Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
-------------
(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, 2003
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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Ketchum Street, Westport, Connecticut 06880
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant`s telephone number, including area code (203) 226-4447
--------------
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. /_/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). /_/ Yes /X/ No
The aggregate market value of the outstanding common equity of the
registrant held by non-affiliates as of the last business day of the
registrant's most recently completed second fiscal quarter was approximately
$18.7 million.
The number of shares outstanding of the registrant's common stock is
641,970,392 as of April 5, 2004.
Table of Contents
Page
Part I
Item 1. Business 3
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 30
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 30
Item 6. Selected Financial Data 47
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 62
Item 8. Financial Statements and Supplementary Data 62
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 62
Item 9A. Controls and Procedures 63
Part III
Item 10. Directors and Executive Officers of the Registrant 63
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and Management 71
Item 13. Certain Relationships and Related Transactions 74
Item 14. Principal Accounting Fees and Services 95
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 95
Signatures 97
2
PART I
ITEM 1. BUSINESS
A. General Development of Business
Overview
NCT Group, Inc. (OTCBB: NCTI) is a high-tech, intellectual property
development company. As used in this Annual Report on Form 10-K, "we," "our,"
"us," "company" and "NCT" refer to NCT Group, Inc. and its subsidiaries, unless
the context requires otherwise. As of February 29, 2004, NCT held approximately
595 patents and related rights and an extensive library of know-how and
non-patented technology. Our patents allow us and our subsidiaries and licensees
to develop product lines that include those listed below by our three operating
segments:
Communications Segment
o Pro Tech communications headsets and other products
o NoiseBuster(R)consumer headsets; ProActive(R)industrial headsets
o ClearSpeech(R) microphones, speakers, suite of noise and echo
cancellation algorithms and other products
o An aircraft cabin quieting system
o Artera Turbo(TM) Internet speed enhancement service
Media Segment
o Sight & Sound(R)place-based audio and billboard media
o Gekko(TM)flat speakers, frames, prints and subwoofers
Technology Segment
o Java(TM) - language based microprocessor cores.
For the year ended December 31, 2003, our operating revenue consisted of
approximately 62.0% in technology licensing fees and royalties, 35.2% in product
sales, 1.8% in advertising and 1.0% in engineering and development services. Our
recognized technology licensing fee revenue for the year ended December 31, 2003
was primarily due to recognition of deferred revenue and generally did not
represent cash realized by the company. No additional cash will be realized upon
recognition of revenue from our remaining deferred revenue balance. Please refer
to detailed discussion below in I. - Revenue. Presently, we do not have material
revenue-generating licensing contracts. The revenue contribution by our
operating segments for 2001, 2002 and 2003 is outlined below in I. - Revenue and
in Note 25 - notes to our consolidated financial statements.
In 2003, we have been primarily dependent upon funding from Carole Salkind.
Although we do not have a formal agreement requiring her to do so, we believe
that Carole Salkind will continue to provide funds to NCT. Our belief that
funding from her will continue is based primarily upon her continued funding of
NCT during 2003 despite NCT's failure to repay her notes as the notes matured.
During 2003, Carole Salkind has allowed matured notes to be rolled into new
notes along with accrued interest and default penalties. See further information
about this in the section "Certain Relationships and Related Transactions."
Operating segments
We operate our business ventures out of separate subsidiaries, organized
into three operating segments: communications, media and technology. Each of our
operating segments is targeted to the commercialization of products in specific
markets. The following table summarizes our ownership of entities within our
operating segments as of December 31, 2003.
3
NCT Group, Inc.
50% or Greater Ownership
------------------------
% Ownership
-----------
Operating Segment Actual Fully Diluted (a)
- ----------------- ------ -------------
Communications Segment
- ----------------------
NCT Hearing Products, Inc. ("NCT Hearing") 100 100
Pro Tech Communications, Inc. ("Pro Tech") 82 24
NCT Medical Systems, Inc. 90 90
Noise Cancellation Technologies (Europe) Ltd. ("NCT Europe") (b) 100 100
Artera Group, Inc. ("Artera") 100 69 (c)
Artera Group International Limited ("Artera International")(b) 100 100 (d)
Midcore Software, Inc. ("Midcore") 100 100
Midcore Software Limited (b) 100 100
ConnectClearly.com, Inc. ("ConnectClearly") 99 94
Media Segment
- -------------
Distributed Media Corporation ("DMC") 99 99
DMC Cinema, Inc. (e) 84 84 (f)
DMC HealthMedia Inc. ("DMC HealthMedia") (e) 100 100
Distributed Media Corporation International Limited ("DMCI") (b) 100 100
Distributed Media Corporation Limited (b) 100 100
DMC New York, Inc. ("DMC NY") 100 100
NCT Audio Products, Inc. ("NCT Audio") (e) 100 100
NCT Video Displays, Inc. ("NCT Video") 100 100
Technology Segment/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 (b) 100 100
Footnotes:
- ----------
(a) In addition to all of the potential dilutions described in this table,
under convertible notes of NCT Group, Inc. issued to Carole Salkind if any
subsidiary of NCT (other than Pro Tech Communications, Inc.) makes a public
offering of its common stock, Carole Salkind has the right to exchange all
or any part of the principal amount of the notes 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.
(b) Denotes foreign subsidiaries.
(c) Assumes a $1.00 per share price for the Artera Group, Inc. common stock
into which certain of 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, refer to Note 2 - notes
to the consolidated financial statements.
(d) On April 5, 2002, Artera International ceased its Internet service provider
operations and entered into liquidation proceedings that have not yet been
concluded.
(e) NCT's shares of this subsidiary are presently under the jurisdiction of a
Connecticut court. For more information about this, see the Production
Resource Group (PRG) litigation in the section entitled "Legal
Proceedings."
(f) On February 28, 2002, DMC Cinema ceased business operations and the
corporation is now dormant.
4
Business Operations
Business operations for NCT's material business units during fiscal 2003
include those outlined below. From time to time, we may rationalize our
operating model to emphasize one business unit over others as we align our
limited resources to seek to maximize key opportunities.
NCT Hearing Products, Inc.:
o Designs, develops and markets active noise reduction headphone and
headset products for consumer, industrial and communications markets
o Product lines include the NoiseBuster(R) line of consumer audio
headphones and the ProActive(R) line of industrial communications
headsets and active noise reduction earmuffs
o 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.:
o An 82%-owned subsidiary of NCT Hearing Products, Inc. acquired in
September 2000
o Designs, develops and manufactures lightweight headsets and new audio
technologies for applications in fast-food, telephone and other
commercial settings
o 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
o Granted a license from NCT Hearing for active noise reduction
technology as well as noise and echo cancellation technologies for use
in lightweight cellular, multimedia and telephony headsets and this
technology will provide differentiation for Pro Tech products
o Three business divisions are headset products, which develops,
manufactures and distributes headsets and other communications
products to the call center market and fast-food markets;
telecommunication system integration, which sells and installs analog,
digital and Internet protocol phone systems to call centers as well as
to small and medium-sized businesses; and call center operation, which
runs a full service call center utilizing the latest customer
relationship management technology
Noise Cancellation Technologies (Europe) Ltd.:
o Provides research and engineering services to the company in the field
of active sound control technology and to all NCT business units as
needed
o Development center for all ClearSpeech algorithm technology
o Provides marketing and sales support to the company for European sales
Artera Group, Inc.:
o Develops and markets Artera Turbo(TM) software-based, high-speed data
communication and network optimization service to residential users as
well as small and medium businesses
o Foundation for Artera Turbo provided by NCT subsidiary Midcore
Software, Inc.'s product called MidPoint Software
o Markets Artera Turbo through a network of resellers including Internet
service providers, incumbent local exchange carriers and others
o U.K.-based information technology subsidiary, Artera Group
International Limited, offering voice and data services to the
business community was closed in 2002. On December 18, 2001, the Board
of Directors of Artera Group International Limited decided to suspend
under-performing operations and reduce the number of employees. On
March 21, 2002, the Board decided to cease all operations. Cessation
was formalized on April 5, 2002 when Artera Group International
Limited entered liquidation proceedings which proceedings are still
underway
5
ConnectClearly.com, Inc.:
o Established to focus on the development of Internet telephony-based
voice applications targeted to the e-commerce and e-CRM (electronic
customer relationship management) markets
o NCT's proprietary Internet telephony software is the basis for
developing a user-friendly "click to talk" application for improving
the completion rate of Internet transactions by allowing for real-time
customer service access by a user
Distributed Media Corporation:
o Media company that uses proprietary digital technology to deliver
audio and visual advertising messages integrated with CD-quality music
to a variety of out-of-home and professional venues such as retail
stores and hospitals
o Develops and distributes Sight & Sound(R), a microbroadcasting system
that delivers place-based broadcast and billboard advertising
o Generates revenue from advertising sales and licensing activities
o Subsidiary DMC HealthMedia Inc. was formed in May 2000 to develop
Sight & Sound(R) networks in hospitals and other health care venues.
As of December 31, 2003, DMC HealthMedia has completed installations
in four New York City hospitals and 16 outpatient health care
facilities.
o Subsidiary DMC Cinema, Inc., formerly known as Theater Radio Network,
was acquired in August 2000. DMC Cinema provided audio programming in
cinemas, producing and distributing a content mix of music, trivia,
public service announcements and advertisements. In 2002, DMC Cinema
ceased business operations because of under-performance and the
corporation is now dormant.
NCT Audio Products, Inc.:
o Designs, develops and markets products which utilize innovative flat
panel transducer technology including the Gekko(TM) flat speaker and
ArtGekko(TM) printed grille collection
o Gekko(TM)flat speakers are distributed to consumers through a network
of audio resellers
o Provides speakers to our subsidiary Distributed Media Corporation for
use in its Sight & Sound(R)microbroadcasting system
Advancel Logic Corporation:
o Participant in the native Java(TM) (Java(TM) is a trademark of Sun
Microsystems, Inc.) embedded microprocessor market whose purpose 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
o Developed 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 including the next generation home appliances
and automotive applications, smart cards for a variety of
applications, hearing aids and mobile communications devices
o In 1998, certain Advancel-developed technology was licensed to
STMicroelectronics SA for smart card applications, and in 2003,
STMicroelectronics SA began shipping orders of its smart card
incorporating our technology
o In 2000, Advancel entered into a license agreement with Infinite
Technology Corporation under which 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 and granted non-exclusive rights to Advancel's
Java(TM) smart card core
6
Historical Developments
For the years ended December 31, 2001, 2002 and 2003, Carole Salkind, a NCT
shareholder, has provided us approximately $2.5 million, $9.6 million and $10.4
million, respectively, cash to sustain our operations, for which we issued
secured convertible notes and warrants. As of December 31, 2003, our
indebtedness to Carole Salkind totaled approximately $33.8 million. For further
information, please refer to the section below entitled "Certain Relationships
and Related Transactions."
In 2003, the company was primarily focused on product and distribution
channel development for Artera Turbo(TM). Highlights for the year include:
o Artera introduced Artera Turbo Version 2.5, a residential dial-up product
with speed improvements over Version 2.0.
o Artera introduced Artera Turbo Version 3.0 with new speed enhancement
features, a simplified installation process, a 40% smaller program size and
more comprehensive help and on-screen documentation.
o Artera introduced Artera Turbo Version 3.1 that increases effective speeds
of e-mail protocols that are not web-based (e.g., Microsoft Outlook(R),
Microsoft Outlook Express(R) and Netscape(R) Mail) including compressible
files sent with them. Additionally, Artera Turbo 3.1 accelerates file
transfer protocol (FTP) uploads and downloads of compressible files and
features automatic software updates and enhanced parental controls.
o Artera developed its Artera Turbo distribution network by signing new
resellers and master distributors in the U.S., Latin America, the
Netherlands, Turkey, the U.K. and elsewhere. These distributors include
telecommunications wholesalers representing hundreds of thousands of
dial-up lines for potential use of Artera Turbo.
o DMC HealthMedia expanded its health care facility-based network by
installing 12 additional outpatient care facilities throughout the New York
metropolitan area.
o DMC HealthMedia advertisers Neighborhood Health Partners and Health Source
increased their presence on the network with expanded advertising
contracts.
o STMicroelectronics, a global leader in semiconductor solutions across
microelectronics applications, provided samples of its smart card chip
incorporating NCT technology to its major customers.
o NCT added two algorithms to its ClearSpeech(R) suite - ClearSpeech Adaptive
Speech Filter II (ASFII) and ClearSpeech Adaptive Noise Suppressor (ANS).
ASFII improves NCT's standard Adaptive Speech Filter noise reduction
algorithm by providing faster response time, less voice distortion and
fewer background noise remnants for automotive communications applications.
ANS is a new algorithm designed to reduce, by 3-12dB, audio signals below a
given threshold.
In 2002, the company's efforts were focused on developing, introducing and
launching the single line, single user version of its Artera Turbo(TM)
subscription service; growing the DMC HealthMedia network and closing
non-performing subsidiaries. Highlights in 2002 include the following:
o We completed our acquisition of DMC New York, Inc., which resulted in an
additional charge of $9.2 million.
o Artera Group launched its new Artera Turbo service on October 9, 2002 and
began development of a distribution channel for the product.
o Artera Group further developed its relationship with GTSI Corporation, a
leading government reseller with annual sales of over $650 million and a
sales force of over 300.
o Artera entered into an agreement with FairPoint Communications, Inc., a
U.S. telephone company. FairPoint Communications will sell Artera Turbo
subscription services through its 29 owned and operated rural local
exchange carriers across 18 states, serving approximately 245,000 access
lines.
o FairPoint relationship was expanded to include FairPoint Broadband, Inc., a
subsidiary of FairPoint Communications, to serve as the exclusive master
distributor of Artera Turbo(TM) to virtually all of the 1,100 rural local
exchange carriers and incumbent local exchange carriers. FairPoint
Broadband is also a non-exclusive master distributor of Artera Turbo(TM) to
approximately 7,600 Internet service providers across the U.S. and Canada.
7
o DMC HealthMedia installed Sight & Sound(R) networks in four hospitals and
four health care facilities in the New York metropolitan area and initiated
advertising sales efforts to organizations promoting health care enrollment
programs.
o Two algorithms in NCT's ClearSpeech suite became certified in 2002 as
eXpressDSP Compliant. This is a program that certifies third-party
developers who meet standards for porting algorithms to Texas Instruments'
platforms, thereby accelerating their time to market.
o ClearSpeech(R) Adaptive Speech Filter algorithm was incorporated into a new
line of Third Generation cell phones from Sharp Corporation (Japan).
o In an effort to improve our financial performance, we closed DMC Cinema,
Inc. (acquired in 2000 as Theater Radio Network), a subsidiary of
Distributed Media Corporation, Artera Group International Limited (acquired
in 2001 as the Web Factory), a subsidiary of Artera Group, Inc. and the
Linthicum, Maryland corporate research and development operation.
During 2001, our activities were focused toward assimilating the operations
of acquired companies, including Artera International (acquired in 2001), DMC
Cinema (acquired in 2000), Midcore Software (acquired in 2000) and Pro Tech
Communications (acquired in 2000), and further development of related
technologies. In addition, we continued our efforts to develop Distributed Media
Corporation. The following were significant events in 2001:
o In January 2001, Artera Group, Inc. secured initial net financing of $2.5
million, based upon convertible notes issued to outside investors with a
face value of $5.0 million, convertible to Artera common stock if the
subsidiary goes public. As founder investors, the investors in Artera
received a 50% discount to face value on the convertible notes. Artera
issued additional 6% convertible notes in 2001 for an aggregate face value
of $2.6 million. Consideration for the $7.6 million face value of Artera
debt issued in 2001 consisted of $2.9 million cash, net of $0.1 million in
expenses, Pro Tech common stock valued at $0.5 million and non-recourse
notes receivable of $1.0 million.
o We reacquired (or agreed to reacquire) DMC licenses that had previously
been sold in 1999 and early 2000, including all DMC licenses for the right
to operate in the New York area and the license for the right to operate in
Israel. These repurchases resulted in aggregate charges in 2001 of $19.3
million, net of $2.7 million reduction of deferred revenue in 2001 (the
2002 charge was $9.2 million as noted above). Our purchase of DMC licenses
previously sold was to preserve the value of DMC in the respective market
areas where licenses had been sold by repurchasing the licenses from
licensees who were not exploiting them and gaining control of the licenses
so that they would be available for future sale at prices that would better
reflect anticipated operational revenue. To that point in time, we had not
been able to develop a sufficient capital core to exploit the technology
and to execute the DMC business plan. Please refer to the section below
entitled "Certain Relationships and Related Transactions."
o NCT and NXT plc reached an agreement to reorganize their 1997 cross-license
arrangements related to flat panel speaker technology. Under the new
agreements, NCT received 2 million ordinary NXT shares in consideration for
the cancellation of the 6% royalty payable by NXT to NCT Audio Products.
The NXT shares at issuance held a value of approximately $9.2 million. We
sold all the NXT shares in 2001 for an aggregate of $6.9 million in cash,
net of fees and expenses.
During 2000, our efforts were devoted to consummating several acquisitions
including Midcore Software, Inc., Theater Radio Network, Inc. (which we renamed
DMC Cinema), and Pro Tech Communications, Inc. and continuing efforts on the
development of Distributed Media Corporation. The following were significant
events in 2000:
o Distributed Media Corporation licensed to Eagle Assets Limited the right to
develop a portion of the New York microbroadcasting region for $2 million.
We agreed to reacquire this license in 2001 (see above).
o Distributed Media Corporation licensed to Brookepark Limited the right to
develop Israel as a microbroadcasting media market for $2 million. We
agreed to reacquire this license in 2001 (see above).
o NCT licensed to Delphi Automotive Systems the rights to ClearSpeech(R)
noise, acoustic echo and live echo cancellation algorithms for use in its
mobile multimedia computing platform for hands-free cellular
communications.
8
o Our subsidiary, Advancel Logic Corporation, licensed to Infinite Technology
Corporation exclusive rights to create, make, market, sell and license
products and intellectual property based upon Advancel's Java(TM)
Turbo-J(TM) technology, subject to rights previously licensed to ST
Microelectronics and granted non-exclusive rights to Advancel's Java(TM)
smart card core.
During 1999, NCT Audio's marketing accelerated. Headset marketing
continued, as did technology licensing of the ClearSpeech technology. During
1999, NCT's media subsidiary Distributed Media Corporation (formed in 1998) was
launched. Also during 1999, NCT introduced home theater in a box and home
theater speaker bundles; Lernout & Hauspie licensed ClearSpeech noise and echo
cancellation for speech applications; Distributed Media Corporation executed
contracts with Barnes & Noble College Bookstores and Wherehouse Entertainment
stores; and Distributed Media Corporation entered into a $1 million financing
agreement with Production Resource Group.
B. Business Strategy
Our objective is to leverage our existing base of proprietary technologies
by licensing them and developing new products and services. To achieve this
objective, we license our technologies to subsidiary companies that are focused
in particular markets so that the subsidiaries, in turn, may offer our
technologies for licensing to others and developing products and services to be
offered to customers. Employing this strategy, the subsidiary is responsible for
developing the specific knowledge and intimacy with its market and industry.
NCT's technologies are applicable to a wide variety of markets, and therefore,
this market knowledge would be difficult to cultivate without specialized
subsidiaries. For example, Artera Group, Inc. licensed the Artera Turbo (TM)
technology and is commercializing a subscription-based service for Internet
users. Pro Tech Communications, Inc. licensed NCT's active noise reduction and
ClearSpeech(R) algorithms for use in headset products. Distributed Media
Corporation is commercializing a microbroadcasting system utilizing NCT's flat
speaker technology and proprietary system management algorithms. From time to
time, we sell ownership interests in NCT and our subsidiaries to acquire assets
and funds needed to operate and finance our ventures.
We anticipate that as we establish distribution channels and as consumer
awareness of our products and communication and media services increases, so,
too, will product sales and revenue from licensing fees and royalties. At the
same time, we continue to strive to lower the cost of our products and services
and enhance their technological performance.
C. Technology
Active Noise Reduction. Active noise reduction systems are particularly
effective at minimizing 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. Products incorporating this technology include NCT's
NoiseBuster(R) and ProActive(R) headset lines.
Signal Enhancement. Our technology can be used to reduce unwanted signals
that enter into a communications network, as when background noise enters
telecommunications or radio systems from a telephone receiver or microphone. We
have developed a line of patented algorithms called ClearSpeech(R) that perform
various signal enhancement functions. The ClearSpeech Adaptive Speech Filter
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. ClearSpeech
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 ClearSpeech Reference Noise Filter isolates and removes
interfering signals, such as background radio, television, machine and siren
noise, so communications can be heard more clearly. The reference noise filter
algorithm was designed to remove interference from a desired signal in
applications where a reference signal for the interference is available.
9
Digital Broadcasting Station System Software. Digital broadcasting station
system software is being utilized by DMC in its Sight & Sound(R)
microbroadcasting system to deliver customized music programming to each
broadcasting 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.
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 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.
Information and Traffic Optimization Management Software. Artera's
patent-pending technology, Artera Turbo(TM), is a subscription-based service
that allows users with a single 56K dial-up connection to browse the Internet at
effective speeds faster than with a 325kbs digital subscriber line connection
for a fraction of the cost of broadband. Effective speeds of faster connections
such as cable, digital subscriber line (DSL) and integrated services digital
network (ISDN) are improved as well. Artera Turbo enhances the effective speed
of Internet activities, including web browsing, e-mail and file transfers, for
any residence or small to medium sized office, educational institution or
governmental facility. Artera Turbo works via a series of proprietary data
management techniques. These involve optimization processes Artera Turbo
performs on an information stream to reduce the number of bytes transferred over
the network (reduction of the size of data transferred). Those techniques that
have been developed by us are the subjects of three pending patents of NCT,
licensed to Artera. We believe that those aspects of the Artera Turbo technology
that are patent pending are unique to NCT and Artera. While it is not possible
to patent all of Artera Turbo's data optimization technology, our patents
pending cover the unique implementation techniques we have developed. To use
Artera Turbo, the user installs the Artera Turbo software on his or her computer
via download or CD. No additional hardware is required for the user, nor for the
user's Internet service provider. The Artera Turbo software causes the user's
computer to connect to the Internet through one of Artera Turbo's data centers.
These data centers are integrated systems of server hardware and proprietary and
non-proprietary software operated by Artera (or outside providers on Artera's
behalf) at commercial facilities. The data centers perform most of the data
management functions of Artera Turbo and communicate with users' computers to
cause them to perform related functions. Record keeping, access control and
billing are accomplished through a customer relations management system
connected to the data centers. In forthcoming versions of Artera Turbo, we
expect large enterprises to be able to house their own, separate data centers,
resulting in bandwidth usage reductions in their private networks. The Artera
Turbo product not only increases effective data transfer speeds, but also
manages Internet access with features such as usage control and accounting,
routing, firewall, e-mail server, caching, parental controls and more.
D. NCT Proprietary Rights and Protection
As of February 29, 2004, NCT and its subsidiaries held approximately 595
patents and related rights and an extensive library of know-how and unpatented
technology. We have patent coverage in the U.S., Canada, Japan, Europe, Korea,
Australia, Hong Kong and Taiwan. We hold or have rights to 317 inventions as of
February 29, 2004, including 113 United States patents and over 482
corresponding foreign patents. We have pending 119 U.S. and foreign patent
applications. Our engineers have made 164 invention disclosures for which we are
in the process of preparing patent applications.
NCT has continued to make substantial investments in its technology and
intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field-testing of several products and
applications. Management believes that our investment in our technology has
resulted in the expansion of the value of our intellectual property portfolio
and improvement in the functionality, speed, costs of components, products and
applications. Our intellectual property strategy has been to build upon our base
of core technology that we have developed, acquired or exclusively licensed 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 core
patents. As our patent holdings increase, we believe the importance of our core
patents will diminish from a competitive viewpoint.
10
DMC received a U.S. patent for Network of Digital Broadcast Systems in
January 2003. During 2003, we also received five foreign patents based on
headset active vibration control and acoustic echo canceller technologies (two
in each of Canada and Europe and one in Japan). We also filed three applications
based on Artera technology in 12 foreign countries in December 2003. In 2002,
three U.S. patent applications plus their corresponding foreign applications
were filed to cover Artera technology. In addition, one U.S. and one European
headset patent were issued in 2002 covering cushioned earphones and headsets for
aircraft.
Our core patents and advanced patents and patent applications include the
following technologies:
o active noise control for headsets;
o adaptive feed forward approach to active noise control;
o cabin quieting and vibration isolation;
o multi-channel noise control;
o combined feedforward and feedback control;
o control using harmonic filters;
o filters for signal enhancement and speech filtering;
o control systems for noise shaping;
o ClearSpeech (R) technology;
o Sight & Sound(R)'s method and apparatus for delivering audiovisual
information; and
o Artera Turbo information and traffic optimization management.
The patents described above include patents of all ages ranging from
pending applications, which will have a duration of 20 years from their filing
dates, through patents soon to expire. Our patents have expiration dates ranging
from 2004 through 2019, with the majority of the material patents upon which we
rely expiring in 2011 and beyond.
NCT has been granted the following trademark registrations:
Mark Field of Use
---- ------------
NCT logo Company logo
NoiseBuster(R) Headsets
ClearSpeech(R) Adaptive speech filter products
ProActive(R) Headsets
Sight & Sound(R) Microbroadcasting
Artera(R) Computer software that permits
high-speed Internet connection and
high-speed electronic transmission of data,
images, documents and voice
Fastest Ride on the Net!(R) Computer software that permits high-speed
Internet connection and high-speed
electronic transmission of data, images,
documents and voice
11
We have also applied for registration of a number of trademarks including:
Mark Field of Use
---- ------------
Artera(TM) Telecommunications services
involving electronic transmission of
data, images, documents and voice;
provision of high-speed access to
area networks and the Internet;
hosting of web sites of others;
telecommunications consultation (a)
Artera Turbo(TM) Computer software that permits high-speed
Internet connection and high-speed electronic
transmission of data, images, documents and
voice; hosting of web sites of others (a)
Fastest Ride on the Net!(TM) Telecommunications services involving
electronic transmission of data, images,
documents and voice; provision of high-speed
access to area networks and the Internet
Footnote:
---------
(a) In December 2002, oppositions were filed before the U.S. Patent and
Trademark Office to these trademark registration applications for
Artera and Artera Turbo. The alleged basis for the oppositions is a
confusing similarity to another trademark already registered (Altera).
NCT intends to defend these Artera and Artera Turbo trademark
registration applications against these oppositions. For more
information, see the section "Legal Proceedings."
We also filed trademark registration applications for the names Gekko(TM)
and ArtGekko(TM). These applications were challenged by the holder of a
registered trademark for the name Gecko on the grounds of similarity and
confusion in a proceeding before the U.S. Patent and Trademark Office. A
settlement of these challenges has been reached in principle, and a final
settlement agreement is expected soon. The settlement is not expected to require
payments by either party and is expected to permit NCT to continue to use the
Gekko and ArtGekko names.
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 registration applications or applications filed in the future will
result in the issuance of a patent or registered 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 or registered in the future that would have an adverse effect on our
ability to market our technologies or products or maintain our competitive
position with respect to our technologies and products. Substantial resources
may be required to obtain and defend patent and trademark rights of NCT.
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, annuities and maintenance fees for our extensive patent portfolio
are a significant portion of our expenses; such costs typically range from
$300,000 to $600,000 annually. Maintenance fees are charged to maintain granted
U.S. patents in force; foreign patents and applications are subject to annuity
fees 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. If this occurs, we will have to prioritize
our portfolio accordingly.
12
E. Research and Development
Our research and development personnel focus on product, software and
algorithm development, which provides the technological basis for our technology
licensing and commercial products, and on basic research, which helps provide
the scientific advances that ultimately lead to new products and technology. As
of February 29, 2004, our product and development team was comprised of
approximately 22 development engineers and scientists. In addition to our
internal research and development team, we have entered into joint research and
development initiatives with other companies.
NCT-sponsored research and development expenses aggregated $6.0 million,
$4.7 million and $3.7 million for the years ended December 31, 2001, 2002 and
2003, respectively. We anticipate that we will continue to make significant
research and development expenditures to maintain our competitive position. This
includes improving our current technologies and products and developing newer
technologies and products.
Our key research and development activities over the last three fiscal
years include:
o Development of Artera Turbo subscription service and web-based
customer relationship management system for Artera;
o Improvement to existing echo cancellation and noise filtering
algorithms including porting to specific hardware platforms and
processor cores;
o Development of four new ClearSpeech(R) noise filtering algorithms,
adaptive speech filter II, adaptive noise suppressor, speech in noise
detector and intelligent squelch filter;
o Improvements to the active noise cancellation technologies used in our
headset products;
o Development of new algorithms and systems;
o Development of advertisement play verification software; and
o Development of echo cancellation/noise filtering software module
appropriate for integration into an Internet telephony program.
F. Existing Products and Services
Introduction
NCT and its subsidiaries, rather than its licensees, produces each of the
existing products and services we discuss below. 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, to our warehouse or to our third-party warehousing
provider. Our employees are 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.
Revenue recognized for our product lines based upon our technologies is
classified in our statements of operations as technology licensing fees and
royalties, product sales, advertising and engineering and development services.
Our product lines (and licenses) that comprised more than 15% of our total
revenue in any one of the last three years are as follows:
o Flat panel technology licensed to New Transducers Ltd. (NXT) comprised
approximately 15.1%, 29.2% and 44.0% of our total revenue in 2001, 2002 and
2003, respectively.
o Midcore technology licensed to Teltran International Group, Inc. (Teltran)
comprised approximately 21.7%, 26.2% and zero of our total revenue in 2001,
2002 and 2003, respectively.
o Pro Tech Communications' product revenue was 20.5%, 22.5% and 24.3% of our
total revenue in 2001, 2002 and 2003, respectively.
13
NCT Hearing Products
o NoiseBuster(R). Line of personal active noise reduction headphones and
communications headsets that has been marketed since 1997. The NoiseBuster
reduces low frequency background noise electronically using active noise
reduction technology, while leaving speech and music clearly audible. The
NoiseBuster headset is sold directly by NCT as well as through a network of
resellers.
o ProActive(R). Line of active noise reduction industrial hearing protection
and closed back communications headsets that has been marketed since 1996.
The ProActive is ideal for use in higher-noise environments consisting
largely of low-frequency noise that cannot easily be reduced with passive
methods. Low frequency noise masks the intelligibility of speech and
warning signals, which can be hazardous. ProActive is sold directly by NCT
as well as through a network of resellers.
o NB-PCU. Integration of NCT's active noise control technology into in-flight
passenger entertainment systems. As a component of the system, NCT also has
developed a low-cost headset specifically for in-flight use to be used in
conjunction with the integrated active noise reduction electronics. The
system is currently being installed in first and business-class cabins on
new United Airlines' aircraft.
Pro Tech Communication Products
Pro Tech currently sells high-quality, lightweight headsets to call centers
and the fast food industry. The following are products manufactured or assembled
by Pro Tech and sold directly by Pro Tech as well as through a network of
resellers:
o The ProCom. Lightweight fast-food headset
o The Apollo. Advanced, lightweight headset design sold for use with
telephone users in the call center and small office market
o The Apollo Freedom Series Headset. A headset made to plug directly into
phone systems that already have amplification built into their existing
handset
o The Gemini Amplifier. A full feature amplifier designed to be used in
nearly all phone or PC phone configurations in the call center and small
office market
o The USB Adapter. An adapter that allows the use of an amplifier and headset
in PC phone installations
o The DSP Intelligent Microphone. Designed to serve those markets where the
use of a headset is not wanted but headset functionality is required such
as speech recognition and speech enabling input/output PC gaming
applications
o The Manager's Headset. A lightweight over-the-ear fast-food headset which
provides improved comfort to the fast-food store manager monitoring
drive-through activity
o The A-10 Amplifier. Multi-line amplifier being offered with each of Pro
Tech's headsets, 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
o The A-27 Amplifier. Designed for automatic control distributors or phone
systems which use the standard PJ-237 2-prong plug as their interface
o The Active Series Headset. Designed for the mobile headset user
o The Trinity Headset. Designed for users in noisy environments
NCT Communications Products
ClearSpeech (R) algorithms are developed by NCT and licensed directly from
NCT to manufacturers for use in a wide variety of communications applications.
o ClearSpeech(R)Adaptive Speech Filter. Removes stationary noise from voice
transmissions
o ClearSpeech(R)Adaptive Speech Filter II. Removes broadband stationary noise
from voice transmissions, particularly aimed at automotive environments
o ClearSpeech(R)-Acoustic Echo Cancellation. Removes acoustic echoes in
hands-free full duplex communication systems
o ClearSpeech(R)-Reference Noise Filter. Isolates and removes interfering
signals, such as background radio, television, machine and siren noise, so
communications can be heard more clearly
14
o ClearSpeech(R)-Speech in Noise Detector. A noise-robust voice activity
detector that produces a binary value, depending on whether or not speech
is detected, and an audio output for which non-speech segments have been
muted
o ClearSpeech(R)-Intelligent Squelch Filter. Reduces unwanted signals such as
pops and pre-speech noise experienced in some radio communications
o ClearSpeech(R)-Line Echo Cancellation. Reduces electrical echo caused by
2-4 wire hybrids in telephone networks
o ClearSpeech(R) Adaptive Noise Suppressor. Reduces signals that are below a
given threshold
o ClearSpeech(R)-Mic. The first digital noise reduction microphone system for
use with hands-free communication systems, substantially reduces background
road, tire, wind, engine and traffic noise from hands-free calls, allowing
the person receiving the call to hear voices more clearly and with less
frustration
o ClearSpeech(R)-Speaker. A loudspeaker that cleans background noise from the
incoming speech signal over a two-way or mobile radio for better
intelligibility, suitable for use with mobile radios, fleet communication
systems, marine radios and many other communication systems
o ClearSpeech(R) Chip Set. Currently being sold for incorporation into
communication systems at drive-through fast-food restaurants, allows the
system to filter background car noise so that only the voice comes through,
cutting down on errors in the order process
o ClearSpeech(R)-PCB Board. Currently sold for incorporation into
communication systems for public transportation buses
o ClearSpeech(R)-Algorithm Evaluation Platform. A hardware platform designed
to facilitate real-time evaluation of the ClearSpeech algorithms
NCT Audio Products
Gekko(TM) flat speaker and ArtGekko(TM) speaker grille. Line of flat audio
speakers utilizing NCT's patented flat panel transducer technology and line of
acoustically permeable, decorative speaker grilles. With this technology,
Gekko(TM) speakers deliver sweet space sound that floods the room with sound as
opposed to conventional speakers which deliver sound like a spotlight. Available
in two sizes, 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. Gekko(TM) flat speakers have
been sold since 1998 through a network of audio retailers. NCT Audio also
provides flat speakers for Distributed Media Corporation's Sight & Sound(R)
microbroadcasting system.
Distributed Media Corporation Advertising
Sight & Sound(R) system. Sight & Sound(R) provides advertisers with a
place-based medium in out-of-home commercial and professional establishments.
The Sight & Sound(R) unit is comprised of a stationary billboard format and
broadcast music and advertisements. The source of the sound for the system is
our digital broadcast system that 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 installed in the store. The system is
controlled and monitored remotely from a central site and the system is scalable
to any number of sites. The audio portion of the advertising is downloaded
electronically while the print aspect of our advertisements is sent to
independent agents who place the advertisements in the establishments.
The viability of this business is dependent on advertising placements.
Because of this and because advertisers, especially national advertisers,
require significant reach into a market when purchasing media, an important
objective of DMC is to develop a substantial network of establishments as
quickly as possible. There are two different strategies DMC has employed for
building the Sight & Sound(R) network. One strategy is for DMC to contract
directly with large national retailers (such as Barnes & Noble College
Bookstores) and with health care facilities for the deployment of the Sight &
Sound(R) music system and media service in their establishments. Under this
contract strategy, DMC (or its designee) provides, installs and operates the
Sight & Sound(R) system at its directly contracted locations and pays the
contracted person (such as Barnes & Noble College Bookstores or the health care
facility) a percentage of the advertising revenue generated by its installed
locations. As contracted, we
15
maintain the system by providing the music genre selected along with the audio
advertisements to be aired and the billboard advertisements to be displayed on
the flat panel speakers at the respective locations. DMC pays a portion of the
advertising revenue generated (a royalty) as compensation for our use of the
facilities where the Sight & Sound(R) system is located (including the
establishments secured by DMC's licensees). We believe the payment serves
several purposes including: an inducement for the establishment owner to house
the Sight & Sound(R) unit and an incentive for the establishment owner to seek
and promote advertisers to air/display advertisements at the location.
DMC had executed a contract with Barnes & Noble College Bookstores, which
allows for the placement of our Sight & Sound(R) system in its approximately 400
retail store locations throughout the U.S. (as our cash resources will allow).
As of December 31, 2003, 33 Barnes & Noble College Bookstores locations are
currently operating DMC digital broadcasting systems primarily installed in
2000. Our installed base of operating Barnes & Noble College Bookstores
locations has declined due to lost leases and new construction by the retailer.
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.
A second strategy developed to accelerate the expansion of the Sight &
Sound network is the licensing of market areas (by geographic territories or
lines of business). As a way of accelerating the growth of DMC and delivering
expanded reach to its advertisers, through 2000, DMC had actively pursued a
licensing strategy of forming national and international affiliate networks
(generally within a defined geographical or market area such as health,
education, hospitality or fitness). Since 2000, DMC has de-emphasized its
licensing efforts due to insufficient capital to market to prospective
licensees, inadequate financing to provide equipment to the licensees, as
needed, and weakness in the advertising sector. In the licensing strategy, DMC
(as licensor) provides the Sight & Sound unit to the licensee, as the licensee
may request. The licensee secures locations to house the Sight & Sound unit, is
responsible for the installation, maintenance and operation of the Sight & Sound
unit and is responsible for selling local and regional advertising in its
licensed area. Upon request from the licensee and for a fee, DMC maintains the
system by providing music of the selected genre along with the audio and visual
advertising scheduled to be aired and displayed on the behalf of the paying
advertiser. DMC installs and operates the system on behalf of the licensee only
as requested by the licensee and for a fee. Both DMC and the licensee are
responsible for selling advertising, although DMC's emphasis is to attract
national advertisers (see discussion of DMC licensing activities in I. - Revenue
below). As noted above, DMC pays a portion of the advertising revenue generated
to the licensee as compensation for our use of the facilities where the Sight &
Sound(R) system is located. We believe the payment serves as an inducement for
the licensee to secure locations to house the Sight & Sound(R) unit and provides
an incentive for the licensee to seek and promote advertisers to air/display
advertisements at its locations.
Artera Group Products
Artera Turbo is a software-based service that improves the effective
performance of communication lines for Internet-based applications such as web
browsing, e-mail and file transfers. It accomplishes these improvements by
employing a number of patent-pending, performance enhancement techniques that
decrease the size and increase efficiencies in the movement, storage and
delivery of electronic data. The core of the Artera Turbo service is the
MidPoint technology, which we combined with other performance enhancing
technologies we invented to create Artera Turbo. The following releases have
been made:
o With Artera Turbo version 1 (released January 2002), local area
network-based PC users (typically, businesses) utilizing multiple dial-up
lines are able to achieve effective speeds of up to four times the normal
speed of dial-up lines. The effective speeds of faster connections such as
cable, digital subscriber line and integrated services digital network are
improved as well.
o With Artera Turbo version 2 (released October 2002), residential, single PC
users with a single dial-up line are able to achieve effective speeds
averaging five times as fast as those achieved when Artera Turbo is not
used. The effective speeds of faster connections such as cable, digital
subscriber line and integrated services digital network are improved as
well.
o With Artera Turbo version 2.5 (released January 2003), the single dial-up
line, single PC user is able to achieve effective speeds averaging 5.6
times as fast as those achieved when Artera Turbo is not used. The
effective speeds of faster connections such as cable, digital subscriber
line and integrated services digital network are also improved.
16
o With Artera Turbo 3.0 (released April 2003), we introduced an intuitive
user interface that makes accessing features, adding options and changing
settings easier for the user and that includes visual feedback to the user
to indicate some of Artera Turbo's most important features.
o With Artera Turbo Version 3.1 (released December 2003), we added the
ability to increase effective speeds of e-mails that are not web-based
(e.g., Microsoft Outlook(R)e-mails), including compressible attachments
sent with them, and of compressible files uploaded or downloaded via file
transfer protocol (FTP). We also added an automatic software update feature
and enhanced parental controls, which are important to the residential
user. The Local Area Network (LAN)-based product allows small office and
home network users connected to a LAN to share an Internet connection by
teaming multiple dial-up or other lines. For broadband access to LAN-based
technology, the user is able to achieve more than twice the effective speed
using less than half the bandwidth. Also within this version of Artera
Turbo was our Road Warrior client software, which allows notebook computer
users to move easily from their office LANs to use at home or on the road.
For each application of Artera Turbo, the level of its performance depends
on the nature of the data being transmitted. The general rule is that the more
compressible, cacheable and inefficiently designed the data, the higher Artera
Turbo's performance. Artera Turbo is most effective with web browsing, e-mail,
e-mails with compressible attachments and file transfer of compressible files.
Artera Turbo is less effective with streaming media, secure web pages such as
those used for credit card forms, e-mail with non-compressible attachments and
FTP transfers of non-compressible files. While Internet connections are
generally faster with multiple lines (requiring multiple modems and, typically,
multiple Internet service provider accounts), Artera Turbo achieves effective
speed improvements with only one line, modem, Internet service provider account
and personal computer. All of the performance enhancements described above have
been verified in tests conducted in our laboratories, although we have not
contracted independent laboratories to conduct the tests on the product.
Although there are other products being marketed by Internet service
providers and other vendors that perform services similar to Artera Turbo, we
differentiate our product from the competition by offering high performance with
more features and greater adaptability. For example:
o Artera Turbo works with any type of Internet connection including dial-up,
ISDN, wireless, satellite, DSL, cable and T-1 lines. Many Internet speed
enhancers deliver speed improvements only for narrowband dial-up.
o Artera Turbo includes an integrated, ultra-secure firewall to protect
computers from viruses, hackers and other unwanted attacks. To our
knowledge, no other Internet speed enhancer contains this feature.
o Artera Turbo includes integrated web site parental controls to allow
parents to determine which web pages their children may or may not visit.
To our knowledge, no other Internet speed enhancer contains this feature.
o All current Internet speed enhancers trade off, to some extent, on-screen
graphics resolution for effective speed increases, but with Artera Turbo,
our tests indicated the rate of effective speed increase for a given level
of graphics resolution reduction is higher than with other Internet speed
enhancers;
o Artera Turbo comes in a single user residential version and a small
office/home office (SoHo) version that can support up to 249 concurrent
users on a LAN. In 2004, we have developed an enterprise version that will
support 250 or more concurrent users on a LAN.
We continue to work to improve Artera Turbo to allow even faster effective
Internet speeds and to permit the use of the product under additional personal
computer and network configurations. Artera Turbo will remain a valuable product
even if the use of narrowband dial-up Internet access declines in the United
States over time, because (i) Artera Turbo increases effective speeds of faster,
broadband connections as well as dial-up; (ii) any decline in dial-up in the
United States will be gradual; (iii) Artera Turbo will still be able to service
large numbers of dial-up customers in other countries; and (iv) with forthcoming
versions, Artera Turbo will be able to improve effective data transfer speeds
within internal LANs not connected to the Internet.
Artera Turbo is delivered to end users as a subscription service, generally
on a month-to-month basis but sometimes under annual or other arrangements.
Artera markets its services to regulated and unregulated phone companies,
Internet service providers (ISP), wireless providers and other organizations
that offer Internet access services. Artera continues to expand its distribution
channels for resellers. Distribution is via Artera's network of exclusive and
non-exclusive distributors and their resellers in the United States and around
the world. Distributors
17
include ISPs and others that offer Internet access services such as Incumbent
Local Exchange Carriers and Competitive Local Exchange Carriers. Artera Turbo is
generally offered to end users in one of the following ways:
o As a bundled offering, in which a reseller has a single offering of
Internet access service and Artera Turbo is an included part of that
offering for all of the reseller's customers.
o As a premium offering, in which a reseller offers a standard Internet
access service that does not include Artera Turbo and a premium Internet
access service that does, with the customer selecting between the two.
o As a separate offering, in which a reseller offers Artera Turbo as a
distinct product that can be purchased and used to enhance the existing
Internet access offerings of the reseller.
Artera Turbo pricing to distributors varies depending on the version being
distributed, the geographical territory, the volume of distribution, the support
services performed by the distributor, the nature and extent of the distribution
and marketing commitments and, of course, the competitive environment. Artera
Turbo pricing to end users is determined by the resellers. Some resellers do not
specifically charge for Artera Turbo, choosing instead to include it in their
offerings to improve performance, reduce end user turnover (churn) and garner
new customers. Of the distributors who do charge for Artera Turbo, monthly per
user charges generally range from $2.00 to $5.00. Other Internet access speed
enhancers are generally priced in the same range. Our experience with retaining
Artera Turbo subscribers is at or above the norm for similar paid
Internet-related services. The majority of distributors signed by Artera
continue to offer Artera Turbo to their customers.
In 2002, Artera, FairPoint Communications, Inc. and FairPoint Broadband,
Inc., a wholly-owned subsidiary of FairPoint Communications, Inc., executed
various license agreements whereby FairPoint served, with some exceptions, as
the exclusive master distributor of Artera Turbo to ILECs, rural local exchange
carriers and certain ISPs in the United States and Canada and have other
non-exclusive rights with respect to Artera Turbo in that territory. On May 23,
2003, FairPoint Broadband and Artera entered into a memorandum of understanding
in which they noted their mutual intent to execute a new agreement. On November
1, 2003, the parties executed a new agreement that replaced the prior agreements
with FairPoint Broadband and FairPoint Communications. Please refer to Note 13 -
notes to the consolidated financial statements.
As of December 31, 2003, FairPoint has paid us $546,000 in non-refundable
license fees representing the total amount due us. The balance of the license
fee of $2.0 million required under one of the prior agreements will not be
collected because of the renegotiated agreement executed in 2003. To date,
Fairpoint has paid us only a nominal amount (less than $1,000) in royalties.
FairPoint has told us that it has not sought alternative vendors for services
like Artera's, but rather has worked with Artera to make the relationship more
beneficial for both parties. We too have not sought a replacement for FairPoint
and have worked to improve the relationship for mutual benefit. Although we
continue to sign up and seek other distributors for Artera Turbo in North
America and beyond, those are additions to, not replacements of, FairPoint. Our
experience with retaining Artera Turbo subscribers through FairPoint is
comparable to our experience through other distributors, which is at or above
the norm for similar paid Internet-related services.
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 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:
18
- --------------------------------------------------------------------------------
Date Initial
Relationship
Key Licensees Established Applications
------------- ----------- ------------
Ultra Electronics Ltd. June 1991 Aircraft Cabin Quieting Systems
New Transducers Ltd. March 1997 Flat Panel Transducers
Oki Electric Industry Co., Ltd. October 1997 Communications
STMicroelectronics SA & November 1998 Java(TM)platform
STMicroelectronics Srl
Delphi Automotive Systems May 2000 Communications
Sharp Corporation August 2001 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 (refer to Note 4 - notes to the consolidated financial statements
for further details). Each quarter on a timely basis, Ultra provides us with an
accounting of its sales of products incorporating NCT technology; however, Ultra
tends to not pay us the royalties due on a timely basis.
New Transducers Ltd. (U.K.)
New Transducers Ltd. (NXT), its parent, NXT plc, a United Kingdom company
listed on the London Stock Exchange, NCT and NCT Audio executed various
cross-licensing agreements in 1997. In 2001, NCT and NXT entered into an
arrangement to reorganize the cross-license agreements between the companies.
Under the new agreements, we received two million ordinary NXT plc shares in
consideration of the cancellation of the royalty payable by NXT to NCT Audio
under the 1997 cross-license agreement. The NXT plc shares, upon issuance, had a
market value of approximately $9.2 million; these shares were sold for $6.9
million after commissions, resulting in a loss of $2.3 million. We used the cash
proceeds in accordance with the revised agreements. In addition, ownership of
specified intellectual property, the rights to which were previously licensed to
NXT, was 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 agreed to design a low-cost flat panel
speaker for use by Distributed Media Corporation. 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 DMC 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 (refer to Notes 4, 16 and 17 - 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 (refer to Note 4
- -
19
notes to the consolidated financial statements). This agreement terminates upon
the expiration of the last applicable licensed patent, unless earlier terminated
by written agreement of the parties.
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 smart card
applications. The T2J-processor core is designed to accelerate the execution of
Javacard(TM)-based smart card 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 revenue of $0.2 million in 1998 and
$2.2 million in 1999. We anticipate royalty revenue from this source may be
significant in the future. Royalty payments (based on an amount per T2J
microprocessor core unit) from STMicroelectronics commenced during 2003. In
accordance with the 1998 agreement, as amended, 50% of the earned royalty
payments will not be paid until ST exhausts the $900,000 minimum royalty it
prepaid in 1999; the other 50% will be paid to us and recognized as royalty
revenue when billed by us (our billings are based upon royalty reports provided
to us quarterly by ST). For the year ended December 31, 2003, we earned
approximately $28,000 in royalties from ST and recognized approximately $14,000
in royalty revenue. As of December 31, 2003, the remaining balance of prepaid
royalty was approximately $886,000.
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. NCT
has recognized approximately $30,000 of royalty revenue from Delphi for the year
ended December 31, 2003.
Sharp Corporation (Japan)
In August 2001, NCT and Sharp executed a license agreement for an initial
term of three years. Under the agreement, which included an up-front development
fee of $75,000 and future per unit royalties to NCT (due upon sale of licensed
products), Sharp licensed our ClearSpeech(R) adaptive speech filter algorithm
for use with Sharp's current and future wireless communication products. In
2002, Sharp Japan's Communication Division incorporated NCT's ClearSpeech(R)
adaptive speech filter algorithm into its new line of Third Generation Cell
Phones (3G Phones). The adaptive speech filter cleans background noise from
transmitted speech for improved voice quality, listening comfort and
intelligibility. Sharp pays NCT a royalty for each licensed product sold,
leased, distributed or otherwise transferred by Sharp. Each licensed product is
a "unit" for purposes of the royalty calculation, each unit has one or more
"channels" defined as each simultaneous or concurrent channel of signal
processing embodying or employing all or part of the licensed patents or
technology. The per unit royalty is as follows: $0.50 per channel for the first
500,000 channels; $0.45 per channel in excess of 500,000 channels to and
including 1,000,000; and $0.30 per channel in excess of 1,000,000. To date, we
have received only one royalty payment of approximately $3,400 from Sharp
(received in the third quarter of 2002).
H. Marketing and Sales
In addition to licensing its technologies, NCT markets its products and
services through its subsidiaries in a variety of ways. Generally, the
subsidiaries take a distribution channel approach, as opposed to direct selling.
NCT assists each subsidiary with executing marketing communications programs
that maximize the reach into the target audience while minimizing the expense.
We employ public relations in addition to other targeted direct efforts such as
direct mail and e-mail marketing. Where appropriate, we advertise in industry
trade magazines as well as attend and exhibit at trade shows. As of February 29,
2004, NCT and its subsidiaries had an internal sales and marketing force of 13
employees.
20
Financial information relating to domestic and foreign sales and sales for
the years ended December 31, 2001, 2002 and 2003 is set forth in Note 26 - 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 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. Revenue
The following table sets forth the percentage contribution of each of our
operating segments in relation to total revenue for the years ended December 31,
2001, 2002 and 2003. The 2001 revenue and percentage contribution includes
$222,000 technology licensing fee revenue we recognized on licenses (in the
media business segment) that we subsequently determined to reacquire (see
below). Please note that in the following table, "other" represents amounts to
reconcile the reportable segment data to the consolidated financial statements,
primarily items eliminated in consolidation (refer to Note 25 - notes to the
consolidated financial statements).
(In thousands of dollars)
Years Ended December 31,
---------------------------------------------------------------------------------------------
2001 2002 2003
--------------------------- --------------------------- ---------------------------
Amount % of Total Amount % of Total Amount % of Total
------------ ------------- ----------- ------------- ----------- -------------
Communications $ 8,019 75.6% $ 5,963 81.5% $ 3,681 75.8%
Media 2,612 24.6% 2,270 31.0% 2,272 46.7%
Technology 1,028 9.7% - - 14 0.3%
Other (1,047) (9.9%) (914) (12.5%) (1,109) (22.8%)
------------ ------------- ----------- ------------- ----------- -------------
Total $ 10,612 100.0% $ 7,319 100.0% $ 4,858 100.0%
============ ============= =========== ============= =========== =============
The following table sets forth the percentage contribution of the separate
operating segments in relation to NCT's technology licensing and royalty revenue
for the years ended December 31, 2001, 2002 and 2003.
(In thousands of dollars)
Years Ended December 31,
---------------------------------------------------------------------------------------------
2001 2002 2003
--------------------------- --------------------------- ---------------------------
Amount % of Total Amount % of Total Amount % of Total
------------ ------------- ----------- ------------- ----------- -------------
Communications $ 2,639 46.8% $ 2,334 52.0% $ 843 28.0%
Media 1,834 32.6% 2,140 47.6% 2,140 71.0%
Technology 1,028 18.3% - - 14 0.5%
Other 132 2.3% 19 0.4% 16 0.5%
------------ ------------- ----------- ------------- ----------- -------------
Total $ 5,633 100.0% $ 4,493 100.0% $ 3,013 100.0%
============ ============= =========== ============= =========== =============
Technology licensing fees and royalties were approximately 53.1%, 61.4% and
62.0% of total revenue for the years ended December 31, 2001, 2002 and 2003,
respectively. Our 2003 technology licensing fees were primarily attributable to
recognition of deferred revenue from license agreements entered into prior to
2002. We do not expect to receive cash or other consideration from our deferred
revenue. In some cases, the consideration we received for licenses was for an
amount less than we recorded as deferred revenue. In addition, our revenue
includes DMC licenses we subsequently reacquired ($222,000 of the revenue
recognized in 2001). Our repurchased license cost was $19.3 million, net of
reduction of deferred revenue in 2001 and $9.2 million in 2002. Our 2003
technology licensing fees and royalty revenue was primarily attributable to
recognition of deferred revenue of $2.1 million from the New Transducers Ltd.
License and did not represent cash. Our 2002 technology licensing fees and
royalty revenue was primarily attributable to recognition of deferred revenue of
$2.1 million from the New Transducers Ltd. license and $1.9 million from Teltran
International Group, Inc. license and did not represent cash. Our 2001
21
technology licensing fees and royalty revenue were primarily attributable to
recognition of deferred revenue of $1.6 million from the New Transducers 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 and did not represent cash.
Aggregate DMC license fees recognized were $222,000 in 2001 (approximately
$111,000 for each of Brookepark and Eagle Assets) and zero in 2002 and 2003. DMC
had licensed the New York designated market area to Eagle Assets Limited in
March 2000 and in 1999 to investors who transferred their licenses to DMC New
York, Inc. (DMC NY). Please refer to "Certain Relationships and Related
Transactions" for a description of our reacquisition of licenses from DMC NY for
which we incurred charges of $18.0 million and approximately $9.2 million,
respectively, in 2001 and 2002.
In 2001, we agreed to reacquire the license issued to Eagle Assets to
develop a portion of the New York microbroadcasting region and have accrued $2.0
million for such reacquisition with the form of consideration currently being
negotiated. Also in 2001, we agreed to reacquire the license issued to
Brookepark Limited for the right to operate in Israel for $2.0 million and we
have accrued that amount in our consolidated financial statements. The
reacquisition was to be 50% from Brookepark and 25% from each of two transferees
from Brookepark: Austost Anstalt Schaan and Balmore S.A. This Israel license has
not yet been reacquired but only the terms with respect to the form of
consideration are in negotiation. Upon our decision to reacquire DMC licenses
previously sold to Brookepark and Eagle Assets, we reduced the remaining
deferred revenue to zero (we recorded an expense of $1.3 million expense
representing our $4.0 million reacquisition price for the Eagle Assets and
Brookepark licenses, less $2.7 million reduction of unrecognized deferred
revenue; these were part of the aggregate $19.3 million, net, repurchased
license charge in 2001). For the DMC licenses held by each of Eagle Assets and
Brookepark, we negotiated and agreed in principle that the reacquisition cost
would be $2.0 million for each; thus, the amount we accrued is one we expect
will not be subject to further negotiation. We do not have written agreements to
reacquire the licenses. Our negotiations were with the investment advisors of
Brookepark and Eagle Assets who represented to us that they were authorized to
negotiate on behalf of the licensees. The ongoing negotiation is with respect to
the form of consideration that the $2.0 million to be paid to each of Eagle
Assets and Brookepark. We have agreed that the reacquisition price will be paid
with debt or equity securities of NCT or its subsidiaries (not cash). Due to
poor performance of NCT and its subsidiaries over the last two years, the entity
from which the debt or equity securities will be issued and the form of that
consideration have not been agreed upon by the parties. From time to time, we
have had discussions about the form of consideration with the investment
advisors for the licensees. Our DMC licensees have not generated any revenue
with the technology DMC licensed to them nor have they used the DMC licenses to
distribute the Sight & Sound(R) systems.
NCT's product revenue for the years ended December 31, 2001, 2002 and 2003
is primarily attributable to its communications operating segment. Product
revenue was approximately $4.6 million (43.0% of total revenue), $2.7 million
($36.8% of total revenue) and $1.7 million (35.2% of total revenue) for the
years ended December 31, 2001, 2002 and 2003, respectively. Product gross profit
for the years ended December 31, 2001, 2002 and 2003 was $1.2 million, $1.4
million, and $0.9 million, respectively.
Advertising revenue (media operating segment) was $279,000, $105,000 and
$88,000, respectively, for the years ended December 31, 2001, 2002 and 2003 and
represented 2.6%, 1.4% and 1.8% of total revenue for the years ended December
31, 2001, 2002 and 2003, respectively. Our advertising placements have been
limited because of limited financial resources to outfit establishments, which,
in turn, result in limited reach available to advertisers. Advertising gross
profit for the years ended December 31, 2001, 2002 and 2003 was $(53,000),
$90,000, and $74,000, respectively.
J. Concentrations of Credit Risk
As outlined below, our three largest technology licensing fees and royalty
customers accounted for approximately 97.7% of technology licensing and royalty
revenue during 2003.
22
(In thousands of dollars)
As of December 31, 2003
and For the Year then Ended
---------------------------------
Customer Receivable Revenue
---------------------------------------- ------------- --------------
New Transducers Ltd. (NXT) $ - $ 2,140
Fairpoint Broadband, Inc. - 437
OKI Electronic Industry Co., Ltd. - 366
Ultra Electronics, Ltd. 16 16
STMicroelectronics 7 14
Delphi Automotive Systems 5 30
All Others (a) 284 10
------------- --------------
Total licensing fees and royalties $ 312 $ 3,013
============= ==============
Footnote:
- ---------
(a) $250 of receivable is reserved.
As outlined below, our three largest product customers accounted for
approximately 29.9% of product revenue during 2003 and 12.6% of aggregate gross
accounts receivable at December 31, 2003.
(In thousands of dollars)
As of December 31, 2003
and For the Year then Ended
---------------------------------
Customer Receivable Revenue
---------------------------------------- ------------- --------------
HM Electronics $ 65 $ 203
Muzak 7 194
3M Corporation 3 114
McDonalds 16 102
AM-COM - 12
Velocity Internet, LLC 10 10
All Others 183 1,073
------------- --------------
Total product $ 284 $ 1,708
============= ==============
NCT sells its products and services to original equipment manufacturers,
distributors and end users in various industries worldwide. Although our policy
is to collect receivables in cash, from time to time, our revenue and accounts
receivable may be settled in securities of the customer's company or in
securities of NCT or its subsidiaries held by the customer rather than cash, and
we may not realize cash in the amount recorded for the transaction.
Our payment terms are dependent on the type of revenue. Generally, trade
receivables are due 30 to 60 days after the invoice date; royalty receivables
are due 30 to 90 days after they are earned; and license fee 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 maintained
primarily in banks and in 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.
23
K. Competition
We have a number of direct competitors. To our knowledge, each of our
competitors is pursuing its own technology, either on its own or in
collaboration with others, and has commenced attempts to commercially exploit
such technology. NCT 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 and services includes:
Competitive
------------------------------------------------------------------------
Product/Service Competition Advantages Disadvantages
--------------- ----------- ---------- -------------
NoiseBuster(R) headphone Sony, Bose High performing active noise reduction; Limited name recognition;
low cost product limited marketing and
distribution; long lead
times for production
Pro Tech lightweight Plantronics, Inc., Superior design and construction; low Limited name recognition;
telephone headsets GN Netcom, Inc. cost product limited marketing and
distribution; long lead
times for production
Gekko(TM)flat speakers Sony, Aiwa, and any other Flat wall-mounting design; greater sound Limited name recognition;
speaker manufacturer dispersion; wide choice of decorator limited marketing; long
facades lead times for production
ClearSpeech(R) noise and Lucent, Texas Instruments, High-quality noise and echo cancellation; Limited name recognition;
echo cancellation other large communications minimal voice quality degradation limited marketing
companies
Sight & Sound(R) system In-store music providers Ongoing cash incentives to site owners; Limited name recognition;
such as Muzak; other demographically targeted opportunity for limited marketing
advertising media advertisers
Artera Turbo(TM) service Internet accelerator services Speeds up all types of access including Limited name recognition;
from Propel, Proxyconn and dialup, ISDN, DSL, cable, satellite, limited marketing
Slipstream; broadband wireless; greater functionality including
Internet access services firewall and parental controls; addresses
more markets with single-user residential
version and LAN-version for small
business and enterprise
L. 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.
M. Employees
NCT and its subsidiaries had 68 employees as of February 29, 2004. The
employees include 13 in sales and marketing; 13 in executive and administrative
roles; 14 in the areas of finance, accounting, human resources, legal,
information technology and intellectual property; 22 in engineering and
development; and 6 in operations and
24
production. None of our employees is represented by a labor union. NCT considers
its relationships with employees to be satisfactory.
N. Recent Financing Transactions
Our financing transactions during the year ended December 31, 2003
consisted of convertible notes issued to Carole Salkind and others (refer to
Note 12 - notes to the consolidated financial statements).
During the fourth quarter of 2003, we reached an oral agreement with
Crammer Road LLC to cancel the July 2002 private equity credit agreement and
replace it with a new private equity credit agreement. The new private equity
agreement will have similar business terms to the existing agreement but it will
include enhanced disclosures that we believe will be more easily understood by
our shareholders.
From January 1, 2003 through December 31, 2003, we issued an aggregate of
approximately $41.7 million debt to Carole Salkind that included approximately
$10.4 million from cash invested by Ms. Salkind in 2003 and included
approximately $25.9 million of principal that we rolled over into new debt,
along with approximately $2.4 million in default penalties (10% of the principal
in default), approximately $1.9 million in accrued interest and approximately
$1.0 million additional consideration. Such rollover principal included
approximately $23.9 million of principal in default on matured convertible notes
that we did not repay and approximately $2.0 million that was not in default but
the underlying notes were consolidated at Ms. Salkind's request (along with
interest and additional consideration) into a new note, payable on demand. The
notes held by Ms. Salkind are convertible into shares of NCT at fixed conversion
prices or exchangeable for shares of any NCT subsidiary (except Pro Tech
Communications, Inc.) that makes a public offering of its common stock (at the
public offering price). See the section below called "Certain Relationships and
Related Transactions."
On April 22, 2003, NCT issued a convertible note to Alpha Capital
Aktiengesellschaft for $235,000. The note matures on April 22, 2005 and bears
interest at 8% per annum, payable January 1, 2004 and annually thereafter, and
at maturity. From April 10, 2004 until the note is paid in full, Alpha has the
right to convert any outstanding principal of the note, and at Alpha's election,
the interest accrued on the note into shares of NCT common stock at a conversion
price per share of $0.04. The company would be required to make certain
liquidating damages payments if it fails to effect a conversion in a timely
manner. NCT has an obligation to register for resale the underlying common stock
(see below).
On September 4, 2003, NCT issued a convertible note to Alpha Capital
Aktiengesellschaft in the principal amount of $400,000 and to Libra Finance
S.A., as finder, in the principal amount of $40,000. These notes mature on
September 4, 2005. Interest accrues at the rate of 8% per annum and is payable
January 1, 2004 and annually thereafter, and at maturity. From April 10, 2004
until the notes are paid, the holders have the right to convert any outstanding
principal of the notes, and at the election of the holder, the interest accrued
on the notes into shares of NCT common stock at a conversion price of 80% of the
average of the closing bid price for the five days immediately preceding
conversion. The company would be required to make certain liquidating damages
payments if it fails to effect a conversion in a timely manner. NCT has an
obligation to register for resale the underlying common stock (see below).
For the April 22, 2003 and the September 4, 2003 notes, NCT is obligated to
file a registration statement with the Securities and Exchange Commission (SEC)
covering 140% of the underlying common shares for resale within 45 days after
the latest of the effectiveness of, abandonment of or failure to pursue the
declaration of effectiveness of three other registration statements (NCT's
pending registration statement, a registration statement covering the shares
issuable upon the conversion of our series H preferred stock and a registration
statement covering the shares for our private equity credit agreement). Such
registration statement must be declared effective within 150 days of its filing.
If the filing and effectiveness deadlines are not met or the number of shares
covered by an effective registration statement is less than 120% of the amount
needed for conversion of the outstanding notes, liquidated damages accrue at the
rate of 2% per month of the principal outstanding and of the principal and
interest attributable to the note amounts converted into shares. Such liquidated
damages are due in immediately available funds within 10 days of demand.
25
O. Operating segments
For a full discussion of operating segments and geographic areas, refer to
Notes 25 and 26 - notes to the consolidated financial statements.
P. Available Information
You may visit our website at http://www.nctgroupinc.com for further
information about our business. 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 Securities and Exchange
Commission'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 Securities and Exchange Commission at 1-800-SEC-0330. Our
Securities and Exchange Commission filings are also available to the public from
the Securities and Exchange Commission'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
that 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 the corporate headquarters
for several of our subsidiaries including DMC, Advancel, Artera and DMC
HealthMedia and our sales and marketing offices.
We entered into a lease agreement effective March 21, 2002 for 2,400 square
feet of space located at 7525 Connelley Drive, Suite C, Hanover, Maryland for a
term of three years, which expires March 2005, at a monthly rental of $2,400.
This facility is used for NCT Hearing engineering.
Pro Tech's executive, sales and manufacturing facilities occupy
approximately 13,000 square feet of space located at 4492 Okeechobee Road, Fort
Pierce, Florida, pursuant to a lease agreement which expires in February 2006
and provides for monthly rental of approximately $5,000 increasing to
approximately $8,000 over the five-year term.
Artera's sales and product development operations occupy approximately
6,400 square feet of space located at 900 Straits Turnpike, 2nd Floor,
Middlebury, Connecticut pursuant to a five-year lease agreement, which expires
March 2004, for an average monthly rental of approximately $10,600. We are
negotiating the terms of an extension of the existing lease.
Our European operations are conducted primarily 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 $5,000, subject to
annual inflationary adjustments. In addition, we occupy approximately 2,100
square feet of space in Staffordshire, England pursuant to a three-year lease
agreement, which expires February 2006, for an average monthly rental of
approximately $1,050.
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 2004.
ITEM 3. LEGAL PROCEEDINGS
Theater Radio Network - InsiderStreet (Neometrix) 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
26
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 February 28, 2002, Theater Radio
Network (DMC Cinema) ceased operations, although that does not preclude it (or
an assignee) from further prosecuting the Theater Radio Network claims. On March
26, 2002, Theater Radio Network retained new counsel in this action. On or about
October 9, 2002, InsiderStreet.com, Inc. changed its name to Neometrix Corp. On
or about April 14, 2003, Neometrix Corp. changed its name to Neometrix
Technology Group, Inc.
Production Resource Group Litigation
On June 6, 2001, Production Resource Group (PRG) began legal proceedings
against NCT and our subsidiary, Distributed Media Corporation, in the Superior
Court for the Judicial District of Fairfield County, Connecticut. PRG's
complaint alleged 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(R) equipment. The complaint also alleged 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. On July 26, 2001, the court granted a pre-judgment remedy
giving PRG the right to attach or garnish up to $2.1 million of specified assets
of NCT and DMC. On October 4, 2001, we filed an answer to the plaintiff's
complaint, denying PRG's material allegations, seeking dismissal of the
complaint and counterclaiming for breach of PRG's obligation to deliver
equipment.
On December 20, 2001, NCT and DMC accepted an Offer of Judgment requiring
NCT and DMC to pay PRG $2.0 million. That judgment was entered on January 17,
2002 along with costs of $0.2 million. In December 2001, we recorded all
anticipated liability related to payment of this judgment. PRG is conducting
post-judgment discovery regarding enforcement of the judgment. In June 2003, in
furtherance of its efforts to collect on the judgment, PRG filed the judgment in
the Circuit Court for Anne Arundel County, Maryland; the Superior Court of New
Jersey, Hudson County; and the Circuit Court of St. Lucie County, Florida.
Beginning February 2003, PRG has served papers on NCT and DMC seeking to enforce
the judgment against their assets. PRG has also served papers on the
subsidiaries of NCT and DMC, and on various third parties with which NCT and DMC
do business, seeking to enforce the judgment against any assets of NCT and DMC
in the possession of those served. As of February 29, 2004, PRG had collected
approximately $135,000 in NCT's and DMC's cash or cash equivalent assets as a
result of the judgment (including the pre-judgment remedy referred to above). On
or about December 10, 2003, PRG filed a motion for an Order in Aid of Execution
requiring NCT and DMC to turn over to a Connecticut state marshal, for possible
sale for the benefit of PRG, equity and debt securities NCT and DMC hold
(including equity in their subsidiaries) sufficient to satisfy the approximately
$2.1 million remaining on the judgment. In connection therewith, on February 25,
2004, NCT turned over to the marshal, for possible sale for the benefit of PRG,
NCT's 5,876 shares of common stock of NCT Audio Products, Inc. representing 100%
of the issued and outstanding shares of NCT Audio. At the same time, DMC turned
over to the marshal, for possible sale for the benefit of PRG, DMC's 20,000
shares of common stock of DMC Cinema, Inc. representing 84% of the issued and
outstanding shares of DMC Cinema, its 100 shares of common stock of DMC
HealthMedia Inc. representing 100% of the issued and outstanding shares of DMC
HealthMedia, a $153,956 principal amount promissory note from (and related
security agreement with) DMC Cinema and a $1,388,666 principal amount promissory
note from (and related security agreement with) DMC HealthMedia. NCT reported to
the court that all of the other equity and debt securities NCT owns could not be
so turned over because they are covered by security interests in favor of Carole
Salkind and are in her possession. To the extent that further payment of the
judgment is in cash or in securities turned over and sold for the benefit of
PRG, such payment could be material to our financial position.
On January 2, 2002, outside the scope of the judgment entered into with NCT
and DMC, PRG amended its Connecticut complaint to allege that NCT's Chairman and
Chief Executive Officer Michael Parrella, in dealing with PRG on behalf of NCT,
committed breaches of good faith and fair dealing, unfair trade practices and
fraud. NCT has agreed to indemnify Mr. Parrella for any liabilities (including
legal fees) he may incur as a result of the PRG claims against him in this
action. On July 15, 2002, Mr. Parrella moved to strike the portions of PRG's
amended complaint that pertain to him personally. On February 25, 2003, the
court granted Mr. Parrella's motion in part,
27
striking those portions of the amended complaint against him that allege a
breach of an obligation of good faith and fair dealing, but declining to strike
those portions of the amended complaint against him that allege unfair trade
practices and fraud. On August 8, 2003, Mr. Parrella filed a motion for summary
judgment on all remaining allegations. On March 11, 2004, the court denied the
motion. Trial has been tentatively scheduled for September 2004. Mr. Parrella
has told NCT that he intends to deny and defend against all pending allegations.
To the extent that NCT may ultimately indemnify Mr. Parrella for liabilities
arising out of these allegations and for related legal fees, we believe that our
directors and officers indemnification insurance (subject to certain exceptions
under the insurance policy and after payment of a $100,000 deductible) will
cover such payments. Discovery as to Mr. Parrella has begun.
On or about December 15, 2003, PRG filed a complaint in the Delaware
Chancery Court in and for New Castle County against NCT, DMC, Michael J.
Parrella (Chairman and Chief Executive Officer of NCT), Irene Lebovics
(President and a Director of NCT), John J. McCloy II (a Director of NCT) and Sam
Oolie (a Director of NCT). On or about January 6, 2004, PRG amended its
complaint to add Cy E. Hammond (Chief Financial Officer of NCT) as a defendant.
On February 13, 2004, the defendants filed a motion to dismiss all claims in the
amended complaint. On or about March 30, 2004, PRG again amended its complaint,
this time to refine and expand some of its allegations. PRG's complaint (as
amended) alleges that NCT and DMC are insolvent, that during the insolvency the
individual named defendants owe a fiduciary duty to PRG as a judgment creditor
in the Connecticut litigation described above, and that the individual
defendants breached that duty and mismanaged the affairs of NCT and its
subsidiaries (including DMC). The complaint (as amended) seeks the appointment
of a receiver over the business and assets of NCT and DMC and money damages
against the individual defendants in an amount at least equal to the amount of
the Connecticut judgment remaining unsatisfied. NCT has agreed to indemnify the
individual defendants for any liabilities (including legal fees) they may incur
as a result of the PRG claims against them in this Delaware action. NCT has
submitted those claims for director and officer indemnification insurance
coverage by two insurers. On February 25, 2004, one of those insurers initially
denied coverage. NCT is considering whether to challenge that initial denial.
The other insurer has not yet stated its position with respect to coverage. NCT
and DMC intend, and the individual defendants have told NCT that they intend, to
deny and defend against all allegations. Discovery in the action has begun.
Maryland Lease Litigation
On or about January 31, 2002, West Nursery Land Holding Limited Partnership
brought an action against NCT 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, the court entered judgment as requested in the complaint. On
or about July 11, 2002, West Nursery brought an action against NCT in the
Superior Court for the Judicial District of Fairfield County, Connecticut
seeking to enforce the Maryland judgment in Connecticut. On August 5, 2002, the
Connecticut court issued a pre-judgment remedy prohibiting NCT from disposing of
its assets other than in the ordinary course of business. On September 23, 2002,
West Nursery moved for a default judgment on its Connecticut complaint. On
October 29, 2002, NCT filed an objection to the motion for default judgment and
filed an answer to the complaint in which it denied the material allegations of
the complaint. Through December 31, 2002, West Nursery had collected
approximately $27,000 on this judgment. On December 31, 2002, NCT and West
Nursery executed a settlement agreement under which all claims of West Nursery
against NCT are being discharged in consideration of the issuance by NCT of
1,248,170 shares of its common stock (approximately $56,000 in stock priced at
$.0448 per share). On March 3, 2003, the Connecticut court approved the
settlement agreement. On or about April 1, 2003, NCT issued the 1,248,170 shares
of common stock to West Nursery. Dismissal of the Connecticut action with
prejudice occurred on August 18, 2003. Dismissal of the Maryland action with
prejudice is expected shortly.
Alpha, Austost, Balmore and Libra v. NCT and Artera
On or about December 17, 2002, an action was brought by Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore S.A. and Libra Finance S.A.
against NCT Group, Inc. and Artera Group, Inc. in Supreme Court of the State of
New York, County of New York. In their complaint, plaintiffs alleged that NCT
and Artera breached a number of payment and stock registration obligations in
connection with the January 9, 2001 convertible notes of Artera, the March 2,
2001 series A convertible preferred stock of Artera, the March 14, 2001
convertible
28
notes of NCT, the April 4, 2001 convertible notes of Artera, the April 12, 2001
convertible notes of NCT, the June 29, 2001 convertible notes of Artera, the
July 30, 2002 series B convertible preferred stock of Pro Tech Communications,
Inc., the January 10, 2002 convertible note of Artera and the March 11, 2002
convertible note of NCT. Registration rights claims were alleged against NCT in
connection with notes and preferred stock of Artera and Pro Tech because such
notes and preferred stock are exchangeable into common stock of NCT. Plaintiffs
sought damages in the aggregate amount of $12.2 million, which included
approximately $4.1 million note principal allegedly in default due to
non-payment upon respective maturity dates, plus interest, attorneys' fees and
costs.
On or about April 7, 2003, before an answer was filed in the case, NCT,
Artera and the plaintiffs executed a settlement agreement. After hearings on May
15, 2003 and September 16, 2003, the court on September 16, 2003 approved the
settlement agreement, thereby causing it to become effective. Pursuant to the
settlement agreement, the plaintiffs granted releases from the monetary claims
in the complaint (i) against NCT and Artera and pertaining to interest allegedly
accrued through April 7, 2003 on all notes described in the complaint and (ii)
against NCT for NCT's non-payment of liquidated damages allegedly due as a
result of a failure by NCT to register the shares of its common stock for which
the notes and preferred stock described in the complaint are convertible or
exchangeable. In consideration of these releases and as required by the
settlement agreement, on September 18, 2003, NCT issued to the plaintiffs an
aggregate of 61,776,062 new shares of its common stock, representing $4.0
million in stock priced at $.06475 per share (the average of the ten closing
prices of the common stock immediately preceding the initial hearing for court
approval of the settlement agreement). The settlement shares were allocated as
follows: 14,109,883 shares ($913,615 worth) to Alpha, 20,868,729 shares
($1,351,250 worth) to Austost, 21,076,266 shares ($1,364,688 worth) to Balmore
and 5,721,189 shares ($370,447 worth) to Libra. Also included in the settlement
agreement was the release of claims, not originally asserted in the complaint,
(x) against Artera and pertaining to interest allegedly accrued through April 7,
2003 on a May 25, 2001 note of Artera and (y) against NCT for NCT's non-payment
of liquidated damages allegedly due as a result of a failure by NCT to register
the shares of its common stock for which such May 25, 2001 note of Artera is
exchangeable. On November 12, 2003, pursuant to the settlement agreement, the
action was dismissed, with prejudice as to the claims released by the settlement
agreement and without prejudice as to the claims not so released (primarily,
approximately $4.1 million in principal allegedly due and payable on the notes
described in the complaint). As noted, only accrued interest charges and
liquidated damages were settled, not note principal allegedly due and payable.
Upon court approval of the settlement agreement in September 2003, NCT reduced
previously recorded accrued interest of $0.9 million and previously recorded
liquidated damages for non-registration of common shares underlying convertible
and exchangeable notes and preferred stock of $8.0 million and recorded a $4.9
million gain on litigation settlement. Please note that interest and liquidated
damages continued to accrue between the settlement date and the date the court
approved the settlement and such additional costs were recorded in NCT's records
resulting in a reversal of $8.9 million of costs, not the expected $8.1 million
($12.2 million in damages sought compared to the $4.0 million settlement).
Artera International U.K. Section 214 Indemnification
On or about December 5, 2002, Michael Parrella (Chairman and Chief
Executive Officer and a Director of NCT), Irene Lebovics (President and a
Director of NCT) and Cy Hammond (Treasurer and Chief Financial Officer of NCT)
received letters from the Liquidator of NCT's indirect subsidiary, Artera
International located in the United Kingdom, informing them that the Liquidator
is considering asserting claims against them under Section 214 of the U.K.
Insolvency Act. Under that provision of the Insolvency Act, individuals who were
Directors of a U.K. corporation prior to its liquidation can be held personally
liable to the liquidation estate, under certain circumstances, for up to the
amount by which the net liabilities of the corporation increased between (i) the
time the Directors knew or ought to have concluded that there was no reasonable
prospect that the corporation would avoid liquidation and (ii) the commencement
of liquidation proceedings. The Liquidator asserted that such amount in this
instance is approximately $6.3 million. Each of the recipients of the letter was
a Director of Artera International prior to its liquidation. NCT agreed to
indemnify Messrs. Parrella and Hammond and Ms. Lebovics for any liabilities that
may arise against them from these U.K. Section 214 claims and to provide them
with legal representation with respect to the claims. NCT does not have
directors and officers' indemnification insurance coverage for the claims. On
March 25, 2003, Messrs. Parrella and Hammond and Ms. Lebovics filed a joint
response to the Liquidator's claims in which they denied any liability or
wrongdoing. On November 26, 2003, the Liquidator issued letters to Messrs.
Parrella and Hammond and Ms. Lebovics stating that he would not be asserting any
Section 214 claims against them.
29
Artera Trademark Oppositions
On December 17, 2002 and December 23, 2002, in connection with all of NCT's
pending U.S. trademark registration applications for "Artera Turbo" and with
some of NCT's pending U.S. trademark registration applications for "Artera,"
Altera Corporation filed oppositions to the granting of such registrations. The
alleged basis for the oppositions is, in essence, that the Artera marks are
confusingly similar to Altera Corporation's mark of "Altera" which was
registered in a number of product and service categories prior to the initial
filing of the "Artera Turbo" and "Artera" applications being opposed. NCT
intends to defend against these oppositions vigorously.
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 or 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
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
PART II
ITEM 5. MARKET FOR 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 sales price information for NCT's common
stock for specified quarterly periods is set forth below:
2002 2003
----------------- -------------------
High Low High Low
------- ------- ------- --------
1st Quarter $0.159 $0.078 $0.075 $0.028
2nd Quarter $0.150 $0.050 $0.081 $0.027
3rd Quarter $0.102 $0.058 $0.078 $0.031
4th Quarter $0.095 $0.040 $0.057 $0.037
As of February 29, 2004, there were approximately 4,000 shareholders of
record representing approximately 38,000 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.
Please refer to Note 17 - notes to the consolidated financial statements
for a discussion of outstanding options and warrants as of December 31, 2003 and
activity for the three years then ended. In September 2003, the Board of
Directors accelerated the vesting schedules to 100% vested for the options
granted on October 25, 2002 in gratitude for continuing employee dedication and
the suspension of salary increases. In October 2002, the Board of Directors
accelerated the vesting schedules to 100% vested for all options granted before
October 25, 2002 to acknowledge its gratitude for ongoing employee dedication
during the company's 2002 restructuring and cost-saving measures, including
suspension of employee salary increases. The table that follows summarizes our
equity compensation plan information as of December 31, 2003.
30
Number of securities Number of securities
to be issued upon remaining available for
exercise of Weighted-average future issuance under
outstanding options, exercise price of equity plans (excluding
warrants and rights as outstanding options, securities reflected in
Category of December 31, 2003 warrants and rights Column (a))
-------- ---------------------- ------------------- -----------
(a) (b) (c)
Equity compensation
plans approved by
security holders 110,864,282* $0.2080 -
Equity compensation
plans not approved by
security holders 712,380,337 $0.0525 Not limited
-----------
Total 823,244,619 $0.0735
===========
*Approximately 49.1 million of the options granted are subject to approval
by the company's stockholders of a sufficient increase in the number of shares
of common stock (1) authorized and (2) covered by the 2001 Plan.
Please refer to Note 16 - notes to the consolidated financial statements
for a discussion of issuance of our common stock upon conversions or exchanges
of other securities and a description of sales of unregistered securities by NCT
and its subsidiaries during the three years ended December 31, 2003 and
Liquidity and Capital Resources within the "Management's Discussion and
Analysis" section for discussion of sales of our unregistered securities in
2003. The table below identifies the unregistered sales of our securities to
purchasers during the previous three years, as well as the amount and nature of
the consideration paid by each purchaser. The issuance of these securities,
except as otherwise indicated, was deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, as a sale by an issuer not involving a
public offering.
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/9/01 NCT Networks, Inc. Convertible Notes Austost Anstalt Schaan; $1,000,000 cash; $1,000,000
($5,040,000 principal amount) Balmore S.A.; non-recourse notes; 1,190,000
Amro International, S.A.; shares of Pro Tech
Nesher Ltd.; Communications, Inc. common
Talbiya B. Investments Ltd.; stock
The Gross Foundation, Inc.;
Libra Finance S.A. (as finder)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/9/01 2,863,894 shares of NCT common stock 15 shareholders of Midcore Fill-up provision
Software, Inc.
(Midcore acquisition)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/9/01 2,455,248 shares of NCT common stock 5 shareholders of TRN Fill-up provision
(TRN acquisition)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/13/01 NCT Convertible Note ($500,000 Carole Salkind $500,000 cash
principal amount); matured 4/14/01
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/13/01 NCT warrant to acquire $500,000 of Carole Salkind Exercisable for cash at $0.071
NCT common stock per share per 12/20/01
amendment
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/22/01- 7,831,908 shares of NCT common stock Austost Anstalt Schaan; Balmore 937 shares of
4/11/01 S.A.; Zakeni Limited ConnectClearly.com, Inc.
common stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
31
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/27/01 8,299 shares of Artera Group, Inc. Internet Business Management Acquisition of Teltran Web
Series A Preferred Stock Limited; Four Pitt, Inc.; Teltran Factory Limited
International Group, Ltd.;
Austost Anstalt Schaan; Amro
International, S.A.; Balmore
S.A.; Berkeley Group, Ltd.; ICT
N.V.; Leval Trading, Inc. Nesher,
Ltd.; Talbiya B. Investments
Ltd.; The Gross Foundation, Inc.;
United Securities Services, Inc.;
Libra Finance S.A.; John
Chalfin/Offchurch Nominees
Limited; John Chalfin/Hillhurst
Investments, Ltd.; Teltran
International Ltd (Web Factory
acquisition)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/14/01 NCT Convertible Notes ($267,500 Alpha Capital Aktiengesellschaft; $250,000 cash
aggregate principal amount) Libra Finance S.A. (as finder)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/16/01- 7,218,150 shares of NCT common stock Endeavour Capital Fund, S.A. 767 shares of Series G
5/25/01 Preferred Stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/30/01 3,850,000 shares of NCT common stock NXT plc Surrender of option and 532
shares of NCT Audio Products,
Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/4/01 Artera Group, Inc. Convertible Notes Amro International, S.A.; $700,000 cash
($875,000 aggregate principal amount) Alpha Capital Aktiengesellschaft
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/12/01 NCT Convertible Notes ($133,750 Alpha Capital Aktiengesellschaft; $125,000 cash
aggregate principal amount) Libra Finance S.A. (as finder)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/12/01 13,333,333 shares of NCT common stock Crammer Road LLC 2,000 shares of DMC New York,
Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/12/01 NCT Convertible Note ($1 million Crammer Road LLC 1,000 shares of DMC New York,
principal amount), maturing 12/31/01 Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/12/01 NCT Video Displays, Inc. Convertible Crammer Road LLC $500,000 cash
Note ($500,000 principal amount),
maturing 12/31/01
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/12/01 $50,000,000 NCT common stock Crammer Road LLC Cash and shares of DMC New
issuable under credit line; York, Inc. common stock
$17,000,000 minimum commitment amount
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/12/01 NCT warrant for 250,000 shares of Crammer Road LLC Exercisable for cash at $0.14
NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/17/01- 15,340,680 shares of NCT common stock Austost Anstalt Schaan; $2,015,000 Artera Group, Inc.
7/25/01 Balmore S.A.; January 9, 2001 convertible
Amro International, S.A.; notes
Nesher Ltd.;
Talbiya B. Investments Ltd.;
The Gross Foundation, Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/2/01 702,045 shares of NCT common stock Arab Commerce Bank, Ltd. 39 shares of NCT Audio
Products, Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/14/01 NCT warrant for 500,000 shares Carole Salkind Exercisable for cash at $0.071
per share per 12/20/01
amendment
- --------------- -------------------------------------- ----------------------------------- --------------------------------
32
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/14/01 NCT Convertible Note ($1,361,615 Carole Salkind Cancellation and surrender of
principal amount) $1,000,000 NCT Convertible
Note; dated 1/26/99 accrued
interest; default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/18/01 4,302,425 shares of NCT common stock Carole Salkind Conversion of NCT Convertible
Note ($500,000 principal
amount issued 2/13/01)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/25/01 Artera Group, Inc. Convertible Notes Alpha Capital Aktiengesellschaft; $300,000 cash
($375,000 principal amount), Amro International, S.A.
maturing 5/25/02
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/4/01- 2,499,576 shares of NCT common stock Zakeni Limited 273 shares of Pro Tech Series
7/19/01 A Preferred Stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/29/01 Artera Group, Inc. Convertible Notes Alpha Capital Aktiengesellschaft; $700,000 cash and $300,000
($1,250,000 principal amount), Amro International, S.A.; The Subscription receivable
maturing 6/29/02 Gross Foundation, Inc.; Leval
Trading, Inc.; Nesher Ltd.;
Talbiya B. Investments Ltd.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/30/01 500 shares of Pro Tech Alpha Capital Aktiengesellschaft $457,000 cash, net of expenses
Communications, Inc. Series B
Convertible Preferred Stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/30/01 Pro Tech Communications, Inc. Alpha Capital Aktiengesellschaft Exercisable for cash
warrant to purchase 1,000,000 shares
of common stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/7/01- 4,510,753 shares of NCT common stock Austost Anstalt Schaan; $503,500 Artera Group, Inc.
10/15/01 Balmore S.A. January 9, 2001 convertible
Amro International, S.A.; notes
Nesher Ltd.;
Talbiya B. Investments Ltd.;
The Gross Foundation, Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/22/01 NCT Convertible Note ($1,673,393 Carole Salkind Cancellation and surrender of
principal amount) $250,000, $250,000, $500,000
and $250,000 NCT Convertible
Notes; accrued interest;
default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/22/01 NCT warrant for 625,000 shares Carole Salkind Exercisable for cash at $0.071
per share per 12/20/01
amendment
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/22/01 612,893 shares of NCT common stock Michael J. Parrella $56,999 in cash
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/22/01 171,342 shares of NCT common stock Irene Lebovics $15,935 in cash
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/22/01 215,765 shares of NCT common stock Cy E. Hammond $20,066 in cash
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/28/01 568,770 shares of NCT common stock Interep National Radio Sales Advertising services
- -------------- -------------------------------------- ----------------------------------- --------------------------------
9/10/01 1,980,198 shares of NCT common stock Tycon Equity Partners LLC Consulting services
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/10/01 1,000,000 shares of NCT common stock Carole Salkind $93,000 in cash
- --------------- -------------------------------------- ----------------------------------- --------------------------------
33
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/28/01 Warrant for 1,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.071
common stock per share per 12/20/01
amendment
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/28/01 NCT Convertible Note ($2,535,469 Carole Salkind $1,000,000 cash and
principal amount) cancellation and surrender of
$1,361,615 NCT Convertible
Note along with accrued
interest and default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/11/01 192,632 shares of NCT common stock Zakeni Limited 14 shares of Pro Tech
Communications, Inc. Series A
Preferred Stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/23/01- 6,014,029 shares of NCT common stock Crammer Road LLC NCT Video Note dated 4/12/01
10/29/01
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/25/01 5,000,000 shares of NCT common stock Libra Finance S.A. $397,600 cash and settlement
of $2,400 in consulting fees;
warrant exercised at $0.08 per
share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/25/01 Warrant for 20,000,000 shares of NCT Libra Finance S.A. Exercisable for cash at $0.09
common stock per share; price amended
January 10, 2002 to the lower of
$0.07 or the lowest closing bid
price from 1/10/02 through
6/28/02, as amended through
6/28/03 (see 6/28/02 below)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/30/01 3,275,864 shares of NCT common stock Alpha Capital Aktiengesellschaft $293,750 stated value 5/25/01
Artera convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/7/01 283,770 shares of NCT common stock Zakeni Limited 20 shares of Pro Tech
Communications, Inc. series A
preferred stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/27/01 357,927 shares of NCT common stock James McManus Employment termination
agreement
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/6/01 5,000,000 shares of NCT common stock Libra Finance S.A. $330,500 in cash, settlement
of note in amount of $65,000
and $4,500 of consulting fees;
exercised at $0.08 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/20/01 Warrant for 1,250,000 shares of NCT Carole Salkind Exercisable for cash at $0.071
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/20/01 NCT Convertible Note ($2,014,270 Carole Salkind $1,000,000 cash and
principal amount) cancellation and surrender of
$500,000 and $250,000 NCT
Convertible Notes along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/21/01- 3,783,156 shares of NCT common stock Austost Anstalt Schaan $300,000 face value of 1/9/01
12/26/01 Artera notes
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/23/02 328,717 shares of NCT common stock Robert Crisp Settlement of amounts due
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/1/02 Warrant for 500,000 shares of NCT Piedmont Consulting, Inc. Exercisable for cash at $0.20
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/2/02 300,000 shares of NCT common stock Piedmont Consulting, Inc. Per consulting agreement
- --------------- -------------------------------------- ----------------------------------- --------------------------------
34
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/8/02- Option to acquire 8,350,000 shares Leben Care, Inc. Exercisable for cash at prices
1/25/02 of NCT common stock ranging from $0.079 to $0.13
per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/10/02 $550,000 Convertible Note Alpha Capital Aktiengesellschaft Settlement of $465,000 bridge
financing notes dated 11/14/01
and 12/27/01 and cash of
approximately $84,000
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/10/02 Warrant for 5,000,000 shares of NCT Libra Finance S.A. Exercisable for cash at the
common stock lower of $0.07 or the lowest
closing bid price from 1/10/02
through 6/28/02, as amended
through 6/28/03 (see 6/28/02
below)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/11/02 Warrant for 2,789,082 shares of NCT Carole Salkind Exercisable for cash at $0.079
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/11/02 NCT Convertible Note ($2,231,265 Carole Salkind $350,000 cash and cancellation
principal amount) and surrender of the August
22, 2001 NCT Convertible Note
along with accrued interest
and default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/11/02 Option to acquire 10% equity Carole Salkind New indebtedness
interest in Artera Group, Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/25/02 NCT Convertible Note ($650,000 Carole Salkind $650,000 cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/25/02 NCT Convertible Note ($250,000 Carole Salkind $250,000 cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/25/02 Warrant for 812,500 shares of NCT Carole Salkind Exercisable for cash at $0.09
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/25/02 Warrant for 312,500 shares of NCT Carole Salkind Exercisable for cash at $0.09
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/31/02 Warrant for 104,167 shares of NCT Robert C. Lau (as designee of Exercisable for cash at $0.13
common stock Clayton Dunning & Company, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/27/02 NCT Convertible Note ($827,412 Carole Salkind $800,000 cash and accrued
principal amount) interest and default penalty
on the 1/25/02 note in
principal amount of $250,000
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/27/02 Warrant for 1,034,226 shares of NCT Carole Salkind Exercisable for cash at $0.079
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/27/02 Option to acquire 3,375,000 shares Stop Noise, Inc. Exercisable for cash at prices
of NCT common stock ranging from $0.79 to $0.12
per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/28/02 2,142,073 shares of NCT common stock James McManus Exchange of 6.43 common shares
of DMC received upon exercise
of DMC option
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/1/02 NCT Convertible Note ($350,000 Carole Salkind $350,000 cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/1/02 Warrant for 437,500 shares of NCT Carole Salkind Exercisable for cash at $0.079
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
35
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/11/02 3,930,818 shares of NCT common stock Swedbank Luxembourg Exchange for 160 common shares
of NCT Audio Products, Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/11/02 Convertible Note ($400,000 principal Alpha Capital Aktiengesellschaft $352,500 in cash, net of
amount) $47,500 in legal fees and
finder's fees paid to a third
party that arranged the
financing
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/12/02 3,748,478 shares of NCT common stock Alpha Capital Aktiengesellschaft Conversion of $250,000 8% note
dated April 12, 2001
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/12/02 1,863,204 shares of NCT common stock Alpha Capital Aktiengesellschaft Conversion of $125,000 8% note
dated March 4, 2001
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/2/02 NCT Convertible Note ($1,275,483 Carole Salkind Settlement and cancellation of
principal amount) $1,000,000 note dated 3/27/00
along with accrued interest
and default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/2/02 NCT Convertible Note ($1,425,000 Carole Salkind $1,425,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/2/02 Warrant for 3,188,708 shares of NCT Carole Salkind Exercisable for cash at $0.094
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/2/02 Warrant for 3,562,500 shares of NCT Carole Salkind Exercisable for cash at $0.094
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/29/02 NCT Convertible Note ($350,000 Carole Salkind $350,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/29/02 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.095
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/31/02 281,534 shares of NCT common stock Amro International, S.A. Exchanged $25,000 Artera
Group, Inc. January 9, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/2/02 NCT Convertible Note ($300,000 Carole Salkind $300,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/2/02 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.097
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/6/02 200,000 shares of NCT common stock Steven M. Esrick Settlement of legal action
(exempt under Section 3(a)(10) of
the Securities Act of 1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/13/02 NCT warrant to acquire 250,000 Blue Future, Inc. Exercisable for cash at $0.16
shares of common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/17/02 NCT warrant to acquire 350,000 Thomas Cotton Exercisable for cash at $0.081
shares of common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/17/02 NCT warrant to acquire 400,000 Barry H. Chappel Exercisable for cash at $0.081
shares of common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/17/02 NCT warrant to acquire 400,000 John M. Capozzi Exercisable for cash at $0.081
shares of common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
36
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/24/02 1,800 shares of Series H Convertible Crammer Road LLC $120,000 cash and exchange of
Preferred Stock 12,000 shares of DMC New York,
Inc.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/28/02 Extension of time to determine the Libra Finance S.A. Exercisable at the lower of
exercise prices of two warrants $0.07 or the lowest closing
previously granted to acquire shares bid price from 6/28/02 through
of NCT common stock in the amount of 6/28/03
20,000,000 (10/25/01) and 5,000,000
(1/10/02)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/2/02 662,167 shares of NCT common stock Amro International, S.A. Exchange for $50,000 Artera
Group, Inc. January 9, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/3/02 NCT Convertible Note ($350,000 Carole Salkind $350,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/3/02 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.078
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/12/02 Warrant for 20,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.075
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/15/02 NCT Convertible Note ($350,000 Carole Salkind $350,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/15/02 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.075
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/23/02 NCT Convertible Note ($525,000 Carole Salkind $525,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/23/02 Warrant for 2,250,000 shares of NCT Carole Salkind Exercisable for cash at $0.059
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/14/02 NCT Convertible Note ($350,000 Carole Salkind $350,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/14/02 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.082
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/26/02 694,711 shares of NCT common stock Amro International, S.A. Exchange for $50,000 Artera
Group, Inc. January 9, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/29/02 NCT Convertible Note ($490,000 Carole Salkind $490,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/29/02 Warrant for 2,100,000 shares of NCT Carole Salkind Exercisable for cash at $0.076
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/9/02 NCT Convertible Note ($350,000 Carole Salkind $350,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/9/02 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.077
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/18/02 480,272 shares of NCT common stock Nesher Ltd. Exchange for $37,500 Artera
Group, Inc. January 9, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/18/02 480,272 shares of NCT common stock Talbiya B. Investments Ltd. Exchange for $37,500 Artera
Group, Inc. January 9, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/30/02 Warrant for 10,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.070
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
37
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/30/02 NCT Convertible Note ($3,770,098.38 Carole Salkind $800,000 cash and cancellation
principal amount) and surrender of $2,535,469
convertible note dated 9/28/01
along with accrued interest
and default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/30/02 Warrant for 16,157,565 shares of NCT Carole Salkind Exercisable for cash at $0.070
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/30/02 Option to acquire 50,000,000 shares Acme Associates, Inc. Exercisable for cash at $0.070
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/11/02 Warrant for 2,000,000 shares of NCT FairPoint Communications, Inc. Exercisable for cash at $0.150
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/17/02 5,938,081 shares of NCT common stock Linford Group Limited Settlement of guarantee of
(exempt under Section 3(a)(10) of subsidiary's payment
the Securities Act of 1933) obligation for office
refurbishment services
rendered in the United
Kingdom
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/7/02 NCT Convertible Note ($400,000 Carole Salkind $400,000 cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/7/02 Warrant for 1,750,000 shares of NCT Carole Salkind Exercisable for cash at $0.072
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/20/02 NCT Convertible Note ($400,000 Carole Salkind $400,000 cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/20/02 Warrant for 1,750,000 shares of NCT Carole Salkind Exercisable for cash at $0.054
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/21/02 NCT Convertible Note ($1,463,449.36 Carole Salkind Cancellation and surrender of
principal amount) $1,275,482.97 convertible note
dated 5/2/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/21/02 Warrant for 6,271,926 shares of NCT Carole Salkind Exercisable for cash at
common stock $0.0535 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/22/02 Warrant for 300,000 shares of NCT Gavin Brackenridge Exercisable for cash at $0.054
common stock per share
- --------------- --------------------------------------- ----------------------------------- --------------------------------
12/2/02 NCT Convertible Note ($350,000 Carole Salkind $350,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/2/02 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.048
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/6/02 Warrant for 1,400,000 shares of NCT Alpha Capital Exercisable for cash at the
common stock Aktiengesellschaft lower of $0.07 or the lowest
closing bid price from 12/6/02
through 12/6/03
- --------------- -------------------------------------- ----------------------------------- --------------------------------
38
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/6/02 Warrant for 15,000,000 shares of NCT Alpha Capital Exercisable for cash at $0.01
common stock Aktiengesellschaft per share. Vests as to
2,000,000 shares if penalty
provisions associated with
prior transactions are not
discharged as of 4/7/03.
Remainder vests if 12/6/02
promissory note maturing 4/7/03
defaults, later extended to
5/30/03 (see 9/4/03).
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/11/02 Warrant for 1,250,000 shares of NCT KEQ Partners III Exercisable for cash at $0.063
common stock (as designee of Kalkines, Arky, per share
Zall & Bernstein LLP, HealthNet
Connections LLC and HNC New York
Representatives LLC)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 NCT Convertible Note ($400,000 Carole Salkind $400,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 1,750,000 shares of NCT Carole Salkind Exercisable for cash at $0.042
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 200,000 shares of NCT Robert L. Bernstein Exercisable for cash at
common stock $0.0515 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 200,000 shares of NCT Gavin Brackenridge Exercisable for cash at
common stock $0.0125 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 250,000 shares of NCT Gavin Brackenridge Exercisable for cash at $0.08
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 250,000 shares of NCT Gavin Brackenridge Exercisable for cash at $0.15
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 67,000 shares of NCT Dr. Henry Murray (as designee of Exercisable for cash at $0.10
common stock The Murray Group) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 33,000 shares of NCT Diana T. Murray (as designee of Exercisable for cash at $0.10
common stock The Murray Group) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 100,000 shares of NCT Dr. Henry Masur (as designee of Exercisable for cash at $0.10
common stock The Murray Group) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 300,000 shares of NCT Steven Keenan Exercisable for cash at $0.099
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 200,000 shares of NCT B. Michael Pisani/ Exercisable for cash at $0.10
common stock Granite Securities Corporation per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 200,000 shares of NCT Charles T. Lanktree Exercisable for cash at $0.10
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 50,000 shares of NCT Robert F. Callahan (as designee Exercisable for cash at $0.10
common stock of C & C Partners, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 25,000 shares of NCT Robert F. Callahan (as designee Exercisable for cash at $0.25
common stock of C & C Partners, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 25,000 shares of NCT Robert F. Callahan (as designee Exercisable for cash at $0.50
common stock of C & C Partners, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 25,000 shares of NCT Robert F. Callahan (as designee Exercisable for cash at $0.75
common stock of C & C Partners, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 50,000 shares of NCT Sandy Eisemann/NRI, Inc. (as Exercisable for cash at $0.10
common stock designee of C & C Partners, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 25,000 shares of NCT Sandy Eisemann/NRI, Inc. (as Exercisable for cash at $0.25
common stock designee of C & C Partners, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
39
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 25,000 shares of NCT Sandy Eisemann/NRI, Inc. (as Exercisable for cash at $0.50
common stock designee of C & C Partners, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/16/02 Warrant for 25,000 shares of NCT Sandy Eisemann/NRI, Inc. (as Exercisable for cash at $0.75
common stock designee of C & C Partners, Inc.) per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/17/02 40,000,000 shares of NCT common Crammer Road LLC Settlement of legal action
stock and the right to acquire
28,000,000 additional shares on 65
days notice (exempt under Section
3(a)(10) of the Securities Act of
1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/26/02 NCT Convertible Note ($2,381,487 Carole Salkind Cancellation and surrender of
principal amount) $2,014,270 convertible note
dated 12/20/01 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/26/02 Warrant for 10,206,373 shares of NCT Carole Salkind Exercisable for cash at $0.042
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/26/02 Option to acquire 23,000,000 shares Motorworld, Incorporated Exercisable for cash at $0.042
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/30/02 NCT Convertible Note ($350,000 Carole Salkind $350,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/30/02 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.041
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/31/02 Warrant for 250,000 shares of NCT Michael Dickerson Exercisable for cash at $0.10
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/15/03 NCT Convertible Note ($450,000 Carole Salkind $450,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/15/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.041
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/23/03 NCT Convertible Note ($2,747,634.92 Carole Salkind Cancellation and surrender of
principal amount) $2,231,265.04 convertible note
dated 1/11/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/23/03 Warrant for 11,775,579 shares of NCT Carole Salkind Exercisable for cash at $0.04
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/23/03 Option to acquire 23,000,000 shares Inframe, Inc. Exercisable for cash at $0.042
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/30/03 NCT Convertible Note ($350,000 Carole Salkind $350,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
1/30/03 Warrant for 1,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.041
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/11/03 NCT Convertible Note ($1,252,592.41 Carole Salkind Cancellation and surrender of
principal amount) $650,000 convertible note
dated 1/25/02 along with
accrued interest and default
penalty and $450,000 cash
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/11/03 Warrant for 5,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.04
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
2/11/03 Option to acquire 7,000,000 shares Avant Interactive, Inc. Exercisable for cash at $0.04
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
40
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/4/03 NCT Convertible Note ($450,000 Carole Salkind $450,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/4/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.035
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/5/03 3,033,981 shares of NCT common stock Balmore S.A. Exchange for $125,000 Artera
Group, Inc. January 9, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/12/03 Option to acquire 13,500,000 shares Avant Interactive, Inc. Exercisable for cash at $0.031
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/13/03 NCT Convertible Note ($980,802.25 Carole Salkind Cancellation and surrender of
principal amount) $827,412.26 convertible note
dated 2/27/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/13/03 NCT Convertible Note ($864,615.56 Carole Salkind Cancellation and surrender of
principal amount) $350,000 convertible note
dated 3/1/02 along with
accrued interest and default
penalty and $450,000 cash
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/13/03 Warrant for 4,250,000 shares of NCT Carole Salkind Exercisable for cash at $0.031
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
3/13/03 Warrant for 3,750,000 shares of NCT Carole Salkind Exercisable for cash at $0.031
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/1/03 1,248,170 shares of NCT common stock West Nursery Land Holding Limited Settlement of legal action
(exempt under Section 3(a)(10) of Partnership
the Securities Act of 1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/2/03 NCT Convertible Note ($450,000 Carole Salkind $450,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/2/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.029
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/3/03 Option to acquire 2,000,000 shares Avant Interactive, Inc. Exercisable for cash at $0.029
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/7/03 1,158,940 shares of NCT common stock Balmore S.A. Exchange for $35,000 Artera
Group, Inc. January 9, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/11/03 2,321,263 shares of NCT common stock Mesa Partners, Inc. Settlement of legal action
(exempt under Section 3(a)(10) of
the Securities Act of 1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/11/03 NCT Convertible Note ($450,000 Carole Salkind $450,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/11/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.031
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/11/03 Option to acquire 2,000,000 shares Avant Interactive, Inc. Exercisable for cash at $0.031
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/15/03 3,164,556 shares of NCT common stock Alpha Capital Aktiengesellschaft Exchange for $100,000 Artera
Group, Inc. April 4, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/17/03 Option to acquire 2,000,000 shares Turbo Networks, Inc. Exercisable for cash at $0.037
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/21/03 NCT Convertible Note ($450,000 Carole Salkind $450,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
41
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/21/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.037
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/22/03 Convertible Note in principal amount Alpha Capital Aktiengesellschaft Convertible into shares of NCT
of $235,000 common stock at $0.04 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
4/30/03 3,703,704 shares of NCT common stock Alpha Capital Aktiengesellschaft Exchange for $200,000 Artera
Group, Inc. April 4, 2001
convertible note
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/8/03 28,000,000 shares of NCT common stock Crammer Road LLC See 12/17/02 transaction above
(exempt under Section 3(a)(10) of
the Securities Act of 1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/15/03 NCT Convertible Note ($450,000 Carole Salkind $450,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/15/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.046
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/22/03 Option to acquire 18,550,000 shares Turbo Networks, Inc. Exercisable for cash at $0.042
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/22/03 NCT Convertible Note ($1,692,462.74 Carole Salkind Cancellation and surrender of
principal amount) $1,425,000 convertible note
dated 5/2/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/22/03 Warrant for 7,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.042
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/28/03 NCT Convertible Note ($415,000 Carole Salkind $415,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
5/28/03 Warrant for 1,900,000 shares of NCT Carole Salkind Exercisable for cash at $0.044
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/05/03 Warrant for 2,250,000 shares of NCT NATCO, LLC Exercisable for cash at $0.048
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/12/03 NCT Convertible Note ($2,449,811.87 Carole Salkind Cancellation and surrender of
principal amount) $1,463,449, $350,000, and
$300,000 convertible notes dated
11/21/02, 5/29/02 and 6/2/02,
respectively, along with accrued
interest and default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/12/03 Warrant for 10,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.044
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/12/03 NCT Convertible Note ($435,000 Carole Salkind $435,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/12/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.044
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/12/03 Option to acquire 23,000,000 shares Maple Industries, Inc. Exercisable for cash at $0.044
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/28/03 NCT Convertible Note ($410,000 Carole Salkind $410,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/28/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.038
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
6/28/03 Option to acquire 2,000,000 shares Turbo Networks, Inc. Exercisable for cash at $0.04
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
42
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/3/03 5,142,297 shares of NCT common stock Crammer Road LLC Conversion of 14 shares of NCT
series H preferred stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/14/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at
common stock $0.0312 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/14/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at
common stock $0.0312 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/14/03 Warrant for 750,000 shares of NCT John Harris (as designee of Stop Exercisable for cash at
common stock Noise, Inc.) $0.0312 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/14/03 Option to acquire 25,000,000 shares Acme Associates, Inc. Exercisable for cash at
of NCT common stock $0.0312 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/14/03 NCT Convertible Note ($410,000 Carole Salkind $410,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/14/03 NCT Convertible Note ($414,480.93 Carole Salkind Cancellation and surrender of
principal amount) $350,000 convertible note
dated 7/3/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/15/03 5,368,098 shares of NCT common stock Balmore S.A. Exchange of $175,000 1/9/01
Artera convertible notes
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/28/03 NCT Convertible Note ($414,750.19 Carole Salkind Cancellation and surrender of
principal amount) $350,000 convertible note
dated 7/15/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/28/03 NCT Convertible Note ($410,000 Carole Salkind $410,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/28/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.042
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/28/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.042
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/28/03 5,924,171 shares of NCT common stock Alpha Capital Aktiengesellschaft Exchange of $250,000 4/4/01
Artera convertible notes
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/28/03 4,739,336 shares of NCT common stock Balmore S.A. Exchange of $200,000 1/9/01
Artera convertible notes
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/31/03 7,000,000 shares of NCT common stock Balmore S.A. Exchange of $312,200 1/9/01
Artera convertible notes
- --------------- -------------------------------------- ----------------------------------- --------------------------------
7/31/03 8,000,000 shares of NCT common stock Austost Anstalt Schaan Exchange of $356,800 1/9/01
Artera convertible notes
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/07/03 NCT Convertible Note ($622,529.18 Carole Salkind Cancellation and surrender of
principal amount) $525,000 convertible note
dated 7/23/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/07/03 Warrant for 2,750,000 shares of NCT Carole Salkind Exercisable for cash at
common stock $0.0539 per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/18/03 NCT Convertible Note ($425,000 Carole Salkind $425,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/18/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.045
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/22/03 15,080,938 shares of NCT common stock Crammer Road LLC Conversion of 51 shares of NCT
series H preferred stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
43
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/28/03 NCT Convertible Note ($414,884.82 Carole Salkind Cancellation and surrender of
principal amount) $350,000 convertible note
dated 8/14/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/28/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.055
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/28/03 NCT Convertible Note ($375,000 Carole Salkind $375,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
8/28/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.055
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/04/03 NCT Convertible Notes ($440,000 Alpha Capital Aktiengesellschaft; $390,000 in cash
aggregate principal amount) Libra Finance S.A. (as finder)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/04/03 Cancellation of 2,500,000 shares Alpha Capital Aktiengesellschaft 12,500,000 shares of the
from the December 6, 2002 Warrant December 6, 2002 warrant
for 15,000,000 shares of NCT common vested on May 30, 2003 and
stock remain in force. The remaining
2,500,000 shares of the December
6, 2002 warrant vested on May
30, 2003 and are cancelled on
September 4, 2003.
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/11/03 NCT Convertible Note ($580,650.27 Carole Salkind Cancellation and surrender of
principal amount) $490,000 convertible note
dated 8/29/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/11/03 Warrant for 2,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.050
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/11/03 Option for 7,500,000 shares of NCT Acme Associates, Inc. Exercisable for cash at $0.052
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/12/03 NCT Convertible Note ($400,000 Carole Salkind $400,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/12/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.050
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/18/03 14,109,883 shares of NCT common Alpha Capital Aktiengesellschaft Settlement of legal action
stock (exempt under Section 3(a)(10)
of the Securities Act of 1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/18/03 20,868,729 shares of NCT common Austost Anstalt Schaan Settlement of legal action
stock (exempt under Section 3(a)(10)
of the Securities Act of 1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/18/03 21,076,266 shares of NCT common Balmore S.A. Settlement of legal action
stock (exempt under Section 3(a)(10)
of the Securities Act of 1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/18/03 5,721,189 shares of NCT common stock Libra Finance S.A. Settlement of legal action
(exempt under Section 3(a)(10) of
the Securities Act of 1933)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
9/22/03 2,834,526 shares of NCT common stock Crammer Road LLC Conversion of 10 shares of NCT
series H preferred stock
- --------------- -------------------------------------- ----------------------------------- --------------------------------
44
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/02/03 NCT Convertible Note ($816,096.49 Carole Salkind $400,000 in cash plus
principal amount) cancellation and surrender of
$350,000 convertible note
dated 9/9/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/02/03 Warrant for 4,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.043
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/03/03 Option to acquire 5,750,000 shares Acme Associates, Inc. Exercisable for cash at $0.043
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/14/03 NCT Convertible Note ($4,469,018.84 Carole Salkind Cancellation and surrender of
principal amount) $3,770,098.38 convertible note
dated 9/30/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/14/03 Warrant for 19,250,000 shares of NCT Carole Salkind Exercisable for cash at $0.044
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/14/03 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/14/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.044
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
10/14/03 Option to acquire 44,000,000 shares Acme Associates, Inc. Exercisable for cash at $0.044
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/03/03 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/03/03 Warrant for 2,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.044
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/03/03 Option to acquire 2,000,000 shares Acme Associates, Inc. Exercisable for cash at $0.045
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/21/03 NCT Convertible Note ($474,154.08 Carole Salkind Cancellation and surrender of
principal amount) $400,000 convertible note
dated 11/07/02 along with
accrued interest and default
penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/21/03 Warrant for 2,250,000 shares of NCT Carole Salkind Exercisable for cash at $0.041
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/21/03 NCT Convertible Note ($425,000.00 Carole Salkind $425,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/21/03 Warrant for 2,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.041
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/21/03 Option to acquire 6,500,000 shares Acme Associates, Inc. Exercisable for cash at $0.041
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/22/03 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
11/22/03 Warrant for 2,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.041
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
45
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Name of Person/Entity to whom
Date of Sale Amount and Type securities were sold Aggregate Amount and Type
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/15/03 NCT Convertible Note ($3,828,984.72 Carole Salkind Cancellation and surrender of
principal amount) $400,000, $350,000, $450,000,
$1,692,462.74 and $415,000
convertible notes dated
11/20/02, 12/02/02, 05/15/03,
05/22/03 and 05/28/03 along
with accrued interest and
default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/15/03 Warrant for 16,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.037
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/15/03 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/15/03 Warrant for 2,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.037
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/17/03 Option to acquire 99,750,000 shares Acme Associates, Inc. Exercisable for cash at $0.037
of NCT common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/31/03 NCT Convertible Note ($7,479,384.54 Carole Salkind Cancellation and surrender of
principal amount) $400,000, $2,381,486.89,
$350,000, $2,449,811.87,
$435,000 and $410,000
convertible notes dated
12/16/02, 12/26/02, 12/30/02,
06/12/03, 06/12/03 and 06/28/03
along with accrued interest and
default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/31/03 Warrant for 32,250,000 shares of NCT Carole Salkind Exercisable for cash at $0.040
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/31/03 NCT Convertible Note ($785,000.00 Carole Salkind $785,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/31/03 Warrant for 5,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.040
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
12/31/03 NCT Convertible Note ($3,050,000.00 Carole Salkind Cancellation and surrender of
principal amount) $400,000, $816,096.49 $400,000
and $400,000 convertible notes
dated 09/12/03, 10/02/03,
10/14/03 and 11/03/03 along
with accrued interest and
$996,238 additional note
principal amount in
consideration of willingness for
continued funding provided by
Carole Salkind
- --------------- -------------------------------------- ----------------------------------- --------------------------------
46
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below is derived from
our historical financial statements. The data set forth below is qualified in
its entirety by and should be read in conjunction with our consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that are included elsewhere in this Annual
Report on Form 10-K.
(in thousands of dollars, except per share amounts)
Years Ended December 31,
--------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------ ------------ ----------- ----------- -----------
RESULTS OF OPERATIONS AND
LOSS PER SHARE:
REVENUE:
Technology licensing fees and royalties $ 3,552 (b) $ 9,928 (b) $ 5,633 (b) $ 4,493 $ 3,013
Product sales, net 2,208 2,001 4,568 2,697 1,708
Advertising - 828 279 105 88
Engineering and development services 1,303 83 132 24 49
------------ ------------ ------------ ----------- -----------
Total revenue $ 7,063 $ 12,840 $ 10,612 $ 7,319 $ 4,858
------------ ------------ ------------ ----------- -----------
COSTS, EXPENSES AND OTHER INCOME:
Cost of product sales $ 2,767 $ 2,127 $ 3,340 $ 1,279 $ 787
Cost of advertising - 814 332 15 14
Cost of engineering and development services 2,216 55 2 8 53
Selling, general and administrative 11,878 11,408 18,983 (f) 14,850 17,519 (m)
Research and development 6,223 4,412 5,966 4,711 3,684
Other operating (income) expense, net 7,032 (c) 2,661 (d) 35,841 (g) 11,439 (k) (244)
------------ ------------ ------------ ----------- -----------
Operating costs, expenses and other income 30,116 21,477 64,464 32,302 21,813
Non-operating items:
Other (income) expense, net 166 (162) 16,099 (h) 7,411 (l) (943)(n)
Interest (income) expense, net 552 1,849 6,127 (i) 7,711 14,288 (o)
------------ ------------ ------------ ----------- -----------
Total costs and expenses $ 30,834 $ 23,164 $ 86,690 $ 47,424 $ 35,158
------------ ------------ ------------ ----------- -----------
Net loss before cumulative effect
of change in accounting principle $ (23,771) $ (10,324) $ (76,078) $(40,105) $(30,300)
Cumulative effect of change in accounting principle - - (1,582)(j) - -
------------ ------------ ------------ ----------- -----------
NET LOSS $ (23,771) $ (10,324) $ (77,660) $(40,105) $(30,300)
Less:
Beneficial conversion features 10,567 5,667 (e) 392 46 -
Preferred stock dividends 494 113 969 2,817 2,948
------------ ------------ ------------ ----------- -----------
Loss attributable to common stockholders $ (34,832) $ (16,104) $ (79,021) $(42,968) $(33,248)
============ ============ ============ =========== ===========
Loss per share: $ (0.18) $ (0.06) $ (0.20) $ (0.10) $ (0.06)
Loss before cumulative effect
of change in accounting principle - - (0.01) - -
------------ ------------ ------------ ----------- -----------
Basic and diluted net loss per share $ (0.18) $ (0.06) $ (0.21) $ (0.10) $ (0.06)
============ ============ ============ =========== ===========
Weighted average common shares outstanding -
Basic and diluted (a) 190,384 292,758 377,084 446,423 563,543
============ ============ ============ =========== ===========
47
As of December 31,
-------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets $ 13,377 $ 39,382 $ 20,009 $ 13,569 $ 12,775
Total current liabilities 7,728 23,386 56,959 53,542 62,927
Total long term liabilities 4,107 3,761 7,765 5,011 2,746
Accumulated deficit (131,475) (141,799) (219,459) (259,564) (289,864)
Stockholders' equity (capital deficit)(p) (367) 9,858 (53,463) (53,673) (61,211)
Working capital deficit (3,281) (9,727) (52,636) (51,409) (60,816)
Footnotes:
- ----------
(a) Excludes shares issuable upon the exercise of outstanding stock
options, warrants, convertible preferred stock and convertible debt
since their effect would be antidilutive.
(b) Includes revenue recognized upon DMC licensing activities for DMC
licenses that during 2002 we subsequently reacquired, or plan to
reacquire, as follows: 1999 - $850,000; 2000 - $1,055,545; and 2001 -
$222,220.
(c) Includes a $2.4 million charge in connection with NCT's write down of
its investment in Top Source Automotive, Inc. 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 $1.0 million adjustment to beneficial conversion feature
previously reported by our 82% owned subsidiary, Pro Tech
Communications, Inc.
(f) Increase compared to 2000 is primarily due to higher compensation
costs, litigation and patent expenses, depreciation and amortization
and costs attributable to acquired companies.
(g) Primarily consists of $1.9 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); $19.3 million, net, for
repurchased licenses (composed of $18.0 million write down for the
acquisition of shares of DMC New York, Inc., representing repurchased
licenses and accrual for obligation to acquire remaining licenses and
$1.3 million, net of $2.7 million reduction of deferred revenue, for
reacquisition of other DMC licenses from two licensees); and $1.5
million write down of investment in Top Source Automotive.
(h) Primarily consists of $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.
(i) Includes $3.3 million amortization of original debt discounts; $0.9
million relating to the amortization of beneficial conversion features
on convertible debt; $0.7 million from debt issuance costs; and $1.2
million interest charges on indebtedness.
(j) 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.
(k) Primarily consists of $9.2 million charge for repurchased licenses due
to additional costs incurred to acquire 12,000 shares of DMC New York,
Inc. in exchange for our series H preferred stock, $2.1 million
impairment of other intangible assets and $0.3 million for the
impairment of goodwill.
48
(l) Primarily consists of $6.1 million for finance costs associated with
non-registration of shares; $0.8 million for other-than-temporary
declines in value of available-for-sale securities; and $0.4 million
default penalties on debt.
(m) Includes a $3.8 million increase in consulting expenses from the
issuance of options.
(n) Primarily consists of $2.2 million for finance costs associated with
non-registration of shares; $2.1 million default penalties on debt;
and $(5.3) million gain on litigation settlements.
(o) Includes $5.3 million of amortization of original debt discounts; $4.9
million relating to the amortization of beneficial conversion features
on convertible debt; $2.9 million interest charges on indebtedness;
$1.1 million amortization of additional debt discounts.
(p) NCT has never declared nor paid cash dividends on its common stock.
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 in this Annual
Report on Form 10-K. In addition, we caution readers that our actual results in
fiscal 2004 and beyond may differ materially from those expressed in any
forward-looking statements made by, or on behalf of, us.
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 Annual 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
operating segments that are dependent on our ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of products; produce a cost effective product that will gain
acceptance in relevant consumer and other product markets; increase revenue from
products and services; realize funding from technology licensing fees,
royalties, product sales, and engineering and development revenue to sustain our
current level of operation; introduce, on a timely basis, new products and
services; 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
relationships; 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.
49
Overview
Our business operations are organized into three operating segments:
communications, media and technology. NCT's operating revenue is comprised of
technology licensing fees and royalties, product sales, advertising and
engineering and development services. Operating revenue in 2003 consisted of
approximately 62.0% in technology licensing fees and royalties, 35.2% in product
sales, 1.8% in advertising and 1.0% in engineering and development services. For
the five years ended December 31, 2003, our revenue consisted of 62.4% in
technology licensing fees and royalties, 30.9% in product sales, 3.0% in
advertising and 3.7% in engineering and development services. Such five-year
revenue included approximately $2.1 million for DMC license fees for licenses
that we subsequently reacquired and that resulted in charges to our statements
of operations ($19.3 million, net, in 2001 and $9.2 million in 2002). Excluding
the revenue recognized from the sale of DMC licenses that we subsequently
determined to reacquire, our revenue for the five years ended December 31, 2003
consisted of approximately 60.4% in technology licensing fees and royalties,
32.5% in product sales, 3.2% in advertising and 3.9% in engineering and
development services. Our revenue recognition policies are described in
"Critical Accounting Policies" below. 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.
We had actively pursued an acquisition strategy through 2001. Our
statements of operations include the results of acquired companies from the
respective dates of acquisition. In 2001, we acquired Artera Group International
Limited (formerly known as Teltran Web Factory Limited) and 25% of DMC New York,
Inc. In June 2002, pursuant to an exchange agreement, we acquired the remaining
75% of DMC New York, Inc. and $120,000 cash from Crammer Road in exchange for
1,800 shares of our series H preferred stock. Please refer to Note 2 - notes to
our consolidated financial statements for further information about our
acquisitions.
In December 2001, management decided to close the company's Maryland
research facility. During 2002, due to under-performance, we ceased the business
operations of DMC Cinema and Artera Group International Limited. In connection
with these actions, the company reduced the number of its employees from 135 at
December 31, 2001 to 74 at December 31, 2002, a 45.2% decrease. We had 75
employees at December 31, 2003 and 68 at February 29, 2004.
NCT continued its practice of marketing its technologies through licensing
to third parties for fees, generally by obtaining technology license fees when
initiating strategic relationships with new partners, and subsequent royalties.
We have entered into a number of licensing agreements with established firms for
the integration of our technologies into products. The speed with which we can
achieve the commercialization of our technologies and subsequently receive
royalties depends, in 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 and a resulting revenue stream can be generated.
Presently, we are selling products through several of our licensees,
including: Ultra is installing aircraft cabin quieting systems in the SAAB 340
turboprop aircraft; Oki is integrating ClearSpeech(R) algorithms into large
scale integrated circuits for communications applications; and Thales Avionics
In-flight Systems (formerly known as BE Aerospace) and Long Prosper are
providing NoiseBuster(R) components for United Airlines' in-flight entertainment
and information systems.
Going Concern Risks
Since its inception, NCT has experienced substantial recurring losses from
operations, which amounted to $289.9 million on a cumulative basis through
December 31, 2003. NCT's internally generated funds from its revenue sources
have not been sufficient to cover its operating costs. The ability of our
revenue sources, especially technology license fees, royalties, product sales
and advertising, 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 licensing agreement negotiations. To the extent our internally
generated funds are not adequate, 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
50
of common stock, convertible preferred stock and/or convertible debt. There is
no assurance that our shareholders would approve a sufficient increase in our
authorized shares. There is no assurance any such financing is or would become
available. There can be no assurance that sufficient funding will be provided by
our revenue sources or additional capital.
Management believes that currently available funds will not be sufficient
to sustain NCT operations at its current levels through the next six months.
Such funds consist of available cash and the funding derived from our revenue
sources. Cash and cash equivalents amounted to $1.0 million as of December 31,
2003 and the working capital deficit was $60.8 million. NCT has been able to
continue its operations by raising additional capital to fund its operations.
NCT has been primarily dependent upon funding from Carole Salkind in 2003. At
December 31, 2003, NCT is in default on $6.7 million of its indebtedness and is
subject to a judgment of $2.1 million. Please refer to Liquidity and Capital
Resources below. In the event that external financing is not available or
timely, NCT would have to substantially reduce its level of operations in order
to conserve cash. These reductions could have an adverse effect on NCT's
relationships with its customers and suppliers (refer to Note 1 - notes to the
consolidated financial statements). Reducing operating expenses and capital
expenditures alone may not be adequate, and continuation as a going concern is
dependent upon the level of funding realized from our internal and external
funding sources, all of which are presently uncertain. Uncertainty exists with
respect to the adequacy of current funds to support NCT's activities or to pay
awards or judgments against the company 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.
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, 2003 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.
Critical Accounting Policies
The preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based upon assumptions about matters that are highly
uncertain at the time the estimate is made, and if different estimates that
reasonably could have been used, or changes in the accounting estimates that are
reasonably likely to occur periodically, could materially impact the financial
statements. Management believes the following critical accounting policies
reflect its more significant estimates and assumptions used in the preparation
of the consolidated financial statements.
51
Revenue Recognition
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 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. Our preference is to collect amounts due from the sale of our
technologies, services and products in cash. However, from time to time,
receivables may be settled by securities transferred to us by the customer in
lieu of cash payment and such other consideration may or may not be realized by
us in cash.
At December 31, 2003, our deferred revenue aggregated $3.3 million. We do
not expect to realize any cash in connection with recognizing revenue from our
deferred revenue.
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 NCT upon the acquisition of some or all of the stock held by
minority shareholders of a subsidiary, except where such accounting is, in
substance, the purchase of licenses previously sold to such minority
shareholders or their affiliates. Effective January 1, 2002, goodwill and
intangibles with indefinite lives are no longer amortized. Prior to January 1,
2002, goodwill was amortized using the straight-line method over the estimated
period of benefit (generally ranging from five to twenty years). Goodwill
amortization expense for the year ended December 31, 2001 was $1.7 million.
Annually, or if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount, the company tests its goodwill for impairment.
Our annual evaluation is conducted in December. At December 31, 2003, the
company evaluated the goodwill allocated to its Advancel reporting unit, NCT
Hearing reporting unit and Midcore/Artera reporting unit and determined no
impairment existed. The fair value of the reporting units was determined using
the income approach by discounting future benefits. Our key assumptions
underlying the projections for our reporting units included the following:
Advancel Reporting Unit
o Revenue projections were based upon the royalties due Advancel from
STMicroelectronics whose product sales started in 2003. Our revenue is
projected to increase approximately 850% in the first two years and
increase annually thereafter at rates ranging from 42% to 18%.
o Based upon our projected revenue, we calculated our market penetration
would be less than 1% in 2004; we estimated significant growth in years
2005 to 2008 and our projected market penetration increases to
approximately 6% of the smart card market. We believe such an increase is
feasible since Advancel's technology introduces multiple functionality to
smart cards and ST is a market-leading supplier of smart card chips.
o We believe expenses will be nominal (we assumed these would be
approximately 10% of royalty revenue) since no further significant costs
are expected to be incurred by us.
o Although we have not historically achieved profitability or significant
revenue growth in any of our operations, our projections include profitable
operations from 2004 through 2008 (our projection covered a five-year
period).
o Discount rate of 10% was used (considered consistent with the risks
involved as implementation will be performed by ST resulting in an annuity
stream to us and no further investment is required by us).
o We used a probability-weighted approach to assess the likelihood of five
possible outcomes.
52
NCT Hearing Reporting Unit
o Fair value testing was based on NCT Hearing's operations and only our
controlling interest in ProTech (a 81.6%-owned subsidiary of NCT Hearing
Products, Inc.); our valuation estimate included reliance upon
knowledgeable officers and employees with extensive experience in the
headset and communications industry.
o Our projections covered a five-year period.
o Material revenue was projected from products for which there are no
historical sales; however, our projections also represent current product
lines that have existing, established distribution channels; as well as
revenue projected for products incorporating the ANR/ClearSpeech
technology. We estimated the projected sales by identifying the products to
be improved, the timing to achieve the results and expected sales based on
our experience with current products. We estimated different sales levels
and selling prices, applied an estimated probability of achieving the
projected levels to arrive at our final projected amounts. Our revenue
projections reflected annual increases ranging from 106% to 18%. New
products comprise approximately from 44% to 68% of revenue during the
projected period.
o Profitability is projected for 2004 through 2008 although this reporting
unit has not been profitable since 1995. From 2004 through 2008, projected
net profit increases from 6.4% of revenue to 29.0% of revenue.
o 20% discount rate was used (considered consistent with the risks involved;
approximates cost of equity capital).
o Additional, third party financing for working capital was projected at
approximately $250,000.
Artera/Midcore Reporting Unit
o Our subscribers are projected to comprise a mix of approximately 14%
residential and 86% small business and enterprise users; revenues projected
reflect our share of revenues under arrangements with third parties. We
projected significant annual increases in number of subscribers although we
have no historical basis for generating revenue (or profit) in this
business operation. Artera Turbo 2.0 was released in October 2002 and
Artera Turbo 3.1 became available in December 2003.
o Our revenue is projected to increase annually beyond the first year at
rates ranging from approximately 140% to approximately 7%, averaging
approximately 134% for the second and third years and averaging
approximately 22% for the next three years. The substantial increase during
the first years reflects the anticipated increase in enterprise revenue.
o Our projections covered a six-year period.
o We estimated that our market penetration would be less than 1% of worldwide
dial-up Internet users throughout the projection period.
o We have projected profitability beginning in 2005 although this operation
has not historically achieved profitability.
o We anticipated that working capital financing of up to $5.0 million would
be required in 2004.
o We used a probability-weighted approach to assess the likelihood of six
possible outcomes.
o 35% discount rate was used which was considered consistent with the risks
involved and Artera's expected future cost of borrowing.
These evaluations required informed, but subjective judgment in forecasting
revenues and expenses especially given that these reporting units are either in
a start-up phase or have no recent historical record for generating revenues or
positive cash flows. In all cases, we considered objective evidence where
available. Although we have not historically been profitable, we believe that
profitability may be achieved in the future if the necessary sales levels are
reached.
If the financing noted above is not received, changes to our assumptions
will be required in connection with further testing for impairment. In addition,
future events such as market conditions or operational performance of our
reporting units could cause us to modify our assumptions.
The company also recognizes an impairment loss on goodwill acquired upon
the acquisition of stock held by minority shareholders of subsidiaries if the
subsidiary's minority interest has no carrying value, the subsidiary has a
capital deficit and the projected future operating results of the subsidiary are
not positive. Impairment of goodwill, net for the years ended December 31, 2001,
2002 and 2003 was $14.1 million, $0.3 million and zero, respectively. At
December 31, 2003, the carrying value of our goodwill, net was $7.2 million.
53
Patent rights and other intangible assets with finite useful lives, 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 fifteen years. Amortization expense
for the years ended December 31, 2001, 2002 and 2003 was $0.4 million, $0.5
million and $0.3 million, respectively.
The company evaluates the remaining useful life of intangible assets with
finite useful lives each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of amortization. If the
evaluation determines that the intangible asset's remaining useful life has
changed, the remaining carrying amount of the intangible asset is amortized
prospectively over that revised remaining useful life. The company evaluates its
intangible assets with finite useful lives for impairment whenever events or
other changes in circumstances indicate that the carrying amount may not be
recoverable. The testing for impairment includes evaluating the undiscounted
cash flows of the asset and the remaining period of amortization or useful life.
The factors used in evaluating the undiscounted cash flows include: current
operating results, projected future operating results and cash flows and any
other material factors that may effect the continuity or the usefulness of the
asset. If impairment exists, the intangible asset is written down to its fair
value based upon discounted cash flows. Impairment of other intangibles for the
years ended December 31, 2001, 2002 and 2003 was zero, $2.1 million and zero,
respectively. At December 31, 2003, our patent rights and other intangibles, net
were $1.3 million.
Recent Authoritative Accounting Guidance
On January 1, 2003, we adopted the following standards as a result of the
issuance of new accounting pronouncements by the Financial Accounting Standards
Board (FASB) in 2002:
o Statement of Financial Accounting Standards (SFAS) No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections"
o SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities"
o FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others"
On July 1, 2003, we adopted the following standards as a result of the
issuance of new accounting pronouncements by the FASB in 2003:
o SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities"
o SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity"
On January 17, 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." On December 24, 2003, the FASB issued a complete replacement
of FIN No. 46, entitled FIN 46 Revised, which clarifies certain complexities of
FIN 46.
For more detailed information regarding any pronouncements and the impact
thereof on our business, results of operations and financial position, refer to
Note 3 - notes to our consolidated financial statements.
Results of Operations
Year ended December 31, 2003 compared to year ended December 31, 2002.
Total revenue in 2003 decreased by $2.4 million, or 32.9%, to $4.9 million
from $7.3 million in 2002 reflecting decreases in most of our revenue sources.
Total costs and expenses during the same period decreased by $12.2 million, or
25.7%, primarily due to: (a) $9.2 million reduction in write downs of investment
and repurchased licenses, net; and (b) $5.3 million gain on litigation
settlements.
Technology licensing fees and royalties decreased $1.5 million, or 33.3%,
to $3.0 million from $4.5 million in 2002. The decrease is primarily
attributable to the absence of licensing fees of $1.9 million related to Teltran
for 2003 partially offset by licensing fees of $0.4 million related to FairPoint
for 2003. Our recognition of technology licensing fee revenue for both periods
was due primarily to recognition of deferred revenue from NXT. During 2003, we
received $0.3 million in cash under our 2002 FairPoint agreement. During the
fourth quarter of 2003, the 2002 FairPoint agreement was replaced which resulted
in Artera meeting all specific performance criteria under that
54
agreement and the recognition of all $0.4 million of deferred revenue. At
December 31, 2003, our deferred revenue related to NXT was $2.7 million. No
additional cash will be realized from our NXT deferred revenue.
Product sales decreased $1.0 million, or 37.0%, to $1.7 million from $2.7
million in 2002. The decrease was primarily due to $0.5 million of lower product
sales recognized by Pro Tech due to reduced fast-food headset purchases by major
distributors and a $0.2 million decrease as a result of the cessation of
operations of Artera International in March 2002. Our principal product
customers for 2003, HM Electronics, Muzak, 3M Corporation and McDonalds,
accounted for $0.6 million of total product sales compared to $0.7 million in
2002. Sales to Muzak, 3M Corporation and McDonalds consisted of Pro Tech
headsets and accessories. Sales to HM Electronics consisted of chips that use
our ClearSpeech algorithms. Total sales to these customers were less in 2003
compared to 2002 due to a weaker economy. There can be no assurance that our
product customers will continue to place orders with us at the same levels as in
the prior years. The loss of one or more customers, a reduction in orders or
increased product returns could adversely affect our operating results.
Gross profit on product sales, as a percentage of product sales, improved
to 53.9% in 2003 from 52.6% for the same period in 2002.
Revenue from advertising remained consistent in 2003 compared to 2002 at
$0.1 million. Advertising revenue is derived from the sale of audio and visual
advertising in the Sight & Sound locations. We experienced an increase in
revenue from health venues, which was offset by a decrease in revenue from
non-health venues. Although our limited cash resources have reduced our
expectations, we anticipate increasing revenue from the Sight & Sound(R)
locations in health venues. We believe it is reasonable to expect revenue to
increase in the future because (i) our network of installed sites is growing
and, as a result, our reach into the market and number of impressions delivered
is increasing which makes the network more compelling to advertisers; (ii) each
site is supported by at least one paying advertiser, in most cases health
insurance plans, and generally their commitments are for one to two years; and
(iii) additional site and advertiser opportunities are in negotiation. At
December 31, 2003, twenty sites in hospitals and neighborhood family care
centers are operational. Cost of advertising also remained consistent in 2003
compared to 2002. These costs include the amounts due to the installed locations
(as compensation for our use of the facilities where the Sight & Sound system is
located) and communication expenses for the Sight & Sound locations. At December
31, 2003, revenue from health care venues was 100% of total advertising revenue
as compared to 66% for the same period in 2002.
Selling, general and administrative expenses in 2003 increased $2.7
million, or 18.2%, to $17.5 million from $14.8 million in 2002 due primarily to
a $4.2 million increase in consulting expense from the issuance of options and
$0.3 million accrual for asserted minimum royalties due to a licensor. This
increase was partially offset by an $0.8 million decrease in legal and patent
expenses as a result of finalizing legal matters and a $0.1 million decrease in
each of salary and related benefits, corporate and office related expenses
relating to a reduced workforce.
Research and development expenditures in 2003 decreased $1.0 million, or
21.3%, to $3.7 million from $4.7 million in 2002. This decrease was due
primarily to: (i) a $0.6 million decrease in prototype parts and product
development; and (ii) a $0.4 million decrease in depreciation and amortization.
Research and development costs consist primarily of compensation and benefit
costs (ranging from 70% to 75% of total), depreciation (approximately 7% of
total), parts, and development costs and services of outside firms. Our
principal projects during 2003 include development of other components of our
Artera Turbo subscription service, ClearSpeech algorithm development and
development of safety earmuff (next generation active noise reduction, or ANR,
ProActive). The company expects research and development expenditures to
continue at similar levels as those experienced during 2003.
Included in NCT's total costs and expenses were non-cash expenditures
including depreciation and amortization of $0.7 million and $1.3 million in 2003
and 2002, respectively, impairment of other intangibles of zero and $2.1 million
in 2003 and 2002, respectively, impairment of goodwill of zero and $0.3 million
in 2003 and 2002, respectively, realized loss in value of marketable securities
deemed other-than-temporary of zero and $0.8 million in 2003 and 2002,
respectively, and interest expense of $14.3 million in 2003 and $7.7 million in
2002 due to an increase in debt financing.
55
Interest expense was $14.3 million for 2003 compared to $7.7 million for
2002, an increase of $6.6 million, or 85.7%. This increase was due primarily to
the increase in debt financing during 2003 and our issuance of warrants in
conjunction with the debt. Interest includes $5.3 million of amortization
related to discounts, $4.9 million of amortization of beneficial conversion
features, $2.9 million of interest expense on debt and $1.1 million of
amortization of additional debt discounts.
NCT had estimated net operating loss carryforwards of $157.5 million,
estimated capital loss carryforwards of $3.6 million and research and
development credit carryforwards of approximately $2.4 million for federal
income tax purposes at December 31, 2003. No tax benefit for these operating
losses has been recorded in NCT's financial statements. Our ability to utilize
our net operating loss and capital loss carryforwards may be subject to an
annual limitation. The limitation of these carryforwards may be triggered by
ownership changes, specifically any tax-free reorganization or a change
involving a 5% shareholder. Under contractual restrictions, many of the
beneficial owners of 5% of NCT common stock are prohibited from holding in
excess of 9.99% of our common stock at any given time. Carole Salkind has no
such contractual restriction. At her election at any time, she may convert notes
issued by NCT and accrued interest thereon into shares of NCT common stock (if
sufficient authorized shares are available for such conversion) thereby
triggering an ownership change which would result in a limitation of our ability
to utilize net operating loss carryforwards.
Year ended December 31, 2002 compared to year ended December 31, 2001.
Total revenue in 2002 decreased by $3.3 million, or 31.1%, from $10.6
million in 2001 to $7.3 million in 2002 reflecting decreases in each of our
revenue sources. Total costs and expenses during the same period decreased by
45.3%, or $39.3 million, primarily due to: (a) $13.8 million reduction in
goodwill impairment; (b) $11.6 million reduction in write-downs on investments
and repurchased licenses, net; and (c) $6.2 million reduction in
other-than-temporary loss in value of available-for-sale securities.
Technology licensing fees and royalties decreased $1.1 million, or 19.6%,
from $5.6 million in 2001 to $4.5 million in 2002. The decrease is primarily
attributable to the absence of licensing fees related to Infinite Technology
Corporation (ITC) for 2002. Despite repeated attempts to obtain invoices on the
development work performed and an accounting of NCT shares sold by ITC, all of
which had been sold by the end of March 2002, no such accounting was provided.
As such, we recognized no revenue and expense under the ITC arrangement in 2002.
However, we believe ITC performed work in 2002 pursuant to the research and
development contract (refer to Note 4 - notes to the consolidated financial
statements). Our basis for belief that ITC performed development work in 2002
was attributable to the sales by ITC of shares of NCT common stock that we had
issued to ITC for the express purpose of funding its development work. Our
belief was based upon a phone conversation and no documentation was provided to
us, as required by the agreement, to support the assertion that the remaining
shares had been sold; consequently, no adjustment has been made to the
liability. The nature of the work performed was software engineering to add
functionality to the microprocessor chip. Based upon invoices that ITC had
provided in 2001, that work was performed in both the United States and Armenia.
Our recognition of technology licensing fee revenue for both periods was
primarily due to recognition of deferred revenue from NXT and Teltran. During
the fourth quarter of 2002, FairPoint agreed to distribute Artera Turbo, which
is expected to generate future revenue. Artera Turbo 2.0 became available in
October 2002. At December 31, 2002, our deferred revenue related to NXT was $4.8
million. No additional cash will be realized from our NXT deferred revenue.
Product sales decreased $1.9 million, or 41.3%, from $4.6 million in 2001
to $2.7 million in 2002. The decrease was primarily due to $0.5 million of lower
product sales recognized by Pro Tech due to reduced fast-food headset purchases
by major distributors and a $1.0 million decrease as a result of the cessation
of operations of Artera International in March 2002. Product revenue recognized
by Artera International was $0.2 million for the year ended December 31, 2002
and $1.2 million for the same period in 2001. Our principal product customers,
Muzak, AM-COM and McDonalds, accounted for $0.8 million of 2002 product sales
compared to $0.9 million in 2001. Sales to Muzak and McDonalds consisted of Pro
Tech headsets and accessories. Sales to AM-COM consisted of ClearSpeech
microphones and accessories used by ham radio operators. In each case, our sales
to these customers were less in 2002 compared to 2001 due to a weaker economy.
There can be no assurance that our product customers will continue to place
orders with us at the same levels as in the prior years. The loss of one or more
of these customers, the reduction in orders or increased product returns could
adversely affect our operating results.
56
Gross profit on product sales, as a percentage of product sales, improved
to 52.6% in 2002 from 26.9% for the same period in 2001. Excluding Artera
International's contribution to gross profit, gross profit improved to 55.0%
from 26.9%.
Revenue from advertising decreased $0.2 million, or 66.7%, from $0.3
million in 2001 to $0.1 million in 2002. Advertising revenue is derived from the
sale of audio and visual advertising in the Sight & Sound(R) locations. Cost of
advertising revenue decreased $0.3 million, or approximately 100%, from $0.3
million in 2001 to less than $0.1 million in 2002. These costs include the
amounts due to the installed locations (as compensation for our use of the
facilities where the Sight and Sound(R) system is located) and communication
expenses for the Sight & Sound(R) locations. These decreases are primarily due
to the termination of operations of DMC Cinema in February 2002. Although
constrained by our limited cash resources, we anticipate increasing revenue from
the Sight & Sound(R) locations in health care venues. At December 31, 2002,
revenue from health care venues was 66% of total advertising revenue as compared
to zero for the same period in 2001.
Selling, general and administrative expenses in 2002 decreased $3.9
million, or 20.9%, to $14.8 million from $18.7 million in 2001, primarily due
to: (i) a $1.7 million decrease in amortization expense related to the adoption
of SFAS No. 142 effective January 1, 2002; (ii) a $1.1 million decrease in legal
and patent expenses; (iii) a $1.9 million decrease in salary and related benefit
costs as a result of a reduction in workforce; and (iv) an $0.9 million decrease
which represents an overall reduction in sales related costs, such as travel,
trade shows and commissions. These decreases were partially offset with a $3.0
million increase in consulting expenses due primarily to non-cash charges from
the issuance of warrants and options.
Research and development expenditures in 2002 decreased $1.3 million, or
21.7%, to $4.7 million from $6.0 million in 2001. This decrease was due
primarily to: (i) a $1.0 million decrease in product development costs related
to Infinite Technology Corporation; (ii) a $1.1 million decrease in salary and
related benefit costs related to a reduced workforce; and (iii) a $0.3 million
decrease in rent related to the closing of our Maryland facility offset by
increases in depreciation and amortization ($0.4 million), parts for prototypes
($0.3 million), support for our UK office ($0.2 million) and reduction in costs
reclassified as cost of sales ($0.2 million). Research and development costs
consist primarily of compensation and benefit costs (ranging from 70% - 75% of
total), depreciation (approximately 11% of total), parts, and development costs
and services of outside firms. Our principal projects during 2002 include
development of other components of our Artera Turbo subscription service,
ClearSpeech algorithm development and development of safety earmuff (next
generation active noise reduction, or ANR, ProActive). The company expects
research and development expenditures to continue at similar levels as those
experienced during 2002.
Included in NCT's total costs and expenses were non-cash expenditures
including depreciation and amortization of $1.3 million and $3.0 million in 2002
and 2001, respectively, impairment of other intangibles of $2.1 million and zero
in 2002 and 2001, respectively, impairment of goodwill of $0.3 million and $14.1
million (net of reduction in deferred revenue) in 2002 and 2001, respectively,
realized loss in value of marketable securities deemed other-than-temporary of
$0.8 million and $7.0 in 2002 and 2001, respectively, and interest expense of
$7.7 million in 2002 and $6.2 million in 2001 due to an increase in debt
financing.
Interest expense increased by 24.2%, or $1.5 million, to $7.7 million in
2002 from $6.2 million in 2001. The 2002 increase was primarily due to the
increase in debt financing during 2002 and our issuance of warrants in
conjunction with the debt. Interest includes $2.9 million of amortization
related to discounts, $2.3 million of interest expense on debt, $2.3 million of
amortization of beneficial conversion features, and $0.1 million of amortization
of debt issuance costs.
NCT had estimated net operating loss carryforwards of $121.0 million,
estimated capital loss carryforwards of $2.3 million and research and
development credit carryforwards of approximately $2.5 million for federal
income tax purposes at December 31, 2002. No tax benefit for these operating
losses has been recorded in NCT's financial statements. Our ability to utilize
our net operating loss and capital loss carryforwards may be subject to an
annual limitation. The limitation of these carryforwards may be triggered by
ownership changes, specifically any tax-free reorganization or a change
involving a 5% shareholder. Under contractual restrictions, many of the
beneficial owners of 5% of NCT common stock are prohibited from holding in
excess of 9.99% of our common stock at any
57
given time. Carole Salkind has no such contractual restriction. At her election
at any time, she may convert notes issued by NCT and accrued interest thereon
into shares of NCT common stock thereby triggering an ownership change which
would result in a limitation of our ability to utilize net operating loss
carryforwards.
Liquidity and Capital Resources
Please refer to "Going Concern Risks" above for a description of
uncertainties that raise substantial doubt at December 31, 2003 about NCT's
ability to continue as a going concern. We believe our internally generated
resources are insufficient to meet our short-term and long-term requirements.
Refer to the table and discussion below under the subheading "Contractual
Obligations." NCT has experienced substantial losses from operations since its
inception, which have been recurring and amounted to $289.9 million on a
cumulative basis through December 31, 2003. 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 and royalties;
o product sales;
o advertising revenue; and
o engineering and development services.
We recently entered into financing transactions because internally
generated funding sources were insufficient to maintain our operations,
including:
o NCT Convertible Notes Issued to Carole Salkind
o Other Debt Financings
In 2003, we have been primarily dependent upon funding from Carole Salkind.
Although we do not have a formal agreement requiring her to do so, we believe
that Carole Salkind will continue to provide funds to NCT. Our belief that
funding from her will continue is based primarily upon her continued funding of
NCT during 2002 and 2003 despite NCT's failure to repay her notes as the notes
matured. Commencing January 2001, upon the maturity of Ms. Salkind's initial
note to NCT dated January 1999, NCT has established a history of defaulting on
the repayment of obligations owed to Carole Salkind as such obligations become
due. Ms. Salkind has allowed NCT to roll over maturing note principal, along
with accrued interest (including interest at the default rate of 13% for the
period after maturity until settlement) and a default penalty (10% of the
principal amount in default), into new notes that generally mature upon demand
or from six months to one year from the date of the rolled-over note. In
addition to the financing provided by rolling over maturing notes, Ms. Salkind
has continued to provide NCT with new funds. However, NCT has no legally binding
assurance that Ms. Salkind will continue funding NCT in the near-term or that
the amount, timing and duration of funding from her will be adequate to sustain
our business operations.
At December 31, 2003, NCT's cash and cash equivalents aggregated $1.0
million. NCT's working capital deficit was $60.8 million at December 31, 2003,
compared to a deficit of $51.4 million at December 31, 2002, a $9.4 million
increase in the working capital deficit. Current liabilities increased primarily
due to the net increase of related party convertible notes of approximately
$14.4 million (net of discounts) partially offset by the decrease in accrued
non-registration fees of $3.9 million.
NCT is in default of an aggregate of $6.7 million of its indebtedness at
December 31, 2003 comprised of $3.2 million of notes payable and $3.5 million of
convertible notes (refer to Notes 11 and 12 - notes to the consolidated
financial statements). Of such defaults, $5.7 million is attributable to our
failure to repay indebtedness upon maturity and $1.0 million is attributable to
a cross-default provision. The following table summarizes our indebtedness in
default at December 31, 2003.
58
(In millions)
New Defaults
Indebtedness Defaults Cured Indebtedness
In Default during during In Default
Notes Payable: 12/31/02 the Period the Period 12/31/03
----------------- --------------- ---------------- -----------------
Obligation to prior owner
of Web Factory $ 2.4 (a) $ 0.3 (d) $ - $ 2.7 (a)
Top Source Automotive 0.2 (a) - (0.2) -
Former Employees / Other 0.3 (a) 0.4 (0.2) 0.5 (a)
----------------- --------------- ---------------- -----------------
Subtotal $ 2.9 $ 0.7 $ (0.4) $ 3.2
----------------- --------------- ---------------- -----------------
Convertible Notes:
Carole Salkind Notes $ 2.9 (b) $ 21.0 $ (23.9) $ -
6% Notes 4.2 (a) - (1.7) 2.5 (a)
8% Notes 1.0 (c) - - 1.0 (c)
----------------- --------------- ---------------- -----------------
Subtotal $ 8.1 $ 21.0 $ (25.6) $ 3.5
----------------- --------------- ---------------- -----------------
Grand Total $ 11.0 $ 21.7 $ (26.0) $ 6.7
================= =============== ================ =================
Footnotes:
----------
(a) Default due to nonpayment.
(b) Default due to judgment against us in excess of amounts permitted
under the notes.
(c) Default due to cross-default provision (default on other debt).
(d) Foreign exchange rate fluctuations.
Net cash used in operating activities for the year ended December 31, 2003
was $10.3 million primarily due to funding the 2003 net loss, as adjusted to
reconcile to net cash. The operating cash flow characteristics of our technology
licensing efforts include the following:
o Our technology licensing activities have resulted in unpredictable streams
of revenue recognition, in part, due to the unpredictable timing of
executing new license agreements;
o Significant new license agreements usually result only after the
prospective licensee has made a lengthy review of our technologies;
o Receipt of licensing compensation and the related revenue recognition often
occur in different operating periods;
o From time to time, we accept licensing compensation in forms other than
cash, typically equity securities;
o Assets acquired in the past, as compensation for license agreements, have
lost value rapidly resulting in material write-offs;
o Most of our licensing agreements provide for one-time license fees and for
long-term royalty streams; and
o To date, most of our licensing activities have resulted in one-time
licensing fees and insignificant long-term royalty streams.
Our deferred revenue balance at December 31, 2003 was $3.3 million, $2.7
million of which was attributed to NXT. We do not expect to realize any cash
from our deferred revenue balance. Our NXT deferred revenue balance originated
at the value of the securities received from our licensee, not all of which was
realized in cash because the value of the securities declined before we sold
them. We recorded $8.6 million of net deferred revenue upon the receipt of
shares of NXT in connection with the March 2001 NXT agreements ; such revenue is
being recognized over four years. We sold all of the NXT shares in 2001 for
approximately $6.9 million resulting in a loss of $2.3 million. The net proceeds
were used in accordance with our NXT agreements. As such, no additional cash is
expected from our NXT deferred revenue balance. From time to time, our deferred
revenue balances originate at the value of securities received from our
licensees, which would not be realized in cash if the value of the underlying
securities declines before we sell such securities.
Net cash used in investing activities was $0.2 million December 31, 2003
due to purchases of capital equipment primarily by Artera Group as it expands
the Artera Turbo data centers in anticipation of future growth.
59
Net cash provided by financing activities was $10.7 million for the year
ended December 31, 2003 and was primarily due to the issuance and sale of
related party convertible notes.
At December 31, 2003, the aggregate face value of NCT's outstanding debt
was $41.4 million, presented on the balance sheet net of discounts of
approximately $5.2 million ($36.2 million, net of discounts). Of the total debt,
$35.5 million, net of discounts, is short-term. Presently, we do not have
sufficient internally generated funds to provide for short-term or long-term
debt service. Please see further discussion below under the subheading
"Contractual Obligations."
At December 31, 2003, the company's short-term debt was $35.5 million,
(principally comprised of $32.1 million of face value of outstanding convertible
notes, net and $3.4 million of outstanding notes payable), shown net of
discounts of approximately $5.2 million on the consolidated balance sheet,
compared to $22.0 million of short-term debt (presented net of $4.1 million of
discounts) at December 31, 2002. The cash proceeds from debt issued in 2003 were
primarily used for general corporate purposes. The increase in short-term debt
at December 31, 2003 compared to December 31, 2002 was primarily attributable to
issuance of debt to Carole Salkind. During the year ended December 31, 2003, NCT
issued an aggregate of approximately $41.7 million of convertible notes to
Carole Salkind as consideration for approximately $10.4 million of cash and the
rollover of approximately $23.9 million of principal in default on matured
convertible notes (includes all of the notes outstanding at December 2002),
approximately $2.4 million of default penalties (10% of the principal amount in
default), approximately $1.9 million of interest and approximately $3.1 million
for convertible notes consolidated in advance of maturity (along with accrued
interest and additional consideration).
As described above, as of December 31, 2003, we are in default (primarily
from non-payment) on $6.7 million of our indebtedness, including $3.2 million of
notes payable and $3.5 million of convertible notes.
NCT believes that the level of financial resources available to it is
critical to its ability to continue as a going concern. From time to time, NCT
may need to raise additional capital through equity or debt financing in order
to sustain its operations or capitalize upon business opportunities and market
conditions. NCT expects that from time to time its outstanding short-term debt
may be replaced with new short or long-term borrowings. Although we believe that
we can continue to access the capital markets in 2003 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. In addition, the company's subsidiaries are not at a stage
where they may separately be able to obtain financing or other funding based
upon their lack of or limited performance history and borrowing base assets.
We intend to use the July 2002 private equity credit agreement (or its
replacement private equity credit agreement) for cash as soon as the contractual
conditions for doing so are satisfied. However, the 2002 equity credit line may
not be a reliable source of new cash capital for NCT. In order for us to have
the right to make puts of our common stock to draw capital, those shares of our
common stock must be authorized and available for issuance and registered for
resale with the SEC. Completion of the registration process may require an
extensive amount of time and the speed at which a registration statement is
declared effective by the SEC is not completely within NCT's control. If the
registration statement covering the shares underlying the private equity credit
agreement is not declared effective within 120 days from the date it is filed,
or if any blackout period, as defined, exceeds 30 days, Crammer Road may
terminate its investment obligation under the 2002 private equity credit
agreement. Further, NCT must maintain an active trading market able to absorb
large quantities of traded shares of our common stock. If the market for our
common stock has an insufficient volume of shares traded, large quantities of
shares of our common stock sold by Crammer Road to satisfy our puts may drive
down the price of our common stock due to lack of demand for those shares. The
issuance of our common stock at a price discounted 10% from the market price may
depress our stock price and dilute the investment of holders of our common
stock. Further, the terms of our
60
private equity credit agreement do not prohibit selling short. A short sale is
the sale of securities that are not owned by the seller (typically borrowed from
a broker-dealer or institutional investor) but are promised to be delivered by
the seller to the lender (selling first and buying later). The seller plans to
buy the securities, which he will then turn around and sell, at a price that he
hopes will be declining so that the price he pays will be less than the price
for which he sells them. Our common stockholders may be exposed to market price
risks from potential low-risk short selling strategies by Crammer Road. Since
the put into our common stock is 90% of the average of the lowest closing bid
price for any three trading days during the 10 trading days immediately
following the put date, our common stock could be sold short in an effort to
drive down the price of the common stock by creating an imbalance of sell-side
interest. Such a strategy is low risk to Crammer Road due to the discount
represented by the put price that provides a hedge against price increases.
From time to time, we may change the terms of options, warrants or other
securities. In some instances, this has been to generate cash.
NCT has no lines of credit with banks or other lending institutions and,
therefore, has no unused borrowing capacity.
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 business partners,
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.
At December 31, 2003, we have 33 of the approximately 400 Barnes & Noble
College Bookstores operating our Sight & Sound(R) system, and as negotiated and
as our capital resources allow, may install the Sight & Sound(R) system in
additional stores. Our average cost for outfitting a store is approximately
$18,000. We have not identified the source of funding to proceed with such
installations. We have no assurance that sufficient capital will become
available. Other than this, there were no material commitments for capital
expenditures as of December 31, 2003 and no material commitments are anticipated
in the near future.
Contractual Obligations
The impact that our contractual obligations as of December 31, 2003 are
expected to have on our liquidity and cash flow in future periods is as follows:
(In thousands of dollars)
Payments Due by Period
----------------------------------------------------------------------------------------
Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years
--------------- ---------------- ---------------- --------------- ------------------
Convertible Notes Payable $ 37,949 $ 37,274 $ 675 $ - $ -
Notes Payable 3,403 3,403 - - -
Leases 2,888 590 1,467 738 93
Purchase Obligations - - - - -
Other Long-Term Liabilites - - - - -
--------------- ---------------- ---------------- --------------- ------------------
Total $ 44,240 $ 41,267 $ 2,142 $ 738 $ 93
=============== ================ ================ =============== ==================
We believe that our internally generated resources are presently
insufficient to meet our short-term or long-term financing obligations as they
become due. As outlined above, we have been borrowing funds from Carole
61
Salkind to sustain our operations. Of the total obligations outlined in the
table above, approximately 93% will become due before December 31, 2004. We
anticipate that Carole Salkind may continue to extend us financing and allow us
to roll over convertible notes due her as those notes mature. However, NCT has
no legally binding assurance that Ms. Salkind will continue funding NCT in the
near-term or that the amount, timing and duration of funding from her will be
adequate to sustain our business operations. We also anticipate that other note
holders will convert into or exchange for shares of our common stock once those
underlying shares are authorized. We have no assurance that our shareholders
will approve an adequate increase in the number of our authorized shares.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As of
December 31, 2003, we are not involved in any material unconsolidated
transactions.
Indemnifications
We enter into contractual arrangements under which we may agree to
indemnify the third party to such arrangement from any losses incurred relating
to the services they perform on behalf of NCT or for losses arising from certain
events as defined within the particular contract, which may include, for
example, litigation or claims relating to past performance. Such indemnification
obligations may not be subject to maximum loss clauses. Historically, payments
made related to these indemnifications have been immaterial.
From time to time, NCT has agreed to indemnify its directors and officers
for liabilities that may arise against them from legal actions. For additional
information, see the section below called "Certain Relationships and Related
Transactions" under the subheading Indemnification of Management.
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 interest rate risk on some of its
obligations. We do 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 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 report of the independent auditors Eisner 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 98.
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.
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
62
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 Eisner LLP
(formerly Richard A. Eisner & Company, LLP) (Eisner) 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. During the fiscal year ended December 31, 2001, and the
subsequent period to February 12, 2002, neither NCT nor any person on NCT's
behalf consulted Eisner 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 Eisner included in prior filings with the
Securities and Exchange Commission.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
NCT's principal executive officer and its principal financial officer,
based on their evaluation of the company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this Annual Report on Form 10-K, have concluded that the
company's disclosure controls and procedures are effective for ensuring that
information required to be disclosed by the company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
Changes in internal controls
There were no changes in the company's internal control over financial
reporting that occurred during the company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF NCT
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 17,
2004.
Name Age Positions and Offices
---- --- ---------------------
Michael J. Parrella 56 Chairman of the Board of Directors and
Chief Executive Officer
John J. McCloy II 66 Director
Samuel A. Oolie 67 Director
Irene Lebovics 50 Director, President
Cy E. Hammond 49 Director, Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
Jonathan M. Charry, Ph.D. 55 Senior Vice President, Corporate
Development
R. Wayne Darville 51 Chief Operating Officer of Artera
Group, Inc.
Irving M. Lebovics 52 Senior Vice President, Global Sales
Mark Melnick 45 Vice President, General Counsel and
Secretary
No family relationships exist among any of the company's executive officers
or directors, except that Irving Lebovics, Senior Vice President, Global Sales,
is the spouse of Irene Lebovics, a director of NCT and its President.
63
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
Chairman of the Board of Directors of Artera Group, Inc., a subsidiary of NCT,
positions he has held since the formation of Artera. Mr. Parrella 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.
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
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
Gravitas Technology, Inc. He is a director of the Sound Shore Fund, Inc.,
Ashland Management and the American Council on Germany.
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 a director and Senior Vice President,
Chief Financial Officer, Treasurer and Assistant Secretary of NCT. On March 17,
2004, Mr. Hammond became a director of NCT. He joined NCT as Controller in
January 1990 and was appointed a Vice President in February 1994. On September
4, 1997, Mr. Hammond was elected to serve as Acting Chief Financial Officer and
Treasurer of NCT Audio Products, Inc. On January 5, 2000, he was elected to
serve as Acting Chief Financial Officer, Treasurer and Assistant Secretary for
Advancel Logic Corporation. On August 20, 2002, Mr. Hammond was elected to serve
as President
64
and Treasurer of DMC New York, Inc. He also serves as Treasurer for the
following NCT subsidiaries: Artera Group, Inc., Chaplin Patents Holding Company,
Inc., Distributed Media Corporation, DMC HealthMedia Inc., Midcore Software,
Inc., NCT Far East, Inc., NCT Hearing Products, Inc., NCT Muffler, Inc. and NCT
Video Displays, Inc. 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 also serves as
director of various NCT subsidiaries, as follows: Artera Group, Inc.,
ConnectClearly.com, Inc., DMC Cinema, Inc., DMC New York, Inc., NCT Video
Displays, Inc., Pro Tech Communications, Inc., Artera Group International
Limited and Noise Cancellation Technologies (Europe) Ltd.
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. Dr. Charry currently serves as a director of
ConnectClearly.com, Inc.
R. Wayne Darville currently serves as Chief Operating Officer of Artera
Group, Inc., a subsidiary of NCT Group, Inc., and has held this position since
August 15, 2002. Prior to that and from May 1, 2002, he served as Chief
Information Officer of Artera Group, Inc. From March 1, 1999 to January 1, 2002,
Mr. Darville was Vice President of Technology and Information Systems, and acted
as Vice President of Networks, of Interoute Telecommunications, Inc. From
September 1, 1995 to February 28, 1999, he was Vice President of Westinghouse
Communications, overseeing operations and security of that company's
international networks. From August 1, 1989 to August 31, 1995, he was General
Manager of CC&S Services, Inc., a subsidiary of Frontier Communications (MI),
where he directed the creation of data centers serving information technology
systems for incumbent local exchange carriers.
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, a director of NCT
and its President.
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 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, PC) in New York, NY. From 1982 to 1984, he was an associate at the law
firm of Seyfarth, Shaw, Fairweather & Geraldson (now known as Seyfarth Shaw LLP)
in New York, NY.
65
Committees of the Board of Directors
Our Board of Directors has established a Compensation Committee and an
Audit Committee.
The Compensation Committee reviews and determines the compensation
policies, programs and procedures of the company as they relate to NCT's senior
management. The Compensation Committee is presently comprised of Messrs. McCloy
and Oolie and held one meeting during the fiscal year ended December 31, 2003.
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 and for other aspects of the company's
financial reporting. The Audit Committee is composed of Messrs. McCloy and Oolie
and held six meetings during the fiscal year ended December 31, 2003. 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 and that John McCloy is an audit committee
financial expert.
Code of Ethics
NCT has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K)
that applies to our Chief Executive Officer (or those performing similar
functions) as well as any and all senior financial officers (including our Chief
Financial Officer). The Code of Ethics is filed as Exhibit 14 to this Annual
Report on Form 10-K for the year ended December 31, 2003.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file reports of ownership of, and
transactions in, NCT's securities with the Securities and Exchange Commission.
Such directors, executive officers and shareholders are also required to furnish
the company with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms furnished to us, and written representations
from certain reporting persons, NCT believes that all filing requirements
applicable to its directors, executive officers and 10% shareholders were
complied with during the fiscal year ended December 31, 2003, except for: (a) a
grant of options made on September 10, 2003 under the 2001 Plan to each of the
following directors and executive officers: Messrs. Parrella, McCloy, Oolie,
Hammond, Charry, Lebovics and Melnick and Ms. Lebovics were not timely reported
on Form 4 (these eight Form 4s were filed late); (b) a grant of options to Mr.
Darville made on September 10, 2003 under the 2001 Plan was not reported on Form
4 nor did Mr. Darville timely file his initial ownership information on Form 3
(Mr. Darville subsequently filed a Form 5 for 2003 that was not timely filed);
(c) Acme Associates, Inc. did not timely file Form 4s upon grants of options to
acquire shares of NCT common stock (two transactions prior to becoming a group
filer with Carole Salkind), but filed late Form 4s covering these transactions;
and (d) Carole Salkind did not timely file Form 4 reports during 2003 for
convertible note, warrant and option transactions (total of 91 transactions
during 2003) but filed late Form 4s covering 71 transactions (a group filing
with Acme Associates, Inc.) and subsequently filed the remaining 2003
transactions on a Form 5 which was not timely filed (a group filing with Acme
Associates, Inc.).
66
ITEM 11. EXECUTIVE COMPENSATION
Set forth below is information for the three fiscal years ended December
31, 2003, 2002 and 2001 relating to compensation received by: (1) NCT's Chief
Executive Officer; and (2) the other four most highly compensated executive
officers of NCT whose total annual salary and bonus for the fiscal year ended
December 31, 2003 exceeded $100,000 (collectively the "Named Executive
Officers").
Summary Compensation Table
Securities
Underlying All
Name and Principal Other Annual Options/Warrants Other
Position Year Salary ($) Bonus ($) Compensation ($)(a) SARs (#) Compensation ($)
- ---------------------------- ----- ----------- --------------- ------------------- ---------------- ----------------
Michael J. Parrella 2003 $ 320,016 $ 433,412 (b) $ 20,688 9,260,000 (e) $ -
Chief Executive 2002 320,016 136,473 (c) 20,688 14,000,000 (f) -
Officer and Chairman 2001 320,016 299,142 (d) 20,688 5,324,505 (g) -
of the Board
Irene Lebovics 2003 200,000 143,526 (b) 12,000 4,000,000 (e) -
President and 2002 200,000 45,036 (c) 12,000 2,350,000 (f) -
Director 2001 200,000 98,717 (d) 12,000 800,000 (h) -
Cy E. Hammond 2003 180,000 216,706 (b) 12,000 3,600,000 (e) -
Senior Vice President, 2002 180,000 68,237 (c) 12,000 1,950,000 (f) -
Chief Financial Officer 2001 180,000 149,571 (d) 12,000 760,000 (i) -
and Treasurer
Jonathan M. Charry 2003 200,000 - - 800,000 (e) -
Senior Vice President, 2002 200,000 - - 1,175,000 (f) -
Corporate Development 2001 200,000 56,170 (d) - 400,000 -
R. Wayne Darville (j) 2003 200,000 - - 680,000 (e) -
Chief Operating Officer 2002 118,750 - - 460,000 (f) -
Artera Group, Inc.
Footnotes:
- ---------
(a) Other annual compensation is comprised of automotive lease payments or
automotive allowances paid to the Named Executive Officers.
(b) Bonus amounts accrued and unpaid as of December 31, 2003 and the years in
which the amounts were earned are as follows:
Amounts Accrued and Unpaid at December 31, 2003
Relating To:
--------------------------------------------------------------------------
2001 2002 2003 Total
---------------- --------------- --------------- ----------------
Michael J. Parrella $ 61,597 $ 136,473 $ 433,412 $ 631,482
Irene Lebovics - - 108,434 108,434
Cy E. Hammond - - 162,741 162,741
Jonathan M. Charry 24,000 - - 24,000
---------------- --------------- --------------- ----------------
$ 85,597 $ 136,473 $ 704,587 $ 926,657
================ =============== =============== ================
(c) Bonus amounts accrued and unpaid as of December 31, 2002 and the years in
which the amounts were earned are as follows:
Amounts Accrued and Unpaid at December 31, 2002
Relating To:
------------------------------------------------------
2001 2002 Total
---------------- --------------- ---------------
Michael J. Parrella $ 61,597 $ 136,473 $ 198,070
Irene Lebovics - 38,908 38,908
Cy E. Hammond 5,298 68,237 73,535
Jonathan M. Charry 24,000 - 24,000
---------------- --------------- ---------------
$ 90,895 $ 243,618 $ 334,513
================ =============== ===============
67
(d) Bonus amounts accrued and unpaid as of December 31, 2001 were attributable
to amounts earned in 2001, as follows:
Michael J. Parrella $ 61,597
Irene Lebovics 20,327
Cy E. Hammond 30,798
Jonathan M. Charry 24,000
--------------
$ 136,722
==============
(e) Current year options are comprised of one grant for each of the Named
Executive Officers. Please refer to the table "Options and Warrants Granted
in 2003." The options granted to the Named Executive Officers were granted
subject to approval by NCT shareholders of a sufficient increase in (1) the
authorized shares of common stock and (2) the authorized number of shares
under the 2001 Plan. At the time of such shareholder approval, if the
market value of the company's common stock exceeds the exercise price of
the subject options, the company will incur a non-cash charge to earnings
equal to the spread between the exercise price of the option and the market
price, times the number of option shares involved. If the increase is not
approved, granted options would be reduced pro rata for the excess
unauthorized shares.
(f) 2002 options are comprised of two grants for each of the Named Executive
Officers granted subject to approval by NCT shareholders of a sufficient
increase in (1) the authorized shares of common stock and (2) the
authorized number of shares under the 2001 Plan. At the time of such
shareholder approval, if the market value of the company's common stock
exceeds the exercise price of the subject options, the company will incur a
non-cash charge to earnings equal to the spread between the exercise price
of the option and the market price, times the number of option shares
involved. If the increase is not approved, granted options would be reduced
pro rata for the excess unauthorized shares.
(g) Includes 2,824,505 shares that remained an obligation of NCT from a grant
in 2000. Due to an insufficient number of shares available under the 1992
Plan in 2000, the Board of Directors reduced a 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.
(h) Includes 50,000 shares under a replacement grant of an option that 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.
(i) Includes 10,000 shares under a replacement grant of an option that 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.
(j) Mr. Darville was hired as Chief Information Officer of Artera Group, Inc.
effective May 1, 2002. He was promoted to Chief Operating Officer of Artera
on August 15, 2002. The 2002 salary amount reflects his compensation from
his date of hire. In accordance with his letter of employment, Mr.
Darville's compensation was established with a base salary of $150,000 per
annum and a bonus of up to 25% of his base salary. Upon his hire, Mr.
Darville was granted an initial stock option to acquire 430,000 shares at
an exercise price of $0.081 per share. Since August 15, 2002, Mr. Darville
has received a salary of $200,000 per annum.
68
Options and Warrants Granted in 2003
The following table summarizes the Named Executive Officers' stock option
and warrant activity during 2003:
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 2003 (a) Per Share Date 5% 10%
- -------------------- --------- --------------- ----------- ----------- -------------- --------------
Michael J. Parrella 9,260,000 (c) 39.3% $ 0.054 09/10/10 $ 203,566 $ 474,396
Irene Lebovics 4,000,000 (d) 17.0% 0.054 09/10/10 87,934 204,923
Cy E. Hammond 3,600,000 (d) 15.3% 0.054 09/10/10 79,140 184,431
Jonathan M. Charry 800,000 (d) 3.4% 0.054 09/10/10 17,587 40,985
R. Wayne Darville 800,000 (d) 3.4% 0.054 09/10/10 17,587 40,985
Footnotes:
- ----------
(a) Percentages for the grants listed above are based upon the aggregate total
granted in 2003 under the 2001 Plan less amounts granted to consultants and
non-employee directors (i.e., Messrs. McCloy and Oolie). These options are
subject to shareholder approval of a sufficient increase in (1) the
authorized shares of common stock and (2) the authorized number of shares
under the 2001 Plan.
(b) The dollar amounts in 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 dates. 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) These options were granted under the 2001 Plan with an exercise price of
$0.054 per share, a value that was equal to the fair market value of NCT's
common stock on the date of grant. These options are subject to shareholder
approval of a sufficient increase in (1) the authorized shares of common
stock and (2) the authorized number of shares under the 2001 Plan. These
options vest as follows: as to 50%, date of grant; balance prior to the
closing of any one of the following: (1) third party acquires the right to
a 10% equity interest in NCT Group, Inc.; (2) third party acquires the
right to a 10% equity interest in NCT's subsidiary, Artera Group, Inc.; (3)
third party licenses NCT or subsidiary's intellectual property or commits
to distribute products for $15 million in aggregate license fee or minimum
royalties. In any event, all options vest three years from date of grant.
The vesting requirement under all options granted prior to October 25, 2002
was accelerated to 100% vested as of October 25, 2002 and the vesting
requirement under all options granted on October 25, 2002 was accelerated
to 100% vested as of September 10, 2003.
(d) Options to acquire these shares were granted pursuant to the 2001 Plan with
an exercise price of $0.054 per share, a value that was equal to the fair
market value of NCT's common stock on the date of grant. These options are
subject to shareholder approval of a sufficient increase in (1) the
authorized shares of common stock and (2) the authorized number of shares
under the 2001 Plan. These options vest as follows: 40% on the date of
grant (September 10, 2003) and 30% on each of the first and second
anniversaries of the date of grant. The vesting requirement under all
options granted prior to October 25, 2002 was accelerated to 100% vested as
of October 25, 2002 and the vesting requirement under all options granted
on October 25, 2002 was accelerated to 100% vested as of September 10,
2003.
69
2003 Aggregated Option and Warrant Exercises and
December 31, 2003 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, 2003, and the unexercised options and warrants held and the value
thereof at that date, by each of the Named Executive Officers.
Number of Shares
Underlying Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares and Warrants at And Warrants at
Acquired December 31, 2003 December 31, 2003
On Value -------------------------------------- -----------------------------
Name Exercise (#) Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
- -------------------- ------------- ----------- --------------- ----------------- ------------- -------------
Michael J. Parrella - $ - 47,056,634 4,630,000 $ - $ -
Irene Lebovics - - 8,243,323 2,400,000 - -
Cy E. Hammond - - 5,439,024 2,160,000 - -
Jonathan M. Charry - - 3,273,049 480,000 - -
R. Wayne Darville - - 1,000,000 480,000 - -
Compensation of Directors
None of our directors received fees, as such, for his or her services as a
director during 2003. Mr. Parrella and Ms. Lebovics received salaries and earned
bonuses in 2003 from NCT. See above at "Executive Compensation and Summary
Compensation Table" and below at "Compensation Arrangements with Certain
Officers and Directors."
During 2003, each director was granted options to acquire shares of NCT's
common stock under the 2001 Plan. The options were granted subject to approval
by NCT shareholders of a sufficient increase in (1) the authorized shares of
common stock and (2) the authorized number of shares under the 2001 Plan. The
shares of common stock underlying options granted in 2003 under the 2001 Plan
were 1,350,000 for each of Messrs. McCloy and Oolie, 9,260,000 for Mr. Parrella
and 4,000,000 for Ms. Lebovics. The options expire seven years from the dates of
grant. The exercise price was $0.054 per share, a value equal to the fair market
value of NCT's common stock on the date of grant. The vesting schedules for the
directors, other than Ms. Lebovics, are as follows: 50% vest on the date of
grant (September 10, 2003); balance prior to the closing of any one of the
following: (1) third party acquires the right to a 10% equity interest in NCT
Group, Inc.; (2) third party acquires the right to a 10% equity interest in
NCT's subsidiary, Artera Group, Inc.; (3) third party licenses NCT or
subsidiary's intellectual property or commits to distribute products for $15
million in aggregate license fee or minimum royalties. In any event, all options
vest three years from date of grant. The vesting terms of Ms. Lebovics' 2003
grant is outlined above in footnotes to the table, "Options and Warrants Granted
in 2003." The vesting requirement under all options granted prior to October 25,
2002 was accelerated to 100% vested as of October 25, 2002 and the vesting
requirement under all options granted on October 25, 2002 was accelerated to
100% vested as of September 10, 2003.
70
Compensation Arrangements with Certain Officers and Directors
Certain of NCT's executive officers, including two who serve as
directors of NCT, 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 participants of amounts that
represent a percentage of the value of the transactions consummated by NCT and
its subsidiaries. The participants included in this arrangement, the effective
date participation began and the percentage cash overrides are as follows:
Participant Date Participation Commenced Percent
------------------------ ------------------------------- -----------
Michael J. Parrella February 1, 1996 1.00%
Irene Lebovics January 1, 2001 0.33%
Cy E. Hammond September 4, 1997 0.50%
Jonathan Charry, Ph.D., NCT's Senior Vice President, Corporate Development,
receives an annual base salary of $150,000 and a $50,000 per annum 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 May 1, 2002, NCT hired R. Wayne Darville as its Chief Information
Officer of Artera Group, Inc. He was promoted to Chief Operating Officer of
Artera on August 15, 2002. In accordance with his letter of employment, Mr.
Darville's compensation was established with a base salary of $150,000 per annum
and a bonus of up to 25% of his base salary. Since August 15, 2002, Mr. Darville
has received a salary of $200,000 per annum.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2003, John McCloy and Sam Oolie
served as members of the Compensation Committee of NCT's Board of Directors.
Each of Messrs. McCloy and Oolie also served as members of the Board of
Directors of NCT Audio Products, Inc. since their respective appointments in
1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 29, 2004, information
concerning the shares of common stock beneficially owned by:
o each person who, to the knowledge of NCT, is the holder of 5% or more of
the common stock of NCT;
o each person who presently serves as a director of NCT;
o the five most highly compensated executive officers of NCT (including NCT's
Chief Executive Officer) in the fiscal year ended December 31, 2003; and
o all executive officers and directors of NCT as a group.
71
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 of
Name of Beneficial Owner Ownership (a) Class (a)
- --------------------------------------- --------------- --------------
Michael J. Parrella 49,329,260 (b) 7.2%
John J. McCloy 3,937,012 (c) *
Sam Oolie 4,221,825 (d) *
Irene Lebovics 11,612,347 (e) 1.8%
Cy E. Hammond 5,619,789 (f) *
Jonathan M. Charry 3,273,049 (g) *
R. Wayne Darville 1,000,000 (h) *
All Executive Officers and Directors
as a Group (9 persons) 80,793,282 (i) 11.4%
Carole Salkind 1,595,435,047 (j) 71.8%
Crammer Road LLC 559,791,497 (k) 47.0%
Alpha Capital Aktiengesellschaft 93,652,731 (l) 13.0%
Acme Associates, Inc. 240,500,000 (m) 27.3%
Libra Finance S.A. 51,728,290 (n) 7.5%
Austost Anstalt Schaan 52,572,481 (o) 7.8%
Balmore S.A. 55,792,081 (p) 8.4%
* Less than one percent.
Footnotes:
- ----------
(a) Assumes the exercise of currently exercisable options (including options
granted in 2002 and 2003 subject to a sufficient increase in (i) authorized
shares of common stock and (ii) shares under the 2001 Stock Incentive Plan)
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 45,244,634 shares issuable upon the exercise of his
currently exercisable options, 13,333 shares held by or in custody for Mr.
Parrella's children, 3,000,000 shares issuable upon the exercise of
currently exercisable options transferred in 2002 by Mr. Parrella to his
children (Mr. Parrella disclaims beneficial ownership of the shares held by
his children) and 458,400 shares issuable upon the exercise of currently
exercisable options held by his son, Michael J. Parrella, Jr., an officer
of Artera Group, Inc., a wholly-owned subsidiary of the company (Mr.
Parrella disclaims beneficial ownership of these shares). Also includes
612,893 shares of common stock held by Mr. Parrella's spouse, shares as to
which Mr. Parrella disclaims beneficial ownership.
(c) Mr. McCloy's business address is 475 Park Avenue South, 33rd Floor, New
York, New York 10016. Includes 5,000 shares from a stock award granted by
NCT, 3,632,012 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.
(d) Mr. Oolie's business address is 21 Industrial Avenue, Upper Saddle River,
New Jersey 07458. Includes 20,000 shares from stock awards granted by NCT,
3,882,012 shares issuable upon the exercise of currently exercisable
options, 75,000 shares owned by the named person's spouse, shares 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.
72
(e) Ms. Lebovics' business address is 20 Ketchum Street, Westport, Connecticut
06880. Includes 7,992,073 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 an executive officer of NCT,
serving as its Senior Vice President, Global Sales. Mr. Lebovics holds
various options to acquire an aggregate of 3,338,415 shares of NCT common
stock. Also includes 2,858,415 shares issuable upon the exercise of
currently exercisable options held by Mr. Lebovics, shares as to which Ms.
Lebovics has no voting or investment power.
(f) Mr. Hammond's business address is 20 Ketchum Street, Westport, Connecticut
06880. Includes 5,404,024 shares issuable upon the exercise of currently
exercisable options.
(g) Dr. Charry's business address is 20 Ketchum Street, Westport, Connecticut
06880. Consists of 3,273,049 shares issuable upon the exercise of currently
exercisable options.
(h) Mr. Darville's business address is 20 Ketchum Street, Westport, Connecticut
06880. Consists of 1,000,000 shares issuable upon the exercise of currently
exercisable options.
(i) Includes 75,086,219 shares issuable to nine persons upon the exercise of
currently exercisable options and 25,000 shares from stock awards issued by
NCT to two directors. Excludes options to acquire 12,580,000 shares from
NCT that are not presently exercisable but become exercisable over time by
the nine executive officers and directors of NCT as a group. Also includes
3,458,400 shares issuable to children of Michael Parrella upon their
exercise of currently exercisable options, shares as to which Mr. Parrella
disclaims beneficial ownership.
(j) Ms. Salkind's address is c/o Sills Cummis Epstein & Gross P.C., One
Riverfront Plaza, Newark, New Jersey 07102. Includes 866,043,232 shares
issuable upon the conversion of convertible notes in aggregate principal
amount of $34,249,483 and 33,628,629 shares for interest thereon through
February 29, 2004 (including interest calculated at the default rate as
applicable), calculated at the respective conversion prices under the
convertible notes ranging from $0.029 to $0.055. Also includes 20,093,615
shares for default penalty (10% of the shares issuable on principal in
default) issuable to Ms. Salkind at February 29, 2004. Also includes
288,715,753 shares issuable to Ms. Salkind upon the exercise of currently
vested warrants. Also includes 5,000 shares owned by Morton Salkind, Ms.
Salkind's husband and a former director of NCT, and currently exercisable
options held by Morton Salkind to acquire 2,175,000 shares of NCT common
stock, shares as to which she has no voting or investment power and
disclaims beneficial ownership. Also includes currently exercisable options
held by Acme Associates, Inc. to acquire 240,500,000 shares of NCT common
stock; currently exercisable options held by Motorworld, Incorporated to
acquire 23,000,000 shares of NCT common stock; currently exercisable
options held by Inframe, Inc. to acquire 23,000,000 shares of NCT common
stock; currently exercisable options held by Avant Interactive, Inc. to
acquire 24,500,000 shares of NCT common stock; currently exercisable
options held by Turbo Networks, Inc. to acquire 22,550,000 shares of NCT
common stock; and currently exercisable options held by Maple Industries,
Inc. to acquire 23,000,000 shares of NCT common stock. Carole Salkind is
the sole shareholder of Acme Associates (see footnote (m) below),
Motorworld, Inframe, Avant, Turbo Networks and Maple. Also includes
currently exercisable options held by Leben Care, Inc. (whose sole
shareholder is Carole Salkind's son, Steven Salkind) to acquire 8,350,000
shares of NCT common stock and currently exercisable options held by Stop
Noise, Inc. (whose sole shareholder is Steven Salkind) to acquire 3,375,000
shares of NCT common stock, shares as to which Carole Salkind disclaims
beneficial ownership.
(k) Crammer Road LLC's business address is P.O. Box 866, George Town, Anderson
Square Building, Shedden Road, Grand Cayman, Cayman Islands, British West
Indies. David Sims of Navigator Management Ltd. has voting and dispositive
control of NCT's shares on behalf of Crammer Road. Includes 446,366,127
shares issuable upon conversion of the series H preferred stock, along with
accretion, calculated at $0.0413 (NCT's closing bid price on February 29,
2004 less the 25% discount per the agreement). Includes 101,010,101 shares
issuable pursuant to the private equity credit agreement minimum commitment
amount of $5.0 million calculated at $0.0495 (NCT's closing bid price on
February 29, 2004 less a 10% discount). Also includes 1,250,000 shares
issuable under currently exercisable warrants. 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.
73
(l) Alpha Capital Aktiengesellschaft's business address is Pradafant 7, 9490
Furstentums, Vaduz, Liechtenstein. Konrad Ackermann, Director, has voting
and dispositive control of NCT's shares on behalf of Alpha Capital.
Includes currently exercisable warrants to acquire 13,900,000 shares of NCT
common stock at a weighted average exercise price of $0.012 per share,
32,153,088 shares issuable upon exchange of various convertible notes
issued by Artera Group, Inc. along with accrued interest, 12,539,228 shares
issuable upon exchange of series B preferred stock of Pro Tech
Communications, Inc. and accretion thereon, and 22,351,735 shares issuable
upon conversion of three NCT notes along with accrued interest, all
calculated at $0.055 (NCT's closing bid price on February 29, 2004) 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.
(m) Acme Associates, Inc.'s business address is 322 Green Pond Road, Hibernia,
New Jersey 07842. As noted in footnote (j) above, Carole Salkind is the
sole shareholder of Acme Associates. Consists of currently exercisable
options to acquire 240,500,000 shares of NCT's common stock at a weighted
average exercise price of $0.0453 per share.
(n) Libra Finance S.A.'s business address is c/o Trident Trust Company (BVI)
Limited, Trident Chambers, Box 146, Road Town, Tortola, 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 of NCT common stock at an exercise price of
$0.027 per share, 20,367,621 shares issuable upon exchange of series A
preferred stock of Artera Group, Inc. and accretion thereon, 639,480 shares
issuable upon conversion of NCT convertible notes dated March 14, 2001 and
April 12, 2001 and interest thereon, and 9,445,579 shares issuable upon
conversion of a NCT convertible note dated September 4, 2003 and interest
thereon, all calculated at $0.055 (NCT's closing bid price on February 29,
2004) less applicable discounts.
(o) Austost Anstalt Schaan's business address is Landstrasse 8, 9496
Fuerstentum, Balzers, Liechtenstein. Thomas Hackl has voting and
dispositive control of NCT's shares on behalf of Austost. Includes
21,935,928 shares issuable upon exchange of series A preferred stock of
Artera Group, Inc. and accretion thereon and 5,841,924 shares issuable upon
exchange of a convertible note issued by Artera Group, Inc. and interest
thereon, calculated at $0.055 (NCT's closing bid price on February 29,
2004).
(p) Balmore S.A.'s business address is c/o Trident Chambers, P.O. Box 146, Road
Town, Tortola, British Virgin Islands. Gissela Kindle has voting and
dispositive control of NCT's shares on behalf of Balmore. Includes
21,935,928 shares issuable upon exchange of series A preferred stock of
Artera Group, Inc. and accretion thereon and 756,253 shares issuable upon
exchange of a convertible note issued by Artera Group, Inc. and interest
thereon, calculated at $0.055 (NCT's closing bid price on February 29,
2004).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Secured Convertible Notes and Warrants Issued to Carole Salkind
Beginning in 1999, NCT has issued convertible notes to Carole Salkind, a
stockholder and spouse of a former director of NCT. As of December 31, 2003, the
aggregate principal balance outstanding of these notes was approximately $33.8
million. Substantially all the assets of NCT Group, Inc. secure the notes. We
have sustained our operations in 2002 and 2003 primarily from the funding
received from Carole Salkind and are dependent upon such funding to continue
operations. Although we do not have a formal agreement requiring her to do so,
we believe that Carole Salkind will continue to provide funds to NCT. Our belief
that funding from her will continue is based primarily upon her continued
funding of NCT during 2002 and 2003 despite NCT's failure to repay her notes as
the notes matured. Commencing January 2001, upon the maturity of Ms. Salkind's
initial note to NCT dated January 1999, NCT has established a history of
defaulting on the repayment of obligations owed to Carole Salkind as such
obligations become due. Ms. Salkind has allowed NCT to roll over maturing notes,
along with accrued interest (including interest at a default rate equal to the
note's stated rate plus 5% after default) and a default penalty (10% of the
principal in default), into new notes that generally mature upon demand or six
months to one year from the date of the rolled-over note. In addition to the
financing provided by rolling over maturing notes, Ms. Salkind has continued to
provide NCT with new funds. From time to time, NCT has obtained oral assurances
that Ms.
74
Salkind will continue funding NCT. However, NCT has no legally binding assurance
that Ms. Salkind will continue funding NCT in the near-term or that the amount,
timing and duration of funding from her will be adequate to sustain NCT.
At Ms. Salkind's election, the notes are convertible into shares of our
common stock and exchangeable for shares of common stock of any of our
subsidiaries that makes a public offering of its common stock (except Pro Tech).
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 default penalty become immediately due and payable. To date, no
demands for payment under these notes have been made other than demands for
payment at maturity.
Of the debt owed Carole Salkind as of December 31, 2003, $25,780,000
represents cash loans made by Ms. Salkind (rather than non-cash items including
interest and default penalties rolled into new notes). Through December 31,
2003, Carole Salkind has loaned NCT $26,530,000 in cash. She converted one
$500,000 note into shares of NCT common stock (on May 18, 2001) and was repaid
one $250,000 note (loaned on January 25, 2002 and repaid from an escrow account
established as part of another transaction that was not consummated in which NCT
engaged with an unrelated third party). Summarized below are the convertible
notes issued to Carole Salkind that are outstanding as of December 31, 2003:
Conversion
Issue Date Due Date Principal Price
------------ ----------- ----------------- --------------
01/15/03 01/15/04 $ 450,000 $ 0.0410
01/23/03 01/23/04 2,747,635 0.0400
01/30/03 01/30/04 350,000 0.0410
02/11/03 02/11/04 1,252,592 0.0400
03/04/03 03/04/04 450,000 0.0350
03/13/03 03/13/04 980,802 0.0310
03/13/03 03/13/04 864,616 0.0310
04/02/03 04/02/04 450,000 0.0290
04/11/03 04/11/04 450,000 0.0310
04/21/03 04/21/04 450,000 0.0370
07/14/03 01/14/04 410,000 0.0312
07/14/03 01/14/04 414,481 0.0312
07/28/03 01/28/04 414,750 0.0420
07/28/03 01/28/04 410,000 0.0420
08/07/03 02/07/04 622,529 0.0539
08/18/03 02/18/04 425,000 0.0450
08/28/03 02/28/04 414,885 0.0550
08/28/03 02/28/04 375,000 0.0550
09/11/03 03/11/04 580,650 0.0500
10/14/03 04/14/04 4,469,019 0.0440
11/21/03 05/21/04 474,154 0.0410
11/21/03 05/21/04 425,000 0.0410
11/22/03 05/22/04 400,000 0.0410
12/15/03 06/15/04 3,828,985 0.0370
12/15/03 06/15/04 400,000 0.0370
12/31/03 06/30/04 7,479,385 0.0400
12/31/03 06/30/04 785,000 0.0400
12/31/03 On Demand 3,050,000 0.0400
-----------------
$ 33,824,483
=================
In conjunction with the issuance of convertible notes to Ms. Salkind, NCT
issued Ms. Salkind warrants to acquire shares of NCT common stock. As noted
below, we amended the exercise prices on each of the warrants granted prior to
December 20, 2001 to $0.071. Further, we granted Ms. Salkind warrants in
consideration of her irrevocable waiver of her rights to exchange convertible
notes for, or exercise a warrant for, shares of Pro Tech common stock. The
warrants to purchase shares of NCT common stock granted to Ms. Salkind as of
December 31, 2003 are as follows:
75
Shares
Grant Date Expiration Date Exercise Price Granted
------------ ------------------- ------------------ ----------------
02/13/01 02/13/06 $ 0.0710 7,042,254
05/14/01 05/14/06 0.0710 500,000
08/22/01 08/22/06 0.0710 625,000
09/28/01 09/28/06 0.0710 1,000,000
12/20/01 12/20/06 0.0710 1,250,000
01/11/02 01/11/07 0.0790 2,789,082
01/25/02 01/25/07 0.0900 812,500
01/25/02 01/25/07 0.0900 312,500
02/27/02 02/27/07 0.0790 1,034,266
03/01/02 03/01/07 0.0790 437,500
05/02/02 05/02/07 0.0940 3,188,708
05/02/02 05/02/07 0.0940 3,562,500
05/29/02 05/29/07 0.0950 1,500,000
06/02/02 06/02/07 0.0970 1,500,000
07/03/02 07/03/07 0.0780 1,500,000
07/12/02 07/12/07 0.0750 20,000,000
07/15/02 07/15/07 0.0750 1,500,000
07/23/02 07/23/07 0.0590 2,250,000
08/14/02 08/14/07 0.0820 1,500,000
08/29/02 08/29/07 0.0760 2,100,000
09/09/02 09/09/07 0.0770 1,500,000
09/30/02 09/30/07 0.0700 10,000,000
09/30/02 09/30/07 0.0700 16,157,565
11/07/02 11/07/07 0.0720 1,750,000
11/20/02 11/20/07 0.0540 1,750,000
11/21/02 11/21/07 0.0535 6,271,926
12/02/02 12/02/07 0.0480 1,500,000
12/16/02 12/16/07 0.0420 1,750,000
12/26/02 12/26/07 0.0420 10,206,373
12/30/02 12/30/07 0.0412 1,500,000
01/15/03 01/15/08 0.0410 2,000,000
01/23/03 01/23/08 0.0400 11,775,579
01/30/03 01/30/08 0.0410 1,500,000
02/11/03 02/11/08 0.0400 5,500,000
03/04/03 03/04/08 0.0350 2,000,000
03/13/03 03/13/08 0.0310 4,250,000
03/13/03 03/13/08 0.0310 3,750,000
04/02/03 04/02/08 0.0290 2,000,000
04/11/03 04/11/08 0.0310 2,000,000
04/21/03 04/21/08 0.0370 2,000,000
05/15/03 05/15/08 0.0460 2,000,000
05/22/03 05/22/08 0.0420 7,500,000
05/28/03 05/28/08 0.0440 1,900,000
06/12/03 06/12/08 0.0440 10,500,000
06/12/03 06/12/08 0.0440 2,000,000
06/28/03 06/28/08 0.0380 2,000,000
07/14/03 07/14/08 0.0312 2,000,000
07/14/03 07/14/08 0.0312 2,000,000
07/28/03 07/28/08 0.0420 2,000,000
07/28/03 07/28/08 0.0420 2,000,000
08/07/03 08/07/08 0.0539 2,750,000
08/18/03 08/18/08 0.0450 2,000,000
08/28/03 08/28/08 0.0550 2,000,000
76
Shares
Grant Date Expiration Date Exercise Price Granted
------------ ------------------- ------------------ ----------------
08/28/03 08/28/08 0.0550 2,000,000
09/11/03 09/11/08 0.0500 2,500,000
09/12/03 09/12/08 0.0500 2,000,000
10/02/03 10/02/08 0.0430 4,000,000
10/14/03 10/14/08 0.0440 19,250,000
10/14/03 10/14/08 0.0440 2,000,000
11/03/03 11/03/08 0.0440 2,000,000
11/21/03 11/21/08 0.0410 2,250,000
11/21/03 11/21/08 0.0410 2,500,000
11/22/03 11/22/08 0.0410 2,500,000
12/15/03 12/15/08 0.0370 16,500,000
12/15/03 12/15/08 0.0370 2,500,000
12/31/03 12/31/08 0.0400 32,250,000
12/31/03 12/31/08 0.0400 5,500,000
----------------
281,965,753
================
The following outlines all of our convertible note transactions with Carole
Salkind through December 31, 2003:
On January 26, 1999, Carole Salkind agreed to purchase convertible notes of
NCT in an aggregate principal amount of $4.0 million. The initial two-year
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) equal to 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) $0.17. In no event, however, 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
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
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 convertible
note to Ms. Salkind for $1,361,615 due September 14, 2001. Also on May 14, 2001,
we granted Ms. Salkind a five-year warrant for the purchase of 500,000 shares of
NCT 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 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 common stock of any other public subsidiary of
NCT at the respective initial public offering prices, at the election of Ms.
Salkind. On September 4, 2001, NCT defaulted on repayment of the May 14, 2001
note. The default provision in the note imposed a penalty of $136,162 (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 May 14, 2001 note
in default into a new note, dated September 28, 2001, for an aggregate of
$2,535,469. This note matured on September 28, 2002 and bore 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 July 12, 2002, Ms. Salkind waived her right to
exchange the September 28, 2001 note for shares of common stock of Pro Tech. On
September 28, 2002, we defaulted on repayment of the $2,535,469 note dated
September 28, 2001. On September 30, 2002, we issued a new note in the principal
amount of $3,770,098 to settle the September 28, 2001 note, default penalty and
accrued interest thereon and included $800,000 additional cash received from Ms.
Salkind. The
77
September 30, 2002 note bore interest at 8% per annum and matured on September
30, 2003. The September 30, 2002 note was convertible into common stock of NCT
(at $0.070) and exchangeable for shares of common stock of any subsidiary of NCT
(other than Pro Tech) that made a public offering of its common tock (at the
public offering price thereof). In conjunction with the issuance of the
September 30, 2002 note, we issued Carole Salkind a five-year warrant to acquire
16,157,565 shares of NCT common stock at an exercise price of $0.070 per share.
We defaulted on repayment of the September 30, 2002 note. As outlined below, the
September 30, 2002 note was rolled into a new note dated October 14, 2003.
On February 13, 2001, NCT issued Ms. Salkind a promissory note in the
amount of $500,000 payable with accrued interest at the rate of 7% per annum 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. In connection with
issuance of this note, 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
(representing the right to acquire 7,042,254 shares of NCT common stock) and
$0.06 per share for Pro Tech common stock. On July 12, 2002, Ms. Salkind waived
her right to purchase shares of Pro Tech upon exercise of this warrant. NCT
defaulted on the repayment of the February 13, 2001 note. 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.
In 2001, 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 amount of $1,250,000. The default
provisions in the notes imposed an aggregate penalty of $125,000 (10% of
principal amount 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
cash 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 (such note was rolled into
another note dated January 23, 2003 as outlined below). This note was
convertible into shares of NCT common stock (at $0.079) or exchangeable for
shares of common stock of any of NCT's subsidiaries that goes public (at the
initial public offering price). Prior to a waiver agreement dated July 12, 2002,
the note had also been exchangeable for shares of Pro Tech (at $0.06). 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. 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 purchases or commits
to purchase an equity interest in Artera Group, Inc. for payment of at least $5
million. In other words, Ms. Salkind may acquire a 10% equity interest in Artera
Group based upon the value attributed to Artera Group by an unrelated investor
who pays at least $5 million for an equity interest in Artera Group. For
example, if an unrelated investor pays $20 million to purchase a 20% equity
interest, Ms. Salkind may acquire 10% equity of Artera Group for $10 million.
In 2001, NCT defaulted on repayment to Ms. Salkind of its convertible notes
dated August 25, 1999 and September 19, 1999, representing an aggregate
principal amount of $750,000. The default provisions in the notes imposed an
aggregate penalty of $75,000 (10% of principal amount in default). Default
interest from the dates of default was due on the principal in default at the
rate of prime plus 5%. On December 20, 2001, we issued Ms. Salkind an 8%
convertible note in the principal amount of $2,014,270 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 included $1,000,000 new funding from Ms.
Salkind and the settlement of the notes to Ms. Salkind dated August 25, 1999 and
September 19, 1999. On December 26, 2002, the December 20, 2001 note (along with
accrued interest and default penalty thereon) was rolled into a new note in the
amount of $2,381,487. This note matured December
78
26, 2003 and was convertible into shares of NCT common stock at a conversion
price of $0.042. The note was also exchangeable for shares of common stock of
any of NCT's subsidiaries that made a public offering of its common stock (at
the initial public offering price). In connection with this rollover on December
26, 2002, we issued a five-year warrant to Ms. Salkind to acquire 10,206,373
shares of NCT common stock at an exercise price per share of $0.042. As outlined
below, the December 26, 2002 note was rolled into a new note dated December 31,
2003.
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 approximately 9.2 million shares of NCT common stock. In
addition, 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% convertible notes in the
principal amounts of $650,000 (due January 25, 2003) and $250,000 (due February
8, 2002). On January 25, 2002 in conjunction with the issuance of the notes, we
granted Ms. Salkind two five-year warrants to purchase an aggregate of 1,125,000
shares of NCT common stock at $0.09 per share. Ms. Salkind paid NCT $650,000 on
January 25, 2002. The $650,000 note was convertible into shares of NCT common
stock (at $0.09) and exchangeable for shares of common stock of any subsidiary
of NCT that made a public offering of its common stock (at the initial public
offering price thereof). Prior to a waiver agreement dated July 12, 2002, the
note had also been exchangeable for shares of Pro Tech (at $0.06). We rolled the
January 25, 2002 note for $650,000 into a new note dated February 11, 2003 as
described below.
Ms. Salkind paid $250,000 on January 25, 2002, for the benefit of NCT, into
an escrow account and NCT issued a 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. The January 25, 2002 note for $250,000 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 for the default penalty ($25,000) and accrued
interest (less interest credited on the escrow account) due on the $250,000 note
along with $800,000 cash loaned to NCT by Ms. Salkind. The February 27, 2002
note bore interest at 8% per annum payable at maturity (February 27, 2003). This
note was convertible into common stock of NCT (at $0.079) and exchangeable for
shares of common stock of any subsidiary of NCT that made a public offering of
its common stock (at the public offering price thereof). Prior to a waiver
agreement dated July 12, 2002, the note had also been exchangeable for shares of
Pro Tech (at $0.06). 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. We rolled the February 27, 2002 note for $827,412 into a new note dated
March 13, 2003 as outlined below.
On March 1, 2002, NCT issued Ms. Salkind an 8% 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 cash on March 1, 2002. This note was convertible into common stock
of NCT (at $0.079) and exchangeable for shares of common stock of any subsidiary
of NCT that made a public offering of its common stock (at the public offering
price thereof). Prior to a waiver agreement dated July 12, 2002, the note had
also been exchangeable for shares of Pro Tech (at $0.06). This note was rolled
into a new note dated March 13, 2003 as described below.
We defaulted on repayment of the $1,000,000 note dated March 27, 2000 due
March 27, 2002. On May 2, 2002, we issued a new note for $1,275,483 to settle
the March 27, 2000 note, default penalty and accrued interest thereon. This note
bore interest at 8% per annum and matured on November 2, 2002. This note was
convertible into common stock of NCT (at $0.094) and exchangeable for shares of
common stock of any subsidiary of NCT that made a public offering of its common
stock (at the public offering price thereof). Prior to a waiver agreement dated
July 12, 2002, the note had also been exchangeable for shares of Pro Tech (at
$0.03). In conjunction with the issuance of this May 2, 2002 note, we issued
Carole Salkind a five-year warrant to acquire 3,188,708 shares of NCT common
stock at an exercise price of $0.094 per share. On November 2, 2002, we
defaulted on repayment of this May 2, 2002 note. On November 21, 2002, we issued
a new note in the principal amount of $1,463,449 to settle this May 2, 2002
note, default penalty and accrued interest thereon. The November 21, 2002 note
bore interest at 8% per annum, matured on May 21, 2003 and was convertible into
common stock of NCT (at $0.0535) and exchangeable for shares of common stock of
any subsidiary of NCT (other than Pro Tech) that made a public
79
offering of its common stock (at the public offering price thereof). In
conjunction with the issuance of the November 21, 2002 note, we issued Carole
Salkind a five-year warrant to acquire 6,271,926 shares of NCT common stock at
an exercise price of $0.0535 per share. As described below, the November 21,
2002 note was rolled into a new note dated June 12, 2003.
Also on May 2, 2002, we issued Carole Salkind an 8% convertible note for
$1,425,000 due May 2, 2003, for funds we received from her as follows: $300,000
on April 1, 2002, $350,000 on April 15, 2002, $350,000 on May 1, 2002 and
$425,000 on May 2, 2002. This May 2, 2002 note was convertible into shares of
NCT common stock (at $0.094) and exchangeable for shares of common stock of any
NCT subsidiary that made a public offering of its common stock (at the public
offering price thereof). Prior to a waiver agreement dated July 12, 2002, this
note had also been exchangeable for shares of Pro Tech (at $0.03). In
conjunction with the issuance of this note, we issued Carole Salkind a five-year
warrant to acquire 3,562,500 shares of NCT common stock at an exercise price of
$0.094 per share. We defaulted on the repayment of this May 2, 2002 note. As
described below, the May 2, 2002 note was rolled into a new note dated May 22,
2003.
On May 29, 2002 and June 2, 2002, we issued Carole Salkind 8% convertible
notes for $350,000 and $300,000, respectively, for which Ms. Salkind paid us
$350,000 and $300,000, respectively, in cash. The notes matured on May 29, 2003
and June 2, 2003, respectively, were convertible into shares of NCT common stock
at $0.095 and $0.097, respectively, and were exchangeable for shares of common
stock of any NCT subsidiary (other than Pro Tech) that made a public offering of
its stock (at the public offering price thereof). In connection with the
issuance of these notes, we issued Carole Salkind two five-year warrants each to
acquire 1,500,000 shares of NCT common stock at exercise prices of $0.095 and
$0.097 per share, respectively. As outlined below, the May 29, 2002 and June 2,
2002 notes were rolled into a new note dated June 12, 2003.
On July 3, 2002, we issued Carole Salkind a note for $350,000, for which
Ms. Salkind paid us $350,000 in cash. The note bore interest at 8% per annum and
matured on July 3, 2003. The note was convertible into shares of NCT common
stock at $0.078 and was also exchangeable for shares of common stock of any NCT
subsidiary (other than Pro Tech) that made a public offering of its common stock
(at the public offering price thereof). In conjunction with the issuance of the
July 3, 2002 note, we issued Carole Salkind a five-year warrant to acquire
1,500,000 shares of NCT common stock, at an exercise price of $0.078 per share.
As outlined below, this note was rolled into a new note dated July 14, 2003.
On July 12, 2002, Carole Salkind, NCT and Pro Tech entered into an
agreement under which Ms. Salkind waived her right to exchange NCT notes for
shares of Pro Tech common stock. In consideration of the waiver, NCT granted
Carole Salkind a five-year warrant to acquire 20,000,000 shares of NCT common
stock at $0.075 per share.
On July 15, 2002, we issued Carole Salkind an 8% note for $350,000 due July
15, 2003, for which Ms. Salkind paid us $350,000 in cash. The note was
convertible into shares of NCT common stock at $0.075 and exchangeable for
shares of common stock of any subsidiary (other than Pro Tech) that made a
public offering of its common stock (at the public offering price thereof). In
conjunction with the issuance of the July 15, 2002 note, we issued Carole
Salkind a five-year warrant to acquire 1,500,000 shares of NCT common stock at
an exercise price of $0.075 per share. As outlined below, this note was rolled
into a new note dated July 28, 2003.
On July 23, 2002, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $525,000 due July 23, 2003 and a five-year warrant to
acquire 2,250,00 shares of NCT common stock at $0.059 per share. Ms. Salkind
paid NCT $525,000 cash on July 23, 2002. This note was convertible into common
stock of NCT (at $0.059) and exchangeable for shares of common stock of any
subsidiary of NCT (other than Pro Tech) that made a public offering of its
common stock (at the public offering price thereof). As outlined below, this
note was rolled into a new note dated August 7, 2003.
On August 14, 2002, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $350,000 due August 14, 2003 and a five-year warrant to
acquire 1,500,000 shares of NCT common stock at $0.082 per share. Ms. Salkind
paid NCT $350,000 cash on August 14, 2002. This note was convertible into common
stock of NCT (at $0.082) and exchangeable for shares of common stock of any
subsidiary of NCT (other than Pro Tech) that made a public offering of its
common stock (at the public offering price thereof). As outlined below, this
note was rolled into a new note dated August 28, 2003.
80
On August 29, 2002, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $490,000 due August 29, 2003 and a five-year warrant to
acquire 2,100,000 shares of NCT common stock at $0.076 per share. Ms. Salkind
paid NCT $490,000 cash on August 29, 2002. This note was convertible into common
stock of NCT (at $0.076) and exchangeable for shares of common stock of any
subsidiary of NCT (other than Pro Tech) that made a public offering of its
common stock (at the public offering price thereof). As outlined below, this
note was rolled into a new note dated September 11, 2003.
On September 9, 2002, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $350,000 due September 9, 2003 and a five-year warrant to
acquire 1,500,000 shares of NCT common stock at $0.077 per share. Ms. Salkind
paid NCT $350,000 cash on September 9, 2002. This note was convertible into
common stock of NCT (at $0.077) and exchangeable for shares of common stock of
any subsidiary of NCT (other than Pro Tech) that made a public offering of its
common stock (at the public offering price thereof). As outlined below, this
note was rolled into a new note dated October 2, 2003.
On September 30, 2002, Carole Salkind, NCT and Pro Tech entered into an
agreement under which Ms. Salkind waived her right to acquire $500,000 worth of
Pro Tech common stock at an amended exercise price of $0.06 per share (8,333,333
Pro Tech common shares) under a warrant dated February 13, 2001. In
consideration for the waiver, NCT granted Carole Salkind a five-year warrant to
acquire 10,000,000 shares of NCT common stock at $0.070 per share.
On November 7, 2002, we issued Carole Salkind a note for $400,000, for
which Ms. Salkind paid us $400,000 in cash. The note bore interest at 8% per
annum and matured on November 7, 2003. The note was convertible into shares of
NCT common stock at $0.072 and exchangeable for shares of common stock of any
subsidiary (other than Pro Tech) that made a public offering of its common stock
(at the public offering price thereof). In conjunction with the issuance of the
November 7, 2002 note, we issued Carole Salkind a five-year warrant to acquire
1,750,000 shares of NCT common stock at an exercise price of $0.072 per share.
As described below, this note was rolled into a new note dated November 21,
2003.
On November 20, 2002, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $400,000 due November 20, 2003 and a five-year warrant to
acquire 1,750,000 shares of NCT common stock at $0.054 per share. Ms. Salkind
paid NCT $400,000 in cash on or about November 20, 2002. This note was
convertible into common stock of NCT (at $0.054) and exchangeable for shares of
common stock of any subsidiary of NCT (other than Pro Tech) that made a public
offering of its common stock (at the public offering price thereof). As outlined
below, this note was rolled into a new note dated December 15, 2003.
On December 2, 2002, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $350,000. Ms. Salkind paid NCT cash for the note. The note
matured on December 2, 2003 and was convertible into common stock of NCT (at
$0.048) and exchangeable for shares of common stock of any subsidiary of NCT
(except Pro Tech) that made a public offering of its common stock (at the public
offering price thereof). In conjunction with the issuance of the note, we issued
Ms. Salkind a five-year warrant to acquire 1,500,000 shares of NCT common stock
at an exercise price per share of $0.048. As outlined below, this note was
rolled into a new note dated December 15, 2003.
On December 16, 2002, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $400,000, for which Ms. Salkind paid NCT $400,000 in cash.
The note matured on December 16, 2003 and was convertible into common stock of
NCT (at $0.042) and exchangeable for shares of common stock of any subsidiary of
NCT (except Pro Tech) that made a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 1,750,000 shares of NCT common
stock at an exercise price per share of $0.042. As outlined below, this note was
rolled into a new note dated December 31, 2003.
On December 30, 2002, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $350,000. Ms. Salkind paid NCT $350,000 cash for the note.
The note matured on December 30, 2003 and was convertible into common stock of
NCT (at $0.0412) and exchangeable for shares of common stock of any subsidiary
of NCT (except Pro Tech) that made a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 1,500,000 shares of
81
NCT common stock at an exercise price per share of $0.0412. As outlined below,
this note was rolled into a new note dated December 31, 2003.
On January 15, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $450,000. Ms. Salkind paid NCT cash for the note. The note
matures on January 15, 2004 and may be converted into common stock of NCT (at
$0.041) and may be exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common
stock at an exercise price per share of $0.041.
On January 23, 2003, we settled the amount due upon our default on the
repayment of the January 11, 2002 note (principal along with accrued interest
and default penalty of 10% of the principal in default) by issuing an 8% note in
the principal amount of $2,747,635 due January 23, 2004. That note had resulted
from rolling over four 1999 notes that were initially due in June and July 2001
that had been rolled over two times since the initial maturity dates. The
January 23, 2003 note may be converted into common stock of NCT (at $0.04) and
may be exchanged for shares of common stock of any subsidiary of NCT (except Pro
Tech) that makes a public offering of its common stock (at the public offering
price thereof). In conjunction with the issuance of the note, we issued Ms.
Salkind a five-year warrant to acquire 11,775,579 shares of NCT common stock at
an exercise price per share of $0.04.
On January 30, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $350,000, for which Ms. Salkind paid NCT $350,000 in cash.
The note matures on January 30, 2004 and may be converted into common stock of
NCT (at $0.041) and exchanged for shares of common stock of any subsidiary of
NCT (except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 1,500,000 shares of NCT common
stock at an exercise price per share of $0.041.
On February 11, 2003, we settled the amount due upon our default on the
repayment of the January 25, 2002 note (principal along with accrued interest
and default penalty of 10% of the principal in default) and $450,000 cash
received from Ms. Salkind by issuing an 8% note in the principal amount of
$1,252,592 due February 11, 2004. The February 11, 2003 note may be converted
into common stock of NCT (at $0.04) and exchanged for shares of common stock of
any subsidiary of NCT (except Pro Tech) that makes a public offering of its
common stock (at the public offering price thereof). In conjunction with the
issuance of the note, we issued Ms. Salkind a five-year warrant to acquire
5,500,000 shares of NCT common stock at an exercise price per share of $0.04.
On March 4, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $450,000. Ms. Salkind paid NCT cash for the note. The note
matures on March 4, 2004 and may be converted into common stock of NCT (at
$0.035) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common
stock at an exercise price per share of $0.035.
On March 13, 2003, we settled the amount due upon our default on the
repayment of the February 27, 2002 note (principal along with accrued interest
and default penalty of 10% of the principal in default) by issuing an 8% note in
the principal amount of $980,802 due March 13, 2004. This March 13, 2003 note
may be converted into common stock of NCT (at $0.031) and exchanged for shares
of common stock of any subsidiary of NCT (except Pro Tech) that makes a public
offering of its common stock (at the public offering price thereof). In
conjunction with the issuance of the note, we issued Ms. Salkind a five-year
warrant to acquire 4,250,000 shares of NCT common stock at an exercise price per
share of $0.031.
Also on March 13, 2003, we settled the amount due upon our default on the
repayment of the March 1, 2002 note (principal along with accrued interest and
default penalty of 10% of the principal in default) and an additional $450,000
cash received from Ms. Salkind by issuing an 8% note in the principal amount of
$864,616 due March 13, 2004. This March 13, 2003 note may be converted into
common stock of NCT (at $0.031) and exchanged for shares of common stock of any
subsidiary of NCT (except Pro Tech) that makes a public offering of its common
stock (at the public offering price thereof). In conjunction with the issuance
of the note, we issued Ms.
82
Salkind a five-year warrant to acquire 3,750,000 shares of NCT common stock at
an exercise price per share of $0.031.
On April 2, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $450,000. Ms. Salkind paid NCT $450,000 cash for the note.
The note matures on April 2, 2004 and may be converted into common stock of NCT
(at $0.029) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common
stock at an exercise price per share of $0.029.
On April 11, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $450,000, for which Ms. Salkind paid NCT $450,000 in cash.
The note matures on April 11, 2004 and may be converted into common stock of NCT
(at $0.031) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common
stock at an exercise price per share of $0.031.
On April 21, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $450,000. Ms. Salkind paid NCT $450,000 cash for the note.
The note matures on April 21, 2004 and may be converted into common stock of NCT
(at $0.037) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common
stock at an exercise price per share of $0.037.
On May 15, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $450,000, for which Ms. Salkind paid NCT $450,000 cash. The
note matured on November 15, 2003 and was convertible into common stock of NCT
(at $0.046) and exchangeable for shares of common stock of any subsidiary of NCT
(except Pro Tech) that made a public offering of its common stock (at the public
offering price thereof). In conjunction with the issuance of the note, we issued
Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common stock
at an exercise price per share of $0.046. As described below, the May 15, 2003
note was rolled into a new note dated December 15, 2003.
On May 22, 2003, we cured the default on the repayment of the May 2, 2002
note due May 2, 2003. The principal due, along with accrued interest and a
default penalty (10% of the principal in default), was rolled into a new 8% note
for $1,692,463 dated May 22, 2003. The May 22, 2003 note matured November 22,
2003 and was convertible into common stock of NCT (at $0.042) and exchangeable
for shares of common stock of any subsidiary of NCT (except Pro Tech) that made
a public offering of its common stock (at the public offering price thereof). In
conjunction with the issuance of the May 22, 2003 note, we issued Ms. Salkind a
five-year warrant to acquire 7,500,000 shares of NCT common stock at an exercise
price per share of $0.042. As described below, the May 22, 2003 note was rolled
into a new note dated December 15, 2003.
On May 28, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $415,000. Ms. Salkind paid NCT $415,000 cash for the note.
The note matured on November 28, 2003 and was convertible into common stock of
NCT (at $0.044) and exchangeable for shares of common stock of any subsidiary of
NCT (except Pro Tech) that made a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 1,900,000 shares of NCT common
stock at an exercise price per share of $0.044. As outlined below, the May 28,
2003 note was rolled into a new note dated December 15, 2003.
On June 12, 2003, we cured NCT defaults on repayment to Ms. Salkind of each
of its convertible notes dated May 29, 2002, June 2, 2002 and November 21, 2002,
representing an aggregate principal amount of $2,113,449. The default provisions
in the notes imposed an aggregate penalty of $211,345 (10% of principal in
default). Default interest from the dates of default was due on the principal
and accrued interest in default at the rate of 13%. On June 12, 2003, we cured
these defaults by canceling the notes and issuing a new 8% convertible note to
Ms. Salkind for $2,449,812 due December 12, 2003. Also on June 12, 2003, NCT
issued Ms. Salkind an 8% convertible note in the principal amount of $435,000
due December 12, 2003, for which Ms. Salkind paid NCT
83
$435,000 in cash. The notes were convertible into common stock of NCT (at
$0.044) and exchangeable for shares of common stock of any subsidiary of NCT
(except Pro Tech) that made a public offering of its common stock (at the public
offering price thereof). In conjunction with the issuance of these notes, we
issued Ms. Salkind five-year warrants to acquire an aggregate of 12,500,000
shares of NCT common stock at an exercise price per share of $0.044. As outlined
below, the June 12, 2003 notes were rolled into a new note dated December 31,
2003.
On June 28, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $410,000, for which Ms. Salkind paid NCT $410,000 in cash.
The note matured on December 28, 2003 and was convertible into common stock of
NCT (at $0.038) and exchangeable for shares of common stock of any subsidiary of
NCT (except Pro Tech) that made a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common
stock at an exercise price per share of $0.038. As described below, the June 28,
2003 note was rolled into a new note dated December 31, 2003.
On July 14, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $410,000. Ms. Salkind paid NCT $410,000 cash for the note.
The note matures on January 14, 2004 and may be converted into common stock of
NCT (at $0.0312) and exchanged for shares of common stock of any subsidiary of
NCT (except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common
stock at an exercise price per share of $0.0312.
Also on July 14, 2003, we cured our default under the July 3, 2002 note by
issuing Ms. Salkind an 8% convertible note in the principal amount of $414,481.
This amount represents the principal rolled over ($350,000), default penalty
($35,000) and accrued interest ($29,481). The note matures on January 14, 2004
and may be converted into common stock of NCT (at $0.0312) and may be exchanged
for shares of common stock of any subsidiary of NCT (except Pro Tech) that makes
a public offering of its common stock (at the public offering price thereof). In
conjunction with this note issuance, we issued Ms. Salkind a five-year warrant
to acquire 2,000,000 shares of NCT common stock at an exercise price per share
of $0.0312.
On July 28, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $410,000. Ms. Salkind paid NCT $410,000 cash for the note.
The note matures on January 28, 2004 and may be converted into common stock of
NCT (at $0.042) and may be exchanged for shares of common stock of any
subsidiary of NCT (except Pro Tech) that makes a public offering of its common
stock (at the public offering price thereof). In conjunction with the issuance
of the note, we issued Ms. Salkind a five-year warrant to acquire 2,000,000
shares of NCT common stock at an exercise price per share of $0.042.
Also on July 28, 2003, we cured our default under the July 15, 2002 note by
issuing Ms. Salkind an 8% convertible note in the principal amount of $414,750.
This amount represents the principal rolled over ($350,000), default penalty
($35,000) and accrued interest ($29,750). The note matures on January 28, 2004
and may be converted into common stock of NCT (at $0.042) and exchanged for
shares of common stock of any subsidiary of NCT (except Pro Tech) that makes a
public offering of its common stock (at the public offering price thereof). In
conjunction with this note issuance, we issued Ms. Salkind a five-year warrant
to acquire 2,000,000 shares of NCT common stock at an exercise price per share
of $0.042.
On August 7, 2003, we cured our default under the July 23, 2002 note by
issuing Ms. Salkind an 8% convertible note in the principal amount of $622,529.
This amount represents the principal rolled over ($525,000), default penalty
($52,500) and accrued interest ($45,029). The note matures on February 7, 2004
and may be converted into common stock of NCT (at $0.0539) and exchanged for
shares of common stock of any subsidiary of NCT (except Pro Tech) that makes a
public offering of its common stock (at the public offering price thereof). In
conjunction with this note issuance, we issued Ms. Salkind a five-year warrant
to acquire 2,750,000 shares of NCT common stock at an exercise price per share
of $0.0539.
On August 18, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $425,000. Ms. Salkind paid NCT $425,000 cash for the note.
The note matures on February 18, 2004 and may be converted into common stock of
NCT (at $0.045) and exchanged for shares of common stock of any subsidiary of
NCT (except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In
84
conjunction with the issuance of the note, we issued Ms. Salkind a five-year
warrant to acquire 2,000,000 shares of NCT common stock at an exercise price per
share of $0.045.
On August 28, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $375,000, for which Ms. Salkind paid NCT $375,000 cash. The
note matures on February 28, 2004 and may be converted into common stock of NCT
(at $0.055) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common
stock at an exercise price per share of $0.055.
Also on August 28, 2003, we cured our default under the August 14, 2002
note by issuing Ms. Salkind an 8% convertible note in the principal amount of
$414,885. This amount represents the principal rolled over ($350,000), default
penalty ($35,000) and accrued interest ($29,885). The note matures on February
28, 2004 and may be converted into common stock of NCT (at $0.055) and exchanged
for shares of common stock of any subsidiary of NCT (except Pro Tech) that makes
a public offering of its common stock (at the public offering price thereof). In
conjunction therewith, we issued Ms. Salkind a five-year warrant to acquire
2,000,000 shares of NCT common stock at an exercise price per share of $0.055.
On September 11, 2003, we cured our default under the August 29, 2002 note
by issuing Ms. Salkind an 8% convertible note in the principal amount of
$580,650. This amount represents the principal rolled over ($490,000), default
penalty ($49,000) and accrued interest ($41,650). The note matures on March 11,
2004 and may be converted into common stock of NCT (at $0.050) and exchanged for
shares of common stock of any subsidiary of NCT (except Pro Tech) that makes a
public offering of its common stock (at the public offering price thereof). In
conjunction with this note, we issued Ms. Salkind a five-year warrant to acquire
2,500,000 shares of NCT common stock at an exercise price per share of $0.050.
On September 12, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $400,000 due March 12, 2004, for which Ms. Salkind paid NCT
$400,000 in cash. The note was convertible into common stock of NCT (at $0.050)
and exchangeable for shares of common stock of any subsidiary of NCT (except Pro
Tech) that made a public offering of its common stock (at the public offering
price thereof). In conjunction with the issuance of the note, we issued Ms.
Salkind a five-year warrant to acquire 2,000,000 shares of NCT common stock at
an exercise price per share of $0.050. As described below, the September 12,
2003 note was consolidated with other outstanding notes into a new note dated
December 31, 2003.
On October 2, 2003, we cured our default under the September 9, 2002 note
by issuing Ms. Salkind an 8% convertible note in the principal amount of
$816,096. This amount represents the principal rolled over ($350,000), default
penalty ($35,000), accrued interest ($31,096) and $400,000 in cash paid by Ms.
Salkind to NCT. The note was due on April 4, 2004 and was convertible into
common stock of NCT (at $0.043) and exchangeable for shares of common stock of
any subsidiary of NCT (except Pro Tech) that made a public offering of its
common stock (at the public offering price thereof). In conjunction with this
note issuance, we issued Ms. Salkind a five-year warrant to acquire 4,000,000
shares of NCT common stock at an exercise price per share of $0.043. As
described below, the October 2, 2003 note was consolidated with other
outstanding notes into a new note dated December 31, 2003.
On October 14, 2003, we cured our default under the September 30, 2002 note
by issuing Ms. Salkind an 8% convertible note in the principal amount of
$4,469,019. This amount represents the principal rolled over ($3,770,098),
default penalty ($377,010) and accrued interest ($321,911). The note matures on
April 14, 2004 and may be converted into common stock of NCT (at $0.044) and
exchanged for shares of common stock of any subsidiary of NCT (except Pro Tech)
that makes a public offering of its common stock (at the public offering price
thereof). In conjunction with this note issuance, we issued Ms. Salkind a
five-year warrant to acquire 19,250,000 shares of NCT common stock at an
exercise price per share of $0.044.
Also on October 14, 2003, NCT issued Ms. Salkind an 8% convertible note in
the principal amount of $400,000, for which Ms. Salkind paid NCT $400,000 in
cash. The note was due on April 14, 2004 and was convertible into common stock
of NCT (at $0.044) and exchangeable for shares of common stock of any subsidiary
of NCT (except Pro Tech) that made a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,000,000 shares of
85
NCT common stock at an exercise price per share of $0.044. As described below,
this October 14, 2003 note was consolidated with other outstanding notes into a
new note dated December 31, 2003.
On November 3, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $400,000, for which Ms. Salkind paid NCT $400,000 in cash.
The note was due on May 3, 2004 and was convertible into common stock of NCT (at
$0.044) and exchangeable for shares of common stock of any subsidiary of NCT
(except Pro Tech) that made a public offering of its common stock (at the public
offering price thereof). In conjunction with the issuance of the note, we issued
Ms. Salkind a five-year warrant to acquire 2,000,000 shares of NCT common stock
at an exercise price per share of $0.044. As described below, the November 3,
2003 note was consolidated with other outstanding notes into a new note dated
December 31, 2003.
On November 21, 2003, we cured our default under the November 7, 2002 note
by issuing Ms. Salkind an 8% convertible note in the principal amount of
$474,154 representing the principal rolled over, default penalty (10% of the
principal in default) and accrued interest. The note matures on May 21, 2004 and
may be converted into common stock of NCT (at $0.041) and exchanged for shares
of common stock of any subsidiary of NCT (except Pro Tech) that makes a public
offering of its common stock (at the public offering price thereof). In
conjunction with this note issuance, we issued Ms. Salkind a five-year warrant
to acquire 2,250,000 shares of NCT common stock at an exercise price per share
of $0.041.
Also on November 21, 2003, NCT issued Ms. Salkind an 8% convertible note in
the principal amount of $425,000, for which Ms. Salkind paid NCT $425,000 in
cash. The note matures on May 21, 2004 and may be converted into common stock of
NCT (at $0.041) and exchanged for shares of common stock of any subsidiary of
NCT (except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with this note issuance, we
issued Ms. Salkind a five-year warrant to acquire 2,500,000 shares of NCT common
stock at an exercise price per share of $0.041.
On November 22, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $400,000. Ms. Salkind paid NCT $400,000 cash for the note.
The note matures on May 22, 2004 and may be converted into common stock of NCT
(at $0.041) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,500,000 shares of NCT common
stock at an exercise price per share of $0.041.
On December 15, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $400,000, for which Ms. Salkind paid NCT $400,000 cash. The
note matures on June 15, 2004 and may be converted into common stock of NCT (at
$0.037) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with the issuance of the note, we
issued Ms. Salkind a five-year warrant to acquire 2,500,000 shares of NCT common
stock at an exercise price per share of $0.037.
Also on December 15, 2003, we cured our defaults under the notes dated
November 20, 2002, December 2, 2002, May 15, 2003, May 22, 2003 and May 28, 2003
by issuing Ms. Salkind an 8% convertible note in the principal amount of
$3,828,985. This amount represents the aggregate principal rolled over
($3,307,463), default penalty ($330,746) and accrued interest ($190,776). The
note matures on June 15, 2004 and may be converted into common stock of NCT (at
$0.037) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction therewith, we issued Ms. Salkind
a five-year warrant to acquire 16,500,000 shares of NCT common stock at an
exercise price per share of $0.037.
On December 31, 2003, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $785,000, for which Ms. Salkind paid NCT $785,000 in cash.
The note matures on June 30, 2004 and may be converted into common stock of NCT
(at $0.040) and exchanged for shares of common stock of any subsidiary of NCT
(except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof). In conjunction with this note issuance, we
issued Ms. Salkind a five-year warrant to acquire 5,500,000 shares of NCT common
stock at an exercise price per share of $0.040.
86
Also on December 31, 2003, we cured our default under the notes dated
December 16, 2002, December 26, 2002, December 30, 2002, June 12, 2003, June 12,
2003 and June 28, 2003 by issuing Ms. Salkind an 8% convertible note in the
principal amount of $7,479,385 representing the aggregate principal rolled over
($6,426,299), default penalty (10% of the principal in default) and accrued
interest. The note matures on June 30, 2004 and may be converted into common
stock of NCT (at $0.040) and exchanged for shares of common stock of any
subsidiary of NCT (except Pro Tech) that makes a public offering of its common
stock (at the public offering price thereof). In conjunction with this note
issuance, we issued Ms. Salkind a five-year warrant to acquire 32,250,000 shares
of NCT common stock at an exercise price per share of $0.040.
Also on December 31, 2003 at the request of Ms. Salkind, we consolidated
four notes in advance of their maturities into one 8% convertible note in the
principal amount of $3,050,000. Consideration for this note consisted of the
surrender of notes dated September 12, 2003, October 2, 2003, October 14, 2003
and November 3, 2003 in aggregate principal amount of $2,016,096 along with
accrued interest through December 31, 2003 and $996,238 additional note
principal in consideration of willingness for continued funding provided by
Carole Salkind. The note is due on demand and may be converted into common stock
of NCT (at $0.040) and exchanged for shares of common stock of any subsidiary of
NCT (except Pro Tech) that makes a public offering of its common stock (at the
public offering price thereof).
Consulting Agreements with Affiliates of Carole Salkind
From time to time, NCT has entered into consulting agreements with the
following entities that are affiliates of Carole Salkind: Acme Associates, Inc.;
Leben Care, Inc.; Stop Noise, Inc. (formerly known as Stopnoise.com, Inc.);
Motorworld, Incorporated; Inframe, Inc.; Avant Interactive, Inc.; Turbo
Networks, Inc. and Maple Industries, Inc. Carole Salkind is the sole shareholder
of Acme Associates, Motorworld, Inframe, Avant, Turbo Networks and Maple. Carole
Salkind's son Steven Salkind is the sole shareholder of Leben Care and Stop
Noise. As such, all of the options granted to the consultants are attributed to
Ms. Salkind. We believe that the consulting agreements made with affiliates of
Ms. Salkind are as fair to us as could have been made with unaffiliated parties.
The consultants provide such on-going consulting services and advice in a
number of areas pertaining to NCT's business affairs as NCT and its subsidiaries
may from time to time reasonably request, including assisting NCT in corporate
development, evaluating merger and acquisition opportunities, refining business
plans, evaluating marketing and product development plans, strategy planning,
and recruiting. The actual consulting services under these agreements are
performed primarily by Morton Salkind, spouse of Carole Salkind, acting on
behalf of the consultants (by John Harris on behalf of Stop Noise). Morton
Salkind is 71 years of age. Mr. Salkind served as a member of NCT's Board of
Directors from his appointment in July 1997 until his resignation in January
1999. He also served as a director of NCT Audio Products, Inc. from September
1997 to January 1999. Morton Salkind disclaims beneficial ownership of the
consultant option shares attributed to Carole Salkind.
The business purpose for having the consulting services be provided through
corporations rather than through direct contracts with Messrs. Salkind and
Harris is that it is only with the liability and other protections and benefits
of the corporate form that the consulting services were offered. The
arrangements have been with multiple corporations rather than one because that
is the only manner in which the services were offered to NCT and, in some
instances, because of the differing areas of operation as among the various
corporations. Although there is some overlap in the consulting periods, the
consulting services are different in each case and are based on the evolving
needs and objectives of NCT and its subsidiaries and the need to draw on the
respective areas of specialization of the consulting entities even where
existing agreements have not yet lapsed. To the date hereof, the consulting
services rendered have included the following: (1) advising on the strategic
direction of NCT and its subsidiaries; (2) assisting NCT in corporate
development; (3) evaluating merger, acquisition and joint venture opportunities;
(4) developing and refining business plans; (5) developing business and growth
strategies; (6) advising on recruiting; (7) discussing product development
issues and expansion; (8) serving as a marketing liaison and facilitator; (9)
evaluating marketing plans; and (10) assisting with various contract
negotiations. As noted above, primarily Morton Salkind acting on behalf of each
of the entities performs the consulting services. Morton Salkind is a successful
businessman who has vast experience in various industries. The basis for the
expertise rendered primarily by Morton Salkind includes, among other things,
education and experience as an entrepreneur, ownership of various companies,
seasoning as a businessman who has served as chief executive officer of many
business ventures, active
87
oversight of the performance of companies, determination of the strategic and
tactical direction of companies and an understanding of our proprietary
technologies and the marketplace. The consulting entities have material business
purposes other than providing consulting services to NCT, as follows:
Material Business Purpose Other Than
Consultant Providing Consulting Services to NCT
--------------------------- --------------------------------------------------------------------
Leben Care, Inc. Building age- and health-restricted residences
Stop Noise, Inc. Applying active noise cancellation to roadworks and large outdoor
public facilities
Acme Associates, Inc. Packaging and delivering interactive electronic products
Motorworld, Incorporated Producing and distributing electronic games for theme parks
Inframe, Inc. Developing advanced interactive systems for games
Avant Interactive, Inc. Developing interactive user interfaces for computers and
electronic devices
Turbo Networks, Inc. Selling electronic data network products to government and large
business offices
Maple Industries, Inc. Real estate development
As compensation for these consulting services, NCT has often agreed to pay
cash fees and grant stock options to the consulting entities and provide health
benefits to Mr. Salkind. The compensation under the consulting agreements
results from negotiations between the parties in anticipation of the quality of
services expected. For consulting agreements with a cash fee component, the cash
fee is normally a monthly retainer to be paid at the end of the initial one-year
consulting agreement term. The consulting agreements are automatically renewable
for a period of one year provided the agreements are not cancelled by either
party after the initial period of the first year. To date, NCT has not made any
of the cash payments for these consulting fees. Health benefits, consisting of
health insurance premiums, paid on behalf of Mr. Salkind were approximately
$1,300, $1,600 and $2,200 in 2001, 2002 and 2003, respectively. In addition, NCT
has often granted five-year stock options that vest immediately to the
consultant at the then current market price of the NCT common stock. There has
been no cash or non-cash consulting compensation paid by NCT directly to Carole
Salkind or Morton Salkind or to any members of their families. We incur
consulting fee expense from our accrual of cash fees and from the fair value
charges of options issued. NCT has incurred consulting compensation to multiple
consulting entities, but the services provided by these entities have not been
contemporaneously received services. Instead, the services have been different
in the case of each entity, based on the entity's area of operations and on the
quantity of time spent on, and value of the advice provided to, NCT by the
representative of the entity, relative to the quantity of time and value of the
advice contemplated to be spent and provided by the entity in its consulting
agreement. The consulting engagements and compensation of entities represented
by Morton Salkind (Morton Salkind is not engaged or compensated directly) is not
dependent upon the ongoing funding provided by Carole Salkind, Morton Salkind's
wife.
At December 31, 2003, cash compensation under consulting agreements with
affiliates of Carole Salkind is as follows:
Initial Term of
Affiliate Agreement Cash Fee
------------------------- --------------------- --------------------------
Leben Care, Inc. 01/25/02 - 01/25/03 $2,500 per month retainer
(Replaced agreement due 01/25/03
dated 01/19/99)
Stop Noise, Inc. 07/01/01 - 07/01/02 None
Acme Associates, Inc. 09/30/02 - 09/30/03 $2,500 per month retainer
due 09/30/03
Motorworld, Incorporated 12/26/02 - 12/26/03 $2,500 per month retainer
due 12/26/03
Inframe, Inc. 01/23/03 - 01/23/04 $2,500 per month retainer
due 01/23/04
Avant Interactive, Inc. 02/11/03 - 02/11/04 $2,500 per month retainer
due 02/11/04
88
Initial Term of
Affiliate Agreement Cash Fee
------------------------- --------------------- --------------------------
Turbo Networks, Inc. 04/17/03 - 04/17/04 $2,500 per month retainer
due 04/17/04
Maple Industries, Inc. 06/12/03 - 06/12/04 $2,500 per month retainer
due 06/12/04
As of December 31, 2003, options (all of which are vested) to purchase
shares of NCT common stock granted to affiliates of Ms. Salkind are as follows:
Grant Expiration Exercise Shares
Optionee Date Date Price Granted
------------------------ ---------- ------------ ------------ --------------
Leben Care, Inc. 01/08/02 01/24/07 $ 0.0790 1,500,000
Leben Care, Inc. 01/25/02 05/22/06 0.1300 600,000
Leben Care, Inc. 01/25/02 05/22/06 0.1300 300,000
Leben Care, Inc. 01/25/02 05/22/06 0.1300 450,000
Leben Care, Inc. 01/25/02 05/22/06 0.1300 500,000
Leben Care, Inc. 01/25/02 01/24/07 0.0900 5,000,000
--------------
Subtotal 8,350,000
--------------
Stop Noise, Inc. 02/27/02 06/30/06 0.1200 625,000
Stop Noise, Inc. 02/27/02 10/08/06 0.0925 1,500,000
Stop Noise, Inc. 02/27/02 02/26/07 0.0790 1,250,000
--------------
Subtotal 3,375,000
--------------
Acme Associates, Inc. 09/30/02 09/30/07 0.0700 50,000,000
Acme Associates, Inc. 07/14/03 07/14/08 0.0312 25,000,000
Acme Associates, Inc. 09/11/03 09/11/08 0.0520 7,500,000
Acme Associates, Inc. 10/03/03 10/03/08 0.0430 5,750,000
Acme Associates, Inc. 10/14/03 10/14/08 0.0440 44,000,000
Acme Associates, Inc. 11/03/03 11/03/08 0.0450 2,000,000
Acme Associates, Inc. 11/21/03 11/21/08 0.0410 6,500,000
Acme Associates, Inc. 12/17/03 12/17/08 0.0370 99,750,000
--------------
Subtotal 240,500,000
--------------
--------------
Motorworld, Incorporated 12/26/03 12/26/07 0.0420 23,000,000
--------------
--------------
Inframe, Inc. 01/23/03 01/23/08 0.0420 23,000,000
--------------
Avant Interactive, Inc. 02/11/03 02/11/08 0.0400 7,000,000
Avant Interactive, Inc. 03/12/03 03/12/08 0.0310 13,500,000
Avant Interactive, Inc. 04/03/03 04/03/08 0.0290 2,000,000
Avant Interactive, Inc. 04/11/03 04/11/08 0.0310 2,000,000
--------------
Subtotal 24,500,000
--------------
Turbo Networks, Inc. 04/17/03 04/17/08 0.0370 2,000,000
Turbo Networks, Inc. 05/22/03 05/22/08 0.0420 18,550,000
Turbo Networks, Inc. 06/28/03 06/28/08 0.0400 2,000,000
--------------
Subtotal 22,550,000
--------------
--------------
Maple Industries, Inc. 06/12/03 06/12/08 0.0440 23,000,000
--------------
Total 368,275,000
==============
89
SpringerRun, Inc.
On July 2, 2003, NCT entered into a consulting agreement with SpringerRun,
Inc., under which SpringerRun provides consulting services to NCT and its
subsidiaries, consisting primarily of raising capital and debt financing,
identifying potential joint ventures and other strategic transactions and
finding distributors, licensees and end users for products and technologies. The
term of the SpringerRun agreement is one year, with possible renewals. Under the
agreement, NCT will pay SpringerRun the following: for capital raised, 6% of the
amount thereof plus 5% of the amount thereof in warrants to purchase NCT stock;
for debt financing raised, 1% of the amount thereof; for joint ventures or
distribution license or end user agreements entered into, 7% of NCT's net
revenues therefrom for three years, 5% thereafter. In lieu of cash, some of the
compensation described above may, at SpringerRun's request and if agreed to by
NCT, be given as stock of NCT or of a joint venture entered into by NCT. The
compensation formula and other material terms and conditions in this agreement
are comparable to those used by NCT with similarly situated, unrelated
consultants. To date, NCT has not paid SpringerRun any compensation under the
agreement, and none is owed to it. John McCloy II, a Director of NCT, is also
Chairman of the Board of Directors, Chief Executive Officer and a 40%
shareholder of SpringerRun. John McCloy II's son John McCloy III is President,
Treasurer, Secretary, a Director and a 25% shareholder of SpringerRun. John
McCloy II's son Rush McCloy is a 25% shareholder of SpringerRun.
Spyder Technologies Group, LLC
On October 24, 2002, Artera Group, Inc. entered into a master distributor
agreement with Spyder Technologies Group, LLC under which Spyder distributed the
Artera Turbo service in Puerto Rico, the U.S. Virgin Islands and a number of
countries in the Caribbean region. The term of the agreement was through
February 2008. Compensation consisted of a commission to Spyder of 50% of gross
revenues on sales originated by local distributors that were brought to Artera
by Spyder, out of which those distributors were to be paid 30% to 40% of gross
revenues as a commission from Spyder. With some exceptions in Puerto Rico and
the U.S. Virgin Islands, Spyder's distribution rights were exclusive, although
Artera had the right to terminate the exclusivity in February of each year
beginning 2004 if specified revenue thresholds were not met. The compensation
structure, commission rate and other material terms of the agreement were
comparable to those used by Artera with similarly situated, unrelated master
distributors at the time. On October 1, 2003, Artera and Spyder entered into a
new, superseding master distributor agreement for Puerto Rico, the U.S. Virgin
Islands and these same countries in the Caribbean. The new agreement changed the
compensation structure from one of commissions from Artera to Spyder for
distributors brought by Spyder to Artera, to one of royalties from Spyder to
Artera on sales to distributors by Spyder. The royalties are calculated on a per
unit basis and vary based upon the size and category of the end user of the
product and the support services provided by Artera. The term of the new
agreement is through February 2008. The compensation structure, royalty rates
and other material terms of the agreement are comparable to those used by Artera
with similarly situated, unrelated master distributors.
On October 24, 2002, Artera entered into a master distributor agreement
with Spyder under which Spyder distributed the Artera Turbo service in the
United States. The term of the agreement was through October 2003, with either
party having the right to terminate upon 30 days' notice thereafter.
Compensation consisted of a commission to Spyder of 50% of gross revenues on
sales originated by U.S. distributors that were brought to Artera by Spyder, out
of which those distributors were to be paid 30% to 40% of gross revenues as a
commission from Spyder. Spyder's distribution rights in the U.S. were
non-exclusive. The compensation structure, commission rate and other material
terms of the agreement were comparable to those used by Artera with similarly
situated, unrelated master distributors at the time. On September 1, 2003,
Artera and Spyder entered into a new, superseding master distributor agreement
for the U.S., with expansion to cover Canada, South America and Central America.
The new agreement changed the compensation structure from one of commissions
from Artera to Spyder for distributors brought by Spyder to Artera, to one of
royalties from Spyder to Artera on sales to distributors by Spyder. The
royalties are calculated on a per unit basis and vary based upon the size and
category of the end user of the product and the support services provided by
Artera. The term of the new agreement is five years. The compensation structure,
royalty rates and other material terms of the agreement are comparable to those
used by Artera with similarly situated, unrelated master distributors.
On September 1, 2003, Artera entered into a reseller agreement with Spyder
under which Spyder resells the Artera Turbo service in the United States,
Canada, South America and Central America. Spyder is to pay Artera per
90
unit royalties that vary based upon the size and category of the end user of the
product. The term of the agreement is one year, with possible renewals. The
compensation structure, royalty rates and other material terms of the agreement
are comparable to those used by Artera with similarly situated, unrelated
resellers.
Under all of the Spyder agreements, Spyder earned aggregate commissions of
$143 and $3,017 for the years ended December 31, 2002 and 2003, respectively,
and to date, Spyder has not paid Artera any royalties.
In addition, from time to time on an "as needed" basis, Spyder provides
technical consulting services to Artera pertaining to Artera Turbo. For the
years ended December 31, 2002 and 2003, Spyder earned aggregate technical
consulting fees of $12,330 and $86,840, respectively.
Jonathan Parrella, the son of NCT's Chairman and Chief Executive Officer,
is President of and holds a 45% ownership interest in Spyder. Bulldog
Communications, Inc. holds a 25% ownership interest in Spyder. Bulldog
Communications, Inc. is owned 20% by each of Michael Parrella, Karen Parrella,
Michael Parrella, Jr., Jonathan Parrella and Daniel Parrella (the Chairman and
Chief Executive Officer of NCT, and, respectively, his wife and three sons).
Michael Parrella, Jr. is an officer of Artera Group. Michael Parrella is also
the Chairman of the Board, and Karen Parrella is the President, of Bulldog
Communications.
As of December 31, 2003, Jonathan Parrella held options to acquire
1,000,000 shares of NCT common stock at an exercise price of $0.13 per share.
These options were transferred to him by his father in November 2002.
Indebtedness of Management
On various dates commencing in 2000, Jonathan M. Charry, Ph.D., NCT's
Senior Vice President, Corporate Development, entered into 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 May 1, 2002, the
borrowed funds had not been repaid but were consolidated with interest into an
outstanding promissory note due January 15, 2003 for an aggregate principal
amount owed to NCT of $107,960. The due date of this note represents an
extension from May 1, 2002 which itself was a product of prior extensions. This
note went into default on January 15, 2003. NCT is seeking to collect on the May
1, 2002 note. However, NCT believes that incentive compensation that is or will
be due Dr. Charry may offset the amount owed NCT. The note bore interest at an
annual rate of 6.0% through its due date of January 15, 2003, and bears interest
at prime plus 5% thereafter.
Indemnification of Management
On or about December 5, 2002, NCT agreed to indemnify three individuals,
NCT directors and officers, who had each also served as a Director of Artera
Group International Limited, a U.K.-based subsidiary, prior to its entering into
liquidation proceedings (refer to Note 19 - notes to the consolidated financial
statements) for any liabilities that may arise against them from claims under
Section 214 of the U.K. Insolvency Act and to provide them with legal
representation with respect to the claims. For additional information about this
matter, see the section "Legal Proceedings."
On or about January 27, 2003, NCT agreed to indemnify NCT's Chairman and
Chief Executive Officer for any liabilities that may arise against him in a
lawsuit brought in Connecticut against him, NCT and NCT's subsidiary Distributed
Media Corporation by Production Resource Group (PRG) and to provide him with
legal representation in the suit. For additional information about this matter,
see the section "Legal Proceedings."
On or about January 14, 2004, NCT agreed to indemnify five individuals, NCT
directors and officers, for any liabilities that may arise against them in a
lawsuit brought in Delaware against them, NCT and NCT's subsidiary Distributed
Media Corporation by PRG and to provide them with legal representation in the
suit. This Delaware suit is separate from but related to the Connecticut suit
brought by PRG described above. For additional information about this matter,
see the section "Legal Proceedings."
91
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).
Crammer Road LLC, former owner of DMC New York, Inc.
In June 2002, we completed our acquisition of 12,000 shares (75%) of DMC
New York, Inc. from Crammer Road LLC, a Cayman Islands limited liability
company. This was pursuant to a June 21, 2002 exchange agreement with Crammer
Road to acquire the remaining 12,000 shares of DMC NY in exchange for 1,800
shares of our series H convertible preferred stock and $120,000 in cash.
Pursuant to an April 12, 2001 exchange agreement and an April 12, 2001
securities purchase agreement, NCT acquired a 25% interest in DMC NY for $4.0
million from Crammer Road, then the sole stockholder of DMC NY. DMC NY was the
owner of 16 licenses previously purchased from our subsidiary, Distributed Media
Corporation. The acquisitions resulted in charges 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. Our 2001 financial statements include an aggregate $18.0
million charge, classified as "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 12,000 shares
of DMC NY. Our 2002 financial statements include an additional charge of $9.2
million for this acquisition classified as "write downs of investment and
repurchased licenses" in our consolidated statement of operations.
The consideration we paid to Crammer Road in 2001 for this acquisition
consisted of a $1.0 million convertible note due December 31, 2001 (accruing
interest at 2% per month), $1.0 million in cash (an escrow account was
established with Crammer Road's counsel as a matter of convenience in funding
our purchase of 1,000 shares of DMC NY common stock; we received from Vidikron
in April 2001 $1 million cash paid into that escrow account on our behalf, which
we used to acquire the 1,000 shares of DMC NY) and $2.0 million of our common
stock (13,333,333 million shares subject to increase based upon a repricing
provision). Because we intended to acquire the remaining 75% interest in DMC NY
pursuant to an April 12, 2001 private equity credit agreement with Crammer Road,
we accrued $14.0 million in 2001, our cost of repurchasing the remaining 12,000
shares of DMC NY under that the 2001 private equity credit agreement. However,
as a result of our completion of the purchase of the remaining 12,000 shares of
DMC NY pursuant to the June 2002 exchange agreement, our acquisition of all
16,000 shares of DMC NY totaled an aggregate of approximately $27.2 million ($1
million cash, shares of our common stock valued at $2 million, a $1 million
note, $18 million in value of our series H preferred stock and approximately
$5.2 million representing the additional value resulting from the conversion
rate of 75% of the fair market value, as defined, of NCT common stock into which
the series H preferred stock is convertible). Those 16,000 shares of DMC NY
(100% of DMC NY) represented the 16 New York area DMC licenses we had sold for
$4.0 million in cash and the exchange of 9,600 shares of our preferred stock
($9.6 million stated value that investors had acquired for approximately $5.4
million in cash). The purchase price was arrived at in various negotiations
between NCT and Crammer Road. NCT believed the purchase price was a reasonable
one because the sale resulted in NCT's control of the number one designated
market area. NCT believed that the repurchase of licenses previously sold
preserved their value because NCT retrieved the licenses from licensees who were
not exploiting them (by not securing locations to house Sight & Sound units nor
securing advertisers to air or display ads on the Sight & Sound units) and made
the licenses available for sale again in the future at prices that would better
reflect anticipated operational revenue. We did not obtain a valuation from an
outside firm regarding the acquisition of DMC NY. While we are not currently
marketing the licenses, we believe we will be able to resell the licenses for a
value in excess of $9.4 million. We believe that the licenses should command a
high price once the advertising industry has recovered and companies increase
their spending on advertising. Our expectation is based upon our current
installations proving the viability of the system and the ability to generate
revenue. We believe that our system has unique features that make it difficult
to replicate. In addition, we believe that the establishment of an authorized
library of music in various genres and a means for monitoring the required
royalty payments is a barrier to entry to potential competitors. Please note
that we increased our Sight & Sound installations in health care facilities
during 2003 at an increasing rate compared to 2002. We had eight installations
at December 31, 2002 compared to 20 as of December 31, 2003, an increase of
150%. To date in 2004, we have already increased our
92
installations in health care facilities by more than 150% compared to the
installed base as of December 31, 2003. Further, we have increased our
advertising contracts, only some of which has been reflected in our revenue.
Crammer Road obtained the 16 DMC licenses from other investors in private
transactions. In 2000, five investors in our series E and F preferred stock (see
below) contributed their 16 New York area DMC licenses to Crammer Road in a
private transaction, in exchange for membership interests in Crammer Road. The
investors holding the licenses advised NCT and DMC of plans to contribute the
licenses to Crammer Road. NCT and DMC did not object to those contributions. 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) for which they had paid an aggregate of approximately $5.4 million;
thus their cash basis in the 16 DMC licenses was approximately $9.4 million. 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 issued 12,454 shares of our series E preferred stock
from December 30, 1998 through April 13, 1999 for approximately $4.0 million in
cash, 1,700 shares of our series C preferred stock and 2.1 million shares of our
common stock (approximately $617 per share). On August 10, 1999, we issued 8,500
shares of our series F preferred stock for approximately $1.0 million in cash
(approximately $118 per share). The relationship of the stated value of the
series F preferred stock to the consideration received therefore reflected what
NCT was able to command for the investment at the time. The series F preferred
stock subscription agreement provided, at the company's election, that the
investors would invest up to an additional $4.0 million in cash or in kind at a
future date. On September 10, 1999, these preferred stock investors entered into
a subscription agreement to acquire four DMC licenses for $4 million. Due to the
extreme discount of the preferred stock stated value to the consideration
received, for accounting purposes, NCT treated the $4 million cash attributed to
the four DMC licenses as additional consideration for its series F preferred
stock as the series F subscription agreement provided that the investors may
invest up to $4.0 million at a future date and there was a proximity in time
between the two distinct transactions, August 10, 1999 for the series F
preferred stock placement and September 10, 1999 for the $4.0 million DMC
license subscription. 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 capital contribution of licenses to Crammer Road was for
purposes of administrative convenience 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 it a
perceived form of liquidity, possibly through an initial public offering or
through the acquisition of DMC NY by Distributed Media Corporation or NCT
(possibly using shares of NCT common stock issued under the 2000 private equity
credit agreement). The licensees apparently lacked the ability or interest to
initiate services under the license agreements. More than nine months had lapsed
since the execution of the license agreements. The licensees had not identified
any locations to house the Sight & Sound units nor had they secured any
advertising contracts. Thus, by September 2000, we realized that the licensees
were unable to properly exploit the licenses in their respective market areas.
Concurrently, due to a lack of capital (DMC expected some capital would have
been provided by licensees' payment of fees for services rendered by DMC on
their behalf and at their request), DMC was unable to execute its business plan
to provide, install and operate its digital broadcast system at locations in the
New York area. DMC intended to secure its own (national account) locations to
house the Sight & Sound units and obtain its own (national account) advertisers.
A large number of Sight & Sound locations were needed to attract advertisers.
Because neither DMC nor the licensees had been successful in securing locations
to house the Sight & Sound units or in obtaining advertising contracts, Crammer
Road did not perceive that it had an opportunity to exploit the licenses in a
viable business venture without a large infusion of cash. 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 and a
director of NCT).
The entities that contributed licenses to Crammer Road and the controlling
persons thereof were as follows: Sovereign Partners, LP - Mr. Stephen Hicks /
Mr. Daniel Pickett; Dominion Capital Fund, Ltd. - Mr. David Sims; Canadian
Advantage Limited Partnership - Mr. Mark Valentine; Atlantis Capital Fund, Ltd.
- - Mr. David Sims. Mr. David Sims of Navigator Management Limited has voting and
dispositive control of NCT shares on behalf of Crammer Road LLC. Further, each
of the following entities are investors in Crammer Road LLC and were previously
investors in NCT: Advantage Bermuda Fund, Ltd.; Atlantis Capital Fund, Ltd.;
Canadian Advantage Limited Partnership; Dominion Capital Fund, Ltd.; and
Sovereign Partners, LP. In addition, an affiliate of the prior
93
investors in NCT has advisory roles with respect to two of the investors in
Crammer Road LLC: VMH Management Ltd. (an affiliate of Thomson Kernaghan & Co.,
Ltd.) is the advisor to Advantage Bermuda Fund, Ltd. and Canadian Advantage
Limited Partnership (these latter two funds have merged into Canadian Advantage
Limited Partnership II). Southridge Capital Management is a sub advisor to
Dominion Capital Fund, Ltd. and serves as a consultant to Atlantis Capital Fund,
Ltd. and Canadian Advantage Limited Partnership II.
As noted above, under the 2001 private equity credit agreement with Crammer
Road, we intended to 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 but
upon further negotiations, reacquired those 12,000 shares, in connection with
the 2002 exchange agreement, in exchange for our series H preferred stock. The
June 2002 exchange agreement did not supersede the April 2001 private equity
credit agreement although these agreements contemplated the same transaction. On
July 25, 2002, we entered into a new private equity credit agreement with
Crammer Road (this credit agreement did not replace the April 2001 credit
agreement because the parties had unresolved issues outstanding, as explained
below) that provides that shares of up to $50 million (the maximum commitment
amount) of our common stock may be sold to Crammer Road pursuant to put notices
delivered by the company to Crammer Road. The July 2002 credit agreement
requires us to put at least $5 million (the minimum commitment amount) of our
common stock, in exchange for cash, at a discount to market of 10%. Upon our
puts of shares of our common stock under this equity credit line, the existing
holders of our common stock will suffer immediate dilution of their shares. In
conjunction with the execution of the July 2002 credit agreement, we issued a
five-year warrant to Crammer Road for 1,000,000 shares of our common stock
exercisable at $0.07375 per share. We are obligated to register for resale
shares of our common stock for the warrant and the July 2002 credit agreement in
an amount no less than 112% of the maximum commitment amount. Moreover, if we
fail to issue shares for the minimum commitment amount during the commitment
period (which terminates 24 months after effectiveness of a resale registration
statement relating to the shares or earlier as described in the agreement), we
must pay Crammer Road an amount equal to the product of (i) the minimum
commitment amount, less the aggregate shares of our common stock actually
delivered to Crammer Road under the equity credit line and (ii) the 10% discount
(a maximum "penalty" of $500,000 calculated as $5.0 million times 10%). This
penalty provision was as negotiated and agreed to by the parties.
Crammer Road did not immediately release NCT from its obligations under the
April 2001 private equity credit agreement and disagreed with NCT about what was
required of NCT under a penalty provision in the April 2001 agreement. In
September 2002, Crammer Road brought an action against us for claims arising out
of the April 12, 2001 private equity credit agreement, a registration rights
agreement relating thereto, an exchange agreement, a registration rights
agreement relating thereto, two promissory notes and an additional side letter
agreement. On October 30, 2002, NCT and Crammer Road executed a settlement
agreement calling for dismissal of all claims of Crammer Road in the action or
otherwise arising out of the April 12, 2001 agreements in consideration of the
issuance by NCT to Crammer Road of 68 million shares of its common stock
(approximately $5.4 million calculated at the last sale price on October 30,
2002). On December 11, 2002, the court approved the settlement agreement. On
December 17, 2002, we issued Crammer Road 40 million of the 68 million shares.
The other 28 million shares were issuable on 65 days' demand by Crammer Road (as
agreed by the parties, so that Crammer Road would not exceed its contractual
restriction of holding no more than 9.99% of NCT common stock at any point in
time). On May 8, 2003, we issued Crammer Road the other 28 million shares of our
common stock. Issuance of these 68 million shares to Crammer Road resolved all
issues in dispute with Crammer Road pertaining to the 2001 agreement.
Prior to the issuance of the 68 million settlement shares to Crammer Road,
NCT had issued an aggregate of 22.2 million shares of its common stock to
Crammer Road. Those shares were not registered and were not immediately tradable
by Crammer Road. Those issuances were in connection with:
o a $500,000 put to Crammer Road under the September 2000 private equity
credit line (2.8 million shares);
o the purchase of 2,000 shares of common stock of DMC NY (13.3 million
shares); and
o the exchange of a note issued on April 12, 2001 by NCT Video Displays,
Inc., a wholly owned subsidiary of NCT (6.0 million shares).
94
Vidikron of America, Inc.
On September 29, 2000, NCT and Distributed Media Corporation signed
separate agreements to license various microbroadcasting technologies to
Vidikron of America, Inc. for an aggregate of $2 million. Vidikron is a
manufacturer of high-end home theater equipment. Vidikron's intention was to
develop commercial video applications using the technology it licensed from NCT
and DMC. We recognized an aggregate of $2 million in technology license revenue
in fiscal 2000 attributable to Vidikron. We used $1 million of the proceeds from
Vidikron for working capital and general corporate purposes and the other $1
million to acquire 1,000 shares of common stock of DMC NY in 2001. We
constructively received $2 million from Vidikron in April 2001, comprised of $1
million cash and $1 million paid into an escrow account on our behalf which we
used to acquire 1,000 shares of DMC NY. An escrow account was established with
the seller's counsel as a matter of convenience in funding our purchase of 1,000
shares of DMC NY common stock. Crammer Road owned such shares of DMC NY. Crammer
Road's sole corporate director is Navigator Management Ltd. The sole director of
Navigator Management is David Sims. Vidikron's majority shareholder is Markland
LLC. Markland's sole corporate director is also Navigator Management Ltd.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed or accrued by NCT
for the audit and other services provided by Eisner LLP for the years ended
December 31, 2002 and 2003.
Years Ended December 31,
-------------------------------
2002 2003
-------------- --------------
Audit Fees (a) $ 167,000 $ 177,000
Audit-Related Fees (b) 100,000 95,000
Tax Fees (c) 100,000 65,000
All Other Fees (d)
- -
-------------- --------------
Total $ 367,000 $ 337,000
============== ==============
Footnotes:
- ----------
(a) Represents fees billed and accrued for professional services rendered in
connection with the annual audit and quarterly review of the financial
statements included in our annual reports on Form 10-K and quarterly
reports on Form 10-Q.
(b) Represents fees billed for professional services rendered in connection
with our filing of registration statements on Form S-1 with the SEC.
(c) Represents fees billed for professional services rendered in conjunction
with federal and state tax return preparation and other tax matters.
(d) Represents fees for professional services other than those reported above.
The audit committee specifically pre-approved Eisner LLP's fees for the
company's 2002 and 2003 audits.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Item 15(a)(1) Financial Statements.
The following financial statements are filed as part of this Annual Report on
Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2002 and December 31, 2003
95
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss for the years ended December 31, 2001, 2002 and 2003
Consolidated Statements of Stockholders' Equity (Capital Deficit) for the years
ended December 31, 2001, 2002 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2002 and 2003
Notes to the Consolidated Financial Statements
Item 15(a)(2) Financial Statement Schedules.
Independent Auditors' Report on 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 15(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 15(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of 2003.
96
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, on April 8, 2004.
NCT Group, Inc.
---------------
(Registrant)
By: /s/ Michael J. Parrella
------------------------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
By: /s/ Cy E. Hammond
------------------------------------
Cy E. Hammond
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------------------------------------------------------------------------------
Chief Executive Officer and
/s/ Michael J. Parrella Chairman of the Board of Directors April 8, 2004
- ---------------------------
Michael J. Parrella
/s/ Irene Lebovics President and Director April 8, 2004
- ---------------------------
Irene Lebovics
/s/ John J. McCloy Director April 8, 2004
- ---------------------------
John J. McCloy II
/s/ Samuel A. Oolie Director April 8, 2004
- ---------------------------
Samuel A. Oolie
Senior Vice President, Chief
/s/ Cy E. Hammond Financial Officer and Director April 8, 2004
- ---------------------------
Cy E. Hammond
97
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENT INDEX
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2002 and 2003 F-2
Consolidated Statements of Operations and Consolidated Statements of F-3
Comprehensive Loss for the years F-3 ended December 31, 2001, 2002 and 2003
Consolidated Statements of Stockholders' Equity (Capital Deficit) for the years F-4
ended December 31, 2001, 2002 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2001, F-5
2002 and 2003
Notes to the Consolidated Financial Statements F-6
Independent Auditors' Report on Schedule II F-58
Schedule II F-59
98
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
NCT Group, Inc.
We have audited the accompanying consolidated balance sheets of NCT Group, Inc.
and subsidiaries (the "Company") as of December 31, 2002 and 2003, 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, 2002 and 2003. 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 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 provide a
reasonable basis for our opinion.
In our opinion, 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, 2002 and 2003 and the consolidated results of
their operations and their consolidated cash flows for each of the years ended
December 31, 2001, 2002 and 2003 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 negative cash flows from operating
activities and it has incurred net losses from inception, has a working capital
deficiency, is subject to a judgment against the Company and is in default on
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 Note 3 to the consolidated financial statements, effective
January 1, 2002, the Company adopted a new method of accounting for its goodwill
and during 2003 the Company adopted a new accounting standard for its equity
instruments with characteristics of both liabilities and equity.
/s/ Eisner LLP
- ------------------
Eisner LLP
New York, New York
March 12, 2004
With respect to Note 28
March 31, 2004
F-1
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Notes 3, 11 and 12)
(In thousands of dollars, except share data)
December 31, December 31,
2002 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 806 $ 988
Investment in available-for-sale marketable securities (Note 5) 102 49
Accounts receivable, net (Note 6) 245 255
Inventories, net (Note 7) 622 509
Other current assets (includes $108 and $138, respectively, due from officers) (Note 9) 358 310
------------- -------------
Total current assets 2,133 2,111
Property and equipment, net (Note 8) 954 641
Goodwill, net (Notes 2 and 3) 7,184 7,184
Patent rights and other intangibles, net (Note 3) 1,519 1,223
Other assets (includes $31 and zero, respectively, due from officer)(Note 9) 1,779 1,616
------------- -------------
$ 13,569 $ 12,775
============= =============
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 4,648 $ 2,905
Accrued expenses (includes $1,242 and $1,128, respectively, related parties) (Note 10) 16,916 13,799
Notes payable (Note 11) 3,540 3,403
Related party convertible notes (due to a stockholder) (Notes 12 and 21) 14,206 28,650
Current maturities of convertible notes (Note 12) 4,254 3,438
Deferred revenue (Note 13) 2,877 2,763
Shares of subsidiary subject to exchange into a variable number of shares (Note 14) - 742
Other current liabilities (Note 15) 7,101 7,227
------------- -------------
Total current liabilities 53,542 62,927
------------- -------------
Long-term liabilities:
Deferred revenue (Note 13) 2,675 535
Convertible notes (Note 12) 779 675
Other liabilities (Note 15) 1,557 1,536
------------- -------------
Total long-term liabilities 5,011 2,746
------------- -------------
Commitments and contingencies (Note 24)
Minority interest in consolidated subsidiaries 8,689 8,313
------------- -------------
Capital deficit (Note 16):
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Convertible series H preferred stock, issued and outstanding, 1,800 and 1,725
shares, respectively (redemption amount $18,900,000 and $20,700,000, respectively)
(liquidation amount $18,376,767 and $18,300,822, respectively) 18,377 18,301
Common stock, $.01 par value, authorized 645,000,000 shares:
issued and outstanding, 483,474,345 and 641,970,392 shares, respectively 4,835 6,420
Additional paid-in capital 180,899 205,102
Accumulated other comprehensive income (loss) (516) (1,170)
Accumulated deficit (259,564) (289,864)
Shares payable, 29,248,170 and 3,029,608 shares, respectively 2,296 -
------------- -------------
Total capital deficit (53,673) (61,211)
------------- -------------
$ 13,569 $ 12,775
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Note 3)
(In thousands of dollars, except per share amounts)
For the Years Ended December 31,
---------------------------------------------------
REVENUE: 2001 2002 2003
--------------- -------------- --------------
Technology licensing fees and royalties $ 5,633 $ 4,493 $ 3,013
Product sales, net 4,568 2,697 1,708
Advertising 279 105 88
Engineering and development services 132 24 49
--------------- -------------- --------------
Total revenue 10,612 7,319 4,858
--------------- -------------- --------------
COSTS, EXPENSES AND OTHER INCOME:
Cost of product sales 3,340 1,279 787
Cost of advertising 332 15 14
Cost of engineering and development services 2 8 53
Selling, general and administrative (includes zero, $4,226, $8,514
related party consulting expenses, respectively)(Note 21) 18,734 14,773 17,511
Research and development 5,966 4,711 3,684
Provision for doubtful accounts 249 77 8
Impairment of goodwill, net (Notes 3 and 16) 14,114 300 -
Impairment of other intangibles (Note 3) - 2,116 -
Write downs of investment and repurchased licenses, net (includes $14,000,
$9,199 and zero of related party expenses, respectively) (Notes 2 and 11) 20,778 9,199 -
Costs of exiting activities (Note 19) 1,886 145 -
Other (income) expense, net (Note 18) (937) (321) (244)
--------------- -------------- --------------
Total operating costs, expenses and other income 64,464 32,302 21,813
Non-operating items:
Other (income) expense, net (includes related party expenses of $2,106,
$3,863 and $2,103, respectively) (Notes 18 and 21) 16,099 7,411 (943)
Interest expense (includes related party expenses of $1,864,
$6,284 and $12,397, respectively) 6,170 7,725 14,324
Interest income (43) (14) (36)
--------------- -------------- --------------
Total costs and expenses 86,690 47,424 35,158
--------------- -------------- --------------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (76,078) (40,105) (30,300)
Cumulative effect of change in accounting principle (Note 5) (1,582) - -
--------------- -------------- --------------
NET LOSS $ (77,660) $ (40,105) $ (30,300)
Less: Beneficial conversion features (Notes 12 and 16) 392 46 -
Preferred stock dividends (Note 16) 969 2,817 2,948
--------------- -------------- --------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (79,021) $ (42,968) $ (33,248)
=============== ============== ==============
Loss per share attributable to common stockholders:
Loss attributable to common stockholders before cumulative
effect of change in accounting principle $ (0.20) $ (0.10) $ (0.06)
Cumulative effect of change in accounting principle (0.01) - -
--------------- -------------- --------------
Basic and diluted $ (0.21) $ (0.10) $ (0.06)
=============== ============== ==============
Weighted average common shares outstanding -
Basic and diluted 377,084 446,423 563,543
=============== ============== ==============
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Note 3)
(In thousands of dollars)
For the Years Ended December 31,
---------------------------------------------------
2001 2002 2003
--------------- -------------- --------------
NET LOSS $ (77,660) $ (40,105) $ (30,300)
Other comprehensive income (loss):
Currency translation adjustment (8) (566) (601)
Adjustment of unrealized gain or loss / (unrealized loss) on
available-for-sale marketable securities 3,379 - (53)
--------------- -------------- --------------
COMPREHENSIVE LOSS $ (74,289) $ (40,671) $ (30,954)
=============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) (Note 3)
(In thousands of dollars and shares)
Convertible Preferred Stock
-------------------------------------
Series G Series H Common Stock
----------------- ----------------- ----------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------- -------- --------
Balance at December 31, 2000 1 $ 574 - $ - 334,150 $ 3,341
Sale of common stock - - - - 2,000 20
Sale of preferred stock - - - - - -
Conversion of preferred stock (1) (582) - - 7,218 72
Dividend to preferred shareholders - 8 - - - -
Exchange of series A preferred stock in subsidiary - - - - 2,976 30
Dividend and amortization of discount on beneficial conversion
price to subsidiary preferred and common shareholders - - - - - -
Exchange of subsidiary common stock for 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 features on convertible debt - - - - - -
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
Sale of preferred stock, net - - 2 18,000 - -
Dividend to preferred shareholders - - - 377 - -
Charges for the non-registration of the underlying shares of NCT
to subsidiary preferred shareholders - - - - - -
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred shareholders - - - - - -
Exchange of subsidiary common stock for common stock - - - - 6,073 61
Conversion of convertible debt - - - - 5,611 56
Exchange of subsidiary convertible debt for common stock - - - - 2,599 26
Shares issued for settlement obligations/prepayments - - - - 46,438 465
Shares payable for settlement obligations - - - - - -
Retirement of treasury stock - - - - (6,078) (61)
Warrants issued in conjunction with convertible debt
and related rights - - - - - -
Beneficial conversion feature on convertible debt - - - - - -
Net loss - - - - - -
Currency translation adjustment - - - - - -
Compensatory stock options and warrants - - - - - -
Expenses related to prior sale of stock - - - - - -
------ ------ ------ ------- -------- --------
Balance at December 31, 2002 - $ - 2 $18,377 483,474 $ 4,835
Conversion of preferred stock - - - (785) 23,058 231
Dividend to preferred shareholders - - - 709 - -
Charges for the non-registration of the underlying shares of NCT
to subsidiary preferred shareholders - - - - - -
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred shareholders - - - - - -
Reversal of redemption adjustment on subsidiary preferred - - - - - -
Exchange of subsidiary convertible debt for common stock - - - - 42,093 421
Shares issued for settlement obligations/prepayments - - - - 93,345 933
Warrants issued in conjunction with convertible debt
and related rights - - - - - -
Beneficial conversion feature on convertible debt - - - - - -
Net loss - - - - - -
Currency translation adjustment - - - - - -
Valuation of available-for-sale marketable securities - - - - - -
Compensatory stock options and warrants - - - - - -
Adjustment of monetary value on subsidiary shares upon
adoption of SFAS 150 - - - - - -
Expenses related to prior sale of stock - - - - - -
------ ------ ------ ------- -------- --------
Balance at December 31, 2003 - $ - 2 $18,301 641,970 $ 6,420
====== ====== ====== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
====================================================================================================================================
Accumulated
Additional Accumu- Other
Paid-in lated Comprehensive Shares
Capital Deficit Income/(Loss) Payable
----------- ---------- ------------- -----------
Balance at December 31, 2000 $ 154,838 $ (141,799) $ (3,321) $ (213)
Sale of common stock 166 - - -
Sale of preferred stock - - - -
Conversion of preferred stock 510 - - -
Dividend to preferred shareholders (8) - - -
Exchange of series A preferred stock in subsidiary 267 - - -
Dividend and amortization of discount on beneficial conversion
price to subsidiary preferred and common shareholders (1,353) - - -
Exchange of subsidiary common stock for 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 - - 213
Liability for make up of value on shares issued to ITC (610) - - -
Warrants issued in conjunction with convertible debt 747 - - -
Beneficial conversion features on convertible debt 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 $ -
Sale of preferred stock, net 5,309 - - -
Dividend to preferred shareholders (377) - - -
Charges for the non-registration of the underlying shares of NCT
to subsidiary preferred shareholders (2,086) - - -
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred shareholders (400) - - -
Exchange of subsidiary common stock for common stock 409 - - -
Conversion of convertible debt 348 - - -
Exchange of subsidiary convertible debt for common stock 193 - - -
Shares issued for settlement obligations/prepayments 3,260 - - -
Shares payable for settlement obligations - - - 2,296
Retirement of treasury stock (2,902) - - -
Warrants issued in conjunction with convertible debt
and related rights 4,492 - - -
Beneficial conversion feature on convertible debt 3,422 - - -
Net loss - (40,105) - -
Currency translation adjustment - - (566) -
Compensatory stock options and warrants 4,747 - - -
Expenses related to prior sale of stock (137) - - -
----------- ---------- ------------- -----------
Balance at December 31, 2002 $ 180,899 $ (259,564) $ (516) $ 2,296
Conversion of preferred stock 554 - - -
Dividend to preferred shareholders (709) - - -
Charges for the non-registration of the underlying shares of NCT
to subsidiary preferred shareholders (1,896) - - -
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred shareholders (343) - - -
Reversal of redemption adjustment on subsidiary preferred 125 - - -
Exchange of subsidiary convertible debt for common stock 1,333 - - -
Shares issued for settlement obligations/prepayments 5,488 - - (2,296)
Warrants issued in conjunction with convertible debt
and related rights 5,415 - - -
Beneficial conversion feature on convertible debt 5,959 - - -
Net loss - (30,300) - -
Currency translation adjustment - - (601) -
Valuation of available-for-sale marketable securities - - (53) -
Compensatory stock options and warrants 8,429 - - -
Adjustment of monetary value on subsidiary shares upon
adoption of SFAS 150 (138) - - -
Expenses related to prior sale of stock (14) - - -
----------- ---------- ------------- -----------
Balance at December 31, 2003 $ 205,102 $ (289,864) $ (1,170) $ -
=========== ========== ============= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
====================================================================================================================================
Unearned
Portion of Expenses
Compen- to be Paid
satory with Treasury Stock
Option/ Common --------------------
Warrant Stock Shares Amount Total
----------- ----------- ------- --------- -----------
Balance at December 31, 2000 $ (37) $ (562) 6,078 $ (2,963) $ 9,858
Sale of common stock - - - - 186
Sale of preferred stock - - - - -
Conversion of preferred stock - - - - -
Dividend to preferred shareholders - - - - -
Exchange of series A preferred stock in subsidiary - - - - 297
Dividend and amortization of discount on beneficial conversion
price to subsidiary preferred and common shareholders - - - - (1,353)
Exchange of subsidiary common stock for 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 - - 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 features on convertible debt - - - - 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 37 - - - 474
----------- ----------- ------- --------- -----------
Balance at December 31, 2001 $ - $ - 6,078 $ (2,963) $ (53,463)
Sale of preferred stock, net - - - - 23,309
Dividend to preferred shareholders - - - - -
Charges for the non-registration of the underlying shares of NCT
to subsidiary preferred shareholders - - - - (2,086)
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred shareholders - - - - (400)
Exchange of subsidiary common stock for common stock - - - - 470
Conversion of convertible debt - - - - 404
Exchange of subsidiary convertible debt for common stock - - - - 219
Shares issued for settlement obligations/prepayments - - - - 3,725
Shares payable for settlement obligations - - - - 2,296
Retirement of treasury stock - - (6,078) 2,963 -
Warrants issued in conjunction with convertible debt
and related rights - - - - 4,492
Beneficial conversion feature on convertible debt - - - - 3,422
Net loss - - - - (40,105)
Currency translation adjustment - - - - (566)
Compensatory stock options and warrants - - - - 4,747
Expenses related to prior sale of stock - - - - (137)
----------- ----------- ------- --------- -----------
Balance at December 31, 2002 $ - $ - - $ - $ (53,673)
Conversion of preferred stock - - - - -
Dividend to preferred shareholders - - - - -
Charges for the non-registration of the underlying shares of NCT
to subsidiary preferred shareholders - - - - (1,896)
Dividend and amortization of discounts on beneficial conversion
price to subsidiary preferred shareholders - - - - (343)
Reversal of redemption adjustment on subsidiary preferred - - - - 125
Exchange of subsidiary convertible debt for common stock - - - - 1,754
Shares issued for settlement obligations/prepayments - - - - 4,125
Warrants issued in conjunction with convertible debt
and related rights - - - - 5,415
Beneficial conversion feature on convertible debt - - - - 5,959
Net loss - - - - (30,300)
Currency translation adjustment - - - - (601)
Valuation of available-for-sale marketable securities - - - - (53)
Compensatory stock options and warrants - - - - 8,429
Adjustment of monetary value on subsidiary shares upon
adoption of SFAS 150 - - - - (138)
Expenses related to prior sale of stock - - - - (14)
----------- ----------- ------- --------- -----------
Balance at December 31, 2003 $ - $ - - $ - $ (61,211)
=========== =========== ======= ========= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
====================================================================================================================================
F-4
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 3 and 20)
(In thousands of dollars)
For the Years Ended December 31,
------------------------------------------
2001 2002 2003
----------- ----------- --------------
Cash flows from operating activities:
Net loss $ (77,660) $ (40,105) $ (30,300)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,977 1,305 724
Common stock, warrants and options issued as consideration for:
Compensation 37 169 -
Operating expenses (includes zero, $4,081 and $8,349, respectively,related
party consulting expenses) 637 4,792 8,429
Provision for inventory 691 76 (122)
Provision for doubtful accounts and uncollectible amounts 1,249 239 21
Loss on disposition of fixed assets 30 5 33
Gain on settlement of lawsuit - - (4,888)
Finance costs associated with non-registration of common shares 2,318 5,529 2,207
Preferred stock dividends as interest - - 11
Default penalty on notes (related party) 1,208 441 2,104
Amortization of discounts on notes (includes $387, $2,700 and $5,715,
respectively, with related parties) 3,348 2,888 6,348
Amortization of beneficial conversion feature on convertible notes (includes
$845, $2,156 and $4,740, respectively, with related parties) (Note 12) 946 2,305 4,900
Related party convertible note induced conversion expense 190 - -
Write downs of investment and repurchased licenses, net (includes $14,000, $9,199
and zero of related party expenses, respectively) (Notes 2, 11 and 18) 20,778 9,199 -
Impairment of goodwill, net (Note 3) 14,114 300 -
Impairment of other intangibles (Note 3) - 2,116 -
Issuance of convertible note and preferred stock of subsidiary for placement fees 656 - 40
Costs of exiting activities (Note 19) 1,886 145 -
Realized loss on available-for-sale securities (Note 5) 7,036 765 -
Realized loss on fair value of warrant (Note 5) 1,355 151 1
Cumulative effect of change in accounting principle (Note 5) 1,582 - -
Loss on sale of NXT ordinary shares (Note 4) 2,301 - -
Settlement of debt (67) - (231)
Minority interest loss (473) (458) -
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 2,432 132 (31)
Decrease in inventories 109 331 235
(Increase) decrease in other assets (680) 971 210
Increase in accounts payable and accrued expenses 4,760 3,164 2,131
Decrease in other liabilities and deferred revenue (3,784) (4,140) (2,154)
----------- ----------- --------------
Net cash used in operating activities $ (12,024) $ (9,680) $ (10,332)
----------- ----------- --------------
Cash flows from investing activities:
Capital expenditures $ (1,377) $ (3) $ (150)
Net cash paid for Artera Group International Limited acquisition (100) - -
Payment for shares of DMC New York (repurchased licenses) (1,000) - -
Proceeds from sale of equipment 11 11 -
Proceeds from sale of NXT ordinary shares 6,858 - -
----------- ----------- --------------
Net cash provided by (used in) investing activities $ 4,392 $ 8 $ (150)
----------- ----------- --------------
Cash flows from financing activities:
Proceeds from:
Issuance of related party convertible notes, net (Notes 12 and 21) $ 2,500 $ 9,590 $ 10,440
Issuance of convertible notes and notes payable, net (Notes 11 and 12) 3,195 1,019 590
Sale of subsidiary preferred stock, net 418 110 -
Sale of excess exchange shares 164 - -
Sale of common stock 186 - -
Collection of subscription receivable 213 - -
Exercise of stock options and warrants, net 800 - -
Repayment of notes (436) (497) (322)
----------- ----------- --------------
Net cash provided by financing activities $ 7,040 $ 10,222 $ 10,708
----------- ----------- --------------
Effect of exchange rate changes on cash $ (8) $ (311) $ (44)
----------- ----------- --------------
Net increase (decrease) in cash and cash equivalents (600) 239 182
Cash and cash equivalents - beginning of period 1,167 567 806
----------- ----------- --------------
Cash and cash equivalents - end of period $ 567 $ 806 $ 988
=========== =========== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
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," "we," "our" or "us") is a technology developer with a
portfolio of patents and related rights and other non-patented technology. Our
technologies allow us to develop products, services and applications that we
market to various industries. NCT operates in three segments: communications,
media and technology. Product offerings of our communications segment include:
Artera Turbo (TM) software-based, high-speed, data communication and network
optimization service; an aircraft cabin quieting system; ClearSpeech(R)
microphones, speakers, and a suite of noise and echo cancellation algorithms;
and our telephony communications, consumer and industrial headsets. Product
offerings of our media segment include Sight & Sound(R) place-based audio and
billboard media and Gekko(TM) flat speakers, prints and subwoofers. Our
technology segment provides Java(TM)-language based microprocessor cores.
NCT has experienced substantial losses from operations since its inception,
which cumulatively amounted to $289.9 million through December 31, 2003. Cash
and cash equivalents amounted to $1.0 million at December 31, 2003. A working
capital deficit of $60.8 million exists at December 31, 2003. NCT is in default
of $3.2 million of its notes payable and $3.5 million of its convertible notes
at December 31, 2003 and is subject to a judgment of $2.1 million. 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 revenue does not generate sufficient cash, management believes
additional working capital financing must be obtained. We are attempting to
raise additional capital through debt and equity financings in order to fund
operations (see Note 28). 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 or to pay
awards or judgments against the company 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 16).
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, 2003 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:
DMC New York, Inc.
We acquired a 25% interest in DMC New York, Inc. ("DMC NY") on April 12,
2001 for $4.0 million. The consideration consisted of a $1.0 million convertible
note due December 31, 2001 issued to Crammer Road, $1.0 million cash and $2.0
million of our common stock (13.3 million shares). We had accrued $14.0 million
for the remaining 75% interest in the second quarter of 2001 based upon our
agreement to acquire such interest. Our consolidated statement of operations for
the year ended December 31, 2001 includes an aggregate charge of $18.0 million
for this acquisition classified as write downs of investment and repurchased
licenses, net. In June 2002, we acquired the remaining 12,000 shares (75%) of
the outstanding capital stock of DMC NY in exchange for 1,800 shares of our
series H preferred stock and $0.1 million net proceeds from Crammer Road LLC
(see Note 16). DMC NY was the owner of 16 licenses previously purchased from our
subsidiary, Distributed Media Corporation ("DMC") in 1999. The purchase of the
remaining 75% of DMC NY has been valued at the estimated fair value of the NCT
common stock underlying our series H preferred stock of $23.2 million ($18
million stated value and approximately $5.2 million representing the additional
fair value resulting from the conversion rate of 75% of the
F-6
fair market value, as defined, of NCT common stock into which the series H
preferred stock is convertible). Because DMC NY has not commenced operations, we
recorded an aggregate charge of $9.2 million for this acquisition for the year
ended December 31, 2002 classified on our consolidated statement of operations
as write downs of investment and repurchased licenses, net. DMC NY has not
recorded any revenue and apart from its New York metropolitan area license
rights, has no other assets or operations. The aggregate cost for our
acquisition of these 16,000 shares (25% in 2001 and 75% in 2002) was $27.2
million. The purchase price was arrived at in various negotiations between NCT
and Crammer Road. The acquisition resulted in our control of the number one
designated market area. We did not obtain an independent valuation. The
company's acquisition of DMC NY is summarized as follows:
DMC New York
Date Consideration Shares Acquired % Interest Acquisition Price
---- ------------- --------------- ---------- -----------------
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 common stock 2,000 12.50% $2.0 million
6/24/02 1,800 shares series H preferred stock 12,000 75.00% $23.2 million
Artera Group International Limited
Our wholly-owned subsidiary, Artera Group, Inc., entered into an agreement
with Teltran International, Inc. ("Teltran") 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 16).
This preferred stock was valued based upon 6% convertible notes issued in
January 2001 (see Note 12). The acquisition was accounted for as a purchase,
resulting in initial goodwill of approximately $6.2 million that was
subsequently written off (see Note 3). On June 29, 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 that 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 underperforming operations and reduce the number of
employees. On March 21, 2002, the Board of Directors of Artera Group
International Limited determined to cease operations (see Note 19).
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 2001 and 2002, pro forma adjustments include additional amortization
expense of $0.1 million and zero, respectively. The pro forma results
F-7
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, 2001 and January 1,
2002.
(Unaudited; in thousands of dollars, except per share data)
Years Ended December 31,
---------------------------------
2001 (a,b) 2002 (b)
---------- ----------
Net revenue $ 10,859 $ 7,319
Net loss (78,025) (40,105)
Loss attributable to common stockholders (79,386) (42,968)
Loss per common share - basic and diluted $ (0.21) $ (0.10)
Footnotes:
- ----------
(a) Includes Artera Group International Limited acquisition.
(b) Includes DMC NY acquisition that did not have any effect on the pro forma
results.
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. We include losses from our
majority-owned subsidiaries in our consolidated statements of operations
exclusive of amounts attributable to minority shareholders' common equity
interests only up to the basis of such minority shareholders' interests. Losses
in excess of that amount are borne by NCT. Such amounts from Pro Tech
Communications, Inc. ("Pro Tech"), our 82% owned subsidiary, borne by NCT for
the years ended December 31, 2002 and 2003 amounted to $2.0 million and $0.2
million, respectively. Future earnings of our majority-owned subsidiaries which
would otherwise be attributable to minority shareholders' interests will be
allocated to minority shareholders only after future earnings are sufficient to
recover the cumulative losses absorbed by NCT in excess of NCT's allocable
percentage ($2.2 million at December 31, 2003). 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 and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and revenue and
expenses during the period reported. These estimates include assessing the
collectibility of accounts receivable, the use and recoverability of inventory,
useful lives for depreciation and amortization periods of tangible and
intangible assets and the assumptions underlying projections of cash flows
regarding testing for impairment of long-lived assets. The markets for the
company's products and services are characterized by intense competition, rapid
technological development, evolving standards, all of which could impact the
future realizability of the company's assets. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the period
that they are determined to be necessary. Actual results could differ from those
estimates.
Reclassifications:
Some amounts in prior years' 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.
F-8
Revenue Recognition:
Revenue 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, revenue 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. No revenue was
recognized under the percentage of completion method for the years ended
December 31, 2001, 2002 and 2003.
For technology licensing fees paid by joint venturers, co-venturers,
strategic partners or other licensees which are fixed and determinable, accepted
by the customer and nonrefundable, revenue is recognized upon execution of the
license agreement unless it is subject to completion of any performance criteria
specified within the agreement, in which case it is deferred until such
performance criteria is met. Royalties are frequently required pursuant to
license agreements or may be the subject of separately executed royalty
agreements. Revenue from royalties is recognized ratably over the royalty period
based upon periodic reports submitted by the royalty obligor or based on minimum
royalty requirements.
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). The company reviews declines in value of its portfolio when
general market conditions change or specific information pertaining to an
industry or individual company becomes available. The factors considered in
assessing whether a decline is other than temporary include: our evaluation of
the length of the time and the extent to which the market value of the industry
has been depressed or the market value of the security has been less than cost;
evaluation of financial condition and near-term prospects of the business,
including cash sufficiency and new product developments; assessment of
observable marketplace-determined values and trends; and our intent and ability
to retain our investment in the business for a sufficient period of time to
allow for any anticipated recovery in market value. At December 31, 2002 and
2003, all of the company's marketable securities have been deemed
available-for-sale securities.
Derivative Instruments:
Derivatives are 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 Statement of Financial Accounting Standards ("SFAS") No. 138,
"Accounting for Certain Derivative Instruments - an Amendment of SFAS No. 133,"
effective January 1, 2001, resulted in a $1.6 million charge that is reflected
as cumulative effect of change in accounting principle on the consolidated
statements of operations for the year ended December 31, 2001. For the years
ended December 31, 2001, 2002 and 2003, fair value charges of $1.4 million, $0.2
million and less than $0.1 million, respectively, are included in other (income)
expense, net (see Note 18). As of December 31, 2003, the company does not own
any derivative instruments.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method for the operations of Pro Tech and
is determined using the average cost method for all other inventories. NCT
assesses the realizability of inventories by periodically conducting a physical
inventory and reviewing the movement of inventory to determine the value of
items that 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, 2002 and 2003, the company's inventory reserves were $0.4 million and $0.3
million, respectively (see Note 7).
F-9
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 (see Note 8).
Deferred Charges:
Deferred charges, included on the consolidated balance sheets 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 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 2001, 2002 and 2003, the company
amortized approximately $0.1 million of deferred charges and wrote off
unamortized charges relating to removals of approximately zero, $0.1 million and
less than $0.1 million, respectively, included in research and development
expenses on the consolidated statements of operations. At December 31, 2002 and
2003, deferred charges were $0.4 million and $0.2 million, respectively.
Software Costs:
It is our policy to capitalize costs in connection with the internal
development or purchase of computer software products to be sold, leased or
otherwise marketed after technological feasibility has been established. When
software costs are capitalized, they are included in property and equipment and
amortized over the products estimated useful life. During the years ended
December 31, 2002 and 2003, no software costs were capitalized.
Goodwill and Intangible Assets with Indefinite Useful Lives:
The excess of the consideration paid over the fair value of net assets
(including identifiable intangibles) 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 held by minority shareholders of a
subsidiary, except where such accounting is, in substance, the purchase of
licenses previously sold to such minority shareholders or their affiliates.
NCT adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective
January 1, 2002. Under SFAS No. 142, we ceased amortizing goodwill and
intangible assets with indefinite useful lives and test them for impairment at
least annually and whenever there is an impairment indicator. All acquired
goodwill and intangible assets with indefinite useful lives were assigned to
reporting units (an operating segment or a component of an operating segment
that constitutes a business for which discrete financial information is
available) for purposes of impairment testing and segment reporting. Our
reporting units with goodwill consist of NCT Hearing and Midcore Software,
Inc./Artera Group, Inc., both of which are within the communications operating
segment and Advancel Logic Corporation within the technology operating segment.
We have no intangible assets with indefinite useful lives. The carrying value of
our goodwill by operating segment follows:
(In thousands of dollars)
Communications Media Technology
Segment Segment Segment Total
--------------- ----------- ------------- ------------
Balance as of
January 1, 2003 $ 6,845 $ - $ 339 $ 7,184
Goodwill acquired - - - -
Impairment losses - - - -
--------------- ----------- ------------- ------------
Balance as of
December 31, 2003 $ 6,845 $ - $ 339 $ 7,184
=============== =========== ============= ============
Goodwill impairment is evaluated at the reporting unit level, comparing the
carrying value of the reporting unit with its estimated fair value. If the fair
value exceeds its carrying value, no impairment is recognized. If the carrying
value of the reporting unit exceeds its fair value, then the carrying value of
the goodwill is compared to the implied fair value of the goodwill. If the
implied fair value of the goodwill exceeds its carrying value, no impairment is
recognized. If the carrying value of the goodwill exceeds its implied fair value
then impairment is recognized to the extent of the excess. We recognized no
impairment upon adoption of SFAS No. 142 with respect to our goodwill. We
recognized an impairment charge from goodwill of $0.3 million during the year
ended
F-10
December 31, 2002 in connection with the step acquisition of shares of NCT Audio
(see Note 16). Based on our evaluation, as of December 31, 2003, we determined
no impairment exists. If SFAS No. 142 had been in effect at January 1, 2001, the
adjusted net loss attributable to common stockholders and loss per share would
have been as follows:
(In thousands of dollars, except per share amount)
For the Years Ended December 31,
------------------------------------------
2001 2002 2003
------------ ----------- ------------
Loss attributable to common stockholders before
cumulative effect of change in accounting principle $ (77,439) $ (42,968) $ (33,248)
Cumulative effect of change in accounting principle (1,582) - -
Add back: Goodwill amortization 1,691 - -
------------ ----------- ------------
Adjusted net loss attributable to common stockholders $ (77,330) $ (42,968) $ (33,248)
============ =========== ============
Basic and diluted loss per share
Loss per share attributable to common stockholders before $ (0.20) $ (0.10) $ (0.06)
cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle (0.01) - -
Goodwill amortization 0.01 - -
------------ ----------- ------------
Adjusted loss per share $ (0.20) $ (0.10) $ (0.06)
============ =========== ============
Prior to the adoption of SFAS No. 142 on January 1, 2002, goodwill was
mortized using the straight-line method over the estimated period of benefit
(ranging from five to twenty years). Goodwill amortization expense was $1.7
million for 2001. We also evaluated the carrying value and period of
amortization of our goodwill at each balance sheet date. The factors used in the
evaluation included: 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 $14.1 million
(net of reduction in deferred revenue of $2.1 million) in 2001 (see Note 16). 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 that resulted in additional goodwill of $3.9 million. On December
18, 2001, the Board of Directors of Artera Group International Limited decided
to suspend underperforming operations and reduce the number of employees. As a
result, the $9.8 million carrying value of the goodwill as of that date was
considered fully impaired in accordance with 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,
Inc. ("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 No. 121.
Patent Rights and Other Intangible Assets with Finite Useful Lives:
Under the guidelines in SFAS No. 142 and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," intangible assets with finite
lives are tested for impairment whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. We are also required
to evaluate the useful lives each reporting period. We test our intangible
assets with finite useful lives for impairment by using the estimated future
cash flows directly associated with, and that are expected to arise as a direct
result of, the use of the intangible asset. We do so by projecting the future
estimated revenue and costs and comparing the resultant undiscounted cash flows
to the carrying amount of the intangible asset. If the carrying amount exceeds
the undiscounted cash flows, an impairment may be indicated. The carrying amount
is then compared to the discounted cash flows, and if there is an excess, such
amount is recorded as an impairment.
Patent rights and other intangible assets, which include 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 estimated
useful lives, ranging from one to seventeen years. Amortization expense was $0.4
million, $0.5 million and $0.3 million for 2001, 2002 and 2003, respectively.
Accumulated amortization of patent rights and other intangible
F-11
assets was $3.9 million and $4.3 million at December 31, 2002 and 2003,
respectively. The other intangibles subject to amortization are categorized
below with an estimate of the amortization expense for the next five years.
(In thousands of dollars)
December 31, 2003
-------------------------------------------
Gross Carrying Accumulated Carrying
Amount Amortization Value
-------------- ------------- ------------
Amortized intangible assets
Patents $ 4,147 $ (3,837) $ 310
Licensed technology 1,332 (419) 913
-------------- ------------- ------------
Total $ 5,479 $ (4,256) $ 1,223
============== ============= ============
Estimated amortization expense for the years ending:
- ----------------------------------------------------
December 31, 2004 $ 222
December 31, 2005 $ 191
December 31, 2006 $ 191
December 31, 2007 $ 190
December 31, 2008 $ 186
Prior to the adoption of SFAS No. 142, at each balance sheet date, NCT
evaluated the period of amortization of other intangible assets. The factors
used in evaluating the period of amortization include: current operating
results, anticipated future operating results, and any other material factors
that effect the continuity of the business. Based on our evaluation as of
December 31, 2002, we determined an impairment was present with respect to the
license granted to Pro Tech. The resulting impairment charge to Pro Tech, on its
accounting records, was $11.5 million. Upon consolidation of Pro Tech's results
of operations in our financial statements, we recorded an impairment in the
carrying value of other intangible assets with finite lives of $2.1 million
representing the minority shareholders' portion of this impairment in our
consolidated statement of operations for the year ended December 31, 2002. Based
on our evaluation as of December 31, 2003, we determined no impairment exists.
Other Assets:
Other long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the costs to sell the assets. There were no such impairments for the years ended
December 31, 2001, 2002 and 2003.
Advertising:
Advertising expenses include commissions paid to advertising
representatives and agencies and are expensed as incurred. Advertising expenses
for the years ended December 31, 2001, 2002 and 2003 were $0.5 million, $0.1
million and $0.1 million, respectively, and are included in selling, general and
administrative expenses.
Comprehensive Loss:
The company reports comprehensive loss in accordance with SFAS No. 130,
"Reporting Comprehensive Income." The provisions for SFAS No. 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 income (loss)" is included on the consolidated balance sheets as a
component of stockholders' capital deficit. Due to availability of net operating
losses and the deferred tax benefit resulting therefrom being fully reserved,
there is no tax effect associated with any component of other comprehensive
loss. Comprehensive loss is comprised of net loss and other comprehensive income
(loss). Other comprehensive income (loss) 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-12
Foreign Currency Translation:
Local currencies are generally considered the functional currency for our
foreign subsidiaries. The company translates its foreign assets and liabilities
at the exchange rates in effect at each balance sheet date. Revenue and expenses
are translated using average rates for the year. The resulting foreign currency
translation adjustments are included in accumulated other comprehensive income
(loss) as a component of stockholders' equity (capital deficit). The foreign
currency transaction gains and losses are included in the consolidated
statements of operations and were not material for the years ended December 31,
2001, 2002 and 2003. The foreign currency translation adjustment of $0.6 million
for each of the years ended December 31, 2002 and 2003 is related to our United
Kingdom operations.
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, aggregating
2,778,065,174 shares, have not been included as the effect would be antidilutive
(see Notes 12, 14 and 16). During the third quarter of 2003, NCT received
requests to exchange 6% convertible note principal aggregating $0.5 million, or
11.1 million shares; requests to exchange Artera series A preferred stock stated
value of $1.5 million, or 28.8 million shares; elections to receive royalty
payments of $1.7 million due to the founding stockholders of Midcore Software,
Inc. ("Midcore") in 34.2 million shares; and a request to fulfill the look back
provision which is valued at zero (see Note 15) associated with the Midcore
acquisition and issue 26.2 million shares of its common stock that it could not
fulfill because the requests were in excess of the number of shares of common
stock currently authorized. As such, we have included 3,029,608 (the remaining
number authorized) of the 26.2 million look back shares issuable under the
Midcore acquisition agreement in our weighted average common shares outstanding
on the accompanying consolidated statement of operations for the year ended
December 31, 2003 and in shares payable on our consolidated balance sheet at
December 31, 2003. These shares issuable under the above requests, but not
included in shares payable as described have also not been included in the
calculation of weighted average shares used in the net loss per share as such
inclusion would be anti-dilutive.
However, when preferred stock is convertible into common stock at an
effective 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 in conjunction with such
convertible securities, 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 proceeds received from the
transaction are allocated in accordance with EITF 98-05 and EITF 00-27. The
allocated 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 (see Note 16).
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 also 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. The company's preference is to collect its
receivables in cash. However, from time to time, receivables may be settled by
securities transferred to the company by the customer in lieu of cash payment.
Significant Customers:
In each of the years ended December 31, 2001, 2002 and 2003, revenue
derived from certain customers comprised more than 10% of our consolidated
revenue ("significant customers"). In 2001 and 2002, we had two significant
customers one of whom was our only significant customer in 2003. One of these
customers accounted
F-13
for $2.3 million and $1.9 million of our consolidated revenue for the years
ended December 31, 2001 and 2002, respectively. The other customer accounted for
$1.6 million, $2.1 million and $2.1 million of our consolidated revenue for the
years ended December 31, 2001, 2002 and 2003, respectively. As of December 31,
2002 and 2003, the company had no accounts receivable due from its significant
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,
2002 and 2003, 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. The fair value of notes payable approximates the
carrying value based on interest rates that are currently available to the
company for issuance of debt with similar terms and remaining maturities. The
fair value of convertible notes payable to Carole Salkind is not objectively
determinable due to the related party nature of these instruments. The face
value of convertible notes held by Carole Salkind at December 31, 2002 and 2003
was $18.1 million and $33.8 million, respectively. At December 31, 2002 and
2003, these outstanding notes were convertible into 281.8 million and 857.5
million shares, respectively, of NCT common stock with a fair value of $12.1
million and $34.3 million, respectively.
Stock-Based Compensation:
The company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," 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. Under APB No. 25, no
compensation costs are recognized if the option exercise price is equal to or
greater than the fair market price of the common stock on the date of the grant.
Under SFAS No. 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. No stock-based employee compensation cost is reflected
in our net loss attributable to common stockholders, as options granted under
our plans have an exercise price equal to or greater than the market value of
the underlying common stock on the date of grant. Had compensation costs been
determined as prescribed by SFAS No. 123, the company's net loss attributable to
common stockholders and net loss per share would have been the pro forma amounts
indicated below:
(In thousands of dollars, except per share amounts)
For the Years Ended December 31,
--------------------------------------------------------
2001 2002 2003
----------------- ----------------- -----------------
Net loss attributable to common stockholders $ (79,021) $ (42,968) $ (33,248)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (1,701) (1,696) (1,077)
----------------- ----------------- -----------------
Pro forma net loss attributable to common stockholders $ (80,722) $ (44,664) $ (34,325)
================= ================= =================
Net loss per common share (basic and diluted):
As reported $ (0.21) $ (0.10) $ (0.06)
================= ================= =================
Pro forma $ (0.21) $ (0.10) $ (0.06)
================= ================= =================
The weighted-average fair values at date of grant for options granted
during 2001, 2002 and 2003 were $0.07, $0.06 and $0.04, respectively, and were
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions:
Years ended December 31,
--------------------------------------------------------
2001 2002 2003
---- ---- ----
Expected life in years 3 3.5 3.5
Interest rate 3.27%-5.41% 2.50%-3.61% 2.25%
Volatility 100% 100% 100%
Dividend yield 0% 0% 0%
F-14
Recent Accounting Pronouncements:
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." The rescinded SFAS No. 4 had
required all gains and losses from extinguishments of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. Upon adoption of SFAS No. 145, companies are required to apply the
criteria in APB Opinion No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," in determining the
classification of gains and losses resulting from the extinguishments of debt.
We adopted this statement on January 1, 2003. The adoption of SFAS No. 145 did
not have a material impact on our results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities at their fair value
when a liability has been incurred. Under previous guidance, certain exit costs
were accrued at the date of management's commitment to an exit or disposal plan.
We adopted this statement on January 1, 2003. The adoption of SFAS No. 146 did
not have a material impact on our results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," in its entirety. Such
Interpretation elaborates on the disclosures to be made by a guarantor about its
obligations under certain guarantees issued. It also clarifies that a guarantor
is required to recognize, at the inception of certain guarantees issued or
modified after December 31, 2002, a liability for the fair value of the
obligation undertaken in issuing the guarantee. We adopted this statement on
January 1, 2003. The adoption of FIN 45 did not have a material impact on our
results of operations or financial position.
On January 17, 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." On December 24, 2003, the FASB issued FIN 46 Revised ("FIN
46R") which clarifies certain complexities of FIN 46. The primary objectives of
FIN 46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary"). This
interpretation of Accounting Research Bulletin 51 for consolidation applies to
an entity in which either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that both the primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. A company with a
variable interest in a VIE must disclose certain information. A public entity
must apply the provisions of FIN 46R no later than the end of the first
reporting period that ends after March 31, 2004. We believe the adoption of FIN
46 will not have an impact on our results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies when a
contract meets the characteristics of a derivative, clarifies when a derivative
contains a financing component and amends certain other existing pronouncements.
We adopted this statement on July 1, 2003. The adoption of SFAS No. 149 did not
have a material impact on our results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim financial
reporting period commencing after June 15, 2003. Effective July 1, 2003, we
adopted SFAS No. 150 and the effect on our consolidated balance sheet was as
follows: a $0.6 million decrease in minority interest in consolidated
subsidiaries, a $0.1 million decrease in additional paid-in capital and a $0.7
million increase in current liabilities (see Note 14).
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, 2002 and 2003, 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 to
the company in connection with joint ventures are recorded as revenue to the
extent appropriate in accordance with the company's revenue recognition policy.
Total revenue recorded by the company relating to these strategic relationships
for technology licensing fees and royalties, engineering and development
services and product sales was as follows:
(In thousands of dollars)
For the Years Ended December 31,
---------------------------------------------
2001 2002 2003
------------- ------------- --------------
New Transducers Ltd. $ 1,605 $ 2,140 $ 2,140
Oki Electric Industry Co., Ltd 219 402 366
Ultra Electronics, Ltd. 114 19 5
Infinite Technology Corporation 1,028 - -
------------- ------------- --------------
Total $ 2,966 $ 2,561 $ 2,511
============= ============= ==============
Outlined below is a summary of the nature and terms of the above strategic
relationships:
New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT plc
(formerly, Verity Group plc). On March 30, 2001, NXT plc, NXT, NCT Audio and the
company entered into several agreements terminating previous agreements from
1997 to 1999. 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, was transferred to NXT. NXT has
licensed NCT and its subsidiaries with certain NXT and all NCT-developed
intellectual property. NXT is to design a low-cost flat panel speaker for use by
DMC. A side letter with NXT was entered into on or about March 30, 2001, whereby
NCT agreed to pay NXT $0.6 million as a non-refundable design fee related to
Gekko(TM) loudspeakers. The design fee was a prepayment of royalties due under
the four-year term of this side letter. We offset the $9.2 million license fee
due NCT with the $0.6 million design fee owed to NXT resulting in $8.6 million
of deferred revenue. The deferred revenue balance is being recognized on a
straight-line basis over the specific performance period of four years (see Note
13). 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 3,850,000 shares of our common stock (see Note 16). 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 18).
Oki Electric Industry Co., Ltd. ("Oki"). In October 1997, the company and
Oki executed a license agreement. Under the terms of the agreement, which
included an up-front license fee and future per unit royalties, Oki licensed the
company's ClearSpeech(R) noise cancellation algorithm for integration into
large-scale integrated circuits for communications applications. The company has
granted Oki the right to manufacture, use and sell products incorporating the
algorithm. The company recognized $0.2 million, $0.4 million and $0.4 million in
royalty revenue in 2001, 2002 and 2003, respectively.
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 $114,000,
$19,000 and $5,000 in royalty revenue in 2001, 2002 and 2003, respectively.
F-16
Infinite Technology Corporation ("ITC"). On May 8, 2000, as amended
effective June 30, 2000, Advancel Logic Corporation ("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 would fund research and engineering development
related to microprocessor and semiconductor chips for which the company would
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 did not receive $2.5 million in proceeds from the sale
of NCT shares, NCT was 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 received $2.5 million in proceeds from the
sale of NCT shares and there were NCT shares remaining, ITC would have to return
the unsold share excess to NCT. At each of December 31, 2002 and 2003, the
shortfall based upon the sales of our common stock reported to us by ITC
amounted to $1.4 million, included in other liabilities. Although the license
agreement and the strategic alliance and technology development amendment, both
with ITC, are separate and unrelated, we determined that they should be
accounted for as a single transaction, thus, both agreements are combined for
financial reporting purposes. Prepaid research and engineering costs have been
recognized in expense as these services are performed by ITC. These costs were
billed by ITC based on the number of hours spent by ITC personnel developing
this chip during each period. In addition, the company recognized license fee
revenue in amounts to match the research and engineering expense recognized. The
strategic alliance and technology development amendment does not have a
definitive expiration date. 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 represented research and engineering performed by
ITC. For each of the years ended December 31, 2002 and 2003, the company did not
recognize license fee revenue or research and engineering expenses related to
ITC.
5. Marketable Securities:
Investment in marketable securities comprises available-for-sale securities
at fair market value. The following table sets forth the market value, carrying
value, and realized and unrealized gain (loss) of our available-for-sale
securities:
(In thousands of dollars)
(In thousands of dollars)
Cost Market Adjusted Market
Basis Realized Unrealized Value Cost Basis Unrealized Value
01/01/02 Loss Loss 12/31/02 01/01/03 Gain (Loss) 12/31/03
-------- ----------- ----------- ----------- --------- ----------- ---------
ITC $ 798 $ (689) $ (15) $ 94 $ 94 $ (56) $ 38
Teltran 84 (76) - 8 8 3 11
-------- ----------- ----------- ----------- --------- ----------- ---------
Totals $ 882 $ (765) $ (15) $ 102 $ 102 $ (53) $ 49
======== =========== =========== =========== ========= =========== =========
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. At that time, these
shares represented 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, 2003,
Teltran had not fulfilled its registration obligation. The warrant expired on
October 26, 2003. Teltran was required to pay an ongoing, per unit royalty. The
adoption of SFAS No. 138
F-17
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 years ended December 31, 2001, 2002 and
2003, the company recorded a loss of the carrying amount of this derivative of
$1.4 million, $0.2 million and less than $0.1 million, respectively (see Note
18). 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 No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
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, including
observable marketplace-determined values and trends and company specific
developments and cash viability prospects among others. For the years ended
December 31, 2001 and 2002, the company recorded impairment charges of
approximately $7.0 million and $0.8 million, respectively, representing
other-than-temporary declines in the value of marketable securities (see Note
18). At December 31, 2003, a net unrealized loss of $0.1 million is included on
the consolidated balance sheet as part of accumulated other comprehensive income
(loss).
6. Accounts Receivable:
(In thousands of dollars)
December 31,
-------------------------------
2002 2003
-------------- -------------
Technology license fees and royalties $ 268 $ 278
Joint ventures and affiliates 34 34
Other receivables 283 284
-------------- -------------
$ 585 $ 596
Allowance for doubtful accounts (340) (341)
-------------- -------------
Accounts receivable, net $ 245 $ 255
============== =============
7. Inventories:
(In thousands of dollars)
December 31,
-------------------------------
2002 2003
-------------- -------------
Finished goods $ 799 $ 588
Components 227 203
-------------- -------------
$ 1,026 $ 791
Reserve for obsolete and slow moving inventory (404) (282)
-------------- -------------
Inventories, net $ 622 $ 509
============== =============
At December 31, 2002 and 2003, net inventories determined by the FIFO
method were $593 and $494, respectively, and net inventories determined by the
average cost method were $29 and $15, respectively. The reserve is primarily for
finished goods at December 31, 2002 and 2003. The reduction in reserves
primarily represents the sale of related inventory.
F-18
8. Property and Equipment:
(In thousands of dollars)
December 31,
-------------------------------
2002 2003
-------------- -------------
Machinery and equipment $ 2,027 $ 1,210
Furniture and fixtures 642 622
Leasehold improvements 972 392
Tooling 631 632
Other 478 429
------------- -------------
$ 4,750 $ 3,285
Accumulated depreciation (3,796) (2,644)
------------- -------------
Property and equipment, net $ 954 $ 641
============== =============
Depreciation expense for the years ended December 31, 2001, 2002 and 2003
was $0.9 million, $0.9 million and $0.4 million, respectively.
9. Other Assets:
(In thousands of dollars)
December 31,
-------------------------------
2002 2003
-------------- -------------
Notes receivable $ 1,000 $ 1,000
Due from officers (Note 21) 108 138
Other 250 172
-------------- -------------
$ 1,358 $ 1,310
Reserve for uncollectible amounts (a) (1,000) (1,000)
-------------- -------------
Other current assets $ 358 $ 310
============== =============
Marketable ITC securities (b) $ 1,320 $ 1,320
Advances and deposits 75 73
Deferred charges 353 223
Due from officer 31 -
-------------- -------------
Other assets (classified as long term) $ 1,779 $ 1,616
============== =============
Footnotes:
- ----------
(a) 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 six accredited investors. The company fully reserved such amount
in 2001 (see Notes 12 and 18). As of December 31, 2002 and 2003, the notes
remain unpaid.
(b) Valued at agreed amount of $5.00 per share returnable to ITC in settlement
of obligation (see Note 15) at December 31, 2002 and 2003. The market value
of these shares at December 31, 2002 and 2003 had they not been returnable
in settlement of the obligation would be $0.1 million and less than $0.1
million, respectively.
F-19
10. Accrued Expenses:
(In thousand of dollars)
December 31,
--------------------------------
2002 2003
-------------- --------------
Non-registration fees $ 7,005 $ 3,147
Interest 1,405 1,484
Interest due to a related party 809 818
Judgments 2,124 2,072
Default penalties due to a related party 288 -
Consulting fees due to a related party 145 310
Incentive compensation due to officers 335 927
Other 4,805 5,041
-------------- --------------
Accrued Expenses $ 16,916 $ 13,799
============== ==============
11. Notes Payable:
(In thousands of dollars)
December 31,
---------------------------------
2002 2003
--------------- ---------------
Logical eBusiness Solutions Limited (f/k/a DataTec) (a) $ 2,414 $ 2,679
Obligation of subsidiary to a prior owner of Web Factory;
past due; payable in 1,500,000 British Pounds Sterling;
interest accrues at 4% per annum above the base rate
of National Westminister Bank plc (see Note 19).
Note due investor 385 385
Interest at 8% per annum payable at maturity; effective interest rate
of 80.3% per annum resulting from the issuance of warrants and finders fees;
matured April 7, 2003 (a); default interest accrues at 18% per annum.
Note due stockholder of subsidiary 171 142
Interest at 8.5% per annum; monthly payments (including interest)
of $3.5 through May 2003, remainder matured June 27, 2003.
Remainder rolled into note bearing interest at 8.5% per annum; monthly
payments (including interest) of $3.5 through May 2004, remainder
matures June 27, 2004.
Top Source Automotive 204 -
Default interest rate accrued at two times prime;
included in settlement.
Notes due former employees 116 100
$100 bears interest at 8.25% per annum, compounded annually;
past due (a). Remainder bore interest at 12% per annum, due on demand.
Other financings 284 97
Interest ranging from 7% to 9% per annum; $220 matured
November 1, 2002 (a); $35 due July 15, 2003; $29 all other.
Interest ranging from 7% to 9% per annum;
$35 due July 15, 2003 (a); $62 all other.
--------------- ---------------
$ 3,574 $ 3,403
Less: unamortized debt discounts (34) -
--------------- ---------------
$ 3,540 $ 3,403
=============== ===============
Footnote:
- ---------
(a) Notes payable in default due to nonpayment.
F-20
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"). In connection therewith, NCT Audio paid TST $3.5 million. 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 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. The amount which TST and TSA owed NCT Audio was in dispute, and
receipt of the funds by NCT Audio was contingent on the outcome of the
bankruptcy proceedings of TST and TSA. In December 2001, NCT reduced its
investment to zero as a result of the bankruptcy filing of TST, TSA and their
corporate affiliates 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.
In the bankruptcy case of Global Technovations, Inc. (GTI) (formerly known
as Top Source Technologies, Inc.) and its subsidiary Top Source Automotive,
Inc.), on February 18, 2003, the bankruptcy court approved an amended Plan of
Reorganization and Disclosure Statement. Pursuant to the amended Plan, NCT Audio
Products, Inc. (i) was granted a release from all claims of GTI and TSA
(including NCT Audio's alleged obligations under a $204,000 principal amount
note due April 16, 1999 and its alleged obligation to issue $100,000 of its
preferred stock under an agreement with TST); (ii) received $125,000 from the
bankruptcy estate on March 25, 2003; (iii) has an uncontested claim against the
bankruptcy estate for $1,500,000; and (iv) released the debtors and their
officers and directors from all claims other than the claim described in clause
(iii) above. In connection with the settlement, we recorded income from
litigation settlement of $429,000 (consisting of $125,000 cash received and
release of obligations to: (a) repay a note for $204,000 and (b) issue preferred
stock for $100,000) included in non-operating other (income) expense, net on the
consolidated statement of operations for the year ended December 31, 2003 (see
Note 18). There can be no assurance that NCT Audio will realize any amount from
(iii) above.
12. Convertible Notes Payable:
(In thousands of dollars)
December 31,
---------------------------------
2002 2003
Related Party Convertible Notes: --------------- ---------------
Issued to Carole Salkind - related party (a) (see Note 21) $ 18,064 $ 33,824
Weighted average effective interest rate of 55.5% per annum; accrues
interest 8% per annum; collateralized by substantially all of the
assets of NCT; convertible into NCT common stock at prices ranging
from $0.029 - $0.055 or exchangeable for common stock of NCT
subsidiaries except for Pro Tech; maturing by quarter as follows:
2002 2003
------------- ------------
On demand $ - $ 3,050
March 31 4,059 11,163
June 30 3,538 19,611
September 30 6,185
December 31 4,282
Less: unamortized debt discounts (3,858) (5,174)
--------------- ---------------
$ 14,206 $ 28,650
=============== ===============
F-21
(In thousands of dollars)
December 31,
---------------------------------
2002 2003
Convertible Notes: --------------- ---------------
8% Convertible Notes (b) $ 976 $ 1,651
Weighted average effective interest rate of 20.6% per annum;
convertible into NCT common stock at various rates; matures:
2002 2003
------------- ------------
March 14, 2002 $ 17 $ 17
April 12, 2002 9 9
January 10, 2004 550 550
March 11, 2004 400 400
April 22, 2005 235
September 4, 2005 440
6% Convertible Notes (c) 4,228 2,474
Weighted average effective interest rate of 85.8% per annum;
convertible into NCT common stock at 100% of the five-day average
closing bid price preceding conversion; past due:
2002 2003
------------- ------------
January 9, 2002 $ 2,022 $ 818
April 4, 2002 875 325
May 25, 2002 81 81
June 29, 2002 1,250 1,250
--------------- ---------------
$ 5,204 $ 4,125
Less: unamortized debt discounts (171) (12)
Less: amounts classified as long term (779) (675)
--------------- ---------------
$ 4,254 $ 3,438
=============== ===============
Footnotes:
- ----------
(a) NCT has issued convertible notes collateralized by substantially all of the
assets of NCT to Carole Salkind, a stockholder and spouse of a former
director of NCT, since 1999. During 2002, NCT issued an aggregate of $19.6
million of convertible notes as consideration for $9.6 million of cash and
rollover of $8.5 million in principal for matured convertible notes
(includes all of the notes outstanding at December 31, 2001), $0.6 million
of interest, and $0.9 million of default penalties. We paid one note in
2002 of approximately $0.3 million. We recorded original issue discounts of
$2.8 million to the notes based upon the relative fair values of the debt
and warrants granted to Ms. Salkind (see Note 17). We recorded discounts of
$1.6 million for warrants issued as consideration for irrevocable waivers
relating to Pro Tech common stock whereby the original instrument was a
convertible note or warrant issued in conjunction with a convertible note
(see Note 17). In addition, beneficial conversion features totaling $3.1
million have been recorded as a discount to the notes. These discounts are
being amortized over the term of the related notes. During 2003, NCT issued
an aggregate of $41.7 million of convertible notes as consideration for
$10.4 million of cash, rollover of $23.9 million in principal for matured
convertible notes (includes all of the notes outstanding at December 31,
2002) and $3.1 million for convertible notes consolidated in advance of
maturity, $1.9 million of interest, and $2.4 million of default penalties.
We recorded original issue discounts of $4.8 million to the notes based
upon the relative fair values of the debt and warrants granted to Ms.
Salkind (see Note 17). We recorded discounts of $1.0 million for
consideration related to the consolidation of convertible notes. In
addition, beneficial conversion features totaling $6.0 million have been
recorded as a discount to the notes. These discounts are being amortized
over the term of the related notes. For the years ended December 31, 2001,
2002 and 2003, respectively, $1.1 million, $4.9 million and $10.5 million
of amortization related to these discounts is classified as interest
expense in our consolidated statements of operations. Unamortized discounts
of $3.9 million and $5.2 million have been reflected as a reduction to the
convertible notes in our consolidated balance sheet as of December 31, 2002
and 2003, respectively. 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 stated in
the note plus 5%. 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 $0.25 million (see Note 23), an event of default occurred with
respect to the notes outstanding as of that date. As of December 31, 2002,
$2.9 million of the notes were in default as a result of this event and
were extinguished when these notes were rolled over during the first
quarter of 2003. As of December 31, 2003, none of the notes outstanding are
in default. In addition, because NCT had defaulted on repayment of all of
the notes as they matured during 2001, 2002 and 2003, an aggregate default
penalty expense of $1.2 million, $0.4 million and $2.1 million,
respectively, has been
F-22
reflected in our statements of operations in other income (expense) (see
Note 18). At December 31, 2002 and 2003, respectively, $0.3 million and
zero of accrued default penalties are included in accrued expenses (see
Note 10).
(b) Notes with principal totaling approximately $26,000 are convertible at 80%
of the lowest closing bid price for the five days preceding conversion; a
note totaling $0.6 million is convertible at the lower of $0.07 per share
or 80% of the lowest closing bid price for the five days preceding
conversion; a note totaling $0.4 million is convertible at $0.0647 per
share; a note totaling $0.2 million is convertible at $0.04 per share and
notes totaling approximately $0.4 million are convertible at 80% of the
average of the closing bid price for the five days preceding conversion. On
January 10, 2002, substantially all of the assets of our subsidiary, Artera
Group, Inc., were made collateral for a holder of a $0.6 million note. In
connection with recording debt issued in 2001 and 2002, beneficial
conversion features totaling $0.4 million had been recorded as a discount
to the notes and are being amortized over the term of the related notes.
For the years ended December 31, 2001, 2002 and 2003, respectively, $0.1
million, $0.1 million and $0.2 million of amortization related to discounts
is classified as interest expense in our consolidated statements of
operations. Unamortized discounts of $0.2 million and less than $0.1
million have been reflected as a reduction to the convertible notes in our
consolidated balance sheet as of December 31, 2002 and 2003, respectively.
We did not fulfill registration obligations and recorded finance costs
associated with non-registration of common shares of $0.1 million and $0.2
million for the years ended December 31, 2002 and 2003, respectively, (see
Note 18). The company settled $0.1 million of accrued interest payable and
approximately $0.1 million of accrued non-registration fees payable on
convertible notes with four holders through April 7, 2003 by issuance of
shares of its common stock (see Note 16). The notes included in the
settlement are accruing interest from April 7, 2003 at the stated rate of
8%. The company did not repay convertible notes aggregating approximately
$26,000 upon maturity, which are in default for non-payment. In addition,
on convertible notes aggregating approximately $1.0 million, we are in
default due to a cross default clause.
(c) 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. 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 were amortized to interest expense
over the term of the respective notes. For the years ended December 31,
2001, 2002 and 2003, respectively, $2.8 million, $0.2 million and zero of
amortization related to these discounts is classified as interest expense
in our consolidated statements of operations. No unamortized discounts have
been reflected as a reduction to the convertible notes in our consolidated
balance sheet as of December 31, 2002 and 2003. On January 10, 2002,
substantially all of the assets of our subsidiary, Artera Group, Inc., were
made collateral for three holders of notes with principal aggregating $3.1
million. As a result of exchanges, at December 31, 2003, the principal for
these three holders aggregated $1.3 million. We were obligated but unable
to register additional shares at various dates during 2001. As a result, we
have recorded finance costs associated with non-registration of common
shares of approximately $1.6 million, $2.6 million and $2.0 million in
finance costs included in other (income) expense, net for the years ended
December 31, 2001, 2002 and 2003, respectively, (see Note 18). The company
settled $0.8 million of accrued interest payable and approximately $4.6
million of accrued non-registration fees payable on convertible notes with
four holders through April 7, 2003 by issuance of shares of its common
stock (see Note 16). The notes included in the settlement are accruing
interest from April 7, 2003 at the stated rate of 6%. The aggregate
outstanding principal amount of approximately $2.5 million is in default
for non-payment. These notes are senior debt of our subsidiary, Artera
Group, Inc.
F-23
13. Deferred Revenue:
(In thousands of dollars)
December 31,
--------------------------------
2002 2003
---------------- --------------
NXT $ 4,815 $ 2,675
FairPoint 143 -
Other 594 623
---------------- --------------
$ 5,552 $ 3,298
Less: amount classified as current (2,877) (2,763)
---------------- --------------
Deferred revenue (classified as long term) $ 2,675 $ 535
================ ==============
As of December 31, 2003, NCT does not expect to realize any additional cash
from revenue that has been deferred.
FairPoint Broadband, Inc. ("FairPoint"), a wholly-owned subsidiary of
FairPoint Communications, Inc., and Artera executed a ten-year exclusive
marketing license on October 11, 2002 whereby FairPoint would serve as the
exclusive master distributor of Artera Turbo(TM) to certain rural local exchange
carriers, incumbent local exchange carriers and Internet service providers in
the United States and Canada and would have other non-exclusive rights with
respect to Artera Turbo. The terms of the agreement included a license fee of
approximately $2.0 million payable in cash over 24 months and per unit royalties
ranging from 40% to 50% of subscriber fees. The license fee revenue was being
recognized over the ten-year term of the agreement (approximately $16,800 per
month). In conjunction with this agreement, FairPoint Communications, Inc., was
issued a five-year warrant to purchase 2.0 million shares of NCT common stock at
an exercise price of $0.15 per share. The warrant was fully vested and
non-forfeitable on the date of grant. As such, the date of grant was used as the
measurement date in accordance with EITF 96-18. The fair value of this warrant
was approximately $0.1 million, determined using the Black-Scholes
option-pricing model, was recorded to deferred revenue and recognized in the
same periods and in the same manner (capitalized) as if we had paid cash, in
accordance with EITF 00-18. We recorded $50,400 of license fee revenue that had
been reduced to zero (as a result of amortizing the fair value of the warrant)
for the year ended December 31, 2002 in our consolidated statement of operations
in accordance with EITF 01-09. The remainder of the warrant fair value was
offset against FairPoint deferred revenue at December 31, 2002 on our
consolidated balance sheet. Through December 31, 2002, we had received $252,000
of the Fairpoint license fee.
On May 23, 2003, FairPoint Broadband and Artera entered into a memorandum
of understanding noting their mutual intent to amend, amend and restate or enter
into a new agreement to supersede the October 11, 2002 exclusive marketing
license agreement with respect to the royalties FairPoint would be obligated to
pay Artera and other matters. The memorandum of understanding provided that if
Artera and FairPoint did not execute a new agreement by June 30, 2003, then,
from July 1, 2003 to July 15, 2003, either party could have terminated the
October 11, 2002 license agreement via written notice to the other. If such
termination occurred, Artera would be deemed to have waived its right to license
fees (but not royalties) from FairPoint for the period after April 30, 2003. The
parties did not execute a new agreement by June 30, 2003 but neither party gave
written notice of termination by July 15, 2003. The parties continued to
negotiate a new agreement to amend or replace the October 11, 2002 agreement
pursuant to their mutual intent.
On November 1, 2003, FairPoint and Artera entered into a five-year master
distributor agreement which amends and replaces the October 11, 2002 exclusive
master distributor agreement, the May 23, 2003 memorandum of understanding and
all prior agreements between FairPoint Communications, Inc. and Artera. The new
agreement provides for: (i) the license fee as paid per the October 11, 2002
exclusive marketing license agreement to be fully earned; (ii) no further
license fee to be paid; and (iii) per unit royalties based upon the level of
service required from Artera ranging from $0.75 to $5.00 per end user. Through
December 31, 2003, we received an aggregate of $0.5 million of the FairPoint
license fee representing the period from October 2002 through mid April 2003 and
waived our right to the balance of license fees of $1.5 million. Upon entering
into the new agreement, we recognized the remaining license fee revenue that had
been deferred of $0.5 million during the fourth quarter of 2003 because no
further performance was required.
F-24
14. Shares of Subsidiary Subject to Exchange into a Variable Number of Shares:
Upon adoption of SFAS No. 150 on July 1, 2003, an aggregate of 550 shares
of Pro Tech series A and B convertible preferred stock (see Note 16) were
outstanding with exchange rights into NCT common stock valued at $0.6 million,
which was reclassified from minority interest in consolidated subsidiaries to
current liabilities on our consolidated balance sheet at a monetary value of
$0.7 million. An adjustment of monetary value on subsidiary shares of
approximately $0.1 million was charged to additional paid-in capital to reflect
the fair value of the shares required to be issued upon exchange.
For the year ended December 31, 2003, we calculated the 4% dividends earned
by holders of the Pro Tech series A and B preferred stock at approximately
$11,000. Following adoption of SFAS No. 150 on July 1, 2003, this amount is
included in interest expense.
The monetary value of Pro Tech series A and B preferred stock was $0.7
million in our consolidated balance sheet at December 31, 2003, which is
comprised of approximately $0.7 million of shares plus the accrued dividends of
approximately $55,000. NCT would have to issue approximately 17.2 million shares
of our common stock if settlement of the stated value had occurred as of
December 31, 2003. NCT has the option to settle the accrued dividends in cash or
common stock. As of December 31, 2003, settlement in common stock for the
accrued dividends would require issuance of approximately 1.5 million shares of
our common stock. There is no limit on the number of shares that NCT could be
required to issue upon exchange of the Pro Tech series A and B preferred stock.
15. Other Liabilities:
(In thousands of dollars)
December 31,
-----------------------
2002 2003
----------- ---------
License reacquisition payable $ 4,000 $ 4,000
Development fee payable 650 650
Royalty payable 1,695 1,679
Due to selling shareholders of Theater Radio Network 557 557
Due to L&H 100 100
Loan advance by investor 65 230
Other 34 11
----------- ---------
Other current liabilities $ 7,101 $ 7,227
=========== =========
Due to ITC (Notes 4 and 9) $ 1,422 $ 1,422
Other 135 114
----------- ---------
Other liabilities (classified as long term) $ 1,557 $ 1,536
=========== =========
License reacquisition payable at each of December 31, 2002 and 2003 is
comprised of $4.0 million for the cost of reacquiring DMC licenses from two
licensees.
On September 28, 2000, NCT Video Displays, Inc., our wholly-owned
subsidiary, 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 include certain
electronic outdoor billboard displays that utilize a laser or light beam
scanning methodology. 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 28, 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 had a carrying amount of
$0.8 million and $0.7 million at December 31, 2002 and 2003, 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
the estimated useful life of nine years. In addition, as part of this agreement,
NCT Video and ADT 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 $1.0
million for performing such development work. At each of December 31, 2002 and
2003, $0.7 million was included in other current liabilities.
F-25
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 included $1.8 million to be paid by NCT in cash, over 36 months,
the timing of which was based upon earned royalties. If after 36 months or
August 29, 2003, the total royalty had not been earned, or if earned but not
fully paid, then the recipients could 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. On
August 29, 2000, we recorded the entire $1.8 million obligation as a liability.
On September 23, 2003, the founding stockholders of Midcore made an election to
accept payment of the $1.7 million royalty due them in NCT common stock. Prior
to the election, approximately $45,000 of this liability had been paid. The
election and calculation of the number of shares were provided for in the August
29, 2000 agreement under which NCT acquired Midcore. This calculation is based
upon the volume-weighted average closing bid price for the ten days immediately
preceding August 29, 2003, or $0.04914 per share. NCT is obligated to issue 34.2
million shares of its common stock to fulfill its $1.7 million royalty
obligation included in other current liabilities at December 31, 2003 on our
consolidated balance sheet.
The merger agreement provided that NCT had an obligation to register with
the Securities and Exchange Commission ("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. In addition, we are obligated to issue 26.2 million shares (the look
back shares) of NCT common stock to the founding stockholders of Midcore because
the value of shares issued upon the acquisition of Midcore, related to a price
guarantee, was less than $1.5 million on the third anniversary of the
acquisition. This issuance of additional common stock based on a reduction in
security prices will not affect the cost of the acquired company in accordance
with SFAS No. 141. We will record the current fair value of the additional
consideration issued and simultaneously reduce the amount previously recorded
for securities issued at the date of acquisition.
Midcore's founding stockholders are currently in discussions with the
company relating to the royalty and look back obligations as discussed above,
and the company's inability to issue shares since the company has insufficient
authorized shares. The company remains unable to issue the shares until an
increase in authorized shares is approved by the shareholders. The company, in
these circumstances, is unable to assess whether these discussions will result
in a resolution of these matters.
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,
through DMC Cinema, then a newly formed subsidiary of NCT's subsidiary, 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 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 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 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 (DMC Cinema). The selling
shareholders have demand registration rights for these earnout shares. The
earnout provided that if DMC Cinema had 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
F-26
upon the trailing twenty-day closing bid price on December 31, 2001, would be
issued to the selling shareholders and the placement agent. If the accrued
revenue for this period was 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 had 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, would be
issued. If DMC Cinema's accrued revenue for such period was less than $4.7
million, then the number of shares to be issued would 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, 2002 and 2003, approximately $0.6 million is included in other
current liabilities for this earnout obligation. This accrual increased our cost
of the acquisition and resulting goodwill (see Note 3).
16. Capital Stock:
Authorized Capital Stock
NCT has 655 million shares authorized, 645 million shares of which are
$0.01 par value common stock and 10 million of which are $0.10 par value
preferred stock. At the NCT annual meeting of shareholders held on July 10,
2001, 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.
Common shares available for future issuance
At the December 31, 2003 common stock price of $0.04, our common shares
issued and required to be reserved for issuance exceeded the number of shares
authorized at that date. As such, NCT intends to seek shareholder approval of an
amendment to NCT's Restated Certificate of Incorporation to increase the number
of shares of common stock authorized for NCT. At December 31, 2003, the shares
of common stock required to be reserved were as follows, calculated at the $0.04
common stock price on that date (or the discount therefrom as allowed under the
applicable exchange or conversion agreements) along with premiums in excess of
the calculated number of shares as required under the applicable exchange or
conversion agreements:
NCT Preferred Stock (a) 914,958,904
Stock options and warrants 823,244,619
NCT Convertible Notes issued to Carole Salkind 878,891,374
8% Convertible Notes 59,650,989
ConnectClearly Common Stock exchange 2,264,063
Pro Tech Preferred Stock exchange 22,597,252
6% Convertible Notes exchange 94,597,108
Artera Preferred Stock exchange 154,763,084
Earnout for Theater Radio Network acquisition; look back
and royalty payable for Midcore Software acquisition 67,450,777
Private Equity Credit Agreement 173,611,111
----------------
3,192,029,281
================
Footnote:
---------
(a) We are required to reserve 100,000,000 shares of our common stock for
the conversion of series H preferred stock until additional authorized
shares of common stock are approved by stockholders. Although our annual
shareholder meeting had not taken place as of December 31, 2003, we have
presented the entire calculated reserve requirement for our preferred
stock.
F-27
Transactions with Crammer Road LLC
2002 Exchange Agreement
On June 21, 2002, NCT entered into an exchange agreement with Crammer Road
to acquire the remaining 12,000 shares of DMC NY in exchange for 1,800 shares of
our series H convertible preferred stock and $120,000 in cash (see discussion of
DMC NY below, NCT Group, Inc. Preferred Stock below and Crammer Road in Note
21).
Private Equity Credit Agreements
On July 25, 2002, we entered into a new private equity credit agreement
with Crammer Road. The July 2002 credit agreement provides that shares of up to
$50 million (the maximum commitment amount) 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 agreement require us to put at least $5 million (the minimum
commitment amount) of our common stock, in exchange for cash, at a discount to
market of 10%. In connection with the execution of this private equity credit
agreement, we issued a five-year warrant to Crammer Road for 1,000,000 shares of
our common stock with an exercise price of $0.07375 per share (see Note 17). We
are obligated to register for resale shares of our common stock for the warrant
and the credit agreement in an amount no less than 112% of the maximum
commitment amount. If we fail to issue shares for the minimum commitment amount
during the commitment period (which terminates 24 months after effectiveness of
a resale registration statement relating to the shares or earlier as described
in the agreement), we must pay Crammer Road, in immediately available funds, an
amount equal to the product of (i) the minimum commitment amount, less the
aggregate shares of our common stock actually delivered to Crammer Road under
the equity credit line and (ii) the 10% discount.
On April 12, 2001, we executed a private equity credit agreement that
provided 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 April 2001 private equity credit agreement replaced the September 2000
private equity credit agreement. In conjunction with this transaction, the
company issued Crammer Road a warrant for 250,000 shares of the company's common
stock. The terms of that credit agreement obligated the company to put $17
million of our common stock (the minimum commitment amount) to Crammer Road. The
agreement provided for a penalty for late effectiveness of a registration
statement covering the shares in the minimum commitment amount. In addition, if
we failed to issue and deliver shares for the minimum commitment amount of $17
million during the commitment period, which would terminate 18 months after the
commitment period began, NCT was 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. NCT and Crammer Road had a dispute about the amount due under the
penalty provision of the April 2001 private equity credit agreement (see
Settlement with Crammer Road below).
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 343,604 shares were issued
in 2001.
2001 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. 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 NY with an aggregate value of $2.0 million. In accordance
with the exchange agreement, NCT was 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 requested
acceleration of the effectiveness of the registration statement covering those
shares was less than $0.16 per share, up to a maximum of 3,333,334 additional
shares. We were obligated to register these issued shares of common stock and
the reset shares. For the years ended December 31, 2001 and 2002, we incurred
charges of $0.5 million and $3.4 million, respectively, due to non-registration
of these shares included in other (income) expense, net in our consolidated
statement of operations (see Note 18). In 2002, we settled our obligation to
Crammer Road for the reset shares (see Settlement with Crammer Road below).
F-28
DMC New York, Inc.
NCT acquired 75% of DMC NY in 2002 and 25% in 2001. Our aggregate cost of
the DMC NY shares was approximately $27.2 million (see Note 2).
If a registration statement covering amounts pursuant to the April 12, 2001
exchange agreement with Crammer Road were not in effect by July 1, 2001, we
agreed to acquire 1,000 shares of DMC NY 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. In 2002, we settled our obligation to
Crammer Road under this agreement (see Settlement with Crammer Road below).
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. 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 would be 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 98-05, as
codified in EITF 00-27, in 2001, we recorded a beneficial conversion feature of
approximately $33,000 in connection with this convertible note. The beneficial
conversion feature was accounted for as a discount to the note and was allocated
to a component of additional paid-in capital. For the year ended December 31,
2001, the discount was recognized as interest expense in our consolidated
statement of operation. In October 2001, Crammer Road exchanged the NCT Video
note for 6,014,029 shares of our common stock.
Settlement with Crammer Road
In September 2002, Crammer Road brought a legal action against NCT alleging
that NCT breached a series of agreements entered into by Crammer Road and NCT on
April 12, 2001, namely, a Private Equity Credit Agreement, a Registration Rights
Agreement relating thereto, an Exchange Agreement, a Registration Rights
Agreement relating thereto, two promissory notes and an additional side letter
agreement. On October 30, 2002, a settlement agreement was executed by the
parties and approved by the court on December 11, 2002. Under the settlement
agreement, all claims in the suit by Crammer Road are dismissed in consideration
of the issuance by NCT to Crammer Road of 68 million shares of NCT common stock
($5.44 million priced at $.08 per share). On December 17, 2002, we issued
Crammer Road 40 million of the 68 million shares. The remaining 28 million
shares were issuable 65 days after demand therefore by Crammer Road. As of
December 31, 2002, $2.2 million is included in shares payable on our
consolidated balance sheet. On or about May 8, 2003, the company issued the
remaining 28,000,000 shares to Crammer Road which were included in shares
payable at December 31, 2002.
Shares Issued for Acquisitions
As noted above, on April 12, 2001, we issued Crammer Road shares of our
common stock in exchange for shares of DMC NY.
NCT issued approximately 21.3 million shares of its common stock in 2000 to
consummate the acquisitions of Theater Radio Network and Midcore Software. In
February 2001, due to fill-up provisions, we issued an aggregate of 5,319,142
additional shares for these acquisitions. We have an obligation to issue
additional shares of our common stock to satisfy an earnout provision for the
Theater Radio Network acquisition. Further, we are obligated to issue additional
NCT shares to satisfy a look back provision for the Midcore Software acquisition
and royalty payable (see Note 15).
F-29
Shares Issued upon Conversion or Exchange of Indebtedness
During the years ended December 31, 2001, 2002 and 2003, $2.5 million, $0.2
million and $1.8 million, respectively, of the 6% convertible notes plus
interest were exchanged for 26,910,453 shares, 2,598,956 shares and 42,092,786
shares of NCT's common stock. At December 31, 2003, $2.5 million of the 6%
convertible note principal remained that could be exchanged for NCT common
stock.
During the year ended December 31, 2002, $0.4 million of our 8% convertible
notes plus interest were converted into 5,611,682 shares of NCT's common stock.
As noted above, in October 2001, we issued Crammer Road shares of our
common stock upon Crammer Road's exchange of the NCT Video note.
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, net (see Note 18).
Shares Issued for Settlement of Legal Claims
We issued Crammer Road shares of NCT common stock in December 2002 and May
2003 pursuant to a settlement agreement (see Settlement with Crammer Road
above).
On or about January 31, 2002, West Nursery Land Holding Limited Partnership
brought an action against NCT in the District Court of Maryland for Anne Arundel
County. On December 31, 2002, NCT and West Nursery executed a settlement
agreement under which all claims of West Nursery against NCT were discharged in
consideration of the issuance by NCT of 1,248,170 shares of its common stock.
Pursuant to the settlement agreement between NCT and West Nursery Holding
Limited Partnership, on or about April 1, 2003, the company issued 1,248,170
shares of its common stock (i.e., $56,000 in stock priced at $0.0448 per share)
to West Nursery which were included in shares payable at December 31, 2002.
On February 21, 2002, an action was brought by Mesa Partners, Inc. against
NCT and DMC. On December 3, 2002, NCT, DMC and Mesa executed a settlement
agreement that was approved by the court in April 2003. Pursuant to the
settlement agreement, on or about April 11, 2003, NCT issued 2,321,263 shares of
its common stock (i.e., $125,000 in stock priced at $0.05385 per share) to Mesa.
On or about December 17, 2002, an action was brought by Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore S.A. and Libra Finance S.A.
against NCT Group, Inc. and Artera Group, Inc. On or about April 7, 2003, NCT,
Artera and the plaintiffs executed a settlement agreement. In September 2003,
upon court approval of the settlement agreement, NCT issued 61,776,067 shares of
its common stock (i.e., $4.0 million in stock priced at $0.06475 per share) to
the plaintiffs, reduced previously accrued interest payable of $0.9 million
(consists of $0.1 million and $0.8 million related to the 8% and 6% convertible
notes, respectively) and liquidated damages for non-registration of common
shares underlying convertible and exchangeable notes and preferred stock of $8.0
million (consists of $0.1 million and $4.6 million related to the 8% and 6%
convertible notes, respectively and $3.3 million related to Artera series A
preferred stock). We recorded a $4.9 million gain on litigation settlements
included in non-operating other (income) expense, net for the year ended
December 31, 2003.
During the year ended December 31, 2002, we recorded charges totaling $0.5
million for the issuance of 6,138,081 shares of our common stock. Of these
shares, 5,938,081 were valued at approximately $0.5 million and were issued to
settle a legal matter with Linford Group Limited related to a leasehold of our
indirect subsidiary Artera Group International Limited. In addition, 200,000 of
the total number of shares were issued to settle a legal matter and were valued
at less than $0.1 million (based upon the closing bid price on the date of the
settlement).
F-30
Shares Issued to Vendors and Others
During the year ended December 31, 2002, we recorded a charge of less than
$0.1 million for the issuance of 300,000 shares of our common stock for a
partial payment of consulting services (based upon the closing bid price on the
date of the agreement).
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.
Of these shares, 2,994,066 were for current obligations totaling $804,683
(328,717 of such shares were issued to an employee) and 171,429 were for future
obligations totaling $60,000.
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, 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. During the
years ended December 31, 2002 and 2003, no shares of ConnectClearly were
exchanged for shares of NCT common stock. At December 31, 2003, 63
ConnectClearly common shares subject to exchange are outstanding.
Distributed Media Corporation
During 2001, employees of DMC exercised options and were issued 7.06 shares
of DMC common stock. On February 28, 2002, we issued 2,142,073 shares of our
common stock in exchange for 6.435 shares of DMC common stock pursuant to an
employment termination agreement. We recorded a charge based on the fair value
of our common stock at that date of $0.2 million included in our consolidated
statement of operations for the year ended December 31, 2002, classified as
selling, general and administrative expense.
NCT Audio Products, Inc.
Initial Financing
NCT Audio sold 2,145 common shares in 1997 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 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).
In 2002, $0.3 million of goodwill resulting from a step acquisition was impaired
because of NCT Audio's continuing inability to generate positive cash flows from
operations. Included in our consolidated statements of operations are impairment
charges aggregating $2.1 million and $0.3 million for the years ended December
31, 2001 and 2002, respectively.
Through December 31, 2003, we have issued an aggregate of 31,239,483 shares
of our common stock in exchange for 2,145 shares of NCT Audio common stock.
During the years ended December 31, 2001 and 2002, 597 and 160 shares of NCT
Audio common stock, respectively, were exchanged for 4,824,068, and 3,930,818
shares of
F-31
NCT common stock. At December 31, 2002 and 2003, no 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 17). 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. Under the exchange agreement, Austost and Balmore were obligated to
return to NCT 13,671,362 shares of NCT common stock ("Excess Exchange Shares").
On March 7, 2000, some terms and conditions of the exchange agreement were
amended. 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, approximately 10 million Excess
Exchange Shares were sold by Austost and Balmore. In 2001, NCT received
proceeds, net of commissions, of $0.2 million upon the sale of the remaining
Excess Exchange Shares.
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
21).
On each of October 25, 2001 and December 6, 2001, 5.0 million shares of NCT
common stock were issued with a restrictive legend upon exercise of warrants
held by a placement agent for an aggregate of $0.8 million in cash.
Transactions Affecting Common Stock of Pro Tech Communications, Inc.
In 2001, NCT received 1,190,476 shares of Pro Tech common stock as partial
consideration for the January 9, 2001 6% convertible notes then issued (see Note
12). 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.
At December 31, 2003, 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. Through 2003, NCT designated eight
series of preferred stock, including series A, B, C, D, E, F, G and H 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, G and H
designations. In November 2001, series C, D, E and F were eliminated. As of
December 31, 2003, there are 1,725 shares of series H preferred stock issued and
outstanding.
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 of $0.10 per share and a stated value of
F-32
$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. 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 proceeds, net of expenses, of
approximately $1.7 million cash. 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. During the year ended December 31, 2001, the
company issued 7,218,150 shares of our common stock upon conversion of the
remaining 767 shares of series G preferred stock. As of December 31, 2001, 2,004
shares of NCT's series G preferred stock had been converted into 12,124,745
shares of NCT's common stock. At December 31, 2002 and 2003, no series G
preferred stock was outstanding.
Series H Convertible Preferred Stock
In June 2002, NCT designated series H preferred stock consisting of 1,800
designated shares with a par value $0.10 per share, a stated value of $10,000
per share and a cumulative dividend of 4% per annum on the stated value payable
upon conversion in either cash or common stock, at NCT's election. On March 10,
2003, NCT amended the number of designated shares of series H convertible
preferred stock from 1,800 shares to 2,100 shares. The series H preferred stock
is senior in rank to our common stock and has a liquidation value equal to the
dividends plus the stated value in the case of liquidation, dissolution or
winding up of NCT. The holders of our series H preferred stock have no voting
rights (except as may be required by law). Each share of series H preferred
stock is convertible into shares of the company's common stock at 75% of the
average closing bid price of common stock for the five-day trading period
immediately preceding conversion. The holder of the series H preferred stock is
subject to a limitation on the percentage ownership of outstanding common shares
of the company, as defined. The series H preferred stock is redeemable by us in
cash at any time at a redemption price that is a function of the time between
the date the series H was originally issued and the redemption date. The
redemption price ranges from 85% of stated value (within three months of
issuance) to 120% of stated value (after nine months from issuance). On June 24,
2002, we issued 1,800 shares ($18 million stated value) of our series H
preferred stock to Crammer Road LLC for $120,000 cash and 12,000 shares of DMC
New York, Inc. (see Note 2). For the years ended December 31, 2002 and 2003, we
have included $0.4 million and $0.7 million, respectively, representing
preferred stock dividends on the consolidated statement of operations. For the
year ended December 31, 2003, 75 shares of series H preferred stock along with
accrued dividends totaling approximately $0.8 million were converted into
23,057,761 shares of NCT's common stock. As of December 31, 2003, 1,725 shares
of series H preferred stock are outstanding.
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 of $0.10 per share and stated value $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. At December 31,
2002 and 2003, we have included $8.0 million and $8.3 million, respectively,
representing the carrying value of the preferred stock included in minority
interest on the consolidated balance sheets. 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). For each of the years ended
December 31, 2001, 2002 and 2003, the dividends are approximately $0.3 million.
These amounts are included in preferred stock dividends on the consolidated
statement of operations for the years then ended.
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 and may not convert into Artera
common stock. NCT is obligated to register shares of its common stock for the
exchange of Artera series A preferred stock. For the years ended December 31,
2001, 2002 and 2003, we incurred charges of $0.7 million, $2.1 million and $1.9
million, respectively, for non-registration of the underlying shares of NCT
common stock. These amounts are included in preferred stock dividends on the
consolidated statement of operations for the years then ended. 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
F-33
preferred stock being redeemed (together with accrued and unpaid dividends
thereon). As a result of a settlement of a legal action (see above), which
included $3.3 million of accrued non-registration fees payable relating to our
inability to register the shares, we recorded a related gain of $2.0 million for
the year ended December 31, 2003 included in non-operating other (income)
expense and we are no longer accruing for these expenses for three holders of
Artera series A preferred stock. Pursuant to an exchange rights and release
agreement dated April 10, 2003, three holders of an aggregate of 3,154 shares of
Artera series A preferred stock received an additional right to exchange into
NCT preferred stock (a series to be designated) upon thirty days prior written
notice. As of December 31, 2003, 8,299 shares of Artera series A preferred stock
are issued and outstanding and no shares have been converted.
Pro Tech Communications, Inc. Preferred Stock
- ---------------------------------------------
(see Note 14)
On September 29, 2000, Pro Tech entered into a securities purchase and
supplemental exchange rights agreement with the company and three holders 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 cumulative 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 Pro Tech's common stock at
a discount from the quoted market value.
On July 30, 2001, Pro Tech entered into an agreement with a holder 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%.
Pro Tech recorded a beneficial conversion feature of $125,000 in connection with
the issuance of its series B preferred stock that resulted in a reduction to the
outstanding balance of the preferred stock and an increase to additional paid-in
capital. The beneficial conversion feature was 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). For the years
ended December 31, 2001, 2002 and 2003, $79,000, $46,000 and zero, respectively,
of the beneficial conversion feature was recognized. In connection with this
2001 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. The aggregate of $142,000, $46,000 and zero
is included in beneficial conversion features on the consolidated statement of
operations for the years ended December 31, 2001, 2002 and 2003, respectively.
As of December 31, 2002, under the terms of the Pro Tech series B
convertible preferred stock agreement dated July 30, 2001, the holder of those
shares may have had a right to require Pro Tech to redeem the shares and any
such redemption would not have been within the sole control of Pro Tech. The
redemption value was 125% of the stated value of $0.5 million or $125,000.
Accordingly, approximately $0.1 million redemption adjustment was recorded
during 2001 increasing the minority interest in consolidated subsidiaries. On
April 10, 2003, NCT and Pro Tech entered into an agreement with the holder of
the series B preferred stock whereby the holder agreed to waive certain
requirements of the registration rights agreement relating to the series B
preferred stock. This waiver released Pro Tech from the requirement to register
shares of Pro Tech's common stock for the conversion of the series B preferred
stock. This cancelled the triggering event, which may have placed the redemption
of the series B preferred stock at the holder's option. With the signing of this
agreement, such redemption became under the control of Pro Tech. Pro Tech was no
longer required to carry the series B preferred stock at 125% of the stated
value. Accordingly, approximately $0.1 million redemption adjustment was
reversed during the year ended December 31, 2003.
Prior to the adoption of SFAS No. 150, for the years ended December 31,
2001, 2002 and 2003, we calculated the 4% dividends earned by holders of the Pro
Tech series A convertible preferred stock and the Pro Tech series B redeemable
convertible preferred stock at approximately $24,000, $22,000 and $11,000,
respectively. These amounts are included in preferred stock dividends and in the
calculation of loss attributable to common stockholders on the consolidated
statement of operations for the years then ended. At December 31, 2002, we have
included $0.7 million representing the carrying value of the preferred stock
included in minority interest on the consolidated balance sheet.
F-34
During the year ended December 31, 2001, 1,162 shares of Pro Tech series A
preferred stock were converted into 4,951,873 shares of Pro Tech common stock
and 288 shares of Pro Tech series A preferred stock were 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. During the years ended
December 31, 2002 and 2003, there were no conversions or exchanges. At December
31, 2003, there were 50 shares of Pro Tech's series A preferred stock
outstanding and 500 shares of Pro Tech series B preferred stock outstanding.
Treasury Stock
On March 1, 2002, NCT retired and cancelled all 6,078,065 shares of
treasury stock.
17. Common Stock Options and Warrants:
The company values options and warrants using the Black-Scholes option
pricing model and accounts for options and warrants issued to those that are not
employees of the company or members of the Board of Directors as outlined
herein. The fair value of options and warrants issued to general consultants are
recorded as consulting expense over the vesting period of the related options or
warrants and classified 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 allocated 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 acquisitions are recorded as additional
purchase price.
Stock Options:
The company has stock option plans under which directors, officers,
employees and consultants may be granted options to purchase common stock or
other equity-based awards. The company's stock option plans that have been
approved by shareholders are as follows: 1987 Stock Option Plan (the "1987
Plan"); the NCT Group, Inc. 1992 Stock Incentive Plan (as amended, the "1992
Plan"); the NCT Group, Inc. Option Plan for Certain Directors (as amended, the
"Directors Plan"); and the NCT Group, Inc. 2001 Stock and Incentive Plan (the
"2001 Plan"). In addition, options outside the option plans have been granted.
Due to plan expirations, no future grants or options for the purchase of shares
of NCT common stock are available under the 1987 Plan, the 1992 Plan or the
Direction Plan.
As of December 31, 2003, there were no options outstanding under the
Directors Plan. The following summarizes information about the company's stock
options outstanding and exercisable at December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Plan Exercise Prices Outstanding (In Years) Price Exercisable (a) Price
- ---------------- ------------------ ----------------- ------- ----------- -------------- ----------
1987 Plan $ 0.50 to $0.625 1,350,000 0.09 $ 0.5093 1,350,000 $ 0.5093
================= ==============
1992 Plan $ 0.103 to $1.00 42,459,337 3.86 $ 0.4037 42,459,337 $ 0.4037
================= ==============
2001 Plan $ 0.054 to $0.13 67,054,945 (b) 5.94 $ 0.0780 52,476,945 (b) $ 0.0847
================= ==============
Non-plan $ 0.029 to $0.2656 368,375,000 4.44 $ 0.0455 368,375,000 $ 0.0455
================= ==============
Footnotes:
- ----------
(a) Exercisable on a plan by plan basis subject to the approval by the company's
stockholders of a sufficient increase in the number of shares of common stock
authorized. (b) Approximately 49.1 million of the number outstanding and 34.5
million of the number exercisable under the 2001 Plan are subject to the
approval by the company's stockholders of a sufficient increase in the number of
shares of common stock (1) authorized and (2) covered by the 2001 Plan. At the
time of such shareholder approval, if the market value of the company's common
stock exceeds the exercise price of the subject options, the company will incur
a non-cash charge to earnings equal to the spread between the exercise price of
the option and the market price, times the number of options involved. If
shareholder approval of the increase is not obtained at an annual meeting of
shareholders , options granted will be reduced pro rata for the excess
unauthorized shares.
F-35
1987 Plan
The company's 1987 Plan provided for the granting of up to 4.0 million
shares of common stock as either incentive stock options or nonstatutory stock
options. Options to purchase shares could be granted under the 1987 Plan to
persons who, in the case of incentive stock options, were full-time employees
(including officers and directors) of the company; or, in the case of
nonstatutory stock options, were employees or non-employee directors of the
company. The exercise price of all incentive stock options was required to be at
least equal to the fair market value of such shares on the date of grant and
could be exercisable over a ten-year period as determined by the Board of
Directors. The exercise price and duration of the nonstatutory stock options
were determined by the Board of Directors. 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. At December 31, 2001, 2002 and
2003, there were outstanding, exercisable options under the 1987 Plan to acquire
1,350,000 shares of common stock at a weighted average exercise price of $0.5093
per share.
1992 Plan
On October 6, 1992, the company adopted the 1992 Plan for the granting of
shares and options to purchase up to 10.0 million shares of common stock to its
officers, employees, consultants and directors. The exercise price of options
granted under the 1992 Plan was required to be at least equal to the fair market
value of such shares on the date of the grant, and such options were generally
exercisable over a five to ten-year period with vesting schedules 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 available there under to 30.0 million. 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 under the 1992 Plan from 30.0 million to 50.0
million shares.
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
Chairman of the Board of Directors and Chief Executive Officer 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. The exercise price of the options was equal to the market price
at the date the shares were made available under the plans; accordingly, no
compensation expense 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. The
replacement grants under the 1992 Plan totaled approximately 67,000 options. The
exercise price of those 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 these options. In addition, in 2001, the company granted 357,927
shares of common stock under the 1992 Plan to a former officer in connection
with his employment termination agreement. The company recorded a charge of
approximately $33,000 in connection with that grant, representing the market
price at the date of termination.
From time to time, the Board of Directors accelerates the vesting schedules
of previously granted stock options so that the right to acquire the underlying
shares becomes 100% vested. On September 20, 2001, the vesting schedule on the
December 6, 2000 grant to acquire 6,000,000 shares made to NCT's Chairman of the
Board of Directors and Chief Executive Officer was accelerated in 2001 due to
his formation of Artera Group, Inc. and conceptualization of its strategy. On
October 25, 2002, the Board of Directors deemed all options granted to
directors, officers and employees before that date as fully vested to
acknowledge its gratitude for ongoing employee dedication during the 2002
restructuring and cost-saving measures, including suspension of employee salary
increases. On September 10, 2003, the Board of Directors accelerated the vesting
schedules of options granted to directors, officers and employees dated October
25, 2002 to 100% vested to acknowledge its continued gratitude for employee
dedication. Although the acceleration of vesting schedules was a modification of
the original grants, there was no accounting consequence because the market
price on the date of such modification was lower than the original exercise
prices of the grants which exercise prices were not revised.
F-36
1992 Plan activity is summarized as follows:
Years Ended December 31,
------------------------------------------------------------------------------------
2001 2002 2003
--------------------------- ------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ ------------ ---------- ------------ -------------
Outstanding at beginning of year 47,057,690 $ 0.43 46,408,663 $ 0.42 44,022,537 $ 0.420
Options granted 1,641,992 $ 0.19 - $ - - $ -
Options exercised - $ - - $ - - $ -
Options canceled, expired or forfeited (2,291,019) $ 0.55 (2,386,126) $ 0.44 (1,563,200) $ 0.672
------------ ------------ ------------
Outstanding at end of year 46,408,663 $ 0.42 44,022,537 $ 0.42 42,459,337 $ 0.404
============ ============ ============
Options exercisable at year-end 42,180,040 $ 0.42 44,022,537 $ 0.42 42,459,337 $ 0.404
============ ============ ============
Options available for grant at year-end - - -
============ ============ ============
Directors Plan
On November 15, 1994, the Board of Directors adopted the Directors Plan
which was approved by shareholders at the annual meeting held in July 1996. As
of December 31, 2003, the Directors Plan has no shares available due to the
expiration of the plan.
Directors Plan activity is summarized as follows:
Years Ended December 31,
------------------------------------------------------------------------------------
2001 2002 2003
-------------------------- ------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ ------------ ---------- ------------ -------------
Outstanding at beginning of year 538,500 $ 0.73 538,500 $ 0.73 - $ -
Options granted - $ - - $ - - $ -
Options exercised - $ - - $ - - $ -
Options canceled, expired or forfeited - $ - (538,500) $ 0.73 - $ -
------------ ------------ ------------
Outstanding at end of year 538,500 $ 0.73 - $ - - $ -
============ ============ ============
Options exercisable at year-end 538,500 $ 0.73 - $ - - $ -
============ ============ ============
Options available for grant at year-end 282,500 - -
============ ============ ============
2001 Plan
On April 25, 2001, the Board of Directors adopted the 2001 Plan for the
granting of shares and options to purchase up to 18,000,000 shares of common
stock to directors, officers, employees and consultants. 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. On June
3, 2002, June 13, 2002 and October 25, 2002, the Board of Directors granted
seven-year options to purchase shares of NCT common stock to directors, officers
and employees in the aggregate amount of 430,000, 10,575,000 and 20,675,000
shares, respectively, at exercise prices of $0.081, $0.081 and $0.083,
respectively, the fair market value of shares of NCT common stock on the
respective dates of grant. On September 10, 2003, the Board of Directors granted
seven-year options to purchase shares of NCT common stock to directors, officers
and employees in the aggregate amount of 26,290,000 shares, at an exercise price
of $0.054 per share, the fair market value of shares of NCT common stock on the
date of grant. The June 13, and October 25, 2002 and the September 10, 2003
grants were made subject to the approval by the company's stockholders of a
sufficient increase in the number of shares of common stock (1) authorized and
(2) covered by the 2001 Plan. At the time of such shareholder approval, if the
market value of the company's common stock exceeds the exercise price of the
subject options, the company will incur a non-cash charge to earnings equal to
the spread between the exercise price of the option and the market price, times
the number of shares involved. If shareholder approval of the increase is not
obtained at an annual meeting of shareholders, options granted will be reduced
pro rata for the excess unauthorized shares. On October 25, 2002, the Board of
Directors deemed all options granted to directors, officers, consultants and
employees before that date as fully vested (pending the approval as noted above)
to acknowledge its gratitude for ongoing employee dedication during the 2002
restructuring and cost-saving measures, including suspension of employee salary
increases. On September 10, 2003, the Board of Directors accelerated the vesting
schedules of options granted to directors, officers and employees dated October
25, 2002 to 100% vested to acknowledge its continued gratitude for employee
dedication. Although the acceleration of vesting schedules was a modification of
the original grants, there was no
F-37
accounting consequence because the market price on the date of the modification
was lower than the original exercise price of the grants which exercise prices
were not revised.
2001 Plan activity is summarized as follows:
Years Ended December 31,
------------------------------------------------------------------------------------------
2001 2002 2003
--------------------------- ------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------ ------------- --------------- ------------ -----------
Outstanding at beginning of year - $ - 10,387,503 $ 0.13 41,485,358 $ 0.100
Options granted 10,387,503 $ 0.13 31,680,000 $ 0.08 26,290,000 $ 0.054
Options exercised - $ - - $ - - $ -
Options canceled, expired or forfeited - $ - (582,145) $ 0.13 (720,413) $ 0.096
------------- ------------- ------------
Outstanding at end of year 10,387,503 $ 0.13 41,485,358 $ 0.10 67,054,945 (a) $ 0.078
============= ============= ============
Options exercisable at year-end 5,355,001 $ 0.13 30,080,358 $ 0.11 52,476,945 $ 0.085
============= ============= ============
Options available for grant at year-end 7,612,497 - -
============= ============= ============
Footnote:
- ---------
(a) As of December 31, 2003, 49,054,945 of the outstanding options under the
2001 Plan are subject to the approval by the company's stockholders of a
sufficient increase in the number of shares of common stock (1) authorized and
(2) covered by the 2001 Plan.
Non-plan
From time to time at the discretion of the Board of Directors, non-plan
options are granted. 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 and
vesting schedules vary from (i) fully vested at the date of grant to (ii)
multiple year apportionment of vesting, as determined by the Board of Directors.
In 2001, the company issued 3,850,000 shares of NCT common stock to NXT plc for
an option which NCT had granted to NXT plc in 1997. This issuance was in
connection with reorganizing existing cross-license agreements between NCT and
NXT plc (see Note 4). In 2002 and 2003, the Board of Directors granted non-plan
options to acquire NCT common stock to consulting entities in which Carole
Salkind or her son were the sole shareholder (see Note 21). The fair value of
these consulting options (determined using the Black-Scholes option pricing
model) resulted in aggregate charges of $4.1 million and $8.3 million included
in our selling, general and administrative expenses for the year ended December
31, 2002 and 2003, respectively.
Non-plan stock option activity is summarized as follows:
Years Ended December 31,
---------------------------------------------------------------------------------
2001 2002 2003
----------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ---------- ------------- ---------- ------------ -------------
Outstanding at beginning of year 4,025,000 $ 0.30 100,000 $ 0.27 84,825,000 $ 0.07
Options granted - $ - 100,225,000 $ 0.07 283,550,000 $ 0.0393
Options exercised (3,850,000) $ 0.30 - $ - - $ -
Options canceled, expired or forfeited (75,000) $ 0.50 (15,500,000) $ 0.08 - $ -
----------- ------------- ------------
Outstanding at end of year 100,000 $ 0.27 84,825,000 $ 0.07 368,375,000 $ 0.0455
=========== ============= ============
Options exercisable at year-end 100,000 $ 0.27 84,825,000 $ 0.07 368,375,000 $ 0.0455
=========== ============= ============
Warrants:
The company's warrants are issued 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 date of issuance.
During 2001, in conjunction with the issuance of convertible notes, NCT
issued 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
F-38
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). We reduced the exercise price of this warrant in
January 2002 from $0.09 per share to an exercise price, as amended as of June
28, 2002, to the lesser of $0.07 or the lowest closing bid price between January
10, 2002 and June 28, 2003. During 2001, we issued warrants to outside
consultants for the right to acquire an aggregate of 3,125,000 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).
During 2002, in conjunction with the issuance of convertible notes, NCT
granted Carole Salkind five-year warrants to acquire an aggregate of 96,372,920
shares of its common stock (including 30,000,000 warrants for her irrevocable
wavier to rights to exchange her notes and a warrant for shares of Pro Tech
common stock) at exercise prices ranging from $0.041 to $0.097 per share, a
weighted average exercise price of $0.069. The fair value of these warrants was
$5.0 million (determined using the Black-Scholes option pricing model). Based
upon allocation of the relative fair values of the instruments, we recorded a
discount of $4.4 million to the convertible notes issued to Carole Salkind.
During 2002, we issued warrants to outside consultants for the right to acquire
an aggregate of 10,854,167 shares of our common stock at exercise prices ranging
from $0.054 to $0.75 per share, a weighted average exercise price of $0.099 and
recorded a charge for consulting services of $0.6 million (determined using the
Black-Scholes option pricing model). Included in these shares, as consideration
for advisory services by a placement agent, was a five-year warrant to acquire
5,000,000 shares of our common stock at an exercise price, as amended as of June
28, 2002, of the lesser of $0.07 or the lowest closing bid price between January
10, 2002 and June 28, 2003, or $0.027 per share. In conjunction with the
execution of a license agreement with FairPoint Broadband, Inc. (see Note 13),
NCT issued a five-year warrant for 2,000,000 shares of its common stock to
FairPoint Communications, Inc. exercisable at $0.15 per share. The fair value of
this warrant was approximately $0.1 million (determined using the Black-Scholes
option pricing model) which was recorded as a reduction of license fee revenue
(see Note 13). In connection with the issuance of a promissory note on December
6, 2002, we issued two five-year warrants to the note holder, one for 1,400,000
shares of NCT common stock at an exercise price per share of the lesser of $0.07
or the lowest closing bid price of NCT common stock for the period from the
grant date through the first anniversary, or $0.027 per share. The fair value of
the warrant was less than $0.1 million (determined using the Black-Scholes
option pricing model) and was recorded as a discount to the related note payable
based upon allocation of the relative fair values of the instruments. The other
warrant was for 15,000,000 shares at an exercise price of $0.01 per share,
subject to certain conditions and vested and became exercisable in its entirety
as of the date, if any, that both of the following events occurred: (a) NCT
failed to pay when due and payable (April 7, 2003) any amount owed by it to the
note holder under the promissory note, dated December 6, 2002, in the principal
amount of $385,000, and (b) NCT failed, as of the date that the note became due
and payable (April 7, 2003), to pay any amount owed by NCT under certain
registration penalty provisions and such payment obligation had not been
otherwise discharged. If the event described in clause (b) occurred but the
event described in clause (a) did not occur, then this warrant vested and became
exercisable as to 2,000,000 shares only. During 2003, both of these events
occurred and we recorded the fair value of this warrant (calculated as of May
30, 2003) as interest expense of $0.6 million (determined using the
Black-Scholes option pricing model) for the year ended December 31, 2003 as a
result of this vesting. On September 4, 2003, 2,500,000 shares of the warrant
issued to Alpha Capital on December 6, 2002 were cancelled resulting in no
accounting effect. Based upon additional negotiation in 2003, the warrant vested
as to 12.5 million shares and 2.5 million warrant shares were cancelled.
During 2003, in conjunction with the issuance of convertible notes, NCT
issued Carole Salkind five-year warrants to acquire an aggregate of 175,175,579
shares of its common stock at exercise prices ranging from $0.029 to $0.055 per
share, a weighted average exercise price of $0.04078. The fair value of these
warrants was $5.6 million (determined using the Black-Scholes option pricing
model). Based upon allocation of the relative fair values of the instruments, we
recorded a discount of $4.8 million to the convertible notes issued to Carole
Salkind. During 2003, we issued warrants to outside consultants for the right to
acquire an aggregate of 3,000,000 shares of our common stock at exercise prices
ranging from $0.0312 to $0.048 per share, a weighed average exercise price of
$0.0438 and recorded a charge for consulting services of $0.1 million
(determined using the Black-Scholes option pricing model).
F-39
Warrant activity is summarized as follows:
Years Ended December 31,
------------------------------------------------------------------------------------
2001 2002 2003
------------------------- -------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------- ----------- ------------ ------------
Outstanding at beginning of year 21,048,331 $ 0.36 43,725,585 $ 0.207 169,667,922 $ 0.0910
Warrants granted 33,542,254 $ 0.13 126,627,087 $ 0.066 178,175,579 $ 0.0408
Warrants exercised (10,000,000) $ 0.08 - $ - - $ -
Warrants canceled, expired or forfeited (865,000) $ 0.40 (684,750) $ 0.621 (3,838,164) $ 0.2512
------------ ------------- ------------
Outstanding at end of year 43,725,585 $ 0.21 169,667,922 $ 0.091 344,005,337 $ 0.0601
============ ============= ============
Warrants exercisable at year-end 42,396,318 $ 0.20 168,788,705 $ 0.090 343,639,714 (a) $ 0.0597
============ ============= ============
Footnote:
- ---------
(a) Exercisable subject to the approval by the company's stockholders of a
sufficient increase in the number of shares of common stock authorized.
The following table summarizes information about warrants outstanding at
December 31, 2003:
Warrants Outstanding Warrants Exercisable
------------------------------------------------- --------------------------------
Weighted
Average
Remaining
Weighted Contractual Weighted
Range of Number Average Life Number Average
Exercise Prices Outstanding Exercise Price (In Years) Exercisable Exercise Price
------------------ -------------- -------------- ------------ -------------- --------------
$0.0100 to $0.0290 40,900,000 $0.02190 2.31 40,900,000 $0.02190
$0.0310 to $0.0400 94,775,579 $0.03780 4.68 94,775,579 $0.03780
$0.0410 to $0.0500 89,606,373 $0.04356 4.51 89,606,373 $0.04356
$0.0535 to $0.0700 44,729,491 $0.06387 3.91 44,729,491 $0.06387
$0.0710 to $0.0990 58,104,310 $1.07866 3.22 58,104,310 $0.07866
$0.1000 to $0.7500 15,889,584 $0.30547 1.64 15,523,961 $0.30296
-------------- --------------
344,005,337 343,639,714
============== ==============
Stock Options and Warrants of Pro Tech Communications, Inc.:
On March 5, 1998, the Pro Tech Board of Directors adopted the 1998 Stock
Option Plan for the benefit of its directors, officers, employees and
consultants. This plan originally authorized the issuance of up to 500,000
shares of common stock and was increased to 2 million shares of common stock on
August 11, 2000. The authorized shares for this plan were increased to 30
million on April 12, 2002 at Pro Tech's annual meeting of stockholders. As of
December 31, 2003, Pro Tech's outstanding stock options have exercise prices
ranging from $0.06 to $0.4375 and a weighted average remaining contractual life
of approximately 3.8 years. The following table summarizes Pro Tech's stock
option activity:
Years Ended December 31,
------------------------------------------------------------------------------------
2001 2002 2003
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- ------------ -------------- ------------ ------------- ------------
Outstanding at beginning of year 1,528,000 $ 0.440 1,740,000 $ 0.283 1,372,500 $ 0.253
Options granted 940,000 $ 0.170 250,000 $ 0.060 - $ -
Options exercised - $ - - $ - - $ -
Options expired (728,000) $ 0.468 (617,500) $ 0.259 (87,500) $ 0.402
-------------- -------------- -------------
Outstanding at end of year 1,740,000 $ 0.283 1,372,500 $ 0.253 1,285,000 $ 0.242
============== ============== =============
Options exercisable at year-end 1,187,500 $ 0.265 1,235,000 $ 0.232 1,285,000 $ 0.242
============== ============== =============
In connection with issuance of Pro Tech's series A preferred stock, Pro
Tech provided warrants to purchase 4,500,000 shares of Pro Tech's common stock.
The warrants were exercisable at $0.50 per share and expired on October 28,
2003. In connection with Pro Tech's series B preferred stock, Pro Tech issued a
warrant to purchase 1,000,000 shares of its common stock. The warrant is
exercisable at $0.13 per share and expires on July 30, 2004. Pro Tech has the
right to require the warrant holder to exercise upon a call by Pro Tech under
the following
F-40
conditions: (1) one-third of the warrant is callable if the closing bid price of
the common stock for each of the previous fifteen days equals or exceeds $0.177
per share and the average daily trading volume during such period is at least
150,000 shares; (2) two-thirds of the warrant is callable if the closing bid
price of the common stock for each of the previous fifteen days equals or
exceeds $0.244 per share and the average daily trading volume during such period
is at least 150,000 shares; and (3) the entire warrant is callable if the
closing bid price of the common stock for each of the previous fifteen days
equals or exceeds $0.295 per share and the average daily trading volume during
such period is at least 150,000 shares. We estimated the fair value of the
warrants issued in connection with our issuance of Pro Tech preferred stock
using the Black-Scholes option pricing model (see Pro Tech preferred stock
discussion in Note 16).
As of December 31, 2003, the outstanding Pro Tech warrants have an exercise
price of $0.13 and a weighted average remaining contractual life of less than
one year. The following table summarizes Pro Tech's warrant activity:
Years Ended December 31,
-----------------------------------------------------------------------------
2001 2002 2003
------------------------ ------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ----------- ------------ ------------- ------------
Outstanding at beginning of year 4,500,000 $ 0.500 5,500,000 $ 0.433 5,500,000 $ 0.433
Warrants granted 1,000,000 $ 0.130 - $ - - $ -
Warrants canceled or expired - $ - - $ - (4,500,000) $ 0.500
------------ ----------- -------------
Outstanding at end of year 5,500,000 $ 0.433 5,500,000 $ 0.433 1,000,000 $ 0.130
============ =========== =============
18. Other (Income) Expense:
(In thousands of dollars)
For the Years Ended December 31,
------------------------------------------
2001 2002 2003
------------- ------------- --------------
Settlement of accounts payable $ (67) $ - $ (54)
Write-down of prepaid royalty - 563 -
Minority share of loss in subsidiary - Pro Tech (473) (458) -
Other (397) (426) (190)
------------- ------------- --------------
Other (income) expense (classified as operating) $ (937) $ (321) $ (244)
============= ============= ==============
Finance costs associated with non-registration
of common shares $ 2,318 $ 6,070 $ 2,207
Litigation settlements (Notes 11 and 16) - - (5,317)
Default penalties on debt (Note 12) 1,208 441 2,103
Other-than-temporary decline in value of available-for-sale
securities 7,036 765 -
Depreciation in fair value of warrant 1,355 151 1
Realized loss on sale of trading securities 2,301 - -
Inducement charge 190 - -
Reserve for notes receivable 1,000 - -
Other 691 (16) 63
------------- ------------- --------------
Other (income) expense (classified as non-operating) $ 16,099 $ 7,411 $ (943)
============= ============= ==============
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). For the years
ended December 31, 2001 and 2002, respectively, NCT recorded
other-than-temporary realized losses of $3.9 million and $0.7 million included
in other (income) expense, net in the consolidated statement of operations. At
December 31, 2003, an unrealized loss of $0.1 million included on the
consolidated balance sheet as part of accumulated other comprehensive income
(loss).
F-41
The company accounts for its investment in InsiderStreet.com, Inc., (now
known as Neometrix Corp.) stock as available-for-sale securities valued at fair
value, with unrealized gains and losses excluded from earnings but reported in a
separate component of stockholders' equity (capital deficit) until they are
sold. For the year ended December 31, 2001 (second quarter of 2001), the holding
loss of $2.5 million was considered other-than-temporary due to the longevity of
the economic downturn in the industry sector and company specific prospects and
is included in other (income) expense, net in the consolidated statement of
operations.
In 2001, we decided to reacquire the DMC licenses held by two licensees,
Eagle Assets Limited and Brookepark Limited and we accrued an aggregate of $4.0
million for this reacquisition cost. As a result, we incurred an aggregate
charge of $1.3 million, net of $2.7 million reduction of deferred revenue
previously recorded from the sale of licenses, classified as write downs of
investment and repurchased licenses in our consolidated statement of operations.
Concurrently, we ceased recognition of revenue on these DMC licenses.
19. Costs of Exiting Activities:
On December 18, 2001, the Board of Directors of Artera Group International
Limited decided to suspend underperforming operations and reduce employees. In
connection therewith, the company recorded a write-down of $1.1 million for the
year ended December 31, 2001 principally relating to equipment and other costs
yet to be incurred at December 31, 2001. For the year ended December 31, 2002
the company recorded a write-down of $0.4 million relating to the remainder of
the net assets.
On March 21, 2002, the Board of Directors of Artera Group International
Limited, a U.K.-based subsidiary, decided that the corporation should cease all
operations and be liquidated. Cessation of operations was formalized on April 5,
2002 and liquidation proceedings are pending at December 31, 2003.
In December 2001, management decided to close the company's Maryland
research facilities. In connection therewith, the company recorded a charge for
the year ended December 31, 2001 of $0.8 million principally relating to lease
termination and other costs yet to be incurred at December 31, 2001. The
abandonment of this facility was completed in the first quarter of 2002. For the
year ended December 31, 2002, we recorded employee termination costs of $0.3
million along with an adjustment relating to the lease termination and lawsuit
settlement of $(0.6) million.
These costs have been included in the consolidated statement of operations
as "costs of exiting activities."
On February 28, 2002, DMC Cinema, Inc. ceased business operations and had
no material operations at date of discontinuance.
F-42
20. Supplemental Cash Flow Disclosures:
(In thousands of dollars)
For the Years Ended December 31,
---------------------------------------------
2001 2002 2003
--------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 11 $ 17 $ 35
=============== ============= =============
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 $ - $ - $ (53)
=============== ============= =============
Issuance of series H preferred stock in exchange for previously accrued
acquisition of subsidiary $ - $ 14,000 $ -
=============== ============= =============
Issuance of common stock upon conversion of principal portion of
convertible notes $ 500 $ 375 $ -
=============== ============= =============
Issuance of common stock in exchange for common stock of subsidiary $ 984 $ - $ -
=============== ============= =============
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 common stock for services $ 435 $ 19 $ -
=============== ============= =============
Issuance of notes for placement services rendered $ 527 $ - $ -
=============== ============= =============
Issuance of options and warrants for services $ 438 $ - $ -
=============== ============= =============
Issuance of common stock upon exchange of principal portion of convertible
notes of subsidiary $ 2,477 $ 200 $ 1,754
=============== ============= =============
Issuance of common stock in exchange for preferred stock of subsidiary $ 261 $ - $ -
=============== ============= =============
Property and equipment financed through capitalized leases and notes payable $ 1,404 $ 15 $ -
=============== ============= =============
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 $ - $ -
=============== ============= =============
Issuance of common stock to fulfill common stock payable obligation $ - $ - $ 2,296
=============== ============= =============
Issuance of common stock upon conversion of preferred stock and dividends $ - $ - $ 785
=============== ============= =============
Issuance of common stock to settle litigation $ - $ - $ 4,125
=============== ============= =============
Finance costs associated with non-registration of common shares
on preferred stock of subsidiary $ - $ - $ 1,896
=============== ============= =============
21. Related Parties:
Carole Salkind
Beginning in 1999, NCT has issued convertible notes to Carole Salkind, a
stockholder, an accredited investor and spouse of a former director of NCT. As
of December 31, 2003, the principal balance outstanding of these notes
aggregated approximately $33.8 million (see Note 12). The notes are
collateralized by substantially all the assets of NCT Group, Inc. and certain
assets of NCT Video Displays, Inc. 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, except Pro Tech. 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.
Consulting Agreements
On January 25, 2002, NCT and Leben Care, Inc. entered into a consulting
agreement. This agreement replaced an agreement dated January 19, 1999. The
consulting agreement calls for a monthly fee of $2,500, payable at the end of
the one-year term, and equity compensation in the form of options. The agreement
was renewed for one year at the end of its term and will expire on January 25,
2004. On January 8, 2002 and January 25, 2002, NCT granted to Leben Care, Inc.
options to purchase 8,350,000 shares of NCT common stock at exercise prices
ranging from $0.079 to $0.130 (an aggregate exercise price of $809,000). The
options vested on the date of grant. The
F-43
options expire on dates ranging from May 22, 2006 to January 24, 2007. The
options were granted in consideration of consulting services provided by Leben
Care to NCT. Carole Salkind's son Steven Salkind is the sole shareholder of
Leben Care. We recorded a charge of $545,000 and zero for the fair value (see
Note 17) of the options and a $120,000 and $30,000 consulting fee as called for
under the agreement for consulting expenses included in selling, general and
administrative expenses in our consolidated statement of operations for the
years ended December 31, 2002 and 2003, respectively. The accrued consulting
expenses of $150,000 are included in accrued expenses at December 31, 2003 in
our consolidated balance sheet.
On July 1, 2001, NCT and Stop Noise, Inc. (formerly known as Stopnoise.com,
Inc.) entered into a consulting agreement. The consulting agreement is for an
initial one-year term and calls for equity compensation in the form of options.
On February 27, 2002, NCT granted to Stop Noise, Inc. five-year options to
purchase 3,375,000 shares of NCT common stock at exercise prices ranging from
$0.079 to $0.120 (an aggregate exercise price of $312,500). The options vested
on June 30, 2002. The options expire on dates ranging from June 30, 2006 to
February 26, 2007. The options were granted in consideration of consulting
services provided by Stop Noise to NCT. Carole Salkind's son Steven Salkind is
the sole shareholder of Stop Noise. We recorded an aggregate charge for the fair
value (see Note 17) of the options as called for under the agreement of
approximately $187,000 for consulting expenses included in selling, general and
administrative expenses in our consolidated statement of operations for the year
ended December 31, 2002. The agreement was renewed for one-year at the end of
its initial term and expired on June 30, 2003. On July 14, 2003, NCT issued a
warrant to John Harris, as designee for Stop Noise, Inc. to satisfy health care
coverage obligations under the consulting agreement dated July 1, 2001. We
recorded a charge for the fair value of the warrant of $17,500 for consulting
expenses included in selling, general and administrative expenses in our
consolidated statement of operations for the year ended December 31, 2003.
On September 30, 2002, NCT and Acme Associates, Inc. entered into a
consulting agreement. The consulting agreement calls for a monthly fee of
$2,500, payable at the end of the one-year term, and equity compensation in the
form of options. The agreement was renewed for one-year at the end of its
initial term and will expire on September 30, 2004. On September 30, 2002, NCT
granted to Acme Associates, Inc. a five-year option to purchase 50,000,000
shares of NCT common stock at an exercise price of $0.07 per share (an aggregate
exercise price of $3.5 million). The options vested on the date of grant. The
September 30, 2002 consulting agreement was amended on July 14, 2003, September
11, 2003, October 3, 2003, October 14, 2003, November 3, 2003, November 21, 2003
and December 17, 2003 to provide for additional consulting services with
additional options as consideration. Pursuant to the amendments, on July 14,
2003, September 11, 2003, October 3, 2003, October 14, 2003, November 3, 2003,
November 21, 2003 and December 17, 2003, NCT granted to Acme Associates, Inc.
non-plan options to purchase an aggregate of 190,500,000 shares of NCT common
stock at exercise prices ranging from $0.0312 to $0.052 per share (an aggregate
exercise price of $7.4 million). The five-year options vested on their
respective dates of grant. We recorded an aggregate charge of $0.8 million for
the fair value of the options as called for under the amendments to the
agreement for consulting expenses included in selling, general administrative
expenses in our consolidated statement of operations for the year ended December
31, 2003. The options were granted in consideration of consulting services
provided by Acme Associates to NCT. Carole Salkind is the sole shareholder of
Acme Associates. We recorded a charge of $2,625,000 and $5,561,000 (of which
approximately $4.7 million was during the fourth quarter of 2003) for the fair
value (see Note 17) of the options and a $25,000 and $12,500 consulting fee as
called for under the agreement for consulting expenses included in selling,
general and administrative expenses in our consolidated statement of operations
for the years ended December 31, 2002 and 2003, respectively. The accrued
consulting expenses of $37,500 are included in accrued expenses at December 31,
2003 in our consolidated balance sheet.
On December 26, 2002, NCT and Motorworld, Incorporated entered into a
consulting agreement. The agreement calls for a monthly fee of $2,500, payable
at the end of the one-year term, and equity compensation in the form of options.
On December 26, 2002, NCT granted to Motorworld, Incorporated a five-year option
to purchase 23,000,000 shares of NCT common stock at an exercise price of $0.042
per share (an aggregate exercise price of $966,000). The options vested on the
date of grant. The options were granted in consideration of consulting services
provided by Motorworld to NCT. Carole Salkind is the sole shareholder of
Motorworld Incorporated. We have recorded a charge of $724,000 and zero for the
fair value (see Note 17) of the options and a zero and $30,000 consulting fee as
called for under the agreement for consulting expenses included in selling,
general and administrative expenses in our consolidated statement of operations
for the years ended December 31, 2002 and 2003, respectively. The accrued
consulting expenses of $30,000 are included in accrued expenses at December 31,
2003 in our consolidated balance sheet.
On January 23, 2003, NCT and Inframe, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
consideration of consulting services provided by Inframe to NCT. Such consulting
services are performed by Morton Salkind, husband of Carole Salkind, acting on
behalf of Inframe, Inc. Carole Salkind is the sole shareholder
F-44
of Inframe, Inc. The agreement expires on January 23, 2004 and is subject to a
one-year renewal unless cancelled after the initial period. Pursuant to the
agreement, on January 23, 2003, NCT granted to Inframe, Inc. non-plan options to
purchase 23,000,000 shares of NCT common stock at an exercise price of $0.042
per share (an aggregate exercise price of $1.0 million). The five-year options
vest on the date of grant. We have recorded a charge of $0.7 million for the
fair value of the options (see Note 17) and a $27,500 consulting fee as called
for under the agreement for consulting expenses included in selling, general and
administrative expenses in our consolidated statement of operations for the year
ended December 31, 2003. The accrued consulting expenses of $27,500 are included
in accrued expenses at December 31, 2003 in our consolidated balance sheet.
On February 11, 2003, NCT and Avant Interactive, Inc. entered into a
consulting agreement. The agreement calls for a monthly fee of $2,500, payable
at the end of the one-year term, and equity compensation in the form of options,
in consideration of consulting services provided by Avant to NCT. Such
consulting services are performed by Morton Salkind, husband of Carole Salkind,
acting on behalf of Avant Interactive, Inc. Carole Salkind is the sole
shareholder of Avant Interactive, Inc. The agreement expires on February 11,
2004 and is subject to a one-year renewal unless cancelled after the initial
period. The February 11, 2003 consulting agreement was amended on March 12,
2003, April 3, 2003 and April 11, 2003 to provide for additional consulting
services, with additional options as compensation. Pursuant to the agreement and
its subsequent amendments, on February 11, 2003, March 12, 2003, April 3, 2003
and April 11, 2003, NCT granted to Avant Interactive, Inc. non-plan options to
purchase 7,000,000 shares, 13,500,000 shares, 2,000,000 shares and 2,000,000
shares, respectively, of NCT common stock at exercise prices of $0.04 per share,
$0.031 per share, $0.029 per share and $0.031 per share, respectively (an
aggregate exercise price of $0.8 million). The five-year options vest on their
respective dates of grant. We have recorded an aggregate charge of $0.6 million
for the fair value of the options (see Note 17) and a $27,500 consulting fee as
called for under the agreement for consulting expenses included in selling,
general and administrative expenses in our consolidated statement of operations
for the year ended December 31, 2003. The accrued consulting expenses of $27,500
are included in accrued expenses at December 31, 2003 in our consolidated
balance sheet.
On April 17, 2003, NCT and Turbo Networks, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
consideration of consulting services provided by Turbo to NCT. Such consulting
services are performed by Morton Salkind, husband of Carole Salkind, acting on
behalf of Turbo Networks, Inc. Carole Salkind is the sole shareholder of Turbo
Networks, Inc. The agreement expires on April 17, 2004 and is subject to a
one-year renewal unless cancelled after the initial period. The April 17, 2003
consulting agreement was amended on May 22, 2003 and June 28, 2003 to provide
for additional consulting services, with additional options as compensation.
Pursuant to the agreement and its subsequent amendments, on April 17, 2003, May
22, 2003 and June 28, 2003, NCT granted to Turbo Networks, Inc. non-plan options
to purchase 2,000,000 shares, 18,550,000 shares and 2,000,000 shares,
respectively, of NCT common stock at exercise prices of $0.037, $0.042 and
$0.04, respectively (an aggregate exercise price of $0.9 million). The five-year
options vest on their respective dates of grant. We have recorded an aggregate
charge of $0.7 million for the fair value of the options (see Note 17) and a
$20,000 consulting fee as called for under the agreement for consulting expenses
included in selling, general and administrative expenses in our consolidated
statement of operations for the year ended December 31, 2003. The accrued
consulting expenses of $20,000 are included in accrued expenses at December 31,
2003 in our consolidated balance sheet.
On June 12, 2003, NCT and Maple Industries, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
consideration of consulting services provided by Maple to NCT. Such consulting
services are performed by Morton Salkind, husband of Carole Salkind, acting on
behalf of Maple Industries, Inc. Carole Salkind is the sole shareholder of Maple
Industries, Inc. The agreement expires on June 12, 2004 and is subject to a
one-year renewal unless cancelled after the initial period. Pursuant to the
agreement, on June 12, 2003, NCT granted to Maple Industries, Inc. non-plan
options to purchase 23,000,000 shares of NCT common stock at an exercise price
of $0.044 (an aggregate exercise price of $1.0 million). The five-year option
vests on its date of grant. We have recorded an aggregate charge of $0.8 million
for the fair value of the options (see Note 17) and a $17,500 consulting fee as
called for under the agreement for consulting expenses included in selling,
general and administrative expenses in our consolidated statement of operations
for the year ended December 31, 2003. The accrued consulting expenses of $17,500
are included in accrued expenses at December 31, 2003 in our consolidated
balance sheet.
SpringerRun, Inc.
On July 2, 2003, NCT entered into a consulting agreement with SpringerRun,
Inc., under which SpringerRun provides consulting services to NCT and its
subsidiaries, consisting primarily of raising capital and debt financing,
identifying potential joint ventures and other strategic transactions and
finding distributors, licensees and end users for products and technologies. The
term of the SpringerRun agreement is one year, with possible
F-45
renewals. Under the agreement, NCT will pay SpringerRun the following: for
capital raised, 6% of the amount thereof plus 5% of the amount thereof in
warrants to purchase NCT stock; for debt financing raised, 1% of the amount
thereof; for joint ventures or distribution license or end user agreements
entered into, 7% of NCT's net revenues therefrom for three years, 5% thereafter.
In lieu of cash, some of the compensation described above may, at SpringerRun's
request and if agreed to by NCT, be given as stock of NCT or of a joint venture
entered into by NCT. The compensation formula and other material terms and
conditions in this agreement are comparable to those used by NCT with similarly
situated, unrelated consultants. To date, NCT has not paid SpringerRun any
compensation under the agreement, and none is owed to it. John McCloy II, a
Director of NCT, is Chairman, Chief Executive Officer, a Director and a 40%
shareholder of SpringerRun. John McCloy II's son John McCloy III is President,
Treasurer, Secretary, a Director and a 25% shareholder of SpringerRun. John
McCloy II's son Rush McCloy is a 25% shareholder of SpringerRun.
Spyder Technologies Group, LLC
On October 24, 2002, Artera Group, Inc. entered into a master distributor
agreement with Spyder Technologies Group, LLC under which Spyder distributed the
Artera Turbo service in Puerto Rico, the U.S. Virgin Islands and a number of
countries in the Caribbean region. The term of the agreement was through
February 2008. Compensation consisted of a commission to Spyder of 50% of gross
revenues on sales originated by local distributors that were brought to Artera
by Spyder, out of which those distributors were to be paid 30% to 40% of gross
revenues as a commission from Spyder. With some exceptions in Puerto Rico and
the U.S. Virgin Islands, Spyder's distribution rights were exclusive, although
Artera had the right to terminate the exclusivity in February of each year
beginning 2004 if specified revenue thresholds were not met. The compensation
structure, commission rate and other material terms of the agreement were
comparable to those used by Artera with similarly situated, unrelated master
distributors at the time. On October 1, 2003, Artera and Spyder entered into a
new, superseding master distributor agreement for Puerto Rico, the U.S. Virgin
Islands and these same countries in the Caribbean. The new agreement changed the
compensation structure from one of commissions from Artera to Spyder for
distributors brought by Spyder to Artera, to one of royalties from Spyder to
Artera on sales to distributors by Spyder. The royalties are calculated on a per
unit basis and vary based upon the size and category of the end user of the
product and the support services provided by Artera. The term of the new
agreement is through February 2008. The compensation structure, royalty rates
and other material terms of the agreement are comparable to those used by Artera
with similarly situated, unrelated master distributors.
On October 24, 2002, Artera entered into a master distributor agreement
with Spyder under which Spyder distributed the Artera Turbo service in the
United States. The term of the agreement was through October 2003, with either
party having the right to terminate upon 30 days' notice thereafter.
Compensation consisted of a commission to Spyder of 50% of gross revenues on
sales originated by U.S. distributors that were brought to Artera by Spyder, out
of which those distributors were to be paid 30% to 40% of gross revenues as a
commission from Spyder. Spyder's distribution rights in the U.S. were
non-exclusive. The compensation structure, commission rate and other material
terms of the agreement were comparable to those used by Artera with similarly
situated, unrelated master distributors at the time. On September 1, 2003,
Artera and Spyder entered into a new, superseding master distributor agreement
for the U.S., with expansion to cover Canada, South America and Central America.
The new agreement changed the compensation structure from one of commissions
from Artera to Spyder for distributors brought by Spyder to Artera, to one of
royalties from Spyder to Artera on sales to distributors by Spyder. The
royalties are calculated on a per unit basis and vary based upon the size and
category of the end user of the product and the support services provided by
Artera. The term of the new agreement is five years. The compensation structure,
royalty rates and other material terms of the agreement are comparable to those
used by Artera with similarly situated, unrelated master distributors.
On September 1, 2003, Artera entered into a reseller agreement with Spyder
under which Spyder resells the Artera Turbo service in the United States,
Canada, South America and Central America. Spyder is to pay Artera per unit
royalties that vary based upon the size and category of the end user of the
product. The term of the agreement is one year, with possible renewals. The
compensation structure, royalty rates and other material terms of the agreement
are comparable to those used by Artera with similarly situated, unrelated
resellers.
In addition, from time to time on an "as needed" basis, Spyder provides
technical consulting services to Artera pertaining to Artera Turbo. Spyder
earned $12,330 and $86,840 for technical consulting expenses included in
research and development expenses in our consolidated statement of operations
for the years ended December 31, 2002 and 2003, respectively. At December 31,
2003, $18,580 was included in accounts payable on the consolidated balance
sheet.
Jonathan Parrella, the son of NCT's Chairman and Chief Executive Officer,
is President of and holds a 45% ownership interest in Spyder. Bulldog
F-46
Communications, Inc. holds a 25% ownership interest in Spyder. Bulldog
Communications, Inc. is owned 20% by each of Michael Parrella, Karen Parrella,
Michael Parrella, Jr., Jonathan Parrella and Daniel Parrella (the Chairman and
Chief Executive Officer of NCT, and, respectively, his wife and three sons).
Michael Parrella is also the Chairman of the Board, and Karen Parrella is the
President, of Bulldog Communications. Spyder earned aggregate commissions of
$143 and $3,017 for the years ended December 31, 2002 and 2003, respectively. At
December 31, 2003, $102 was included in accounts payable on our consolidated
balance sheet.
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 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.
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.
Compensation of Director
The company's former Chairman of the Board of Directors, who continued as a
director until his resignation on May 29, 2002, received compensation from the
company in 2001 and 2002 of $63,000 and $15,750, respectively.
Incentive Compensation of Management
NCT's Chairman of the Board of Directors and Chief Executive Officer, who,
at December 31, 2003, holds options and warrants for the right to acquire an
aggregate of 51,686,634 shares of the company's common stock, received an
incentive bonus consisting of a 1% cash override on the value derived by the
company, in cash or otherwise, upon the execution of transactions with
unaffiliated parties. Under this arrangement, the company included in selling,
general and administrative costs approximately $299,000, $136,000 and $433,000
for the years ended December 31, 2001, 2002 and 2003, respectively.
The company's President and a director of NCT, who at December 31, 2003
holds options and warrants for the right to acquire an aggregate of 10,643,323
shares of the company's common stock, had an incentive bonus arrangement
consisting of a 1/3% cash override on the value derived from transactions, in
cash or otherwise, entered into by the company with unaffiliated parties. Her
participation in this incentive bonus commenced effective January 2001. Under
this arrangement, the company included in selling, general and administrative
costs approximately $99,000, $45,000 and $144,000 for the years ended December
31, 2001, 2002 and 2003, respectively.
The company's Senior Vice President, Chief Financial Officer, who at
December 31, 2003 holds options and warrants for the right to acquire an
aggregate of 7,599,024 shares of the company's common stock, had an incentive
bonus arrangement consisting of a 1/2% cash override on the value derived from
transactions, in cash or otherwise, entered into by the company with
unaffiliated parties. Under this arrangement, the company included in selling,
general and administrative costs approximately $150,000, $68,000 and $217,000
for the years ended December 31, 2001, 2002 and 2003, respectively.
The company's Senior Vice President, Corporate Development, who at December
31, 2003 holds options for the right to acquire an aggregate of 3,753,049 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 consisting of 1% of the value of specific subsidiary financing
transactions in which he was directly involved and 1/2% of the value of
licensing agreements and joint venture alliances in which he was directly
involved. Under this arrangement, the company included in selling, general and
administrative expenses approximately $56,000, zero and zero for the years ended
December 31, 2001, 2002 and 2003, respectively.
F-47
Guarantee of Indebtedness by Management
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.
Indebtedness of Management
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. Effective May 1, 2002, the borrowed
funds had not been repaid but were consolidated with interest into an
outstanding promissory note due January 15, 2003 for an aggregate principal
amount owed to NCT of $107,960. The note bore interest at an annual rate of 6.0%
through its due date of January 15, 2003, and bears interest at prime plus 5%
thereafter. The note was not paid when due on January 15, 2003 and became past
due. NCT is seeking to collect on the May 1, 2002 note. However, NCT believes
that incentive compensation (see above) that is or will be due him may offset
the amount owed NCT. At December 31, 2003, $24,000 was due him.
On January 30, 2002, NCT's Chairman of the Board of Directors and Chief
Executive Officer, entered into a promissory note in the principal amount of
$29,510 to borrow funds from the company in anticipation of cash overrides due
under the incentive compensation arrangement described above. The note matures
on January 31, 2004. The note bears interest at 5.75% per annum payable at
maturity and default interest at the stated rate plus 5%. Subsequent to December
31, 2003, the note plus accrued interest was paid.
Indemnification of Management
On or about December 5, 2002, NCT agreed to indemnify three individuals,
NCT directors and officers, who had each also served as a Director of Artera
Group International Limited, a U.K.-based subsidiary, prior to its entering into
liquidation proceedings (see Note 19) for any liabilities that may arise against
them from claims under Section 214 of the U.K. Insolvency Act and to provide
them with legal representation with respect to the claims. On November 26, 2003,
the Liquidator issued letters to these three individuals stating that he would
not be asserting any Section 214 claims against them. As a result, no amount has
been accrued at December 31, 2003.
Crammer Road LLC
The company has executed a number of transactions with Crammer Road (see
Note 16) and settled a legal action brought in 2002 by Crammer Road. Crammer
Road was the sole stockholder of DMC NY, the owner of 16 licenses previously
purchased from Distributed Media Corporation. We acquired 25% of DMC NY in 2001
and 75% in 2002 (see Note 2). We intended to 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 under the April 12, 2001 private equity credit agreement
with Crammer Road, but reacquired those 12,000 DMC NY shares in exchange for our
series H preferred stock. The purchase price paid for DMC NY aggregated
approximately $27.2 million and was arrived at in various negotiations between
NCT and Crammer Road. We did not obtain a valuation from an outside firm.
Crammer Road obtained the 16 DMC licenses from other investors in private
transactions. In 2000, five investors in our series E and F preferred stock
contributed their 16 New York area DMC licenses to Crammer Road in a private
transaction, in exchange for membership interests in Crammer Road. The investors
holding the licenses advised NCT and DMC of plans to contribute the licenses to
Crammer Road. NCT and DMC did not object to those contributions. 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 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. 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 capital contribution of licenses to Crammer Road was for purposes of
administrative convenience 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 it a perceived form of
liquidity, possibly through an initial public offering or through the
acquisition of DMC NY by DMC or NCT. Subsequently, it appeared that the
licensees lacked the ability to initiate services under the license agreements.
Concurrently, due to a lack of capital (such capital would have been provided,
in part, by the licensees for services rendered on their behalf and at their
request by DMC), DMC was unable to execute its business plan to provide, install
and operate our digital broadcast system at locations in the New York area. DMC
was undercapitalized despite the license fees received because it was unable to
attract adequate private financing or complete an initial public offering to
establish a sufficient installed base of Sight & Sound locations that would be
attractive to prospective advertisers. As such, Crammer Road did not perceive
that it had an opportunity to exploit
F-48
the licenses in a viable business venture. DMC did not receive any requests from
Crammer Road to install the locations it had secured. In addition, Crammer Road
did not seek to obtain advertising contracts as all of its efforts would require
additional investment in the venture. On September 27, 2000, DMC NY issued
16,000 shares of its common stock in exchange for 16 licenses held by Crammer
Road pursuant to a license exchange agreement. Certain officers and directors of
NCT comprise 100% of the Board of Directors of DMC NY.
Vidikron of America
On September 29, 2000, NCT and Distributed Media Corporation signed
separate agreements to license various microbroadcasting technologies to
Vidikron of America, Inc. for an aggregate of $2 million. Vidikron is a
manufacturer of high-end home theater equipment. Vidikron's intention was to
develop commercial video applications using the technology it licensed from NCT
and DMC. We used $1 million of the proceeds from Vidikron for working capital
and general corporate purposes and the other $1 million to acquire 1,000 shares
of common stock of DMC New York, Inc. in 2001. Such shares of DMC NY were owned
by Crammer Road LLC. Crammer Road's sole corporate director is Navigator
Management Ltd. The sole director of Navigator Management is David Sims.
Vidikron's majority shareholder is Markland LLC. Markland's sole corporate
director is also Navigator Management Ltd.
22. 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
the losses on available-for-sale securities and stock compensation expenses
related to warrants and options.
The company files consolidated federal and state tax returns. At December
31, 2003, the company had available estimated net operating loss carryforwards
of approximately $157.5 million, estimated capital loss carryforwards of $3.6
million and estimated research and development credit carryforwards of
approximately $2.4 million for federal income tax purposes of which
approximately $27.6 million will expire within the five years ending December
31, 2008 ($1.6 million expire in 2004) and approximately $129.9 million expire
at various dates from December 31, 2009 through December 31, 2023. 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 NCT 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 $2.8 million and $17.7 million in 2002 and 2003, respectively. The
difference is as follows:
Years Ended December 31,
----------------------------------------------
2001 2002 2003
-------------- -------------- -------------
Statutory rate (34.0)% (34.0)% (34.0)%
State tax net of federal effect (5.6) (5.6) (5.6)
Permanent differences 11.5 13.8 0.2
Effect of adjustments to prior year
net operating loss carryforwards 2.7 - (19.0)
Increase in valuation allowances 25.4 25.8 58.4
-------------- -------------- -------------
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.
F-49
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the company's deferred tax assets and liabilities are as follows:
(In thousands of dollars)
December 31,
---------------------------------
2002 2003
--------------- ----------------
Accounts receivable $ 36 $ 44
Inventory 159 112
Investments 6,107 6,108
Property, equipment and intangibles 173 (193)
Accrued expenses 1,456 1,347
Stock compensation 5,997 9,337
--------------- ----------------
Total temporary differences $ 13,928 $ 16,755
Federal net operating and capital loss carryforwards 48,818 63,784
Federal research and development credits 2,492 2,408
--------------- ----------------
$ 65,238 $ 82,947
Less: Valuation allowance (65,238) (82,947)
--------------- ----------------
Deferred taxes $ - $ -
=============== ================
23. Litigation:
Theater Radio Network - InsiderStreet (Neometrix) 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 February 28, 2002, Theater Radio Network (DMC Cinema) ceased
operations, although that does not preclude it (or an assignee) from further
prosecuting the Theater Radio Network claims. On March 26, 2002, Theater Radio
Network retained new counsel in this action. On or about October 9, 2002,
InsiderStreet.com, Inc. changed its name to Neometrix Corp. On or about April
14, 2003, Neometrix Corp. changed its name to Neometrix Technology Group, Inc.
Management believes that at this stage it cannot assess the likelihood of a
favorable outcome. Further, since the amount of damages, if any, Theater Radio
Network may recover cannot be quantified until the legal process is complete; no
amount has been recorded in the financial statements.
Production Resource Group Litigation
On June 6, 2001, Production Resource Group ("PRG") began legal proceedings
against NCT and our subsidiary, Distributed Media Corporation, in the Superior
Court for the Judicial District of Fairfield County, Connecticut. PRG's
complaint alleged 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(R) equipment. The complaint also alleged 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. On July 26, 2001, the court granted a pre-judgment remedy
giving PRG the right to attach or garnish up to $2.1 million of specified assets
of NCT and DMC. On October 4, 2001, we filed an answer to the plaintiff's
complaint, denying PRG's material allegations, seeking dismissal of the
complaint and counterclaiming for breach of PRG's obligation to deliver
equipment.
F-50
On December 20, 2001, NCT and DMC accepted an Offer of Judgment requiring
NCT and DMC to pay PRG $2.0 million. That judgment was entered on January 17,
2002 along with costs of $0.2 million. In December 2001, we recorded all
anticipated liability related to payment of this judgment. PRG is conducting
post-judgment discovery regarding enforcement of the judgment. In June 2003, in
furtherance of its efforts to collect on the judgment, PRG filed the judgment in
the Circuit Court for Anne Arundel County, Maryland; the Superior Court of New
Jersey, Hudson County; and the Circuit Court of St. Lucie County, Florida.
Beginning February 2003, PRG has served papers on NCT and DMC seeking to enforce
the judgment against their assets. PRG has also served papers on the
subsidiaries of NCT and DMC, and on various third parties with which NCT and DMC
do business, seeking to enforce the judgment against any assets of NCT and DMC
in the possession of those served. On or about December 10, 2003, PRG filed a
motion for an Order in Aid of Execution requiring NCT and DMC to turn over to a
state marshal, for possible sale for the benefit of PRG, equity and debt
securities NCT and DMC hold (including equity in their subsidiaries) sufficient
to satisfy the approximately $2.1 million remaining on the judgment. To the
extent that further payment of the judgment is in cash or in securities
surrendered and sold for the benefit of PRG, such payment could be material to
our financial position. As of December 31, 2003, PRG had collected approximately
$129,000 in NCT's and DMC's cash or cash equivalent assets as a result of this
judgment and the pre-judgment remedy referred to above. PRG is currently
conducting post-judgment discovery regarding additional enforcement of the
judgment.
On January 2, 2002, outside the scope of the judgment entered into with NCT
and DMC, PRG amended its Connecticut complaint to allege that NCT's Chairman and
Chief Executive Officer Michael Parrella, in dealing with PRG on behalf of NCT,
committed breaches of good faith and fair dealing, unfair trade practices and
fraud. NCT has agreed to indemnify Mr. Parrella for any liabilities (including
legal fees) he may incur as a result of the PRG claims against him in this
action. On July 15, 2002, Mr. Parrella moved to strike the portions of PRG's
amended complaint that pertain to him personally. On February 25, 2003, the
court granted Mr. Parrella's motion in part, striking those portions of the
amended complaint against him that allege a breach of an obligation of good
faith and fair dealing, but declining to strike those portions of the amended
complaint against him that allege unfair trade practices and fraud. On August 8,
2003, Mr. Parrella filed a motion for summary judgment on all remaining
allegations. To the extent that NCT may ultimately indemnify Mr. Parrella for
liabilities arising out of these allegations and for related legal fees, we
believe that our directors and officers indemnification insurance (subject to
certain exceptions under the insurance policy and after payment of a $100,000
deductible) will cover such payments. Discovery as to Mr. Parrella has begun.
On or about December 15, 2003, PRG filed a complaint in the Delaware
Chancery Court in and for New Castle County against NCT, DMC, Michael J.
Parrella (Chairman and Chief Executive Officer of NCT), Irene Lebovics
(President and a Director of NCT), John J. McCloy II (a Director of NCT) and Sam
Oolie (a Director of NCT). PRG's complaint alleges that NCT and DMC are
insolvent, that during the insolvency the individual named defendants owe a
fiduciary duty to PRG as a judgment creditor in the Connecticut litigation
described above, and that the individual defendants breached that duty. The
complaint seeks the appointment of a receiver over the business and assets of
NCT and DMC and money damages against the individual defendants in an amount at
least equal to the amount of the Connecticut judgment remaining unsatisfied. NCT
has agreed to indemnify the individual defendants for any liabilities (including
legal fees) they may incur as a result of the PRG claims against them in this
Delaware action. NCT has submitted those claims for director and officer
indemnification insurance coverage by two insurers.
Artera Trademark Oppositions
On December 17, 2002 and December 23, 2002, in connection with all of NCT's
pending U.S. trademark registration applications for "Artera Turbo" and with
some of NCT's pending U.S. trademark registration applications for "Artera,"
Altera Corporation filed oppositions to the granting of such registrations. The
alleged basis for the oppositions is, in essence, that the Artera marks are
confusingly similar to Altera Corporation's mark of "Altera" which was
registered in a number of product and service categories prior to the initial
filing of the "Artera Turbo" and "Artera" applications being opposed. NCT
intends to defend against these oppositions vigorously.
NCT has issued shares of its common stock during 2003 in settlement of
legal claims (see Note 16). See Note 28 for litigation activity occurring after
December 31, 2003.
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 or 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.
F-51
24. 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
----------------------------- ----------------
2004 $ 590
2005 561
2006 466
2007 440
2008 369
Thereafter 462
----------------
Total minimum lease payments $ 2,888
================
Rent expense was $1.0 million, $0.7 million and $0.7 million for the years
ended December 31, 2001, 2002 and 2003, respectively.
Benefit Plan Liability:
In April 1996, the company established the NCT Group, Inc. 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 $0.7 million, while individual benefit exposure in each Benefit Plan fiscal
year is limited to $45,000. 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. The company believes it has sufficient accruals to
meet its obligation at December 31, 2003.
Advertising Commitments:
As of December 31, 2003, the company is obligated under Sight & Sound(R)
technology and services agreements to pay up to 25% of advertising revenue to
the locations airing and displaying advertisements. The amounts under these
agreements were negligible at December 31, 2003.
Contingencies:
Under the July 25, 2002 private equity credit agreement with Crammer Road,
we are required to put at least $5 million (the minimum commitment amount) of
our common stock, in exchange for cash, at a discount to market of 10% (see Note
16). This credit agreement provides that shares of up to $50 million (the
maximum commitment amount) of our common stock may be sold to Crammer Road
pursuant to put notices delivered by the company to Crammer Road. The company is
obligated to register for resale no less than 112% of the maximum commitment
amount. If we fail to issue shares for the minimum commitment amount during the
commitment period (which terminates 24 months after effectiveness of a resale
registration statement relating to the shares or earlier as described in the
agreement), we must pay Crammer Road, in immediately available funds, an amount
equal to the product of (i) the minimum commitment amount, less the aggregate
shares of our common stock actually delivered to Crammer Road under the equity
credit line and (ii) the 10% discount (the maximum would be $0.5 million).
The company may have a contingent liability arising out of a possible
violation of Section 5 of the Securities Act of 1933, as amended, 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. We ceased
this practice during 2001 and the passage of time will mitigate this
contingency. 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
F-52
company's obligations to them. We believe that at December 31, 2002 and 2003,
the company has no further contingent liability relating to this matter.
25. Segment Information:
Management views the company as being organized into three reportable
operating segments: communications, media and technology. Reportable segment
data as of December 31, 2001, 2002 and 2003 and for the years then ended are
provided in the table below. Information about our operating segments is found
following the table. Information about the goodwill and related impairment of
our operating segments is found in Note 3.
The Other data columns are 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 net interest expense, litigation liabilities and non-operating
fixed assets. Also included in the components of revenue attributed to
other-corporate are license fees and royalty revenue from subsidiaries that are
offset (eliminated) in the other-consolidating column. Other-consolidating
consists of items eliminated in consolidation such as intersegment revenue.
(In thousands of dollars)
Total
Reportable ---------- Other ------------- Grand
Communications Media Technology Segments Corporate Consolidating Total
------------------------------------------------------------------------------------------
2003:
License Fees and Royalties - External $ 843 $ 2,140 $ 14 $ 2,997 $ 16 $ - $ 3,013
Other Revenue - External 1,722 123 - 1,845 - - 1,845
Revenue - Other Operating Segments 1,116 9 - 1,125 173 (1,298) -
Interest (Income) Expense, net 2,593 2,796 (353) 5,036 9,252 - 14,288
Depreciation/Amortization 1,003 1,826 115 2,944 166 (2,386) 724
Net Loss (14,398) (4,038) (37) (18,473) (130,523) 118,696 (30,300)
Segment Assets 21,279 24,548 2,017 47,844 2,486 (37,555) 12,775
Capital Expenditures 150 - - 150 - - 150
2002:
License Fees and Royalties - External $ 2,334 $ 2,140 $ - $ 4,474 $ 19 $ - $ 4,493
Other Revenue - External 2,655 171 - 2,826 - - 2,826
Revenue - Other Operating Segments 974 (41) - 933 (10,141) 9,208 -
Interest (Income) Expense, net 1,922 1,575 (186) 3,311 4,400 - 7,711
Depreciation/Amortization 1,107 2,026 115 3,248 198 (2,141) 1,305
Net Loss (10,836) (8,520) (797) (20,153) (16,334) (3,618) (40,105)
Segment Assets 21,865 25,579 2,383 49,827 14,730 (50,988) 13,569
Capital Expenditures 18 - - 18 - - 18
2001:
License Fees and Royalties - External $ 2,639 $ 1,834 $ 1,028 $ 5,501 $ 132 $ - $ 5,633
Other Revenue - External 4,642 337 - 4,979 - - 4,979
Revenue - Other Operating Segments 738 441 - 1,179 10,033 (11,212) -
Interest (Income) Expense, net 4,005 528 76 4,609 1,518 26 6,153
Depreciation/Amortization 1,612 1,689 120 3,421 904 (1,348) 2,977
Loss before cumulative effect of
accounting change (27,430) (14,282) (4,361) (46,073) (25,349) (4,656) (76,078)
Cumulative effect of accounting change (1,582) - - (1,582) - - (1,582)
Net Loss (29,012) (14,282) (4,361) (47,655) (25,349) (4,656) (77,660)
Segment Assets 16,701 30,708 2,991 50,400 13,676 (44,067) 20,009
Capital Expenditures 1,780 991 - 2,771 10 - 2,781
COMMUNICATIONS:
NCT Hearing Products, Inc.:
NCT Hearing designs, develops and markets active noise reduction headset
products to the audio headphone and communications headset markets. The product
lines include the NoiseBuster(R) and the ProActive(R) lines. The NoiseBuster(R)
products consist of the NoiseBuster ANR headsets, consumer headsets, and the
NB-PCU, a headset used for in-flight passenger entertainment systems. 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.
F-53
Pro Tech Communications, Inc.:
Pro Tech designs, develops and manufactures light-weight telecommunications
headsets and new audio technologies for use 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.:
NCT Europe provides research and engineering services in the field of
active sound control technology to NCT Audio, NCT Hearing, DMC and other
business units as needed. NCT Europe also provides technical sales support
services to the company for European sales.
ConnectClearly.com, Inc.:
ConnectClearly was established to focus on the development of
Internet-telephony-based voice applications targeted to the e-commerce and e-CRM
(electronic customer relationship management) markets. NCT's proprietary
Internet telephony software would be the basis for developing a user-friendly
"click to talk" application for improving the completion rate of Internet
transactions by allowing for real-time customer service access by a user.
Principal markets for ConnectClearly are the telecommunications industries and
principal customers are original equipment manufacturers, system integrators and
end-users.
Artera Group, Inc.:
Artera is the developer of high-speed data communications and network
optimization technology. The information and traffic management benefits of this
advanced technology are applicable to enterprise as well as small/medium
business markets. The company's Artera Turbo(TM) Internet service optimizes last
mile performance and provides high-speed Internet usage to residential users.
The bandwidth and speed performance of traditional dial-up connections as well
as broadband connections such as cable, DSL, ISDN and Tl are dramatically
increased. In addition to the speed optimizations, the technology includes all
the features necessary for optimal network usage - ultra-secure firewall,
content control, email and usage accounting.
MEDIA:
NCT Audio Products, Inc.:
NCT Audio is engaged in the design, development and marketing of products,
which utilize flat panel transducer technology. The products available from NCT
Audio include the Gekko(TM) flat speaker and the ArtGekko(TM) printed grille
collection. The Gekko(TM) flat speaker's primary external market is the home
audio market. The principal customers are DMC and end-users.
Distributed Media Corporation:
DMC provides location based broadcast and billboard-type advertising
through a microbroadcasting network of Sight & Sound(R) systems within
commercial and professional settings. The Sight & Sound(R) systems consist of
flat panel transducer-based speakers (provided by NCT Audio), a personal
computer containing DMC's Sight & Sound(R) 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.
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 developed 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.
F-54
26. Geographical Information (by country of origin) - Total Segments:
(In thousands of dollars)
As of December 31, and
For the Years then Ended
-----------------------------------------------------
2001 2002 2003
----------------- ----------------- --------------
Revenue
United States $ 6,916 $ 4,460 $ 2,290
Europe 3,402 2,453 2,179
Far East 294 406 389
----------------- ----------------- --------------
Total $ 10,612 $ 7,319 $ 4,858
================= ================= ==============
Identifiable Assets
United States $ 19,272 $ 13,464 $ 12,689
Europe 737 105 86
Far East - - -
----------------- ----------------- --------------
Total $ 20,009 $ 13,569 $ 12,775
================= ================= ==============
27. Selected Quarterly Financial Data (Unaudited):
The following tables contain selected quarterly financial data for each
quarter of 2003 and 2002. 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 of dollars, except per share data)
Year Ended December 31, 2003
----------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
----------- ----------- ----------- ----------- -----------
Net revenue $ 1,182 $ 1,050 $ 1,190 $ 1,436 $ 4,858
Gross profit 971 869 945 1,219 4,004
Loss attributable to common stockholders (7,750) (8,730) (3,068) (13,700) (33,248)
Loss per share - basic and diluted $ (0.02) $ (0.02) $ (0.01) $ (0.02) $ (0.06)*
Year Ended December 31, 2002
----------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
----------- ----------- ----------- ----------- -----------
Net revenue $ 2,014 $ 2,055 $ 1,713 $ 1,537 $ 7,319
Gross profit 1,507 1,646 1,419 1,445 6,017
Loss attributable to common stockholders (6,879) (14,365) (11,961) (9,763) (42,968)
Loss per share - basic and diluted $ (0.02) $ (0.03) $ (0.03) $ (0.02) $ (0.10)
Footnotes:
- ----------
* Loss per share for each quarter is computed using the weighted-average number
of shares outstanding during that quarter and loss per share for the full year
is computed using the weighted-average number of shares outstanding during the
year. Therefore, the sum of the four quarters' loss per share does not equal the
full-year loss per share.
2nd Quarter 2003:
- -----------------
Includes $1.5 million charge for consulting expenses relating to the issuance of
options.
3rd Quarter 2003:
- -----------------
Includes $(4.9) million gain for settlement of litigation relating to some of
our convertible instruments.
4th Quarter 2003:
- -----------------
Includes $4.7 million charge for consulting expenses relating to the issuance of
options. Also includes $5.0 million interest expense relating to the increased
issuance of our convertible debt.
F-55
1st Quarter 2002:
- -----------------
Includes $0.3 million writedown due to impairment of goodwill attributed to our
step acquisition of NCT Audio. Also includes $0.3 million charge for costs of
exiting activities attributable to closing facilities.
2nd Quarter 2002:
- -----------------
Includes $9.2 million charge for our acquisition of the remaining 12,000 shares
of DMC New York ($14.0 million previously accrued 2nd quarter 2001).
4th Quarter 2002:
- -----------------
Includes $1.2 million charge for impairment of other intangible assets
attributed to our minority shareholders' portion of the license granted to Pro
Tech. Also includes $(0.1) million gain for costs of exiting activities
attributable to closing facilities and certain operations.
28. Subsequent Events:
Transactions with Carole Salkind
On February 13, 2004, NCT issued a convertible note payable to Ms. Salkind
for approximately $0.4 million as consideration for approximately $0.4 million
in cash. The note is due on demand and bears interest at 8% per annum payable at
maturity. The note is convertible into shares of our common stock at $0.05 per
share and may be exchanged for shares of common stock of any other NCT
subsidiary except Pro Tech that has an initial public offering (at the initial
public offering price thereof). In conjunction with the note, a five-year
warrant was issued to Ms. Salkind to purchase approximately 6.8 million shares
of our common stock at an exercise price of $0.05 per share.
On March 5, 2004 and March 15, 2004, NCT issued convertible notes payable
to Ms. Salkind for approximately $1.0 million as consideration for approximately
$1.0 million in cash. The notes are due on demand and bear interest at 8% per
annum. The notes are convertible into shares of our common stock and may be
exchanged for shares of common stock of any other NCT subsidiary except Pro Tech
that has an initial public offering (at the initial public offering price
thereof). In conjunction with the notes, five-year warrants were issued to Ms.
Salkind to purchase approximately 18.5 million shares of our common stock.
NCT defaulted on convertible notes payable to Ms. Salkind for an aggregate
principal of $11.2 million as they matured through March 2004. Of such defaults,
an aggregate of $5.2 million in principal, along with accrued interest and a
default penalty, representing notes that matured during January 2004 was rolled
into a new note for approximately $6.2 million dated March 15, 2004 and an
aggregate of $3.1 million in principal, along with accrued interest and a
default penalty, representing those maturing during February 2004 was rolled
into a new note dated March 15, 2004 for approximately $3.6 million. The notes
are due on demand and bear interest at 8% per annum. The notes are convertible
into shares of our common stock and may be exchanged for shares of common stock
of any other NCT subsidiary except Pro Tech that has an initial public offering
(at the initial public offering price thereof). In conjunction with these notes,
five-year warrants were issued to Ms. Salkind to purchase approximately 159.8
million shares of our common stock. We are currently in negotiation with Ms.
Salkind to cure approximately $2.9 million in principal representing notes that
matured during March 2004.
Infinite Technology Corporation
On March 31, 2004, ITC, Advancel and NCT entered into a cross-release
agreement that released the parties from any and all claims, through the date of
the cross-release, under prior agreements and affirms the ownership of ITC
common stock (see Notes 5 and 9). The agreement will result in the elimination
of $1.4 million as an obligation of Advancel and the reduction in the carrying
amount of the ITC common stock to its fair value. The pro forma effects of such
release, if it had been effected on December 31, 2003, would be a decrease in
liabilities and other assets of $1.4 million and $1.3 million, respectively, and
an increase in paid-in capital of $0.1 million.
Indemnification of Management
On or about January 14, 2004, NCT agreed to indemnify five individuals, NCT
directors and officers, for any liabilities that may arise against them in a
lawsuit brought in Delaware against them, NCT and NCT's subsidiary Distributed
Media Corporation by PRG and to provide them with legal representation in the
suit. This Delaware suit is separate from but related to the Connecticut suit
brought by PRG (see Note 23).
F-56
Litigation
Production Resource Group Litigation
In the portion of the Connecticut case against NCT and DMC, on February 25,
2004, NCT surrendered NCT's 5,876 shares of common stock of NCT Audio Products,
Inc. representing 100% of the issued and outstanding shares of NCT Audio, for
possible sale for the benefit of PRG. Such surrender may adversely affect NCT's
right to any further proceeds from the TSA/TST bankruptcy estate (see Note 11).
At the same time, DMC surrendered DMC's 20,000 shares of common stock of DMC
Cinema, Inc. representing 84% of the issued and outstanding shares of DMC
Cinema, its 100 shares of common stock of DMC HealthMedia Inc. representing 100%
of the issued and outstanding shares of DMC HealthMedia, a $153,956 principal
amount promissory note from (and related security agreement with) DMC Cinema and
a $1,388,666 principal amount promissory note from (and related security
agreement with) DMC HealthMedia, for possible sale for the benefit of PRG. NCT
reported to the court that all of the other equity and debt securities NCT owns
could not be so surrendered because they are covered by security interests in
favor of Carole Salkind and are in her possession. At December 31, 2003, the net
liabilities included in our consolidated balance sheet related to NCT Audio, DMC
Cinema and DMC HealthMedia were $16.1 million, $4.9 million and $1.7 million,
respectively. For the year ended December 31, 2003, the net earnings (loss)
before income taxes included in our consolidated statement of operation related
to NCT Audio, DMC Cinema and DMC HealthMedia were $2.0 million, less than $(0.1)
million and $(0.6) million, respectively.
In the portion of the Connecticut case against NCT Chairman and Chief
Executive Officer Michael Parrella (as to which NCT has agreed to indemnify Mr.
Parrella), on March 11, 2004, the court denied Mr. Parrella's motion to dismiss
all pending claims against him in the case. Trial has been tentatively scheduled
for September 2004. Mr. Parrella has told NCT that he intends to deny and defend
against all pending allegations.
In the Delaware case, on or about January 6, 2004, PRG amended its
complaint dated December 15, 2003 to add Cy E. Hammond (Chief Financial Officer
of NCT) as a defendant. PRG's amended complaint alleges that the individual
named defendants owe a fiduciary duty to PRG and breached that duty. The amended
complaint seeks money damages against the individual defendants in an amount at
least equal to the amount of the Connecticut judgment remaining unsatisfied. NCT
has agreed to indemnify Mr. Hammond for any liabilities (including legal fees)
he may incur as a result of the PRG claims against him in this Delaware action.
NCT has added Mr. Hammond to the submission of claims for director and officer
indemnification insurance coverage by two insurers along with the other
previously named individual defendants. On February 25, 2004, one of those
insurers initially denied coverage. NCT is considering whether to challenge that
initial denial. The other insurer has not yet stated its position with respect
to coverage. On February 13, 2004, the defendants filed a motion to dismiss all
claims in the amended complaint. On or about March 30, 2004, PRG again amended
its complaint, this time to refine and expand some of its claims relating to the
alleged mismanagement of the affairs of NCT and its subsidiaries (including
DMC). Discovery in the action has begun. NCT and DMC intend, and the individual
defendants have told NCT that they intend, to deny and defend against all
allegations.
F-57
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. and subsidiaries as of
December 31, 2002 and 2003 and for each of the years ended December 31, 2001,
2002 and 2003 taken as a whole. The 2001, 2002 and 2003 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/ Eisner LLP
- ----------------------
Eisner LLP
New York, New York
March 12, 2004
F-58
SCHEDULE II
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Charged Charged to
Balance at to costs other Balance at
beginning and accounts - Deductions - end of
Description of period expenses Describe Describe period
- ------------------------------------------------------ ---------- -------- ----------- -------------- ------------
Allowance for doubtful accounts:
Year ended December 31, 2001 $ 103 $ 249 $ (46) (a) $ (8) (b) $ 298
Year ended December 31, 2002 298 77 (29) (a) (6) (b) 340
Year ended December 31, 2003 340 8 (7) (a) - 341
Reserve for uncollectible amounts:
Year ended December 31, 2001 - 1,000 - - 1,000
Year ended December 31, 2002 1,000 - - - 1,000
Year ended December 31, 2003 1,000 - - - 1,000
Allowance for inventory obsolescence:
Year ended December 31, 2001 100 691 - - 791
Year ended December 31, 2002 791 239 - (626) (b) 404
Year ended December 31, 2003 404 - - (122) (b) 282
Accumulated depreciation:
Year ended December 31, 2001 4,352 936 1,115 (c) (1,809) (b) 4,594
Year ended December 31, 2002 4,594 852 186 (d) (1,836) (b) 3,796
Year ended December 31, 2003 3,796 429 25 (d) (1,606) (b) 2,644
Accumulated goodwill amortization:
Year ended December 31, 2001 5,182 1,691 16,239 (e) (21,988) (f) 1,124
Year ended December 31, 2002 1,124 - - - 1,124
Year ended December 31, 2003 1,124 - - - 1,124
Accumulated patent and other intangibles amortization:
Year ended December 31, 2001 3,536 350 - - 3,886
Year ended December 31, 2002 3,886 453 2,116 (e) (2,495) (f) 3,960
Year ended December 31, 2003 3,960 296 - - 4,256
Attention is directed to the foregoing auditors' report and to the accompanying
notes to our consolidated financial statements.
Footnotes:
- ----------
(a) Accounts written-off directly to expense.
(b) Accounts previously reserved for, written off in current year.
(c) Write off fixed asset dispositions against reserve.
(d) Currency translation adjustments.
(e) Write down intangibles to estimated fair value.
(f) Write off fully amortized intangibles.
F-59
NCT Group, Inc.
Index to Exhibits
Item 15(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.
3(c) Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of NCT Networks, Inc. (now known as Artera
Group, Inc.) as filed in the office of the Secretary of State of the
State of Delaware of February 23, 2001.
3(d)(1) Certificate of Designation, Preferences and Rights of Series H
Convertible Preferred Stock of NCT Group, Inc. as filed in the office
of the Secretary of State of the State of Delaware of June 21, 2002,
incorporated herein by reference to Exhibit 3(c) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
3(d)(2) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series H Convertible Preferred Stock of NCT Group, Inc.
as filed in the office of the Secretary of State of the State of
Delaware of March 7, 2003, incorporated herein by reference to Exhibit
3(a) NCT's Quarterly Report on Form 10-Q for the quarter ended March
31, 2003 filed on May 15, 2003.
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) Secretary's Certificate dated February 1, 1999, as to a five-year
extension of the expiration dates of the Warrants described in 4(a),
(b) and (c) above, incorporated herein by reference to Exhibit 4(e) of
the Company's Pre-effective Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-60574) filed on September 5, 2001.
4(e)(1) 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 by NCT on behalf of Ms. Salkind on February 13, 2001.
4(e)(2) 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.
II-1
4(f)(1) 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(f)(2) 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.
4(g)(1) Warrant issued to Carole Salkind for the purchase of 625,000 shares of
common stock dated August 22, 2001, filed by NCT as an exhibit to
Schedule 13D filed on behalf of Carole Salkind on September 14, 2001.
4(g)(2) 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.
4(h)(1) 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.
4(h)(2) 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.
4(i)(1) 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(i)(2) Letter agreement dated January 10, 2002 amending exercise price of
Warrant dated October 25, 2001 issued to Libra Finance S.A. for the
purchase of 20,000,000 shares of NCT common stock from a purchase
price of $0.09 per share to the lower of: $0.07 per share or the
lowest closing bid price from January 10, 2002 through June 28, 2002,
incorporated by reference to Exhibit 4(c) to the Quarterly Report
filed on Form 10-Q for the quarter ended March 31, 2002, filed on May
15, 2002.
4(i)(3) Letter Agreement dated as of June 28, 2002 amending exercise price of
warrant dated October 25, 2001 for the purchase of 20,000,000 shares
of NCT common stock to the lesser of $0.07 or the lowest closing bid
price between January 10, 2002 and June 28, 2003 inclusive,
incorporated by reference to Exhibit 4(i)(3) of NCT's Pre-effective
Amendment 8 to Registration Statement on Form S-1 (Registration No.
333-60574), filed on September 16, 2003.
4(j) 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(k) Warrant dated January 1, 2002 issued to Piedmont Consulting, Inc. for
the purchase of 500,000 shares of NCT common stock at a purchase price
of $0.20 per share, incorporated by reference to Exhibit 4(a) to the
Quarterly Report filed on Form 10-Q for the quarter ended March 31,
2002, filed on May 15, 2002.
II-2
4(l)(1) Warrant dated January 10, 2002 issued to Libra Finance S.A. for the
purchase of 5,000,000 shares of NCT common stock at a purchase price
of the lower of: $0.07 per share or the lowest closing bid price from
January 10, 2002 through June 28, 2002, incorporated by reference to
Exhibit 4(b) to the Quarterly Report filed on Form 10-Q for the
quarter ended March 31, 2002, filed on May 15, 2002.
4(l)(2) Letter Agreement dated as of June 28, 2002 amending exercise price of
warrant dated January 10, 2002 for the purchase of 5,000,000 shares of
NCT common stock to the lesser of $0.07 or the lowest closing bid
price between January 10, 2002 and June 28, 2003 inclusive,
incorporated herein by reference to Exhibit 4(l)(2) of NCT's
Pre-effective Amendment No.8 to Registration Statement of Form S-1
(Registration No. 333-60574), filed on September 16, 2003.
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, incorporated herein by reference to Exhibit 4(m) to the
Annual Report on Form 10-K for the year ended December 31, 2001, filed
on April 30, 2002.
4(n) Option dated January 11, 2002 granted to Carole Salkind to acquire a
10% equity interest in Artera Group, Inc, incorporated herein by
reference to Exhibit 4(n) to the Annual Report on Form 10-K for the
year ended December 31, 2001, filed on April 30, 2002.
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, incorporated herein by reference to Exhibit 4(o) to
the Annual Report on Form 10-K for the year ended December 31, 2001,
filed on April 30, 2002.
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, incorporated herein by reference to Exhibit 4(p) to
the Annual Report on Form 10-K for the year ended December 31, 2001,
filed on April 30, 2002.
4(q) Option granted to Leben Care, Inc. dated January 25, 2002 for an
aggregate of 8,350,000 shares of NCT common stock at exercise prices
ranging from $0.079 to $0.13 per share, incorporated herein by
reference to Exhibit 4(ah) of NCT's Pre-effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
4(r) Warrant dated January 31, 2002 issued to Robert C. Lau for the
purchase of 104,167 shares of NCT common stock at a purchase price of
$0.13 per share, incorporated by reference to Exhibit 4(d) to the
Quarterly Report filed on Form 10-Q for the quarter ended March 31,
2002, filed on May 15, 2002.
4(s) 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, incorporated herein by reference to Exhibit 4(q)
to the Annual Report on Form 10-K for the year ended December 31,
2001, filed on April 30, 2002.
4(t) Option granted to Stop Noise, Inc. dated February 27, 2002 for an
aggregate of 3,375,000 shares of NCT common stock at exercise prices
ranging from $0.079 to $0.12 per share, incorporated herein by
reference to Exhibit 4(ai) of NCT's Pre-effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
4(u) Warrant dated March 1, 2002 issued to Carole Salkind for the purchase
of 437,500 shares of NCT common stock at a purchase price of $0.079
per share, incorporated by reference to Exhibit 4(e) to the Quarterly
Report filed on Form 10-Q for the quarter ended March 31, 2002, filed
on May 15, 2002.
II-3
4(v) Warrant dated May 2, 2002 issued to Carole Salkind for the purchase of
3,188,708 shares of NCT common stock at a purchase price of $0.094 per
share, incorporated by reference to Exhibit 4(f) to the Quarterly
Report filed on Form 10-Q for the quarter ended March 31, 2002, filed
on May 15, 2002.
4(w) Warrant dated May 2, 2002 issued to Carole Salkind for the purchase of
3,562,500 shares of NCT common stock at a purchase price of $0.094 per
share, incorporated by reference to Exhibit 4(g) to the Quarterly
Report filed on Form 10-Q for the quarter ended March 31, 2002, filed
on May 15, 2002.
4(x) Warrant dated May 29, 2002 issued to Carole Salkind for the purchase
of 1,500,000 shares of NCT common stock at a purchase price of $0.095
per share, incorporated herein by reference to Exhibit 4(y) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(y) Warrant dated June 2, 2002 issued to Carole Salkind for the purchase
of 1,500,000 shares of NCT common stock at a purchase price of $0.097
per share, incorporated herein by reference to Exhibit 4(z) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(z) Warrant dated June 13, 2002 issued to Blue Future, Inc. for the
purchase of 250,000 shares of NCT common stock at a purchase price of
$0.16 per share, incorporated herein by reference to Exhibit 4(ad) of
NCT's Pre-effective Amendment No. 5 to Registration Statement on Form
S-1 (Registration No. 333-60574) filed on August 9, 2002.
4(aa) Warrant dated June 17, 2002 issued to Thomas Cotton for the purchase
of 350,000 shares of NCT common stock at a purchase price of $0.081
per share, incorporated herein by reference to Exhibit 4(ae) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(ab) Warrant dated June 17, 2002 issued to Barry H. Chappel for the
purchase of 400,000 shares of NCT common stock at a purchase price of
$0.081 per share, incorporated herein by reference to Exhibit 4(af) of
NCT's Pre-effective Amendment No. 5 to Registration Statement on Form
S-1 (Registration No. 333-60574) filed on August 9, 2002.
4(ac) Warrant dated June 17, 2002 issued to John Capozzi for the purchase of
400,000 shares of NCT common stock at a purchase price of $0.081 per
share, incorporated herein by reference to Exhibit (4ag) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(ad) Warrant dated July 3, 2002 issued to Carole Salkind for the purchase
of 1,500,000 shares of NCT common stock at a purchase price of $0.078
per share, incorporated herein by reference to Exhibit 4(aa) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(ae) Warrant dated July 12, 2002 issued to Carole Salkind for the purchase
of 20,000,000 shares of NCT common stock at a purchase price of $0.075
per share, incorporated herein by reference to Exhibit 4(ab) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(af) Warrant dated July 15, 2002 issued to Carole Salkind for the purchase
of 1,500,000 shares of NCT common stock at a purchase price of $0.075
per share, incorporated herein by reference to Exhibit 4(ac) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
II-4
4(ag) Warrant dated July 23, 2002 issued to Carole Salkind for the purchase
of 2,250,000 shares of common stock, incorporated herein by reference
to Exhibit 4(aj) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
4(ah) Warrant dated August 14, 2002 issued to Carole Salkind for the
purchase of 1,500,000 shares of common stock, incorporated herein by
reference to Exhibit 4(ak) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
4(ai) Warrant dated August 29, 2002 issued to Carole Salkind for the
purchase of 2,100,000 shares of common stock, incorporated herein by
reference to Exhibit 4(al) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
4(aj) Warrant dated September 9, 2002 issued to Carole Salkind for the
purchase of 1,500,000 shares of common stock, incorporated herein by
reference to Exhibit 4(am) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
4(ak) Warrant dated September 30, 2002 issued to Carole Salkind for the
purchase of 10,000,000 shares of Common Stock, incorporated herein by
reference to Exhibit 4(an) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
4(al) Warrant dated September 30, 2002 issued to Carole Salkind for the
purchase of 16,157,565 shares of common stock, incorporated herein by
reference to Exhibit 4(ao) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
4(am) Option dated as of September 30, 2002 granted to Acme Associates, Inc.
for the purchase of 50,000,000 shares of NCT common stock at an
exercise price of $0.070 per share (prior options to Acme Associates,
Inc, were cancelled by this new grant), incorporated herein by
reference to Exhibit 4(ap) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
4(an) Warrant dated October 11, 2002 issued to FairPoint Communications,
Inc. for the purchase of 2,000,000 shares of NCT common stock at a
purchase price of $0.15 per share, incorporated by reference to
Exhibit 4(aj) of the company's Annual Report on Form 10-K for the year
ended December 31, 2002, filed on April 4, 2003.
4(ao) Warrant dated November 7, 2002 issued to Carole Salkind for the
purchase of 1,750,000 shares of NCT common stock at a purchase price
of $0.072 per share, incorporated by reference to Exhibit 4(af) of the
company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, filed November 14, 2002.
4(ap) Warrant dated November 20, 2002 issued to Carole Salkind for the
purchase of 1,750,000 shares of NCT common stock at a purchase price
of $0.054 per share, incorporated by reference to Exhibit 4(al) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed on April 4, 2003.
4(aq) Warrant dated November 21, 2002 issued to Carole Salkind for the
purchase of 6,271,926 shares of NCT common stock at a purchase price
of $0.0535 per share, incorporated by reference to Exhibit 4(am) of
the company's Annual Report on Form 10-K for the year ended December
31, 2002, filed on April 4, 2003.
II-5
4(ar) Warrant dated November 22, 2002 issued to Gavin Brackenridge for the
purchase of 300,000 shares of NCT common stock at a purchase price of
$0.054 per share, incorporated by reference to Exhibit 4(an) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed on April 4, 2003.
4(as) Warrant dated December 2, 2002 issued to Carole Salkind for the
purchase of 1,500,000 shares of NCT common stock at a purchase price
of $0.048 per share, incorporated by reference to Exhibit 4(ao) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(at) Warrant dated December 6, 2002 issued to Alpha Capital
Aktiengesellschaft for the purchase of 1,400,000 shares of NCT common
stock at a purchase price of the lower of $0.07 per share or the
lowest closing bid price per share from December 6, 2002 through
December 6, 2003, incorporated by reference to Exhibit 4(bl) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(au) Warrant dated December 6, 2002 issued to Alpha Capital
Aktiengesellschaft for the purchase of 15,000,000 shares of NCT common
stock at a purchase price of $0.01 per share, incorporated by
reference to Exhibit 4(bm) of the company's Annual Report on Form 10-K
for the year ended December 31, 2002, filed April 4, 2003.
4(av) Letter Agreement dated April 7, 2003 amending the vesting terms of a
December 6, 2002 warrant for 15,000,000 shares issued to Alpha Capital
Aktiengesellschaft, incorporated herein by reference to Exhibit 4(l)
of NCT's Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 filed on May 15, 2003.
4(aw) Warrant dated December 11, 2002 issued to KEQ Partners III (as
designee of Kalkines, Arky Zall & Bernstein LLP, HealthNet Connections
LLC and HNC New York Representatives LLC) for the purchase of
1,250,000 shares of NCT Common Stock at a purchase price of $0.063 per
share, incorporated by reference to Exhibit 4(a) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(ax) Warrant dated December 16, 2002 issued to Carole Salkind for the
purchase of 1,750,000 shares of NCT common stock at a purchase price
of $0.042 per share, incorporated by reference to Exhibit 4(ap) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(ay) Warrant dated December 16, 2002 issued to Robert L. Bernstein for the
purchase of 200,000 shares of NCT common stock at a purchase price of
$0.515 per share, incorporated by reference to Exhibit 4(aq) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(az)(1) Warrant dated December 16, 2002 issued to Gavin Brackenridge for the
purchase of 200,000 shares of NCT common stock at a purchase price of
$0.125 per share, incorporated by reference to Exhibit 4(ar) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(az)(2) Warrant dated December 16, 2002 issued to Gavin Brackenridge for the
purchase of 250,000 shares of NCT common stock at a purchase price of
$0.08 per share, incorporated by reference to Exhibit 4(as) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(az)(3) Warrant dated December 16, 2002 issued to Gavin Brackenridge for the
purchase of 250,000 shares of NCT common stock at a purchase price of
$0.150 per share, incorporated by reference to Exhibit 4(at) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
II-6
4(ba)(1) Warrant dated December 16, 2002 issued to Dr. Henry Murray (as
designee of The Murray Group) for the purchase of 67,000 shares of NCT
common stock at a purchase price of $0.100 per share, incorporated by
reference to Exhibit 4(au) of the company's Annual Report on Form 10-K
for the year ended December 31, 2002, filed April 4, 2003.
4(ba)(2) Warrant dated December 16, 2002 issued to Diana T. Murray (as designee
of The Murray Group) for the purchase of 33,000 shares of NCT common
stock at a purchase price of $0.100 per share, incorporated by
reference to Exhibit 4(av) of the company's Annual Report on Form 10-K
for the year ended December 31, 2002, filed April 4, 2003.
4(ba)(3) Warrant dated December 16, 2002 issued to Dr. Henry Masur (as designee
of The Murray Group) for the purchase of 100,000 shares of NCT common
stock at a purchase price of $0.100 per share, incorporated by
reference to Exhibit 4(aw) of the company's Annual Report on Form 10-K
for the year ended December 31, 2002, filed April 4, 2003.
4(bb) Warrant dated December 16, 2002 issued to Steven Keenan for the
purchase of 300,000 shares of NCT common stock at a purchase price of
$0.099 per share, incorporated by reference to Exhibit 4(ax) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(bc) Warrant dated December 16, 2002 issued to B. Michael Pisani / Granite
Securities Cooperation for the purchase of 200,000 shares of NCT
common stock at a purchase price of $0.100 per share, incorporated by
reference to Exhibit 4(ay) of the company's Annual Report on Form 10-K
for the year ended December 31, 2002, filed April 4, 2003.
4(bd) Warrant dated December 16, 2002 issued to Charles T. Lanktree for the
purchase of 200,000 shares of NCT common stock at a purchase price of
$0.100 per share, incorporated by reference to Exhibit 4(az) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(be)(1) Warrant dated December 16, 2002 issued to Sandy Eisemann / NRI, Inc.
(as designee of C&C Partners, Inc.) for the purchase of 50,000 shares
of NCT common stock at a purchase price of $0.100 per share,
incorporated by reference to Exhibit 4(ba) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
4(be)(2) Warrant dated December 16, 2002 issued to Sandy Eisemann / NRI, Inc.
(as designee of C&C Partners, Inc.) for the purchase of 25,000 shares
of NCT common stock at a purchase price of $0.250 per share,
incorporated by reference to Exhibit 4(bb) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
4(be)(3) Warrant dated December 16, 2002 issued to Sandy Eisemann / NRI, Inc.
(as designee of C&C Partners, Inc.) for the purchase of 25,000 shares
of NCT common stock at a purchase price of $0.500 per share,
incorporated by reference to Exhibit 4(bc) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
4(be)(4) Warrant dated December 16, 2002 issued to Sandy Eisemann / NRI, Inc.
(as designee of C&C Partners, Inc.) for the purchase of 25,000 shares
of NCT common stock at a purchase price of $0.750 per share,
incorporated by reference to Exhibit 4(bd) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
4(bf)(1) Warrant dated December 16, 2002 issued to Robert F. Callahan (as
designee of C&C Partners, Inc.) for the purchase of 50,000 shares of
NCT common stock at a purchase price of $0.100 per share, incorporated
by reference to Exhibit 4(be) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
II-7
4(bf)(2) Warrant dated December 16, 2002 issued to Robert F. Callahan (as
designee of C&C Partners, Inc.) for the purchase of 25,000 shares of
NCT common stock at a purchase price of $0.250 per share, incorporated
by reference to Exhibit 4(bf) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
4(bf)(3) Warrant dated December 16, 2002 issued to Robert F. Callahan (as
designee of C&C Partners, Inc.) for the purchase of 25,000 shares of
NCT common stock at a purchase price of $0.500 per share, incorporated
by reference to Exhibit 4(bg) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
4(bf)(4) Warrant dated December 16, 2002 issued to Robert F. Callahan (as
designee of C&C Partners, Inc.) for the purchase of 25,000 shares of
NCT common stock at a purchase price of $0.750 per share, incorporated
by reference to Exhibit 4(bh) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
4(bg) Warrant dated December 26, 2002 issued to Carole Salkind for the
purchase of 10,206,373 shares of NCT common stock at a purchase price
of $0.042 per share, incorporated by reference to Exhibit 4(bi) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(bh) Option dated December 26, 2002 granted to Motorworld, Incorporated for
an aggregate of 23,000,000 shares of NCT common stock at an exercise
price of $0.042 per share, incorporated by reference to Exhibit 4(bn)
of the company's Annual Report on Form 10-K for the year ended
December 31, 2002, filed April 4, 2003.
4(bi) Warrant dated December 30, 2002 issued to Carole Salkind for the
purchase of 1,500,000 shares of NCT common stock at a purchase price
of $0.0412 per share, incorporated by reference to Exhibit 4(bj) of
the company's Annual Report on Form 10-K for the year ended December
31, 2002, filed April 4, 2003.
4(bj) Warrant dated December 31, 2002 issued to Michael Dickerson for the
purchase of 250,000 shares of NCT common stock at a purchase price of
$0.10 per share, incorporated by reference to Exhibit 4(bk) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
4(bk) Warrant dated January 15, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.041 per share, incorporated herein by reference to Exhibit 4(by)
of NCT's Pre-effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(bl) Option granted to Inframe, Inc. dated January 23, 2003 for an
aggregate of 23,000,000 shares of NCT common stock at an exercise
price of $0.042 per share, incorporated by reference to Exhibit 4(bo)
of the company's Annual Report on Form 10-K for the year ended
December 31, 2002, filed April 4, 2003.
4(bm) Warrant dated January 23, 2003 issued to Carole Salkind for the
purchase of 11,775,579 shares of NCT common stock at a purchase price
of $0.04 per share, incorporated herein by reference to Exhibit 4(bz)
of NCT's Pre-effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(bn) Warrant dated January 30, 2003 issued to Carole Salkind for the
purchase of 1,500,000 shares of NCT common stock at a purchase price
of $0.041 per share, incorporated herein by reference to Exhibit 4(ca)
of NCT's Pre-effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
II-8
4(bo) Option granted to Avant Interactive, Inc. dated February 11, 2003 for
an aggregate of 7,000,000 shares of NCT common stock at an exercise
price of $0.04 per share, incorporated by reference to Exhibit 4(bp)
of the company's Annual Report on Form 10-K for the year ended
December 31, 2002, filed April 4, 2003.
4(bp) Warrant dated February 11, 2003 issued to Carole Salkind for the
purchase of 5,500,000 shares of NCT common stock at a purchase price
of $0.04 per share, incorporated herein by reference to Exhibit 4(cb)
of NCT's Pre-effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(bq) Warrant dated March 4, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.035
per share, incorporated herein by reference to Exhibit 4(cc) of NCT's
Pre-effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(br) Option granted to Avant Interactive, Inc. dated March 12, 2003 for an
aggregate of 13,500,000 shares of NCT common stock at an exercise
price of $0.031 per share, incorporated by reference to Exhibit 4(bq)
of the company's Annual Report on Form 10-K for the year ended
December 31, 2002, filed April 4, 2003.
4(bs) Warrant dated March 13, 2003 issued to Carole Salkind for the purchase
of 4,250,000 shares of NCT common stock at a purchase price of $0.031
per share, incorporated herein by reference to Exhibit 4(cd) of NCT's
Pre-effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(bt) Warrant dated March 13, 2003 issued to Carole Salkind for the purchase
of 3,750,000 shares of NCT common stock at a purchase price of $0.031
per share, incorporated herein by reference to Exhibit 4(ce) of NCT's
Pre-effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(bu) Warrant dated April 2, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.029
per share, incorporated herein by reference to Exhibit 4(cf) of NCT's
Pre-effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(bv) Option granted to Avant Interactive, Inc. dated April 3, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.029 per share, incorporated by reference to Exhibit 4(m) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(bw) Warrant dated April 11, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT Common Stock at a purchase price of $0.031
per share, incorporated herein by reference to 4(m) NCT's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003 filed on May
15, 2003.
4(bx) Option granted to Avant Interactive, Inc. dated April 11, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.031 per share, incorporated by reference to Exhibit 4(o) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(by) Option granted to Turbo Networks Inc. dated April 17, 2003 for an
aggregate of 2,000,000 shares of NCT common stock at an exercise price
of $0.037 per share, incorporated by reference to Exhibit 4(q) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
II-9
4(bz) Warrant dated April 21, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT Common Stock at a purchase price of $0.037
per share, incorporated herein by reference to Exhibit 4(n) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003
filed on May 15, 2003.
4(ca) Warrant dated May 15, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.046
per share, incorporated by reference to Exhibit 4(s) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(cb) Option granted to Turbo Networks Inc. dated May 22, 2003 for an
aggregate of 18,550,000 shares of NCT common stock at an exercise
price of $0.042 per share, incorporated by reference to Exhibit 4(t)
of the company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 filed on August 14, 2003.
4(cc) Warrant dated May 22, 2003 issued to Carole Salkind for the purchase
of 7,500,000 shares of NCT common stock at a purchase price of $0.042
per share, incorporated by reference to Exhibit 4(u) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(cd) Warrant dated May 28, 2003 issued to Carole Salkind for the purchase
of 1,900,000 shares of NCT common stock at a purchase price of $0.044
per share, incorporated by reference to Exhibit 4(v) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(ce) Warrant dated June 5, 2003 issued to NATCO, LLC for the purchase of
2,250,000 shares of NCT common stock at the purchase price of $0.048
per share, incorporated by reference to Exhibit 4(w) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(cf) Warrant dated June 12, 2003 issued to Carole Salkind for the purchase
of 10,500,000 shares of NCT common stock at the purchase price of
$0.044 per share, incorporated by reference to Exhibit 4(y) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(cg) Warrant dated June 12, 2003 issued to Carole Salkind for the purchase
of 2,000,0000 shares of NCT common stock at a purchase price of $0.044
per share, incorporated by reference to Exhibit 4(z) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(ch) Option granted to Maple Industries, Inc. dated June 12, 2003 for the
purchase of 23,000,000 shares of NCT common stock at an exercise price
of $0.044 per share, incorporated by reference to Exhibit 4(x) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(ci) Warrant dated June 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.038
per share, incorporated by reference to Exhibit 4(ab) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(cj) Option granted to Turbo Networks, Inc. dated June 28, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.04 per share, incorporated by reference to Exhibit 4(aa) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
II-10
4(ck)(1) Warrant dated July 14, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.0312
per share, incorporated by reference to Exhibit 4(ad) of the company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003
filed on August 14, 2003.
4(ck)(2) Warrant dated July 14, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.0312
per share, incorporated by reference to Exhibit 4(ae) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on November 19, 2003.
4(cl) Warrant dated July 14, 2003 issued to John Harris (as designee of Stop
Noise, Inc.) for the purchase of 750,000 shares of NCT common stock at
a purchase price of $0.0312 per share, incorporated by reference to
Exhibit 4(ac) of the company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 filed on August 14, 2003.
4(cm) Option granted to Acme Associates, Inc. dated July 14, 2003 for the
purchase of 25,000,000 shares of NCT common stock at an exercise price
of $0.0312 per share, incorporated herein by reference to Exhibit
4(cm) of NCT's Pre-effective Amendment No. 8 to Registration Statement
on Form S-1 (Registration No. 333-60574) filed on September 16, 2003.
4(cn)(1) Warrant dated July 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.042
per share, incorporated by reference to Exhibit 4(af) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(cn)(2) Warrant dated July 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.042
per share, incorporated by reference to Exhibit 4(ag) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(co) Warrant dated August 7, 2003 issued to Carole Salkind for the purchase
of 2,750,000 shares of NCT common stock at a purchase price of $0.0539
per share, incorporated herein by reference to Exhibit 4(co) to NCT's
Pre-Effective Amendment No. 8 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on September 16, 2003.
4(cp) Warrant dated August 18, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.045 per share, incorporated herein by reference to Exhibit 4(cp)
to NCT's Pre-Effective Amendment No. 8 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on September 16, 2003.
4(cq)(1) Warrant dated August 28, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.055 per share, incorporated herein by reference to Exhibit
4(cq)(1) to NCT's Pre-Effective Amendment No. 8 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on September
16, 2003.
4(cq)(2) Warrant dated August 28, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.055 per share, incorporated herein by reference to Exhibit
4(cq)(2) to NCT's Pre-Effective Amendment No. 8 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on September
16, 2003.
4(cr) Option granted to Acme Associates, Inc. dated September 11, 2003 for
the purchase of 7,500,000 shares of NCT common stock at an exercise
price of $0.052 per share, incorporated herein by reference Exhibit
4(ao) of the company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003 filed on November 19, 2003.
II-11
4(cs) Warrant dated September 11, 2003 issued to Carole Salkind for the
purchase of 2,500,000 shares of NCT common stock at a purchase price
of $0.05 per share, incorporated herein by reference Exhibit 4(ap) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(ct) Warrant dated September 12, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.05 per share, incorporated herein by reference Exhibit 4(aq) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(cu) Warrant dated October 2, 2003 issued to Carole Salkind for the
purchase of 4,000,000 shares of NCT common stock at a purchase price
of $0.043 per share, incorporated herein by reference Exhibit 4(ar) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(cv) Option granted to Acme Associates, Inc. dated October 3, 2003 for the
purchase of 5,750,000 shares of NCT common stock at an exercise price
of $0.043 per share, incorporated herein by reference Exhibit 4(as) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(cw) Option granted to Acme Associates, Inc. dated October 14, 2003 for the
purchase of 44,000,000 shares of NCT common stock at an exercise price
of $0.044 per share, incorporated herein by reference Exhibit 4(at) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(cx) Warrant dated October 14, 2003 issued to Carole Salkind for the
purchase of 19,250,000 shares of NCT common stock at a purchase price
of $0.044 per share, incorporated herein by reference Exhibit 4(au) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(cy) Warrant dated October 14, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.044 per share, incorporated herein by reference Exhibit 4(av) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(cz) Warrant dated November 3, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.044 per share, incorporated herein by reference Exhibit 4(aw) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(da) Option granted to Acme Associates, Inc dated November 3, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.045 per share, incorporated herein by reference Exhibit 4(ax) of
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 filed on November 19, 2003.
4(db) Warrant dated November 21, 2003 issued to Carole Salkind for the
purchase of 2,250,000 shares of NCT common stock at a purchase price
of $0.041 per share.
4(dc) Warrant dated November 21, 2003 issued to Carole Salkind for the
purchase of 2,500,000 shares of NCT common stock at a purchase price
of $0.041 per share.
4(dd) Option granted to Acme Associates, Inc. dated November 21, 2003 for
the purchase of 6,500,000 shares of NCT Common stock at an exercise
price of $0.041 per share.
4(de) Warrant dated November 22, 2003 issued to Carole Salkind for the
purchase of 2,500,000 shares of NCT common stock at a purchase price
of $0.041 per share.
II-12
4(df) Warrant dated December 15, 2003 issued to Carole Salkind for the
purchase of 16,500,000 shares of NCT common stock at a purchase price
of $0.037 per share.
4(dg) Warrant dated December 15, 2003 issued to Carole Salkind for the
purchase of 2,500,000 shares of NCT common stock at a purchase price
of $0.037 per share.
4(dh) Option granted to Acme Associates, Inc. dated December 17, 2003 for
the purchase of 99,750,000 shares of NCT Common stock at an exercise
price of $0.037 per share.
4(di) Warrant dated December 31, 2003 issued to Carole Salkind for the
purchase of 32,250,000 shares of NCT common stock at a purchase price
of $0.04 per share.
4(dj) Warrant dated December 31, 2003 issued to Carole Salkind for the
purchase of 5,500,000 shares of NCT common stock at a purchase price
of $0.04 per share.
4(dk) Warrant dated February 13, 2004 issued to Carole Salkind for the
purchase of 6,750,000 shares of NCT common stock at a purchase price
of $0.05 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).
*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 Securities and
Exchange Commission on August 30, 1996 (Reg. No. 333-11209).
10(e)(1) 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)(2) 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)(3) 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)(4) 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.
II-13
10(e)(5) 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, filed on November 17,
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, filed on November 5, 1998.
10(h) Consulting Agreement dated January 20, 1999 between NCT and Leben
Care, Inc. along with correspondence dated January 8, 2002, amendment
and extension thereof and three amendments thereto, incorporated by
reference to Exhibit 10(am) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
10(i) 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, filed on November 15, 1999.
10(j) 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(k) 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(l) 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.
10(m)(1) 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(m)(2) 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 for the year ended December 31,
1999, filed on April 14, 2000.
10(n) 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(o)(1) 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.
II-14
10(o)(2) 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(p)(1) 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(p)(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(q) License Agreement Amendment dated effective June 30, 2000, between NCT
Group, Inc., Advancel Logic Corporation and Infinite Technology
Corporation, incorporated herein by reference to Exhibit 10 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, filed on November 27, 2000.
10(r) Securities Purchase and Supplemental Exchange Rights Agreement dated
August 10, 2000 by and among ConnectClearly.com, Inc. NCT Group, Inc.,
and Austost Anstalt Schaan, Balmore S.A. and Zakeni Limited,
incorporated herein by reference to Exhibit 10(ak) of the Company's
Pre-effective Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 333-47084) filed on October 25, 2000.
10(s) 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(t) 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(u) 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(v)(1) 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(v)(2) 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.
II-15
10(w)(1) 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(w)(2) 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.
10(x) 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(y)(1) 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(y)(2) 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(y)(3) 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(y)(4) 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(z)(1) 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(z)(2) 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(z)(3) 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.
10(aa)(1) 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(aa)(2) 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.
II-16
10(aa)(3) 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(ab)(1) 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(ab)(2) 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(ac)(1) 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(ac)(2) 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(ac)(3) 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(ac)(4) 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(ac)(5) 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(ac)(6) 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(ac)(7) 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 to 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.
10(ad)(1) 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(ad)(2) 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.
II-17
10(ae)(1) 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(ae)(2) 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(ae)(3) 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(ae)(4) 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(af)(1) 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(af)(2) 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(ag) 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 June 30, 2001, filed on August 15,
2001.
10(ah) 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(ai)(1)
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(ai)(2) 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(ai)(3) 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(ai)(4) 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.
II-18
10(aj)(1) 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(aj)(2) 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(aj)(3) 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(aj)(4) 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(ak)(1) 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(ak)(2) 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.
10(al) Consulting Agreement dated July 1, 2001 between NCT and Stop Noise,
Inc. along with an addendum thereto dated October 9, 2001 and two
amendments thereto, incorporated by reference to Exhibit 10(an) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
10(am) License Agreement dated August 10, 2001 between Sharp Corporation,
acting through its Communication Systems Group and NCT Group, Inc. ,
incorporated by reference to Exhibit 10(a) of the company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003, filed on
August 14, 2003.
10(an)(1) 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(an)(2) 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(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.
II-19
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(R) 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)(1) Subscription Agreement dated January 10, 2002, between Artera Group,
Inc. and Alpha Capital Aktiengesellschaft, incorporated by reference
to Exhibit 10(a) to the Quarterly Report filed on Form 10-Q for the
quarter ended March 31, 2002, filed on May 15, 2002.
10(ar)(2) Security Agreement dated January 10, 2002, between Artera Group, Inc.
and Alpha Capital Aktiengesellschaft, incorporated by reference to
Exhibit 10(b) to the Quarterly Report filed on Form 10-Q for the
quarter ended March 31, 2002, filed on May 15, 2002.
10(ar)(3) Convertible Note in the principal amount of $550,000 dated January 10,
2002, issued by Artera Group, Inc. to Alpha Capital
Aktiengesellschaft, incorporated by reference to Exhibit 10(c) to the
Quarterly Report filed on Form 10-Q for the quarter ended March 31,
2002, filed on May 15, 2002.
10(ar)(4) Funds Escrow Agreement dated January 10, 2002, between Artera Group,
Inc. and Alpha Capital Aktiengesellschaft, incorporated by reference
to Exhibit 10(d) to the Quarterly Report filed on Form 10-Q for the
quarter ended March 31, 2002, filed on May 15, 2002.
10(as)(1) Subscription Agreement dated March 11, 2002, between the Company and
Alpha Capital Aktiengesellschaft, incorporated by reference to Exhibit
10(f) to the Quarterly Report filed on Form 10-Q for the quarter ended
March 31, 2002, filed on May 15, 2002.
10(as)(2) Funds Escrow Agreement dated March 11, 2002, between the Company and
Alpha Capital Aktiengesellschaft, incorporated by reference to Exhibit
10(g) to the Quarterly Report filed on Form 10-Q for the quarter ended
March 31, 2002, filed on May 15, 2002.
10(as)(3) Convertible Note in the principal amount of $400,000 dated March 11,
2002, issued by the Company to Alpha Capital Aktiengesellschaft,
incorporated by reference to Exhibit 10(h) to the Quarterly Report
filed on Form 10-Q for the quarter ended March 31, 2002, filed on May
15, 2002.
10(at)(1) Exchange Agreement between the company and Crammer Road LLC dated as
of June 21, 2002, incorporated herein by reference to Exhibit 10(bm)
of NCT's Pre-effective Amendment No. 5 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on August 9, 2002.
10(at)(2) Registration Rights Agreement (Exhibit B to the Exchange Agreement
dated as of June 21, 2002) dated as of June 21, 2002 between the
company and Crammer Road LLC, incorporated herein by reference to
Exhibit 10(bm)(1) of NCT's Pre-effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
10(au) Agreement dated July 12, 2002 relating to Pro Tech Exchange Rights
among the Company, Pro Tech Communications, Inc., and Carole Salkind,
incorporated herein by reference to Exhibit 10(bp) of NCT's
Pre-effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
II-20
10(av)(1) Private Equity Credit Agreement dated as of July 25, 2002 between NCT
Group, Inc. and Crammer Road LLC, incorporated herein by reference to
Exhibit 10(bq) of NCT's Pre-effective Amendment No. 5 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on August 9,
2002.
10(av)(2) Registration Rights Agreement (Exhibit A to Private Equity Credit
Agreement) dated as of July 25, 2002 between NCT Group, Inc. and
Crammer Road LLC, incorporated herein by reference to Exhibit
10(bq)(1) of NCT's Pre-effective Amendment No. 5 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on August 9,
2002.
10(ax) Secured Convertible Note in principal amount of $525,000 dated July
23, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(br) of NCT's Pre-effective Amendment No. 6
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on November 4, 2002.
10(ay) Secured Convertible Note in principal amount of $350,000 dated August
14, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(bs) of NCT's Pre-effective Amendment No. 6
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on November 4, 2002.
10(az)(1) License Agreement dated August 15, 2002 between Fairpoint
Communications, Inc. and Artera Group, Inc., incorporated by reference
to Exhibit 10(b) of the company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003, filed on August 14, 2003.
10(az)(2) Memorandum of Understanding dated May 23, 2003 between Fairpoint
Broadband, Inc. and Artera Group, Inc., incorporated by reference to
Exhibit 10(x) of the company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, filed on August 14, 2003.
10(ba) Secured Convertible Note in principal amount of $490,000 dated August
29, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(bt) of NCT's Pre-effective Amendment No. 6
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on November 4, 2002.
10(bb) Secured Convertible Note in principal amount of $350,000 dated
September 9, 2002 issued by the Company to Carole Salkind,
incorporated herein by reference to Exhibit 10(bu) of NCT's
Pre-effective Amendment No. 6 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 4, 2002.
10(bc) Consulting Agreement dated September 30, 2002 between NCT and Acme
Associates, Inc., incorporated by reference to Exhibit 10(ao) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
10(bd) Secured Convertible Note in principal amount of $3,770,098.38 dated
September 30, 2002 issued by the Company to Carole Salkind,
incorporated herein by reference to Exhibit 10(bv) of NCT's
Pre-effective Amendment No. 6 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 4, 2002.
10(be) Agreement dated September 30, 2002 relating to Pro Tech Exchange
Rights among the Company, Pro Tech Communications, Inc., and Carole
Salkind, incorporated herein by reference to Exhibit 10(bw) of NCT's
Pre-effective Amendment No. 6 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 4, 2002.
10(bf) Exclusive Marketing License Agreement dated October 11, 2002 between
FairPoint Broadband, Inc. and Artera Group Inc., incorporated herein
by reference to Exhibit 10(b) to NCT's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003, filed on November 19, 2003.
II-21
10(bg) Master Distributor Agreement dated October 24, 2002, between Artera
Group, Inc. and Spyder Technologies Group, LLC, incorporated herein by
reference to Exhibit 10(by) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
10(bh) Settlement Agreement and Release dated October 30, 2002 made by and
between Crammer Road LLC and NCT, incorporated herein by reference to
Exhibit 10(bx) of NCT's Pre-effective Amendment No. 6 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on November
4, 2002.
10(bi) Secured Convertible Note in principal amount of $400,000 dated
November 7, 2002 issued by the Company to Carole Salkind, incorporated
by reference to Exhibit 10(af) of the company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, filed November 14,
2002.
10(bj) Secured Convertible Note in principal amount of $400,000 dated
November 20, 2002 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ak) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
10(bk) Secured Convertible Note in principal amount of $1,463,449.36 dated
November 21, 2002 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(al) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
10(bl) \ Secured Convertible Note in principal amount of $350,000 dated
December 2, 2002 issued by the company to Carole Salkind, incorporated
by reference to Exhibit 10(ap) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
10(bm) Settlement Agreement dated December 3, 2002 among Mesa Partners, Inc.,
the company, and Distributed Media Corporation approved by the court
on April 8, 2003, incorporated herein by reference to Exhibit 10(k) of
NCT's Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 filed on May 15, 2003.
10(bn) Settlement Agreement dated December 11, 2002 among Kalkines, Arky Zall
& Bernstein LLP, HealthNet Connections LLC, HNC New York
Representatives LLC, the company, Distributed Media Corporation and
DMC HealthMedia Inc, incorporated herein by reference to Exhibit
10(bm) of NCT's Pre-effective Amendment No. 8 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on September
16, 2003.
10(bo) Secured Convertible Note in principal amount of $400,000 dated
December 16, 2002 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(aq) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
10(bp) Secured Convertible Note in principal amount of $2,381,486.89 dated
December 26, 2002 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ar) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
10(bq) Consulting Agreement dated December 26, 2002 between NCT and
Motorworld, Incorporated, incorporated by reference to Exhibit 10(ba)
of the company's Annual Report on Form 10-K for the year ended
December 31, 2002, filed April 4, 2003.
10(br) Secured Convertible Note in principal amount of $350,000 dated
December 30, 2002 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(as) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
II-22
10(bs) Settlement Agreement dated December 31, 2002 between West Nursery Land
Holding Limited Partnership and the company approved by the court on
March 3, 2003, incorporated herein by reference to Exhibit 10(f) of
NCT's Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 filed on May 15, 2003.
10(bt) License Agreement dated January 6, 2003 (October 1, 2002 was the date
inadvertently indicated on our Form 10-K) between NCT Group, Inc. and
Stop Noise, Inc., incorporated by reference to Exhibit 10(aj) of the
company's Annual Report on Form 10-K for the year ended December 31,
2002, filed April 4, 2003.
10(bu) Secured Convertible Note in principal amount of $450,000 dated January
15, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(at) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
10(bv) Secured Convertible Note in principal amount of $2,747,634.92 dated
January 23, 2003 issued by the company to Carole Salkind, incorporated
by reference to Exhibit 10(au) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
10(bw) Consulting Agreement dated January 23, 2003 between NCT and Inframe,
Inc., incorporated by reference to Exhibit 10(f) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003,
filed on August 14, 2003.
10(bx) Secured Convertible Note in principal amount of $350,000 dated January
30, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(av) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
10(by) Secured Convertible Note in principal amount of $1,252,592.41 dated
February 11, 2003 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(aw) of the company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed April
4, 2003.
10(bz) Consulting Agreement dated February 11, 2003 between NCT and Avant
Interactive, Inc. and amendments thereto dated March 12, 2003, April
3, 2003 and April 11, 2003, incorporated by reference to Exhibit 10(i)
of the company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, filed on August 14, 2003.
10(ca) Secured Convertible Note in principal amount of $450,000 dated March
4, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(ax) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
10(cb) Secured Convertible Note in principal amount of $980,802.25 dated
March 13, 2003 issued by the company to Carole Salkind, incorporated
by reference to Exhibit 10(ay) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
10(cc) Secured Convertible Note in principal amount of $864,615.56 dated
March 13, 2003 issued by the company to Carole Salkind, incorporated
by reference to Exhibit 10(az) of the company's Annual Report on Form
10-K for the year ended December 31, 2002, filed April 4, 2003.
10(cd) Secured Convertible Note in principal amount of $450,000 dated April
2, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(cr) of NCT's Pre-effective Amendment No. 7
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on April 18, 2003.
II-23
10(ce) Settlement Agreement dated April 7, 2003 among Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore, S.A., Libra
Finance, S.A., the company and Artera Group, Inc., approved by the
court on September 16, 2003, incorporated herein by reference to
Exhibit 10(ay) to NCT's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed on November 19, 2003.
10(cf) Exchange Rights and Release Agreement dated April 10, 2003 among the
company, Pro Tech Communications, Inc., Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore, S.A., and Libra
Finance, S.A., incorporated herein by reference to Exhibit 10(l) of
NCT's Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, filed on May 15, 2003.
10(cg) Secured Convertible Note in principal amount of $450,000 dated April
11, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(m) of NCT's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003, filed on May 15, 2003.
10(ch) Consulting Agreement dated April 17, 2003 between the company and
Turbo Networks, Inc. and amendment thereto dated May 22, 2003 and June
28, 2003, incorporated by reference to Exhibit 10(r) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003,
filed on August 14, 2003.
10(ci) Secured Convertible Note in principal amount of $450,000 dated April
21, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(n) of NCT's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003, filed on May 15, 2003.
10(cj)(1) Subscription Agreement dated April 22, 2003 between the company and
Alpha Capital Aktiengesellschaft, incorporated by reference to Exhibit
10(u) of the company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003, filed on August 14, 2003.
10(cj)(2) Convertible Note in the principal amount of $235,000 dated April 22,
2003 issued by NCT Group, Inc. to Alpha Capital Aktiengesellschaft,
incorporated by reference to Exhibit 10(t) of the company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003, filed on
August 14, 2003.
10(ck) Secured Convertible Note in principal amount of $450,000 dated May 15,
2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(v) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(cl) Secured Convertible Note in principal amount of $1,692,462.74 dated
May 22, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(w) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(cm) Secured Convertible Note in principal amount of $415,000 dated May 28,
2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(y) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(cn) Secured Convertible Note in principal amount of $2,449,811.87 dated
June 12, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(z) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(co) Consulting Agreement dated June 12, 2003 between NCT and Maple
Industries, Inc., incorporated by reference to Exhibit 10(ab) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003, filed on August 14, 2003.
10(cp) Secured Convertible Note in principal amount of $435,000 dated June
12, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(aa) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
II-24
10(cq) Secured Convertible Note in principal amount of $410,000 dated June
28, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(ac) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(cr) Consulting Agreement dated July 2, 2003 between the company and
SpringerRun, Inc., incorporated herein by reference to Exhibit 10(az)
to NCT's Quarterly Report on Form 10-Q for the quarter ended September
30, 2003, filed on November 19, 2003.
10(cs) Secured Convertible Note in principal amount of $410,000 dated July
14, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(ad) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(ct) Secured Convertible Note in principal amount of $414,480.93 dated July
14, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(ae) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(cu) Amendment dated July 14, 2003 to Acme Associates, Inc. Consulting
Agreement, incorporated herein by reference to Exhibit 10(cr) to NCT's
Pre-Effective Amendment No. 8 to Registration Statement on Form S-1
(Registration No. 333-60574), filed on September 16, 2003.
10(cv) Secured Convertible Note in principal amount of $414,750.19 dated July
28, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(ag) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(cw) Secured Convertible Note in principal amount of $410,000 dated July
28, 2003 issued by the company to Carole Salkind, incorporated by
reference to Exhibit 10(af) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed on August 14, 2003.
10(cx) Secured Convertible Note in principal amount of $622,529.18 dated
August 7, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(cu) to NCT's Pre-Effective Amendment
No. 8 to Registration Statement on Form S-1 (Registration No.
333-60574), filed on September 16, 2003.
10(cy) Secured Convertible Note in principal amount of $425,000 dated August
18, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(cv) to NCT's Pre-Effective Amendment No. 8
to Registration Statement on Form S-1 (Registration No. 333-60574),
filed on September 16, 2003.
10(cz) Secured Convertible Note in principal amount of $414,884.82 dated
August 28, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(cw) to NCT's Pre-Effective Amendment
No. 8 to Registration Statement on Form S-1 (Registration No.
333-60574), filed on September 16, 2003.
10(da) Secured Convertible Note in principal amount of $375,000 dated August
28, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(cx) to NCT's Pre-Effective Amendment No. 8
to Registration Statement on Form S-1 (Registration No. 333-60574),
filed on September 16, 2003.
10(db) Reseller Agreement dated September 1, 2003 between Artera Group, Inc.
and Spyder Technologies Group, LLC, incorporated herein by reference
to Exhibit 10(ao) of the company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003, filed on November 19, 2003.
II-25
10(dc) Master Distributor Agreement dated September 1, 2003 between Artera
Group, Inc. and Spyder Technologies Group, LLC, incorporated herein by
reference to Exhibit 10(ap) of the company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2003, filed on November 19,
2003.
10(dd) Amendments dated September 11, 2003, October 3, 2003 and October 14,
2003 to Consulting Agreement dated September 30, 2002 between the
company and Acme Associates, Inc., incorporated herein by reference to
Exhibit 10(aq) of the company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, filed on November 19, 2003.
10(de) Secured Convertible Note in principal amount of $580,650.27 dated
September 11, 2003 issued by the company to Carole Salkind,
incorporated herein by reference to Exhibit 10(ar) of the company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003, filed on November 19, 2003.
10(df) Secured Convertible Note in principal amount of $400,000.00 dated
September 12, 2003 issued by the company to Carole Salkind,
incorporated herein by reference to Exhibit 10(as) of the company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003, filed on November 19, 2003.
10(dg) Secured Convertible Note in principal amount of $816,096.49 dated
October 2, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(at) of the company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003, filed on
November 19, 2003.
10(dh) Secured Convertible Note in principal amount of $4,469,018.84 dated
October 14, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(au) of the company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003, filed on
November 19, 2003.
10(di) Secured Convertible Note in principal amount of $400,000.00 dated
October 14, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(av) of the company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003, filed on
November 19, 2003.
10(dj) Secured Convertible Note in principal amount of $400,000.00 dated
November 3, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(aw) of the company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003, filed on
November 19, 2003.
10(dk) Amendment dated November 3, 2003 to Consulting Agreement dated
September 30, 2002 between the company and Acme Associates, Inc.,
incorporated herein by reference to Exhibit 10(ax) of the company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003, filed on November 19, 2003.
10(dl) Master Distributor Agreement dated October 1, 2003 between Artera
Group, Inc. and Spyder Technologies Group, LLC, incorporated herein by
reference to Exhibit 10(dl) to NCT's Pre-Effective Amendment No. 9 to
Registration Statement on Form S-1 (Registration No. 333-60574), filed
on February 4, 2004.
10(dm) Master Distributor Agreement dated November 1, 2003 between Artera
Group, Inc. and FairPoint Broadband, Inc., incorporated herein by
reference to Exhibit 10(dm) to NCT's Pre-Effective Amendment No. 9 to
Registration Statement on Form S-1 (Registration No. 333-60574), filed
on February 4, 2004.
II-26
10(dn) Secured Convertible Note in principal amount of $474,154.08 dated
November 21, 2003 issued by the company to Carole Salkind.
10(do) Secured Convertible Note in principal amount of $425,000.00 dated
November 21, 2003 issued by the company to Carole Salkind.
10(dp) Amendment dated November 21, 2003 to Consulting Agreement dated
September 30, 2002 between the company and Acme Associates, Inc.
10(dq) Secured Convertible Note in principal amount of $400,000.00 dated
November 22, 2003 issued by the company to Carole Salkind.
10(dr) Secured Convertible Note in principal amount of $3,828,984.72 dated
December 15, 2003 issued by the company to Carole Salkind.
10(ds) Secured Convertible Note in principal amount of $400,000.00 dated
December 15, 2003 issued by the company to Carole Salkind.
10(dt) Amendment dated December 17, 2003 to Consulting Agreement dated
September 30, 2002 between the company and Acme Associates, Inc.
10(du) Secured Convertible Note in principal amount of $7,479,384.54 dated
December 31, 2003 issued by the company to Carole Salkind.
10(dv) Secured Convertible Note in principal amount of $785,000.00 dated
December 31, 2003 issued by the company to Carole Salkind.
10(dw) Note Consolidation Agreement dated December 31, 2003, between the
company and Carole Salkind.
10(dx) Secured Convertible Demand Note in principal amount of $3,050,000.00
dated December 31, 2003 issued by the company to Carole Salkind.
10(dy) Secured Convertible Demand Note in principal amount of $425,000.00
dated February 13, 2004 issued by the company to Carole Salkind.
14 Code of Ethics
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, 2003.
23(a) Consent of Eisner LLP.
31(a) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30,
2003, incorporated herein by reference to Exhibit 31(a) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
31(b) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30,
2003, incorporated herein by reference to Exhibit 31(b) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
II-27
31(c) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended
September 30, 2003, incorporated herein by reference to Exhibit 32(c)
of the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, filed on November 19, 2003.
31(d) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended
September 30, 2003, incorporated herein by reference to Exhibit 32(c)
of the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, filed on November 19, 2003.
31(e) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the annual period ended December
31, 2003.
31(f) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the annual period ended December
31, 2003.
32(a) Certification of Form 10-Q for the quarterly period ended March 31,
2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, incorporated herein by
reference to Exhibit 99(a) of the company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 filed on May 15, 2003.
32(b) Certification of Form 10-Q for the quarterly period ended June 30,
2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, incorporated herein by
reference to Exhibit 32(b) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 filed on August 14, 2003.
32(c) Certification of Form 10-Q for the quarterly period ended September
30, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, incorporated herein by
reference to Exhibit 32(c) of the company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2003, filed on November 19,
2003.
32(d) Certification of Form 10-K for the annual period ended December 31,
2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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.
99(d) Employment termination agreement between NCT Group, Inc. and James A.
McManus dated November 27, 2001, incorporated herein by reference to
Exhibit 99(d) of NCT's Pre-effective Amendment No. 6 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on November
4, 2002.
- -----------------------
* Pertains to a management contract or compensation plan or arrangement.
II-28