UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 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)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
283,371,627 shares outstanding as of August 10, 2000
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 June 30, Six Months Ended June 30,
----------------------------- -----------------------------
------------ ---------- ----------- -----------
1999 2000 1999 2000
------------ ---------- ----------- -----------
REVENUES:
Technology licensing fees and Royalties $ 779 $ 333 $ 3,501 $ 589
Product sales, net 576 471 1,228 783
Engineering and development services 366 31 1,175 31
------------ ---------- ----------- -----------
Total revenues $ 1,721 835 5,904 1,403
------------ ---------- ----------- -----------
COSTS AND EXPENSES:
Cost of product sales $ 649 $ 341 $ 1,083 $ 964
Cost of engineering and development Services 395 27 903 27
Selling, general and administrative 2,678 2,217 5,663 3,409
Research and development 1,745 1,116 3,458 2,083
Write down of investment in unconsolidated
subsidiary 2,385 - 2,385 -
Other (income)/expense 204 (124) 307 2,949
Interest (income)/expense (33) 212 (57) 1,378
------------ ---------- ------------ -----------
Total costs and expenses $ 8,023 $ 3,789 $ 13,742 $ 10,810
------------ ---------- ------------ -----------
NET (LOSS)/INCOME $ (6,302) $ (2,954) $ (7,838) $ (9,407)
Common stock preferential return - 47 - 100
Preferred stock dividend requirement 134 235 5,240 901
Accretion of difference between
carrying amount and redemption amount
of redeemable preferred stock 25 48 184 87
------------ ---------- ------------ -----------
NET (LOSS)/INCOME ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (6,461) $ (3,284) $ (13,262) $(10,495)
============ ========== ============ ===========
Basic and diluted income/(loss) per share $ (0.04) $ (0.01) $ (0.08) $ (0.04)
============ ========== ============ ===========
Weighted average common shares outstanding -
basic and diluted 174,238 275,315 165,247 274,514
============ ========== ============ ===========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(Unaudited) (in thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
------------ ---------- ----------- -----------
1999 2000 1999 2000
------------ ---------- ----------- -----------
NET (LOSS)/INCOME $ (6,302) $ (2,954) $ (7,838) $ (9,407)
Other comprehensive (loss)/income:
Currency translation adjustment (3) 25 21 (25)
------------ ---------- ----------- -----------
COMPREHENSIVE (LOSS)/INCOME $ (6,305) $ (2,929) $ (7,817) $ (9,432)
============ ========== ============ ===========
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, June 30,
ASSETS (Note 8) 1999 2000
-------------- -------------
Current assets: (Unaudited)
Cash and cash equivalents (Note 1) $ 1,126 $ 777
Restricted cash (Note 8) 667 321
Accounts receivable, net (Note 2) 237 2,865
Inventories, net (Note 3) 2,265 1,831
Other current assets 152 369
-------------- -------------
Total current assets $ 6,163 $ 4,447
Property and equipment, net 449 379
Goodwill, net 3,497 3,094
Patent rights and other intangibles, net 2,296 2,004
Other assets (Note 6) 2,688 3,107
-------------- -------------
$ 13,377 $ 14,747
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $ 3,647 $ 2,144
Accrued expenses 3,189 2,457
Current maturities of notes payable (Note 7) - 1,054
Accrued payroll, taxes and related expenses 64 37
Other liabilities 807 670
Current maturities of convertible notes(Note 8) - 1,500
Deferred revenue (Note 1) 21 1,354
------------- -------------
Total current liabilities $ 7,728 $ 9,216
------------- -------------
Long term liabilities (Note 8):
Convertible notes $ 4,107 $ 3,314
Note payable - 79
Deferred revenue (Note 1) - 2,278
------------- -------------
Total long term liabilities $ 4,107 $ 5,671
------------- -------------
Commitments and contingencies
Common stock subject to resale guarantee (Note 11) $ 1,592 $ 741
------------- -------------
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 (Note 5)
Preferred stock, $.10 par value, 10,000,000 shares
authorized
Series F preferred stock, 4,715 and 3,464 shares
issued and outstanding, respectively
(redemption amount $4,789,407 and $3,587,755,
respectively) $ 2,790 $ 2,113
Series G preferred stock, issued and outstanding,
0 and 2,004 shares, respectively (redemption
amount $0 and $2,020,268, respectively) - 1,725
Common stock, $.01 par value, authorized
325,000,000 shares; issued 268,770,739 and
281,092,998 shares, respectively 2,688 2,811
Additional paid-in-capital 130,865 137,992
Unearned portion of compensatory stock, warrants
and options (55) (46)
Expenses to be paid with common stock (1,282) (221)
Accumulated deficit (131,475) (140,882)
Accumulated other comprehensive income 65 40
Stock subscriptions receivable (1,000) (1,450)
Treasury stock (6,078,065 shares of common stock) (2,963) (2,963)
------------- -------------
Total stockholders' equity/(deficit) $ (367) $ (881)
------------- -------------
$ 13,377 $ 14,747
============= =============
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)
Six months ended June 30,
------------------------------
1999 2000
-------------- -------------
Cash flows from operating activities:
Net (loss) $ (7,838) $ (9,407)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 900 842
Common stock and options issued as
consideration for:
Compensation 254 9
Operating expenses - 50
Provision for tooling costs 4 -
Provision for inventory - 250
Provision for doubtful accounts 32 (16)
Write down of investment in unconsolidated
subsidiary 2,385 -
Preferred stock received for license fees (850) -
Impairment of goodwill (Note 11) - 3,073
Discount on beneficial conversion feature on
convertible note (Note 8) - 1,000
Changes in operating assets and liabilities:
(Increase) in accounts receivable (254) (112)
(Increase) in license fees receivable (1,804) (2,500)
Decrease in inventories, net 186 181
(Increase)decrease in other assets 18 (106)
Increase (decrease) in accounts payable and
accrued expenses 1,255 (1,713)
Increase in other liabilities and deferred
revenue 1,210 3,441
-------------- -------------
Net cash (used in) operating activities $ (4,502) $ (5,008)
-------------- -------------
Cash flows from investing activities:
Capital expenditures $ (52) $ (86)
Decrease in restricted cash - 346
Acquisition of patent rights (900) -
Deferred charges - (407)
Interest on note receivable (74) -
-------------- -------------
Net cash (used in) investing activities $ (1,026) $ (147)
-------------- -------------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) (Note 8) $ 1,500 $ 1,000
Notes payable (Note 7) - 750
Sale of preferred stock (net) (Note 11) 3,529 1,704
Proceeds from common stock subject to
resale (Note 10) - 620
Exercise of stock options (net) 1 748
-------------- -------------
Net cash provided by financing activities $ 5,030 $ 4,822
-------------- -------------
Effect of exchange rate changes on cash $ 32 $ (16)
-------------- -------------
Net (decrease) in cash and cash equivalents $ (466) $ (349)
Cash and cash equivalents - beginning of period 529 1,126
-------------- -------------
Cash and cash equivalents - end of period $ 63 $ 777
============== =============
Cash paid for interest $ 1 $ -
============== =============
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 and six months ended June 30,
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.
This Amendment No. 1 to the Company's quarterly report on Form 10-Q for the
period ended June 30, 2000 reflects only a change in timing of the recognition
of $6.0 million in revenue related to the technology license granted to Infinite
Technology Corporation ("ITC"), based upon recent advice of the Company's
independent accountants. On May 10, 2000, the Company announced a license
agreement with ITC. Under the agreement, Advancel Logic Corporation
("Advancel"), a majority owned subsidiary of the Company, granted ITC exclusive
rights to create, make, market, sell and license products and intellectual
property based upon Advancel's Java Turbo-J(TM) technology. The agreement also
granted ITC non-exclusive rights to Advancel's Java smartcard core. In
consideration for this license, the Company received 1.2 million shares of ITC's
common stock valued at $6.0 million and will receive on-going unit royalties.
As noted in the Company's Definitive 14A Proxy Statement, filed on June 6,
2000, contemporaneous with the execution of the above noted ITC license
agreement, the Company, Advancel and ITC entered into a separate, unrelated
definitive research and engineering agreement. Specifically, ITC will develop,
make and sell to the Company a DSP System-On-Chip semiconductor chip for which
the Company will pay ITC $2.4 million. The Company has advanced to ITC $3.0
million of its common stock as collateral for future payment of consideration in
this transaction. Should ITC not realize $2.4 million in net proceeds from the
sale of the NCT common stock over the nine to twelve month life of the chip
engineering project, NCT will be liable for the shortfall. In the event that
after receiving $2.4 million in net proceeds from the sale of NCT common stock,
ITC continues to hold additional NCT common stock, ITC is obligated to return
the excess shares to NCT. The Company, prior to this restatement had planned to
account for this transaction as prepaid research and engineering expense in the
quarter ended September 30, 2000.
After consultation with the Company's independent accountants, it was
determined that the $6.0 million ITC license agreement and the $2.4 million ITC
research and engineering agreement should be accounted for as a single
transaction. Thereby, both agreements should be combined for financial reporting
purposes in the quarter ended September 30, 2000. Therefore, the Company is
restating it's second quarter 2000 revenue to exclude the $6.0 million ITC
license fee, moving the $6.0 million ITC license fee to the third quarter 2000
and deferring recognition of $2.4 million of the ITC license fee now deemed
related to the research and engineering agreement. The Company fully expects to
recognize the entire $2.4 million as revenue over the next nine to twelve months
as work on the research and engineering contract progresses.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $140.9 million on a
cumulative basis through June 30, 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, required the Company to restate its first quarter
2000 revenues, deferring recognition of $3.9 million of previously recognized
license fees. Such deferred revenue will be amortized 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. The
total amount of the license fee was $2.0 million of which approximately $1.8
million has been deferred at June 30, 2000. At June 30, 2000, the amount
remaining in accounts receivable totaled $1.25 million.
On March 30, 2000, the Company and DMC signed an agreement to license the
use of DBSS systems and related technology in Israel to Brookepark Limited. The
amount of the license fee was $2.0 million of which approximately $1.8 million
has been deferred at June 30, 2000. At June 30, 2000, the amount remaining in
accounts receivable totaled $1.25 million.
Cash, cash equivalents and short-term investments amounted to $0.8 million
at June 30, 2000, decreasing 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 Notes 7, 8 and 11 with respect to recent
financings.
The accompanying condensed 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 above raise substantial doubt at June
30, 2000, about the Company's ability to continue as a going concern. The
accompanying condensed 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.
2. Accounts Receivable:
Accounts receivable comprise the following:
(thousands of dollars)
December 31, June 30,
1999 2000
---------------- ----------------
Technology license fees and royalties $ - $ 2,545
Engineering and development services 33 -
Other 287 386
Allowance for doubtful accounts (83) (66)
---------------- ----------------
Accounts receivable, net $ 237 $ 2,865
================ ================
3. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, June 30,
1999 2000
---------------- --------------
Components $ 360 $ 487
Finished goods 2,434 1,963
---------------- --------------
Gross inventories $ 2,794 2,450
Reserve for obsolete & slow moving inventory (529) (619)
---------------- --------------
Inventories, net of reserves $ 2,265 $ 1,831
================ ==============
The reserve for obsolete and slow moving inventory at June 30, 2000 has
increased to $0.6 million primarily due to a $0.3 million charge for slow moving
hearing product inventory recorded during the first six months of 2000, net of
applications of reserve.
4. Recent Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133"). As amended by SFAS No. 137,
the Company is required to adopt SFAS 133 for the year ending December 31, 2001.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
SFAS 133 is expected to have no material impact on the Company's financial
condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. In March 2000, the SEC issued
SAB No. 101A to defer for one quarter the effective date of implementation of
SAB 101 and June 2000 issued SAB No. 101B to defer until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999 with
earlier application encouraged. As noted in Note 1 the Company has elected early
application of SAB 101 in the quarter ended March 2000. The effect of the
adoption of SAB 101 in the first quarter of 2000 in a reduction of revenue and
net income of $3.9 million.
5. Stockholders' Equity:
The changes in stockholders' equity during the six months ended June 30, 2000, were as follows:
(in thousands)
--------------------------------------------------------------------------------------------------------------------
Unearned Expenses
Accretion/ Net Compen- To be Transla-
Balance Sale Exchange/ Dividend Sale Stock satory paid tion Balance
at of Conversion of of Subscrip Options/ Net With Adjust- At
12/31/99 Preferred of Preferred Common tion Warrants Loss Common ment 6/30/00
Stock Preferred Stock Stock Receiv Stock
Stock able
---------- --------- ---------- ---------- -------- -------- --------- ------- --------- -------- ------------
Series F
Preferred
Stock:
Shares 5 - (1) - - - - - - - 4
Amount $ 2,790 $ - $ (748) $ 71 $ - $ - $ - $ - $ - $ - $ 2,113
Series G
Preferred
Stock:
Shares - 2 - - - - - - - - 2
Amount $ - $ 1,709 $ - $ 16 $ - $ - $ - $ - $ - $ - $ 1,725
Common
Stock:
Shares 268,771 - 11,568 - 1,530 - - - (776) - 281,093
Amount $ 2,688 $ - $ 116 $ - $ 15 $ - $ - $ - $ (8) $ - $ 2,811
Treasury
Stock:
Shares 6,078 - - - - - - - - - 6,078
Amount $ (2,963) $ - $ - $ - $ - $ - $ - $ - $ - $ - $ (2,963)
Additional
Paid-in Capital $ 130,865 $ - $ 945 $ (87) $ 5,024 $ - $ - $ - $ 1,245 $ - $ 137,992
Accumulated
(Deficit) $(131,475) $ - $ - $ - $ - $ - $ - $(9,407) $ - $ - $(140,882)
Accumulated Other
Comprehensive
Income $ 65 $ - $ - $ - $ - $ - $ - $ - $ - $ (25) $ 40
Stock
Subscription
Receivable $ (1,000) $ - $ - $ - $ - $ (450) $ - $ - $ - $ - $ (1,450)
Expenses
to be
Paid with
Common Stock $ (1,282) $ - $ - $ - $ - $ - $ - $ - $ 1,061 $ - $ (221)
Unearned
Compensatory
Stock Option $ (55) $ - $ - $ - $ - $ - $ 9 $ - $ - $ - $ (46)
6. Other Assets:
On August 14, 1998, NCT Audio Products, Inc. ("NCT Audio") agreed to
acquire substantially all of the assets of Top Source Automotive, Inc. ("TSA"),
an automotive audio system supplier. In 1998 NCT Audio had paid deposits of $3.5
million towards the purchase price. 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 investment in TSA to $1.5
million, representing its 15% minority interest. In addition the Company
recorded a penalty premium of $0.1 million and a note payable of $0.2 million,
as well as 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. The $0.1
million is included on the balance sheet at June 30, 2000 in accrued expenses
and the $0.2 million is included in notes payable.
7. Notes Payable:
On May 26, 2000, the Company, ConnectClearly.com, Inc. (a wholly owned
subsidiary of the Company) and two separate investors entered into two
promissory notes of $250,000 each, in a bridge financing arrangement. These
notes were repaid in August 2000 from the proceeds from a $2.0 million equity
financing arrangement entered into with the note holders. Such notes accrued
interest at 10% per annum.
On June 28, 2000, the Company entered into a $275,000 promissory note with
an investor. Inherent to the note was an original issue discount provision
amounting to $25,000. Such discount is being amortized as interest expense over
the term of the note which is due and payable on August 28, 2000.
8. Long-Term Liabilities:
Convertible Notes:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed to and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. The Company entered into secured convertible notes (the "Notes") for
$4.0 million between January 26, 1999 and March 27, 2000. The Notes mature two
years from their inception date and earn interest at the prime rate as published
from day to day in The Wall Street Journal. The Company recorded a beneficial
conversion feature of $1.0 million in connection with the March 27, 2000
convertible note recorded during the first quarter of 2000, classified as
interest expense.
On July 19, 1999, DMC entered into a convertible guaranteed term promissory
note ("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. Of the $1.0 million note, $750,000 was deposited into an escrow account
and is restricted in its use to pay rental and installation costs of DBSS
systems. At June 30, 2000, the balance in the escrow account, classified as
restricted cash, was $0.2 million. The PRG Note matures on July 19, 2001 and
earns interest at ten percent (10%) per annum. PRG may convert the PRG Note in
whole or in part at its election into shares of DMC's common stock, without par
value, at any time during the period commencing on the date of issuance and
ending on the maturity date. In connection with the PRG Note, PRG was granted a
common stock warrant. In accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company estimated the fair value of this warrant
to be $0.4 million. Such amount is being amortized to interest expense over the
two-year period of the related promissory note. Amortization amounted to $0.1
million for the six months ended June 30, 2000. Unamortized discount of $0.2
million has been reflected as a reduction of the related note payable amount in
the accompanying June 30, 2000 condensed consolidated financial statements.
Note Payable:
On June 2, 2000, the Company and DMC entered into a promissory note ("Roth
Note") with Roth Bros, Inc. ("Roth") in the amount of $0.8 million. Of the $0.8
million note, $0.2 million was deposited into a bank account that is restricted
in its use for equipment purchase, rental and installation costs as it pertains
to the installation of DBSS systems. At June 30, 2000, the balance in the escrow
account, classified as restricted cash, was $0.1 million. The Roth Note matures
twenty-four (24) months from the date of execution and earns interest at fifteen
percent (15%) per annum. In connection with the Roth Note, Roth 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 $0.1 million. Such amount is being amortized to interest expense over the
two-year period of the related promissory note. Amortization amounted to
approximately $2,500 for the six months ended June 30, 2000. Unamortized
discount of $0.1 million has been reflected as a reduction of the related note
payable amount in the accompanying June 30, 2000 condensed consolidated
financial statements.
9. 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. During the second quarter of 2000, the Company and SCI have
had verbal discussions regarding a settlement. Aside from such verbal settlement
discussions, 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 September 16, 1999, certain former shareholders and optionees (the
"Claimants") of Advancel, a majority owned subsidiary of the Company, filed a
Demand for Arbitration against the Company with the American Arbitration
Association in San Francisco, CA. On April 25, 2000, both parties reached a
resolution of the matter. All parties withdrew all charges and claims with
exception to the following. Regarding the Stock Purchase Agreement, NCT and
Advancel did not release the Claimants from any claims arising out of or
relating to Claimants' use, misuse, destruction or theft of NCT and/or
Advancel's property, confidential information, trade secrets or intellectual
property or any claims arising out of or relating to the Proprietary Information
and Invention Agreements. Also, NCT and Advancel did not release Claimants from
any of their obligations under the Non-compete Covenants. NCT has no further
obligations to the Claimants under the Stock Purchase Agreement as a result of
the resolution of this matter which was of no financial or other consequence to
the Company.
On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against Top Source
Technologies, Inc. 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 to a majority shareholder, 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.
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. Such shares were issued
to Austost and Balmore pursuant to the Securities Exchange Agreement (the
"Exchange Agreement") executed on October 9, 1999, as amended on March 7, 2000
(See Note 11- to the Condensed Consolidated Financial Statements for further
details). 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.
The Company believes there are no other patent infringement litigation,
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on the consolidated financial position and
consolidated results of operations.
10. 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 six month ended June 30,
2000, suppliers and vendors sold $0.9 million. At June 30, 2000, common stock
subject to resale guarantee included $0.1 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.
At June 26, 2000 no additional shares were required to be issued in
accordance with such reset provision.
Common stock subject to resale guarantee was $0.7 million at June 30, 2000,
which represented the outstanding shares of common stock valued at the date of
issuance to suppliers and consultants ($0.1 million) and the purchase price plus
guaranteed return on investment related to the above noted Purchase Agreement
($0.6 million).
11. 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"). At the Annual Meeting of Stockholders held on July 13, 2000, the
stockholders approved such amendment.
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 market 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 market value of the Company's
common stock on the date of grant.
On January 25, 2000, the Board of Directors designated a new series of
preferred stock based upon a negotiated term sheet, the Series G Convertible
Preferred Stock ("Series G Preferred Stock"). The Series G Preferred Stock
consists of 5,000 designated shares, par value of $0.10 per share and a stated
value of one thousand dollars ($1,000) per share with a cumulative dividend of
four percent (4%) per annum on the stated value payable upon conversion in
either cash or common stock. On March 6, 2000, as amended March 10, 2000, the
Company and an accredited investor entered into an agreement under which the
Company sold an aggregate stated value of $2.0 million (2,004 shares) of Series
G Preferred Stock, in a private placement pursuant to Regulation D of the
Securities Act of 1933 (the "Securities Act") for an aggregate of $1.750
million. The Company received proceeds, net of expenses, of $1.7 million. Each
share of Series G Preferred Stock is convertible into fully paid and
nonassessable shares of the Company's common stock pursuant to a predetermined
conversion formula which provides that the conversion price will be the lesser
of (i) the average of the closing bid price for the common stock on the
securities market on which the common stock is being traded for five (5)
consecutive trading days prior to the date of conversion; or (ii) the fixed
conversion price of $0.71925. The Company filed a registration statement on
April 20, 2000, (amended on June 13, 2000), to register such shares of common
stock for the conversion of the Series G Preferred Stock and the related
warrant. In connection with the Series G Preferred Stock transaction, on March
6, 2000, the Company granted a warrant for 150,000 shares of the Company's
common stock with an expiration date of March 31, 2005 and an exercise price of
$0.71925. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company estimated the fair market value of this warrant to be
$0.1 million, using the following assumptions in applying the Black-Scholes
valuation method: risk-free interest rates of 6.14%, volatility of 1, and a term
of three years. Such amount is included in the preferred stock dividend
requirement for the six months ended June 30, 2000.
During the six months ended June 30, 2000, the Company issued 10,933,655
shares of the Company's common stock in connection with the conversion of 1,251
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.
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.
In March 2000, 3 shares of NCT Audio Series A Convertible Preferred Stock,
which had been issued in the third quarter of 1998 in a private placement exempt
from registration pursuant to Regulation D of the Securities Act, were exchanged
for 3,000 shares of Series D Preferred Stock, which were converted into 634,915
shares of the Company's common stock. Subsequently, the Company recorded a
one-time, non-cash charge of $0.2 million for the impairment of goodwill based
on the valuation of NCT Audio, 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. Under the Exchange
Agreement, Austost and Balmore were obligated to return to the Company
13,671,362 shares of NCT common stock ("Returnable Shares"). This amendment was
agreed to in order to (1) allow Austost and Balmore to retain 3,611,111
Returnable Shares in exchange for an additional 533 shares of 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. 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.
Subsequently, the Company recorded a one-time, non-cash charge of $2.9 million
for the impairment of goodwill based on the valuation of NCT Audio, which is
included in other expense.
On April 21, 2000 the Board of Directors approved the re-granting of
replacement grants for forfeit options that would otherwise expire in 2000. Such
replacement grants totaled approximately 565,000 options.
At June 30, 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 36.8 million shares of which
options and warrants to purchase 26.0 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 15.0 million and 6.8 million,
respectively. The Company has reserved 4.8 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 at June 30, 2000.
12. 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.
Segment Information follows:
(In thousands of dollars)
Segment
----------------------------------------------------------------------------------
Advancel Total Grand
Audio Hearing Communication Europe DMC Logic Segments Other Total
Corp
------- -------- ------------ ------- --------- -------- --------- -------- -------
For the six months ended
June 30, 2000:
Net Sales - External $ 186 $ 280 $ 339 $ 6 $ - $ - $ 811 $ 3 $ 814
Net Sales - Other
Operating Segments 26 - - 423 - - 449 (449) -
License Fees and Royalties 1 34 156 - 389 - 580 9 589
Interest Income/(Expense), net - - - - (175) (111) (286) (1,092) (1,378)
Depreciation/Amortization 5 - - 17 - 8 30 812 842
Operating Income(Loss) (104) (683) (2,191) 164 (3,794) 22 (6,586) (2,821) (9,407)
Segment Assets 2,277 1,361 996 127 7,530 683 12,974 1,773 14,747
Capital Expenditures - - - - 17 - 17 69 86
For the six months ended
June 30, 1999:
Net Sales - External $ 352 $ 432 $ 666 $ 2 $ - $ 943 $ 2,395 $ 8 $ 2,403
Net Sales - Other
Operating Segments 2 - - 438 - - 440 (400) -
License Fees and Royalties 500 156 863 - 850 1,100 3,469 32 3,501
Write down of Investment
in Uconsolidated Subsidary (2,385) - - - - - (2,385) - (2,385)
Interest Income,net 91 - - 1 - - 92 (35) 57
Depreciation/Amortization 6 - - 10 - 7 23 877 900
Operating Income(Loss) (5,424) (1,683) (1,099) 46 (99) 778 (7,481) (357) (7,838)
Segment Assets 4,453 2,347 1,108 193 442 2,063 10,606 7,723 18,329
Capital Expenditures - - 1 9 3 35 48 4 52
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. (See Note 6 -
Notes to the Condensed Consolidated Financial Statements above for further
details.)
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.
13. Subsequent Events:
At the Annual Meeting of Stockholders held on July 13, 2000, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock from
325 million to 450 million shares. Such action was recommended by the Company's
Board of Directors to make additional shares of the Company's common stock
available for proper business purposes including an increase in the number of
shares of common stock covered by the 1992 Plan pursuant to an amendment of the
1992 Plan approved by the stockholders at such Annual Meeting, and for
acquisitions, public or private financings involving common stock or preferred
stock or other securities convertible to common stock, stock splits and
dividends, present and future employee benefit programs and other corporate
purposes. Such amendment became effective on July 18, 2000, when the Company
filed a Certificate of Amendment to its Restated Certificate of Incorporation in
the Office of the Secretary of the State of Delaware pursuant to the
requirements of the General Corporation Law of the State of Delaware.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
This Amendment No. 1 to the Company's quarterly report on Form 10-Q for the
period ended June 30, 2000 reflects only a change in timing of the recognition
of $6.0 million in revenue related to the technology license granted to Infinite
Technology Corporation ("ITC"), based upon recent advice of the Company's
independent accountants. On May 10, 2000, the Company announced a license
agreement with ITC. Under the agreement, Advancel Logic Corporation
("Advancel"), a majority owned subsidiary of the Company, granted ITC exclusive
rights to create, make, market, sell and license products and intellectual
property based upon Advancel's Java Turbo-J(TM) technology. The agreement also
granted ITC non-exclusive rights to Advancel's Java smartcard core. In
consideration for this license, the Company received 1.2 million shares of ITC's
common stock valued at $6.0 million and will receive on-going unit royalties.
As noted in the Company's Definitive 14A Proxy Statement, filed on June 6,
2000, contemporaneous with the execution of the above noted ITC license
agreement, the Company, Advancel and ITC entered into a separate, unrelated
definitive research and engineering agreement. Specifically, ITC will develop,
make and sell to the Company a DSP System-On-Chip semiconductor chip for which
the Company will pay ITC $2.4 million. The Company has advanced to ITC up to
$3.0 million of its common stock as collateral for future payment of
consideration in this transaction. Should ITC not realize $2.4 million in net
proceeds from the sale of the NCT common stock over the nine to twelve month
life of the chip engineering project, NCT will be liable for the shortfall. In
the event that after receiving $2.4 million in net proceeds from the sale of NCT
common stock, ITC continues to hold additional NCT common stock, ITC is
obligated to return the excess shares to NCT. The Company, prior to this
restatement had planned to account for this transaction as prepaid research and
engineering expense in the quarter ended September 30, 2000.
After consultation with the Company's independent accountants, it was
determined that the $6.0 million ITC license agreement and the $2.4 million ITC
research and engineering agreement should be accounted for as a single
transaction. Thereby, both agreements should be combined for financial reporting
purposes in the quarter ended September 30, 2000. Therefore, the Company is
restating it's second quarter 2000 revenue to exclude the $6.0 million ITC
license fee, moving the $6.0 million ITC license fee to the third quarter 2000
and deferring recognition of $2.4 million of the ITC license fee now deemed
related to the research and engineering agreement. The Company fully expects to
recognize the entire $2.4 million as revenue over the next nine to twelve months
as work on the research and engineering contract progresses.
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 six and three
months ended June 30, 2000, where 89% and 93%, respectively, of the Company's
revenue has been from licensing fees and royalties, 11% and 7%, respectively,
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 three of its alliances: Walker Electronic
Silencing, Inc. ("Walker") is manufacturing and selling industrial silencers;
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. 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 June 30, 2000, its operating revenues,
including technology licensing fees and royalties, product sales and engineering
and development services, have consisted of approximately 24% in product sales,
36% in engineering and development services and 40% in technology licensing fees
and royalties.
Product revenues for the three and six months ended June 30, 1999 and 2000
were:
PRODUCT REVENUES
(thousands of dollars)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------------
Amount As a % of Total Amount As a % of Total
------------- ------------------ ------------------- -------------------
Product 1999 2000 1999 2000 1999 2000 1999 2000
- ---------------- ------ ----- -------- -------- ------- -------- -------- --------
Headsets $199 $127 34.5% 27.0% $408 $280 33.2% 35.8 %
Communications 214 222 37.2% 47.1% 463 313 37.7% 40.0 %
Audio 162 119 28.1% 25.3% 355 186 28.9% 23.8 %
Other 1 3 0.2% 0.6% 2 3 0.2% 0.4 %
------ ----- -------- -------- ------- -------- -------- --------
Total $576 $471 100.0% 100.0% $1,228 $783 100.0% 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 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. The
total amount of the license fee was $2.0 million, of which approximately $1.8
million has been deferred at June 30, 2000. At June 30, 2000, the amount
remaining in accounts receivable totaled $1.25 million.
On March 30, 2000, the Company and DMC signed an agreement to license the
use of DBSS systems and related technology in Israel to Brookepark Limited. The
amount of the license fee was $2.0 million, of which approximately $1.8 million
has been deferred at June 30, 2000. At June 30, 2000, the amount remaining in
accounts receivable totaled $1.25 million.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, 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
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Total revenues for the three months ended June 30, 2000 totaled $0.8
million, compared to $1.7 million for three months ended June 30, 1999, or a
decrease of 53%.
Technology licensing fees and royalties decreased to $0.3 million for the
three months ended June 30, 2000 from $0.8 million for the three months ended
June 30, 1999, a decrease of $0.5 million.
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 $0.5 million for the three months ended June 30, 2000
compared to $0.6 million for the three months ended June 30, 1999, a decrease of
$0.1 million primarily due to lack of cash to fund advertising and the
acquisition of new product inventory.
For the three months ended June 30, 2000 cost of product sales was $0.3
million compared to $0.6 million for the three months ended June 30, 1999, a
decrease of $0.3 million or 48%. The decrease was primarily due to a $0.3
million reserve for slow moving hearing product inventory and minimum royalty
expense of $0.1 million which was recorded in the three months ended June 30,
1999. Product margin was 28% for the three months ended June 30, 2000 as
compared to a negative 13% for the three months ended June 30, 1999 which
relates to the above mentioned reserves for slow moving inventory.
For the three months ended June 30, 2000 selling, general and
administrative expenses amounted to $2.2 million as compared to $2.7 million for
the three months ended June 30, 1999, a decrease of $0.5 million or 17%,
primarily due to a one-time current period reduction in legal accruals
associated with various litigation matters that have been settled (see Note 9 -
"Notes to the Condensed Consolidated Financial Statements" for further details)
and decreased advertising costs.
For the three months ended June 30, 2000, research and development
expenditures amounted to $1.1 million as compared to $1.7 million for the three
months ended June 30, 1999, a decrease of $0.6 million or 36%, primarily through
attrition of Advancel employees in 1999. Research and development formerly
conducted at Advancel will be outsourced to ITC commencing in the third quarter
of 2000. The Company continues to focus on products utilizing its hearing,
audio, communications and microphone technologies, products which have been
developed within a short time period and are targeted for rapidly emerging
markets.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
For the six months ended June 30, 2000, total revenues amounted to $1.4
million, compared to $5.9 million for six months ended June 30, 1999, or a
decrease of 76%.
Technology licensing fees and royalties decreased to $0.6 million in the
first six months of 2000 as compared to $3.5 million for the same period in
1999, a decrease of $2.9 million. During the second quarter of 2000, retroactive
to January 1, 2000, the Company adopted the accounting policies of SAB 101.
Adopting SAB 101 effective January 1, 2000, required the Company to restate its
first quarter 2000 revenues, deferring recognition of $3.9 million of previously
recognized DMC license fees. Such deferred revenue will be amortized over the
next three years in accordance with the Company's interpretation of SAB 101. The
Company has recognized $0.4 million of such revenue in the six months ended June
30, 2000.
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.
For the six months ended June 30, 2000, product sales were $0.8 million
compared to $1.2 million for six months ended June 30, 1999, a decrease of $0.4
million or 36%, primarily due to lack of cash to fund advertising and the
acquisition of new product inventory.
For the six months ended June 30, 2000, cost of product sales amounted to
$1.0 million versus $1.1 million for six months ended June 30, 1999, a decrease
of $0.1 million or 11%. The decrease was primarily due to a reduction of product
sales for the six months ended June 30, 2000 as compared to the six months ended
June 30, 1999. For the six months ended June 30, 2000 product margin decreased
to a negative 23% as compared to 12% during the six months ended June 30, 1999
due primarily to additional hearing product inventory reserves and minimum audio
products royalty expenses.
The gross margin on engineering and development services decreased to 13%
for the six months ended June 30, 2000 from 23% for the same period in 1999 due
to a reduction in funded engineering and development contracts particularly the
ST Microelectronics contract with Advancel.
For the six months ended June 30, 2000, selling, general and administrative
expenses totaled $3.4 million as compared to $5.7 million for the six months
ended June 30, 1999, a decrease of $2.3 million or 40%, primarily due to a
decrease in selling and marketing related expenses, primarily advertising and
headcount and travel related expenses.
For the six months ended June 30, 2000, research and development
expenditures totaled $2.1 million as compared to $3.5 million for the six months
ended June 30, 1999, a decrease of $1.4 million or 40%, primarily through
attrition of Advancel employees in 1999. Research and development formerly
conducted at Advancel will be outsourced to ITC commencing in the third quarter
of 2000. The Company continues to focus on products utilizing its hearing,
audio, communications and microphone technologies, products which have been
developed within a short time period and are targeted for rapidly emerging
markets.
For the six months ended June 30, 2000, other expenses include one-time,
non-cash charges of $3.1 million for impairment of goodwill. This is related to
the Company's 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 $140.9 million on a
cumulative basis through June 30, 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 June 30, 2000 about the Company's
ability to continue as a going concern.
Pursuant to the amended Exchange Agreement between the Company and Austost
and Balmore, the Company (See Note 11 - "Notes to the Condensed Consolidated
Financial Statements for further details) 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 $10.0 million in cash subject to
monthly limitations from proceeds that Austost and Balmore would realize from
their disposition of such Remaining Returnable Shares. Austost and Balmore would
realize a 10% commission on the proceeds from the sale of shares. The fair
market value of such shares at June 30, 2000 was $3.3 million net of
commissions.
At June 30, 2000, cash and cash equivalents were $0.8 million. Restricted
cash of $0.3 million was attributed to the proceeds from the PRG Note and the
Roth Note (see Note 8 - "Notes to the Condensed Consolidated Financial
Statements" for further details), which is restricted to equipment purchase,
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 capital deficit was $(3.1) million at June 30, 2000,
compared to a deficit of $(3.3) million at December 31, 1999. This $0.2 million
improvement was primarily due to the DBSS license agreements totaling $4.0
million to license the use of DBSS systems and related technology in designated
geographical locations of which approximately $2.5 million is included in
accounts receivable at June 30, 2000 offset by the increase in current
maturities of long term debt.
For the six months ended June 30, 2000, the net cash used in operating
activities was $5.0 million compared to $4.5 million for the six months ended
June 30, 1999. The increase in net cash used in operating activities for the six
months ended June 30, 2000 of $0.5 million is primarily due to the reduction of
accounts payable and accrued expenses.
At June 30, 2000, net inventory decreased 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 $4.8 million,
primarily due to the additional $1.0 million secured convertible note (see Note
8 - "Notes to the Condensed Consolidated Financial Statements" for further
details), net proceeds of $1.7 million from the Series G Preferred Stock
financing (see Note 11 - "Notes to the Condensed Consolidated Financial
Statements" for further details) and proceeds of $0.8 million from several
promissory notes (see Note 7- "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 June 30,
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 9 - "Notes to the Condensed
Consolidated Financial Statements" which is included herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
(a) On March 6, 2000, as amended March 10, 2000, the Company entered
into a subscription agreement to sell an aggregate stated value of up
to $2,004,000 (2,004 shares) of Series G Convertible Preferred Stock
("Series G Preferred Stock"). On March 10, 2000, the Company issued
and sold 1,254 shares of Series G Preferred Stock having an aggregate
stated value of $1,254,000. On June 25, 2000, the Company issued and
sold 750 shares of Series G Preferred Stock having an aggregate stated
value of $750,000.
(b) Purchasers. The purchaser of the 2,004 shares of Series G
Preferred Stock was:
The Endeavor Capital Fund, S.A.
The placement agent for the transaction was J.P. Carey, Inc.
(c) Consideration. The aggregate offering price for 2,004 shares of
Series G Preferred Stock having an aggregate stated value of
$2,004,000 was $1,750,000.
(d) Exemption from Registration Claimed. Exemption from registration
is claimed under Regulation D promulgated under the Securities Act. To
the best of the Company's knowledge and belief and in accordance with
representations and warranties made by the purchasers of Series G
Preferred Stock, the purchaser is an "accredited investor" as defined
under Regulation D.
(e) Terms of Conversion. The shares of Series G Preferred Stock became
into shares of common stock of the Company on June 15, 2000. Each
share of Series G Preferred Stock is convertible into a number of
shares of common stock of the Company as determined in accordance with
the following formula (the "Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
-----------------------------------
Conversion Price
where
N = the number of days between (i) the Closing Date,
and (ii) the conversion date.
Conversion
Price = the greater of (i) the amount obtained by
multiplying the Conversion Percentage (which means
80% reduced by an additional 2% for every 30 days
that the Registration Statement has not been filed
by the Filing Date) in effect as of the conversion
date times the average closing bid for the
Company's common stock for the (5) consecutive
trading days immediately preceding such date; or
(ii) $0.71925.
The "Registration Statement" referred to in the foregoing formula was
filed prior to the "Filing Date" as those terms are defined in the
conversion terms of the Series G Preferred Stock.
If the sum computed by such Conversion Rate exceeds 10,000,000 shares
of Common Stock, the Company shall, within five (5) business days
after receiving the Conversion Notice for which the conversion would
exceed the Maximum Share Issuance Amount, either (1) redeem, in
accordance with Section 5, the Series G Preferred Shares which may not
be converted due to the Maximum Shares Issuance Amount as described in
the preceding sentence, or (2) amend this Certificate of Designations
to provide for a Maximum Shares Issuance Amount which will permit the
conversion of all outstanding Series G Preferred Shares.
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.
Registrant
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