UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2000
- --------------------------------------------------------------------------------
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 Identification No.)
incorporation or organization)
20 Ketchum Street, Westport, Connecticut 06880
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 226-4447
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per
share amounts)
Three Months Ended
March 31,
-------------------------
1999 2000
----------- ---------
REVENUES: (Note 1)
Technology licensing fees and royalties $ 2,722 $ 256
Product sales, net 652 312
Engineering and development services 809 -
----------- ---------
Total revenues $ 4,183 $ 568
----------- ---------
COSTS AND EXPENSES:
Cost of product sales $ 434 $ 623
Cost of engineering and development services 508 -
Selling, general and administrative 2,985 1,192
Research and development 1,713 967
Equity in net loss of unconsolidated affiliates
(net of amortization of goodwill of $191) 103 -
Other (income)/expense - 3,073
Interest (income)/expense (24) 1,166
----------- ---------
Total costs and expenses $ 5,719 $ 7,021
----------- ---------
NET LOSS $ (1,536) $(6,453)
Common stock preferential return $ - $ 53
Preferred stock dividend requirement 5,561 666
Accretion of difference between carrying amount
and redemption amount of redeemable
preferred stock 159 39
----------- ---------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (7,256) $(7,211)
=========== =========
Basic and diluted loss per share $ (0.05) (0.03)
Weighted average common shares outstanding -
basic and diluted 158,504 271,580
=========== =========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited) (in thousands of dollars)
Three Months Ended
March 31,
-------------------------
1999 2000
----------- ---------
NET LOSS $ (1,536) $(6,453)
Other comprehensive income/(loss):
Currency translation adjustment 24 (50)
----------- ---------
COMPREHENSIVE LOSS $ (1,512) (6,503)
=========== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1) (in thousands of dollars)
December 31, March 31,
ASSETS (Note 7) 1999 2000
-------------- ------------
Current assets: (Unaudited)
Cash and cash equivalents (Note 1) $ 1,126 $ 1,372
Restricted cash (Note 7) 667 612
Accounts receivable, net (Note 2) 237 3,922
Inventories, net (Note 3) 2,265 1,836
Other current assets 152 210
-------------- ------------
Total current assets $ 4,447 $ 7,952
Property and equipment, net 449 380
Goodwill, net 3,497 3,314
Patent rights and other intangibles, net 2,296 2,150
Other assets (Note 5) 2,688 2,655
-------------- ------------
$ 13,377 $ 16,451
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,647 $ 2,538
Accrued expenses 3,189 2,328
Accrued payroll, taxes and related expenses 64 86
Other liabilities (Note 6) 807 893
Current maturities of convertible notes (Note 7) - 1,015
Deferred revenue (Note 1) 21 1,354
-------------- ------------
Total current liabilities $ 7,728 $ 8,214
-------------- ------------
Long term liabilities:
Convertible notes and accrued interest (Note 7) $ 4,107 3,939
Deferred revenue (Note 1) - 2,611
-------------- ------------
Total long term liabilities $ 4,107 $ 6,550
-------------- ------------
Commitments and contingencies
Common stock subject to resale guarantee (Note 9) $ 1,592 965
-------------- ------------
Minority interest in consolidated subsidiary
Preferred stock in subsidiary, $.10 par value,
1,000 shares authorized, issued and outstanding,
3 and 0 shares, respectively (redemption amount
$317,162 and $0, respectively) $ 317 -
-------------- ------------
Stockholders' equity/(deficit) (Note 4)
Preferred stock, $.10 par value, 10,000,000 shares
authorized
Series F preferred stock, 4,715 and 3,510 shares
issued and outstanding, respectively(redemption
amount $4,789,407 and $3,598,840, respectively) $ 2,790 $ 2,106
Series G preferred stock, issued and outstanding,
0 and 1,254 shares, respectively (redemption
amount $0 and $1,257,023, respectively) - 974
Common stock, $.01 par value, authorized 325,000,000
shares; issued 268,770,739 and 281,146,986 shares,
respectively 2,688 2,812
Additional paid-in-capital 130,865 137,825
Unearned portion of compensatory stock, warrants
and options (55) (51)
Expenses to be paid with common stock (1,282) (617)
Accumulated deficit (131,475) (137,928)
Cumulative translation adjustment 65 15
Stock subscriptions receivable (1,000) (1,451)
Treasury stock (6,078,065 shares of common stock) (2,963) (2,963)
-------------- ------------
Total stockholders' equity/(deficit) $ (367) 722
-------------- ------------
$ 13,377 16,451
============== ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited) (in thousands of dollars)
Three months ended March 31,
-------------------------------
1999 2000
------------- ------------
(Note 1)
Cash flows from operating activities:
Net (loss) $ (1,536) $ (6,453)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 362 402
Common stock and options issued as consideration
for:
Compensation 54 5
Operating expenses - 25
Provision for tooling costs 6 -
Provision for inventory - 250
Provision for doubtful accounts 27 10
Equity in net loss of unconsolidated affiliates,
net of amortization of goodwill of $191 (103) -
Preferred stock received for license fees (2,000) -
Impairment of goodwill (Note 10) - 3,073
Discount on beneficial conversion feature on
convertible note (Note 7) - 1,000
Changes in operating assets and liabilities:
(Increase) in accounts receivable (802) (3,695)
(Increase) decrease in inventories, net (164) 176
Decrease in other assets 20 36
Increase (decrease) in accounts payable and
accrued expenses 976 (1,608)
Increase in other liabilities and
deferred revenue 298 3,865
------------- ------------
Net cash (used in) operating activities $ (2,862) $ (2,914)
------------- ------------
Cash flows from investing activities:
Capital expenditures $ (12) $ (5)
Decrease in restricted cash - 55
Deferred charges - (61)
Acquisition of affiliates (Note 5) (154) -
------------- ------------
Net cash (used in) investing activities $ (166) $ (11)
------------- ------------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) (Note 7) $ 1,000 $ 1,000
Sale of preferred stock (net) (Note 10) 1,799 966
Proceeds from common stock subject to
resale (Note 9) - 620
Exercise of stock options (net) 1 631
------------- ------------
Net cash provided by financing activities $ 2,800 $ 3,217
------------- ------------
Effect of exchange rate changes on cash $ 28 $ (46)
------------- ------------
Net increase (decrease)in cash and cash
equivalents $ (200) $ 246
Cash and cash equivalents - beginning of period 529 1,126
------------- ------------
Cash and cash equivalents - end of period $ 329 $ 1,372
============= ============
Cash paid for interest $ - $ -
============= ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NCT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to instructions and rules of the
Securities and Exchange Commission (the "SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and certain adjustments to
reserves and allowances) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in the NCT Group, Inc. (the "Company"
or "NCT") Annual Report on Form 10-K, for the year ended December 31, 1999,
filed on April 14, 2000.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $137.9 million on a
cumulative basis through March 31, 2000. These losses, which include the cost
for development of products for commercial use, have been funded primarily from
(1) the sale of common stock, including the exercise of warrants or options to
purchase common stock, (2) the sale of preferred stock convertible into common
stock, (3) technology licensing fees, (4) royalties, (5) product sales and (6)
engineering and development funds received from strategic partners and
customers.
During the second quarter of 2000, retroactive to January 1, 2000, the
Company adopted the accounting policies of SEC Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101"). Adopting SAB 101
effective January 1, 2000, requires that the Company restate its first quarter
2000 revenues, deferring recognition of $3.9 million of previously recognized
license fees. Such deferred revenue will now be recognized over the next three
years in accordance with the Company's interpretation of SAB 101.
On March 7, 2000, the Company and DistributedMedia.com, Inc. ("DMC"), a
wholly owned subsidiary of the Company, signed an agreement to license the use
of Digital Broadcasting Station Software ("DBSS") systems and related technology
in two station areas in the New York DMA territory to Eagle Assets Limited
("Eagle"). The amount of the license fee was $1.0 million for each station. At
March 31, 2000, the Company recorded a receivable of $2.0 million and deferred
revenue of $1.9 million (as noted above). On April 6, 2000 the Company received
$0.5 million. An additional $0.5 million is payable within 90 days of the
signing of the agreement and a promissory note for $1.0 million is to be issued
and paid within twelve months of the signing of the agreement. The Company also
granted Eagle the option to purchase in its entirety a 5% interest of the then
outstanding equity of DMC, on a fully diluted basis, at an exercise price equal
to the lesser of (i) $3.0 million or (ii) at any given closing of a sale of
equity interests in DMC at a price equal to 80% of the total fair market value
of the total outstanding equity attributed to DMC at such closing, as evidenced
by the price paid for such equity interests, multiplied by 5%. The Company also
granted Eagle a single option to purchase a non-exclusive license from DMC to
use the DBSS in two additional station areas in the New York DMA territory for
$1.0 million each.
On March 30, 2000, the Company and DMC signed an agreement to license the
use of DBSS systems and related technology in Israel to Brookepark Limited
("Brookepark"). The amount of the license fee was $2.0 million and was recorded
as deferred revenue at March 31, 2000 (as noted above). On March 30, 2000, the
Company received $0.5 million. At March 31, 2000, the Company recorded a $1.5
million receivable. An additional $0.5 million is payable within 90 days of the
signing of the agreement and a promissory note for $1.0 million is to be issued
and paid within twelve months of the signing of the agreement. The Company also
granted Brookepark options to purchase an exclusive license from DMC to use the
DBSS in each of the remaining Middle East countries for $2.0 million each. The
Company shall have the right to terminate any such unexercised option to
purchase an additional license by entering into a separate agreement with a
third party for licensing of the DBSS system or technology in any one of the
remaining Middle East countries. Brookepark will receive a 50% commission on all
cash received by DMC upon the execution of any agreement for the license of the
DBSS system entered into by DMC in any of the remaining Middle East countries
for which Brookepark was the originator of the placement of the license.
Cash, cash equivalents and short-term investments amounted to $1.4 million
at March 31, 2000, increasing from $1.1 million at December 31, 1999. Management
believes that currently available funds will not be sufficient to sustain the
Company at present levels for the next 12 months. The Company's ability to
continue as a going concern is dependent on funding from several sources,
including available cash, cash from the exercise of warrants and options, and
cash inflows generated from the Company's revenue sources: technology licensing
fees and royalties, product sales, and engineering and development services. The
level of realization of funding from the Company's revenue sources is presently
uncertain. In the event that anticipated technology licensing fees and
royalties, product sales, and engineering and development services do not
generate sufficient cash, management believes additional working capital
financing must be obtained. There is no assurance any such financing is or would
become available.
In the event that funding from internal sources is insufficient, the
Company would have to substantially cut back its level of spending which could
substantially curtail the Company's operations. These reductions could have an
adverse effect on the Company's relations with its strategic partners and
customers. Uncertainty exists about the adequacy of current funds to support the
Company's activities until positive cash flow from operations can be achieved,
and uncertainty exists about the availability of financing from other sources to
fund any cash deficiencies. See Note 10 with respect to recent financing.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described above raise substantial doubt at March 31, 2000, about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets or the amount of liabilities that might
result from the outcome of these uncertainties.
2. Accounts Receivable:
Accounts receivable comprise the following:
(thousands of dollars)
December 31, March 31,
1999 2000
---------------- ----------------
Technology license fees and royalties $ - $ 3,685
Engineering and development services 33 33
Other 287 297
Allowance for doubtful accounts (83) (93)
---------------- ----------------
Accounts receivable, net $ 237 $ 3,922
================ ================
Technology licensing fees receivable included DMC license agreements in the
amount of $3.5 million (see Note 1 for further details).
3. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, March 31,
1999 2000
-------------- -------------
Components $ 360 $ 341
Finished goods 2,434 2,274
-------------- -------------
Gross inventories $ 2,794 $ 2,615
Reserve for obsolete & slow moving inventory (529) (779)
-------------- -------------
Inventories, net of reserves $ 2,265 $ 1,836
============== =============
The reserve for obsolete and slow moving inventory at March 31, 2000 has
increased to $0.8 million primarily due to a $0.3 million charge for slow moving
hearing product inventory during the first three months of 2000, net of
applications of reserve.
4. Stockholders' Equity:
The changes in stockholders' equity during the three months ended March 31, 2000, were as follows:
(inthousands)
-------- --------- ---------- ----------- -------- ------------ ---------- ----- --------- -------- ---------
Unearned Expenses
Accretion/ Net Compen- To be Transla-
Balance Sale Exchange/ Dividend Sale Stock satory paid tion Balance
at of Conversion of of Subscription Options/ Net With Adjust- At
12/31/99 Preferred of Preferred Common Receivable Warrants Loss Common ment 3/31/00
Stock Preferred Stock Stock Stock
Stock
-------- --------- ---------- ----------- -------- ------------ ---------- ----- --------- -------- ---------
Series F
Preferred
Stock:
Shares 5 - (1) - - - - - - - 4
Amount $ 2,790 $ - $ (719) $ 35 $ - $ - $ - $ - $ - $ - $ 2,106
Series G
Preferred
Stock:
Shares - 1 - - - - - - - - 1
Amount $ - $ 971 $ - $ 3 $ - $ - $ - $ - $ - $ - $ 974
Common
Stock:
Shares 268,771 - 11,413 - 963 - - - - - 281,147
Amount $ 2,688 $ - $ 114 $ - $ 10 $ - $ - $ - $ - $ - $ 2,812
Treasury
Stock:
Shares 6,078 - - - - - - - - - 6,078
Amount $ (2,963) $ - $ - $ - $ - $ - $ - $ - $ - $ - $ (2,963)
Additional
Paid-in
Capital $ 130,865 $ - $ 918 $ (38) $4,695 $ - $ - $ - $ 1,385 $ - $ 137,825
Accumulated
(Deficit) $(131,475) $ - $ - $ - $ - $ - $ - $(6,453)$ - $ - $(137,928)
Cumulative
Translation
Adjustment $ 65 $ - $ - $ - $ - $ - $ - $ - $ - $ (50) $ 15
Stock
Subscription
Receivable $ (1,000) $ - $ - $ - $ - $ (451) $ - $ - $ - $ - $ (1,451)
Expenses
to be
Paid with
Common Stock $ (1,282) $ - $ - $ - $ - $ - $ - $ - $ 665 $ - $ (617)
Unearned
Compensatory
Stock Option $ (55) $ - $ - $ - $ - $ - $ 4 $ - $ - $ - $ (51)
5. Other Assets:
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), an automotive audio system
supplier. Earlier on June 11, 1998, NCT Audio had paid a non-refundable deposit
of $1,450,000 towards the purchase price. The total purchase price was
$10,000,000 and up to an additional $6,000,000 in possible future cash
contingent payments. NCT Audio then paid Top Source Technologies, Inc. ("TST")
$2,050,000 on July 31, 1998. The money was held in escrow with all of the
necessary securities and documents to evidence ownership of 20% of the total
equity rights and interests in TSA. When the shareholders of TST approved the
transaction on December 15, 1998, the $2,050,000 was delivered to TSA and NCT
Audio took ownership of the documentation and securities held in escrow. NCT
Audio had an exclusive right, as extended, to purchase the assets of TSA through
July 15, 1999. Under the terms of the original agreement, NCT Audio was required
to pay TST $6.5 million on or before March 31, 1999 to complete the acquisition
of TSA's assets. As consideration for an extension of such exclusive right from
March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST a fee of $350,000,
consisting of $20,685 in cash, $125,000 of NCT Audio's minority interest in TSA
earnings, and a $204,315 note payable due April 16, 1999. Due to the non-payment
of the note by April 30, 1999, (a) the note would begin to accrue interest on
April 17, 1999 at the lower of the rate of two times prime rate or the highest
rate allowable by law; (b) the $20,685 and $125,000 portion of the extension fee
would no longer be credited toward the $6.5 million purchase price due at
closing; and (c) the $204,315 portion of the extension fee would no longer be
credited toward the $6.5 million closing amount due. To date, NCT Audio has not
paid the note. In addition, due to NCT Audio's failure to close the transaction
by March 31, 1999, NCT Audio was required to pay a penalty premium of $100,000
of NCT Audio's preferred stock. Since NCT Audio failed to close the contemplated
transaction by May 28, 1999, NCT Audio has forfeited its minority earnings in
TSA for the period June 1, 1999 through May 30, 2000. In exchange for an
extension from May 28, 1999 to July 15, 1999, NCT Audio relinquished 25% of its
minority equity ownership in TSA. As a result, NCT Audio now has a 15% minority
interest in TSA. On or about July 15, 1999, NCT Audio determined it would not
proceed with the purchase of the assets of TSA, as structured, due primarily to
its difficulty in raising the requisite cash consideration. Consequently, NCT
Audio reduced its net investment in TSA to $1.2 million, representing its 15%
minority interest, net of the above noted penalties, and recorded a $2.4 million
charge in the quarter ended June 30, 1999 for the write-down of its investment
to its estimated net realizable value. On September 30, 1999, Onkyo America
purchased substantially all of the assets of TSA and certain assets of TST used
in TSA's operations. NCT Audio is claiming and seeks its pro rata share of the
consideration paid by Onkyo America, less the penalties described above. The
amount which TST owes NCT Audio is in dispute; consequently, receipt of the
funds is contingent on the outcome of the arbitration between the Company, TST
and TSA (see Note 8.)
6. Other Liabilities:
On June 5, 1998, Interactive Products, Inc. ("IPI") entered into an
agreement with the Company granting the Company a license to, and an option to
purchase a joint ownership interest in, patents and patents pending which relate
to IPI's speech recognition technologies, speech compression technologies and
speech identification and verification technology. The aggregate value of the
patented technology is $1,250,000, which was paid by a $150,000 cash payment and
delivery of 1,250,000 shares of the Company's common stock valued at $0.65625
per share on June 5, 1998. At such time as IPI sells any of such shares, the
proceeds thereof will be allocated towards a fully paid-up license fee for the
technology rights noted above. In the event that the proceeds from the sale of
shares are less than the $1,100,000, the Company will record a liability
representing the cash payment due. On July 5, 1998, the Company paid IPI
$50,000, which was held in escrow as security for the fulfillment of the
Company's obligations, towards the liability. The Company recorded a liability
representing the difference between the Company's payment obligations and the
IPI net proceeds from its sale of shares of the Company's common stock. Such
liability was $0.5 million at March 31, 2000.
On September 4, 1998, the Company acquired the issued and outstanding
common stock of Advancel Logic Corporation ("Advancel"), a Silicon Valley-based
developer of microprocessor cores that execute Sun Microsystems' Java(TM) code.
The acquisition was pursuant to a stock purchase agreement dated as of August
21, 1998 (the "Stock Purchase Agreement") among the Company, Advancel and
certain shareholders of Advancel (the "Advancel Shareholders"). The
consideration for the acquisition of the Advancel common stock consisted of an
initial payment of $1.0 million payable by the delivery of 1,786,991 shares of
the Company's treasury stock together with future payments, payable in cash or
in common stock of the Company at the election of the Advancel Shareholders
(individually, an "earnout payment" and collectively, the "earnout payments")
based on Advancel's earnings before interest, taxes, depreciation and
amortization, as defined in the Stock Purchase Agreement, for each of the
calendar years 1999, 2000, 2001 and 2002 (individually, an "earnout year" and
collectively, the "earnout years"). While each earnout payment may not be less
than $250,000 in any earnout year, there is no maximum earnout payment for any
earnout year or for all earnout years in the aggregate. On April 25, 2000, the
Company and the Advancel Shareholders reached an agreement which eliminates any
and all earnout due the Advancel Shareholders (see Note 8). In connection
therewith the Company reversed the $0.3 million liability and reduced selling,
general and administrative expenses by such.
In addition, the Company's liabilities include a $100,000 note payable plus
interest to a former employee of Advancel at March 31, 2000. The note bears
interest at a rate of 8.25%, compounded annually and was due in two equal
installments on December 1, 1998 and March 1, 1999. The note has not been paid.
On April 12, 1999, the Company granted a worldwide non-exclusive,
non-transferable license to L&H. The agreement provides L&H access to NCT's
noise and echo cancellation algorithms for use in L&H's technology. In
consideration of the Company's grant of a license to L&H, the Company recognized
a non-refundable royalty fee of $0.8 million. During the third quarter of 1999,
L&H and the Company agreed to offset the balances due each other. Consequently,
the Company's balance due L&H at March 31, 2000 is $0.1 million.
7. Convertible Notes:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. The secured convertible notes are collateralized by the Company's
inventory, machinery, equipment, stocks, bonds, notes, accounts receivable, any
rights or claims that they may have against any other person, firm, or
corporation for monies, choses in action, any bank accounts, checking accounts,
certificates of deposit or any financial instrument, patents and intellectual
property rights or any other assets owned by Borrower as of the date of the
agreement, or hereafter acquired. A secured convertible note (the "Note") for
$1.0 million was signed on January 26, 1999, and proceeds were received on
January 28, 1999. The Note is to mature on January 25, 2001 and earn interest at
the prime rate as published from day to day in The Wall Street Journal from the
issue date until the Note becomes due and payable. The Holder shall have the
right at any time on or prior to the day the Note is paid in full, to convert at
any time, all or from time to time, any part of the outstanding and unpaid
amount of the Note into fully paid and non-assessable shares of common stock of
the Company at the conversion price. The conversion price, as amended by the
parties on September 19, 1999, on the Note and any other notes, shall be the
lesser of (i) the lowest closing transaction price for the common stock on the
securities market on which the common stock is being traded, at any time during
September 1999; (ii) the average of the closing bid prices for the common stock
on the securities market on which the common stock is being traded for five (5)
consecutive trading days prior to the date of conversion; or (iii) the fixed
conversion price of $0.17. In no event will the conversion price be less than
$0.12 per share. On each of June 4, 1999, June 11, 1999, July 2, 1999, July 23,
1999, August 25, 1999, September 19, 1999 and March 27, 2000, the Company
received proceeds of $250,000, $250,000, $500,000, $250,000, $500,000, $250,000
and $1,000,000, respectively, from the Holder for other secured convertible
notes with the same terms and conditions of the Note described above. At March
31, 2000, the Company has an aggregate of $4.0 million of secured convertible
notes. The Company recorded a beneficial conversion feature of $1.0 million in
connection with the convertible notes during the first quarter of 2000.
On July 19, 1999, DMC, a wholly-owned subsidiary of the Company, signed a
convertible guaranteed term promissory note ("PRG Note") with Production
Resource Group ("PRG") in the amount of $1.0 million. PRG will provide lease
financing to DMC for its Sight and Sound(TM) systems (the "Systems") and will
provide integration, installation and maintenance services to DMC. DMC received
a portion of the PRG Note ($125,000) on July 22, 1999. Of the $1,000,000 note
proceeds, $750,000 was deposited into an escrow account and be used to pay
rental and installation costs due from DMC with respect to the Systems. Further,
DMC may draw an additional $125,000 provided that PRG continues to have a good
faith belief that the Systems are functioning properly and that DMC has obtained
at least one network-wide advertising client providing annual advertising
revenues of at least $250,000. At March 31, 2000, the balance in the escrow
account and classified as restricted cash was $612,000. The PRG Note matures on
July 19, 2001 and earns interest at ten percent (10%) per annum. PRG may convert
the PRG Note in whole or in part at its election into shares of DMC's common
stock, without par value, at any time during the period commencing on the date
of issuance and ending on the maturity date. DMC also has the right to lease
from PRG additional Systems with an aggregate value of up to $9.5 million,
provided that PRG is reasonably satisfied with the success of the DMC business,
including the technology and economics thereof and its likelihood of the
continued success. In connection with the PRG Note, PRG was granted a common
stock warrant. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company estimated the fair value of this warrant to be $0.8
million, using the following assumptions in applying the Black-Scholes valuation
method: risk-free interest rates of 5.61%, volatility of 1%, and a term of three
years. Such amount is being amortized to interest expense over the two-year
period of the related promissory note. Amortization amounted to $0.1 million
during the first three months of 2000. Unamortized discount of $0.2 million has
been reflected as a reduction of the notes payable amount in the accompanying
March 31, 2000 financial statements.
8. Litigation:
Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, for a discussion of the following matters:
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, then the President, Chief Executive
Officer and a Director of the Company, in the Circuit Court for Anne Arundel
County, Maryland. There were no material developments in this matter during the
period covered by this report.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott &
Co., Inc. and the Company in the United States District Court, Southern District
of New York. In March 2000, all parties reached a resolution of no material
financial or other consequence to the Company, which has been subsequently
approved by the court, in which all matters have been resolved.
On November 17, 1998, the Company and NCT Hearing filed suit against Andrea
Electronics Corporation in the United States District Court, Eastern District of
New York. There were no material developments in this matter during the period
covered by this report.
On December 15, 1998, Balmore Funds, S.A. ("Balmore") and Austost Anstalt
Schaan ("Austost") filed suit against the Company's subsidiary, NCT Audio, and
the Company in the Supreme Court of the State of New York, County of New York.
On October 9, 1999, the Company, NCT Audio, Balmore, Austost and LH
Financial agreed, in principle, to settle all legal charges, claims and
counterclaims which have individually or jointly been asserted against the
parties. On October 9, 1999, pursuant to the NCT Audio stock agreement, the
Company, NCT Audio, Balmore and Austost also agreed to exchange 532 shares of
NCT Audio common stock held by Balmore and Austost into 17,333,334 shares of
common stock of the Company. The issuance of such shares of common stock was
ratified by the Board of Directors on October 22, 1999. In April 2000, all
parties reached a resolution of no financial or other consequence to the Company
which has been subsequently approved by the court, in which all matters have
been resolved.
On September 16, 1999, certain former shareholders and optionees (the
"Claimants") of Advancel, a majority owned subsidiary of the Company, filed a
Demand for Arbitration against the Company with the American Arbitration
Association in San Francisco, CA. On April 25, 2000, both parties reached a
resolution of the matter. All parties withdrew all charges and claims with
exception to the following. Regarding the Stock Purchase Agreement, NCT and
Advancel did not release the Claimants from any claims arising out of or
relating to Claimants' use, misuse, destruction or theft of NCT and/or
Advancel's property, confidential information, trade secrets or intellectual
property or any claims arising out of or relating to the Proprietary Information
and Invention Agreements. Also, NCT and Advancel did not release Claimants from
any of their obligations under the Non-compete Covenants. NCT has no further
obligations to the Claimants under the Stock Purchase Agreement as a result of
the resolution of this matter which was of no financial or other consequence to
the Company (see Note 6).
On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against TST and TSA
(the "Respondents") alleging, among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio, breach of fiduciary
duty as a majority shareholder owed to NCT Audio which holds 15% of the
outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. There were no material developments in this matter during the period
covered by this report.
The Company believes there are no other patent infringement litigations,
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on the financial position and results of
operations.
9. Common Stock Subject to Resale Guarantee:
On September 24, 1999, the Company issued 12,005,847 shares of common stock
to suppliers and consultants to settle current obligations of $1.8 million and
future or anticipated obligations of $0.5 million. On October 27, 1999, the
Company issued an additional 1,148,973 shares of common stock to suppliers and
consultants to settle obligations of $0.2 million. During 1999, suppliers and
vendors sold $1.5 million of such shares. During the first quarter of 2000,
suppliers and vendors sold $0.6 million. At March 31, 2000, common stock subject
to resale guarantee included $0.4 million for suppliers and vendors.
The Company has certain contingent obligations under a securities purchase
agreement, dated as of December 27, 1999 (the "Purchase Agreement"), among the
Company, Austost, Balmore and Nesher, Inc. ("Nesher"). Based on an offer as of
November 9, 1999, the Company, Austost, Balmore and Nesher entered into the
Purchase Agreement whereby the Company, on December 28, 1999, issued a total of
3,846,155 shares (the "SPA Shares") to Austost, Balmore and Nesher for a total
purchase price of $500,000. In addition, the Company issued 288,461 shares of
its common stock to the placement agent for the transaction. The price of the
SPA Shares was $0.13 per share, which was $0.03, or 19%, less than the closing
bid price of the Company's common stock as reported by the OTC Bulletin Board on
November 8, 1999, and $0.015, or 10%, less than the closing bid price of the
Company's common stock as reported by the OTC Bulletin Board on December 27,
1999. This per share price may be subject to decrease upon the application of a
reset provision contained in the Purchase Agreement as described below.
Under the reset provision, on June 26, 2000, and again on September 25,
2000, the Company may be required to issue additional shares to one or more of
Austost, Balmore or Nesher if the sum of certain items on those dates is less
than 120% of the total purchase price paid by Austost, Balmore and Nesher for
the SPA Shares. Those items are: (i) the aggregate market value of the SPA
Shares held by Austost, Balmore and Nesher (based on the per share closing bid
price on those dates); (ii) the market value of any SPA Shares transferred by
Austost, Balmore and Nesher as permitted under the Purchase Agreement (based on
the per share closing bid price on the date of transfer); and (iii) any amounts
realized by Austost, Balmore and Nesher from sales of any such shares prior to
June 26, 2000 or September 25, 2000, as the case may be. The number of
additional shares of common stock that the Company would be obligated to issue
in such case would be a number of shares having an aggregate market value (based
on the per share closing bid price on such date) that, when added to the sum of
items (i), (ii) and (iii) set forth above, would equal 120% of the total
purchase price paid for the SPA Shares. The 20% of the total purchase price paid
($100,000) is deemed a preferred return over the initial reset period.
Common stock subject to resale guarantee was $1.0 million at March 31,
2000, which represented the outstanding shares of common stock valued at the
date of issuance to suppliers and consultants ($0.4 million) and the purchase
price plus guaranteed return on investment related to the above noted Purchase
Agreement ($0.6 million).
10. Common Stock:
On January 19, 2000, the Board of Directors amended the Noise Cancellation
Technologies, Inc. Stock Incentive Plan (the "1992 Plan"), subject to
stockholder approval, to increase the aggregate number of shares of the
Company's common stock reserved for issuance upon the exercise of stock options
granted under the 1992 Plan from 30,000,000 shares to 50,000,000 shares and to
amend certain administrative provisions of the 1992 Plan (the "1992 Plan
Amendment"). The Company plans to seek stockholder approval of the 1992 Plan
Amendment at the next annual meeting of stockholders of the Company.
On January 19, 2000, the Board of Directors granted options to purchase 9.9
million shares of the Company's common stock to certain officers and employees
of the Company subject to the approval by the Company's stockholders of an
increase in the number of shares authorized and subject to the approval by the
Company's stockholders of an increase in the number of shares covered by the
1992 Plan. Options to purchase 3.9 million of such shares vest upon approval by
the stockholders of the above noted increases. Options to purchase 2.0 million
of such shares will not become vested or exercisable until the satisfaction of
additional vesting requirements based on the passage of time. Options to
purchase 4.0 million of such shares will not become vested or exercisable until
the satisfaction of additional vesting requirements based on profitability of
the Company or the passage of time, whichever occurs first. The foregoing
options were granted with the exercise price equal to the fair value of the
Company's common stock on January 18, 2000, or $0.41 per share, as determined
from the last sale price as reported by the NASDAQ OTC Bulletin Board.
During the first quarter of 2000, the Board of Directors also granted
options to purchase 2.9 million shares of the Company's common stock to certain
new employees and consultants of the Company for services rendered to the
Company subject to the approval by the Company's stockholders of an increase in
the number of shares authorized and subject to the approval by the Company's
stockholders of an increase in the number of shares covered by the 1992 Plan.
Such options were granted at or above the fair value of the Company's common
stock on the date of grant.
At the time of such stockholder approval, if the market value of the
Company's stock exceeds the exercise price of the subject options noted above,
the Company will incur a non-cash charge to earnings equal to the spread between
the exercise price and the option and market price, times the number of options
involved.
On January 25, 2000, the Board of Directors designated a new series of
preferred stock based upon a negotiated term sheet, the Series G Convertible
Preferred Stock ("Series G Preferred Stock"). The Series G Preferred Stock
consists of 5,000 designated shares, par value of $0.10 per share and a stated
value of one thousand dollars ($1,000) per share with a cumulative dividend of
four percent (4%) per annum on the stated value payable upon conversion in
either cash or common stock. On March 6, 2000, the Company and an accredited
investor entered into an agreement under which the Company sold an aggregate
stated value of $2.0 million (2,004 shares) of Series G Preferred Stock, in a
private placement pursuant to Regulation D of the Securities Act for an
aggregate of $1.750 million. During the first three months of 2000, the Company
issued $1.2 million (1,254 shares) of Series G Preferred Stock in consideration
of $1.0 million. The remaining $0.8 million (750 shares) of Series G Preferred
Stock will be issued upon the registration of shares of common stock for resale
upon the conversion of the Series G Preferred Stock. Each share of Series G
Preferred Stock is convertible into fully paid and nonassessable shares of the
Company's common stock pursuant to a predetermined conversion formula which
provides that the conversion price will be the lesser of (i) the weighted
average of the closing bid price for the common stock on the securities market
on which the common stock is being traded for five (5) consecutive trading days
prior to the date of conversion; or (ii) the fixed conversion price of $0.777.
The Company filed a registration statement on April 20, 2000 to register such
shares of common stock for the conversion of the Series G Preferred Stock. On
March 6, 2000, the Company granted a warrant for 150,000 shares of the Company's
common stock with an expiration date of March 31, 2005 and an exercise price of
$0.71925. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company estimated the fair value of this warrant to be $0.1
million, using the following assumptions in applying the Black-Scholes valuation
method: risk-free interest rates of 6.14%, volatility of 1, and a term of three
years. Such amount is included in the preferred stock dividend requirement at
March 31, 2000.
During the three months ended March 31, 2000, the Company issued 10,778,275
shares of the Company's common stock in connection with the conversion of 1,205
shares of the Company's Series F Convertible Preferred Stock ("Series F
Preferred Stock") which had been issued in the third quarter of 1999 in a
private placement exempt from registration pursuant to Regulation D of the
Securities Act of 1933 (the "Securities Act").
On January 27, 2000, the Series F Preferred Stock Certificate of
Designations was amended to obligate the Company to issue up to 77,000,000
shares of its common stock upon the conversion of the 12,500 designated shares
of Series F Preferred Stock. Such increase in the number of shares of common
stock was made in the interest of investor relations of the Company. The Company
filed a registration statement on April 20, 2000 to register such shares of
common stock for the conversion of Series F Preferred Stock.
During the three months ended March 31, 2000, 3 shares of NCT Audio Series
A Convertible Preferred Stock, which had been issued in the third quarter of
1998 in a private placement exempt from registration pursuant to Regulation D of
the Securities Act, were exchanged for 3,000 shares of Series D Preferred Stock,
which were converted into 634,915 shares of the Company's common stock. In
connection with this transaction, the Company recorded a charge of $0.2 million
for the impairment of goodwill based on the valuation of NCT Audio, which is
included in other expense.
On March 7, 2000, the Company, Balmore and Austost agreed to amend certain
of the terms and conditions of the Exchange Agreement in order to (1) allow
Austost and Balmore to retain 3,611,111 Returnable Shares in exchange for an
additional 533 shares of Audio common stock from a third party investor (the
"Third Party Shares"), which Austost and Balmore shall deliver to NCT, and (2)
substitute cash payments by Austost and Balmore to the Company in lieu of
Austost's and Balmore's obligation to return the remaining Returnable Shares to
the Company pursuant to the Exchange Agreement. In connection with this
transaction, the Company recorded a charge of $2.9 million for the impairment of
goodwill based on the valuation of NCT Audio, which is included in other
expense.
The Company agreed that Austost and Balmore would retain 10,060,251 shares
of the Company's Common Stock (the "Remaining Returnable Shares"), and Austost
and Balmore would agree to pay the Company up to $10,000,000 in cash subject to
monthly limitations from proceeds Austost and Balmore would realize from their
disposition of such Remaining Returnable Shares. Balmore and Austost will
realize a 10% commission on the proceeds from the sale of shares.
At March 31, 2000, the number of shares required to be reserved for the
exercise of options and warrants was 38.0 million. The aggregate number of
shares of common stock required to be reserved for issuance upon the exercise of
all outstanding options and warrants granted was 37.0 million shares of which
options and warrants to purchase 24.7 million shares were currently exercisable.
The aggregate number of shares of common stock required to be reserved for
issuance upon conversion of issued and outstanding shares of Series F Preferred
Stock and Series G Preferred Stock was 3.8 million and 2.6 million,
respectively. The Company has reserved 1.5 million shares of common stock for
issuance to certain holders of NCT Audio common stock upon exchange of their
shares of NCT Audio common stock for shares of the Company's common stock. The
Company also reserved 32.1 million shares of common stock for issuance upon
conversion of the convertible notes. Common shares issued and required to be
reserved for issuance exceed the number of shares authorized. However, should
the aggregate of the number of issued and outstanding shares and shares required
to be reserved for future issuance reach the authorized limit, shares in excess
of the limit will be borrowed from the 1992 Plan.
11. Business Segment Information:
During 1998, the Company adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS No. 131"). The provisions of
SFAS No. 131 require the Company to disclose the following information for each
reporting segment: general information about factors used to identify reportable
segments, the basis of organization, and the sources of revenues; information
about reported profit or loss and segment assets; and reconciliations of certain
reported segment information to consolidated amounts.
(In thousands of dollars)
Segment
------------------------------------------------------------------------------------
Advancel Total Grand
Audio Hearing Communication Europe DMC Logic Segments Other Total
Corp
------- --------- -------------- -------- ------ --------- --------- ------- --------
For the three months ended
months ended
March 31, 2000:
Net Sales - External $ 67 $ 153 $ 92 $ - $ - $ - $ 312 $ - $ 312
Net Sales - Other
Operating Segments 22 - - 220 - - 242 (242) -
License Fees and Royalties 1 34 156 - 56 - 247 9 256
Interest Income/(Expense), net - - - - (82) - (82) (1,084) (1,166)
Depreciation/Amortization 3 - - 9 - 4 16 386 402
Operating Income (Loss) (424) (1,244) (416) 40 (424) (7) (2,475) (3,978) (6,453)
Segment Assets 2,095 1,406 1,074 155 4,756 714 10,200 6,251 16,451
Capital Expenditures - - - - 5 - 5 - 5
For the three months ended
March 31, 1999:
Net Sales - External $ 193 $ 226 $ 377 $ 2 $ - 663 1,461 - 1,461
Net Sales - Other
Operating Segments 15 - - 296 - - 311 (311) -
License Fees and Royalties 500 2 20 - 2,000 200 2,722 - 2,722
Equity in net loss of
Unconsolidated affiliates -
net of amortization 103 - - - - - 103 - 103
Interest Income, net - - - - - - - 24 24
Depreciation/Amortization 3 - - 6 - 4 13 349 362
Operating Income (Loss) (1,447) (751) (1,472) 105 1,921 269 (1,375) (161) (1,536)
Segment Assets 6,689 2,738 485 221 3,454 1,423 15,010 1,069 16,079
Capital Expenditures 1 - - 4 2 1 8 4 12
NCT Audio:
NCT Audio is engaged in the design, development and marketing of products,
which utilize innovative flat panel transducer technology. The products
available from NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM)
printed grille collection. The Gekko(TM) flat speaker is marketed primarily to
the home audio market, with potential in many other markets, including the
professional audio systems market, the automotive audio aftermarket, the
aircraft industry, other transportation markets and multimedia markets. The
principal customers are DMC, end-users, automotive original equipment
manufacturers ("OEMs") and manufacturers of integrated cabin management systems.
NCT Hearing:
NCT Hearing designs, develops and markets active noise reduction ("ANR")
headset products to the communications headset market and the telephony headset
market. The product lines include the NoiseBuster(R) product line and the
ProActive(R) product line. The NoiseBuster(R) products consist of the
NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a headset used for
in-flight passenger entertainment systems and communications headsets for
cellular, multimedia and telephony. The ProActive(R) products consist of noise
reduction headsets and communications headsets for noisy industrial
environments. The majority of NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
Communications:
The Communications division of the Company focuses on the
telecommunications market and in particular the hands-free market. The
Communications technology includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression. ClearSpeech(R)-Acoustic Echo Cancellation removes
acoustic echoes in hands-free full-duplex communication systems. Applications
for this technology are cellular telephony, audio and video teleconferencing,
computer telephony and gaming and voice recognition. ClearSpeech(R)-Compression
maximizes bandwidth efficiency in wireless, satellite and intra- and internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. Applications for this technology are intranet and internet
telephony, audio and video conferencing, PC voice and music, telephone answering
devices, real-time multimedia multitasking, toys and games and playback devices.
The Communications products include the ClearSpeech(R)-Microphone and the
ClearSpeech(R)-Speaker. The majority of Communications' sales are in North
America. Principal markets for Communications are the telecommunications
industries and principal customers are OEMs, system integrators and end-users.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
Company. NCT Europe provides research and engineering to NCT Audio, NCT Hearing,
DMC and Communications as needed. NCT Europe also provides a marketing and sales
support service to the Company for European sales.
DMC:
DMC provides place-based broadcast and billboard advertising through a
microbroadcasting network of Sight and Sound(TM) systems within
commercial/professional settings. The Sight and Sound(TM) systems consist of
flat panel transducer-based speakers (provided by NCT Audio), a personal
computer containing DMC's Sight and Sound DBSS software, telephone access to the
internet, amplifiers and related components. The DBSS software schedules
advertisers' customized broadcast messages, which are downloaded via the
internet, with the respective music genre choice to the commercial/professional
establishments. DMC will develop private networks for large customers with
multiple outlets such as large fast food chains and retail chains.
Advancel Logic Corporation:
Advancel is a participant in the native Java(TM) (Java(TM) is a trademark
of Sun Microsystems, Inc.) embedded microprocessor market. The purpose of the
Java(TM) platform is to simplify application development by providing a platform
for the same software to run on many different kinds of computers and other
smart devices. Advancel has been developing a family of processor cores, which
will execute instructions written in both Java bytecode and C/C++ significantly
enhancing the rate of instruction execution, which opens up many new
applications. The potential for applications consists of the next generation
home appliances and automotive applications, smartcards for a variety of
applications, hearing aids and mobile communications devices.
Other:
The Net Sales - Other Operating Segments primarily consists of
inter-company sales and items eliminated in consolidation. Segment assets
consist primarily of corporate assets.
12. Subsequent Events:
On May 10, 2000, the Company announced a license agreement with Infinite
Technology Corporation ("ITC"). Under the agreement, Advancel grants ITC
exclusive rights to create, make, market, sell and license products and
intellectual property based upon Advancel's Java Turbo-J(TM) technology. The
agreement also grants ITC non-exclusive rights to Advancel's Java smartcard
core. In consideration for this license, the Company will receive $6.0 million
in ITC common stock and on-going unit royalties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
Forward-Looking Statements
Statements in this report which are not historical facts are
forward-looking statements under provisions of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. The Company wishes to caution readers that the important factors
listed below, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause its actual results in
fiscal 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems; produce a cost effective product that will
gain acceptance in relevant consumer and other product markets; increase
revenues from products; realize funding from technology licensing fees,
royalties, product sales, and engineering and development revenues to sustain
the Company's current level of operation; timely introduce new products;
continue its current level of operations to support the fees associated with the
Company's patent portfolio; maintain satisfactory relations with its two
customers that accounted for 42% of the Company's revenues in 1999; attract and
retain key personnel; prevent invalidation, abandonment or expiration of patents
owned or licensed by the Company and expand its patent holdings to diminish
reliance on core patents; have its products utilized beyond noise attenuation
and control; maintain and expand its strategic alliances; and protect Company
know-how, inventions and other secret or unprotected intellectual property.
GENERAL BUSINESS ENVIRONMENT
The Company is focused on the commercialization of its technology through
technology licensing fees, royalties and product sales. The Company's strategy
generally has been to obtain technology licensing fees when initiating joint
ventures and alliances with new strategic partners. Also, as distribution
channels are established and as product sales and market acceptance of the
commercial applications of the Company's technologies build as anticipated by
management, revenues from technology licensing fees, royalties and product sales
are forecasted to fund an increasing share of the Company's requirements. The
revenue from these sources, if realized, will reduce the Company's dependence on
engineering and development services. This is reflected in the first three
months of 2000, where 45% of the Company's revenue has been from licensing fees
and royalties, 55% from product sales. There can be no assurance that technology
licensing fees will continue at that level.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and manufacturing operations. While
the Company works with these firms on product testing and integration, it is not
always able to influence how quickly this process can be completed.
The Company continues to sell and ship NoiseBuster(R) headsets,
Clearspeech(R) products and the Gekko(TM) flat speakers in 2000. The Company
presently sells products through four of its alliances: Walker Electronic
Silencing, Inc. ("Walker") is manufacturing and selling industrial silencers;
Siemens Medical Systems, Inc. ("Siemens") is buying and contracting with the
Company to install quieting headsets for patient use in Siemens' MRI machines;
Ultra Electronics, Limited ("Ultra") is installing aircraft cabin quieting
systems in turboprop aircraft; and Oki Electric Industry Co., Ltd. ("Oki") has
incorporated the Company's Clearspeech(R) noise cancellation algorithm for
integration into large-scale integrated circuits for communications products.
The Company is entitled to receive royalties from Walker on its sales of
industrial silencers, from Ultra on its sales of aircraft cabin quieting systems
and from Oki on its sales of communications products. The Company also is
entitled to receive direct product sales revenue from Siemens' purchase of
headsets. In addition, the Company is entitled to royalties from NXT on its sale
of certain audio products and from suppliers to United Airlines and other major
carriers for integrated noise cancellation active-ready passenger headsets.
From the Company's inception through March 31, 2000, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 26% in
product sales, 40% in engineering and development services and 34% in technology
licensing fees and royalties.
Product revenues for the three months ended March 31, 1999 and 2000 were:
PRODUCT REVENUES
(thousands of dollars)
Three Months Ended March 31,
--------------------------------------------------
Amount As a % of Total
--------------------- ------------------------
Product 1999 2000 1999 2000
------------------ ---------- --------- ----------- ----------
Headsets $ 209 $ 153 32.1% 49.0%
Communications 249 92 38.2% 29.5%
Audio 193 67 29.6% 21.5%
Other 1 - 0.1% 0%
---------- --------- ----------- ----------
Total $ 652 $ 312 100.0% 100.0%
========== ========= =========== ==========
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products.
Management believes that the Company's investment in its technology has resulted
in the expansion of its intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
On March 7, 2000, the Company and DMC, a wholly owned subsidiary of the
Company, signed an agreement to license the use of DBSS systems and related
technology in two station areas in the New York DMA territory to Eagle Assets
Limited ("Eagle"). The amount of the license fee was $1.0 million for each
station. At March 31, 2000, the Company recorded a receivable of $2.0 million
and deferred revenue of $1.9 million (see Note 1). On April 6, 2000 the Company
received $0.5 million. An additional $0.5 million is payable within 90 days of
the signing of the agreement and a promissory note for $1.0 million is to be
issued and paid within twelve months of the signing of the agreement. The
Company also granted Eagle the option to purchase in its entirety a 5% interest
of the then outstanding equity of DMC, on a fully diluted basis, at an exercise
price equal to the lesser of (i) $3.0 million or (ii) at any given closing of a
sale of equity interests in DMC at a price equal to 80% of the total fair market
value of the total outstanding equity attributed to DMC at such closing, as
evidenced by the price paid for such equity interests, multiplied by 5%. The
Company also granted Eagle a single option to purchase a non-exclusive license
from DMC to use the DBSS in two additional station areas in the New York DMA
territory for $1.0 million each.
On March 30, 2000, the Company and DMC signed an agreement to license the
use of DBSS systems and related technology in Israel to Brookepark Limited
("Brookepark"). The amount of the license fee was $2.0 million and was recorded
as deferred revenue at March 31, 2000 (see Note 1). On March 30, 2000, the
Company received $0.5 million. At March 31, 2000, the Company recorded a $1.5
million receivable. An additional $0.5 million is payable within 90 days of the
signing of the agreement and a promissory note for $1.0 million is to be issued
and paid within twelve months of the signing of the agreement. The Company also
granted Brookepark options to purchase an exclusive license from DMC to use the
DBSS in each of the remaining Middle East countries for $2.0 million each. The
Company shall have the right to terminate any such unexercised option to
purchase an additional license by entering into a separate agreement with a
third party for licensing of the DBSS system or technology in any one of the
remaining Middle East countries. Brookepark will receive a 50% commission on all
cash received by DMC upon the execution of any agreement for the license of the
DBSS system entered into by DMC in any of the remaining Middle East countries
for which Brookepark was the originator of the placement of the license.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties,
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales, and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
(Refer to "Liquidity and Capital Resources" below and to Note 1 - "Notes to the
Condensed Consolidated Financial Statements" above for a further discussion
relating to continuity of operations.)
RESULTS OF OPERATIONS
Total revenues for the first three months of 2000 were $0.6 million
compared to $4.2 million for the same period in 1999, a decrease of $3.6 million
or 86%.
Technology licensing fees and royalties was $0.3 million in the first three
months of 2000 compared to $2.7 million for the same period in 1999. Due to the
Company's early adoption of SAB 101, the Company is required to defer $3.9
million of the license fees for DBSS network affiliate licenses which aggregated
$4.0 million. The deferred revenue will be amortized over the next three years
in accordance with the Company's interpretation of SAB 101. The DBSS license
includes the rights to exploit the DBSS technology in a specific geographical
area within one of several networks. The technology includes hardware, software,
rights to practice the intellectual property and the license to deliver music
along with advertising content. The Company anticipates the sale of such
licenses to approximate $1.0 million each based on regional and
commercial/professional settings. The first quarter of 1999 included $2.0
million of DBSS technology license fees, which during the second quarter of 1999
was adjusted by the Company to $1.6 million due to the valuation of the Series E
Preferred Stock which were exchanged for DBSS license fees.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
Product sales were $0.3 million for the first three months of 2000 compared
to $0.7 million for the same period in 1999, a decrease of $0.4 million or 52%,
primarily due to lack of cash to fund the development of new product and
inventory.
Cost of product sales was $0.6 million for the first three months of 2000
versus $0.4 million for the same period in 1999, an increase of $0.2 million or
44%. The increase in 2000 was primarily due to providing a reserve of $0.3
million for slow moving hearing product inventory and minimum royalty expense of
$0.1 million. Product margin was negative 100% for the first three months of
2000 versus 33% during the same period in 1999 due to the above noted inventory
reserve and royalty expenses.
Selling, general and administrative expenses for the first three months of
2000 were $1.2 million versus $3.0 million for the same period in 1999, a
decrease of $1.8 million or 60%, primarily due to a one-time reduction in legal
accruals associated with various litigation matters that have been settled (see
Note 8 - "Notes to the Condensed Consolidated Financial Statements").
Research and development expenditures for the first three months of 2000
were $1.0 million versus $1.7 million for the same period in 1999, a decrease of
$0.7 million or 44%, primarily due to the lack of cash resources to fund
development. The Company continues to focus on products utilizing its hearing,
audio, communications and microphone technologies, products which have been
developed within a short time period and are targeted for rapidly emerging
markets.
In 2000 other expense includes a charge of $3.1 million for impairment of
goodwill. This is related to the Company's increased ownership of NCT Audio,
which is a result of conversions and exchanges of NCT Audio's common stock and
preferred stock for the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $137.9 million on a
cumulative basis through March 31, 2000. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
(1) the sale of common stock, including the exercise of warrants or options to
purchase common stock, (2) the sale of preferred stock convertible into common
stock, (3) technology licensing fees, (4) royalties, (5) product sales, and (6)
engineering and development funds received from strategic partners and
customers.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties
product sales and engineering and development services, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development revenue.
In that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise substantial doubt at March 31, 2000, about the
Company's ability to continue as a going concern.
At March 31, 2000, cash and cash equivalents were $1.4 million. Restricted
cash of $0.6 million was attributed to the proceeds from the PRG Note which is
restricted to rental and installation costs of DBSS Systems. The remaining
resources were invested in interest bearing money market accounts. The Company's
investment objective is preservation of capital while earning a moderate rate of
return.
The Company's working deficit was ($0.3) million at March 31, 2000,
compared to a deficit of $(3.3) million at December 31, 1999. This improvement
of $3.0 million was primarily due to the DBSS license agreements for network
affiliate licenses aggregating $4.0 million.
The net cash used in operating activities remained unchanged compared to
1999. The $2.9 million used in operating activities during 2000 was primarily
due to the four DMC network affiliate licenses incorporating DBSS technology
totaling $4.0 million.
Net inventory decreased during the first three months of 2000 by $0.4
million, primarily due to a $0.3 million increase in reserves for slow moving
hearing product inventory.
The net cash provided by financing activities amounted to $3.2 million,
primarily due to the additional $1.0 million secured convertible note (see Note
7 - "Notes to the Condensed Consolidated Financial Statements" for further
details) and $1.0 million net proceeds from the Series G Preferred Stock
financing (see Note 10 - "Notes to the Condensed Consolidated Financial
Statements" for further details).
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with
supply, manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company to
integrate its active technology into products with limited capital investment in
production facilities and manufacturing personnel; and (iii) access to
well-established channels of distribution and marketing capability of leaders in
several market segments.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
There were no material commitments for capital expenditures as of March 31,
2000, and no other material commitments are anticipated in the near future.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 8 - "Notes to the Condensed
Consolidated Financial Statements" which is included herein.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 27 Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /s/ MICHAEL J. PARRELLA
-----------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ CY E. HAMMOND
---------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: August 21, 2000