.0 million for the DMC licenses
as additional consideration for the series F preferred stock. On December 15,
1999, 974 shares of NCT's series F preferred stock, together with 5,026 shares
of the company's series E preferred stock, were returned to the company as
consideration for eight DMC network affiliate licenses. As of December 31, 2000,
7,526 shares of NCT's series F preferred stock had been converted into
48,776,638 shares of NCT's common stock. At December 31, 2000 and 2001, no
series F preferred stock is outstanding, and the series F preferred stock was
eliminated in 2001.
Series G Convertible Preferred Stock
On January 25, 2000, the Board of Directors of NCT designated a series G
convertible preferred stock. The series G preferred stock consists of 5,000
designated shares, par value $0.10 per share and a stated value of $1,000 per
share with a cumulative dividend of 4% per annum on the stated value payable
upon conversion in either cash or common stock. On September 26, 2000, the
company's Board of Directors approved an amendment to the Series G Certificate
of Designations, Rights and Preferences to increase the maximum share issuance
amount thereunder from 10 million shares to 24 million shares. The amendment
became effective on September 27, 2000 when the company filed it with the
Secretary of State of Delaware. On March 6, 2000, as amended March 10, 2000, NCT
and an accredited investor entered into an agreement under which NCT 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 under the Securities Act,
for an aggregate of $1.75 million. The company received proceeds, net of
expenses, of $1.7 million. Each share of series G preferred stock is convertible
into shares of NCT common stock at the lesser of (i) 20% below the five-day
average closing bid price of common stock immediately prior to conversion or
(ii) $0.71925. In connection with the series G preferred stock transaction, on
March 6, 2000, the company granted a five-year warrant for 150,000 shares of NCT
common stock at an exercise price of $0.71925. In accordance with SFAS 123, the
company estimated the fair market value of this warrant to be $0.1 million using
the Black-Scholes option pricing model. Such amount is included in the preferred
stock dividend requirement for the year ended December 31, 2000. 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. During the year ended December 31,
2000, the company issued 4,906,595 shares of the company's common stock upon the
conversion of 1,237 shares of the company's series G preferred stock. During
2001, we issued 7,218,150 shares of our common stock upon conversion of the
remaining 767 shares of series G preferred stock. At December 31, 2000 and 2001,
there were 767 and no outstanding shares, respectively, of series G preferred
stock.
Artera Group, Inc. Preferred Stock
On February 21, 2001, the Board of Directors of Artera Group, Inc.
designated a series A convertible preferred stock which consists of 30,000
designated shares, par value $0.10 per share and stated value of $1,000 per
share with a cumulative dividend of 4% per annum on the stated value payable
upon conversion in either cash or common stock of Artera. Each share of series A
convertible preferred stock is convertible into shares of Artera common stock on
and after the earlier of two years after issuance or ten days after Artera
becomes publicly traded, at a conversion price equal to the average closing
price for the five trading days prior to the conversion date. We amended these
rights as to $4.3 million stated value of Artera preferred stock that was issued
in conjunction with our acquisition of Artera (see Note 2).
On June 29, 2001, NCT entered into an exchange rights agreement with ten
accredited investors who hold $4.3 million in aggregate stated value of Artera
Group, Inc. series A preferred stock. Each of the ten holders of Artera series A
preferred stock is entitled to exchange the Artera series A preferred stock for
shares of NCT common stock from and after November 30, 2001 at an exchange price
per share of 100% of the average closing bid price of NCT's common stock for the
five trading days prior to the exchange date. NCT is obligated to register
shares of its common stock for the exchange of Artera series A preferred stock.
In 2001, we incurred a charge of $0.7 million for non-registration of the
underlying shares of NCT common stock. This amount is included in preferred
stock dividends and in the calculation of loss attributable to common
stockholders for the year ended December 31, 2001. Pursuant to the exchange
rights agreement, NCT has the option at any time to redeem any outstanding
Artera series A preferred stock by paying the holder cash equal to the aggregate
stated value of the Artera series A preferred stock being redeemed (together
with accrued and unpaid dividends thereon).
F-35
Pro Tech Communications, Inc. Preferred Stock
On September 29, 2000, Pro Tech entered into a securities purchase and
supplemental exchange rights agreement with the company, Austost, Balmore and
Zakeni Limited 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 to the investors. The Pro Tech series A preferred
stock consists of 1,500 designated shares, par value $0.01 per share and a
stated value of $1,000 per share with a dividend rate of 4% per annum on the
stated value. Each share of such stock is exchangeable for shares of NCT's
common stock based upon the lowest average of the average closing bid price for
a share of our common stock for any consecutive five-day period out of 15
trading days preceding the date of exchange, less a discount of 20%. In
addition, each share of this preferred stock is convertible into shares of the
Pro Tech's common stock. In connection with the execution of the securities
purchase and supplemental exchange rights agreement, Pro Tech issued three-year
warrants to the Pro Tech investors to acquire 4.5 million shares of Pro Tech's
common stock exercisable at $0.50 per share. Pro Tech estimated the fair value
of this warrant to be $3.6 million determined using the Black-Scholes option
pricing model. 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 series A 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
attributable to common stockholders on the consolidated statement of operations
for the year ended December 31, 2000.
On July 30, 2001, Pro Tech entered into an agreement with Alpha Capital
Atkiengesellschaft to issue 500 shares of Pro Tech series B redeemable
convertible preferred stock having an aggregate stated value of $0.5 million.
Upon issuance, Pro Tech received approximately $0.4 million in cash, net of
expenses and fees, which was used for working capital purposes. The Pro Tech
preferred stock is convertible into Pro Tech common, and is exchangeable for
shares of NCT common stock (as to 50% from and after six months, and as to 100%
from and after one year, from the issue date) at an exchange rate which is the
lowest average of the average closing bid price for a share of NCT common stock
for any consecutive five trading days out of the 15 trading days preceding the
date of exchange, less a discount of 20%. In accordance with EITF 98-5, as
codified in EITF 00-27, Pro Tech recorded a beneficial conversion feature of
$125,000 in connection with the issuance of its series B preferred stock which
resulted in a reduction to the outstanding balance of the preferred stock and an
increase to additional paid-in capital. The beneficial conversion feature is to
be recognized as an increase to Pro Tech's preferred stock and a decrease to
additional paid-in capital over the period from the date of issuance (July 30,
2001) to the date of earliest conversion (50% on January 30, 2002 and 50% on
July 30, 2002). As of December 31, 2001, $79,190 of the beneficial conversion
feature was recognized. In connection with this transaction, Pro Tech issued a
three-year warrant to purchase 1.0 million shares of its common stock,
exercisable at $0.13 per share. Pro Tech estimated the fair value of this
warrant to be approximately $63,000 using the Black-Scholes option pricing
model. This $63,000 along with the $79,190 beneficial conversion feature is
included in the calculation of net loss attributable to common stockholders
(including NCT Hearing Products) on Pro Tech's statement of operations for the
year ended December 31, 2001.
During the year ended December 31, 2001, 1,450 shares of Pro Tech series A
preferred stock were converted into 4,951,873 shares of Pro Tech common stock or
exchanged for 2,975,978 shares of NCT common stock. In connection with the
issuance of NCT shares, NCT recorded a decrease in the minority interest in
subsidiary and an increase to additional paid-in capital of approximately $0.2
million. At December 31, 2001, there were 50 shares of Pro Tech's series A
preferred stock outstanding and 500 shares of Pro Tech series B preferred stock
outstanding.
NCT Audio Products, Inc. Preferred Stock
On July 27, 1998, NCT Audio entered into subscription agreements to sell 60
shares of NCT Audio's series A convertible preferred stock having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D
under the Securities Act, to six unrelated accredited investors. NCT Audio
received net proceeds of $5.2 million from the sale of NCT Audio series A
preferred stock. Each share of the NCT Audio series A preferred stock has a par
value of $0.10 and a stated value of $100,000 with an accretion rate of 4% per
annum on the stated value. Each share of NCT Audio series A preferred stock was
exchangeable for NCT's series D preferred stock and
F-36
convertible into shares of NCT common stock as determined by a formula 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 NCT's common stock. On January 10, 2000, the remaining
three shares of NCT Audio series A preferred stock were converted into 634,915
shares of the company's common stock.
15. Common Stock Options and Warrants:
The company accounts for its various employee stock option incentive plans
in accordance with APB 25 and furnishes the pro forma disclosures required under
SFAS 123. Under APB 25, no compensation costs are recognized because the option
exercise price is equal to the fair market price of the common stock on the date
of the grant. Under SFAS 123, stock options are valued at grant date using the
Black-Scholes option pricing model and compensation costs are recognized ratably
over the vesting period. Had compensation costs been determined as prescribed by
SFAS 123, the company's net loss and net loss per share would have been reduced
to the pro forma amounts indicated below for the years ended December 31:
(In thousands, except per share amounts)
Years ended December 31,
------------------------------------------------
1999 2000 2001
------ ------ ------
Net loss
As reported $ (23,771) $(10,324) $(77,660)
Pro forma (27,442) (17,700) (79,207)
Loss per share
As reported $ (0.18) $ (0.05) $ (0.21)
Pro forma (0.20) (0.08) (0.21)
The weighted-average fair values at date of grant for options granted
during 1999, 2000 and 2001 were $0.28 to $0.48, $0.27 and $0.07, respectively,
and were estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions:
Years ended December 31,
------------------------------------------
1999 2000 2001
------ ------ ------
Expected life in years 3 3 3
Interest rate 4.56%-6.14% 4.56%-6.56% 3.27%-5.41%
Volatility 1 1.29 1
Dividend yield 0% 0% 0%
The company values options and warrants using the Black-Scholes option
pricing model and accounts for options and warrants issued to parties that are
not employees or members of the Board of Directors as follows. The fair value of
options and warrants issued to general consultants are recorded as selling,
general and administrative expenses. The relative fair value of options and
warrants issued in connection with indebtedness are amortized as interest
expense over the term of the related indebtedness. The fair value of options and
warrants issued in conjunction with preferred stock are accreted as an increase
in loss attributable to common stockholders in the net loss per share
computation over the vesting period of the related options or warrants. The fair
value of options and warrants issued in connection with an acquisition are
recorded as additional purchase price.
F-37
Stock Options:
The following summarizes information about the company's stock options
outstanding and exercisable at December 31, 2001:
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 2.09 $ 0.51 1,350,000 $ 0.51
=============== ===========
Non-plan $ 0.27 100,000 2.34 $ 0.27 100,000 $ 0.27
=============== ===========
1992 Plan $ 0.10 to $ 0.27 7,160,134 5.74 $ 0.21 5,871,549 $ 0.21
$ 0.31 to $ 0.44 21,897,551 6.43 $ 0.37 19,817,943 $ 0.37
$ 0.50 to $ 1.00 17,350,978 4.56 $ 0.56 16,490,548 $ 0.57
--------------- -----------
Total 1992 Plan 46,408,663 $ 0.42 42,180,040 $ 0.42
=============== ===========
Directors Plan $ 0.66 to $ 0.75 538,500 2.09 $ 0.73 538,500 $ 0.73
=============== ===========
2001 Plan $ 0.13 10,387,503 6.67 $ 0.13 5,355,001 $ 0.13
=============== ===========
1987 Plan
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 grant and may
be exercisable over a ten-year period as determined by the Board of Directors.
The exercise price and duration of the nonstatutory stock options are determined
by the Board of Directors. 1987 Plan activity is summarized as follows:
Years Ended December 31,
-------------------------------------------------------------------------------------------
1999 2000 2001
------------------------------ ---------------------------- ----------------------------
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 February 1999, the Board of Directors granted new options under the 1987
Plan aggregating 1,350,000 shares for options that would otherwise expire. The
exercise prices of the new grants were the same as options expiring in 1999,
prices which exceeded the February 1, 1999 stock price, and therefore, there was
no financial statement impact. These options have an expiration date of the
shorter of five years from February 1, 1999 or ten years from the grant date of
the expiring options.
In 2000, the Board of Directors determined that no future grants of options
for the purchase of shares would be made under the 1987 Plan. Thus, no options
for the purchase of shares are available for future grant under the 1987 Plan.
Non-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 non-plan options
generally must be at least equal to the fair market value of such shares on the
date of grant. Non-plan options generally are exercisable over a five to
ten-year period as determined by the Board of Directors. Vesting schedules of
non-plan options vary 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:
F-38
Years Ended December 31,
-------------------------------------------------------------------------------------------
1999 2000 2001
------------------------------- ------------------------------ --------------------------
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 4,284,000 $ 0.33 4,025,000 $0.30
Options granted - - - - - -
Options exercised - - - - (3,850,000) $0.30
Options canceled, expired or forfeited (35,449) $ 4.86 (259,000) $ 0.70 (75,000) $0.50
----------- ------------ ------------
Outstanding at end of year 4,284,000 $ 0.33 4,025,000 $ 0.30 100,000 $0.27
=========== ============ ============
Options exercisable at year-end 4,284,000 $ 0.33 4,025,000 $ 0.30 100,000 $0.27
=========== ============ ============
In 2001, the company issued shares to NXT plc for its options, which NCT
had granted to NXT plc in 1997, to acquire 3,850,000 shares of NCT common stock.
This issuance was in connection with reorganizing existing cross-license
agreements between NCT and NXT plc (see Note 4).
1992 Plan
On October 6, 1992, the company adopted a stock option plan (as amended,
the "1992 Plan") for the granting of shares and options to purchase up to
10,000,000 shares of common stock to officers, employees, consultants and
directors. The exercise price of 1992 Plan options must be at least equal to the
fair market value of such shares on the date of the grant. 1992 Plan options are
generally exercisable over a five to ten-year period as determined by the Board
of Directors. Vesting schedules of 1992 Plan options vary 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 then amended to eliminate the automatic grant of shares of NCT's common
stock upon a non-employee director's initial election to the Board of Directors
and thereafter upon each subsequent election. On July 13, 2000, the stockholders
approved an amendment to the 1992 Plan to increase the aggregate number of
shares of NCT'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.
In February 1999, the Board of Directors granted new options under the 1992
Plan aggregating 798,538 shares for options which expired in 1999 under the 1992
Plan. The exercise prices for these grants were the same as for options expiring
in 1999 (which exceeded the February 1, 1999 price). These grants have an
expiration date of the shorter of five years from February 1, 1999 or ten years
from the grant date of the expiring options.
In January 2000, the Board of Directors granted options to purchase shares
of the company's common stock to officers, employees and consultants, subject to
the approval by the company's stockholders of (1) an increase in the number of
shares of common stock authorized and (2) 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
options granted to consultants amounted to $0.1 million and is included in
selling, general and administrative expenses on the consolidated statements of
operations for the year ended December 31, 2000.
On April 21, 2000, the Board of Directors approved the re-granting to
employees of options to replace options that would otherwise expire in 2000.
Such replacement grants under the 1992 Plan totaled approximately 315,000
options. The price on these new grants was substantially the same as the
exercise price of the replaced grants, and therefore, there was no financial
statement impact with respect to these options.
In July 2000, the Board of Directors canceled 9.9 million options it had
granted in January 2000. The Board of Directors granted 12.4 million 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.
F-39
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. 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 remained an obligation pending future availability
under the 1992 Plan or adoption of a new stock option plan. The Board of
Directors fulfilled this obligation in 2001 by granting options to acquire
824,505 shares under the 1992 Plan and options to acquire 2,000,000 shares under
the 2001 Plan (described below). The market price at the date the shares were
made available under the plans was equal to the exercise price of the options.
Accordingly, no compensation was recognized.
On April 25, 2001, the Board of Directors approved the re-granting to
employees of options to replace options that would otherwise expire in 2001.
Such replacement grants under the 1992 Plan totaled approximately 67,000
options. The exercise price on these new grants was the same as the exercise
price of the replaced grants, and all exercise prices exceeded the fair value of
our common stock on the date of grant. Therefore, there was no financial
statement impact with respect to the these options.
From time to time, the Board of Directors accelerates the vesting schedules
of previously granted stock options granted to officers and directors so that
the right to acquire the underlying shares becomes 100% vested. The vesting
schedules on grants made to NCT's Chairman of the Board of Directors and Chief
Executive Officer were accelerated in each of 2000 and 2001, but the exercise
prices were not modified, as follows: (a) his April 13, 1999 grant to acquire
5,000,000 shares became vested on July 13, 2000 due to DMC and fund raising; (b)
his July 13, 2000 grant to acquire 8,164,634 shares became 100% vested on
December 6, 2000 due to completion of 2000 acquisitions; and (c) his December 6,
2000 grant to acquire 6,000,000 shares became 100% vested on September 20, 2001
due to formation of Artera Group, Inc. and conceptualization of its strategy.
The Board of Directors accelerated the vesting of July 13, 2000 grants (the
exercise prices were not modified) to NCT's President and a director (to acquire
942,073 shares) and to its Senior Vice President, Chief Financial Officer (to
acquire 314,024 shares) due to the completion of 2000 acquisitions (Theater
Radio Network, Midcore Software and Pro Tech). Although the acceleration of
vesting schedules was a modification of the original grants, there was no
accounting consequence because the market prices on the dates of such
modification were lower than the original exercise prices of the grants.
1992 Plan activity is summarized as follows:
Years Ended December 31,
------------------------------------------------------------------------------------------
1999 2000 001
------------------------------- ------------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------------- ----------- -------------- ----------- -----------
Outstanding at beginning of year 19,831,821 $ 0.52 28,024,237 $ 0.47 47,057,690 $ 0.43
Options granted 9,398,538 $ 0.43 35,377,071 $ 0.42 1,641,992 $ 0.19
Options exercised (5,000) $ 0.27 (1,284,907) $ 0.58 - $ -
Options canceled, expired or forfeited (1,201,122) $ 0.60 (12,234,206) $ 0.49 (2,291,019) $ 0.55
Board action - - (2,824,505) $ 0.33 - -
------------ ------------- ------------
Outstanding at end of year 28,024,237 $ 0.47 47,057,690 $ 0.43 46,408,663 $ 0.42
============ ============= ============
Options exercisable at year-end 14,751,044 $ 0.55 32,330,873 $ 0.47 42,180,040 $ 0.42
============ ============= ============
In addition, in 2001, the company granted 357,927 common shares under the
1992 Plan to a former employee in connection with his employment termination
agreement. The company recorded a charge of approximately $33,000 in connection
with this grant, representing the market price at the date of termination.
As of December 31, 2001, 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.
Directors 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, options to purchase 821,000 shares have been approved by the
Board of Directors for issuance. The options granted under the Directors Plan
have exercise
F-40
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,
------------------------------------------------------------------------------------
1999 2000 2001
----------------------------- ------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----------- ---------- ------------- ---------- ---------------
Outstanding at beginning of year 746,000 $ 0.73 538,500 $ 0.73 538,500 $ 0.73
Options granted 538,500 $ 0.73 - - - -
Options exercised - - - - - -
Options canceled, expired or forfeited (746,000) $ 0.73 - - - -
--------- ---------- ----------
Outstanding at end of year 538,500 $ 0.73 538,500 $ 0.73 538,500 $ 0.73
========= ========== ==========
Options exercisable at year-end 538,500 $ 0.73 538,500 $ 0.73 538,500 $ 0.73
========= ========== ==========
As of December 31, 2001, there were 282,500 options for the purchase of
shares available for future grants under the Directors Plan.
2001 Plan
On April 25, 2001, the Board of Directors adopted the NCT Group, Inc. 2001
Stock and Incentive Plan (the "2001 Plan") for the granting of shares and
options to purchase up to 18,000,000 shares of common stock to officers,
employees, consultants and directors. The 2001 Plan was approved by the
stockholders at the company's annual meeting on July 10, 2001. The exercise
price of all 2001 Plan options must be at least equal to the fair market value
of our common stock on the date of grant, and the term and vesting schedules of
2001 Plan options are determined by the Board of Directors. 2001 Plan activity
is summarized as follows:
Year Ended December 31, 2001
-----------------------------
Weighted
Average
Exercise
Shares Price
-------------- ------------
Outstanding at beginning of year - -
Options granted 10,387,503 $ 0.13
Options exercised - -
Options canceled, expired or forfeited - -
--------------
Outstanding at end of year 10,387,503 $ 0.13
==============
Options exercisable at year-end 5,355,001 $ 0.13
==============
As of December 31, 2001, there were 7,612,497 options for the purchase of
shares of common stock available for future grants under the 2001 Plan.
Warrants:
The company's warrants are granted from time to time at the discretion of
the Board of Directors. The exercise price of warrants generally must be at
least equal to the fair market value of the underlying 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 February 1999, the Board of Directors granted new warrants aggregating
2,169,750 shares to replace warrants that expired in 1999. The exercise price of
the new grants was the same as it had been on the warrants expiring in 1999,
which exceeded the February 1, 1999 stock price. Therefore, there was no
financial statement impact with respect to these new warrant grants. These
warrants have an expiration date of the shorter of five years from February 1,
1999 or ten years from the grant date of the expiring warrants.
F-41
In July 1999, in connection with the Production Resource Group note (see
Note 10), Production Resource Group 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 5% of
the common stock of DMC at the purchase price per share equal to an aggregate
price of $1,250,000 (because a DMC qualified sale, as defined, had not closed on
or before December 31, 1999). Such warrant expires July 19, 2004.
During 2000, warrants to acquire an aggregate of 10,979,875 shares of
common stock were issued. Warrants to acquire 167,500 shares were issued in
connection with the series G preferred stock transaction (see Note 14). In
connection with an installation arrangement with a third party, we issued a
warrant to acquire 300,000 shares of common stock. In accordance with SFAS 123,
we estimated the fair value of this warrant to be $0.1 million which is being
amortized to interest expense over the related two-year term of the installation
agreement. In September 2000, the company issued warrants for 10 million shares
of common stock, exercisable at $0.32 per share, to the placement agent for some
of the company's 2000 equity transactions (including ConnectClearly initial
financing and Pro Tech series A preferred stock). Since these warrants were in
connection with equity financings, the fair value of this warrant did not impact
the consolidated statement of stockholders' equity (capital deficit). In 2001 to
encourage the exercise of this warrant, we reduced the exercise price to $0.08
per share and realized $800,000 upon exercise of the warrant. On September 27,
2000, in connection with the execution of a private equity credit agreement, NCT
issued a warrant for 250,000 shares of its common stock, exercisable for $0.34
per share. Since these warrants were in connection with the private equity
credit agreement, the fair value of this warrant did not impact the consolidated
statements of stockholders' equity (capital deficit) at December 31, 2000. In
2001, in conjunction with the new private equity credit agreement, such warrant
was canceled and replaced with another warrant for 250,000 shares, exercisable
for $0.14 per share.
During 2001, in conjunction with the issuance of convertible notes, NCT
granted Carole Salkind warrants to acquire an aggregate of 10,417,254 shares of
its common stock at exercise prices ranging from $0.071 to $0.21 per share. The
fair value of these warrants was $0.7 million (determined using the
Black-Scholes option pricing model). We reduced the exercise price on warrants
granted to her before December 20, 2001 to $0.071 per share. The fair value due
to the repricing of these warrants as determined using the Black-Scholes option
pricing model was $0.3 million. Thus, the company valued the warrants and
repricings at $1.0 million using the Black-Scholes option pricing model. Based
upon allocation of the relative fair values of the instruments, we recorded a
discount of $0.7 million to the convertible notes issued to Carole Salkind. On
October 25, 2001, NCT granted a placement agent a warrant to acquire 20,000,000
shares of NCT common stock at an exercise price of $0.09 per share as
consideration for advisory services with respect to equity placements during
2001 (including Pro Tech series B preferred stock). On January 10, 2002, we
granted the same placement agent a warrant to acquire 5,000,000 shares of NCT
common stock as consideration for advisory services on our $0.6 million
financing then completed (see Note 26). We issued warrants to outside
consultants for the right to acquire an aggregate of 3.1 million shares of our
common stock at exercise prices ranging from $0.093 to $0.59 per share. For the
year ended December 31, 2001, we recorded a charge for consulting services of
$0.4 million (determined using the Black-Scholes option pricing model).
Warrant activity is summarized as follows:
Years Ended December 31,
-------------------------------------------------------------------------------------------
1999 2000 2001
--------------------------- --------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- ------------ ------------ -------------- ------------ ------------------
Outstanding at beginning of year 4,372,684 $ 0.82 10,402,081 $ 0.40 21,048,331 $ 0.36
Warrants granted 9,254,542 $ 0.34 10,979,875 $ 0.34 33,542,254 $ 0.13
Warrants exercised - - - - (10,000,000) $ 0.08
Warrants canceled, expired or forfeited (3,225,145) $ 0.82 (333,625) $ 0.89 (865,000) $ 0.40
-------------- ------------ ------------
Outstanding at end of year 10,402,081 $ 0.40 21,048,331 $ 0.36 43,725,585 $ 0.21
============== ============ ============
Warrants exercisable at year-end 10,402,081 $ 0.40 21,048,331 $ 0.36 42,396,318 $ 0.20
============== ============ ============
F-42
The following table summarizes information about warrants outstanding at
December 31, 2001:
Warrants Outstanding Warrants Exercisable
-------------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Exercise
Exercise Price Outstanding (In Years) Price Number Price
----------------- -------------- ---------- -------- ----------- --------
$0.07 to $0.16 30,917,254 4.31 $0.12 30,917,254 $0.12
$0.19 to $1.66 12,808,331 2.33 $0.42 11,479,064 $0.41
---------- ----------
43,725,585 42,396,318
========== ==========
16. Other (Income) Expense:
(In thousands of dollars)
For the Years Ended
December 31,
------------------------------------------------------------
1999 2000 2001
---- ---- ----
Other operating (income) expense, net consisted of the following:
Forgiveness of payable $ - $ (144) $ (67)
Minority share of loss in subsidiary - Pro Tech - (99) (473)
Other (266) (169) (397)
------------------------------------------------------------
Total other operating income, net $ (266) $ (412) $ (937)
============================================================
Non-operating Other (income) expense, net consisted of the following:
Other-than-temporary decline in value of securities
available-for-sale (Note 5) $ - $ - $ 7,036
Default penalties on debt (Notes 10 and 18) - - 1,208
Depreciation in fair value of warrant (Note 9) - - 1,355
Realized loss on sale of trading securities - NXT (Note 4) - - 2,301
Finance costs associated with non-registration of common shares
and of common shares underlying convertible notes (Notes 10 and 14) - - 2,318
Inducement charges (Note 14) - - 190
Reserve for notes receivable (Note 9) - - 1,000
Other 166 (162) 691
------------------------------------------------------------
Total non-operating other (income) expense, net $ 166 $ (162) $ 16,099
============================================================
F-43
17. Supplemental Cash Flow Disclosures:
(In thousands of dollars)
For the Years Ended December 31,
--------------------------------------------
1999 2000 2001
-------------- ------------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4 $ 3 $ 11
============== ============= ===========
Supplemental disclosures of non-cash investing and financing activities:
Investment in DMC New York and repurchase of licenses $ - $ - $21,000
============== ============= ===========
Receipt of NXT shares for license fee $ - $ - $ 9,160
============== ============= ===========
Settlement of liability as offset against patent $ - $ - $ 405
============== ============= ===========
Unrealized holding loss on available-for-sale securities $ - $ (3,379) $ -
============== ============= ===========
Issuance of 4.3 million shares of common stock upon conversion of note $ - $ - $ 500
============== ============= ===========
Issuance of common stock for acquisition of Midcore Software, Inc. $ - $ 4,818 $ -
============== ============= ===========
Issuance of common stock for acquisition of Theater Radio Network $ - $ 2,500 $ -
============== ============= ===========
Issuance of common stock in exchange for common stock of subsidiary $ 2,632 $ 3,124 $ 984
============== ============= ===========
Issuance of common stock in exchange for prepaid research and
engineering expenses $ - $ 3,000 $ -
============== ============= ===========
Receipt of Pro Tech common shares in lieu of cash to settle
accounts receivable $ - $ - $ 1,350
============== ============= ===========
Issuance of preferred stock of subsidiary, Artera Group, Inc. $ - $ - $ 7,799
============== ============= ===========
Issuance of notes for placement services rendered $ - $ - $ 527
============== ============= ===========
Issuance of common stock for services $ 2,503 $ 547 $ 435
============== ============= ===========
Issuance of common stock in exchange for convertible note of subsidiary $ - $ - $ 2,477
============== ============= ===========
Issuance of common stock in exchange for preferred stock of subsidiary $ 9,306 $ 317 $ 261
============== ============= ===========
Issuance of common stock in exchange for preferred stock $ 3,853 $ 4,024 $ -
============== ============= ===========
Property and equipment financed through capitalized leases and notes
payable $ - $ - $ 1,404
============== ============= ===========
Receipt of Pro Tech common shares for payment of license $ - $ 2,430 $ -
============== ============= ===========
Receipt of non-recourse notes as partial consideration for convertible
note of subsidiary $ - $ - $ 1,000
============== ============= ===========
Receipt of Pro Tech common shares as partial consideration of
convertible note of subsidiary $ - $ - $ 500
============== ============= ===========
Preferred stock exchanged for license $ 9,600 $ - $ -
============== ============= ===========
Issuance of common stock in exchange for patent rights $ 88 $ - $ -
============== ============= ===========
18. Related Parties:
Beginning in 1999, NCT has issued secured convertible notes to Carole
Salkind, an accredited investor and spouse of a former director of NCT. As of
December 31, 2001, the principal balance outstanding of these notes aggregated
approximately $7.2 million. The notes are secured by substantially all the
assets of NCT. At Ms. Salkind's election, the notes are convertible into shares
of our common stock and may be exchanged for shares of common stock of our
subsidiaries. The notes contain various events of default, the occurrence of any
one of which provides, at Ms. Salkind's election, that the outstanding
principal, unpaid interest and a penalty become immediately due and payable. In
the circumstances, a 10% default penalty was accrued as of December 31, 2001
(see Notes 10, 16 and 20).
On August 22, 2001, three individuals, NCT directors and officers, agreed
to purchase in a private placement an aggregate of 1,000,000 shares of
restricted common stock. The aggregate value of the shares was $93,000, or
$0.093 per share, the then fair market value based upon the closing bid price on
August 21, 2001. Shares were issued to NCT's Chairman of the Board of Directors
and Chief Executive Officer (612,893), to NCT's President and a director
(171,342) and to NCT's Senior Vice President, Chief Financial Officer (215,765).
On August 22, 2001, Carole Salkind agreed to purchase 1,000,000 shares of
NCT common stock for $93,000 cash, or $0.093 per share, the then fair market
value. On September 10, 2001, we received the funds from Ms. Salkind and issued
the 1,000,000 shares of common stock to her.
F-44
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 cash compensation from the company in 1999, 2000 and
2001 of $85,000, $64,500 and $63,000, respectively.
NCT's Chairman of the Board of Directors and Chief Executive Officer, who,
at December 31, 2001, holds options and warrants for the right to acquire an
aggregate of 31,901,634 shares of the company's common stock, received an
incentive bonus equal to a 1% cash override on the value derived by the company
upon the execution of agreements or other documentation evidencing transactions
with unaffiliated parties. For the years ended December 31, 1999, 2000 and 2001,
approximately $169,000, $363,000 and $256,000, respectively, was paid by the
company in connection with this arrangement.
The company's President and a director of NCT, who at December 31, 2001
holds options and warrants for the right to acquire an aggregate of 4,534,623
shares of the company's common stock, had an incentive bonus arrangement equal
to 1/3% cash override on the value derived from transactions entered into by the
company with unaffiliated parties. Her participation in this incentive bonus
commenced effective January 2001. Under this arrangement, the company paid
approximately $78,000 for the year ended December 31, 2001.
The company's Senior Vice President, Chief Financial Officer, who at
December 31, 2001 holds options and warrants for the right to acquire an
aggregate of 2,283,742 shares of the company's common stock, had an incentive
bonus arrangement equal to 1/2% cash override on the value derived from
transactions entered into by the company with unaffiliated parties. Under this
arrangement, the company paid approximately $93,000, $134,000 and $125,000 for
the years ended December 31, 1999, 2000 and 2001, respectively.
The company's Senior Vice President, Corporate Development, who at December
31, 2001 holds options for the right to acquire an aggregate of 1,778,049 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 specific 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 and $32,000 in the years ended December 31, 2000 and 2001,
respectively.
NCT's Chairman of the Board of Directors and Chief Executive Officer
personally guaranteed the repayment of a $0.4 million bridge financing note
issued by NCT on December 27, 2001. The guarantee was extinguished in
conjunction with new financing completed on January 10, 2002 (see Note 26).
On various dates in 2000 and 2001, 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. As of December 31, 2001, one promissory note was outstanding for a
principal amount owed to the company of $105,301. The note bears interest at
6.0% and matures on May 1, 2002.
We issued 328,717 shares of NCT common stock to the former president of
Theater Radio Network (who had become an employee of DMC Cinema). This issuance
was in settlement of amounts owed him aggregating approximately $25,000 that he
had advanced to the company.
F-45
NCT intends to acquire the remaining 12,000 shares of common stock of DMC
New York, Inc. (see Notes 2, 14 and 21). The DMC New York Board of Directors is
comprised of individuals who are officers and directors of NCT, specifically,
NCT's Chairman of the Board of Directors and Chief Executive Officer, NCT's
President and a director of NCT and NCT's Senior Vice President, Chief Financial
Officer.
19. Income Taxes:
The company provides for income taxes in accordance with SFAS 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 and state tax returns. At December
31, 2001, the company had available estimated net operating loss carryforwards
of approximately $119.3 million and estimated research and development credit
carryforwards of approximately $2.4 million for federal income tax purposes of
which approximately $11.7 million will expire within the five years ending
December 31, 2006 ($2.1 million expire in 2002) and approximately $110.0 million
expire at various dates from December 31, 2007 through December 31, 2021. 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 may be severely 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 primarily due to the increase in the valuation
allowance of $3.3 million and $27.4 million in 2000 and 2001, respectively. The
difference is as follows:
For the Years ended December 31,
------------------------------------------------------------
1999 2000 2001
---------------- ------------------- ----------------
Statutory rate (34.0)% (34.0)% (34.0)%
State tax net of federal effect - (5.6) (5.6)
Permanent differences - 15.9 11.5
Effect of adjustments to prior year net
operating loss carryforwards - (35.5) 2.7
Other - 2.0 -
Increase in valuation allowances 34.0 57.2 25.4
---------------- ------------------- ----------------
Effective tax rate - % - % - %
================ =================== ================
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:
F-46
(In thousands of dollars)
December 31,
--------------------------------
2000 2001
------------- ---------------
Accounts receivable $ 24 $ 19
Inventory 34 320
Investments - 11,553
Property and equipment 68 400
Accrued expenses 170 2,177
Stock compensation 3,129 4,032
Other 541 -
------------- ---------------
Total temporary differences $ 3,966 $ 18,501
Federal net operating and capital loss
carryforwards 35,639 48,165
Federal research and development credit 2,006 2,393
------------- ---------------
$ 41,611 $ 69,059
Less: Valuation allowance (41,611) (69,059)
------------- ---------------
Deferred taxes $ - $ -
============= ===============
20. Litigation:
Andrea Electronics Corp. Patent and Trademark Litigation
By a letter dated September 9, 1997, our competitor, Andrea Electronics
Corporation, informed us that it believed NCT was improperly using the term "ANR
Ready" and infringing upon a trademark owned by Andrea. Representatives of
existing and/or potential customers also have informed us that Andrea has made
statements claiming that our manufacture and/or sale of specified in-flight
entertainment system products infringe a patent owned by the competitor. We
received a notice dated March 24, 1998 from Andrea notifying us of its concerns
but not confirming any intention to file suit against NCT. NCT exchanged
correspondence with Andrea, but we could not come to any resolution. NCT was
informed by representatives of existing and/or potential customers that Andrea
was continuing to state or imply that NCT was infringing.
On November 17, 1998, NCT and NCT Hearing filed a complaint against Andrea
in the U.S. District Court for the Eastern District of New York. Our complaint
requested that the court enter judgment in our favor as follows: (1) declare
that the two Andrea patents at issue are invalid and unenforceable and that our
products do not infringe upon them; (2) declare that the two Andrea patents at
issue are unenforceable due to misuse by Andrea; (3) award NCT compensatory
damages of no less than $5 million and punitive damages of $50 million for
Andrea's tortious interference with NCT's prospective contractual arrangements;
(4) enjoin Andrea from stating or implying that NCT's products or their use are
infringing any Andrea-owned patents; and (5) award any other relief the court
deems appropriate.
On or about December 30, 1998, Andrea filed its answer to our complaint.
Andrea generally denied the above allegations and brought counterclaims against
NCT and NCT Hearing. These include claims that NCT has infringed the two Andrea
patents at issue, that NCT's use of the "ANR Ready" trademark violated the
Lanham Act and that NCT unfairly competed with Andrea by using the trademark.
NCT and NCT Hearing have since filed a reply and requested that the court
dismiss the counterclaims and enter judgment in our favor. NCT also argued that
Andrea is prevented from recovering under various equitable theories and
defenses. Discovery in this suit commenced in mid-1999. No trial date has yet
been set. In January 2002, NCT's two co-counsel in this action withdrew from the
case because of NCT's untimely payments for legal services. NCT is seeking to
retain new counsel in the action.
Management cannot assess the likelihood that resolution of this suit will
or will not have a material adverse effect on NCT's financial position or
operations. Approximately 3% of our business depends on the patents in
F-47
dispute. However, in the event that the lawsuit does result in a substantial
final judgment against NCT, the judgment could have a material effect on our
quarterly or annual operating results.
Schwebel Capital Litigation
On June 10, 1998, Schwebel Capital Investments, Inc. filed suit in a
Maryland state court against NCT and Michael J. Parrella, our Chief Executive
Officer and Director. The complaint alleges that NCT breached, and Mr. Parrella
interfered with, a purported contract entered into in 1996 between NCT and
Schwebel Capital. Schwebel Capital claims that under the contract, NCT agreed to
pay Schwebel Capital commissions when NCT received capital from its investors.
The complaint further alleges that Schwebel Capital is due commissions totaling
$1.5 million because NCT refused to honor Schwebel Capital's right of first
refusal. Schwebel Capital's complaint sought $1,673,000 in compensatory damages,
$50,000 in punitive damages and $50,000 in attorneys' fees from NCT, as well as
$150,000 in compensatory damages, $500,000 in punitive damages and $50,000 in
attorneys' fees from Mr. Parrella. Subsequently, the court granted a motion to
dismiss the claims against Mr. Parrella. On August 8, 2001, NCT entered into a
settlement agreement with Schwebel Capital. NCT paid a nominal amount to settle
all remaining claims of Schwebel Capital against NCT. The settlement terminating
the litigation was approved by the court on or about September 7, 2001.
NCT Audio Arbitration
On September 16, 1999, NCT Audio filed a demand for arbitration before the
American Arbitration Association in Wilmington, Delaware, against Top Source
Technologies, Inc. and its subsidiary, Top Source Automotive, Inc., alleging,
among other things, breach of the asset purchase agreement by which TSA was to
sell its assets to NCT Audio, breach of fiduciary duties to a shareholder (NCT
Audio holds 15% of the outstanding stock of TSA), and breach of the obligations
of good faith and fair dealing. NCT Audio seeks rescission of the asset 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, TST and TSA filed an answer and
counterclaim in connection with the arbitration proceeding. They asserted the
counterclaim to recover (1) 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; (2) expenses associated
with extending NCT Audio's time to close the transaction; (3) the monies and
stock owed under the extension agreements; and (4) specific legal expenses
incurred by them.
The above arbitration arises out of an asset purchase agreement, dated
August 14, 1998, by and between NCT, TST and TSA, whereby NCT was granted the
exclusive option to purchase substantially all of the assets of TSA. Pursuant to
the asset purchase agreement, NCT became the owner of 20% of the shares of TSA
and TST owned the remaining 80% interest in TSA. The closing date of the asset
purchase agreement was extended on two occasions, March 30, 1999 and May 25,
1999, for substantial additional consideration paid by NCT, including NCT's
surrender of 5% of the shares of TSA. One day after the May 25th extension
agreement was executed, TST and TSA announced in a press release that they had
negotiated a competing transaction with Onkyo America, Inc. whereby Onkyo would
purchase substantially all of the assets of TSA in the event that NCT was unable
to close by the deadline of July 15, 1999.
As a direct result of the announcement of a competing transaction, NCT was
unable to obtain funding to close the transaction by July 15, 1999. NCT
attempted to enjoin the closing of the transaction with Onkyo by way of an
application for preliminary injunction or temporary restraining order brought in
the Delaware Chancery Court on September 16, 1999. This action sought to enjoin
TST and TSA from closing with Onkyo until a decision was rendered in connection
with our demand for Arbitration filed with the American Arbitration Association
on September 16, 1999. On September 17, 1999, prior to the scheduling of the
hearing regarding the application for preliminary injunction or temporary
restraining order, the attorney and agent of TST and TSA orally represented to
counsel for NCT that the Onkyo transaction was not scheduled to close for at
least a month. On that basis, NCT agreed not to seek an immediate hearing on the
application. Less than two weeks after that representation, on October 1, 1999,
TST and Onkyo closed their transaction without any notice to NCT, a minority
shareholder of
F-48
TSA. Since the purpose of the injunction was to prohibit the sale of TSA's
assets to Onkyo, and that had already occurred, NCT withdrew its application for
injunctive relief and has proceeded with the arbitration.
NCT's demand for arbitration sets forth several causes of action, including
breach of the duties of good faith and fair dealing in connection with the asset
purchase agreement, breach of the exclusive option provision of the asset
purchase agreement, breach of the payout provisions, fraudulent inducement
and/or fraudulent concealment in connection with the May 25, 1999 extension
agreement, negligent misrepresentation by failing to disclose the negotiation of
a competing transaction with Onkyo, and breach of the fiduciary duties owed to
minority shareholders. The demand for arbitration requests specific performance
or rescission of the asset purchase agreement, and further claims damages due to
TST's and TSA's breaches of the duties of good faith and fair dealing, breaches
of the fiduciary duties owed by the majority shareholders to minority
shareholders, and fraudulent misrepresentations in connection with the asset
purchase agreement and the amendments thereto. NCT seeks recovery of the $3.5
million invested in the asset purchase agreement, or recovery of its pro rata
share of the sales proceeds paid by Onkyo for TSA's assets.
On December 8, 1999, TST and TSA brought a counterclaim against NCT in the
arbitration action seeking the following: the sum of $204,315 allegedly due and
owing on a promissory note issued by NCT as consideration for the extension of
the closing date in the asset purchase agreement from March 31, 1999 to May 28,
1999; the monetary equivalent of $100,000 of NCT's convertible preferred stock
allegedly owed to TSA by NCT as consideration for extending the closing date to
May 28, 1999; the sum of $1,000,000, constituting the difference between the
price to be paid by NCT under the asset purchase agreement and the actual price
paid by Onkyo for TSA's assets; reimbursement of expenses incurred by TST and
TSA in connection with the failure to close the asset purchase agreement in
excess of $300,000; and recovery of legal fees in connection with the
arbitration and the application for a temporary injunction. NCT maintains that
the promissory note and stock were procured by fraud perpetrated by TST and/or
TSA and otherwise denies the allegations of the counterclaims. On July 17, 2000,
NCT Audio filed a revised demand for arbitration, which elaborated on the
claims, arguments and requests for relief of the original demand for
arbitration. On November 27, 2001, NCT Audio filed an amended arbitration claim,
which further expanded on the claims, arguments and requests for relief of the
original and revised demands for arbitration and which added a claim for breach
by TST and TSA of a confidentiality agreement entered into with NCT Audio in
connection with their August 14, 1998 asset purchase agreement.
On or about December 18, 2001, while the parties were completing discovery
with an arbitration hearing scheduled to begin on January 21, 2002, TST (under
its new name Global Technovations, Inc.) and TSA filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the
District of Delaware. Under federal law, those filings stayed NCT's arbitration
proceedings with TSA and TST. Shortly after the initial filings, the bankruptcy
case was transferred to the U.S. Bankruptcy Court for the Eastern District of
Michigan. NCT Audio was appointed to the creditors' committee in the bankruptcy
case. NCT will file a proof of claim in the bankruptcy case, for amounts owed to
it, and is considering whether any non-bankruptcy avenues of collection may
exist.
Theater Radio Network - InsiderStreet Litigation
On December 6, 2000, our subsidiary DMC Cinema (formerly known as Theater
Radio Network) filed suit against InsiderStreet.com, Inc. in the Circuit Court
of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The
complaint alleges that InsiderStreet breached a May 5, 2000 advertising
agreement with Theater Radio Network and seeks a declaratory judgment and
specific performance of the agreement. The agreement provided that, in exchange
for advertising services performed by Theater Radio Network, InsiderStreet would
deliver to Theater Radio Network $3 million in common stock of InsiderStreet,
with an adjustment in the number of shares to ensure that the total stock
delivered was worth at least $2,000,000 on May 10, 2001 and with registration of
all stock delivered. InsiderStreet has to date made only a partial delivery of
shares and has not registered any of the shares delivered. Discovery in this
litigation has begun. On October 23, 2001, Theater Radio Network terminated its
representation by outside counsel in this action due to a possible conflict of
interest. On March 26, 2002, Theater Radio Network retained new counsel to
continue this action. Management believes that at this early stage it cannot
assess the likelihood of a favorable outcome. Further, since the amount of
damages, if any, DMC Cinema may
F-49
recover cannot be quantified until the legal process is complete, no amount has
been recorded in the financial statements.
Theater Radio Network - Esrick Litigation
On February 5, 2001, Steven Esrick, a former shareholder of Theater Radio
Network, filed suit against DMC Cinema (formerly known as Theater Radio Network)
and Theater Radio Network's former Chief Executive Officer and President in the
Circuit Court of the Sixth Judicial Circuit for Pinellas County, Florida. The
plaintiff's original complaint claimed that Theater Radio Network breached an
alleged oral escrow agreement with the plaintiff arising out of the sale of
Theater Radio Network stock to DMC Cinema by Theater Radio Network's
shareholders and sought unspecified damages. DMC Cinema denied the material
allegations of this complaint and moved to dismiss the case against it. On
November 8, 2001, while DMC Cinema's motion to dismiss was pending, Esrick
amended his complaint, substituting for his original claim the claim that DMC
Cinema breached an alleged agreement to deliver to him 50,000 registered shares
of stock of InsiderStreet, Inc. On December 13, 2001, DMC Cinema filed an Answer
to the amended complaint in which it denied the material allegations of the
amended complaint. DMC Cinema intends to vigorously defend the action.
Currently, the parties are conducting discovery. Management, in consultation
with legal counsel, cannot at this stage determine the likelihood of an
unfavorable outcome.
Production Resource Group Litigation
On June 6, 2001, Production Resource Group began legal proceedings against
NCT and our subsidiary, Distributed Media Corporation, in the Superior Court for
the Judicial District of Fairfield County, Connecticut. Production Resource
Group's complaint alleges that NCT and DMC breached the terms of a July 19, 1999
lease, promissory note and warrant entered into in connection with the lease of
some DMC Sight & Sound(TM) equipment. The complaint also alleges that NCT and
DMC breached a January 11, 2001 resolution agreement designed to settle disputes
between the parties concerning the July 19, 1999 transactions, that we breached
a May 11, 2001 agreement designed to settle disputes between the parties
concerning the July 19, 1999 transactions and the January 11, 2001 resolution
agreement, and that we engaged in misrepresentations and fraud in connection
with these matters. The plaintiff filed an application for pre-judgment remedy
seeking to attach or garnish $2.25 million of our assets. On July 26, 2001, the
court returned an order for pre-judgment remedy having found probable cause to
sustain the validity of Production Resource Group's claim and gave Production
Resource Group the right to attach or garnish up to $2.1 million of specified
assets of NCT and Distributed Media Corporation. As of April 10, 2002,
approximately $78,000 in NCT's cash or cash equivalent assets have actually been
attached or garnished. On October 4, 2001, we filed an answer to the plaintiff's
complaint, generally denying the plaintiff's allegations, seeking dismissal of
the complaint and counterclaiming for breach of Production Resource Group's
obligation to deliver equipment.
On December 20, 2001, NCT and DMC accepted an Offer of Judgment requiring
NCT and DMC to pay Production Resource Group $2.0 million. That judgment was
entered on January 17, 2002. Production Resource Group is currently conducting
post-judgment discovery regarding enforcement of that judgment. To the extent
that payment of the judgment is in cash, such payment could be material to our
cash position. As of December 31, 2001, we have recorded all anticipated
liability related to this judgment.
On January 2, 2002, outside the scope of the judgment entered into with
NCT, Production Resource Group amended its complaint to allege that NCT's
Chairman and Chief Executive Officer Michael Parrella, in dealing with
Production Resource Group on behalf of NCT, committed unfair trade practices,
fraud and breaches of good faith and fair dealing. Mr. Parrella has told NCT
that he intends to deny the allegations. To the extent that NCT may ultimately
indemnify Mr. Parrella for any liabilities arising out of these allegations and
for related legal fees, we believe that our directors and officers
indemnification insurance (after payment of a $100,000 deductible) will be
adequate to cover such payments.
Litigation arising after December 31, 2001 is described in Note 26.
F-50
NCT 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 our financial position and results of
operations. In the circumstances, based upon the information presently
available, management believes that adequate provisions have been estimated and
included in the consolidated financial statements for these matters.
21. 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 of dollars)
Year ending December 31, Amount
----------
2002 $ 599
2003 606
2004 514
2005 513
2006 442
Thereafter 1,257
----------
Total minimum lease payments $ 3,931
==========
Rent expense was $0.6 million, $1.1 million and $1.0 million for the years
ended December 31, 1999, 2000 and 2001, respectively.
Benefit Plan Liability:
In April 1996, the company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, various
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 15, 2002, the company was
not aware of any material unrecorded benefit claim liability.
Employment Contracts:
In connection with the Midcore acquisition on August 29, 2000 (see Note 2),
the company entered into employment agreements with the three principal
shareholders of the acquired company. These agreements are each for a term of
three years. Compensation and benefits called for in the agreements for two
individuals are an annual base salary of $100,000, an annual bonus of at least
$50,000, subject to the achievement of specified bonus criteria, and, at the
discretion of the Board of Directors of NCT, incentive stock options to purchase
common shares of NCT. Compensation and benefits under the agreement for another
individual are annual base salary of 52,236 in British pounds sterling,
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, incentive stock options to
purchase common shares of NCT.
On August 24, 2000, DMC Cinema entered into employment agreements with
the former Chief Executive Officer and shareholder of Theater Radio Network, and
the former president and shareholder of Theater Radio Network. These agreements
have a term expiring on September 30, 2003. For the former CEO, compensation per
the agreement is an annual base salary of $135,000, with an incentive cash award
of up to 75% of his salary based
F-51
upon the satisfaction of targets established by management and approved by the
DMC Cinema Board of Directors on or before January 31 of each year for such
year. For the former president, compensation per the agreement is an annual base
salary of $120,000, with an incentive cash award as negotiated and sales
commissions equal to 5% of the gross amount of all advertising procured by him
and 3% of the gross amount of all other DMC Cinema advertising. In addition, on
August 24, 2000, in exchange for industry knowledge, DMC Cinema agreed to grant
"Founder's" stock equal to 4.0625% of DMC Cinema's outstanding common stock to
each. Further, stock options to purchase common shares of DMC may also be
granted to each, at the discretion of the Board of Directors of DMC. On July 31,
2001, the former CEO resigned from DMC Cinema.
Minimum Royalty Commitments:
As of December 31, 2001, the company is obligated under various agreements
for minimum royalty payments of $60,000 for each of the years ended December 31,
2002, 2003 and 2004.
Contingencies:
The company may have a contingent liability arising out of a possible
violation of Section 5 of the Securities Act in connection with the issuance of
shares of its common stock to satisfy payment obligations to some of its service
providers, vendors and other third parties. Should a court determine that a
violation of Section 5 has occurred, each such recipient of our shares may have
a right for a period of one year from the date of the purchase to obtain
recovery of the consideration given in connection with their purchase of common
shares offered in violation of the Securities Act or, if they have already sold
the stock, to sue the company for damages resulting from their purchase of
common shares to the extent the net proceeds they received were insufficient to
cover the company's obligations to them.
On April 12, 2001, NCT and Crammer Road cancelled the private equity credit
agreement dated September 27, 2000 and finalized a new equity credit agreement.
Under the September 27, 2000 credit agreement, we received $0.5 million from
Crammer Road and issued Crammer Road 2.8 million shares of our common stock. The
new credit agreement provides that shares of up to $50 million of our common
stock may be sold to Crammer Road pursuant to put notices delivered by the
company to Crammer Road. The terms of the credit agreement obligate the company
to put $17 million of our common stock, known as the minimum commitment amount,
to Crammer Road. The minimum commitment amount provides for the sale of NCT's
common stock to Crammer Road at an accelerating discount to the market price of
our common stock on the first $12 million of puts and a fixed discount to market
of 10% for the remaining $5 million of committed puts by us. Assuming we
commence puts on May 1, 2002, the accelerating discount to the market price of
our common stock on the first $12 million of puts may exceed 44% because from
the initial discount of 12.5%, the discount increases each month after May 27,
2001 by 2%. Our required monthly put amount may vary based upon trading volume
of our common stock. In exchange for the first $17 million of our shares under
the minimum commitment amount, Crammer Road is obliged to deliver to us 12,000
shares of common stock of DMC NY and cash in the aggregate amount of $3.0
million. We accrued the $14.0 million cost of our obligation to repurchase the
12 DMC licenses. Such amount is included in write downs of investment and
repurchased licenses in our consolidated statements of operations and in other
liabilities in our consolidated balance sheets (see Note 12). There is no
independent valuation to support the fair market value of DMC NY. The company's
Board of Directors has made a determination that the agreed upon price for DMC
NY is fair. Monthly put notices were required to have been delivered commencing
October 1, 2001, although NCT has made no such deliveries to date. Each monthly
put notice up to the $17 million shall specify a put amount equal to the lesser
of $2.5 million or 150% of the weighted average volume for the common stock for
the 20 trading days preceding the put notice. The terms of the new credit line
further provide that we may elect to put up to an additional $33 million of our
common stock to Crammer Road (at a fixed discount to market of 10%) for cash to
finance our working capital needs. Each put notice that we elect to deliver to
Crammer Road beyond the minimum commitment amount shall specify a put amount
equal to the lesser of $2.0 million or 150% of the weighted average volume for
the common stock for the 20 trading days preceding the put notice. The issuance
and sale of our shares of common stock under this credit agreement will have an
immediate dilutive effect on existing holders of our common stock. We issued a
warrant to Crammer Road for 250,000 shares of our common stock with an exercise
price of $0.14 per share. The warrant for 250,000 shares (with an exercise price
of $0.34 per share) issued to Crammer Road under the September 27, 2000 credit
agreement was cancelled. For each $0.1 million of our
F-52
common stock sold under the new credit line, Crammer Road is entitled to an
additional warrant for 1,000 shares of our common stock at an exercise price per
share equal to 100% of the average of the closing prices of our common stock for
20 trading days prior to issuance of the warrant. NCT and Crammer Road are in
the process of negotiating an amendment to the new equity credit agreement,
which would, among other things, remove the issuance of warrants on each put
closing date. To date, the company has not sold any shares of its common stock
under this agreement. We are required to file a registration statement on Form
S-1 registering for resale no less than 125% of the number of shares of our
common stock that are issuable pursuant to the minimum commitment amount under
the credit line. The resale registration statement covering these credit line
shares was required to have been effective by September 15, 2001. However,
because no put notices have yet been delivered by NCT to Crammer Road, NCT has
not incurred any liability as a result of the passage of that date.
Additionally, if we fail to issue and deliver shares for the minimum commitment
amount during the commitment period, which terminates 18 months after the
commitment period begins, NCT is obligated to pay Crammer Road in immediately
available funds an amount equal to the product of (i) the minimum commitment
amount, less the aggregate value of shares of our common stock actually
delivered to Crammer Road under the credit line and (ii) the then applicable
discount.
On September 4, 1998, the company acquired substantially all of the issued
and outstanding common stock of Advancel Logic Corporation, 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 among the company, Advancel and various shareholders of
Advancel. 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 million shares of the company's common 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 1999, 2000, 2001 and 2002. On April
25, 2000, the Advancel shareholders and NCT effectively amended the stock
purchase agreement, eliminating all of NCT's earnout payment obligations.
22. Business Segment Information:
Management views the company as being organized into three operating
business segments: Media, Communications and Technology. Reportable segment data
for the years ended December 31, 1999, 2000 and 2001 are provided in the table
below. Information about our business segments is found following the table.
The Other data is used to reconcile the reportable segment data to the
consolidated financial statements and is segregated into two categories,
Other-corporate and Other-consolidating. Other-corporate consists of items
maintained at the company's corporate headquarters and not allocated to the
segments. This includes most of the company's debt and related cash, cash
equivalents and related net interest expense, litigation liabilities and
non-operating fixed assets. Also included in the components of revenues
attributed to Other-corporate are license fees and royalty revenues from
subsidiaries that are offset (eliminated) in the Other-consolidating column.
Other-consolidating consists of items eliminated in consolidation such as
intercompany revenues.
F-53
(In thousands of dollars) Segment
-----------------------------------------------------------------------------------------
Total
Reportable ------ Other ------ Grand
Media Communications Technology Segments Corporate Consolidating Total
-----------------------------------------------------------------------------------------
Year Ended
December 31, 2001:
License Fees and Royalties $ 1,834 $ 2,639 $ 1,028 $ 5,501 $ 10,165 $ (10,033) $ 5,633
Other Revenue - External 337 4,642 - 4,979 - - 4,979
Other Revenue - Other Operating Segments 441 738 - 1,179 - (1,179) -
Interest (Income) Expense, net 528 4,005 76 4,609 1,518 - 6,127
Depreciation/Amortization 1,689 1,612 120 3,421 904 (1,348) 2,977
Loss before cumulative effect of
accounting change (14,282) (27,430) (4,361) (46,073) (25,349) (4,656) (76,078)
Cumulative effect of accounting change - (1,582) - (1,582) - - (1,582)
Net Loss (14,282) (29,012) (4,361) (47,655) (25,349) (4,656) (77,660)
Segment Assets 30,708 16,701 2,991 50,400 13,676 (44,067) 20,009
Capital Expenditures 991 1,780 - 2,771 10 - 2,781
Year Ended
December 31, 2000:
License Fees and Royalties $ 2,065 $ 3,257 $ 3,550 $ 8,872 $ 6,331 $ (5,275) $ 9,928
Other Revenue - External 1,145 1,767 - 2,912 - - 2,912
Other Revenue - Other Operating Segments 331 887 - 1,218 - (1,218) -
Interest (Income) Expense, net 286 52 27 365 1,484 - 1,849
Depreciation/Amortization 203 277 50 530 1,489 (5) 2,014
Net (Loss) Income (3,333) (6,002) 2,952 (6,383) (503) (3,438) (10,324)
Segment Assets 12,786 20,355 6,610 39,751 7,381 (7,750) 39,382
Capital Expenditures 27 75 - 102 220 - 322
Year Ended
December 31, 1999:
License Fees and Royalties $ 1,356 $ 1,062 $ 1,100 $ 3,518 $ 4,093 $ (4,059) $ 3,552
Other Revenue - External 852 1,585 1,074 3,511 - - 3,511
Other Revenue - Other Operating Segments 4 866 - 870 - (870) -
Interest (Income) Expense, net 148 1 47 196 356 - 552
Depreciation/Amortization 14 43 16 73 1,897 - 1,970
Net (Loss) Income (13,418) (5,971) (1,956) (21,345) 1,103 (3,529) (23,771)
Segment Assets 3,191 2,852 767 6,810 6,902 (335) 13,377
Capital Expenditures 26 5 3 34 17 - 51
MEDIA:
NCT Audio Products, Inc.:
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 and end-users.
F-54
Distributed Media Corporation:
DMC provides place-based broadcast and billboard advertising through a
microbroadcasting network of Sight & Sound(TM) systems within
commercial/professional settings. The Sight & Sound(TM) systems consist of flat
panel transducer-based speakers (provided by NCT Audio), a personal computer
containing DMC's Sight & Sound software, telephone access to the Internet,
amplifiers and related components. The 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.
COMMUNICATIONS:
NCT Hearing Products, Inc.:
NCT Hearing designs, develops and markets active noise reduction 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, original equipment manufacturers and the
airline industry.
Pro Tech Communications, Inc.:
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.
Noise Cancellation Technologies (Europe) Ltd.:
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 Software, Inc.:
The principal activity of Midcore is as a developer of innovative software
based solutions that address the 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.com, Inc.:
ConnectClearly 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, personal computer voice and music,
telephone answering devices, real-time multimedia multitasking, toys and games
and
F-55
playback devices. ConnectClearly products include the ClearSpeech(R)-Microphone
and the ClearSpeech(R)-Speaker. The majority of ConnectClearly's sales are in
North America. Principal markets for ConnectClearly are the telecommunications
industries and principal customers are original equipment manufacturers, system
integrators and end-users.
Artera Group, Inc.:
Artera Group provides small and medium-sized enterprises, as well as remote
workers and branch locations of large corporations, with a comprehensive range
of highly-reliable and scalable global Internet access and networking services
including backbone connection services, high-speed broadband access, virtual
private networks, web hosting and design, server collocation, e-commerce and
other enhanced services. Artera's broadband communications technology, Artera
Turbo, improves the effective performance of communication lines via a
proprietary series of optimization strategies that increase efficiencies in the
movement and storage of electronic data.
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(TM) 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.
23. Geographical Information (by country of origin) - Total Segments:
(In thousands of dollars)
As of December 31, and
For the Years then Ended
--------------------------------------------------------
1999 2000 2001
---------------- --------------- ---------------
Revenues
United States $ 3,174 $ 11,322 $ 6,916
Europe 3,755 1,250 294
Far East 134 268 3,402
---------------- --------------- ---------------
Total Revenues $ 7,063 $ 12,840 $ 10,612
================ =============== ===============
Net Loss
United States $ 23,353 $ 10,133 $ 74,571
Europe (86) (117) 2,974
Far East 504 308 115
---------------- --------------- ---------------
Total $ 23,771 $ 10,324 $ 77,660
================ =============== ===============
Identifiable Assets
United States $ 13,174 $ 39,237 $ 19,272
Europe 164 145 737
Far East 39 - -
---------------- --------------- ---------------
Total $ 13,377 $ 39,382 $ 20,009
================ =============== ===============
F-56
24. Selected Quarterly Financial Data (Unaudited):
The following tables contain selected quarterly financial data for each
quarter of 2000 and 2001. 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.
(Unaudited; in thousands, except per share data)
Year Ended December 31, 2001
----------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------- -----
Net revenue $ 2,130 $ 2,950 $ 2,871 $ 2,661 $ 10,612
Gross profit (loss) 1,310 2,385 2,229 1,014 6,938
Loss attributable to common stockholders (8,881) (28,123) (8,520) (33,497) (79,021)
Loss per share - basic and diluted $ (0.03) $ (0.07) $ (0.02) $ (0.09) $ (0.21)
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
Loss attributable to common stockholders (7,211) (3,284) (319) (4,296) (15,110)
Loss per share - basic and diluted $ (0.03) $ (0.01) $ - $ (0.01) $ (0.05)
25. Costs of Exiting Activities:
On December 18, 2001, the Board of Directors of Artera Group International
Limited decided to suspend under-performing operations and reduce employees. In
connection therewith, the company has recorded a write-down of $1.1 million
principally relating to equipment and other costs.
On March 20 and 21, 2002, the sole shareholder and Board of Directors,
respectively, of Artera Group International Limited, a U.K.-based subsidiary,
decided that corporation should cease all operations and be liquidated.
Cessation of operations occurred on April 5, 2002 and liquidation proceedings
are pending.
In December 2001, management decided to close the company's Maryland
research facilities. In connection therewith, the company has recorded a charge
of $0.7 million principally relating to lease termination and other costs. The
abandonment of this facility was completed in the first quarter of 2002.
These costs have been included in the consolidated statement of operations
as "costs of exiting activities."
During the first quarter of 2002, the company communicated its termination
to certain employees (26 Artera employees and ten Maryland facility employees).
In accordance with EITF 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity, such costs of
approximately $0.3 million are to be accrued subsequent to December 31, 2001.
On February 28, 2002, DMC Cinema, Inc. ceased business operations. DMC
Cinema had no material operations at date of discontinuance.
26. Subsequent Events (unaudited):
Debt Issuance
On January 10, 2002, NCT entered into a subscription agreement with Alpha
Capital Aktiengesellschaft pursuant to a private placement of a $0.6 million
convertible note as consideration for $0.5 million related to curing
F-57
the default on bridge financing notes dated November 14, 2001 and December 27,
2001 and $0.1 million in cash and expenses. The new convertible note matures on
January 10, 2004 and bears interest at 8% per annum payable at maturity. The
note is convertible into shares of our common stock at the lower of $0.07 or 80%
of the five-day average closing bid price of our stock for the five trading days
preceding conversion. In conjunction with the note, a five-year warrant was
issued to purchase approximately 5 million shares of our common stock at the
lower of $0.07 per share or the lowest closing bid price of the common stock
through June 28, 2002. NCT is obligated to register shares of its common stock
issuable upon conversion of this note and upon exercise of the warrant.
On March 11, 2002, NCT entered into a subscription agreement with Alpha
Capital Aktiengesellschaft pursuant to a private placement of its $400,000
convertible note. The consideration from Alpha Capital consisted of $352,500 in
cash, net of $47,500 for legal fees and finder's fees paid to a third party that
arranged for the financing. The note bears interest at 8% per annum payable at
maturity and matures March 11, 2004. The note is convertible into shares of our
common stock at the lower of $0.07 or 80% of the five-day average closing bid
price of our stock for the five trading days preceding conversion. NCT is
obligated to register shares of its common stock for the conversion of this
note.
Transactions with Carole Salkind
On January 11, 2002, NCT issued a convertible note payable to Carole
Salkind for $2.2 million as consideration for $1.9 million related to curing the
default on a convertible note dated August 22, 2001 and $0.3 million in cash.
The note matures on January 11, 2003, includes a right to convert into our
common stock, Pro Tech common stock or the common stock of any other NCT
subsidiary that has an initial public offering and bears interest at 8% per
annum. In conjunction with the note, a five-year warrant was issued to Ms.
Salkind to purchase approximately 2.8 million shares of our common stock at
$0.079 per share. Ms. Salkind was also granted a five-year option to purchase a
10% equity interest in Artera Group, Inc. common stock at 10% of the net book
value adjusted for any third party equity investment.
On January 25, 2002, NCT issued a convertible note payable to Ms. Salkind
for $0.7 million as consideration for $0.7 million in cash. The note matures on
January 25, 2003, includes a right to convert into NCT common stock, Pro Tech
common stock or the common stock of any other NCT subsidiary that has an initial
public offering and bears interest at 8% per annum. In conjunction with the
note, a five-year warrant was issued to Ms. Salkind to purchase approximately
0.8 million shares of our common stock at $0.09 per share.
On January 25, 2002, NCT issued a convertible note payable to Ms. Salkind
for $0.3 million as consideration for $0.3 million in cash paid by Carole
Salkind, for the benefit of NCT, into an escrow account. The escrow account was
a part of another transaction in which NCT engaged with an unrelated third
party. The note matured on February 8, 2002. That note for $0.3 million was
satisfied as to the principal amount due by the release of $0.3 million from
escrow to Carole Salkind. In conjunction with the note, a five-year warrant was
issued to Ms. Salkind to purchase approximately 0.3 million shares of our common
stock at $0.09 per share.
On February 27, 2002, a new note for the default amount and accrued
interest (less interest credited on the escrow account) due on the January 25,
2002 $0.3 million note along with $0.8 million loaned by Carole Salkind was
issued by NCT. This note matures on February 27, 2003 and bears interest at 8%
per annum payable at maturity. This note is convertible into shares of NCT
common stock (at $0.079) and may be exchanged for shares of common stock of Pro
Tech (at $0.06) or the common stock of any other NCT subsidiary that has an
initial public offering (at the initial public offering prices). In conjunction
with the note, a five-year warrant was issued to Ms. Salkind to purchase
approximately 1.0 million shares of our common stock at $0.079 per share.
On March 1, 2002, NCT issued a convertible note payable to Ms. Salkind for
$0.4 million as consideration for $0.4 million in cash. The note is convertible
into NCT common stock, or at Ms. Salkind's election, exchangeable for Pro Tech
common stock or the common stock of any other NCT subsidiary that has an initial
public offering. The note matures on March 1, 2003 and bears interest at 8% per
annum. In conjunction with the note, a five-year warrant was issued to Ms.
Salkind to purchase approximately 0.4 million shares of our common stock at
$0.079 per share.
F-58
On March 27, 2002, we defaulted on the repayment of the $1,000,000 note
dated March 27, 2000. We received $300,000 from Ms. Salkind on April 1, 2002 and
$350,000 from her on April 15, 2002. We expect that these proceeds will be
rolled into a new note along with the March 27, 2000 note, default penalty and
accrued interest thereon.
Litigation
On January 11, 2002, Broadcast Music, Inc. ("BMI") commenced two
arbitration proceedings against Theater Radio Network with the American
Arbitration Association, for the respective amounts of approximately $153,400
and $62,100. These proceedings were brought under agreements with Theater Radio
Network dated December 11, 1998 (amended December 22, 1998) and June 29, 2001.
BMI's claims are for license fees arising out of the alleged publication by
Theater Radio Network of music in the BMI repertoire. Theater Radio Network
denied the allegations of BMI. No further actions have occurred in these
proceedings.
On or about January 31, 2002, an action was brought against NCT by West
Nursery Land Holding Limited Partnership in the District Court of Maryland for
Anne Arundel County. This action sought repossession of premises at 1025 West
Nursery Road, Linthicum, Maryland and an award of approximately $89,000 in
connection with NCT's shutdown of its offices at, and abandonment of, such
premises. On or about February 7, 2002, judgment as requested in the complaint
was entered by the Court. Such amount is included in the company's accruals for
costs of exiting activities (see Note 25).
On February 21, 2002, an action was brought by Mesa Partners, Inc. against
the company and DMC in Supreme Court, New York, Suffolk County for breach of an
alleged contract for financial consulting services. The complaint seeks
approximately $429,600 plus interest, attorneys' fees and costs. On April 22,
2002, NCT and DMC filed an answer to the complaint in which they denied any
liability. NCT and DMC intend to defend this action vigorously.
F-59
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, 2001 and
for each of the years ended December 31, 2001 and 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
April 10, 2002
F-60
INDEPENDENT AUDITOR'S 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
F-61
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
- ------------------------------------- ------------- ------------------------------------- ------------------ --------------------
Balance at Charged to
beginning Charged in costs other accounts- Deductions- Balance at end of
Description of period and expenses Describe Describe period
- ------------------------------------- ------------- ----------------- --------------- ---------------- -----------------
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 228 $ 77 $ (83) (b) $ (139) (c) $ 83
Year ended December 31, 2000 102 (a) 803 (800) (b) (35) (c) 70
Year ended December 31, 2001 103 (a) 249 (46) (b) (8) (c) 298
Reserve for uncollectible amounts:
Year ended December 31, 1999 - 1,500 (1,500) (b) - -
Year ended December 31, 2000 - - - - -
Year ended December 31, 2001 - 1,000 - - 1,000
Allowance for inventory obsolescence:
Year ended December 31, 1999 508 21 - - 529
Year ended December 31, 2000 529 100 (529) (f) - 100
Year ended December 31, 2001 100 691 - - 791
Accumulated depreciation:
Year ended December 31, 1999 3,274 410 - - 3,684
Year ended December 31, 2000 4,042 (a) 334 - (24) (e) 4,352
Year ended December 31, 2001 4,352 936 - (1,809) (e) 3,479
Accumulated goodwill amortization:
Year ended December 31, 1999 68 970 3,125 (f) - 4,163
Year ended December 31, 2000 4,163 1,019 - - 5,182
Year ended December 31, 2001 5,182 1,691 14,114 (f) (19,863) (g) 1,124
Accumulated patent amortization:
Year ended December 31, 1999 2,293 585 - - 2,878
Year ended December 31, 2000 2,878 658 - - 3,536
Year ended December 31, 2001 3,536 350 - - 3,886
Attention is directed to the foregoing accountants' reports and to the
accompanying notes to our consolidated financial statements.
Footnotes:
(a) Increase from prior year-end due to acquisitions.
(b) Accounts written-off directly to expense.
(c) Accounts previously reserved for, written-off in current year.
(d) Apply to specific prior year-end inventory items.
(e) Write off fixed asset dispositions against reserve.
(f) Write down goodwill to estimated fair value.
(g) Write off fully amortized goodwill.
F-62
NCT Group, Inc.
Index to Exhibits
Item 14(a)(3)
Exhibit
Number Description of Exhibit
- --------- ----------------------
3(a) Second Restated Certificate of Incorporation of NCT Group, Inc. filed in
the Office of the Secretary of State of the State of Delaware on August 15,
2001.
3(b) By-laws of NCT Group, Inc., as amended to date.
4(a) 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(b) 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(c) 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(d) 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(e) Secretary's Certificate dated February 1, 1999, as to a five (5) year
extension of the expiration dates of the Warrants described in 4(a), (b),
(c) and (d) above.
4(f) Warrant issued to Carole Salkind for the purchase of shares of common stock
dated February 13, 2001, filed as an exhibit to Schedule 13D filed on
February 13, 2001.
4(g) Warrant issued to Carole Salkind for the purchase of 500,000 shares of
common stock dated May 14, 2001, filed as an exhibit to Schedule 13D filed
by NCT on behalf of Ms. Salkind on May 18, 2001.
4(h) Warrant issued to Carole Salkind for the purchase of 625,000 shares of
common stock dated August 22, 2001, filed as an exhibit to Schedule 13D
filed on behalf of Carole Salkind on September 14, 2001.
4(i) Warrant issued to Carole Salkind for the purchase of 1,000,000 shares of
common stock dated September 28, 2001, incorporated herein by reference to
Exhibit 10(an)(1) of NCT's Pre-effective Amendment No. 2 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on November 7,
2001.
57
4(j) Letter dated October 25, 2001 amending terms of October 26, 2000 warrant to
Libra Finance, S.A., incorporated herein by reference to Exhibit 10(ao) of
NCT's Pre-effective Amendment No. 2 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 7, 2001.
4(k) Warrant dated October 25, 2001 issued to Libra Finance S.A. for the
purchase of 20,000,000 shares of common stock, incorporated herein by
reference to Exhibit 10(ap) of NCT's Pre-effective Amendment No. 2 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
November 7, 2001.
4(l) Warrant issued to Carole Salkind for the purchase of 1,250,000 shares of
common stock dated December 20, 2001, incorporated herein by reference to
Exhibit 10(ay) of the Company's Pre-effective Amendment No. 3 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
December 21, 2001.
4(m) Warrant issued to Carole Salkind for the purchase of 2,789,082 shares of
common stock at an exercise price of $0.079 per share dated January 11,
2002.
4(n) Option dated January 11, 2002 granted to Carole Salkind to acquire a 10%
equity interest in Artera Group, Inc.
4(o) Warrant dated January 25, 2002 issued to Carole Salkind for the purchase of
812,500 shares of NCT common stock at an exercise price of $0.09 per share.
4(p) Warrant dated January 25, 2002 issued to Carole Salkind for the purchase of
312,500 shares of NCT common stock at an exercise price of $0.09 per share.
4(q) Warrant dated February 27, 2002 issued to Carole Salkind for the purchase
of 1,034,226 shares of NCT common stock at an exercise price of $0.079 per
share.
10(a)Patent Assignment Agreement, dated as of June 21, 1989, among George B.B.
Chaplin, Sound Alternators Limited, the Company, Active Noise and Vibration
Technologies, Inc. and Chaplin Patents Holding Co., Inc., incorporated
herein by reference to Exhibit 10(aa) to Amendment No. 2 on Form S-1 to the
Company's Registration Statement on Form S-18 (Registration No. 33-19926).
58
*10(b) 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(c)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(d) 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 SEC on August 30, 1996 (Reg. No.
333-11209).
10(e)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(e)(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(e)(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(e)(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(e)(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(f)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(g)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.
59
10(h)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(i)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(j)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(k)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(l)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(m)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(n)Strategic Alliance and Technology License Agreement entered into as of May
8, 2000 among NCT Group, Inc., Advancel Logic Corporation and Infinite
Technology Corporation, incorporated by reference to Exhibit 10(ag) of the
Company's Pre-effective Amendment No. 1 to the Registration Statement on
Form S-1 filed on June 13, 2000.
10(n)(1) License Agreement Amendment dated effective September 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 September 30,
2000.
10(n)(2) 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(o)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(p)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(q)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-
60
effective Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 333-47084) filed on October 25, 2000.
10(r)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(s)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(s)(1) 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(t)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(t)(1) 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(t)(2) Exchange 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(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(t)(3) 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.
10(u)Exchange Agreement dated April 12, 2001 by and between Crammer Road LLC
and NCT Group, Inc., incorporated herein by reference to Exhibit 10(at) of
NCT's Registration Statement on Form S-1 (Registration No. 333-60574) filed
on May 9, 2001.
10(u)(1) NCT Group, Inc. note CR-1 in principal amount of $1,000,000 dated April
12, 2001, incorporated herein by reference to Exhibit 10(au) of NCT's
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
May 9, 2001.
10(u)(2) Registration Rights Agreement (Exhibit A to Exchange Agreement) by and
between NCT Group, Inc. and Crammer Road LLC dated as of April 12, 2001,
incorporated herein by reference to Exhibit 10(av) of NCT's Registration
Statement on Form S-1 (Registration No. 333-60574) filed on May 9, 2001.
61
10(v)Subscription Agreement by and between NCT Video Displays, Inc. and Crammer
Road LLC dated as of April 12, 2001, incorporated herein by reference to
Exhibit 10(ax) of NCT's Registration Statement on Form S-1 (Registration
No. 333-60574) filed on May 9, 2001.
10(v)(1) Exchange Rights Agreement dated April 12, 2001 by and between NCT
Group, Inc. and Crammer Road LLC, incorporated herein by reference to
Exhibit 10(aw) of NCT's Registration Statement on Form S-1 (Registration
No. 333-60574) filed on May 9, 2001.
10(v)(2) Convertible Note of NCT Video Displays, Inc. in principal amount of
$500,000 dated as of April 12, 2001, incorporated herein by reference to
Exhibit 10(ay) of NCT's Registration Statement on Form S-1 (Registration
No. 333-60574) filed on May 9, 2001.
10(w)Private Equity Credit Agreement dated as of April 12, 2001 by and between
NCT Group, Inc. and Crammer Road LLC, incorporated herein by reference to
Exhibit 10(az) of NCT's Registration Statement on Form S-1 (Registration
No. 333-60574) filed on May 9, 2001.
10(w)(1) Registration Rights Agreement (Exhibit A to Private Equity Credit
Agreement) dated as of April 12, 2001 by and between NCT Group, Inc. and
Crammer Road LLC, incorporated herein by reference to Exhibit 10(ba) of
NCT's Registration Statement on Form S-1 (Registration No. 333-60574) filed
on May 9, 2001.
10(x)Framework Agreement between NXT plc, New Transducers Limited, NCT Group,
Inc. and NCT Audio Products, Inc. relating to the reorganization of certain
existing arrangements dated as of March 30, 2001, incorporated herein by
reference to Exhibit 10(z) of NCT's Pre-effective Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
September 5, 2001.
10(x)(1) Registration Rights Agreement dated as of March 30, 2001 by and among
NCT Group, Inc. and NXT plc, incorporated herein by reference to Exhibit
10(z)(1) of NCT's Pre-effective Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-60574) filed on September 5, 2001.
10(x)(2) IP Sale Agreement dated April 11, 2001 between NCT Group, Inc., NXT plc
and New Transducers Limited, incorporated herein by reference to Exhibit
10(z)(2) of NCT's Pre-effective Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-60574) filed on September 5, 2001.
10(x)(3) NXT General License between the company and New Transducers Limited
dated as of April 11, 2001, incorporated herein by reference to Exhibit
10(z)(3) of NCT's Pre-effective Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-60574) filed on September 5, 2001.
10(x)(4) Letter dated April 11, 2001 amending the NXT General License dated
April 11, 2001, incorporated herein by reference to Exhibit 10(z)(4) of
NCT's Pre-effective Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on September 5, 2001.
10(x)(5) Cancellation letter between the company, NCT Audio Products, Inc., New
Transducers Limited and NXT plc dated April 11, 2001 canceling the Master
License Agreement dated September 27, 1997 and the New Cross License
Agreement dated September 27, 1997, incorporated herein by reference to
Exhibit 10(z)(5) of NCT's Pre-effective Amendment No. 1 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on September 5,
2001.
10(x)(6) Letter dated April 11, 2001 outlining additional services to be
rendered by NXT plc/New Transducers Limited to Distributed Media
Corporation, incorporated herein by reference of Exhibit 10(z)(6) of NCT's
Pre-Effective Amendment No. 4 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on January 30, 2002.
62
10(y) Subscription Agreement dated March 14, 2001 between the company and Alpha
Capital Aktiengesellschaft, incorporated herein by reference to Exhibit
10(bh) of NCT's Registration Statement on Form S-1 (Registration No.
333-60574) filed on May 9, 2001.
10(y)(1) Form of Convertible Note in principal amount of $250,000 dated March
14, 2001, incorporated herein by reference to Exhibit 10(bi) of NCT's
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
May 9, 2001.
10(z) Subscription Agreement dated April 4, 2001 among Artera Group, Inc.,
Alpha Capital Aktiengesellschaft and Amro International, S.A., incorporated
herein by reference to Exhibit 10(bj) of NCT's Registration Statement on
Form S-1 (Registration No. 333-60574) filed on May 9, 2001.
10(z)(1) Form of Note dated April 4, 2001, incorporated herein by reference to
Exhibit 10(bk) of NCT's Registration Statement on Form S-1 (Registration
No. 333-60574) filed on May 9, 2001.
10(z)(2) Exchange Rights Agreement by and among NCT Group, Inc. and the Holders
identified on Schedule A thereto dated as of April 4, 2001, incorporated
herein by reference to Exhibit 10(ab)(2) of NCT's Pre-effective Amendment
No. 1 to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on September 5, 2001.
10(z)(3) Registration Rights Agreement among NCT Group, Inc. and Holders
identified on Schedule A thereto dated as of April 4, 2001, incorporated
herein by reference to Exhibit 10(ab)(3) of NCT's Pre-effective Amendment
No. 1 to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on September 5, 2001.
10(aa) Subscription Agreement dated April 12, 2001 between the company and Alpha
Capital Aktiengesellschaft, incorporated herein by reference to Exhibit
10(bl) of NCT's Registration Statement on Form S-1 (Registration No.
333-60574) filed on May 9, 2001.
10(aa)(1) Form of Convertible Note in principal amount of $125,000 dated April
12, 2001, incorporated herein by reference to Exhibit 10(bm) of NCT's
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
May 9, 2001.
10(ab) Promissory Note in principal amount of $500,000 dated February 13, 2001,
filed as an exhibit to Schedule 13D filed on February 13, 2001.
10(ac) Product Development and Licensing Agreement dated May 4, 2001 between NCT
Video Displays, Inc. and ViewBeam Technology, L.L.C., incorporated herein
by reference to Exhibit 10(bl) of NCT's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001.
10(ad) Agreement dated May 11, 2001, by and among NCT Group, Inc., Distributed
Media Corporation and Production Resource Group, incorporated herein by
reference to Exhibit 10(af) of NCT's Pre-effective Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
September 5, 2001.
10(ae) Stock and Asset Purchase Agreement by and among Teltran International
Group, Ltd., Internet Protocols Ltd. and NCT Networks, Inc. (now Artera
Group, Inc.) dated as of January 23, 2001, incorporated by reference to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(ae)(1) Side letter dated February 27, 2001, amending the January 23, 2001
Stock and Asset Agreement, incorporated by reference to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on August
15, 2001.
63
10(ae)(2) Stockholders' Agreement dated February 27, 2001 by and among NCT
Group, Inc., NCT Networks, Inc. and the holders of Series A Preferred Stock
of NCT Networks, Inc, incorporated by reference to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001, filed on August 15, 2001.
10(af) Secured Convertible Note in principal amount of $1,361,615 dated May 14,
2001, filed as an exhibit to Schedule 13D filed by NCT on behalf of Ms.
Salkind on May 18, 2001.
10(ag) Secured Convertible Note in principal amount of $1,673,393 dated August
22, 2001 filed as an exhibit to Schedule 13D filed on behalf of Carole
Salkind on September 14, 2001.
10(ah) Subscription Agreement among Artera Group, Inc. and Subscribers: Alpha
Capital Aktiengesellschaft and Amro International, S.A. dated as of May 25,
2001, incorporated by reference to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001, filed on August 15, 2001.
10(ah)(1) Form of Convertible Note dated May 25, 2001, incorporated by reference
to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
filed on August 15, 2001.
10(ah)(2) Exchange Rights Agreement by and among NCT Group, Inc. and the Holders
identified on Schedule A thereto dated as of May 25, 2001, incorporated by
reference to the Quarterly Report on Form 10-Q for the quarter ended June
30, 2001, filed on August 15, 2001.
10(ah)(3) Registration Rights Agreement among NCT Group, Inc. and Holders
identified on Schedule A thereto dated as of May 25, 2001, incorporated by
reference to the Quarterly Report on Form 10-Q for the quarter ended June
30, 2001, filed on August 15, 2001.
10(ai) Subscription Agreement among Artera Group, Inc. and Subscribers: Alpha
Capital Aktiengesellschaft; Amro International, S.A.; The Gross Foundation,
Inc.; Leval Trading, Inc.; Nesher Ltd.; and Talbiya B. Investments Ltd.
dated as of June 29, 2001, incorporated by reference to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on August
15, 2001.
10(ai)(1) Form of Convertible Note dated June 29, 2001, incorporated by
reference to the Quarterly Report on Form 10-Q for the quarter ended June
30, 2001, filed on August 15, 2001.
10(ai)(2) Exchange Rights Agreement (Notes) by and among NCT Group, Inc. and
Holders identified on Schedule A thereto dated as of June 29, 2001,
incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, filed on August 15, 2001.
10(ai)(3) Registration Rights Agreement (Notes) among NCT Group, Inc. and
Holders identified on Schedule A thereto dated as of June 29, 2001,
incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, filed on August 15, 2001.
10(aj) Exchange Rights Agreement (Preferred) by and among NCT Group, Inc. and
Austost Anstalt Schaan; Amro International, S.A.; Nesher Ltd.; Leval
Trading, Inc.; ICT N.V.; Balmore S.A.; The Gross Foundation, Inc.; Talbiya
B. Investments Ltd.; United Securities Services, Inc.; and Libra Finance,
S.A. dated as of June 29, 2001, incorporated by reference to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on August
15, 2001.
10(aj)(1) Registration Rights Agreement (Preferred) among NCT Group, Inc. and
Austost Anstalt Schaan; Amro International, S.A.; Nesher Ltd.; Leval
Trading, Inc.; ICT N.V.; Balmore S.A.; The Gross Foundation, Inc.; Talbiya
B. Investments Ltd.; United Securities Services, Inc.; and Libra Finance,
S.A. dated as of June 29, 2001, incorporated by reference to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on August
15, 2001.
64
10(ak) Securities Purchase and Supplemental Exchange Rights Agreement dated July
30, 2001 by and among Pro Tech Communications, Inc., NCT Group, Inc., and
Alpha Capital Aktiengesellschaft, incorporated by reference to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(ak)(1) Registration Rights Agreement by and between NCT Group, Inc. and Alpha
Capital Aktiengesellschaft dated July 30, 2001, incorporated by reference
to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
filed on August 15, 2001.
10(al) Secured Convertible Note in principal amount of $2,535,469 dated
September 28, 2001, incorporated herein by reference to Exhibit 10(an) of
NCT's Pre-effective Amendment No. 2 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 7, 2001.
10(am) Letter dated October 25, 2001 amending terms of October 26, 2000 warrant
to Libra Finance, S.A., incorporated herein by reference to Exhibit 10(ao)
of NCT's Pre-effective Amendment No. 2 to Registration Statement on Form
S-1 (Registration No. 333-60574) filed on November 7, 2001.
10(an) Letter dated November 14, 2001 amending terms of October 26, 2000 warrant
to Libra Finance S.A., incorporated herein by reference to Exhibit 10(bg)
of NCT's Form 8-K filed November 19, 2001.
10(ao) Letter dated November 9, 2001 to each of the Subscribers identified on
Schedule A thereto (being the subscribers in Artera convertible notes dated
January 9, 2001, April 4, 2001, May 25, 2001, and June 29, 2001) amending
terms of conversion of the Artera convertible notes, 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. 333-60574) filed on
December 21, 2001.
10(ap) Letter dated November 9, 2001 to each of the investors identified on
Schedule A thereto amending the terms of exchange of shares of Artera's
Series A Convertible Preferred Stock, 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. 333-60574) filed on
December 21, 2001.
10(aq) Distributed Media Corporation standard form of license agreement
conveying rights to the use of Sight & Sound systems, incorporated herein
by reference to Exhibit 10(at) of the Company's Pre-effective Amendment No.
3 to Registration Statement on Form S-1 (Registration No. 333-60574) filed
on December 21, 2001.
10(ar) Agreement dated May 20, 1999 between Barnes & Noble College Bookstores
and Distributed Media Corporation, incorporated herein by reference to
Exhibit 10(au) of the Company's Pre-effective Amendment No. 3 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
December 21, 2001.
10(as) Agreement dated August 4, 1999 between TransWorld Entertainment
Corporation and Distributed Media Corporation, incorporated herein by
reference to Exhibit 10(av) of the Company's Pre-effective Amendment No. 3
to Registration Statement on Form S-1 (Registration No. 333-60574) filed on
December 21, 2001.
10(at) Agreement dated October 28, 1999 between Wherehouse Entertainment, Inc.
and Distributed Media Corporation, incorporated herein by reference to
Exhibit 10(aw) of the Company's Pre-effective Amendment No. 3 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed on
December 21, 2001.
65
10(au) Secured Convertible Note in the principal amount of $2,014,270 dated
December 20, 2001, incorporated herein by reference to Exhibit 10(ax) of
the Company's Pre-effective Amendment No. 3 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on December 21, 2001.
10(av) Letter dated December 20, 2001 amending terms of February 13, 2001
warrant to Carole Salkind, incorporated herein by reference to Exhibit
10(az) of the Company's Pre-effective Amendment No. 3 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on December 21,
2001.
10(aw) Letter dated December 20, 2001 amending terms of May 14, 2001 warrant to
Carole Salkind, incorporated herein by reference to Exhibit 10(ba) of the
Company's Pre-effective Amendment No. 3 to Registration Statement on Form
S-1 (Registration No. 333-60574) filed on December 21, 2001.
10(ax) Letter dated December 20, 2001 amending terms of August 22, 2001 warrant
to Carole Salkind, incorporated herein by reference to Exhibit 10(bb) of
the Company's Pre-effective Amendment No. 3 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on December 21, 2001.
10(ay) Letter dated December 20, 2001 amending terms of September 28, 2001
warrant to Carole Salkind, incorporated herein by reference to Exhibit
10(bc) of the Company's Pre-effective Amendment No. 3 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on December 21,
2001.
10(az) Secured Convertible Note in principal amount of $2,231,265.04 dated
January 11, 2002 issued to Carole Salkind.
10(az)(1) Secured Convertible Note in principal amount of $650,000 dated January
25, 2002 issued to Carole Salkind.
10(az)(2) Secured Convertible Note in principal amount of $250,000 dated January
25, 2002 issued to Carole Salkind.
10(az)(3) Secured Convertible Note in principal amount of $827,412 dated
February 27, 2002 issued to Carole Salkind.
16 Change in certifying accountants, dated February 12, 2002, incorporated
herein by reference to the company's current report on Form 8-K filed on
February 14, 2002.
21 Subsidiaries, as of December 31, 2001.
23(a) Consent of Goldstein Golub Kessler LLP.
23(b) Consent of Richard A. Eisner & Company, LLP.
23(c) Consent of Peters Elworthy & Moore, Chartered Accountants.
66
99(a)Employment Agreement by and between NCT Midcore, Inc. (now Midcore
Software, Inc.) and Jerrold Metcoff, dated as of August 29, 2000,
incorporated by reference to the Quarterly Report filed on Form 10-Q for
the quarter ended June 30, 2001, filed on August 15, 2001.
99(b)Employment Agreement by and between NCT Midcore, Inc. (now Midcore
Software, Inc.) and David Wilson, dated as of August 29, 2000, incorporated
by reference to the Quarterly Report filed on Form 10-Q for the quarter
ended June 30, 2001, filed on August 15, 2001.
99(c)Employment Agreement by and between Midcore Software Limited and Barry
Marshall-Johnson, dated as of August 29, 2000, incorporated by reference to
the Quarterly Report filed on Form 10-Q for the quarter ended June 30,
2001, filed on August 15, 2001.
- -----------------------
* Pertains to a management contract or compensation plan or arrangement.
67
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.
---------------
(Registrant)
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 30, 2002
--------------
Signature Capacity Date
------------------------------------------ ------------------------------------------------- ----------------------------------
/s/ MICHAEL J. PARRELLA Chief Executive Officer and April 30, 2002
------------------------------------------
Michael J. Parrella Chairman of the Board of Directors
(Principal Executive Officer)
/s/ IRENE LEBOVICS President and Director April 30, 2002
------------------------------------------
Irene Lebovics
/s/ CY E. HAMMOND Senior Vice President and April 30, 2002
------------------------------------------
Cy E. Hammond Chief Financial Officer
(Principal Financial Officer)
/s/ JAY M. HAFT Director April 30, 2002
------------------------------------------
Jay M. Haft
/s/ JOHN J. McCLOY II Director April 30, 2002
------------------------------------------
John J. McCloy II
/s/ SAMUEL A. OOLIE Director April 30, 2002
------------------------------------------
Samuel A. Oolie
68