UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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Commission file number: 0-18267
NCT Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
20 Ketchum Street, Westport, Connecticut 06880
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(Address of principal executive offices) (Zip Code)
(203) 226-4447
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(Registrant's telephone number, including area code)
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. 367,991,361 shares
outstanding as of May 11, 2001
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands of dollars)
December 31, March 31,
2000 2001
---------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 1,167 $ 342
Accounts receivable, net of reserves (Note 4) 5,483 3,107
Investment in marketable securities - 4,901
Inventories, net of reserves (Note 5) 2,184 2,089
Other current assets (Note 7) 4,825 7,640
---------------- ---------------
Total current assets 13,659 18,079
Property and equipment, net 688 2,223
Goodwill, net 11,711 21,412
Patent rights and other intangibles, net 5,330 5,124
Other assets (Note 7) 7,994 2,972
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$ 39,382 $ 49,810
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,144 $ 4,900
Accrued expenses 5,689 6,766
Current maturities of convertible notes (Note 9) 3,975 8,783
Deferred income 5,652 5,395
Other liabilities (Notes 2 and 8) 3,222 6,220
Notes Payable 704 570
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Total current liabilities 23,386 32,634
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Long term liabilities:
Deferred income 1,611 1,278
Royalty payable 1,150 1,150
Convertible notes (Note 9) 1,000 44
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Total long term liabilities 3,761 2,472
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Commitments and contingencies
Common stock subject to resale guarantee (Note 11) 191 191
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Minority interest in consolidated subsidiary 2,186 9,561
Stockholders' equity (Note 6):
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Series G preferred stock, issued and outstanding, 924 and 583 shares,
respectively (redemption amount $936,213 and $589,406, respectively) 574 390
Common stock, $.01 par value, 450,000,000 shares authorized:
issued and outstanding 334,149,669 and 350,572,490 shares, respectively 3,341 3,506
Additional paid-in-capital 154,838 156,529
Unearned portion of compensatory stock, warrants and options (37) (32)
Accumulated other comprehensive loss (3,321) (4,204)
Expenses to be paid with common stock (562) (446)
Accumulated deficit (141,799) (147,622)
Stock subscriptions receivable (213) (206)
Treasury stock, 6,078,065 shares of common stock (2,963) (2,963)
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Total stockholders' equity 9,858 4,952
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$ 39,382 $ 49,810
================ ===============
The accompanying notes are an integral part of the condensed consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(In thousands except per share amounts)
Three months ended March 31,
------------------------------
2000 2001
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REVENUES:
Technology licensing fees and royalties $ 256 $ 910
Product sales, net 312 1,084
Advertising/media revenue - 490
Engineering and development services - 18
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Total revenues $ 568 $ 2,502
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COSTS AND EXPENSES:
Cost of product sales $ 623 $ 555
Royalty expense - 23
Cost of advertising/media sales - 243
Selling, general and administrative 1,192 3,895
Research and development 967 1,164
Other expense, net 3,073 1,302
Interest expense 1,166 1,143
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Total costs and expenses $ 7,021 $ 8,325
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NET LOSS $ (6,453) $ (5,823)
============== =============
Capital stock beneficial feature and dividend requirement $ 719 $ 250
Accretion of difference between carrying amount
and redemption amount of redeemable preferred stock 39 44
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NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (7,211) $ (6,117)
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Basic and diluted loss per share $ (0.03) $ (0.02)
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Weighted average common shares outstanding -
basic and diluted 271,580 337,738
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NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three months ended March 31,
-----------------------------
2000 2001
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NET LOSS $ (6,453) $ (5,823)
Other comprehensive loss:
Currency translation adjustment (50) 59
Unrealized loss on marketable securities - (942)
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COMPREHENSIVE LOSS $ (6,503) $ (6,706)
============== =============
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,
---------------------------
2000 2001
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Cash flows from operating activities:
Net loss $ (6,453) $ (5,823)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 402 645
Common stock options and warrants issued as consideration for:
Compensation 5 5
Operating expenses 25 -
Provision for inventory 250 -
Provision for doubtful accounts 10 45
Impairment of goodwill (Note 12) 3,073 1,360
Discount on beneficial conversion feature on convertible note (Note 9) 1,000 -
Forgiveness of debt - (404)
Amortization of debt discount - 630
Interest expense on issuance of warrant - 367
Adjustment upon receipt of shares in lieu of cash - 468
Minority interest loss - (61)
Gain on disposition of fixed assets - (6)
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (3,695) 2,252
Decrease in inventories 176 95
(Increase) in other assets (25) (1,735)
Increase(decrease) in accounts payable and accrued expenses (1,608) 773
Increase (decrease) in other liabilities and deferred revenue 3,865 (206)
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Net cash (used in) operating activities $ (2,975) $ (1,595)
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Cash flows from investing activities:
Capital expenditures (5) (326)
Net cash paid for Web Factory acquisition - (100)
Decrease in restricted cash 55 -
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Net cash provided by (used in) investing activities $ 50 $ (426)
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Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable (net) (Note 9) 1,000 828
Sale of preferred stock (net) 966 -
Issuance of subsidiary debt (net) - 420
Sale of common stock subject to resale 620 -
Collection of subscription receivable - 7
Exercise of stock options, net 631 -
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Net cash provided by financing activities $ 3,217 $ 1,255
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Effect of exchange rate changes on cash $ (46) $ (59)
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Net increase (decrease) in cash and cash equivalents $ 246 $ (825)
Cash and cash equivalents - beginning of period 1,126 1,167
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Cash and cash equivalents - end of period $ 1,372 $ 342
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ - $ -
============ ============
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding loss on available-for-sale securities $ - $ (942)
============ ============
Receipt of Pro Tech common shares in lieu of cash to settle accounts receivable $ - $ 1,350
============ ============
Issuance of preferred stock of subsidiary, Artera Group, Inc. $ - $ 8,299
============ ============
Issuance of convertible notes in receipt of common shares of Pro Tech as partial consideration $ - $ 500
============ ============
Issuance of notes for placement services rendered $ - $ 518
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Issuance of notes for convertible notes as partial consideration $ - $ 1,000
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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:
Throughout this document, NCT Group, Inc. and its Subsidiaries are referred
to as "we," "company," "our" or "NCT." 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.
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, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K, as amended, for the year
ended December 31, 2000.
NCT has incurred substantial losses from operations since its inception,
which have been recurring and amounted to $147.6 million on a cumulative basis
through March 31, 2001. 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 and royalties, (4) advertising/media revenues, (5)
product sales and (6) engineering and development funds received from strategic
partners and customers.
Cash, cash equivalents and short-term investments amounted to $0.3 million
at March 31, 2001, decreasing from $1.2 million at December 31, 2000. Management
believes that currently available funds will not be sufficient to sustain NCT at
present levels for the next 12 months. NCT's ability to continue as a going
concern is dependent on funding from several internally generated sources,
including available cash, cash from the exercise of warrants and options, and
cash inflows generated from NCT's revenue sources: technology licensing fees and
royalties, product sales, advertising/media revenues and engineering and
development services. The level of realization of funding from our revenue
sources is presently uncertain. In the event that anticipated technology
licensing fees and royalties, product sales, advertising/media revenues 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, we would
have to substantially cut back our level of spending which could substantially
curtail our operations. Such reductions could have an adverse effect on our
relationships with strategic partners and customers. Uncertainty exists about
the adequacy of current funds to support NCT's activities until positive cash
flow from operations can be achieved, and uncertainty exists about the
availability of financing from other sources to fund any cash deficiencies. See
Notes 9 and 12 with respect to recent financing.
The accompanying financial statements have been prepared assuming that NCT
will continue as a going concern, which contemplates continuity of operations,
realization of assets and satisfaction of liabilities in the ordinary course of
business. The propriety of using the going concern basis is dependent upon,
among other things, the achievement of future profitable operations and the
ability to generate sufficient cash from operations, public and private
financings and other funding sources to meet its obligations. The uncertainties
described above raise substantial doubt at March 31, 2001 about NCT's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amount of liabilities that might result from the outcome
of these uncertainties.
2. Acquisitions:
On March 2, 2001, our wholly-owned subsidiary, Artera Group, Inc., known as
Artera, formerly known as NCT Networks, Inc., acquired 100% of the outstanding
capital stock of Teltran Web Factory Limited, known as the Web Factory, a
U.K.-based company involved in Internet-based communications for small
companies, and certain other assets. Artera agreed to pay Teltran International,
Inc., known as Teltran, and its investors up to $350,000 in cash and up to
4,940,000 stated value in British pounds sterling of Artera's Series A
Convertible Preferred Shares, known as Artera Group Preferred. The purchase
price, which includes the $7.8 million of Artera's Series A Convertible
Preferred and is net of $3.0 million due back from Teltran due to limits on the
amount of liabilities to be assumed under the agreement, amounted to $5.1
million. Artera is in the process of changing the Web Factory's name to Artera
Group International Limited. As part of the acquisition, we agreed to assume
Teltran's earn-out obligations owed to a previous owner of the Web Factory in
the amount of approximately 1,600,000 in British pounds sterling with
consideration to be paid by causing Artera Group International Limited (our
intended new name of Web Factory) to issue its Series A Preferred Stock, when
created and known as Artera Limited Preferred, to such previous owner having a
stated value equal to that amount, with rights to convert to Artera Group
International Limited common stock at a 20% discount to the initial listing
price. If Artera Group International Limited undertakes a public listing of its
common stock on the London Alternative Investment Market prior to September 30,
2001, the Artera Limited Preferred will automatically convert to common stock
immediately prior to the listing date. If Artera Group International Limited
does not undertake a public listing, the previous owner will have the right to
exchange the Artera Limited Preferred for our common stock at a 20% discount to
market. The acquisition was accounted for using the purchase method, resulting
in goodwill of approximately $8.3 million. Amounts allocated to goodwill are
amortized over 20 years on a straight-line basis.
A summary of the assets acquired and liabilities assumed, at estimated fair
market value, was as follows (in thousands):
Current assets $ 312
Property, plant and equipment 467
Goodwill 8,254
Current liabilities (3,878)
Long-term liabilities (45)
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$ 5,110
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3. Recent Accounting Pronouncements:
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 138, Accounting for Certain Derivative Instruments - an Amendment of SFAS
133 ("SFAS 138"). SFAS 138 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives). SFAS 138 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management believes the adoption of SFAS 138 will not have a material impact on
the company's consolidated financial statements, as the company currently does
not use derivative instruments.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB 25
("FIN 44"). This interpretation clarifies certain issues relating to stock
compensation. FIN 44 is effective July 1, 2000; however, certain conclusions in
this interpretation cover specific events that occurred prior to July 1, 2000.
FIN 44 did not have an impact on the company's consolidated financial
statements.
In September 2000, the FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of SFAS 125 ("SFAS 140"). This statement replaced SFAS 125 and is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. SFAS 140 is effective for recognition and
disclosures of certain securitization transactions for fiscal years ending after
December 15, 2000. As of March 31, 2001, the company had no such transactions.
The company does not expect SFAS 140 will have a significant impact on its
consolidated financial statements.
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 consolidated
financial condition or results of operations.
4. Accounts Receivable:
Accounts receivable comprise the following (in thousands):
December 31, March 31,
2000 2001
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Technology license fees and royalties $ 4,597 $ 3,055
Joint ventures and affiliates 76 76
Other trade receivables 880 66
Allowance for doubtful accounts (70) (90)
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Accounts receivable, net $ 5,483 $ 3,107
============== ==============
5. Inventories:
Inventories comprise the following (in thousands):
December 31, March 31,
2000 2001
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Components $ 603 $ 438
Finished goods 1,681 1,751
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Gross inventories $ 2,284 $ 2,189
Reserve for obsolete & slow moving inventory (100) (100)
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Inventories, net of reserves $ 2,184 $ 2,089
============== =============
6. Stockholders' Equity:
The changes in stockholders' equity during the three months ended March 31,
2001 were as follows (in thousands):
Expenses
Exchange/ Accretion Unearned To be
Conversion Dividend Net Stock Compen- paid Accumulated
Balance of of Issuance Subscrip- satory with Other Balance
at Preferred Preferred of Common tion Options/ Net Common Comprehensive At
12/31/00 Stock Stock Stock Receivable Warrants Loss Stock Loss 3/31/01
----------- ---------- --------- --------- ---------- -------- ------- ------ ----------- ----------
Series G
Preferred
Stock:
Shares 1 - - - - - - - - 1
Amount $ 574 (190) 6 - - - - - - $ 390
Common Stock:
Shares 334,150 1,566 - 14,856 - - - - - 350,572
Amount $ 3,341 16 - 149 - - - - - $ 3,506
Treasury Stock:
Shares 6,078 - - - - - - - - 6,078
Amount $ (2,963) - - - - - - - - $ (2,963)
Additional
Paid in Capital $ 154,838 175 (6) 1,522 - - - - - $ 156,529
Accumulated
(Deficit) $(141,799) - - - - - (5,823) - - $(147,622)
Accumulated
Other Comprehensive
Loss $ (3,321) - - - - - - - (883) $ (4,204)
Stock
Subscription
Receivable $ (213) - - - 7 - - - - $ (206)
Expenses to be
Paid with
Common Stock $ (562) - - - - - - 116 - $ (446)
Unearned
Compensatory
Stock Option $ (37) - - - - 5 - - - $ (32)
7. Other Assets (current and long term):
December 31, March 31,
2000 2001
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Other current assets comprise the following (in thousands):
Investment in warrant $ 3,089 $ 3,089
Notes receivable - 1,000
Due from unaffiliated company 743 -
Due from Teltran (see Note 2) - 3,038
Other 993 513
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Other current assets $ 4,825 $ 7,640
============== ==============
Other assets (long term) comprise the following (in thousands):
Marketable securities $ 5,100 $ -
Investment in unconsolidated subs 1,500 1,500
Advances and deposits 663 643
Deferred charges 534 632
Other 197 197
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Other assets $ 7,994 $ 2,972
============== ==============
8. Other Liabilities:
On January 11, 2001, the company, DMC and Production Resource Group,
L.L.C., known as PRG, entered into a resolution agreement to exercise the NCT
warrant issued pursuant to the warrant agreement as modified, and to exchange
common stock in NCT ("Warrant Stock") in exchange therefor: (i) the terms under
which NCT will register the stock received upon the exercise of such warrant for
sale; (ii) the terms under which PRG will purchase 4% of the common stock of DMC
for the consideration provided herein; (iii) the terms under which the parties
will settle certain invoices; and (iv) the terms under which NCT will purchase
the equipment covered by the lease agreement. NCT will register the resale of
the Warrant Stock as provided in the agreement and PRG or the escrow agent will
sell such stock with proceeds to be distributed as provided (1) DMC shall pay
PRG on or before May 31, 2001 $0.9 million in satisfaction of the promissory
note dated November 30, 2000, and (2) DMC shall pay PRG $0.1 million for the
documented invoices ("invoices") in excess of the $0.9 million satisfied in (1)
above. DMC shall pay PRG $0.8 million for the purchase of 105 DBS Systems and
680 speakers currently under lease. Provided that PRG receives at least
one-third of the total amount payable no later than each of January 31, 2001,
March 31, 2001 and May 31, 2001 lease payments will continue through January 31,
2001 at the current rates provided under the lease agreement and will terminate
at such time. Such payments will be applied first to the equipment purchase,
next to the lease payments through January 31, 2001 (or subsequent thereto if
NCT defaults on its obligation hereunder) next to the payment of invoices, next
to the payment of interest and principal on the convertible note, and finally,
to the amount, if any, due with respect to the warrant shares residual value.
Upon satisfaction of all the terms of the resolution agreement, PRG releases NCT
and DMC from any and all obligations including but not limited to exclusivity of
service and source requirements, and all agreements between the parties will be
terminated. Upon completion of payments provided within the agreement, the
Warrant Stock shall be deemed to be cancelled and PRG's rights thereunder shall
have no further effect. As of March 31, 2001, we have recorded an additional
$0.8 million liability due PRG for the purchase of equipment with respect to
this resolution agreement. The company has not paid the January 31, 2001 and
March 31, 2001 installments and was in default of the resolution agreement at
March 31, 2001. On May 11, 2001, the parties resolved the default. See Note 14
with respect to subsequent events for further details.
On January 29, 2001, NCT Video received formal written notice of default
from Advance Display Technologies, known as ADT, of a material obligation with
respect to the product development and license agreement entered into on
September 28, 2000, by the two companies. Upon receipt of this notice of
default, NCT Video had 60 days to cure its default as described in the
agreement. On May 4, 2001, ADT and NCT Video amended the September 28, 2000
agreement, curing the default.
9. Convertible Notes:
On March 14, 2001, NCT entered into a subscription agreement with an
accredited investor pursuant to a private placement of a $250,000 convertible
note to the investor and a $17,500 convertible note as a finder's fee. The
consideration from the investor consisted of $250,000 cash. Such notes mature on
March 14, 2002 and bear interest at 8% per annum, payable at maturity. The notes
are convertible into shares of NCT common stock from and after July 15, 2001 at
a conversion price per share equal to 80% of the lowest closing bid price of NCT
common stock for the five trading days prior to conversion.
On February 13, 2001, the company issued a 60-day, $0.5 million promissory
note bearing interest at 7% per annum, to the holder of our secured convertible
notes together with a warrant to purchase either $500,000 of our common stock at
$0.21 per share or Pro Tech's common stock at $0.44 per share. On April 14,
2001, the maturity date, NCT defaulted on the repayment of the $0.5 million
promissory note. As such, a penalty of 10% of the principal in default, known as
the default amount according to the default provisions in the note, or $50,000,
became due. On May 18, 2001, the company cured this default. The holder agreed
to convert the amounts due into 4,303,425 shares of our common stock at an
agreed upon conversion price of $0.13 per share, a price which approximated the
market price of our common stock on the conversion date.
On January 25, 2001, NCT defaulted on the repayment of $1.0 million of
secured convertible notes held by Carole Salkind (see below). The default
provisions in the note imposed a penalty, the default amount, of $100,000 (10%
of the principal payment in default). Default interest from the date of default
is due on the principal in default and the default amount at the rate of prime
plus 5%. On May 14, 2001, the company cured this default by canceling the $1.0
million note and issuing a new four-month convertible note to Ms. Salkind for
$1,361,615 and granting a five year warrant to purchase 0.5 million shares of
NCT's common stock at an exercise price of $0.13 per share. The convertible note
earns interest at the prime rate as published from day to day in The Wall Street
Journal. The note holder shall have the right at any time on or prior to the day
the convertible notes are paid in full, to convert at any time, all or from time
to time, any part of the outstanding and unpaid amount of the note into fully
paid and non-assessable shares of common stock of the company, at the conversion
price as defined in the note of Artera Group International, Ltd., or of
Distributed Media Corporation International, Ltd.
On January 9, 2001, Artera entered into a subscription agreement with six
accredited investors pursuant to a private placement of its convertible notes
having a stated value of $5,040,000. Artera plans to use the proceeds from the
issuance of the notes for working capital purposes. The consideration from
investors for the convertible notes aggregated approximately $2.5 million and
consisted of cash, nonrecourse notes secured by Teltran common stock and
1,190,476 shares of Pro Tech common stock. The Artera convertible notes mature
January 9, 2002 and bear interest at 6% per annum, payable at maturity. Such
convertible notes are convertible into shares of Artera common stock by dividing
the principal to be converted by 100% of the average of the three lowest closing
bid prices for the Artera common stock on the principal market or exchange where
the Artera common stock is listed or traded for the 10 trading days prior to the
conversion. Pursuant to an exchange rights agreement, as modified, entered into
by NCT and the holders of the Artera convertible notes, such notes are
exchangeable for shares of NCT common stock from and after April 5, 2001 at an
exchange price per share of 100% of the average closing bid price of NCT common
stock for the five trading days prior to the exchange. NCT registered 20 million
shares of common stock that NCT may be obligated to issue upon the exchange of
the Artera convertible notes under Registration Statement No. 333-47084,
effective February 12, 2001. We are obligated to register additional shares for
the exchange of the Artera convertible notes.
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor, 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 for $4.0 million between January
26, 1999 and March 27, 2000. The secured convertible notes mature two years from
their respective issue dates and earn interest at the prime rate as published
from day to day in The Wall Street Journal. The secured convertible notes are
collateralized by substantially all of the company's assets owned or hereafter
acquired. The note holder shall have the right at any time on or prior to the
day the secured convertible notes are paid in full, to convert at any time, all
or from time to time, any part of the outstanding and unpaid amount of the notes
into fully paid and non-assessable shares of common stock of the company at the
conversion price as defined in the notes. The company recorded a beneficial
conversion feature of $1.0 million in connection with the March 27, 2000
convertible note recorded during the first quarter of 2000, classified as
interest expense. On each of June 4, 1999, June 11, 1999, July 2, 1999, July 23,
1999, August 25, 1999 and September 19, 1999, the company received proceeds of
$250,000, $250,000, $500,000, $250,000, $500,000 and $250,000, respectively,
from the holder for other secured convertible notes with the same terms and
conditions of the note described above.
10. Litigation:
On February 5, 2001, a former shareholder of Theater Radio Network, known
as TRN, filed suit against TRN and TRN's former Chief Executive Officer and
President in the Circuit Court of the Sixth Judicial District for Pinellas
County, Florida. The plaintiff's complaint alleges that TRN breached an alleged
oral escrow agreement with the plaintiff arising out of the sale of TRN stock to
DMC Cinema by TRN's shareholders and seeks unspecified damages. On March 7,
2001, TRN filed a motion to provide additional time to respond to the complaint
through April 6, 2001, which was granted by the court on March 13, 2001. On
April 4, 2001 the company filed for dismissal of the case with prejudice due to
the plaintiff's failure to state a claim upon which relief may be granted. TRN
denies the material allegations of the complaint and intends to vigorously
defend the action.
Reference is made to the company's Annual Report on Form 10-K, as amended,
for the fiscal year ended December 31, 2000, for a discussion of the following
matters:
On June 10, 1998, Schwebel Capital Investments, Inc. 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 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 September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against Top Source
Technologies and Top Source Automotive, known as TSA, 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 claims,
litigation, 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.
11. Common Stock Subject to Resale Guarantee:
From time to time, NCT has issued shares of its common stock to suppliers
and consultants to settle current obligations and future or anticipated
obligations. During the first quarter of 2001, an aggregate of 371,429 shares
were issued, of which 171,429 shares were in connection with future obligations
aggregating $60,000. The remaining 200,000 shares, with an aggregate value of
$50,000, were issued to a vendor in settlement of approximately $0.5 million of
outstanding accounts payable. At March 31, 2001, in connection with this
settlement, we recognized approximately $0.4 million which has been included in
miscellaneous income. During the first quarter of 2001, suppliers and vendors
sold common stock, valued at time of issuance, at $0.3 million and realized $0.2
million in proceeds. At March 31, 2001, in connection with the sale of such
shares, we recorded a $0.1 million liability for the shortfall.
12. Common Stock:
On March 30, 2001, NCT and NXT plc, known as NXT, a listed company on the
London Stock Exchange, entered into an arrangement to reorganize the existing
cross license agreements between the companies. The cross license agreements,
dating from 1997, relate to flat panel speaker technology. In April 2001, under
the new agreements, NCT received 2 million ordinary NXT shares in consideration
for the cancellation of the 6% royalty payable by NXT to NCT Audio. The NXT
shares, upon issuance, had a value of approximately $9.2 million. In addition,
ownership of certain intellectual property, the rights to which were previously
granted to NXT, has been transferred to NXT. NXT has licensed NCT and its
subsidiaries certain of the NXT intellectual property and all of the applicable
NCT-developed intellectual property. NXT will design a low-cost flat panel
speaker for use by Distributed Media Corporation International, Ltd., a wholly
owned subsidiary of NCT, formed in the United Kingdom in 2001. Under a separate
agreement NCT has guaranteed payment of $0.6 million as a design fee and minimum
royalty. Also under the new agreements, NXT transferred its 4.8% equity holding
in NCT Audio to NCT in payment of the exercise price for an option held by NXT
to purchase 3,850,000 shares of NCT's common stock. Such NCT shares were issued
to NXT on March 30, 2001. At March 31, 2001, the company and the company's
independent accountants are determining both the date on which to record the
transaction and the revenue recognition period in connection with the $9.2
million of ordinary shares received in the arrangement discussed above. These
shares are freely tradeable and subject to certain distribution limitations. The
outcome of this determination will be reflected in either an amendment to this
Form 10-Q or in our second quarter Form 10-Q.
During the three months ended March 31, 2001, the company issued 1,565,794
shares of NCT's common stock in connection with the conversion of 184 shares of
NCT's Series G Convertible Preferred Stock ("Series G Preferred Stock") which
had been issued in the first quarter of 2000 in a private placement exempt from
registration pursuant to Regulation D of the Securities Act. At March 31, 2001,
583 shares of Series G Preferred Stock are outstanding.
In the first quarter of 2001, 558 shares of NCT Audio common stock were
exchanged for 4,122,023 shares of the company's common stock, including the
3,850,000 shares issued to NXT as mentioned above. In connection with such
exchange, the company recorded a one-time, non-cash charge of $1.4 million for
the impairment of goodwill based on the valuation of NCT Audio, which is
included in other expense.
At March 31, 2001, 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 72.3 million shares of common stock. NCT is also obligated
to reserve shares of its common stock for various specific purposes, including
for issuance upon conversion of issued and outstanding shares of Series G
Preferred Stock, for issuance upon exchange of outstanding shares of NCT Audio
common stock and for issuance upon conversion of the secured convertible notes
and other convertible notes. The common stock we are required to reserve for
issuance exceeds the number of shares authorized. Our directors and senior
officers have agreed, as needed, to set aside the reserve required for the
exercise of their options and warrants, aggregating 41.1 million shares. We
intend to seek an increase of 195,000,000 shares of our authorized common stock
at our 2001 Annual Meeting of Shareholders on July 10, 2001.
On August 10, 2000, the company entered into an agreement with three
accredited investors for the financing of its subsidiary, ConnectClearly.com,
Inc. ("CCC"). In connection with the initial funding of CCC, the company issued
1,000 shares of CCC common stock to these investors in consideration for $0.5
million in cash and conversion of promissory notes payable, due to two of the
investors, totaling $0.5 million. These CCC common shares are exchangeable for
shares of NCT common stock. In the first quarter of 2001, 617 shares of CCC
common stock were exchanged for 5,060,663 shares of NCT's common stock. In
connection with this issuance of the NCT common stock we recorded an increase to
our goodwill in ConnectClearly and an increase to our additional paid capital of
$0.7 million.
In February 2001, in connection with the acquisition of TRN, through a
merger with and into DMC Cinema, due to a decline in the trailing market price
prior to the effective date of the registration of the resale of shares of our
common stock issued to the TRN shareholders, an additional 2,455,248 shares were
issued for the acquisition pursuant to a fill-up provision.
In February 2001, in connection with the acquisition of Midcore Software,
Inc, known as MSI, through a merger with Midcore, due to a decline in the
closing bid price of the company's common stock prior to the effective date of
the registration of the resale of the common stock issued to MSI's shareholders,
an additional 2,863,891 shares were issued pursuant to a fill-up provision.
13. Business Segment Information:
Management views the company as being organized into three business
operating segments: Media, Communications and Technology. The Other operating
segment is used to reconcile the reportable segment data to the consolidated
financial statements and primarily consists of intercompany sales and items
eliminated in consolidation. Other also includes the telecommunications market
and in particular the hands-free market. The technology used in the
communications segment includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression.
Certain items are maintained at the company's corporate headquarters and
are not allocated to the segments. They primarily include most of the company's
debt and related cash and equivalents and related net interest expense, certain
litigation liabilities and certain non-operating fixed assets.
No geographic information for revenues from external customers or for
long-lived assets is disclosed as our primary market and capital investments,
during the three months ended March 31, 2001, were concentrated in the United
States.
Reportable segment data for the three-month period ended March 31, 2001 and
March 31, 2000, is as follows (in thousands):
Segment
-----------------------------------------------------------------
Total Grand
Media Communication Technology Segments Other Total
-----------------------------------------------------------------
For the three months ended
March 31, 2001:
- ---------------
License Fees and Royalties $ 340 $ 576 $ - $ 916 $ (6) $ 910
Other Revenue - External 518 959 - 1,477 115 1,592
Other Revenue - Other Operating
Segments 401 - - 401 (401) -
Operating Income (Loss) (881) (1,927) (78) (2,886) (2,937) (5,823)
Segment Assets 10,938 32,121 5,685 48,744 1,066 49,810
For the three months ended
March 31, 2000:
- ---------------
License Fees and Royalties $ 57 $ 34 $ - $ 91 $ 165 $ 256
Other Revenue - External 67 153 - 220 92 312
Other Revenue - Other Operating
Segments 22 220 - 242 (242) -
Operating Income (Loss) (848) (1,204) (7) (2,059) (4,394) (6,453)
Segment Assets 6,851 1,561 714 9,126 7,325 16,451
MEDIA:
NCT Audio:
NCT Audio is engaged in the design, development and marketing of products,
which utilize innovative flat panel transducer technology. The products
available from NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM)
printed grille collection. The Gekko(TM) flat speaker is marketed primarily to
the home audio market, with potential in other markets, including the
professional audio systems market, the automotive audio aftermarket, the
aircraft industry, other transportation markets and multimedia markets. The
principal customers are DMC, end-users, automotive original equipment
manufacturers, known as OEMs, and manufacturers of integrated cabin management
systems.
Distributed Media Corporation International, Ltd.:
Distributed Media Corporation International, Ltd., known as DMCI, a
subsidiary of NCT, utilizes advanced IT and communications technologies to
manage a worldwide network of place-based Sight & Sound(TM) microbroadcasting
systems used in the delivery of audio and billboard advertising along with
high-quality ambient music to a variety of retail and professional venues. This
global network is controlled from one central location in the U.S. DMCI is the
parent company of DMC whose Sight & Sound(TM) systems are currently being
deployed to retail environments.
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.
DMC Cinema:
DMC Cinema provides entertainment audio programming in multiplex cinemas
nationwide. All programming now being delivered to each theater will be
converted to the Sight and Sound system which allows for remote delivery of
programming and advertising to all sites, improving efficiency and enabling the
quick execution of programming changes. The Sight and Sound system also
continually adjusts volume based on background noise so that the audio is always
maintained at a foreground level.
DMC HealthMedia:
DMC HealthMedia is targeting the installation of Sight & Sound(TM) systems
to hospital waiting rooms, cafeterias and doctors' lounges.
COMMUNICATIONS:
NCT Hearing:
NCT Hearing designs, develops and markets active noise reduction, or ANR,
headset products to the communications headset market and the telephony headset
market. The product lines include the NoiseBuster(R) product line and the
ProActive(R) product line. The NoiseBuster(R) products consist of the
NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a headset used for
in-flight passenger entertainment systems; and communications headsets for
cellular, multimedia and telephony. The ProActive(R) products consist of noise
reduction headsets and communications headsets for noisy industrial
environments. The majority of NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
Pro Tech:
The principal activity of Pro Tech is the design, development and
manufacture of light-weight telecommunications headsets and new audio
technologies for applications in fast-food, telephone and other commercial
applications. Pro Tech currently has marketing agreements with major companies
in the fast food industry and catalog and Internet site distributors of
telephone equipment, primarily in North America.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
company. NCT Europe provides research and engineering to NCT Audio, NCT Hearing,
DMC and other business units as needed. NCT Europe also provides a marketing and
sales support service to the company for European sales.
Midcore:
The principal activity of Midcore is as a developer of innovative
software-based solutions that address the multitude of challenges facing
businesses implementing Internet strategies. Midcore is the provider of MidPoint
Internet infrastructure software that allows multiple users to share one
Internet connection without degrading efficiency and provides on-demand
connections, a software router, a high-performance shared cache, content
control, scheduled retrieval of information and e-mail and usage accounting.
Midcore sales are derived from North America and Europe.
ConnectClearly:
ConnectClearly.com, Inc. is NCTI's webphone subsidiary. The subsidiary will
focus on e-commerce and ECRM (electronic customer relationship management)
applications of NCTI's proprietary Internet telephony software. NCTI will
provide expertise in technology development, business services support and
captial-raising resources to ConnectClearly.
Artera Group:
Artera Group provides small and medium-sized enterprises, as well as remote
workers and branch locations of large corporations, with a comprehensive range
of highly-reliable and scalable global Internet access and networking services
including backbone connection services, high-speed broadband access, virtual
private networks, web hosting and design, server collocation, e-commerce, Voice
over IP and other enhanced services. Artera is accomplishing this by acquiring
ISP companies in strategic geographic areas and by making cooperative
arrangements in other countries. Each Artera cooperative partner is to be
connected and capable of delivering data and voice on a fast overnet backbone
while allowing complete access to the Internet when necessary. This strategy
eliminates the time delays often associated with the Internet and reduces the
costs for establishing secure office-to-office connectivity.
TECHNOLOGY:
Advancel Logic Corporation:
Advancel is a participant in the native Java(TM) (Java(TM) is a trademark
of Sun Microsystems, Inc.) embedded microprocessor market. The purpose of the
Java(TM) platform is to simplify application development by providing a platform
for the same software to run on many different kinds of computers and other
smart devices. Advancel has been developing a family of processor cores, which
will execute instructions written in both Java bytecode and C/C++ significantly
enhancing the rate of instruction execution, which opens up many new
applications. The potential for applications consists of the next generation
home appliances and automotive applications, smartcards for a variety of
applications, hearing aids and mobile communications devices.
NCT Video:
NCT Video develops commercial video and sound applications for sublicensing
to other NCT subsidiaries. NCT Video recently acquired the rights to
breakthrough low cost flat panel video display technology. DMCI will use this
technology to cost effectively deliver both moving and static images as part of
its Sight & Sound(TM) microbroadcasting system.
14. Subsequent Events:
On April 4, 2001, Artera entered into a subscription agreement with two
accredited investors pursuant to a private placement of $700,000 of its
convertible notes. Artera plans to use the proceeds from the issuance of the
notes for working capital purposes. The consideration from the investors for the
convertible notes aggregated $694,000, net of expenses, and consisted of cash.
These Artera convertible notes mature April 4, 2002 and bear interest at 6% per
annum, payable at maturity. Such convertible notes are convertible into shares
of Artera common stock by dividing the principal to be converted by 100% of the
average of the three lowest closing bid prices for the Artera common stock on
the principal market or exchange where the Artera common stock is listed or
traded for the 10 trading days prior to the conversion. Pursuant to an exchange
rights agreement dated April 4, 2001, entered into by NCT and the holders of
these Artera convertible notes, such notes are exchangeable for shares of NCT
common stock from and after April 5, 2001 at an exchange price per share of 100%
of the average closing bid price of NCT common stock for the five trading days
prior to the exchange. NCT is obligated to register shares of common stock for
resale for the exchange of these Artera notes.
On April 12, 2001, NCT and Crammer Road LLC, known as Crammer, cancelled
the private equity credit agreement dated September 27, 2000, and finalized a
new equity credit agreement. The new credit agreement provides that shares of up
to $50 million of our common stock may be sold to Crammer pursuant to put
notices delivered by the company to Crammer. The terms of the credit agreement
obligate the company to put $17 million of our common stock, known as the
Minimum Commitment Amount, to Crammer. The Minimum Commitment Amount provides
for an accelerating discount to the market price (as defined) of our common
stock of up to approximately 30% on the first $12 million of puts and a fixed
discount to market of 10% for the remaining $5 million of committed puts by us.
In exchange for our shares under the Minimum Commitment Amount, Crammer is
obliged to deliver to us shares of common stock of DMC-NY having an agreed upon
value of $13.6 million and cash in the amount of $3.4 million in the aggregate,
pursuant to monthly put notices commencing no later than October 1, 2001. Each
put notice up to the Minimum Commitment Amount of $17 million shall specify a
put amount equal to the lesser of $2.5 million or 150% of the weighted average
volume for the common stock for the twenty trading days preceding the respective
put notice. The terms of the new credit line further provide that we may elect
to put up to an additional $33 million of our common stock to Crammer (at a
fixed discount to market of 10%) for cash to finance our cash needs. Each put
notice which we elect to deliver to Crammer shall specify a put amount equal to
the lesser of $2.0 million or 150% of the weighted average volume for the common
stock for the twenty trading days preceding the respective put notice. The
issuance and sale of our shares of common stock under this credit agreement will
have an immediate dilutive effect on existing holders of our common stock.
In connection with the execution of the new private equity credit
agreement, we issued a replacement warrant to Crammer for 250,000 shares of our
common stock with an exercise price of $0.14 per share. The warrant for 250,000
shares (with an exercise price of $0.34 per share) issued to Crammer under the
old credit agreement has been cancelled. Furthermore, for each $100,000 of our
common stock sold under the new credit line, Crammer is entitled to an
additional warrant for 1,000 shares of our common stock at an exercise price per
share equal to 100% of the average of the closing prices for our common stock
for twenty trading days prior to issuance of the warrant.
In addition, on April 12, 2001, the company entered into an exchange
agreement with Crammer. Pursuant to the exchange agreement, the company issued
to Crammer 13,333,333 shares of NCT common stock in exchange for 2,000 shares of
common stock of DMC-NY. According to the terms of the exchange agreement, NCT is
also obligated to issue Crammer additional shares, known as the Reset Shares, of
NCT common stock if the closing bid price for the five business days prior to
effectiveness of the registration statement is less than $0.16 per share. We are
obligated to register for resale these issued shares of common stock and shares
that may be needed in order to provide for the issuance of the Reset Shares.
Also on April 12, 2001, pursuant to the exchange agreement with Crammer,
NCT issued Crammer a convertible note of $1,000,000. The consideration from
Crammer consisted of 1,000 shares of DMC-NY common stock. Such convertible note
matures on December 31, 2001 and bears interest at 2% per month accruing from
May 27, 2001. The note is convertible into shares of NCT common stock from and
after July 15, 2001 at a conversion price per share equal to 93.75% of the
average closing bid price of NCT common stock for the five consecutive trading
days prior to conversion. We are obligated to register for resale the shares of
our common stock that may be issuable upon the conversion of the note.
NCT also agreed to acquire from Crammer in July 2001 an additional $1.0
million common stock in DMC-NY for $1.0 million in cash or other marketable
securities.
On April 12, 2001, our wholly owned subsidiary, NCT Video Displays, Inc.,
entered into a subscription agreement with Crammer pursuant to a private
placement of a $500,000 convertible note. The consideration from Crammer
consisted of $500,000 cash. The NCT Video note matures on December 31, 2001 and
bears interest at 8% per annum, payable at maturity. Such convertible note is
convertible into shares of NCT Video common stock from and after July 31, 2001
by dividing the principal to be converted by 93.75% of the average of the lowest
closing bid prices for the NCT Video common stock on the principal market or
exchange where the NCT Video common stock is listed or traded for the five
trading days prior to the conversion. Pursuant to an exchange rights agreement
entered into by NCT and Crammer, such note is exchangeable for shares of NCT
common stock from and after September 15, 2001 at an exchange price per share of
93.75% of the average closing bid price of NCT common stock for the five trading
days prior to the exchange. We are obligated to register for resale shares of
our common stock for the exchange of the NCT Video convertible note.
On April 12, 2001, NCT entered into a subscription agreement with an
accredited investor pursuant to a private placement of a $125,000 convertible
note to the investor and a $8,750 convertible note as a finder's fee. The
consideration from the investor consisted of $125,000 cash. Such notes mature on
April 12, 2002 and bear interest at 8% per annum, payable at maturity. The notes
are convertible into shares of NCT common stock from and after July 15, 2001 at
a conversion price per share equal to 80% of the lowest closing bid price of NCT
common stock for the five trading days prior to conversion. We are obligated to
register for resale the shares of our common stock that may be issued upon
conversion of these notes.
On April 25, 2001, our Board of Directors approved the appointment of Irene
Lebovics as a Director of NCT.
On May 3, 2001, we announced the signing of a letter of intent to acquire
one half of the capital stock of Digital Compact Classics, Inc., known as DCC,
in exchange for a license to DCC to offer Sight and Sound(TM) distributed media
service in the Los Angeles area. Under the letter of intent, Wells Investment
Group currently plans to lead a group of investors to contribute $12 million to
DCC to develop the Los Angeles area for DMC in exchange for 40% of DCC's equity.
We hope to close on this transaction late in the second quarter or early in the
third quarter of fiscal 2001.
On May 4, 2001 NCT Video and ViewBeam Technology, L.L.C., (formerly known
as Advanced Display Technologies, L.L.C., known as ADT), known as VBT entered
into a Product Development and Licensing Agreement, known as the agreement, that
modifies the September 28, 2000 Product Development and License Agreement, known
as the Previous Agreement entered into between the parties. All of the
provisions of the previous agreement remain in effect except for certain terms
which replace those in the previous agreement. The agreement does not materially
modify or change the "development fee" to be paid by NCT Video but does modify
the specifications of the product design and the field of use to which the
September 29, 2000 exclusive license was granted. Upon signing of this agreement
NCT Video has cured the previously mentioned January 29, 2001 default.
On May 11, 2001, we and our subsidiary, DMC, entered into an agreement with
PRG to resolve all outstanding issues regarding the lease and purchase by DMC of
approximately 115 Sight and Sound(TM) units that DMC is placing or has placed in
various retail outlets. Such agreement liquidates and satisfies all amounts due
and cures all previous defaults with respect to the PRG transactions. We paid
PRG $103,040 on May 11, 2001 to make up monthly lease payments for which we were
in default, and agreed to pay PRG $925,000 on each of May 30 and June 30, 2001
or, at our election, a single payment of $1,700,000 on May 30, 2001. In
exchange, we will receive clear title to the Sight and Sound(TM) units, and PRG
has agreed to surrender back to us a warrant to purchase 6,666,667 shares of our
common stock. If we default on more than one-half of the May 31, 2001 amount due
to PRG, we have a fifteen day cure period to pay any and all defaulted amounts.
Failure to meet any other obligation under this agreement shall constitute an
immediate material breach which shall without further notice, entitle PRG to
exercise any and all of its rights under the resolution agreement, the note, as
referenced in the resolution agreement and any other agreement between the
parties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001
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. NCT wishes to caution readers that the important factors listed
below, among others, in some cases have affected, and in the future could
affect, NCT's actual results and could cause its actual results in fiscal 2001
and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, NCT.
Important factors that could cause actual results to differ materially
include but are not limited to NCT'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
NCT's current level of operation; timely introduce new products; continue its
current level of operations to support the fees associated with NCT's patent
portfolio; maintain satisfactory relations with its three customers that
accounted for 62.5% of NCT's revenues in 2000; attract and retain key personnel;
prevent invalidation, abandonment or expiration of patents owned or licensed by
NCT 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 our know-how, inventions and other secret
or unprotected intellectual property.
GENERAL BUSINESS ENVIRONMENT
The company's operating revenues are comprised of technology licensing fees
and royalties, product sales, engineering and development services and
advertising media revenue. Operating revenues for the three months ended March
31, 2001 consisted of approximately 43.3% in product sales, 0.7% in engineering
and development services, 36.4% in technology licensing fees and royalties and
19.6% in advertising media revenue. The company continues its transition from a
firm focused principally on research and development of new technology to a firm
focused on the commercialization of its technology through technology licensing
fees, royalties, product sales and microbroadcasting media advertising.
Historically, the company derived the majority of its revenues from engineering
and development funding provided by established companies willing to assist the
company in the development of its active noise and vibration control technology,
and from technology license fees paid by such companies. Management expects that
technology licensing fees, royalties, product sales and microbroadcasting media
advertising revenue will become the principal sources of the company's revenue
as the commercialization of its technology proceeds. As distribution channels
are established and as product sales and market acceptance and awareness of the
commercial applications of the company's technologies build as anticipated by
management, revenues from technology licensing fees, royalties, product sales
and microbroadcasting media advertising revenue are forecasted to fund an
increasing share of the company's requirements.
The company continued its practice of marketing its technology through
licensing to third parties for fees, generally by obtaining technology license
fees when initiating joint ventures and alliances with new strategic partners,
and subsequent royalties. The company has entered into a number of alliances and
strategic relationships with established firms for the integration of its
technology into products. The speed with which the company can achieve the
commercialization of its technology depends, in large part, upon the time taken
by these firms and their customers for product testing and their assessment of
how best to integrate the company's technology into their products and
manufacturing operations. While the company works with these firms on product
testing and integration, it is not always able to influence how quickly this
process can be completed.
Presently, the company is selling products through six of its alliances:
Walker is manufacturing and selling industrial silencers; Siemens is buying and
contracting with the company to install quieting headsets for patient use in
Siemens' magnetic resonance imaging machines; Ultra is installing production
model aircraft cabin quieting systems in the SAAB 340 turboprop aircraft; OKI is
integrating ClearSpeech(R) algorithm into large scale integrated circuits for
communications applications; and BE Aerospace and Long Prosper are providing
NoiseBuster(R) components for United Airlines' and five other international
carriers' comprehensive in-flight entertainment and information systems.
Management believes these developments, among others, help demonstrate the range
of commercial potential for the company's technology and will contribute to the
company's transition from engineering and development to technology licensing
fees, royalties and product sales.
Through the acquisition of Pro Tech, we have expanded our presence in the
telecommunications headset market. Pro Tech is currently expanding its headset
product line for telephony, cellular and multimedia communications and is
positioning itself to increase market share in the lightweight headset market.
NCT has continued to make substantial investments in its technology and
intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products.
Management believes that the investment in our technology has resulted in the
expansion of our intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
Management believes that currently available funds will not be sufficient
to sustain NCT 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.)
In 2001, the company entered into certain transactions which provided
additional funding. These transactions included the issuance of secured
convertible notes; the Artera Group, Inc. Series A Convertible Preferred Stock
private placement; issuance of shares of common stock in lieu of the cash owed
to suppliers and consultants to settle certain obligations of the company; and
private placements of shares of common stock. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources" and in
Notes 9 and 12 - notes to the condensed consolidated financial statements.
RESULTS OF OPERATIONS
Three months ended March 31, 2001 compared to three months ended March 31,
2000
Total revenues for the first three months ended March 31, 2001 were $2.5
million compared to $0.6 million for the same period in 2000, an increase of
$1.9 million or 316.7%, reflecting increases in each of the company's revenue
sources.
Technology licensing fees and royalties were $0.9 million in the first
three months of 2001 compared to $0.3 million for the same period in 2000. The
technology licensing fees and royalties for the first three months of 2001 were
primarily due to recognition of deferred revenue with respect to two DMC
licenses entered into in 2000 aggregating $0.3 million, technology license fees
of $0.6 million with respect to a license entered into with Teltran and prepaid
royalties.
NCT 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 NCT's
revenue in future periods.
Product sales were $1.1 million for the first three months of 2001 compared
to $0.3 million for the same period in 2000, an increase of $0.8 million, or
266.7%, primarily due to the acquisition of Pro Tech in September 2000.
Cost of product sales was $0.6 million for the first three months of 2001
and 2000. Product margin was 48.8% for the first three months of 2001 versus a
negative 100% during the same period in 2000. The improvement in product margin
was primarily due to Pro Tech's reduction in its production and materials costs
along with the adoption of new manufacturing processes improving the operational
efficiency.
Selling, general and administrative expenses for the first three months of
2001 were $3.9 million versus $1.2 million for the same period in 2000, an
increase of $2.7 million, or 225.0%, primarily due to the increased headcount
and administrative expenses related to the ramping up of the subsidiary
companies acquired in 2000. In addition, due to our current and anticipated
expansion plans we have increased our professional fee accruals and
administrative headcount.
For the three months ended March 31, 2001, other (income)/expense, net
includes non-cash charges of $1.4 million in connection with a writedown for the
impairment of goodwillrelated to NCT's increased ownership of NCT Audio, which
was a result of conversions and exchanges of NCT Audio's common stock for NCT's
common stock and a $0.5 million fair value adjustment to certain subsidiary
stock received as consideration for the repayment of certain license fee
receivables, partially offset by $0.4 million from forgiveness of debt. This
compares to $3.1 million for the same period in 2000 for such impairment of
goodwill.
LIQUIDITY AND CAPITAL RESOURCES
The company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $147.6 million on a
cumulative basis through March 31, 2001. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
(1) the sale of common stock, including the exercise of warrants or options to
purchase common stock, (2) the sale of preferred stock convertible into common
stock, (3) convertible debt, (4) technology licensing fees, (5) royalties, (6)
product sales, (7) engineering and development funds received from strategic
partners and customers, and (8) advertising/media revenues.
Management believes that currently available funds will not be sufficient
to sustain the company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees and royalties, product sales, advertising/media
revenue and engineering and development revenue. Reducing operating expenses and
capital expenditures alone may not be sufficient, and continuation as a going
concern is dependent upon the level of realization of funding from our
aforementioned revenue sources, all of which are presently uncertain. In the
event that technology licensing fees, royalties, product sales,
advertising/media revenue and engineering and development revenue are not
realized as planned, then management believes additional working capital
financing must be obtained through the private placement of additional equity of
the company in the form of common stock, convertible preferred stock and/or
convertible debt. There is no assurance any such financing is or would become
available.
There can be no assurance that sufficient funding will be provided by
technology license fees, royalties, product sales, and advertising/media revenue
and engineering and development revenue. In that event, the company would have
to substantially reduce its level of operations. These reductions could have an
adverse effect on the company's relationships with its strategic partners and
customers. Uncertainty exists with respect to the adequacy of current funds to
support the company's activities until positive cash flow from operations can be
achieved, and with respect to the availability of financing from other sources
to fund any cash deficiencies. These uncertainties raise substantial doubt at
March 31, 2001, about the company's ability to continue as a going concern.
At March 31, 2001, cash and cash equivalents were $0.3 million. Such
balance was invested in interest bearing money market accounts.
The company's working capital deficit was $(14.6) million at March 31,
2001, compared to a deficit of $(9.7) million at December 31, 2000. This $4.9
million increase was primarily due to a deficit attributable to the acquisition
of the Web Factory of $(3.6) million and issuance of convertible notes in the
three months ended March 31, 2001.
Net cash used in operating activities for the three months ended March 31,
2001 and 2000 was $1.8 million and $3.0 million, respectively. The $1.2 million
decline was primarily attributable to the $1.2 million lower net loss compared
to the prior year period.Net cash used in investing activities was $1.3 million
for the three months ended March 31, 2001. Such cash was used for capital
expenditures.
Net cash provided from financing activities for the three months ended
March 31, 2001 was $2.3 million and was attributable to the issuance of debt as
outlined in Note 9 - notes to the condensed consolidated financial statements.
The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity. In April 2001, we finalized a
private equity credit agreement which will provide us funds for operating
purposes. See Note 14 - notes to the condensed consolidated financial statements
for further details.
CAPITAL EXPENDITURES
The company intends to continue its business strategy of working with
supply, manufacturing, and distribution and marketing partners to commercialize
its technology. The benefits of this strategy include: (1) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies; (2)
utilization of the manufacturing capacity of the company's allies, enabling the
company to integrate its active technology into products with limited capital
investment; and (3) access to well-established channels of distribution and
marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of March 31,
2001, 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 10 - 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 February 27, 2001, in connection with the acquisition of Teltran Web
Factory, the company's subsidiary Artera Group, Inc. issued $7,799,000 (7,799
shares) of Series A Convertible Preferred Stock ("Series A Preferred Stock").
Also on February 27, 2001, Artera issued 500 shares of Series A Preferred Stock
having an aggregate stated value of $500,000.
(b) Recipients. The recipients of the 8,299 shares of Series A Preferred
Stock was:
Teltran International Group, LTD
Austost Anstalt Schaan
Balmore S.A.
Amro International, S.A.
Nesher, LTD.
Talbiya B. Investments LTD
The Gross Foundation, Inc.
Level Trading, Inc.
Berkeley Group, LTD
United States Securities, Inc.
ICT N.V.
Libra Finance, S.A.
Hillhurst Investments Limited
Internet Business Management Limited
Four Pitt, Inc.
Offchurch Nominees Limited
The placement agent for the transaction was Libra Finance, S.A.
(c) Consideration. The aggregate offering price for 8,299 shares of Series
A Preferred Stock having an aggregate stated value of $8,299,000 was
$8,299,000.
(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 A
Preferred Stock, the purchasers are "accredited investor" as defined
under Regulation D.
(e) Terms of Conversion. The number of shares of Artera Common Stock
issuable upon Conversion of each of the Series A Preferred Shares
pursuant to this Section shall be determined according to the
following formula (the "Conversion Rate"):
Face Value Number of Shares of
---------------- =
Conversion Price Common Stock
provided that shall have the option to pay the 4% Accretion accrued on
each Series A Preferred Share in either cash or cash equivalents. If
Artera elects to pay the 4% Accretion accrued in cash or cash
equivalents, the Conversion Rate shall be:
Stated Value Number of Shares of
----------------- =
Conversion Price Common Stock
(i) "Face Value" equals the Stated Value plus the 4%
Accretion accrued on each share of Series A Preferred Stock;
(ii) "Conversion Price" means the amount obtained by
multiplying 100% by the lowest average of the average Final
Trading Price Closing Bid Price (as defined below) for the Artera
Common Stock for any consecutive five (5) day trading period
immediately preceding the relevant date;
(iii) Final Trading Price" means, for shares of Common Stock
that are listed for trading on a Principal Market as of any date
the last trading price of a share of Common Stock on the LSE's
SEATS PLUS system (the "SEATS PLUS"), or on this AIM Market, or
if not applicable, as reported by Bloomberg on the Principal
Market, provided that if the last trading price is unavailable,
the last reported bid price for a share of Common Stock on the
Principal Market shall be deemed the Final Trading Price; and
(iv) "Final Trading Price" means, if the Common Stock is not
listed for trading on a Principal Market, the greater of (A) the
net book value of a share of Common Stock (prior to dilution for
conversion, exercise or exchange of or for any derivative
securities) that are convertible, exercisable or exchangeable for
shares of Common Stock) reflected on the Company's last regularly
prepared quarterly balance sheet using generally accepted
accounting principles (except for normal year end adjustments or
footnote disclosure unless such balance sheet was prepared at the
Company's fiscal year end, or (B) the value attributed to the
Company's common stock in the most recently consummated outside
financing of the Company provided that such financing was
consummated within nine months of the date for which the Final
Trading Price is to be ascertained. If such value of a share of
Common Stock in clause (B) above is unascertainable or was not
consummated within the previous nine months, the Final Trading
Price shall be as determined in clause (A) above.
(v) "Business Day" shall be any day (other than Saturdays)
as to which commercial banks are open for business to accept
deposits and withdrawals in either New York, New York or London,
England.
ITEM 6. EXHIBITS
(a) Exhibits
**10(ap) Subscription Agreement between NCT Networks, Inc. and
Subscribers: Austost Anstalt Schaan; Balmore, S.A.; Amro
International, S.A.; Nesher Ltd.; Talbiya B. Investments Ltd.;
and The Gross Foundation, Inc. (collectively, Holders of Convertible
Notes of NCT Networks, Inc.) dated January 9, 2001.
**10(aq) Form of Convertible Note of NCT Networks, Inc. dated January 9, 2001.
**10(ar) Exchange Right Agreement among NCT Group, Inc. and Holders of
Convertible Notes of NCT Networks, Inc. dated January 9, 2001.
**10(as) Registration Rights Agreement among NCT Group, Inc. and Holders of
Convertible Notes of NCT Networks, Inc. dated January 9, 2001.
* 10(at) Exchange Agreement dated April 12, 2001 by and between Crammer Road
LLC and NCT Group, Inc.
* 10(au) Registration Rights Agreement (Exhibit A to Exchange Agreement) by
and between NCT Group, Inc. and Crammer Road LLC dated as of
April 12, 2001.
* 10(av) Exchange Rights Agreement dated April 12, 2001 by and between NCT
Group, Inc. and Crammer Road LLC.
* 10(aw) Private Equity Credit Agreement dated as of April 12, 2001 by and
between NCT Group, Inc. and Crammer Road LLC.
* 10(ax) Registration Rights Agreement (Exhibit A to Private Equity Credit
Agreement) dated as of April 12, 2001 by and between NCT Group,
Inc. and Crammer Road LLC.
10(ay) Framework Agreement between NXT plc, New Transducers Limited, NCT
Group, Inc. and NCT Audio Products, Inc. relating to the
reorganization of certain existing arrangements dated as of
March 30, 2001.
10(az) Registration Rights Agreement dated as of March 30, 2001 by and
among NCT Group, Inc. and NXT plc.
10(ba) IP Sale Agreement dated April 11, 2001 between NCT Group, Inc., NXT
plc and New Transducers Limited.
10(bb) NXT General License between the company and New Transducers Limited
dated as of April 11, 2001.
10(bc) Letter dated April 11, 2001 amending the NXT General License dated
April 11, 2001.
10(bd) Cancellation letter between the company, NCT Audio Products, Inc.,
New Transducers Limited and NXT plc dated April 11, 2001 canceling
the Master License Agreement dated September 27, 1997 and the New
Cross License Agreement dated September 27, 1997.
* 10(be) Subscription Agreement by and between NCT Video Displays, Inc. and
Crammer Road LLC dated as of April 12, 2001.
* 10(bf) Convertible Note of NCT Video Displays, Inc. in principal amount
of $500,000 dated as of April 12, 2001.
* 10(bg) NCT Group, Inc. note CR-1 in principal amount of $1,000,000 dated
April 12, 2001.
* 10(bh) Subscription Agreement dated March 14, 2001 between the company and
Alpha Capital Aktiengesellschaft.
* 10(bi) Form of Convertible Note in principal amount of $250,000 dated March
14, 2001.
* 10(bj) April 4, 2001 Subscription Agreement among Artera Group, Alpha
Capital and Amro.
* 10(bk) Form of Note dated April 4, 2001.
10(bl) Product Development and Licensing Agreement dated May 4, 2001 between
NCT Video Displays, Inc. and ViewBeam Technology, L.L.C.
10(bm) Agreement dated May 11, 2001, by and among the company, DMC and
Production Group.
* Incorporated by reference to exhibits filed with NCT's Registration
Statement on Form S-1 (Registration No. 333-60574) filed on
May 10, 2001.
** Incorporated by reference to exhibits filed with NCT's Pre-effective
Amendment No. 3 to Registration Statement on Form S-1 (Registration
No. 333--47084) filed on January 26, 2001.
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: May 21, 2001