UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
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 June 30, 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.
395,534,984 shares outstanding as of August 9, 2001
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands)
December 31, June 30,
2000 2001
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 1,167 $ 749
Investment in marketable securities (Notes 6 and 12) - 9,991
Accounts receivable, net of reserves (Note 6) 5,483 1,088
Inventories, net of reserves (Note 6) 2,184 2,134
Other current assets (Note 6) 4,825 3,541
------------ ------------
Total current assets 13,659 17,503
------------ ------------
Property and equipment, net (Note 6) 688 2,746
Goodwill, net 11,711 22,755
Patent rights and other intangibles, net 5,330 5,280
Other assets (Note 6) 7,994 3,427
------------ ------------
$ 39,382 $ 51,711
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses $ 9,833 $ 11,547
Current maturities of convertible notes (Note 9) 3,975 9,586
Deferred revenue 5,652 8,568
Other liabilities (Notes 2 and 8) 3,222 5,657
Notes payable 704 2,124
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Total current liabilities 23,386 37,482
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Long term liabilities:
Deferred revenue 1,611 6,293
Royalty payable 1,150 1,150
Convertible notes (Note 9) 1,000 -
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Total long term liabilities 3,761 7,443
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Commitments and contingencies (Note 13)
Common stock subject to resale guarantee (Note 11) 191 191
------------ ------------
Minority interest in consolidated subsidiaries 2,186 8,288
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Stockholders' equity (deficiency) (Notes 7, 11 and 12):
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Series G preferred stock, issued and outstanding,
767 and 0 shares, respectively (redemption amount
$783,409 and $0, respectively) 574 -
Common stock, $.01 par value, 450,000,000 shares authorized:
issued and outstanding 334,149,669 and 393,731,418
shares, respectively 3,341 3,937
Additional paid-in-capital 154,838 158,092
Unearned portion of compensatory stock, warrants and options (37) (28)
Accumulated other comprehensive loss (3,321) (1,168)
Expenses to be paid with common stock (562) (330)
Accumulated deficit (141,799) (159,233)
Stock subscriptions receivable (213) -
Treasury stock, 6,078,065 shares of common stock (2,963) (2,963)
------------ ------------
Total stockholders' equity (deficiency) 9,858 (1,693)
------------ ------------
$ 39,382 $ 51,711
============ ============
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 June 30, Six months ended June 30,
---------------------------- --------------------------
2000 2001 2000 2001
------------- ------------- ------------ ------------
REVENUES:
Technology licensing fees and royalties $ 333 $ 1,023 $ 589 $ 1,933
Product sales, net 471 1,229 783 2,313
Advertising/media revenue - 513 - 1,003
Engineering and development services 31 22 31 40
------------- ------------- ------------ ------------
Total revenues $ 835 $ 2,787 $ 1,403 $ 5,289
------------- ------------- ------------ ------------
COSTS AND EXPENSES:
Cost of product sales $ 341 $ 528 $ 964 $ 1,083
Cost of engineering and development services 27 1 27 1
Royalty expense - (60) - (37)
Cost of advertising/media sales - 95 - 338
Selling, general and administrative 2,217 5,331 3,409 7,756
Research and development 1,116 1,358 2,083 2,522
Other (income) expense, net (Note 6) (124) 5,434 2,949 8,206
Interest expense 212 1,711 1,378 2,854
------------- ------------- ------------ ------------
Total costs and expenses $ 3,789 $ 14,398 $ 10,810 $ 22,723
------------- ------------- ------------ ------------
NET LOSS $ (2,954) $ (11,611) $ (9,407) $ (17,434)
============= ============= ============ ============
Capital stock beneficial feature $ 282 $ - $ 1,001 $ 250
Preferred stock dividends 48 371 87 415
------------- ------------- ------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (3,284) $ (11,982) $ (10,495) $ (18,099)
============= ============= ============ ============
Basic and diluted loss per share $ (0.01) $ (0.03) $ (0.04) $ (0.05)
============= ============= ============ ============
Weighted average common shares outstanding -
basic and diluted 275,315 379,407 274,514 358,687
============= ============= ============ ============
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three months ended June 30, Six months ended June 30,
---------------------------- --------------------------
2000 2001 2000 2001
------------- ------------- ------------ ------------
NET LOSS $ (2,954) $ (11,611) $ (9,407) $ (17,434)
Other comprehensive loss:
Currency translation adjustment (25) 93 (25) 152
Unrealized loss on marketable securities - (378) - (1,320)
------------- ------------- ------------ ------------
COMPREHENSIVE LOSS $ (2,979) $ (11,896) $ (9,432) $ (18,602)
============= ============= ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 6)
(Unaudited)
(in thousands)
Six months ended June 30,
-------------------------
2000 2001
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Cash flows from operating activities:
Net loss $ (9,407) $ (17,434)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 842 1,382
Common stock options and warrants issued as consideration for:
Compensation 9 10
Operating expenses 50 -
Provision for inventory 250 -
Provision for doubtful accounts (16) 33
Impairment of goodwill (Note 12) 3,073 1,494
Discount on beneficial conversion feature on convertible note (Note 9) 1,000 -
Convertible note default interest - 150
Convertible note induced conversion expense - 190
Non-cash expense on issuance of warrants - 896
Realized loss on available-for-sale securities - 2,947
Realized loss on fair value of warrant - 2,599
Gain on sale of NXT ordinary shares - (572)
Unrealized loss on trading securities - 482
Forgiveness of debt - (404)
Amortization of debt discount - 1,310
Adjustment upon receipt of shares in lieu of cash - 468
Minority interest loss - (155)
Gain on disposition of fixed assets - (6)
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (112) 1,342
(Increase) in license fee receivable (2,500) -
Decrease in inventories 181 50
(Increase) in other assets (106) (105)
Increase (decrease) in accounts payable and accrued expenses (1,713) 1,688
Increase (decrease) in other liabilities and deferred revenue 3,441 (1,844)
------------ -----------
Net cash (used in) operating activities $ (5,008) $ (5,479)
------------ -----------
Cash flows from investing activities:
Capital expenditures (86) (839)
Net cash paid for Web Factory acquisition - (100)
Decrease in restricted cash 346 -
Deferred charges (407) -
Payment for shares of DMC-NY - (1,000)
Proceeds from sale of NXT ordinary shares - 3,869
------------ -----------
Net cash (used in) provided by investing activities $ (147) $ 1,930
------------ -----------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable (net) (Note 9) 1,750 2,945
Sale of preferred stock (net) 1,704 -
Sale of exchange shares - 164
Sale of common stock subject to resale 620 -
Collection of subscription receivable - 213
Exercise of stock options, net 748 -
Repayment of notes - (40)
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Net cash provided by financing activities $ 4,822 $ 3,282
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Effect of exchange rate changes on cash $ (16) $ (151)
------------ -----------
Net (decrease) in cash and cash equivalents $ (349) $ (418)
Cash and cash equivalents - beginning of period 1,126 1,167
------------ -----------
Cash and cash equivalents - end of period $ 777 $ 749
============ ===========
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 "the company," "we," "our," "us" or "NCT." The accompanying condensed
consolidated financial statements are unaudited but, in the opinion of
management, contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the consolidated
financial position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles applicable
to interim periods. The results of operations for the three and six months ended
June 30, 2001 and cash flows for the six months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for any other interim
period or the full year. These consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto for the
year ended December 31, 2000.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. We have reclassified certain amounts in prior period financial
statements to conform to the current period's presentation.
NCT has incurred substantial losses from operations since its inception,
which have been recurring and amounted to $159.2 million on a cumulative basis
through June 30, 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)
convertible debt; (4) 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 the portion of short-term investments which are
trading securities, amounted to $5.8 million at June 30, 2001, increasing 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 of the 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
Note 9 - Convertible Notes and Note 12 - Common Stock 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
financing and other funding sources to meet our obligations. The uncertainties
described above raise substantial doubt at June 30, 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 (i) 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 (ii) the communication equipment assets of Teltran's
subsidiary Internet Protocols Ltd. Artera agreed to pay Teltran International
Group Limited, 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 Series A
Convertible Preferred Shares, known as Artera Group Preferred. (See Note 12 -
Common Stock for further details). The purchase price, which includes $7.8
million of Artera Group Preferred and is net of $1.2 million due back from
Teltran due to limits on the amount of liabilities to be assumed under the
agreement, amounted to $7.0 million. Artera has changed the Web Factory's name
to Artera Group International Limited. As part of the acquisition, we agreed to
assume Teltran's obligations owed to a previous owner of the Web Factory in the
amount of approximately 1,500,000 in British pounds sterling with consideration
to be paid by causing Artera Group International Limited to issue its Series A
Convertible Preferred Stock, when created and known as Artera Limited Preferred,
to the 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 NCT's common
stock at a 20% discount to market. The acquisition was accounted for using the
purchase method, resulting in goodwill of approximately $10.1 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, is as follows (in thousands):
Current assets $ 484
Property, plant and equipment 467
Goodwill 10,095
Current liabilities (4,031)
Long-term liabilities (45)
---------
$ 6,970
=========
3. Loss Per Share:
We report loss per common share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Generally, the per share
effects of potential common shares such as warrants, options, convertible debt
and convertible preferred stock have not been included, as the effect would be
antidilutive.
4. Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board, known as the FASB,
issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", and SFAS 142, "Goodwill and Other Intangible Assets". SFAS 141
requires that the purchase method of accounting be used for all business
combinations subsequent to June 30, 2001 and specifies criteria for recognizing
intangible assets acquired in a business combination. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually, except in
certain circumstances, and whenever there is an impairment indicator; all
acquired goodwill must be assigned to reporting units for purposes of impairment
testing and segment reporting; effective January 1, 2002, goodwill will no
longer be subject to amortization. Intangible assets with definite useful lives
will continue to be amortized over their respective estimated useful lives. The
company plans to adopt the provisions of SFAS No. 141 effective July 1, 2001 and
SFAS No. 142 effective January 1, 2002. The adoption of SFAS No. 142 may
increase our financial position and results of operations on an ongoing basis
due to the elimination of amortization of goodwill. Conversely, the adoption of
SFAS No. 142 may decrease our financial position and results of operations upon
adoption because of a possible finding of impaired goodwill. We are in the
process of analyzing SFAS No. 142 but we are unable to report the effect the
adoption will have on our financial position and results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments - an Amendment of SFAS 133." SFAS 138 establishes
accounting and reporting standards for derivative instruments, including 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. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires us to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair value
of assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of SFAS 138 on January 1, 2001 resulted in
a net reduction in the value of derivatives, which consists of a warrant to
purchase common stock of a licensee, of $2.6 million during the second quarter
of 2001. We realized a $2.6 million loss in the value of this warrant, which we
included in other expense in the consolidated statement of operations, for the
three and six-months ended June 30, 2001.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
25." This interpretation clarifies certain issues relating to stock
compensation. FIN 44 became effective July 1, 2000; however, certain conclusions
in this interpretation cover specific events that occurred prior to July 1,
2000. The adoption of FIN 44 did not have a material impact on our consolidated
financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of FASB Statement No. 125." SFAS 140 revises the criteria for
accounting for securitizations and other transfers of financial assets and
collateral. In addition, SFAS 140 requires certain additional disclosures.
Except for the new disclosure provisions, which were effective for the year
ended December 31, 2000, SFAS 140 is effective for the transfer of financial
assets occurring after March 31, 2001. As of June 30, 2001, the company did not
incur any of these types of transactions. Management does not expect the
provisions of SFAS 140 to have a significant effect on our consolidated
financial statements.
During the year ended December 31, 2000 we adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." SAB 101 clarifies certain existing accounting principles for the
timing of revenue recognition and the classification of revenues in financial
statements. Since our existing revenue recognition policies were consistent with
the provisions of SAB 101, the result of applying its provisions did not have a
material effect on the company's revenues and costs during the year ended
December 31, 2000.
5. Comprehensive Income:
Comprehensive income is comprised of net income (loss) and other
comprehensive income. Other comprehensive income includes certain changes in
stockholders' equity that are excluded from net income including unrealized
gains and losses on our available-for-sale securities and foreign currency
translation adjustments.
6. Other Financial Data:
Balance Sheet Items:
- --------------------
Investments in marketable securities include available-for-sale and trading
securities at fair value. The following table displays the fair value, cost
basis, and realized/unrealized gain (loss) of the company's available-for-sale
and trading securities (in thousands):
December 31, 2000 June 30, 2001
---------------------------------- ------------------------------------------------------
Fair Cost Unrealized Fair Cost Realized Unrealized
Value Basis Gain/(Loss) Value Basis Gain/(Loss) Gain/(Loss)
---------------------------------- ------------------------------------------------------
Trading securities:
NXT $ - $ - $ - $ 5,037 $ 5,519 $ - $ (482)
---------------------------------- ------------------------------------------------------
Total Trading - - - 5,037 5,519 - (482)
---------------------------------- ------------------------------------------------------
Available for sale:
ITC $ 5,100 $ 6,000 $ (900) $ 4,680 $ 6,000 $ - $ (1,320)
Teltran - - - 253 743 (490) -
Insider Street.com - 2,478 (2,478) 21 2,478 (2,457) -
---------------------------------- ------------------------------------------------------
Total Available 5,100 8,478 (3,378) 4,954 9,221 (2,947) (1,320)
---------------------------------- ------------------------------------------------------
Totals $ 5,100 $ 8,478 $ (3,378) $ 9,991 $14,740 $ (2,947) $ (1,802)
================================== ======================================================
The company reviews declines in the value of its investment portfolio when
general market conditions change or specific information pertaining to an
industry or an individual company becomes available. The company considers all
available evidence to evaluate the realizable value of its investments and to
determine whether the decline in realizable value may be other-than-temporary.
For the three-month and six-month periods ended June 30, 2001, the company
recorded impairment charges of approximately $5.5 million, representing
other-than-temporary declines in value of its investment portfolio. These
charges are included in the other (income) expense, net line in the condensed
consolidated statements of operations. See table of other (income) expense, net
below.
Accounts receivable comprise the following (in thousands):
December 31, June 30,
2000 2001
-------------- --------------
Technology license fees and royalties $ 4,597 $ 106
Joint ventures and affiliates 76 76
Other trade receivables 880 980
Allowance for doubtful accounts (70) (74)
-------------- --------------
Accounts receivable, net $ 5,483 $ 1,088
============== ==============
Inventories comprise the following (in thousands):
December 31, June 30,
2000 2001
-------------- --------------
Components $ 603 $ 437
Finished goods 1,681 1,797
-------------- --------------
Gross inventories $ 2,284 $ 2,234
Reserve for obsolete & slow moving inventory (100) (100)
-------------- --------------
Inventories, net of reserves $ 2,184 $ 2,134
============== ==============
Other current assets comprise the following (in thousands):
December 31, June 30,
2000 2001
-------------- --------------
Investment in warrant $ 3,089 $ 490
Notes receivable - 1,310
Due from unaffiliated company 743 -
Prepaid royalties - 600
Prepaid financing charges - 342
Other 993 799
-------------- --------------
Other current assets $ 4,825 $ 3,541
============== ==============
Other assets (long term) comprise the following (in thousands):
December 31, June 30,
2000 2001
-------------- --------------
Marketable securities $ 5,100 $ -
Investment in unconsolidated
subsidiaries 1,500 1,514
Advances and deposits 663 813
Deferred charges 534 1,035
Other 197 65
-------------- --------------
Other assets $ 7,994 $ 3,427
============== ==============
Property and equipment comprise the following (in thousands):
Estimated
Useful Life December 31, June 30,
(Years) 2000 2001
------------- ------------- ----------
Machinery and equipment 3-5 $ 2,018 $ 2,019
Software costs 3-5 64 4,002
Furniture and fixtures 3-5 1,257 1,981
Leasehold improvements 7-10 1,139 1,620
Tooling 1-3 462 2,177
Projects under construction 3-5 - 991
Other 5-10 100 99
------------- ----------
$ 5,040 $ 12,889
Accumulated depreciation (4,352) (10,143)
------------- ----------
Property and equipment, net $ 688 $ 2,746
============= ==========
At June 30, 2001, property and equipment contains $4.6 million of fixed
asset costs and $4.1 million of accumulated depreciation related to the
acquisition of Web Factory on March 2, 2001.
Statement of Operations Information:
- ------------------------------------
Other (income) expense, net is comprised of the following (in thousands):
Three months Six months
Ended June 30, Ended June 30,
------------------------ -------------------------
2000 2001 2000 2001
----------- ----------- ------------ -----------
Realized loss on securities available for sale $ - $ 2,947 $ - $ 2,947
Unrealized loss on trading securities - 482 - 482
Realized loss on fair value of warrant - 2,599 - 2,599
Gain on sale of trading securities - (572) - (572)
Impairment of goodwill - 113 3,073 1,494
Other (124) (135) (124) 1,256
------------------------ -------------------------
Total other (income) expense, net $ (124) $ 5,434 $ 2,949 $ 8,206
======================== =========================
Supplemental Cash Flow Disclosures:
(in thousands)
Six months ended June 30,
---------------------------
2000 2001
----------- -----------
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 $ - $ (1,320)
=========== ===========
Issuance of 13.3 million shares of common stock as consideration for shares in DMC-NY $ - $ 2,000
=========== ===========
Issuance of 4.3 million shares of common stock upon conversion of promissory note default $ - $ 500
=========== ===========
Issuance of common stock in exchange for common stock of subsidiary $ - $ 984
=========== ===========
Receipt of Pro Tech common shares in lieu of cash to settle accounts receivable $ - $ 1,350
=========== ===========
Issuance of preferred stock of subsidiary, Artera Group, Inc. $ - $ 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 $ - $ 527
=========== ===========
Issuance of notes for convertible notes as partial consideration for shares in DMC-NY $ - $ 1,000
=========== ===========
7. Stockholders' Equity (Deficiency):
The changes in stockholders' equity (deficiency) during the six months
ended June 30, 2001 were as follows (in thousands):
Expenses
Exchange/ Accretion Net Stock Unearned To be Accumu-
Conver- Dividend Issuance Subscrip- Compen- paid lated
Balance sion of of of tion satory with Comprehen- Balance
at Preferred Preferred Common Receiv- Options/ Net Common sive At
12/31/00 Stock Stock Stock able Warrants Loss Stock Loss 6/30/01
------------ ---------- --------- -------- --------- --------- ------- --------- ----------- -----------
Series G Preferred Stock:
Shares 1 (1) - - - - - - - -
Amount $ 574 (864) 290 - - - - - - $ -
Common Stock:
Shares 334,150 7,218 - 52,363 - - - - - 393,731
Amount $ 3,341 73 - 523 - - - - - $ 3,937
Treasury Stock:
Shares 6,078 - - - - - - - - 6,078
Amount $ (2,963) - - - - - - - - $ (2,963)
Additional
Paid in Capital $ 154,838 793 (290) 2,751 - - - - - $ 158,092
Accumulated
(Deficit) $ (141,799) - - - - - (17,434) - - $ (159,233)
Accumulated
Other Comprehensive
Loss $ (3,321) - - - - - - - 2,153 $ (1,168)
Stock
Subscription
Receivable $ (213) - - - 213 - - - - $ -
Expenses to be
Paid with
Common Stock $ (562) - - - - - - 232 - $ (330)
Unearned
Compensatory
Stock Option $ (37) - - - - 9 - - - $ (28)
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 this 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 the 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 that 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. During the first quarter of 2001, we recorded an
additional $0.8 million liability due PRG for the purchase of equipment with
respect to this resolution agreement. The company had 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, 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 would have liquidated and satisfied 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 $0.9 million on
each of May 30 and June 30, 2001 or, at our election, a single payment of $1.7
million on May 30, 2001. In exchange, we would have received clear title to the
Sight and Sound(TM) units, and PRG had agreed to surrender back to us a warrant
to purchase 6,666,667 shares of our common stock. Failure to meet any other
obligation under this agreement constituted 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.
We defaulted on the obligations called for by this agreement and on June 6,
2001 PRG filed with the Superior Court, Judicial Court of Fairfield, at
Bridgeport an application for Prejudgment Remedy seeking to attach or garnish to
the value of $2.25 million assets. On July 26, 2001 the court returned an Order
For Prejudgment Remedy having found probable cause to sustain the validity of
PRG's claim and gave PRG the right to attach or garnish certain NCT and DMC
assets to the extent of $2.1 million.
On January 29, 2001, our wholly owned subsidiary, NCT Video Displays, Inc.,
known as 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 June 29, 2001, Artera entered into a subscription agreement with six
accredited investors pursuant to a private placement of $1.25 million 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 $1.0 million, net of expenses. At June 30, 2001 we
received $0.7 million in cash and had a subscription receivable in the amount of
$0.3 million. Such subscription receivable was collected in full during July
2001. The difference between the face value of the notes and the cash received
resulted in a $0.25 million Original Issue Discount ("OID"). This OID is
included in the accompanying consolidated balance sheet as a direct deduction
from the face amount of the notes with the resulting OID being amortized from
the date of issuance (June 29, 2001) to the date the notes mature (June 29,
2002). This interest expense is a non-cash item. These Artera convertible notes
mature June 29, 2002 and bear simple interest at 6% per annum, payable at
maturity. The effective interest rate on these notes is approximately 32.5%.
Such 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. We are undertaking a public listing of Artera's common stock on the
Alternative Investment Market of the London Stock Exchange, which we hope to
complete by the end of the 2001. Because Artera's common stock is not publicly
tradable, NCT and the six investors entered into an exchange rights agreement
whereby the Artera notes are exchangeable for shares of NCT common stock from
and after November 30, 2001 at an exchange price per share of 100% of the
average closing bid price of NCT's common stock for the five trading days prior
to the exchange. NCT is obligated to register shares for the exchange of these
Artera notes.
On May 25, 2001, Artera entered into a subscription agreement with two
accredited investors pursuant to a private placement of $0.4 million 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 $0.3 million, net of expenses, and consisted of
cash. The difference between the face value of the notes and the cash received
resulted in a $0.1 million OID. This OID is included in the accompanying
consolidated balance sheet as a direct deduction from the face amount of the
notes with the resulting OID being amortized from the date of issuance (May 25,
2001) to the date the notes mature (May 25, 2002). This interest expense is a
non-cash item. These Artera convertible notes mature May 25, 2002 and bear
simple interest at 6% per annum, payable at maturity. The effective interest
rate on these notes is approximately 32.5%. Such 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 May 25, 2001, entered into by NCT and the
holders of these Artera convertible notes, these notes are exchangeable for
shares of NCT common stock from and after September 15, 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, pursuant to the exchange agreement as discussed in Note
13 - Commitments below, with Crammer Road LLC, known as Crammer, NCT issued
Crammer a convertible note of $1.0 million. 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. In accordance
with EITF 98-5, as codified in EITF 00-27, we recorded a beneficial conversion
feature of $66,667 in connection with the April 12, 2001 convertible note
recorded during the second quarter of 2001. The discount to the fair value is
deemed to be a "beneficial conversion" feature and is in essence accounted for
as a discount to the note and is allocated to a component of additional-paid-in
capital. The discount is to be recognized as interest expense over the period
from the date of issuance (April 12, 2001) to the date of earliest conversion
(July 15, 2001). At June 30, 2001 the company recognized $55,319 of interest
expense in its consolidated statement of operations.
On April 12, 2001, NCT Video entered into a subscription agreement with
Crammer whereby NCT Video issued a $0.5 million convertible note to Crammer for
$0.5 million in 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. Because NCT Video's common stock is not
publicly tradable on any market or exchange, NCT and Crammer Road entered into
an exchange rights agreement whereby the NCT Video note is exchangeable for
shares of NCT common stock 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. In accordance with EITF 98-5, as codified in EITF 00-27, we
recorded a beneficial conversion feature of $33,333 in connection with the April
12, 2001 convertible note recorded during the second quarter of 2001. The
discount to the fair value is deemed to be a "beneficial conversion" feature and
is in essence accounted for as a discount to the note and is allocated to a
component of additional-paid-in capital. The discount is to be recognized as
interest expense over the period from the date of issuance (April 12, 2001) to
the date of earliest conversion (July 15, 2001). At June 30, 2001 the company
recognized $16,667 of interest expense in its consolidated statement of
operations.
On April 12, 2001, NCT entered into a subscription agreement with an
accredited investor, Alpha Capital, pursuant to a private placement of a
$125,000 convertible note to the investor. We also issued to Libra Finance, S.A.
a $8,750 convertible note as a finder's fee. The consideration from the investor
consisted of $125,000 cash, which NCT plans to use for working capital purposes.
These notes mature on April 12, 2002 and bear simple 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. In accordance with EITF
98-5, as codified in EITF 00-27, we recorded a beneficial conversion feature of
$33,438 in connection with the April 12, 2001 convertible notes recorded during
the second quarter of 2001. The discount to the fair value is deemed to be a
"beneficial conversion" feature and is in essence accounted for as a discount to
the note and is allocated to a component of additional-paid-in capital. The
discount is to be recognized as interest expense over the period from the date
of issuance (April 12, 2001) to the date of earliest conversion (July 15, 2001).
At June 30, 2001 the company recognized $27,746 of interest expense in its
consolidated statement of operations.
On April 4, 2001, Artera entered into a subscription agreement with two
accredited investors pursuant to a private placement of $0.9 million 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 $0.7 million, net of expenses, and consisted of
cash. The difference between the face value of the notes and the cash received
resulted in a $0.3 million OID. This OID is included in the accompanying
consolidated balance sheet as a direct deduction from the face amount of the
notes with the resulting OID being amortized from the date of issuance (April 4,
2001) to the date the notes mature (April 4, 2002). This interest expense is a
non-cash item. These Artera convertible notes mature April 4, 2002 and bear
simple interest at 6% per annum, payable at maturity. The effective interest
rate on these notes is approximately 32.5%. Such 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, these notes are exchangeable for
shares of NCT common stock from and after September 15, 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 March 14, 2001, NCT entered into a subscription agreement with Alpha
Capital, pursuant to a private placement of a $250,000 convertible note to the
investor. We also issued to Libra Finance, S.A. a $17,500 convertible note as a
finder's fee. The consideration from the investor consisted of $250,000 cash,
which NCT plans to use for working capital purposes. These 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. In accordance with
EITF 98-5, as codified in EITF 00-27, we recorded a beneficial conversion
feature of $66,875 in connection with the March 14, 2001 convertible notes
recorded during the first quarter of 2001. The discount to the fair value is
deemed to be a "beneficial conversion" feature and is in essence accounted for
as a discount to the note and is allocated to a component of additional-paid-in
capital. The discount is to be recognized as interest expense over the period
from the date of issuance (March 14, 2001) to the date of earliest conversion
(July 15, 2001). At June 30, 2001 the company recognized $58,653 of interest
expense in its consolidated statement of operations.
On February 13, 2001, the company issued a 60-day, $0.5 million promissory
note bearing interest at 7% per annum, to Carole Salkind, a holder of our
secured convertible notes, together with a warrant to purchase either $0.5
million of our common stock at $0.21 per share or Pro Tech's common stock at
$0.44 per share. The Company valued the warrant using the Black-Scholes option
pricing model and credited additional paid in capital for $0.5 million. This
amount is being amortized over the life of the promissory note. At June 30,
2001, the company has recognized all the interest expense with respect to this
warrant.
On April 14, 2001, the maturity date, NCT defaulted on the repayment of the
$0.5 million promissory note discussed above. 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. During the three months ended June 30, 2001 we recorded $0.2
million as debt conversion expense included in other expense, net on the
consolidated statement of operations. Such amount represents an induced
conversion calculated as the difference between the conversion price per share
of $0.21, as per the original note, and the agreed upon $0.13 per share used to
convert on May 18, 2001.
On January 25, 2001, NCT defaulted on the repayment of $1.0 million of
secured convertible notes held by Carole Salkind. The default provisions in the
note imposed a penalty, the default amount, of $0.1 million (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
approximately $1.4 million 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 company valued the warrant using the Black-Scholes option pricing model and
credited additional paid in capital for $0.1 million. This amount is being
amortized over the life of the promissory note. At June 30, 2001, the company
has recognized interest expense in the amount of approximately $21,000 with
respect to this warrant. 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 any part of the outstanding and unpaid amount of the note
into fully paid and non-assessable shares of common stock of the company, or of
Artera Group International Ltd., or of Distributed Media Corporation
International Ltd at the conversion price as defined in the note.
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 $5.0 million. 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 approximately $2.5 million and
consisted of $1.0 million in cash, $1.0 million in nonrecourse notes secured by
Teltan common stock and 1,190,476 shares of Pro Tech common stock valued at $
0.5 million. The difference between the face value of the notes and the cash
received resulted in a $2.5 million OID. This OID is included in the
accompanying consolidated balance sheet as a direct deduction from the face
amount of the notes with the resulting OID being amortized from the date of
issuance (January 9, 2001) to the date the notes mature (January 9, 2002). This
interest expense is a non-cash item. The Artera convertible notes mature January
9, 2002 and bear simple interest at 6% per annum, payable at maturity. The
effective interest rate on these notes is approximately 112%. The 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. We
are undertaking a public listing of Artera's common stock on the Alternative
Investment Market of the London Stock Exchange, which we hope to complete by the
end of 2001. Because the Artera common stock is not publicly tradable, NCT and
the investors entered into an exchange rights agreement whereby the Artera 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. We 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. As our shareholders have voted to
increase NCT's authorized capital stock at our 2001 annual shareholders meeting,
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.
The company has defaulted on repayment of each of the above notes dated
June 4, 1999, June 11, 1999, July 2, 1999, July 23, 1999, representing a
convertible note principal balance of $1.25 million due Carole Salkind. The
default provisions in the notes imposed a penalty, the default amount, of
$125,000 (10% of the principal payments 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 July 25, 2001, the company cured these defaults by
canceling the $1.25 million notes and issuing a new four-month convertible note
to Ms. Salkind for $1,658,505 and granting a five year warrant to purchase 0.6
million shares of NCT's common stock at an exercise price of $0.12 per share or
Pro Tech's common stock at an exercise price of $0.105 per share or may elect to
purchase fully paid and non-assessable shares of common stock of Artera Group
International Ltd., or of Distributed Media Corporation International Ltd., at
the conversion price as defined in the warrant. 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., of Pro Tech, or
of Distributed Media Corporation International Ltd.
10. Litigation:
June 6, 2001, PRG filed with the Superior Court, Judicial Court of
Fairfield, at Bridgeport, the court, an application for prejudgment remedy
seeking to attach or garnish to the value of $2.25 million of assets. On July
26, 2001 the court returned an Order For Prejudgment Remedy having found
probable cause to sustain the validity of PRG's claim and gave PRG the right to
attach or garnish certain NCT and DMC assets to the extent of $2.1 million. PRG
can not reclaim the leased property as title for the subject property has been
placed into escrow for the benefit of DMC. We anticipate little or no impact on
the company's business. See Note 8 - Other Liabilities for further details.
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. A
hearing scheduled with respect to the dismissal was postponed and is in the
process of being rescheduled. 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, the Circuit Court. Subsequently, the Circuit Court granted a motion to
dismiss the claims against Mr. Parrella. In July, 2001 the parties agreed to a
court mediated settlement whereby Schwebel agreed to release, settle and dispose
all claims against us and all claims incident thereto against us. The settlement
calls for our payment of a nominal amount, which has been paid. The settlement
is subject to routine approval by the Circuit Court, which is believed to be
imminent.
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 six months of 2001, an aggregate of 616,527 shares
were issued, of which 171,429 shares were in connection with future obligations
aggregating $60,000 and 445,098 shares, with an aggregate value of approximately
$112,000, were issued to two vendors in settlement of approximately $0.6 million
of outstanding accounts payable. At June 30, 2001, in connection with this
settlement, we recognized approximately $0.5 million, which has been included in
miscellaneous income. During the first six months 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 June 30, 2001, in connection with the sale of these
shares, we recorded a $0.1 million liability for the shortfall.
12. Common Stock:
On June 29, 2001, NCT entered into an exchange rights agreement with ten
accredited investors who hold $4,276,000 in aggregate stated value of Series A
Convertible Preferred stock of our subsidiary, Artera Group, Inc. Each of the
ten holders of Artera Series A Convertible Preferred Stock is entitled to
exchange the Artera Series A Convertible Preferred Stock for shares of NCT
common stock from and after November 30, 2001 at an exchange price per share of
100% of the average closing bid price of NCT's common stock for the five trading
days prior to the exchange date. NCT is obligated to register shares for the
exchange of Artera Series A Convertible Preferred Stock. Pursuant to the
exchange rights agreement, NCT has the option at any time to redeem any
outstanding Artera Series A Convertible Preferred Stock by paying the holder
cash equal to the aggregate stated value of the number of shares of Artera
Series A Convertible Preferred Stock being redeemed (together with accrued and
unpaid dividends thereon). See Note 2 - Acquisitions for further details.
On April 12, 2001 NCT and Crammer finalized a new equity credit agreement
in connection with the execution of the private equity credit agreement dated
September 27, 2000. We issued a 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
September 27, 2000 credit agreement has been cancelled. Furthermore, for each
$0.1 million 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. To
date, the company has not sold any shares of its common stock under this
agreement. See Note 9 - Convertible Notes for further details.
In addition, on April 12, 2001, the company entered into an exchange
agreement with Crammer, owner of DMC-NY, a company which holds DMC licenses in
the New York Designated Market Area. 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 for an aggregate value of $2 million.
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 the day before we request
acceleration of the 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.
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. This acquisition has not occurred and the terms are currently being
renegotiated between the parties.
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. These NCT shares were issued
to NXT on March 30, 2001. During the second quarter of 2001 the company recorded
the receipt of the $9.2 million of ordinary shares received in the arrangement
discussed above as deferred revenue until the time as the company and the
company's independent accountants, along with the Securities and Exchange
Commission, known as the SEC, determine both the date on which to record the
transaction and the revenue recognition period. We have included $4.6 million
both in deferred revenue current and deferred revenue long-term in the condensed
consolidated balance sheets at June 30, 2001. The outcome of this determination
will be reflected in either an amendment to this and/or our first quarter Form
10-Q or in our third quarter Form 10-Q.
The company has implemented a plan to orderly dispose of the NXT shares, in
accordance with the terms of various agreements. These NXT shares are freely
tradable and subject to certain distribution limitations.
As of June 30, 2001, the company received $3.9 million in cash proceeds
from sale of NXT ordinary shares, net of fees and expenses. We sold an
additional $0.3 million of NXT ordinary shares in June 30, 2001 with receipt of
funds in July 2001. Such amount has been recorded as a current asset in the
consolidated balance sheets at June 30, 2001. The proceeds were used to fund day
to day working capital requirements of the company. The company realized a gain
of approximately $0.6 million from the sale of the NXT ordinary shares and is
included in other (income) expense, net in the company's consolidated statements
of operations for the six-month period ended June 30, 2001.
For financial reporting purposes, the NXT shares are classified as trading
securities and are included in investments in marketable securities in the
company's condensed consolidated balance sheet at a value of approximately $5.0
million at June 30, 2001. For the quarter ended June 30, 2001, the company has
recorded total charges of approximately $0.5 million relating to this
mark-to-market adjustment.
During the six months ended June 30, 2001, warrants for 3.1 million shares
of common stock were issued to several outside consultants to the company with
exercise prices between $0.14 and $0.59 per share. The company valued the
warrants using the Black-Scholes option pricing model and credited additional
paid in capital for $0.4 million. The company included in the accompanying
consolidated statements of operations a charge for consulting services in the
amount of $0.4 million for the six-months ended June 30, 2001 with respect to
these warrants. In addition, at June 30, 2001 five-year warrants have been
granted to Ms. Salkind to acquire an aggregate of 2.9 million shares of NCT
common stock at prices ranging from $0.12 to $0.21 per share. The company valued
the warrants using the Black-Scholes option pricing model and credited
additional paid in capital and recorded a charge to interest expense for $0.5
million in the accompanying consolidated financial statements for the six-months
ended June 30, 2001 with respect to these warrants. These grants were in
conjunction with new loans to NCT by Ms. Salkind. See Note 9 - Convertible Notes
for further details.
During the six months ended June 30, 2001, the company issued 7,218,150
shares of NCT's common stock in connection with the conversion of 767 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 June 30, 2001,
there were no shares of Series G Preferred Stock outstanding.
During the six months ended June 30, 2001, the company issued 2,193,070
shares of NCT's common stock in connection with the conversion of 223 shares of
Pro Tech's Series A Convertible Preferred Stock, which had been issued in
September 2000. In connection with the issuance, the company recorded a decrease
in the minority interest in subsidiary and an increase to our additional paid in
capital of approximately $0.2 million.
During the six months ended June 30, 2001, 597 shares of NCT Audio common
stock were exchanged for 4,824,068 shares of the company's common stock,
including the 3,850,000 shares issued to NXT as mentioned above. In connection
with the exchange, the company recorded a one-time, non-cash charge of $1.5
million for the impairment of goodwill based on the valuation of NCT Audio,
which is included in other expense, net.
At June 30, 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 68.2 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 subsidiary
common stock, convertible preferred stock and convertible debt into NCT common
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. An increase of 195,000,000 shares of our authorized
common stock was approved 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 six months of 2001, 937 shares of CCC
common stock were exchanged for 7,831,908 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 in capital
of $0.9 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. The additional
shares issued to the selling shareholders with respect to the fill-up provision
was based upon a trailing twenty-day closing bid price of $0.2508 to make-up for
the diminished value. The issuance of the additional shares did not affect the
cost of the acquired company.
Additional NCT shares may be required to be issued based upon future
cumulative revenue of DMC pursuant to the earn-out provision. The selling
shareholders have demand registration rights for these additional shares. The
earn-out provides as follows: if DMC Cinema has accrued revenue of at least
$3,300,000 between August 1, 2000 and December 31, 2001, a number of shares of
NCT common stock having a value of $1,220,000 based upon the trailing twenty-day
closing bid price on December 31, 2001 will be issued to the selling
shareholders. If the accrued revenue for the period is less than $3,300,000,
then the number of shares of NCT common stock to be issued would be pro rated to
the number (based upon the trailing twenty-day closing bid price on December 31,
2001) equal to the product of $1,250,000 multiplied by a fraction which is the
actual accrued revenue for the period divided by $3,300,000. Further, if DMC
Cinema has accrued revenue of at least $4,700,000 between August 1, 2000 and
June 30, 2002, an additional number of shares of NCT common stock having a value
of $1,225,000 based upon the trailing twenty-day closing bid price on June 30,
2002 will be issued. If DMC Cinema's accrued revenue for the period is less than
$4,700,000, then the number of shares to be issued will be pro rated to that
number of shares of NCT common stock having a value (based upon the trailing
twenty-day closing bid price on June 30, 2002) equal to the product of
$1,250,000 multiplied by a fraction which is the actual accrued revenue for the
period divided by $4,700,000. The issuance of additional NCT shares of common
stock pursuant to the earn out provision would increase our cost of the
acquisition, and an increase in the cost of the acquired assets would be
amortized over the remaining life of the assets.
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. The
additional shares issued to the selling shareholders with respect to the fill-up
provision was based upon a trailing twenty-day closing bid price of $0.2470 to
make-up for the diminished value. The issuance of the additional shares did not
affect the cost of the acquired company.
13. Commitments:
On April 12, 2001, NCT and 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 working capital 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. See Note 12 - Common
Stock for further details.
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. See Note
8 - Other Liabilities for further details.
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 third quarter or early in the
fourth quarter of fiscal 2001.
On March 8, 2001 we announced a letter of intent entered into on February
28, 2001 by our subsidiary, Artera Group, Inc., and CompuHelp Technologies,
Inc., a national Internet service provider based in the New York metropolitan
area. By the terms of the letter of intent, Artera would acquire CompuHelp by
purchasing from CompuHelp's two sole shareholders all of the outstanding capital
stock of CompuHelp in consideration for $500,000 in cash and $1,000,000 in
aggregate state value of Artera Convertible Preferred Stock. Artera would also
agree to assume up to $90,000 of CompuHelp's bank debt. In addition, if
CompuHelp's ISP business reached revenue and gross margin targets in the eight
quarters following closing, up to an additional $2,000,000 of Artera Convertible
Preferred stock would be issuable to CompuHelp's two selling shareholders. The
letter of intent remained exclusive until April 30, 2001. On July 12, 2001,
Artera announced the expiration of a letter of intent to acquire CompuHelp.
14. 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 is segregated into two categories, Other-corporate and
Other-consolidating.
Other-corporate consists of certain items maintained at the company's
corporate headquarters and 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. Other-consolidating consists of intercompany sales and items eliminated
in consolidation.
No geographic information for revenues from external customers or for
long-lived assets is disclosed as our primary market and capital investments,
during the six months ended June 30, 2001, were concentrated in the United
States.
Reportable segment data for the three and six-month period ended June 30,
2001 and June 30, 2000, is as follows (in thousands):
(In thousands)
Segment
-----------------------------------------------------------------------------------------
Reportable ------------ Other ------------ Grand
Media Communications Technology Segments Corporate Consolidating Total
-----------------------------------------------------------------------------------------
For the three months ended June 30, 2001:
License Fees and Royalties $ 333 $ 633 $ - $ 966 $ 10,063 $ (10,006) $ 1,023
Other Revenue - External 526 1,238 - 1,764 - - 1,764
Other Revenue - Other Operating
Segments 2 175 - 177 - (177) -
Operating Income (Loss) (4,087) (6,520) (106) (10,713) 8,527 (9,425) (11,611)
For the three months ended June 30, 2000:
License Fees and Royalties $ 333 $ - $ - $ 333 $ 806 $ (806) $ 333
Other Revenue - External 123 472 - 595 (92) (1) 502
Other Revenue - Other Operating
Segments 26 423 - 449 - (449) -
Operating Income (Loss) (3,048) (1,601) (111) (4,760) 1,857 (51) (2,954)
Segment
-----------------------------------------------------------------------------------------
Reportable ------------ Other ------------ Grand
Media Communications Technology Segments Corporate Consolidating Total
-----------------------------------------------------------------------------------------
For the six months ended June 30, 2001:
License Fees and Royalties $ 673 $ 1,209 $ - $ 1,882 $ 10,073 $ (10,022) $ 1,933
Other Revenue - External 1,044 2,312 - 3,356 - - 3,356
Other Revenue - Other Operating
Segments 403 421 - 824 - (824) -
Operating Income (Loss) (4,968) (9,016) (185) (14,169) 6,252 (9,517) (17,434)
Segment Assets 43,765 29,724 6,287 79,776 17,073 (45,138) 51,711
For the six months ended June 30, 2000:
License Fees and Royalties $ 390 $ 189 $ - $ 579 $ 829 $ (819) $ 589
Other Revenue - External 212 626 - 838 - (24) 814
Other Revenue - Other Operating
Segments 26 423 - 449 - (449) -
Operating Income (Loss) (3,898) (2,804) (214) (6,916) (2,620) 129 (9,407)
Segment Assets 9,807 2,484 713 13,004 5,071 (3,328) 14,747
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.
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. Systems are
currently being deployed to retail environments.
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, manufacture
and marketing of lightweight telecommunications headsets. During 2001, Pro Tech
has launched two new business segments. The first, Telecommunications Systems
Integration, concentrates on selling and installing simple to sophisticated
analog, digital and Internet Protocol phone systems. The second, Call Center
Operations, provides services to the medical market using the latest Customer
Relationship Management technologies and strategies.
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
capital-raising resources to ConnectClearly.
Communications Division:
The Communications division of the company focuses on the
telecommunications market and in particular the hands-free market. The
Communications technology included 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 intranet and internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. Applications for this technology are intranet and internet
telephony, audio and video conferencing, 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.
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. Artera's new broadband communications
technology, known as Artera Turbo, improves the effective performance of
communication lines. By offering faster effective speeds, management believes
the Artera Turbo technology will provide a competitive advantage over other
service providers. As a result, we believe that this will have a positive impact
on our Internet service provider and network services business.
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.
15. Subsequent Events:
On July 30, 2001, Pro Tech entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with the company and Alpha Capital to
sell an aggregate value of up to $0.5 million (500 shares) of Pro Tech Series B
Convertible Preferred Stock ("Pro Tech Preferred") to Alpha Capital. On July 30,
2001 Pro Tech issued and sold 500 shares of Pro Tech Preferred having an
aggregate stated value of $0.5 million. Pro Tech received approximately $457,000
in cash, net of expenses and fees, in exchange for the preferred stock. The
conversion rate into Pro Tech common stock shall be the lesser of: (i) the then
lowest average of the average closing bid price for a share of Pro Tech common
stock for any consecutive five day period out of fifteen trading days preceding
the date of such conversion, less a discount of 20%, subject to certain
adjustments set forth in the Articles of Amendment to Articles of Incorporation
of the company dated as of July 30, 2001; or (ii) a fixed conversion price of
$0.25 set forth in the Articles of Amendment to Articles of Incorporation of the
company dated as of July 30, 2001. The exchange rate into NCT common stock shall
be the then lowest average of the average closing bid price for a share of NCT
common stock for any consecutive five trading days out of the fifteen trading
days preceding the date of such conversion, less a discount of 20%. In addition,
under the agreement, Pro Tech issued warrants to purchase 1,000,000 shares of
its common stock. The warrants are exercisable at $0.13 per share and expire on
July 30, 2004. Pro Tech has the right to require the warrant holders to exercise
upon a call by Pro Tech under the following conditions: (1) one third of the
warrants are callable if the closing bid price of the common stock for each of
the previous fifteen days equals or exceeds $0.177 per share and the average
daily trading volume during the period is at least 150,000 shares; (2) two
thirds of the warrants are callable if the closing bid price of the common stock
for each of the previous fifteen days equals or exceeds $0.244 per share and the
average daily trading volume during the period is at least 150,000 shares; and,
(3) all of the warrants are callable if the closing bid price of the common
stock for each of the previous fifteen days equals or exceeds $0.295 per share
and the average daily trading volume during the period is at least 150,000
shares. The $0.5 million proceeds were recorded, by Pro Tech, as $0.3 million
for preferred shares, $0.1 million for the warrants, and $0.1 million for the
beneficial conversion feature, based on their relative fair values.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
Caution Concerning Forward-Looking Statements
The SEC encourages companies to disclose forward-looking information so
that investors can better understand a company's future prospects and make
informed investment decisions. This document contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, particularly statements anticipating future growth in revenues and cash
flow. Words such as "anticipates," "estimates," "expects," "projects,"
"intends," "plans," "believes" "will be", "will continue", "will likely result",
and words and terms of similar substance used in connection with any discussion
of future operating or financial performance identify these forward-looking
statements. Those forward-looking statements are based on management's present
expectations about future events. As with any projection or forecast, they are
inherently susceptible to uncertainty and changes in circumstances, and NCT is
under no obligation to (and expressly disclaims any obligation to) update or
alter its forward-looking statements whether as a result of these changes, new
information, future events or otherwise.
NCT operates in a highly competitive and rapidly changing environment and
business segments that are dependent on our ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems; produce a cost effective product that will
gain acceptance in relevant consumer and other product markets; increase
revenues from products; realize funding from technology licensing fees,
royalties, product sales, and engineering and development revenues to sustain
our current level of operation; introduce, on a timely basis, new products;
continue its current level of operations to support the fees associated with
NCT's patent portfolio; maintain satisfactory relations with its three customers
that accounted for 62.5% of NCT's revenues in 2000; attract and retain key
personnel; maintain and expand our strategic alliances; and protect our
know-how, inventions and other secret or unprotected intellectual property.
NCT's actual results could differ materially from management's expectations
because of changes in these factors. New risk factors can arise and it is not
possible for management to predict all of these risk factors, nor can it assess
the impact of all of these risk factors on the company's business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements. Given
these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
Investors should also be aware that while the company might, from time to
time, communicate with securities analysts, it is against the company's policy
to disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Furthermore, the company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Thus, to the extent that reports issued by securities analysts or others
contain any projections, forecasts or opinions, these reports are not the
responsibility of the company.
In addition, NCT's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions, economic
slowdowns and changes in NCT's plans, strategies and intentions.
GENERAL BUSINESS ENVIRONMENT
The company's operating revenues are comprised of technology licensing fees
and royalties, product sales, advertising/media revenue and engineering and
development services. Operating revenues for the six months ended June 30, 2001
consisted of approximately 36.5% in technology licensing fees and royalties,
43.7% in product sales, 19% in advertising/media revenue , and 0.8% in
engineering and development services 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 advertising/media. 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 these companies. Management expects that
technology licensing fees, royalties, product sales and advertising /media
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 advertising /media 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, NCT is selling products through several of its alliances,
including: 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 sale of the NXT ordinary shares, 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 of these financing is or would become available. (Refer to
"Liquidity and Capital Resources" below and to Note 1 - Basis of Presentation
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; receipt of the NXT ordinary shares in the reorganization of
our existing cross licensing agreements; 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," in Note 9 - Convertible Notes and in Note 12 - Common Stock.
On March 28, 2001, NCT announced that its subsidiary, Distributed Media
Corporation International, Ltd. is planning a public offering of its common
stock on the London Stock Exchange Alternative Investment Market. On July 6,
2001, NCT announced that its subsidiaries, Distributed Media Corporation
International and Artera Group International had deferred planned public
offerings of common stock on the London Stock Exchange AIM until late 2001. NCT
and its financial advisors have determined that in order to maximize valuations
of the public offerings, it is prudent to wait until market conditions are more
favorable.
RESULTS OF OPERATIONS
Three months ended June 30, 2001 compared to three months ended June 30,
2000
Total revenues for the three months ended June 30, 2001 were $2.8 million
compared to $0.8 million for the same period in 2000, an increase of $2.0
million or 250%.
Technology licensing fees and royalties increased to $1.0 million in the
three months ended June 30, 2001 as compared to $0.3 million for the same period
in 2000, an increase of $0.7 million. The technology licensing fees and
royalties for the three months ended June 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. During the second
quarter of 2001, the company recorded the receipt of the $9.2 million of NXT
ordinary shares, received in the arrangement discussed in Note 12 - Common
Stock, as deferred revenue until the time as the company and the company's
independent accountants, along with the SEC, determine both the date on which to
record the transaction and the revenue recognition period. We have included $4.6
million both in deferred revenue current and long-term in the condensed
consolidated balance sheets at June 30, 2001. The outcome of this determination
will be reflected in either an amendment to this and/or our first quarter Form
10-Q or in our third quarter Form 10-Q.
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.
For the three months ended June 30, 2001, product sales were $1.2 million
compared to $0.5 million for three months ended June 30, 2000, an increase of
$0.7 million or 140%, primarily due to the acquisition of Pro Tech in September
2000. This increase was partially offset by the continued decline in sales of
hearing products including the NoiseBuster(R) and ProActive(R) product lines and
the ClearSpeech(R) product line. The decrease in speakers sold by NCT Audio due
to a lack of promotional effort and lack of availability of the product mix is
not expected to continue. We expect stronger sales of Gekko(TM) flat speakers by
NCT Audio as DMC installs its Sight and Sound locations.
Gross profit margin on product sales, as a percentage of product revenues,
increased to 57.0% for the three months ended June 30, 2001 from 27.6% for the
three months ended June 30, 2000. The improvement in product margin was again
primarily due to the acquisition of Pro Tech and its reduction in production and
materials costs along with the adoption of new manufacturing processes improving
the operational efficiency. In addition, the company's sale of existing product
inventory and reduction of new manufacture of its hearing products including
NoiseBuster(R) and ProActive(R) product lines and the ClearSpeech(R) product
line added to the improvement.
Advertising/media revenues were $0.5 million for the three months ended
June 30, 2001 compared to zero for the same period in 2000. Advertising/media
revenues are derived from the sale of audio and visual advertising in the Sight
and Sound locations. Cost of advertising/media revenue was $0.1 million for the
three months ended June 30, 2001 compared to zero for the same period in 2000.
These costs include the commissions paid to advertising representative companies
and agencies and communication expenses related to the Sight and Sound
locations.
For the three months ended June 30, 2001, selling, general and
administrative expenses totaled $5.3 million as compared to $2.2 million for the
three months ended June 30, 2000, an increase of $3.1 million or 141.0%,
primarily due to higher compensation expenses and depreciation and amortization
and costs attributable to acquired companies. Our selling, general and
administrative expenses include compensation which generally comprises from 36%
to 50% of the total; professional fees and expenses, including legal services;
non-cash depreciation and amortization; marketing and promotional costs; and
travel, among other costs. We expect higher selling, general and administrative
expenses in fiscal 2001 primarily due to the full year impact of the companies
acquired in fiscal 2000 and the effect of salary increases.
Included in the company's total costs and expenses were non-cash
expenditures including: (i) depreciation and amortization of $0.7 million in the
three months ended June 30, 2001 and $0.4 million in the same period in 2000;
(ii) impairment of goodwill of $0.1 million in the three months ended June 30,
2001 and zero during the same period in 2000; (iii) interest expense of
$1.7 million in the three months ended June 30, 2001 primarily due to
amortization of Original Issue Discount of $0.8 million, amortization of
beneficial conversion feature in convertible debt of $0.2 million and accrued
interest on certain convertible debt issued by the company of $0.5 million and
zero during the same period in 2000; and (iv) realized loss on marketable
securities deemed other-than-temporary of $2.9, a realized warrant fair value
adjustment of $2.6 million and a $0.5 million unrealized loss on trading
securities adjustment in the three months ended June 30, 2001 and zero
during the same period in 2000. The impairment of goodwill is based upon an
independent valuation performed in 1999 of NCT's majority-owned subsidiary, NCT
Audio, and continuing operating losses incurred in 2001 and 2000.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
For the six months ended June 30, 2001, total revenues amounted to $5.3
million, compared to $1.4 million for six months ended June 30, 2000, or an
increase of 278%, reflecting increases in each of the company's revenue sources.
Technology licensing fees and royalties increased to $1.9 million in the
first six months of 2001 as compared to $0.6 million for the same period in
2000, an increase of $1.3 million. The technology licensing fees and royalties
for the six months ended June 2001 were primarily due to recognition of deferred
revenue with respect to two DMC licenses entered into in 2000 aggregating $0.6
million, technology license fees of $1.2 million with respect to a license
entered into with Teltran and prepaid royalties. During the second quarter of
2001 the company recorded the receipt of the $9.2 million of NXT ordinary
shares, received in the arrangement discussed in Note 12 - Common Stock, as
deferred revenue until the time as the company and the company's independent
accountants, along with the SEC, determine both the date on which to record the
transaction and the revenue recognition period. We have included $4.6 million
both in deferred revenue current and deferred revenue long-term in the condensed
consolidated balance sheet at June 30, 2001. The outcome of this determination
will be reflected in either an amendment to this and/or our first quarter Form
10-Q or in our third quarter Form 10-Q.
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, 2001, product sales were $2.3 million
compared to $0.8 million for six months ended June 30, 2000, an increase of $1.5
million or 188%, primarily due to the acquisition of Pro Tech in September 2000.
This increase was partially offset by the continued decline in sales of hearing
products including the NoiseBuster(R) and ProActive(R) product lines and the
ClearSpeech(R) product line. The decrease in speakers sold by NCT Audio due to a
lack of promotional effort and lack of availability of the product mix is not
expected to continue. We expect stronger sales of Gekko(TM) flat speakers by NCT
Audio as DMC installs its Sight and Sound locations.
Gross profit margin on product sales, as a percentage of product revenues,
increased to 53.2% for the six months ended June 30, 2001, from (23.1%) for the
six months ended June 30, 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 as
well as the sale of product inventory and reduction of new product manufacture
by its hearing products including NoiseBuster(R) and ProActive(R) product lines
and the ClearSpeech(R) product line.
Advertising/media revenues were $1.0 million for the six months ended June
30, 2001 compared to zero for the same period in 2000. Advertising/media
revenues are derived from the sale of audio and visual advertising in the Sight
and Sound locations. Cost of advertising/media revenue was $0.3 million for the
six months ended June 30, 2001 compared to zero for the same period in 2000.
These costs include the commissions paid to advertising representative companies
and agencies and communication expenses related to the Sight and Sound
locations.
For the six months ended June 30, 2001, selling, general and administrative
expenses totaled $7.7 million as compared to $3.4 million for the six months
ended June 30, 2000, an increase of $4.3 million or 126.5%, primarily due to
higher compensation expenses and depreciation and amortization and costs
attributable to acquired companies. Our selling, general and administrative
expenses include compensation which generally comprises from 36% to 50% of the
total; professional fees and expenses, including legal services; non-cash
depreciation and amortization; marketing and promotional costs; and travel,
among other costs. We expect higher selling, general and administrative expenses
in fiscal 2001 primarily due to the full year impact of the companies acquired
in fiscal 2000 and the effect of salary increases.
Research and development expenditures increased to $2.5 million for the
six-month period ended June 30, 2001 compared to $2.1 million for the six-month
period ended June 30, 2000. Over the past several years, the company has been
decreasing the percentage of its sales that is spent on research and
development. The company is beginning to reap the benefits of its previous
research and development expenditures as it deploys their result in revenue
generating activities. The company continues to believe that a strong commitment
to research and development is required to drive long-term growth. However, in
the short-term, the company does not expect research and development
expenditures in 2001 to be significantly higher than in 2000. NCT issued shares
of its common stock having a market value of $3.0 million to ITC as prepaid
research and engineering costs during 2000. No expense for the outsourcing of
research and development was recorded for the six months ended June 30, 2001 as
we have not been invoiced by ITC for any work that has been performed with
respect to this agreement as of August 14, 2001.
Included in the company's total costs and expenses were non-cash
expenditures including: (i) depreciation and amortization of $1.3 million in the
six months ended June 30, 2001 and $0.8 million in the same period in 2000; (ii)
impairment of goodwill of $1.5 million in the six months ended June 30, 2001 and
$3.1 million during the same period in 2000; (iii) interest expense of $2.9
million in the six months ended June 30, 2001 due primarily to amortization of
Original Issue Discount of $1.7 million, amortization of beneficial conversion
feature in convertible debt of $0.2 million and accrued interest on certain
convertible debt issued by the company of $0.5 million and $1.0 million during
the same period in 2000 due to a beneficial conversion feature in connection
with a convertible note; and (iv) realized loss on marketable securities deemed
other-than-temporary of $2.9 million, a realized warrant fair value adjustment
of $2.6 million and a $0.5 million unrealized loss on trading securities
adjustment in the six months ended June 30, 2001 and zero during the same period
in 2000. The impairment of goodwill is based upon an independent valuation
performed in 1999 of NCT's majority-owned subsidiary, NCT Audio, and continuing
operating losses incurred in 2001 and 2000.
LIQUIDITY AND CAPITAL RESOURCES
NCT has incurred substantial losses from operations since its inception,
which have been recurring and amounted to $159.2 million on a cumulative basis
through June 30, 2001. These losses, which include the costs for development of
products for commercial use, have been funded primarily from:
o the sale of common stock;
o the sale of preferred stock convertible into common stock;
o convertible debt;
o technology licensing fees;
o royalties;
o product sales;
o advertising revenues; and
o 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, trading securities and the funding derived from our revenue sources:
technology licensing fees and royalties, product sales, advertising and
engineering 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 revenue sources, all
of which are presently uncertain. In the event that our revenues are not
realized as planned, then management believes additional working capital
financing must be obtained through the private placement or public offering of
additional equity of NCT or its subsidiaries in the form of common stock,
convertible preferred stock and/or convertible debt. Proceeds from sales of our
subsidiaries' securities are used exclusively for the benefit of the issuing
subsidiary and there are generally contractual restrictions to that effect.
There is no assurances that any of these financings are or would become
available.
There can be no assurance that sufficient funding will be provided by
technology license fees, royalties, product sales, advertising revenue and
engineering and development revenue. In that event, NCT would have to
substantially reduce its level of operations. These reductions could have an
adverse effect on NCT's relationships with its customers and suppliers.
Uncertainty exists with respect to the adequacy of current funds to support
NCT's activities until positive cash flow from operations can be achieved and
with respect to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise substantial doubt at June 30, 2001,
about NCT's ability to continue as a going concern.
NCT recently entered into financing transactions because internally
generated funding sources were insufficient. These financing transactions are
described above in the notes to the condensed consolidated financial statements.
Other transactions entered into by NCT to fund its business pursuits during 2001
are described in the notes to the condensed consolidated financial statements
and include:
o Pro Tech Series B Preferred Stock;
o Secured Convertible Notes; and
o Issuance of shares to suppliers and consultants in lieu of cash.
At June 30, 2001, the company's cash and cash equivalents (which are highly
liquid investments with an original maturity of 3 months or less) aggregated
$0.8 million, compared to $1.2 million at December 31, 2000. Such balances were
invested in interest bearing money market accounts.
During the second quarter of 2001 the company recorded the receipt of the
$9.2 million of NXT ordinary shares received in the NXT arrangement. At June 30,
2001 the approximate fair market value of the NXT ordinary shares remaining was
$5.0 million. These NXT shares are freely tradable and subject to certain
distribution limitations.
The company's working capital deficit was $(20.0) million at June 30, 2001,
compared to a deficit of $(9.7) million at December 31, 2000. This $10.3 million
increase was primarily due to assumption of current liabilities in excess of
current assets acquired in the acquisition of the Web Factory of $(3.1) million
and issuance of convertible notes in the six months ended June 30, 2001.
Operating Activities
For the six months ended June 30, 2001, the company had $(5.5) million net
cash used for operations, as compared to $(5.0) million in cash used for
operations for the six months ended June 30, 2000.
The company's net accounts receivable decreased to $1.1 million at June 30,
2001 from $5.5 million at December 31, 2000. The decrease in net accounts
receivable was due to the collection of amounts due from license agreements
entered into during 2000 and a decline in the company's entering into new
technology license agreements in the first half of 2001 compared to the second
half of 2000 in all segments. The company expects net accounts receivable to
decline during 2001 as compared to December 31, 2000 levels as a result of its
ongoing efforts to improve accounts receivable management in its communication
segment.
The company's net inventory level decreased to $2.1 million at June 30,
2001 from $2.2 million at December 31, 2000. The company's inventory turns
(using the cost-of-sales calculation method) decreased to .5 times at June 30,
2001 from .9 times at December 31, 2000. The decrease in net inventory includes
an increase in finished goods and a decrease in raw materials aggregating $0.1
million with respect to Pro Tech's rollout of it's four new products in the
third quarter of 2001. The company expects inventory levels to continue to
decrease and inventory turns to increase during 2001 as compared to December 31,
2000 levels as it continues to improve its supply-chain management and meet the
anticipated demand of its new product introduced during the third quarter of
2001. Inventory management continues to be an area of focus as the company
balances the need to maintain strategic inventory levels to ensure competitive
lead times with the risk of inventory obsolescence due to rapidly changing
technology and customer requirements.
Research and development expenditures increased to $2.5 million for the
six-month period ended June 30, 2001 compared to $2.1 million for the six-month
period ended June 30, 2000. Over the past several years, the company has been
decreasing the percentage of its sales that is spent on research and
development. The company is beginning to reap the benefits of its previous
research and development expenditures as it deploys their result in revenue
generating activities. The company continues to believe that a strong commitment
to research and development is required to drive long-term growth. However, in
the short-term, the company does not expect research and development
expenditures in 2001 to be significantly higher than in 2000.
To improve its future operating cash flow, the company implemented
substantial cost reduction and product simplification plans in 2000 that are
continuing in 2001. These plans involve the discontinuation of unprofitable
product lines and the consolidation of certain duplicate selling and general and
administration expenses due to the acquisitions made in 2000.
Investing Activities
The most significant components of the company's investing activities are:
(i) capital expenditures; (ii) strategic acquisitions of, or investments in,
other companies; and (iii) proceeds from dispositions of investments.
Net cash provided by investing activities was $1.9 million for the
six-month period ended June 30, 2001, as compared to $(0.1) million in net cash
used for investing activities for the six-month period ended June 30, 2000. The
net cash provided by investing activities for the six-month period ended June
30, 2001 was primarily due to proceeds received from dispositions of investments
in marketable securities of NXT, partially offset by capital expenditures and
investments.
Capital expenditures for the six-month period ended June 30, 2001 consumed
$0.9 million, compared to $0.1 million for the six-month period ended June 30,
2000. For the six-month period ended June 30, 2001, the most significant capital
expenditures related to the purchase of property and equipment and leasehold
improvements of $0.8 million. The company anticipates making additional
investments during the remainder of 2001.
For the six-month period ended June 30, 2001, the company received $3.9
million in cash proceeds from sale of NXT ordinary shares, net of fees and
expenses. We sold an additional $0.3 million of NXT ordinary shares in June 2001
with receipt of funds in July 2001. Such amount has been recorded as a current
asset in the consolidated balance sheets at June 30, 2001. The proceeds were
used to fund working capital requirements. The company realized a gain of
approximately $0.6 million from the sale of the NXT ordinary shares and is
included in other (income) expense, net in the company's consolidated statements
of operations for the three and six-month period June 30, 2001. The value of the
remaining unsold NXT ordinary shares at June 30, 2001 was approximately $5.0
million and is included in investments in marketable securities, as trading
securities, in the company's consolidated balance sheets.
In addition to available cash and cash equivalents, the company views its
available-for-sale securities and trading securities as additional sources of
liquidity. At June 30, 2001 and December 31, 2000, the company's
available-for-sale securities had approximate fair market values of $5.0 million
and $5.1 million, respectively. At June 30, 2001 and December 31, 2000, the
company's trading securities had approximate fair market values of $5.0 million
and zero respectively. The majority of these securities represent investments in
technology companies and, accordingly, the fair market values of these
securities are subject to substantial price volatility, and, in general,
suffered a decline during the first half of 2001. In addition, the realizable
value of these securities is subject to market and other conditions. The company
may sell a portion of these available-for-sale securities during 2001.
Financing Activities
The most significant components of the company's financing activities are:
(i) proceeds the sale of convertible preferred stock; (ii) proceeds from the
issuance of convertible debt securities; and (iii) proceeds received from the
sale of returnable shares of common stock.
Net cash provided by financing activities was $3.3 million for the
six-month period ended June 30, 2001, as compared to $4.8 million for the
six-month period ended June 30, 2000. The cash provided by financing activities
for the first half of 2001 was primarily due to the issuance and sale of
convertible notes and the sale of NXT ordinary shares.
At June 30, 2001, the company's short-term debt was $11.7 million, net of
original issue discounts of approximately $2.2 million, (principally comprised
of $11.7 million of face value of outstanding convertible notes and $2.2 million
of outstanding notes payable), compared to $4.7 million of short-term debt at
December 31, 2000.
On January 9, 2001, the company received aggregate net proceeds of $0.6
million from the issuance and sale of $5.0 million of 6% Convertible Notes due
January 9, 2002. These proceeds were used for general corporate purposes.
On March 14, 2001, the company received aggregate net proceeds of $0.3
million from the issuance and sale of $0.3 million of 8 % Convertible Notes due
March 14, 2002. These proceeds were used for general corporate purposes.
On April 4, 2001, the company received aggregate net proceeds of $0.7
million from the issuance and sale of $0.9 million of 6% Convertible Notes due
April 4, 2002. These proceeds were used for general corporate purposes.
On April 12, 2001, the company received aggregate net proceeds of $0.1
million from the issuance and sale of $0.1 million of 8% Convertible Notes due
April 12, 2002. These proceeds were used for general corporate purposes.
On April 12, 2001, the company received aggregate net proceeds of $0.5
million from the issuance and sale of $0.5 million of 8% Convertible Notes due
December 31, 2001. These proceeds were used for general corporate purposes.
On May 25, 2001, the company received aggregate net proceeds of $0.3
million from the issuance and sale of $0.4 million of 6% Convertible Notes due
May 25, 2002. These proceeds were used for general corporate purposes.
On June 29, 2001, the company received aggregate net proceeds of $0.7
million in cash and a subscription receivable of $0.3 million from the issuance
and sale of $1.25 million of 6% Convertible Notes due June 29, 2002. These
proceeds were used for general corporate purposes.
The company's ratio of net debt to net debt plus equity was 85.6% at June
30, 2001 compared to 36.5% at December 31, 2000. The company expects reductions
in its total debt and net debt to net debt plus equity during the remainder of
the year.
The company expects that from time to time outstanding short-term debt may
be replaced with new short or long-term borrowings. Although the company
believes that it can continue to access the capital markets in 2001 on
acceptable terms and conditions, its flexibility with regard to long-term
financing activity could be limited by: (i) the liquidity of our common stock on
the open market, (ii) the company's current level of short-term debt, and (iii)
the company's credit ratings. In addition, many of the factors that affect the
company's ability to access the capital markets, such as the liquidity of the
overall capital markets and the current state of the economy, are outside of the
company's control. There can be no assurances that the company will continue to
have access to the capital markets on favorable terms. In April 2001, we
finalized a private equity credit agreement, which will provide us funds for
operating purposes. See Note 12 - Common Stock for further details.
The company's current ratio was 0.47 to 1 at June 30, 2001 compared to 0.58
to 1 at December 31, 2000.
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, 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 June 30,
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 - Litigation 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 were:
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, each purchaser is an "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
---------------- = Common Stock
Conversion Price
provided that Artera 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
---------------- = Common Stock
Conversion Price
(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 the 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 the financing was consummated within nine months of the date for which
the Final Trading Price is to be ascertained. If the 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of stockholders of the Company was held on July 10, 2001.
At the meeting, Jay M. Haft, Michael J. Parrella, John J. McCloy II, Sam Oolie
and Irene Lebovics were elected directors, each to serve until the next annual
meeting of stockholders and until his successor is elected and qualified. The
stockholders also: (1) approved an amendment of the Company's Restated
Certificate of Incorporation to increase the number of shares of common stock
authorized thereunder from 450,000,000 shares to 695,000,000 shares; (2)
approved the adoption of the 2001 NCT Group, Inc. Stock and Incentive Plan to
provide 18.0 million newly authorized shares of common stock to be used for
options and other stock-based incentive programs for persons eligible to
participate thereunder; and (3) voted down a shareholder proposal on repricing
and extending the term of options and warrants. The vote taken at the meeting
was as follows:
(a) With respect to the election of the directors:
FOR WITHHELD
Jay M. Haft 325,688,937 20,139,765
Michael J. Parrella 329,052,300 16,776,402
John J. McCloy II 325,695,266 20,133,436
Sam Oolie 325,361,664 20,467,038
Irene Lebovics 326,377,667 19,451,035
(b) With respect to the proposal to approve the amendment of the Company's
Restated Certificate of Incorporation to increase the number of shares of common
stock authorized thereunder from 450,000,000 to 695,000,000 shares:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
309,055,817 35,150,077 1,622,808
(c) With respect to the adoption of the 2001 NCT Group, Inc. Stock and
Incentive Plan to provide 18.0 million newly authorized shares of common stock
to be used for options and other stock-based incentive programs for persons
eligible to participate thereunder:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
308,863,752 34,918,282 2,046,668
(d) With respect to a shareholder proposal on repricing and extending the
term of options and warrants:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
49,934,970 88,798,328 5,542,487
ITEM 6. EXHIBITS
(a) Exhibits
10(ag) Stock and Asset Purchase Agreement by and among Teltran
International Group, Ltd., Internet Protocols Ltd. and NCT Networks,
Inc. (now Artera Group, Inc.) dated as of January 23, 2001.
10(ag)(1) Side letter dated February 27, 2001 amending the Stock Asset
Agreement.
10(ag)(2) Stockholders' Agreement dated February 27, 2001 by and among
NCT Group, Inc., NCT Networks, Inc. and the holders of Series A
Preferred Stock of NCT Networks, Inc.
10(ah) Secured Convertible Note in principal amount of $1,361,615 dated May
14, 2001, filed as an exhibit to Schedule 13D filed May 18, 2001.
10(ah)(1) Warrant issued to Carole Salkind for the purchase of 500,000 shares
of common stock dated May 14, 2001, filed as an exhibit to Schedule
13D filed May 18, 2001.
10(ai) Secured Convertible Note in principal amount of $1,658,505 dated
July 25, 2001.
10(ai)(1) Warrant issued to Carole Salkind for the purchase of 625,000 shares
of common stock dated July 25, 2001.
10(aj) Subscription Agreement among Artera Group, Inc. and Subscribers
Alpha Capital Aktiengesellschaft and Amro International, S.A. dated
as of May 25, 2001.
10(aj)(1) Form of Convertible Note dated May 25, 2001.
10(aj)(2) Exchange Rights Agreement by and among NCT Group, Inc. and the
Holders identified on Schedule A thereto dated as of May 25, 2001.
10(aj)(3) Registration Rights Agreement among NCT Group, Inc. and
Holders identified on Schedule A thereto dated as of May 25, 2001.
10(ak) Subscription Agreement among Artera Group, Inc. and Subscribers
Alpha Capital Aktiengesellschaft; Amro International, S.A.; The
Gross Foundation, Inc.; Leval Trading, Inc.; Nesher Ltd.; and
Talbiya B. Investments Ltd. dated as of June 29, 2001.
10(ak)(1) Form of Convertible Note dated June 29, 2001.
10(ak)(2) Exchange Rights Agreement (Notes) by and among NCT Group, Inc. and
Holders identified on Schedule A thereto dated as of June 29, 2001.
10(ak)(3) Registration Rights Agreement (Notes) among NCT Group, Inc. and
Holders identified on Schedule A thereto dated as of June 29, 2001.
10(al) Exchange Rights Agreement (Preferred) by and among NCT Group, Inc.
and Austost Anstalt Schaan; Amro International, S.A.; Nesher Ltd.;
Leval Trading, Inc.; ICT N.V.; Balmore S.A.; The Gross Foundation,
Inc.; Talbiya B. Investments Ltd.; United Securities Services, Inc.;
and Libra Finance, S.A. dated as of June 29, 2001.
10(al)(1) Registration Rights Agreement (Preferred) among NCT Group, Inc.
and Austost Anstalt Schaan; Amro International, S.A.; Nesher Ltd.;
Leval Trading, Inc.; ICT N.V.; Balmore S.A.; The Gross
Foundation, Inc.; Talbiya B. Investments Ltd.; United Securities
Services, Inc.; and Libra Finance, S.A. dated as of June 29, 2001.
10(am) Securities Purchase and Supplemental Exchange Rights Agreement dated
July 30, 2001 by and among Pro Tech Communications, Inc., NCT Group,
Inc., and Alpha Capital Aktiengesellschaft.
10(am)(1) Registration Rights Agreement by and between NCT Group, Inc. and
Alpha Capital Aktiengesellschaft dated July 30, 2001.
99(d) Employment Agreement by and between NCT Midcore, Inc. (now Midcore
Software, Inc.) and Jerrold Metcoff, dated as of August 29, 2001.
99(e) Employment Agreement by and between NCT Midcore, Inc. (now Midcore
Software, Inc.) and David Wilson, dated as of August 29, 2001.
99(f) Employment Agreement by and between Midcore Software Limited and
Barry Marshall-Johnson, dated as of August 29, 2001.
99(g) Employment Agreement by and between DMC Cinema, Inc. and Allan
Martin dated August 24, 2000.
99(h) Employment Agreement by and between DMC Cinema, Inc. and Robert
Crisp dated August 24, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /s/MICHAEL J. PARRELLA
-------------------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/CY E. HAMMOND
-------------------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: August 15, 2001