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 September 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.
412,375,987 shares outstanding as of November 13, 2001
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands)
December 31, September 30,
2000 2001
--------------- -----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 1,167 $ 964
Investment in marketable securities (Note 6) - 922
Accounts receivable, net of reserves (Note 6) 5,483 1,150
Inventories, net of reserves (Note 6) 2,184 2,175
Other current assets (Note 6) 4,825 2,941
--------------- -----------------
Total current assets 13,659 8,152
Property and equipment, net (Note 6) 688 3,550
Goodwill, net (Note 2) 11,711 22,311
Patent rights and other intangibles, net 5,330 4,496
Other assets (Note 6) 7,994 3,521
--------------- -----------------
$ 39,382 $ 42,030
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 9,833 $ 12,167
Current maturities of convertible notes (Note 8) 3,975 11,757
Deferred revenue (Note 11) 5,652 6,401
Other current liabilities (Note 6) 3,222 3,575
Notes payable (Note 2) 704 3,193
--------------- -----------------
Total current liabilities 23,386 37,093
--------------- -----------------
Long term liabilities:
Deferred revenue (Note 11) 1,611 6,153
Royalty payable 1,150 1,102
Convertible notes (Note 8) 1,000 -
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Total long term liabilities 3,761 7,255
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Commitments and contingencies (Note 12)
Common stock subject to resale guarantee (Note 10) 191 266
--------------- -----------------
Minority interest in consolidated subsidiaries 2,186 8,602
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Stockholders' equity (deficit) (Notes 7, 10 and 11):
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, $.01 par value, authorized 450,000,000 and 645,000,000 shares,
respectively: issued 334,149,669 and 404,014,435 shares, respectively 3,341 4,040
Additional paid-in capital 154,838 160,024
Unearned portion of compensatory stock, warrants and options (37) (23)
Accumulated other comprehensive loss (3,321) (5,237)
Expenses to be paid with common stock (562) (271)
Accumulated deficit (141,799) (166,756)
Stock subscriptions receivable (213) -
Treasury stock, 6,078,065 shares of common stock (2,963) (2,963)
--------------- -----------------
Total stockholders' equity (deficit) 9,858 (11,186)
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$ 39,382 $ 42,030
=============== =================
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 September 30, Nine months ended September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
--------------- ---------------- ---------------- ---------------
REVENUES:
Technology licensing fees and royalties $ 7,316 $ 1,759 $ 7,906 $ 5,710
Product sales, net 422 1,209 1,205 3,522
Advertising/media revenue 242 22 242 1,025
Engineering and development services 29 75 59 115
--------------- ---------------- ---------------- ---------------
Total revenues $ 8,009 $ 3,065 $ 9,412 $ 10,372
--------------- ---------------- ---------------- ---------------
COSTS AND EXPENSES:
Cost of product sales $ 445 $ 771 $ 1,408 $ 1,817
Cost of advertising/media sales 410 (128) 410 210
Cost of engineering and development services 27 - 54 1
Selling, general and administrative 2,705 5,026 5,380 14,187
Research and development 720 1,251 3,351 5,256
Other (income) expense, net (Note 6) (222) 2,712 2,920 7,931
Interest expense, net 284 1,491 1,655 4,345
--------------- ---------------- ---------------- ---------------
Total costs and expenses $ 4,369 $ 11,123 $ 15,178 $ 33,747
--------------- ---------------- ---------------- ---------------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ 3,640 $ (8,058) $ (5,766) $ (23,375)
Cumulative effect of accounting change - - - (1,582)
--------------- ---------------- ---------------- ---------------
NET INCOME (LOSS) $ 3,640 $ (8,058) $ (5,766) $ (24,957)
Preferred stock beneficial conversion feature 3,569 105 3,569 355
Preferred stock dividends 390 88 1,191 503
--------------- ---------------- ---------------- ---------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (319) $ (8,251) $ (10,526) $ (25,815)
=============== ================ ================ ===============
Loss per share -
Loss before cumulative effect of change
in accounting principle $ (0.00) $ (0.02) $ (0.04) $ (0.06)
Cumulative effect of change in accounting principle - - - (0.01)
--------------- ---------------- ---------------- ---------------
Basic and diluted $ (0.00) $ (0.02) $ (0.04) $ (0.07)
=============== ================ ================ ===============
Weighted average common shares outstanding -
basic and diluted 296,377 397,761 281,815 371,855
=============== ================ ================ ===============
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Note 5)
(Unaudited)
(in thousands)
Three months ended September 30, Nine months ended September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
--------------- ---------------- ---------------- ---------------
NET INCOME (LOSS) $ 3,640 $ (8,058) $ (5,766) $ (24,957)
Other comprehensive income (loss):
Currency translation adjustment 28 (160) 3 (63)
Unrealized loss on marketable securities (397) (3,912) (397) (1,853)
--------------- ---------------- ---------------- ---------------
COMPREHENSIVE INCOME (LOSS) $ 3,271 $ (12,130) $ (6,160) $ (26,873)
=============== ================ ================ ===============
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)
Nine months ended September 30,
----------------------------
2000 2001
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Cash flows from operating activities:
Net loss $ (5,766) $ (24,957)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 1,323 2,202
Common stock options and warrants issued as consideration for:
Compensation 14 14
Operating expenses 75 580
Provision for doubtful accounts (10) 18
Impairment of goodwill (Note 11) 3,073 1,494
Discount on beneficial conversion feature on convertible note (Note 8) 1,000 383
Common stock received for license fee (6,030) -
Convertible note default interest - 411
Convertible note interest rollover - 393
Convertible note induced conversion expense - 190
Non-cash expense on issuance of warrants - 536
Realized loss on available-for-sale securities - 3,067
Realized loss on fair value of warrant - 1,216
Cumulative effect of accounting change - 1,582
Loss on sale of NXT ordinary shares (Note 11) - 2,301
Forgiveness of debt - (404)
Amortization of debt discount - 2,074
Adjustment upon receipt of shares in lieu of cash - 468
Minority interest loss - (298)
Loss (gain) on disposition of fixed assets 31 (6)
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (345) 51
(Increase) decrease in license fee receivable (4,633) 3,247
Decrease in inventories 512 9
(Increase) decrease in other assets 177 (1,413)
Increase (decrease) in accounts payable and accrued expenses (2,448) 2,119
Increase (decrease) in other liabilities and deferred revenue 5,728 (4,130)
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Net cash used in operating activities $ (7,299) $ (8,853)
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Cash flows from investing activities:
Capital expenditures (108) (1,498)
Net cash paid for Web Factory acquisition - (100)
Decrease in restricted cash 667 -
Deferred charges (411) -
Payment for shares of DMC New York - (1,000)
Proceeds from sale of NXT ordinary shares - 6,858
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Net cash provided by investing activities $ 148 $ 4,260
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Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable (net) (Note 8) 2,250 3,781
Sale of preferred stock (net) 2,004 457
Sale of subsidiary common stock 1,000 -
Sale of exchange shares - 164
Sale of common stock subject to resale 620 -
Sale of common stock - 186
Collection of subscription receivable 1,000 213
Exercise of stock options, net 748 -
Repayment of notes (1,325) (348)
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Net cash provided by financing activities $ 6,297 $ 4,453
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Effect of exchange rate changes on cash $ 7 $ (63)
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Net decrease in cash and cash equivalents (847) (203)
Cash and cash equivalents received from acquisitions 88 -
Cash and cash equivalents - beginning of period 1,126 1,167
------------- -------------
Cash and cash equivalents - end of period $ 367 $ 964
============= =============
The accompanying notes are an integral part of the condensed consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
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 nine months
ended September 30, 2001 and cash flows for the nine months ended September 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 some 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 $166.8 million on a cumulative basis
through September 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 licensees and customers.
Cash and cash equivalents amounted to $1.0 million at September 30, 2001,
decreasing from $1.2 million at December 31, 2000. Management believes that
currently available funds will not be sufficient to sustain NCT at present
levels through the first quarter of 2002. 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 licensees 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 8 -
Convertible Notes and Note 11 - Capital Stock with respect to recent financing.
NCT's consolidated financial statements have been prepared assuming that
NCT will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financing and other funding sources to meet our obligations. The
uncertainties described above raise substantial doubt at September 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 a wholly-owned subsidiary of Teltran International Group
Limited, known as Teltran, and (ii) the communication equipment assets of
Teltran's subsidiary Internet Protocols Ltd. Artera agreed to pay 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
preferred stock-A (see Note 11 - Capital Stock for further details). The
purchase price, which includes $7.8 million of Artera preferred stock-A 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 governing the acquisition,
amounted to $7.0 million. Artera has changed the Web Factory's name to Artera
Group International Limited, known as Artera International. As part of the
acquisition, Artera International agreed to assume Teltran's obligation owed to
a previous owner of the Web Factory in the amount of approximately 1,500,000 in
British pounds sterling. We are negotiating with that former owner in an effort
to have that obligation be discharged via the issuance by Artera International
of its series A convertible preferred stock, when created, having a stated value
equal to the amount owed, with rights to convert to Artera International common
stock at a 20% discount to the initial public listing price of that common
stock. Under this arrangement, if Artera International does not undertake a
public listing, the previous owner would have the right to exchange the Artera
International preferred stock 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. This goodwill is being 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)
----------
Fair market value of acquired entity $ 6,970
==========
On April 12, 2001, NCT acquired a 25% interest in DMC New York, Inc., known
as DMC NY, for $4.0 million. The consideration consisted of a $1.0 million
convertible note issued to Crammer Road LLC, known as Crammer Road (see Note 8 -
Convertible Notes), $1.0 million cash and $2.0 million of our common stock (see
Note 11 - Capital Stock). We intend to acquire the remaining 75% interest in DMC
NY pursuant to the Crammer Road private equity credit agreement (see Note 12 -
Commitments and Contingencies).
3. Loss Per Share:
We report loss per common share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." 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. Under SFAS 142, we will be
required to reassess the goodwill and other intangible assets previously
recorded in connection with prior acquisitions, as well as their useful lives.
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 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 has
adopted the provisions of SFAS No. 141 effective July 1, 2001 and plans to adopt
SFAS No. 142 effective January 1, 2002. The adoption of SFAS No. 142 may improve
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 weaken our financial position and results of operations upon adoption
because of a possible finding of impaired goodwill. We are in the process of
evaluating existing acquired goodwill and other intangible assets, but we are
unable to report the effect the adoption of SFAS No. 142 will have on our
financial position and results of operations. At September 30, 2001, we had
$22.3 million of goodwill, net of amortization and $4.5 million of patent rights
and other intangibles, net of amortization. For the three and nine months ended
September 30, 2001, we had $0.4 and $1.2 million of goodwill amortization
expense, respectively, and $0.2 and $0.5 million of other intangible asset
amortization expense, respectively.
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
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. Effective January 1, 2001, the company adopted SFAS 138.
Upon adoption, the reduction in the fair value of Derivatives, which consists of
a warrant to purchase common stock of a licensee, has been reported as a
cumulative effect of a change in accounting principle of approximately $1.6
million. If SFAS 138 had been applied for all periods presented, there would
have been no effect in the three and nine months ended September 30, 2000. For
the three and nine months ended September 30, 2001, we realized a $0.2 million
and $1.2 million loss, respectively, in the fair value of this warrant, which we
included in other income (expense), net, in the consolidated statement of
operations.
In March 2000, the FASB issued Interpretation No. ("FIN") 44, "Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25." This interpretation clarifies various issues relating to stock
compensation. FIN 44 became effective July 1, 2000; however, some 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 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. The adoption of SFAS 140 has not had 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. ("SAB") 101, "Revenue Recognition in
Financial Statements." SAB 101 clarifies various 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 (Loss):
Comprehensive income (loss) 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 securities
at fair value. These securities were included in other current assets during the
year ended December 31, 2000 and in short-term investments in marketable
securities at September 30, 2001. The following table displays the fair value,
cost basis, and realized/unrealized gain (loss) of the company's
available-for-sale securities (in thousands):
December 31, 2000 September 30, 2001
--------------------------------- -------------------------------------------
Cost Unrealized Fair Cost Realized Unrealized Fair
Basis Gain/(Loss) Value Basis Gain/(Loss) Gain/(Loss) Value
--------------------------------- -------------------------------------------
Available-for-sale:
ITC $ 6,000 $ (900) $ 5,100 $ 6,000 $ - $ (5,232) $ 768
Teltran - - - 743 (589) - 154
InsiderStreet.com 2,478 (2,478) - 2,478 (2,478) - -
--------------------------------- -------------------------------------------
Totals $ 8,478 $ (3,378) $ 5,100 $ 9,221 $ (3,067) $ (5,232) $ 922
================================= ============================================
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- and nine-month periods ended September 30, 2001, the company
recorded impairment charges of approximately $0.3 and $5.9 million,
respectively, representing other-than-temporary declines in value of its
investment portfolio consisting of marketable securities and a warrant included
in other current assets. The $5.9 million impairment charge includes the
cumulative effect upon adoption of SFAS 138 of approximately $1.6 million
related to the revaluation of the warrant at fair value which is reflected in
our consolidated statements of operations. See Other (income) expense, net below
and Note 4 - Recent Accounting Pronouncements for further details.
Accounts receivable comprise the following (in thousands):
December 31, September 30,
2000 2001
-------------- --------------
Technology license fees and royalties $ 4,597 $ -
Joint ventures and affiliates 76 76
Other trade receivables 880 1,162
-------------- --------------
Gross accounts receivable $ 5,553 $ 1,238
Allowance for doubtful accounts (70) (88)
-------------- --------------
Accounts receivable, net of reserves $ 5,483 $ 1,150
============== ==============
Inventories comprise the following (in thousands):
December 31, September 30,
2000 2001
-------------- --------------
Components $ 603 $ 486
Finished goods 1,681 1,789
-------------- --------------
Gross inventories $ 2,284 $ 2,275
Reserve for obsolete & slow moving inventory (100) (100)
-------------- --------------
Inventories, net of reserves $ 2,184 $ 2,175
============== ==============
Other current assets comprise the following (in thousands):
December 31, September 30,
2000 2001
-------------- --------------
Investment in warrant $ 3,089 $ 291
Notes receivable - 1,314
Due from unaffiliated company 743 -
Prepaid royalties - 625
Prepaid financing charges - 191
Other 993 520
-------------- --------------
Other current assets $ 4,825 $ 2,941
============== ==============
Other assets (long term) comprise the following (in thousands):
December 31, September 30,
2000 2001
-------------- --------------
Marketable securities $ 5,100 $ -
Investment in unconsolidated subsidiaries 1,500 1,514
Advances and deposits 663 808
Deferred charges 534 1,128
Other 197 71
-------------- --------------
Other assets $ 7,994 $ 3,521
============== ==============
Marketable securities were reclassified and are included in investment in
marketable securities at September 30, 2001.
Property and equipment comprise the following (in thousands):
Estimated
Useful Life December 31, September 30,
(Years) 2000 2001
----------- ------------ -------------
Machinery and equipment 3-5 $ 2,018 $ 2,869
Software costs 3-5 64 405
Furniture and fixtures 3-5 1,257 1,344
Leasehold improvements 7-10 1,139 1,965
Tooling 1-3 462 2,197
Projects under construction 3-5 - 991
Other 5-10 100 111
------------ -------------
Gross property and equipment $ 5,040 $ 9,882
Accumulated depreciation (4,352) (6,332)
------------ -------------
Property and equipment, net $ 688 $ 3,550
============ =============
Other current liabilities comprise the following (in thousands):
December 31, September 30,
2000 2001
-------------- --------------
Due to IPI on stock settlement $ 455 $ -
Due to ITC on NCT stock shortfall 812 1,355
Product development fee 800 800
Loan advance 500 -
Royalty payable 575 1,223
Other 80 197
-------------- --------------
Other current liabilities $ 3,222 $ 3,575
============== ==============
Statement of Operations Information:
Other (income) expense, net is comprised of the following (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
2000 2001 2000 2001
---- ---- ---- ----
Realized loss on available-for-sale securities $ - $ 121 $ - $ 3,067
Unrealized gain on trading securities - (482) - -
Realized loss on fair value of warrant - 199 - 1,216
Realized loss on sale of trading securities - 2,874 - 2,302
Impairment of goodwill - - 3,073 1,494
Other (222) - (153) (148)
--------------------- -----------------------
Total other (income) expense, net $ (222) $2,712 $2,920 $ 7,931
===================== =======================
Supplemental Cash Flow Disclosures:
(in thousands)
Nine months ended September 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 $ (398) $ (1,853)
============ ==============
Issuance of 13.3 million shares of common stock as consideration for shares in DMC New York, Inc. $ - $ 2,000
============ ==============
Issuance of 4.3 million shares of common stock upon conversion of promissory note default $ - $ 500
============ ==============
Issuance of common stock for acquisition of Midcore Software, Inc. $ 4,817 $ -
============ ==============
Issuance of common stock for acquisition of DMC Cinema, Inc. $ 2,500 $ -
============ ==============
Issuance of common stock in exchange for common stock of subsidiary $ - $ 984
============ ==============
Issuance of common stock in exchange for prepaid research and engineering expenses $ 3,000 $ -
============ ==============
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 notes for placement services rendered $ - $ 527
============ ==============
Issuance of notes for convertible notes as partial consideration for shares in DMC New York, Inc. $ - $ 1,000
============ ==============
Issuance of common stock for services $ - $ 435
============ ==============
Issuance of options and warrants for services $ - $ 438
============ ==============
Issuance of common stock in exchange for convertible note of subsidiary $ - $ 2,477
============ ==============
Issuance of common stock in exchange for preferred stock of subsidiary $ - $ 261
============ ==============
Property and equipment financed through capitalized leases $ - $ 356
============ ==============
Receipt of non-recourse notes as partial consideration for convertible note of subsidiary $ - $ 1,000
============ ==============
Receipt of Pro Tech common shares as partial consideration for convertible note subsidiary $ - $ 500
============ ==============
7. Stockholders' Equity (Deficit):
The changes in stockholders' equity (deficit) during the nine months ended
September 30, 2001 were as follows (in thousands):
Accum-
Unearned Expenses ulated
Accretion Net Compen- To be paid Other
Balance Exchange/ Dividend of Issuance of Stock satory with Compre- Balance
at Conversion of Preferred Common Subscription Options/ Net Common hensive At
12/31/00 Preferred Stock Stock Stock Receivable Warrants Loss Stock Loss 9/30/01
-------- --------------- ---------- ----------- ------------ -------- ------ ---------- --------- --------
Series G Preferred Stock:
Shares 1 (1) - - - - - - - -
Amount $ 574 (864) 290 - - - - - - $ -
Common Stock:
Shares 334,150 7,218 - 62,646 - - - - - 404,014
Amount $ 3,341 73 - 626 - - - - - $ 4,040
Treasury Stock:
Shares 6,078 - - - - - - - - 6,078
Amount $ (2,963) - - - - - - - - $ (2,963)
Additional
Paid-in Capital $ 154,838 793 (290) 4,683 - - - - - $ 160,024
Accumulated
(Deficit) $(141,799) - - - - - (24,957) - - $(166,756)
Accumulated
Other Comprehensive
Loss $ (3,321) - - - - - - - (1,916)$ (5,237)
Stock
Subscription
Receivable $ (213) - - - 213 - - - - $ -
Expenses to be
Paid with
Common Stock $ (562) - - - - - - 291 - $ (271)
Unearned
Compensatory
Stock Option $ (37) - - - - 14 - - - $ (23)
8. Convertible Notes:
NCT Group, Inc. Convertible Notes Issued to Carole Salkind
As of September 30, 2001, NCT is in default on repayment of its secured
convertible notes dated August 25, 1999 and September 19, 1999, representing an
aggregate convertible note principal balance of $0.75 million due Carole
Salkind, spouse of a former NCT director and an accredited investor. The default
provisions in these notes imposed a default penalty of $75,000 (10% of the
principal payments in default). Default interest from the date of default was
due on the aggregate principal in default and the default penalty amount at the
rate of prime plus 5%. The company is negotiating a cure for these defaults.
On September 14, 2001, NCT defaulted on the repayment of a $1.4 million
secured convertible note held by Carole Salkind. The default provision 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 was due
on the principal in default and the default amount at the rate of prime plus 5%.
On September 28, 2001, Ms. Salkind agreed to fund another $1.0 million and to
roll the $1.4 million and default penalty due under the note in default into a
new note for an aggregate of $2.5 million. This note matures on September 28,
2002 and bears interest at 2% above the prime rate as published in The Wall
Street Journal. In connection with this new note, we issued Ms. Salkind a
warrant to acquire 1.0 million shares of NCT common stock at an exercise price
of $0.115 per share. Ms. Salkind has the right to convert any part of the
outstanding and unpaid amount of the note into common stock of (a) the company
at the lower of (i) the average closing bid price for the five trading days
prior to the conversion or (ii) $.093 per share, or (b) Artera International or
(c) Distributed Media Corporation International Ltd., known as DMCI (a
wholly-owned subsidiary of NCT), in the case of (b) and (c) at the respective
conversion prices described in the note. In accordance with The FASB Emerging
Issues Task Force Issue No. ("EITF") 98-5, as codified in EITF 00-27, we
recorded a beneficial conversion feature of $0.7 million in connection with the
September 28, 2001 convertible note recorded during the third quarter of 2001.
The discount is deemed to be a "beneficial conversion" feature and is 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 through
the maturity date of the debt. For the nine months ended September 30, 2001, the
company recognized interest expense in the amount of $5,794 with respect to this
discount. The company valued the warrant using the Black-Scholes option pricing
model and recorded a discount to the note and, credited additional paid-in
capital for $0.1 million. The discount is to be recognized as interest expense
through the maturity date of the debt. For the nine months ended September 30,
2001, the company recognized interest expense in the amount of $864 with respect
to this warrant.
On August 22, 2001, we cured defaults on repayment of notes dated June 4,
1999, June 11, 1999, July 2, 1999 and July 23, 1999, representing an aggregate
convertible note principal balance of $1.25 million due Carole Salkind. (See
discussion of notes relating to Carole Salkind's January 26, 1999 subscription,
below.) The default provisions in these notes imposed an aggregate default
penalty of $125,000 (10% of the principal payments in default). Default interest
from the date of default was due on the aggregate principal in default and the
default penalty amount at the rate of prime plus 5%. NCT cancelled the notes
aggregating $1.2 million and issued a new convertible note to Ms. Salkind for
$1.7 million due December 22, 2001. We also granted Ms. Salkind a five-year
warrant to purchase 625,000 shares of NCT's common stock at an exercise price of
$0.093 per share. The new note is (1) convertible into shares of NCT common
stock at $0.093 per share, (2) exchangeable for shares of common stock of Pro
Tech at an exercise price of $0.14 per share (3) exchangeable for shares of
common stock of Artera International at Artera International's initial public
offering price or (4) exchangeable for shares of common stock of DMCI at DMCI's
initial offering price. The convertible note earns interest at the prime rate.
In accordance with EITF 98-5, as codified in EITF 00-27, we recorded a
beneficial conversion feature of $239,149 in connection with the August 22, 2001
convertible note recorded during the third quarter of 2001. The discount is
deemed to be a "beneficial conversion" feature and is 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 through the
maturity date of the debt. For the nine months ended September 30, 2001, the
company has recognized interest expense in the amount of $78,409 with respect to
this discount. The company valued the warrant using the Black-Scholes option
pricing model and recorded a discount to the note and credited additional
paid-in capital for $0.1 million. The discount is being amortized through the
maturity date of the debt. For the nine months ended September 30, 2001, the
company has recognized interest expense in the amount of $19,414 with respect to
this warrant.
On May 14, 2001, the company cured a January 25, 2001 default on the
repayment of a $1.0 million secured convertible note held by Carole Salkind. The
default provisions in the note imposed a default penalty of $0.1 million (10% of
the principal payment in default). Default interest from the date of default was
due on the principal in default and the default penalty amount at the rate of
prime plus 5%. NCT cancelled the $1.0 million note and issued a new four-month
convertible note to Ms. Salkind in the amount of $1.4 million and granted her a
five year warrant to purchase 0.5 million shares of NCT's common stock at an
exercise price of $0.13 per share. The convertible note earns interest at the
prime rate. Under the note, Ms. Salkind has the right to convert the note into
shares of common stock of the company, to exchange the note for shares of common
stock of Artera International or to exchange the note for shares of common stock
of DMCI, at conversion or exchange prices, respectively, set forth in the note.
In accordance with EITF 98-5 as codified in EITF 00-27, we recorded a beneficial
conversion feature of $57,690 in connection with the May 14, 2001 convertible
note recorded during the second quarter of 2001. The beneficial conversion
feature is accounted for as a discount to the note and is allocated to a
component of additional paid-in capital. For the nine months ended September 30,
2001, the company recognized $57,690 of interest expense in its consolidated
statements of operations. The company valued the warrant using the Black-Scholes
option pricing model and recorded a discount to the note and credited additional
paid-in capital for $0.1 million. The discount was recognized as interest
expense through the maturity date of the debt. For the nine months ended
September 30, 2001, the company recognized the $57,690 with respect to this
warrant.
On February 13, 2001, the company issued a 60-day, $0.5 million convertible
note bearing interest at 7% per annum to Carole Salkind, together with a warrant
for Ms. Salkind to purchase either $0.5 million of the common stock of NCT at
$0.21 per share or the common stock of NCT's subsidiary Pro Tech Communications,
Inc., known as Pro Tech, at $0.44 per share. The consideration consisted of $0.5
million cash which NCT used for working capital purposes. The company valued the
warrant using the Black-Scholes option pricing model and recorded a discount to
the note and credited additional paid in capital for $0.5 million. The discount
was recognized as interest expense through the maturity date of the debt. For
the nine months ended September 30, 2001, the company recognized $458,531 of
interest expense with respect to this warrant. In accordance with EITF 98-5, as
codified in EITF 00-27, we recorded a beneficial conversion feature of $41,469
in connection with the February 13, 2001 convertible note recorded during the
first quarter of 2001. This beneficial conversion feature was limited to the
carrying value of the note less the discount related to fair value of the
warrant. This beneficial conversion feature is accounted for as a discount to
the note and allocated to a component of additional paid-in capital. The
discount was recognized as interest expense through the maturity date of the
debt. On April 14, 2001, NCT defaulted on the repayment of the February 13, 2001
note held by Carole Salkind. As a result, a penalty of 10% of the principal in
default, or $50,000, became due. On May 18, 2001, the company cured this
default. Ms. Salkind 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 nine months ended September 30, 2001, we recorded $0.2 million as
debt conversion expense included in interest 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 the note on
May 18, 2001.
On January 26, 1999, Carole Salkind subscribed 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. The secured convertible notes are collateralized by substantially
all of the company's assets owned or thereafter acquired. Ms. Salkind has the
right to convert any part of the outstanding amount of the notes into shares of
common stock of the company at the respective conversion prices described 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 the secured convertible
notes.
Other NCT Group, Inc. Convertible Notes
On April 12, 2001, pursuant to the exchange agreement as discussed in Note
12 - Commitments and Contingencies, with Crammer Road, NCT issued Crammer Road a
convertible note of $1.0 million. The consideration from Crammer Road 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 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 the shares of our common stock that may be issued 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
beneficial conversion feature is 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 through the maturity date of the debt.
On April 12, 2001, NCT entered into a subscription agreement with an
accredited investor, Alpha Capital Aktiengesellschaft, known as 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 third party, a $8,750 convertible note
as finder's compensation. The consideration from the investor consisted of
$125,000 cash, which NCT used 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 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 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 during the second quarter of 2001. The beneficial conversion feature is
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
through the maturity date of the debt.
On March 14, 2001, NCT entered into a subscription agreement with Alpha
Capital pursuant to a private placement of a $0.3 million convertible note to
the investor. We also issued to Libra Finance S.A., a third party, a $17,500
convertible note as finder's compensation. The consideration from the investor
consisted of $250,000 cash, which NCT used 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 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 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 $66,875 in connection with the March
14, 2001 convertible notes recorded during the first quarter of 2001. The
beneficial conversion feature is 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 through the maturity date of the debt.
Artera Group, Inc. 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 used 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 paid for a third
party finder's fee and legal expenses. 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 through the maturity date of the debt. For the nine months
ended September 30, 2001, the company recognized $62,502 of interest expense in
its consolidated statements of operations. 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. Due to the OID, 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 ten 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 of its common stock 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 used 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 through the maturity date of the
debt. For the nine months ended September 30, 2001, the company recognized
$26,042 of interest expense in its consolidated statements of operations. 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. Due to
the OID, 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 ten 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 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 its common
stock for resale for the exchange of these Artera notes.
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. The consideration from the investors for the convertible
notes aggregated $0.7 million, net of expenses, and consisted of cash. Artera
used the proceeds from the issuance of the notes for working capital purposes.
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 through the maturity date of the
debt. For the nine months ended September 30, 2001, the company recognized
$86,040 of interest expense in its consolidated statements of operations. 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. Due to
the OID, 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 ten 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 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 its shares of
common stock for the exchange of these Artera notes.
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 used the proceeds from the
issuance of the notes for working capital purposes. Consideration 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 Teltran 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 sheets as a direct deduction from the face amount of the notes with the
resulting OID being amortized through the maturity date of the debt. For the
nine months ended September 30, 2001, the company recognized $1.9 million of
interest expense in its consolidated statements of operations. 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. Due to the OID,
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 ten 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. 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 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 will be obligated to issue upon the
exchange of these Artera convertible notes under Registration Statement No.
333-47084, effective February 12, 2001. We are obligated to register additional
shares for the exchange of the Artera convertible notes. During the nine months
ended September 30, 2001, $2.5 million of convertible note principal, plus
interest, were exchanged into 19,271,163 shares of NCT's common stock.
NCT Video Displays, Inc. Convertible Note
On April 12, 2001, NCT Video Displays, Inc., known as NCT Video, our
subsidiary, entered into a subscription agreement with Crammer Road whereby NCT
Video issued a $0.5 million convertible note to Crammer Road for $0.5 million in
cash. 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 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 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 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 during
the second quarter of 2001. The beneficial conversion feature is 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 through the
maturity date of the debt.
9. Litigation:
On June 6, 2001, Production Resource Group began legal proceedings against
NCT and our subsidiary Distributed Media Corporation, known as DMC, in the
Superior Court for the Judicial District of Fairfield County, Connecticut.
Production Resource Group's complaint alleges that NCT and DMC breached the
terms of a July 19, 1999 lease, promissory note and warrant entered into in
connection with the lease of some DMC Sight & Sound(TM) equipment. The complaint
also alleges that NCT and DMC breached a January 11, 2001 resolution agreement
designed to settle disputes between the parties concerning the July 19, 1999
transactions, that we breached a May 11, 2001 agreement designed to settle
disputes between the parties concerning the July 19, 1999 transactions and the
January 11, 2001 resolution agreement, and that we engaged in misrepresentations
and fraud in connection with these matters. The plaintiff filed an application
for pre-judgment remedy seeking to attach or garnish $2.25 million of our
assets. On July 26, 2001, the court returned an order for pre-judgment remedy
having found probable cause to sustain the validity of Production Resource
Group's claim and gave Production Resource Group the right to attach or garnish
up to $2.1 million of specified assets of NCT and Distributed Media Corporation.
As of November 14, 2001, approximately $60,000 in NCT's cash or cash equivalent
assets have actually been attached or garnished. On October 4, 2001, we filed an
answer to the plaintiff's complaint, generally denying the plaintiff's
allegations, seeking dismissal of the complaint and counterclaiming for breach
of Production Resource Group's obligation to deliver equipment. We have recorded
all anticipated liability related to this matter. We anticipate little or no
impact on DMC's ongoing operations as a result of the resolution of this
litigation. An adverse judgment against us, however, could be material to our
cash position.
On December 6, 2000, our subsidiary DMC Cinema (formerly known as Theater
Radio Network) filed suit against InsiderStreet.com, Inc. in the Circuit Court
of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The
complaint alleges that InsiderStreet breached a May 5, 2000 Advertising
Agreement with Theater Radio Network and seeks a declaratory judgment and
specific performance of the agreement. The agreement provided that, in exchange
for advertising services performed by Theater Radio Network, InsiderStreet would
deliver to Theater Radio Network $3.0 million in common stock of InsiderStreet,
with an adjustment in the number of shares to ensure that the total stock
delivered was worth at least $2.0 million on May 10, 2001 and with registration
of all stock delivered. InsiderStreet has to date made only a partial delivery
of shares and has not registered any of the shares delivered. Discovery in this
litigation has recently begun. On October 23, 2001, Theater Radio Network
terminated its representation by outside counsel in this action due to a
possible conflict of interest. Theater Radio Network expects to retain new
counsel shortly to continue this action.
On February 5, 2001, Steven Esrick, a former shareholder of Theater Radio
Network, filed suit against DMC Cinema (formerly known as Theater Radio Network)
and Theater Radio Network's former Chief Executive Officer and President in the
Circuit Court of the Sixth Judicial Circuit for Pinellas County, Florida. The
plaintiff claims that Theater Radio Network breached an alleged oral escrow
agreement with the plaintiff arising out of the sale of Theater Radio Network
stock to DMC Cinema by Theater Radio Network's shareholders and seeks
unspecified damages. On March 7, 2001, DMC Cinema 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, DMC Cinema filed for
dismissal of the case against it, with prejudice, due to the plaintiff's failure
to state a claim upon which relief may be granted. A hearing on that motion is
scheduled for November 20, 2001. DMC Cinema 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 in a
Maryland state court against NCT and Michael J. Parrella, our Chief Executive
Officer and Director. The complaint alleges that NCT breached, and Mr. Parrella
interfered with, a purported contract entered into in 1996 between NCT and
Schwebel Capital. Schwebel Capital claims that under the contract, NCT agreed to
pay Schwebel Capital commissions when NCT received capital from its investors.
The complaint further alleges that Schwebel Capital is due commissions totaling
$1.5 million because NCT refused to honor Schwebel Capital's right of first
refusal. Schwebel Capital's complaint sought $1,673,000 in compensatory damages,
$50,000 in punitive damages and $50,000 in attorneys' fees from NCT, as well as
$150,000 in compensatory damages, $500,000 in punitive damages and $50,000 in
attorneys' fees from Mr. Parrella. Subsequently, the court granted a motion to
dismiss the claims against Mr. Parrella. On August 8, 2001, NCT entered into a
settlement agreement with Schwebel Capital. NCT paid a nominal amount to settle
all remaining claims of Schwebel Capital against NCT. The settlement terminating
the litigation was approved by the court on or about September 7, 2001.
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 duties to a shareholder, NCT Audio
holds 15% of the outstanding stock of TSA, and breach of the obligations of good
faith and fair dealing. There were no material developments in this matter
during the period covered by this report. The parties to the arbitration are
currently engaging in discovery. The evidentiary hearing is scheduled to begin
January 2002.
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.
10. Common Stock Subject to Resale Guarantee:
During the nine months ended September 30, 2001, NCT has issued 1,013,868
shares of its common stock, with a resale guarantee feature, to suppliers and
consultants to satisfy current obligations totaling $604,683. Of these shares,
445,098 with an aggregate value of approximately $0.1 million, were issued to
discharge outstanding accounts payable claims aggregating approximately $0.6
million. In connection with this discharge, we recognized miscellaneous income
of approximately $0.5 million, which has been included in other (income)
expense, net on the consolidated statements of operations. During 2001,
suppliers and vendors sold common stock, valued at time of issuance at $0.4
million and realized $0.2 million in proceeds. In connection with the sale of
these shares, a $0.2 million liability for the shortfall due to the resale
guarantee feature is included in the company's consolidated balance sheet at
September 30, 2001.
11. Capital Stock:
On or about August 23, 2001, 2.0 million shares of NCT common stock issued
with a restrictive legend were sold in a private placement, at current market
value. The proceeds consisted of approximately $0.2 million in cash.
On July 30, 2001, Pro Tech entered into an agreement with Alpha Capital to
issue 500 shares of Pro Tech series B convertible preferred stock (Pro Tech
preferred stock-B) 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 Pro Tech preferred stock-B, which will be used for working capital
purposes. The rate at which the Pro Tech preferred stock-B is convertible into
Pro Tech common stock is 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 15 trading days preceding the date of such
conversion, less a discount of 20%, subject to certain adjustments set forth in
the Articles of Incorporation, as amended, of Pro Tech; or (ii) $0.25. NCT and
Alpha Capital entered into an exchange rights agreement under which the Pro Tech
preferred stock-B is exchangeable for shares of NCT common stock as to 50% from
and after six months, and as to 100% from and after one year, from the Pro Tech
preferred stock-B issue date. The rate at which the Pro Tech preferred stock-B
is exchangeable into NCT common stock is the lowest average of the average
closing bid price for a share of NCT common stock for any consecutive five
trading days out of the 15 trading days preceding the date of such conversion,
less a discount of 20%. In accordance with EITF 98-5, as codified in EITF 00-27,
Pro Tech recorded a beneficial conversion feature of $125,000 in connection with
the Pro Tech preferred stock-B issuance which resulted in a reduction to the
outstanding balance of the preferred stock and an increase to additional paid-in
capital. The beneficial conversion feature is to be recognized as an increase to
preferred stock and a decrease to additional paid-in capital over the period
from the date of issuance (July 30, 2001) to the date of earliest conversion
(January 30, 2002). At September 30, 2001, $42,568 of the beneficial conversion
feature was recognized. In addition, under the agreement, Pro Tech issued a
warrant to purchase 1 million shares of its common stock. The warrant is
exercisable at $0.13 per share and expires on July 30, 2004. The $0.5 million
proceeds were recorded, by Pro Tech, as $0.3 million for the preferred shares,
$0.1 million for the warrants, and $0.1 million for the beneficial conversion
feature, based on their relative fair values. The company valued the warrant,
using the Black-Scholes option pricing model, at $63,000. The $63,000 is
included in the calculation of income/(loss) attributable to common stockholders
on the condensed consolidated statements of operations for the three and nine
months ended September 30, 2001.
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 Artera
preferred stock-A. Each of the ten holders of Artera preferred stock-A is
entitled to exchange the Artera preferred stock-A 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 of its common stock
for the exchange of Artera preferred stock-A. Pursuant to the exchange rights
agreement, NCT has the option at any time to redeem any outstanding Artera
preferred stock-A by paying the holder cash equal to the aggregate stated value
of the number of shares of Artera preferred stock-A being redeemed (together
with accrued and unpaid dividends thereon). See Note 2 - Acquisitions for
further details.
On April 12, 2001, NCT and Crammer Road finalized a new equity credit
agreement and cancelled their private equity credit agreement dated September
27, 2000. Under the new private equity credit agreement, we are required to put
$17 million of our common stock to Crammer Road in exchange for 12,000 shares of
DMC NY and cash in the amount of approximately $3.0 million pursuant to monthly
notices. Our monthly put notices were required to commence no later than October
1, 2001; however, we have not delivered any put notices to date. See Note 12 -
Commitments and Contingencies for further details.
On April 12, 2001, the company entered into an exchange agreement with
Crammer Road. Pursuant to the exchange agreement, the company issued to Crammer
Road 13,333,333 shares of NCT common stock in exchange for 2,000 shares of
common stock of DMC NY for an aggregate value of $2.0 million. According to the
terms of the exchange agreement, NCT is also obligated to issue Crammer Road
additional shares, known as the Reset Shares, of NCT common stock if the closing
bid price of the NCT common stock for the five business days prior to the day
before we request acceleration of the effectiveness of the registration
statement (referred to below) is less than $0.16 per share. We are obligated to
register these issued shares of common stock and the shares of common stock that
may be needed in order to provide the Reset Shares under a registration
statement with the Securities and Exchange Commission.
NCT also agreed to acquire from Crammer Road in July 2001 an additional
1,000 shares of DMC NY common stock for $1.0 million in cash or other marketable
securities. To date, we have not acquired the additional 1,000 shares of DMC NY
but are negotiating the terms of such acquisition with Crammer Road. We paid
$100,000 to Crammer Road in September 2001.
On March 30, 2001, NCT and NXT plc, known as NXT, entered into agreements,
known as the new NXT agreements, 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 NXT
agreements, NCT received 2.0 million ordinary NXT shares in consideration of the
cancellation of the 6% royalty payable by NXT to NCT Audio Products, Inc., known
as NCT Audio, a subsidiary of NCT. The NXT shares, upon issuance, had a value of
approximately $9.2 million. In addition, ownership of specified intellectual
property, the rights to which were previously granted to NXT, was transferred to
NXT. NXT licensed to NCT and its subsidiaries some 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 DMCI. Under a separate
agreement, NCT guaranteed payment of $0.6 million as a design fee and minimum
royalty. Also under the new NXT 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. At March 31, 2001, the company recorded the
receipt of the $9.2 million of NXT ordinary shares as an investment in
marketable securities and classified these ordinary shares as trading
securities. Though this reorganization of the existing cross-license agreements
consists of separate and unrelated agreements, the company and its auditors
determined that these agreements should be accounted for as a single
transaction. The amended cross-license agreement and design and minimum royalty
agreements are combined for financial reporting purposes. At March 31, 2001, the
company recorded $8.6 million as deferred revenue and is recognizing this
revenue over a 48-month period commencing April 1, 2001. For the nine months
ended September 30, 2001, the company recognized $1.1 million of license fee
revenue with respect to this transaction. At September 30, 2001, deferred
revenue included $7.5 million related to the NXT transaction of which $2.1
million was classified as a current liability.
During the nine months ended September 30, 2001, the company received $6.9
million in cash proceeds from the sale of 2.0 million NXT ordinary shares, net
of fees and expenses. Under the new NXT agreements, the company has a
requirement to apply at least 66% of the proceeds received from the sale of
these shares to the development of the business of Distributed Media
Corporation. The company realized a loss of approximately $2.3 million from the
sale of the NXT ordinary shares, which is included in other (income) expense,
net in the company's consolidated statements of operations for the nine-month
period ended September 30, 2001.
During the nine months ended September 30, 2001, the company issued
warrants for 3.1 million shares of its common stock to several outside
consultants to the company with exercise prices ranging from $0.093 to $0.59 per
share. The company valued the warrants using the Black-Scholes option pricing
model and credited additional paid-in capital and recorded a charge for
consulting services for $0.4 million at September 30, 2001 and the period then
ended in the accompanying consolidated financial statements.
During the nine months ended September 30, 2001, the company issued
five-year warrants to Carole Salkind to acquire an aggregate of 4.5 million
shares of NCT common stock at prices ranging from $0.093 to $0.21 per share. The
company valued the warrants using the Black-Scholes option pricing model and
credited additional paid-in capital for $0.7 million and recorded a charge to
interest expense for the amortized portion of $0.6 million in the accompanying
consolidated financial statements for the nine months ended September 30, 2001.
These warrants were in conjunction with new loans to NCT by Ms. Salkind. See
Note 8 - Convertible Notes for further details.
During the nine months ended September 30, 2001, NCT issued an aggregate of
3,165,495 shares of its common stock to suppliers and consultants. See Note 10 -
Common Stock Subject to Resale Guarantee for a discussion of 1,013,868 of these
shares issued with a resale guarantee feature. The remaining 2,151,627 of these
shares were issued without a resale guarantee feature, of which 171,429 were for
future obligations totaling $60,000 and 1,980,198 were for current obligations
totaling $200,000.
During the nine months ended September 30, 2001, NCT issued 7,218,150
shares of its 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. At September 30, 2001, there were
no shares of series G preferred stock outstanding.
During the nine months ended September 30, 2001, NCT issued 2,499,576
shares of its common stock in connection with the exchange of 254 shares of Pro
Tech's series A convertible preferred stock, which had been issued in September
2000. In connection with the issuance, NCT recorded a decrease in the minority
interest in subsidiary and an increase to additional paid-in capital of
approximately $0.2 million. At September 30, 2001, there were 84 shares of Pro
Tech's series A convertible preferred stock outstanding.
During the nine months ended September 30, 2001, 597 shares of NCT Audio
common stock were exchanged for 4,824,068 shares of NCT's common stock,
including the 3,850,000 shares issued to NXT noted above. In connection with the
exchange, the company recorded a non-cash charge of $1.5 million for the
impairment of goodwill based on the valuation of NCT Audio, which is included in
other (income) expense, net.
During the nine months ended September 30, 2001, $2.5 million of Artera
convertible debt principal, plus interest, was exchanged for 19,271,163 shares
of NCT's common stock. At September 30, 2001, $5.1 million of convertible debt
principal remained that could be either converted into Artera common stock or
exchanged for NCT common stock.
At September 30, 2001, the aggregate number of shares of NCT common stock
required to be reserved for issuance upon the exercise of all outstanding
options and warrants granted was 89.2 million shares. NCT is also obligated to
reserve shares of its common stock for various purposes, including for issuance
upon conversion of convertible preferred stock and convertible debt of NCT as
well as upon exchange of common stock and debt instruments of NCT subsidiaries.
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. NCT has committed to
issue more shares of common stock than it is authorized to issue at September
30, 2001.
On August 10, 2000, the company's subsidiary, ConnectClearly.com, Inc.,
known as CCC, entered into an agreement with three accredited investors calling
for the issuance of 1,000 shares of CCC common stock in consideration for $0.5
million in cash and the cancellation of promissory notes payable to two of the
investors in the aggregate principal amount of $0.5 million. These CCC common
shares are exchangeable for shares of NCT common stock. In the first nine 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 NCT common stock, we
recorded an increase to our goodwill in CCC and an increase to our additional
paid-in capital of $0.9 million.
On February 9, 2001, in accordance with a "fill-up" provision of the
agreement by which DMC Cinema acquired Theatre Radio Network, Inc., known as
TRN, NCT issued an additional 2,455,248 shares of its common stock due to a
decline in the trailing market price prior to the effective date of the
registration of shares of our common stock issued to the TRN shareholders. The
additional shares issued to the selling shareholders with respect to the fill-up
provision were based upon a trailing 20-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 Cinema pursuant to an earn-out provision of the
agreement by which TRN was acquired. The TRN selling shareholders have
registration rights for these additional shares. The earn-out provides as
follows: if DMC Cinema has accrued revenue of at least $3.3 million between
August 1, 2000 and December 31, 2001, a number of shares of NCT common stock
having a value of $1.22 million based upon the trailing 20-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 $3.3 million, then the number of shares of
NCT common stock to be issued would be prorated to the number (based upon the
trailing 20-day closing bid price on December 31, 2001) equal to the product of
$1.25 million multiplied by a fraction which is the actual accrued revenue for
the period divided by $3.3 million. Further, if DMC Cinema has accrued revenue
of at least $4.7 million between August 1, 2000 and June 30, 2002, an additional
number of shares of NCT common stock having a value of $1.225 million based upon
the trailing 20-day closing bid price on June 30, 2002 will be issued. If DMC
Cinema's accrued revenue for the period is less than $4.7 million, then the
number of shares to be issued will be prorated to that number of shares of NCT
common stock having a value (based upon the trailing 20-day closing bid price on
June 30, 2002) equal to the product of $1.25 million multiplied by a fraction
which is the actual accrued revenue for the period divided by $4.7 million. 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.
On February 9, 2001, we issued an additional 2,863,894 shares of our common
stock to the selling shareholders of Midcore Software, Inc. The number of
additional shares issued to the selling shareholders was determined under a
contractual fill-up provision and was based upon the closing bid price of
$0.2470 to makeup for the diminished value. The issuance of the additional
shares did not affect the cost of the acquired company.
12. Commitments and Contingencies:
NCT may have a contingent liability arising out of a possible violation of
Section 5 of the Securities Act of 1933, as amended, known as the Securities
Act, in connection with the issuance of shares of its common stock to satisfy
payment obligations to some of its service providers, vendors and other third
parties (each, a "Vendor"). Should a court determine that a violation of Section
5 has occurred, each Vendor may have a right for a period of one year from the
date of the purchase to obtain recovery of the consideration given in connection
with the purchase of common shares offered in violation of the Securities Act
or, if it has already sold the stock, to sue the company for damages resulting
from the purchase of common shares to the extent the net proceeds received were
insufficient to cover the company's obligations to the Vendor.
On April 12, 2001, NCT and Crammer Road cancelled the private equity credit
agreement dated September 27, 2000 and finalized a new equity credit agreement.
Under the September 27, 2000 credit agreement, we received $0.5 million from
Crammer Road and issued Crammer Road 2.8 million shares of our common stock. The
new credit agreement provides that shares of up to $50 million of our common
stock may be sold to Crammer Road pursuant to put notices delivered by the
company to Crammer Road. The terms of the credit agreement obligate the company
to put $17 million of our common stock, known as the minimum commitment amount,
to Crammer Road. The minimum commitment amount provides for the sale of NCT's
common stock to Crammer Road at an accelerating discount to the market price of
our common stock 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. We estimate that
the accelerating discount to the market price of our common stock on the first
$12 million of puts may be up to 35% because after the initial discount of
12.5%, the discount increases each month after May 27, 2001 by 2% and our
required monthly put amount may vary based upon trading volume of our common
stock. In exchange for the first $17 million of our shares under the minimum
commitment amount, Crammer Road is obliged to deliver to us 12,000 shares of
common stock of DMC NY and cash in the aggregate amount of $3.0 million. There
is no independent valuation to support the fair market value of DMC NY. The
company's Board of Directors has made a determination that the agreed upon price
for DMC NY is fair. Monthly put notices were required to have been delivered
commencing October 1, 2001, although NCT has made no such deliveries to date.
Each monthly put notice up to the $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 20 trading days preceding the 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 Road (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 Road beyond the minimum commitment amount 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 20 trading days preceding the 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. We issued a warrant to Crammer Road 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 Road under
the September 27, 2000 credit agreement was cancelled. Furthermore, for each
$0.1 million of our common stock sold under the new credit line, Crammer Road 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 of
our common stock for 20 trading days prior to issuance of the warrant. To date,
the company has not sold any shares of its common stock under this agreement. We
are required to file a registration statement on Form S-1 registering for resale
no less than 125% of the number of shares of our common stock that are issuable
pursuant to the minimum commitment amount under the credit line. The resale
registration statement covering these credit line shares was required to have
been effective by September 15, 2001. However, because no put notices have yet
been delivered by NCT to Crammer Road, NCT has not incured any liability as a
result of the passage of that date. Additionally, if we fail to issue and
deliver shares for the minimum commitment amount during the commitment period,
which terminates 18 months after the commitment period begins, NCT is obligated
to pay Crammer Road in immediately available funds an amount equal to the
product of (i) the minimum commitment amount, less the aggregate value of shares
of our common stock actually delivered to Crammer Road under the credit line and
(ii) the then applicable discount.
On May 4, 2001, NCT Video and ViewBeam Technology, L.L.C., formerly known
as Advanced Display Technologies, L.L.C., 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. Some of the provisions of the Previous
Agreement remain in effect. The Agreement does not materially modify or change
the "development fee" to be paid by NCT Video but does modify the specifications
of the product design and the field of use to which the September 28, 2000
exclusive license was granted.
In May 2001, we signed 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 & Sound(TM) distributed media service in the Los
Angeles area. Under the letter of intent, Wells Investment Group 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. The structure of this
transaction is being negotiated. We hope to close on this transaction late in
the fourth quarter of 2001.
On February 28, 2001, Artera entered into a letter of intent with CompuHelp
Technologies, Inc., a national Internet service provider (ISP) 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 $0.5 million in
cash and $1.0 million in aggregate stated value of Artera series A convertible
preferred stock. Artera would also agree to assume up to $0.1 million 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 $2.0 million of Artera series A 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, the letter of intent to
acquire CompuHelp expired.
13. Business Segment Information:
Management views the company as being organized into three business
operating segments: Media, Communications and Technology. The Other operating
segment is used to reconcile the reportable segment data to the consolidated
financial statements and is segregated into two categories, Other-corporate and
Other-consolidating.
Other-corporate consists of items maintained at the company's corporate
headquarters and not allocated to the segments. This includes most of the
company's debt and related cash and equivalents and related net interest
expense, some litigation liabilities and non-operating fixed assets. Also
included in the components of revenues attributed to Other-corporate are license
fees and royalty revenues from subsidiaries which are offset (eliminated) in the
other-consolidating column. Other-consolidating consists of items eliminated in
consolidation, such as intercompany revenues.
During the nine months ended September 30, 2001, no geographic information
for revenues from external customers or for long-lived assets is disclosed as
our primary market and capital investments, were concentrated in the United
States.
Reportable segment data for the three and nine-month period ended September
30, 2001 and September 30, 2000, is as follows (in thousands):
Segment
-----------------------------------------------------------------------------------
Reportable -------- Other ------------- Grand
Media Communications Technology Segments Corporate Consolidating Total
-----------------------------------------------------------------------------------
For the three months ended September 30, 2001:
License Fees and Royalties $ 868 $ 685 $ 173 $ 1,726 $ 38 $ (5) $ 1,759
Other Revenue - External 32 1,274 - 1,306 - - 1,306
Other Revenue - Other Operating
Segments 38 184 - 222 - (222) -
(Loss) Income before cumulative effect of
accounting change (4,186) (3,625) (172) (7,983) (540) 465 (8,058)
Cumulative effect of accounting change - - - - - - -
Net (Loss) Income (4,186) (3,625) (172) (7,983) (540) 465 (8,058)
For the three months ended September 30, 2000:
License Fees and Royalties $ 1,333 $ 2,791 $ 3,550 $ 7,674 $ 4,870 $ (5,228) $ 7,316
Other Revenue - External 484 336 - 820 - (127) 693
Other Revenue - Other Operating
Segments 105 11 - 116 - (116) -
(Loss) Income before cumulative effect of
accounting change (128) (2,473) 3,563 962 7,116 (4,438) 3,640
Cumulative effect of accounting change - - - - - - -
Net (Loss) Income (128) (2,473) 3,563 962 7,116 (4,438) 3,640
Segment
-----------------------------------------------------------------------------------
Reportable -------- Other ------------- Grand
Media Communications Technology Segments Corporate Consolidating Total
-----------------------------------------------------------------------------------
For the nine months ended September 30, 2001:
License Fees and Royalties $ 2,076 $ 1,894 $ 1,656 $ 5,626 $ 10,111 $ (10,027) $ 5,710
Other Revenue - External 1,076 3,586 - 4,662 - - 4,662
Other Revenue - Other Operating
Segments 441 605 - 1,046 - (1,046) -
(Loss) Income before cumulative effect of
accounting change (8,619) (10,591) (356) (19,566) 5,244 (9,053) (23,375)
Cumulative effect of accounting change - (1,582) - (1,582) - - (1,582)
Net (Loss) Income (8,619) (12,173) (356) (21,148) 5,244 (9,053) (24,957)
Segment Assets 38,080 29,833 1,687 69,600 17,255 (44,825) 42,030
For the nine months ended September 30, 2000:
License Fees and Royalties $ 1,724 $ 2,825 $ 3,550 $ 8,099 $ 5,853 $ (6,046) $ 7,906
Other Revenue - External 696 961 - 1,657 - (151) 1,506
Other Revenue - Other Operating
Segments 131 434 - 565 - (565) -
(Loss) Income before cumulative effect of
accounting change (4,025) (3,086) 3,349 (3,762) 2,305 (4,309) (5,766)
Cumulative effect of accounting change - - - - - - -
Net (Loss) Income (4,025) (3,086) 3,349 (3,762) 2,305 (4,309) (5,766)
Segment Assets 15,225 29,246 6,645 51,116 6,322 (19,502) 37,936
MEDIA:
NCT Audio Products, Inc.:
NCT Audio is engaged in the design, development and marketing of products,
which utilize innovative flat panel transducer technology. The products offered
by 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 include
Distributed Media Corporation, end-users, automotive original equipment
manufacturers and manufacturers of integrated aircraft cabin management systems.
Distributed Media Corporation International Ltd.:
DMCI utilizes advanced information 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.
Distributed Media Corporation:
DMC provides place-based broadcast and billboard advertising through a
microbroadcasting network of Sight & Sound(TM) systems within
commercial/professional settings. The Sight & Sound(TM) systems consist of flat
panel transducer-based speakers (provided by NCT Audio), a personal computer
containing DMC's Sight & Sound(TM) 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, Inc.:
DMC Cinema provides entertainment audio programming in multiplex cinemas
nationwide. We produce content that includes a mix of music, trivia, public
service announcements and audio advertisements (radio type advertisements). DMC
Cinema is dependent on advertising placements to achieve revenues. Theaters do
not pay for advertising or the CDs presently used; rather, advertisers pay. We
have employees who write script, organize music and place the advertisements in
a radio type format. The audio programming is sent to the theaters via CD
mailings on a periodic basis. All programming now being delivered to theaters
will be converted to the Sight & Sound(TM) 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 & Sound(TM)
system also continuously adjusts audio volume based on background noise so that
the audio is maintained at a foreground level.
DMC HealthMedia, Inc.:
DMC HealthMedia is targeting the installation of Sight & Sound(TM) systems
to hospital waiting rooms, cafeterias and doctors' lounges.
COMMUNICATIONS:
NCT Hearing Products, Inc.:
NCT Hearing designs, develops and markets active noise reduction headset
products to the communications headset and telephony headset markets. Its
product lines include the NoiseBuster(R) and ProActive(R) product lines. The
NoiseBuster 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
functions. The ProActive products consist of noise reduction headsets and
communications headsets for noisy industrial environments. The majority of NCT
Hearing's sales are in North America. Principal customers consist of end-users,
retail stores, original equipment manufacturers and the airline industry.
Pro Tech Communications, Inc.:
Pro Tech Communications, Inc., an 82%-owned subsidiary of NCT Hearing
Products, Inc. acquired in September 2000, is a provider of telemarketing
services and proprietary products and services to call centers. The principal
activity of Pro Tech is the design, development and manufacture of lightweight
telecommunications headsets and new audio technologies for applications in
fast-food, telephone and other commercial settings. It currently has marketing
agreements with major companies in the fast-food industry and with catalog and
Internet site distributors of telephone equipment, primarily in North America.
Pro Tech is comprised of three business units. Pro Tech's call center operation
runs a full service call center utilizing the latest customer relationship
management technology, and is focused on healthcare applications. Its
telecommunication system integration segment sells and installs analog, digital
and Internet protocol phone systems to call centers as well as to small and
medium-sized businesses. The headset products segment develops, manufactures and
distributes headsets and other communications products to the call center market
and fast-food markets. Pro Tech received an exclusive license from NCT Hearing
for active noise reduction technology as well as ClearSpeech noise and echo
cancellation technologies for use in lightweight cellular, multimedia and
telephony headsets. This technology will provide differentiation for Pro Tech
products.
Noise Cancellation Technologies (Europe) Ltd.:
The principal activity of Noise Cancellation Technologies (Europe) Ltd. is
the provision of research and engineering services to the company in the field
of active sound control technology. NCT Europe provides research and engineering
to NCT Audio, NCT Hearing, DMC and other NCT business units as needed. NCT
Europe also provides a marketing and sales support service to the company for
European sales.
Midcore Software, Inc.:
Midcore Software, Inc., a wholly-owned subsidiary of NCT, is 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 which 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. Midcore sells the
MidPoint product through a network of resellers as well as on the Internet. The
latest version of the product, MidPoint 5.0, became available in June 2001.
MidPoint 5.0 has been enhanced with an integrated ultra-secure firewall,
SoftHost(TM) distributed web hosting, major additions to its integrated e-mail
server and management features, improved support for broadband connections,
failed line detection with automatic backup, support for Microsoft's virtual
private network, enhanced connection management for digital, analog, cable, T1
and E1 lines, enhanced content control/site blocking and many more useful
features. MidPoint is available for a one-time license fee with prices starting
at $79 or as a subscription service with monthly fees as low as $9.99.
ConnectClearly.com, Inc.:
ConnectClearly was established for the purpose of developing technology for
the telecommunications market and in particular the hands-free market. The
technology includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression and Turbo Compression and ClearSpeech(R) Adaptive
Speech Filter(R). ClearSpeech-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-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, personal computer voice and music,
telephone answering devices, real-time multimedia multitasking, toys and games
and playback devices. ConnectClearly products include the ClearSpeech-Microphone
and the ClearSpeech-Speaker. The majority of ConnectClearly's sales are in North
America. Principal markets for ConnectClearly are the telecommunications
industries and principal customers are original equipment manufacturers, system
integrators and end-users.
Communications Division:
The Communications division within NCT Group, Inc. focuses on the
telecommunications market and in particular the hands-free market. The
Communications technology include 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 original equipment manufacturers, system
integrators and end-users.
Artera Group, Inc.:
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(TM) bytecode and C/C++
significantly enhancing the rate of instruction execution, which opens up many
new applications. Potential applications consist of the next generation home
appliances and automotive applications, smartcards for a variety of
applications, hearing aids and mobile communications devices.
NCT Video Displays, Inc.:
NCT Video develops commercial video and sound applications for sublicensing
to other NCT subsidiaries. NCT Video recently acquired the rights to
breakthrough low cost flat panel video display technology. DMCI will use this
technology to cost effectively deliver both moving and static images as part of
its Sight & Sound(TM) microbroadcasting system.
14. Subsequent Events:
On October 25, 2001, NCT reduced the exercise price of an October 26, 2000
warrant issued to Libra Finance S.A. as to 5.0 million shares of our common
stock from $0.32 to $0.08 per share. On or about October 25, 2001, Libra Finance
paid us $400,000 for the exercise of these 5.0 million warrant shares.
Additionally, Libra Finance was issued a warrant to purchase up to 20.0 million
shares of our common stock at $0.09 per share. We are obligated to register the
shares of common stock underlying the October 25, 2001 warrant.
On November 14, 2001, NCT reduced the exercise price on the remaining 5.0
million shares under the October 26, 2000 Libra Finance warrant from $0.32 to
$0.08. Exercise as to all or some of those 5.0 million shares is expected soon.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001
Caution Concerning Forward-Looking Statements
This report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of any number of factors, many of which
are beyond the control of management. NCT operates in a highly competitive and
rapidly changing environment and 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 customers; 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.
All references to years, unless otherwise noted, refer to our fiscal year,
which ends on December 31. All references to quarters, unless otherwise noted,
refer to the quarters of our fiscal year.
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 nine months ended September 30,
2001 consisted of approximately 55.1% in technology licensing fees and
royalties, 34.0% in product sales, 9.9% in advertising/media revenue, and 1.0%
in engineering and development services.
NCT 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.
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 through the first quarter of 2002. Such funds consist of
available cash and 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 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 Pro Tech Communications, Inc. series B convertible
preferred stock private placement; the Artera Group, Inc. series A convertible
preferred stock private placement; receipt of the NXT, plc 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," and in Note 8 - Convertible Notes and
Note 11 - Capital Stock.
RESULTS OF OPERATIONS
Three months ended September 30, 2001 compared to three months ended
September 30, 2000
Total revenues for the three months ended September 30, 2001 were $3.1
million compared to $8.0 million for the same period in 2000, a decrease of $5.0
million or 62.5%.
Technology licensing fees and royalties were $1.8 million in the three
months ended September 30, 2001 as compared to $7.3 million for the same period
in 2000, a decrease of $5.5 million. During the three months ended September 30,
2001, $1.4 million of license fee revenue is a result of our recognition of
deferred revenue in accordance with SAB 101, including $0.5 million as a result
of the NXT transaction. The 2000 period included $3.6 million of license fee
revenue from Infinite Technology Corporation in connection with a license
agreement for Advancel's Java(TM) Turbo-J technology and $2.5 million of license
fee revenue from Pro Tech.
NCT continues to realize royalties from other existing licensees including
Ultra, Oki and suppliers to United Airlines and other carriers. NCT recognized
approximately $0.1 million in royalty revenue during the three months ended
September 30, 2001 compared to $0.5 million during the same prior year period.
NCT recognized royalty revenues based upon periodic reports submitted by the
royalty obligors and believes the decrease in royalty revenue is attributable to
the timing of the receipt of royalty reports and an economic slowdown in the
communications sector in which Oki operates. 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 September 30, 2001, product sales were $1.2
million compared to $0.4 million for three months ended September 30, 2000, an
increase of $0.8 million or 200%, primarily due to the impact of acquisitions.
Excluding the effect of acquisitions, product sales decreased approximately $0.2
million, or 50%, due to declines in sales of communications products,
particularly the ClearSpeech(R) product line and sales of NCT Audio products,
particularly Gekko(TM) flat speakers. The decline in sales of communications
products is attributable to an economic downturn in that sector. The decrease in
speakers sold by NCT Audio was due to a lack of promotional effort and the lack
of available inventory in the sizes demanded. The lack of available inventory in
the necessary product mix is not expected to continue as we replenish our
supply. We expect stronger sales of Gekko(TM) flat speakers by NCT Audio as DMC
installs its Sight & Sound locations.
Gross profit margin on product sales, as a percentage of product revenues,
increased to 36.2% for the three months ended September 30, 2001 primarily due
to acquired companies compared to (5.5)% for the three months ended September
30, 2000. Excluding the effect of the acquisitions, the improvement in product
gross margin was due primarily to lower product royalty expense in the three
months ended September 30, 2001 compared to the same prior year period when
fixed minimum royalty expenses were required to be recognized in accordance with
our royalty arrangements with outside firms selling our products.
Advertising/media revenues were $22,000 for the three months ended
September 30, 2001 compared to $0.2 million for the same period in 2000.
Advertising/media revenues are derived from the sale of audio and visual
advertising in the Sight & Sound locations and in theaters. Advertisers pay us
in cash or other consideration such as marketable securities and include
advertising agencies, Internet media companies, a music promoter and a financial
planning entity. Cost of advertising/media revenue was $(0.1) million for the
three months ended September 30, 2001 compared to $0.4 million for the same
period in 2000.
For the three months ended September 30, 2001, selling, general and
administrative expenses totaled $5.0 million as compared to $2.7 million for the
three months ended September 30, 2000, an increase of $2.3 million or 85.2%,
primarily due to higher compensation, depreciation and amortization expenses 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.
Total costs and expenses included non-cash expenditures of: (i)
depreciation and amortization of $0.8 million in the three months ended
September 30, 2001 and $0.5 million in the same period in 2000; (ii) interest
expense of $1.5 million in the three months ended September 30, 2001 primarily
due to amortization of OID of $0.8 million, amortization of beneficial
conversion feature in convertible debt of $0.2 million and accrued costs on
certain convertible debt issued by the company of $0.1 million and zero during
the same period in 2000; and (iii) realized loss on marketable securities deemed
other-than-temporary of $0.1 million, a realized warrant fair value adjustment
of $0.2 million and a $2.9 million realized loss on sale of trading securities
in the three months ended September 30, 2001 and zero during the same period in
2000.
Nine months ended September 30, 2001 compared to nine months ended
September 30, 2000
For the nine months ended September 30, 2001, total revenues amounted to
$10.4 million, compared to $9.4 million for nine months ended September 30,
2000, or a decrease of 1.1%.
Technology licensing fees and royalties decreased to $5.7 million in the
first nine months of 2001 as compared to $7.9 million for the same period in
2000, a decrease of $2.2 million. During the nine months ended September 30,
2001, $3.8 million of license fee revenue is primarily a result of our
recognition of deferred revenue in accordance with SAB 101, including $1.1
million as a result of the NXT transaction and $1.7 million of license fee
revenue generated from the 2000 Infinite Technology Corporation license
agreement for Advancel's Java(TM) Turbo-J technology. The amount for 2000
included $3.6 million of license fee revenue from Infinite Technology
Corporation and $2.5 million of license fee revenue from Pro Tech.
NCT continues to realize royalties from other existing licensees including
Ultra, Oki and suppliers to United Airlines and other carriers. NCT recognized
approximately $0.2 million in royalty revenue during the nine months ended
September 30, 2001 compared to $0.7 million during the same prior year period.
NCT recognizes royalty revenues based upon periodic reports submitted by the
royalty obligors and believes the decrease in royalty revenue is attributable to
the timing of the receipt of royalty reports and an economic slowdown in the
communications sector in which Oki operates. Royalties from these and other
licensees are expected to account for a greater share of NCT's revenue in future
periods.
For the nine months ended September 30, 2001, product sales were $3.5
million compared to $1.2 million for nine months ended September 30, 2000, an
increase of $2.3 million or 191.7%, of which $2.8 million was due to the impact
of acquisitions. Excluding the effect of acquisitions, product sales decreased
approximately $0.5 million, or 41.7%, due to declines in sales of communications
products, particularly the ClearSpeech(R) product line and sales of NCT Audio
products, particularly Gekko(TM) flat speakers. The decline in sales of
communications products is attributable to an economic downturn in that sector.
The decrease in speakers sold by NCT Audio was due to a lack of promotional
effort and the lack of available inventory in the sizes demanded. The lack of
available inventory in the necessary product mix is not expected to continue as
we replenish our supply. We expect stronger sales of Gekko(TM) flat speakers by
NCT Audio as DMC installs its Sight & Sound locations.
Gross profit margin on product sales, as a percentage of product revenues,
increased to 48.4% for the nine months ended September 30, 2001 primarily due to
acquired companies compared to (16.8)% for the nine months ended September 30,
2000. Excluding the effect of the acquisitions, the improvement in product gross
margin was due primarily to lower product royalty expense in the nine months
ended September 30, 2001 compared to the same prior year period when fixed
minimum royalty expenses were required to be recognized in accordance with our
royalty arrangements with outside firms selling our products.
Advertising/media revenues were $1.0 million for the nine months ended
September 30, 2001 compared to $0.2 million for the same period in 2000.
Advertising/media revenues are derived from the sale of audio and visual
advertising in the Sight & Sound locations and in theaters. Advertisers pay us
in cash or other consideration such as marketable securities and include
advertising agencies, Internet media companies, a music promoter and a financial
planning entity. Cost of advertising/media revenue was $0.2 million for the nine
months ended September 30, 2001 compared to $0.4 million 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 & Sound
locations.
For the nine months ended September 30, 2001, selling, general and
administrative expenses totaled $14.2 million as compared $5.4 million for the
nine months ended September 30, 2000, an increase of $8.8 million or 163.0%,
primarily due to higher compensation, depreciation and amortization expenses,
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 $5.3 million for the
nine-month period ended September 30, 2001 compared to $3.4 million for the
nine-month period ended September 30, 2000. NCT 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. Expense of approximately
$1.7 million for the outsourcing of research and development to ITC was recorded
for the nine months ended September 30, 2001.
Included in NCT's total costs and expenses were non-cash expenditures of:
(i) depreciation and amortization of $2.2 million in the nine months ended
September 30, 2001 and $1.3 million in the same period in 2000; (ii) impairment
of goodwill of $1.5 million in the nine months ended September 30, 2001 and $3.1
million during the same period in 2000; (iii) interest expense, net of $4.3
million in the nine months ended September 30, 2001 due primarily to
amortization of OID of $2.2 million, amortization of beneficial conversion
feature in convertible debt of $0.4 million and accrued interest on certain
convertible debt issued by the company of $0.4 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 $3.1 million, a realized warrant fair value adjustment
of $1.2 million and a $2.3 million realized loss on sale of trading securities
in the nine months ended September 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 $166.8 million on a cumulative basis
through September 30, 2001. These losses, which include the costs for
development of products for commercial use, have been funded primarily from:
o the sale of our and our subsidiaries' common stock;
o the sale of our and our subsidiaries' preferred stock convertible into our
common stock;
o the sale of our and our subsidiaries' debt instruments convertible into our
common stock;
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 NCT through the first quarter of 2002. Such funds consist of
available cash 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
primarily for the benefit of the issuing subsidiary. There is no assurance 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 September 30,
2001 about NCT's ability to continue as a going concern.
We 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 also described in the notes to the condensed consolidated financial
statements.
At September 30, 2001, the company's cash and cash equivalents (which are
highly liquid investments with an original maturity of 3 months or less)
aggregated $1.0 million. NCT's working capital deficit was $(30.8) million at
September 30, 2001, compared to a deficit of $(9.7) million at December 31,
2000. This $21.1 million increase in working capital deficit was primarily due
to a deficit attributable to the acquisition of the Web Factory of $(3.5)
million, the issuance of convertible notes in the nine months ended September
30, 2001 and an increase in accounts payable and accrued expenses. NCT's current
ratio was 0.21 to 1 at September 30, 2001 compared to 0.58 to 1 at December 31,
2000.
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. During the
nine months ended September 30, 2001, the company, upon sale of all 2 million
ordinary shares, received $6.9 million in cash proceeds, net of fees and
expenses. Under the new NXT agreements, the company has a requirement to apply
at least 66% of the proceeds received from the sale of these shares to the
development of the business of Distributed Media Corporation. The company
realized a loss of approximately $2.3 million from the sale of the NXT ordinary
shares, which is included in other (income) expense, net in the company's
consolidated statements of operations for the nine-month period ended September
30, 2001.
Operating Activities
Net cash used in operating activities for the nine months ended September
30, 2001 and 2000 was $8.9 million and $7.3 million, respectively.
Our net accounts receivable decreased to $1.2 million at September 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.
Our net inventory level remained the same at $2.2 million. The company's
inventory turns (using the cost-of-sales calculation method) decreased to 0.5
times at September 30, 2001 from 0.9 times at December 31, 2000. The company
expects inventory levels 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 products
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 $5.3 million for the
nine-month period ended September 30, 2001 compared to $3.4 million for the
nine-month period ended September 30, 2000. 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 evaluation and restructuring of
unprofitable product offerings, including some telephony products, and the
consolidation of various 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 $4.3 million for the
nine-month period ended September 30, 2001, as compared to $0.1 million in net
cash provided by investing activities for the nine-month period ended September
30, 2000. The net cash provided by investing activities for the nine-month
period ended September 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 nine-month period ended September 30, 2001
consumed $1.5 million, compared to $0.1 million for the nine-month period ended
September 30, 2000. For the nine-month period ended September 30, 2001, the most
significant capital expenditures related to the purchase of property and
equipment and leasehold improvements of approximately $1.3 million. The company
anticipates making additional investments during the remainder of 2001.
For the nine-month period ended September 30, 2001, the company received
$6.9 million in cash proceeds from the sale of NXT ordinary shares, net of fees
and expenses. Under the new NXT agreements, the company has a requirement to
apply at least 66% of the proceeds received from the sale of these shares to the
development of the business of Distributed Media Corporation. The company
realized a loss of approximately $2.3 million from the sale of the NXT ordinary
shares which is included in other (income) expense, net in the company's
consolidated statements of operations for the nine-month period ended September
30, 2001.
In addition to available cash and cash equivalents, the company views its
available-for-sale securities as additional sources of liquidity. At September
30, 2001 and December 31, 2000, the company's available-for-sale securities had
approximate fair market values of $1.0 million and $5.1 million, 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 nine months 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 the fourth quarter of 2001.
Financing Activities
The most significant components of the company's financing activities are:
(i) proceeds from the sale of convertible preferred stock; and (ii) proceeds
from the issuance of convertible debt securities.
Net cash provided by financing activities was $4.5 million for the
nine-month period ended September 30, 2001, as compared to $6.3 million for the
nine-month period ended September 30, 2000. The cash provided by financing
activities for the nine months ended September 30, 2001 was primarily due to the
issuance and sale of convertible notes.
At September 30, 2001, the company's short-term debt was $15.0 million, net
of original issue discounts of approximately $1.9 million, (principally
comprised of $13.7 million of face value of outstanding convertible notes and
$3.2 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 February 13, 2001, the company received net proceeds of $0.5 million
from the issuance and sale of a $0.5 million convertible note. 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 a $0.5 million 8% convertible note 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 receivable of $0.3 million, which has been collected, 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.
On July 30, 2001, the company received aggregate net proceeds of $0.5
million in cash from the private placement of 500 shares of Pro Tech's series B
convertible preferred stock and warrants to purchase 1,000,000 shares if its
common stock. The proceeds were used by Pro Tech for general corporate purposes.
On September 28, 2001, the company received $0.5 million proceeds in cash
and a $0.5 million subscription receivable from the issuance of a convertible
note aggregating $2.5 million. Such convertible note included the roll over of a
convertible note dated May 14, 2001 in the amount of $1.5 million and the
issuance of a warrant for 1.0 million shares of our common stock.
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 may provide us funds for
operating purposes, although we are currently in default under that agreement.
See Note 12 - Commitments and Contingencies for further details.
The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
Capital Expenditures
The company intends to continue its business strategy of working with
supply, manufacturing, 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 September
30, 2001, and no other material commitments are anticipated in the near future.
Quantitative Or Qualitative Disclosure About Market Risk
NCT's primary market risk exposures include fluctuations in interest rates
and foreign exchange rates. NCT is exposed to short-term interest rate risk on
some of its obligations and trade accounts receivable sales. NCT does not use
derivative financial instruments to hedge cash flows for such obligations. In
the normal course of business, NCT employs established policies and procedures
to manage these risks.
Based upon a hypothetical 10 percent proportionate increase in interest
rates from the average level of interest rates during the last twelve months,
and taking into consideration expected investment positions, commissions paid to
selling agents, growth of new business and the expected borrowing level of
variable-rate debt, the expected effect on net income related to our financial
instruments would be immaterial.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 9 - Litigation which is
included herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
On July 30, 2001, Pro Tech entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with the company and Alpha Capital
Aktiengesellschaft (the "Pro Tech Investors") to sell an aggregate value of up
to $500,000 (500 shares) of Pro Tech series B convertible preferred stock ("Pro
Tech preferred stock-B"). On such date Pro Tech issued and sold 500 shares of
Pro Tech preferred stock-B having an aggregate stated value of $500,000. The
purchaser of the 500 shares of Pro Tech preferred stock-B was Alpha Capital
Aktiengesellschaft. The aggregate purchase price for the 500 shares was
$500,000. 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 purchaser of Pro
Tech preferred stock-B, the purchaser is an "accredited investor" as defined
under Regulation D. Each share of Pro Tech preferred stock-B is convertible into
a number of shares of common stock of Pro Tech or exchangeable into a number of
shares of common stock of the company as determined in accordance with the
following formula (the "Exchange Rate"):
Face value = Number of shares of Pro Tech or
-----------------
Exchange price NCT common stock (as applicable)
provided that NCT shall have the option to pay the 4% Accretion accrued on
each Pro Tech preferred stock-B share in either cash or cash equivalents.
If NCT elects to pay the 4% Accretion accrued in cash or cash equivalents,
the Exchange Rate shall be:
Stated value = Number of shares of Pro Tech or
-----------------
Exchange price NCT common stock (as applicable)
where "Face Value" equals the Stated Value plus the 4% Accretion accrued on
each share of Pro Tech preferred stock-B; and "Exchange Price" means the
amount obtained by multiplying 0.8 by the lowest average of the average
Closing Bid Price for the NCT Common Stock for any consecutive five (5) day
trading period out of the fifteen (15) days preceding such relevant date.
On July 30, 2001, Pro Tech issued a three-year warrant to purchase
1,000,000 shares of its common stock to Alpha Capital Aktiengesellschaft at an
exercise price of $0.13 per share.
On August 22, 2001, NCT issued a convertible note ($1,673,393 principal
amount) to Carole Salkind upon the cancellation and surrender of $250,000,
$250,000, $500,000 and $250,000 NCT convertible notes along with accrued
interest and a default penalty.
On August 22, 2001, NCT issued a five-year warrant for 625,000 shares of
common stock to Carole Salkind, exercisable at $0.093 per share.
On August 22, 2001, NCT issued 612,893 shares of NCT common stock to
Michael J. Parrella, 171,342 shares of NCT common stock to Irene Lebovics and
215,765 shares of NCT common stock to Cy E. Hammond.
On August 28, 2001, NCT issued 568,770 shares of NCT common stock to
Interep National Radio Sales as payment for advertising service.
On September 10, 2001, NCT issued 1,980,198 shares of NCT common stock to
Tycon Equity Partners LLC as payment for consulting service.
On September 10, 2001, NCT issued 1,000,000 shares of NCT common stock to
Carole Salkind for which Ms. Salkind paid the company $93,000.
On September 28, 2001, NCT issued a warrant for 1,000,000 shares of NCT
common stock to Carole Salkind, exercisable at $0.115 per share.
On September 28, 2001, NCT issued a convertible note ($2,535,469) to Carole
Salkind in consideration of $1.0 million cash and cancellation and surrender of
a $1,361,615 NCT convertible note along with accrued interest and default
penalty.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
NCT's annual meeting was held July 10, 2001. The results of the vote were
reported in the Form 10-Q for the quarter ended June 30, 2001.
ITEM 6. EXHIBITS
(a) Exhibits
10(aa) Subscription Agreement between NCT Networks, Inc. and Subscribers:
Austost Anstalt Schaan; Balmore, S.A.; Amro International, S.A.;
Nesher Ltd.; Talbiya B. Investments Ltd.; and The Gross Foundation,
Inc. (collectively, Holders of Convertible Notes of NCT Networks,
Inc.) dated January 9, 2001, incorporated herein by reference to
Exhibit 10(ap) of the Company's Pre-effective Amendment No. 3 to
Registration Statement on Form S-1 (Registration No. 333-47084)
filed on January 26, 2001.
10(ab) Form of Convertible Note of NCT Networks, Inc. dated January 9,
2001, incorporated herein by reference to Exhibit 10(aq) of the
Company's Pre-effective Amendment No. 3 to Registration Statement
on Form S-1 (Registration No. 333-47084) filed on January 26, 2001.
10(ac) Exchange Rights Agreement among NCT Group, Inc. and Holders
of Convertible Notes of NCT Networks, Inc. dated January 9, 2001,
incorporated herein by reference to Exhibit 10(ar) of the
Company's Pre-effective Amendment No. 3 to Registration Statement
on Form S-1 (Registration No. 333-47084) filed on January 26, 2001.
10(ad) Registration Rights Agreement among NCT Group, Inc. and Holders of
Convertible Notes of NCT Networks, Inc. dated January 9, 2001,
incorporated herein by reference to Exhibit 10(as) of the Company's
Pre-effective Amendment No. 3 to Registration Statement on Form S-1
(Registration No. 333-47084) filed on January 26, 2001.
10(ae) Exchange Agreement dated April 12, 2001 by and between Crammer
Road LLC and NCT Group, Inc., incorporated herein by
reference to Exhibit 10(at) of NCT's Registration Statement on Form
S-1 (Registration No. 333-60574) filed on May 10, 2001.
10(af) Registration Rights Agreement (Exhibit A to Exchange Agreement)
by and between NCT Group, Inc. and Crammer Road LLC dated
as of April 12, 2001, incorporated herein by reference to Exhibit
10(av) of NCT's Registration Statement on Form S-1 (Registration No.
333-60574) filed on May 10, 2001.
10(ag) Exchange Rights Agreement dated April 12, 2001 by and between
NCT Group, Inc. and Crammer Road LLC, incorporated herein
by reference to Exhibit 10(aw) of NCT's Registration Statement on
Form S-1 (Registration No. 333-60574) filed on May 10, 2001.
10(ah) Private Equity Credit Agreement dated as of April 12, 2001,
by and between NCT Group, Inc. and Crammer Road LLC,
incorporated herein by reference to Exhibit 10(az) of NCT's
Registration Statement on Form S-1 (Registration No. 333-60574)
filed on May 10, 2001.
10(ai) Registration Rights Agreement (Exhibit A to Private Equity
Credit Agreement) dated as of April 12, 2001 by and between NCT
Group, Inc. and Crammer Road LLC, incorporated herein by reference
to Exhibit 10(ba) of NCT's Registration Statement on Form S-1
(Registration No. 333-60574) filed on May 10, 2001.
10(aj) Framework Agreement between NXT plc, New Transducers Limited,
NCT Group, Inc. and NCT Audio Products, Inc. relating to
the reorganization of certain existing arrangements dated as of
March 30, 2001, incorporated herein by reference to Exhibit 10(z)
of NCT's Pre-effective Amendment No. 1 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on September 5, 2001.
10(ak) Registration Rights Agreement dated as of March 30, 2001
by and among NCT Group, Inc. and NXT plc, incorporated herein
by reference to Exhibit 10(z)(1) of NCT's Pre-effective Amendment
No. 1 to Registration Statement on Form S-1 (Registration No.
333-60574) filed on September 5, 2001.
10(al) IP Sale Agreement dated April 11, 2001 between NCT Group, Inc., NXT
plc and New Transducers Limited, incorporated herein by reference
to Exhibit 10(z)(2) of NCT's Pre-effective Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-60574)
filed on September 5, 2001.
10(am) NXT General License between the company and New Transducers Limited
dated as of April 11, 2001, incorporated herein by reference to
Exhibit 10(z)(3) of NCT's Pre-effective Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-60574)
filed on September 5, 2001.
10(an) Letter dated April 11, 2001 amending the NXT General License
dated April 11, 2001, incorporated herein by reference to Exhibit
10(z)(4) of NCT's Pre-effective Amendment No. 1 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on
September 5, 2001.
10(ao) Cancellation letter between the company, NCT Audio Products, Inc.,
New Transducers Limited and NXT plc dated April 11, 2001 canceling
the Master License Agreement dated September 27, 1997 and the New
Cross License Agreement dated September 27, 1997, incorporated
herein by reference to Exhibit 10(z)(5) of NCT's Pre-effective
Amendment No. 1 to Registration Statement on Form S-1 (Registration
No. 333-60574) filed on September 5, 2001.
10(ap) Subscription Agreement by and between NCT Video Displays,
Inc. and Crammer Road LLC dated as of April 12, 2001, incorporated
herein by reference to Exhibit 10(ax) of NCT's Registration
Statement on Form S-1 (Registration No. 333-60574) filed on
May 10, 2001.
10(aq) Convertible Note of NCT Video Displays, Inc. in
principal amount of $500,000 dated as of April 12, 2001,
incorporated herein by reference to Exhibit 10(ay) of NCT's
Registration Statement on Form S-1 (Registration No. 333-60574)
filed on May 10, 2001.
10(ar) NCT Group, Inc. note CR-1 in principal amount of $1,000,000
dated April 12, 2001, incorporated herein by reference to Exhibit
10(au) of NCT's Registration Statement on Form S-1 (Registration No.
333-60574) filed on May 10, 2001.
10(as) Subscription Agreement dated March 14, 2001 between the
company and Alpha Capital Aktiengesellschaft, incorporated herein by
reference to Exhibit 10(bh) of NCT's Registration Statement on Form
S-1 (Registration No. 333-60574) filed on May 10, 2001.
10(at) Form of Convertible Note in principal amount of $250,000
dated March 14, 2001, incorporated herein by reference to Exhibit
10(bi) of NCT's Registration Statement on Form S-1 (Registration No.
333-60574) filed on May 10, 2001.
10(au) April 4, 2001 Subscription Agreement among Artera Group, Inc.
Alpha Capital Aktiengesellschaft and Amro International, S.A.,
incorporated herein by reference to Exhibit 10(bj) of NCT's
Registration Statement on Form S-1 (Registration
No. 333-60574) filed on May 10, 2001.
10(av) Form of Note dated April 4, 2001, incorporated herein
by reference to Exhibit 10(bk) of NCT's Registration Statement on
Form S-1 (Registration No. 333-60574) filed on May 10, 2001.
10(aw) Product Development and Licensing Agreement dated May 4, 2001
between NCT Video Displays, Inc. and ViewBeam Technology, L.L.C.,
incorporated herein by reference to Exhibit 10(bl) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001,
filed on May 21, 2001.
10(ax) Agreement dated May 11, 2001, by and among NCT Group, Inc.,
Distributed Media Corporation and Production Resource Group,
incorporated herein by reference to Exhibit 10(af) of NCT's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on September 5, 2001.
10(ay) Stock and Asset Purchase Agreement by and among Teltran
International Group, Ltd., Internet Protocols Ltd. and NCT
Networks, Inc. (now Artera Group, Inc.) dated as of January 23,
2001, incorporated by reference to Exhibit 10(ag) of NCT's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
filed on August 15, 2001.
10(ay)(1)Side letter dated February 27, 2001, amending the January 23, 2001
Stock and Asset Agreement, incorporated by reference to
Exhibit 10(ag)(1) of NCT's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, filed on August 15, 2001.
10(ay)(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, incorporated by reference to
Exhibit 10(ag)(2) of NCT's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, filed on August 15, 2001.
10(az) Secured Convertible Note in principal amount of $1,361,615 dated
May 14, 2001.
10(az)(1)Warrant issued to Carole Salkind for the purchase of 500,000 shares
of common stock dated May 14, 2001.
10(ba) Not Used.
10(bb) Subscription Agreement among Artera Group, Inc. and Subscribers:
Alpha Capital Aktiengesellschaft and Amro International, S.A. dated
as of May 25, 2001, incorporated by reference to Exhibit 10(aj)
of NCT's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001, filed on August 15, 2001.
10(bb)(1)Form of Convertible Note dated May 25, 2001, incorporated by
reference to Exhibit 10(aj)(1) of NCT's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bb)(2)Exchange Rights Agreement by and among NCT Group, Inc. and the
Holders identified on Schedule A thereto dated as of May 25, 2001,
incorporated by reference to Exhibit 10(aj)(2) to NCT's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bb)(3)Registration Rights Agreement among NCT Group, Inc. and Holders
identified on Schedule A thereto dated as of May 25, 2001,
incorporated by reference to Exhibit 10(aj)(3) of NCT's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bc) Subscription Agreement among Artera Group, Inc. and Subscribers:
Alpha Capital Aktiengesellschaft; Amro International, S.A.; The
Gross Foundation, Inc.; Leval Trading, Inc.; Nesher Ltd.; and
Talbiya B. Investments Ltd. dated as of June 29, 2001, incorporated
by reference to Exhibit 10(ak) of NCT's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bc)(1)Form of Convertible Note dated June 29, 2001, incorporated by
reference to Exhibit 10(ak)(1) of NCT's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bc)(2)Exchange Rights Agreement (Notes) by and among NCT Group, Inc. and
Holders identified on Schedule A thereto dated as of June 29, 2001,
incorporated by reference to Exhibit 10(ak)(2) of NCT's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bc)(3)Registration Rights Agreement (Notes) among NCT Group, Inc. and
Holders identified on Schedule A thereto dated as of June 29, 2001,
incorporated by reference to Exhibit 10(ak)(3) of NCT's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bd) Exchange Rights Agreement (Preferred) by and among NCT Group, Inc.
and Austost Anstalt Schaan; Amro International, S.A.; Nesher Ltd.;
Leval Trading, Inc.; ICT N.V.; Balmore S.A.; The Gross Foundation,
Inc.; Talbiya B. Investments Ltd.; United Securities Services,
Inc.; and Libra Finance, S.A. dated as of June 29, 2001,
incorporated by reference to Exhibit 10(al) of NCT's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bd)(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,
incorporated by reference to Exhibit 10(al)(1) of NCT's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(be) Securities Purchase and Supplemental Exchange Rights Agreement
dated July 30, 2001 by and among Pro Tech Communications, Inc., NCT
Group, Inc., and Alpha Capital Aktiengesellschaft, incorporated by
reference to Exhibit 10(am) of NCT's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001, filed on August 15, 2001.
10(be)(1)Registration Rights Agreement by and between NCT Group, Inc. and
Alpha Capital Aktiengesellschaft dated July 30, 2001, incorporated
by reference to Exhibit 10(am)(1) of NCT's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
10(bf) Secured Convertible Note in principal amount of $1,673,393 dated
August 22, 2001.
10(bf)(1)Warrant issued to Carole Salkind for the purchase of 625,000 shares
of common stock dated August 22, 2001.
10(bg) Secured Convertible Note in principal amount of $2,535,469 dated
September 28, 2001, incorporated herein by reference to Exhibit
10(an) of NCT's Pre-effective Amendment No. 2 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on
November 7, 2001.
10(bg)(1)Warrant issued to Carole Salkind for the purchase of
1,000,000 shares of common stock dated September 28, 2001,
incorporated herein by reference to Exhibit 10(an)(1) of NCT's
Pre-effective Amendment No. 2 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 7, 2001.
10(bh) Letter dated October 25, 2001 amending terms of October 26, 2000
warrant to Libra Finance, S.A., incorporated herein by reference to
Exhibit 10(ao) of NCT's Pre-effective Amendment No. 2 to
Registration Statement on Form S-1 (Registration No. 333-60574)
filed on November 7, 2001.
10(bh)(1)Warrant dated October 25, 2001 issued to Libra Finance S.A.
for the purchase of 20,000,000 shares of common stock, incorporated
herein by reference to Exhibit 10(ap) of NCT's Pre-effective
Amendment No. 2 to Registration Statement on Form S-1 (Registration
No. 333-60574) filed on November 7, 2001.
10(bi) Letter dated November 14, 2001 amending terms of October 26, 2000
warrant to Libra Finance S.A., incorporated herin by reference to
Exhibit 10(bg) of NCT's Form 8-K filed August 19, 2001.
99(a) Employment Agreement by and between NCT Midcore, Inc. (now Midcore
Software, Inc.) and Jerrold Metcoff, dated as of August 29, 2000,
incorporated by reference to Exhibit 99(d) of NCT's Quarterly
Report filed on Form 10-Q for the quarter ended June 30, 2001, filed
on August 15, 2001.
99(b) Employment Agreement by and between NCT Midcore, Inc. (now Midcore
Software, Inc.) and David Wilson, dated as of August 29, 2000,
incorporated by reference to Exhibit 99(e) of NCT's Quarterly
Report filed on Form 10-Q for the quarter ended June 30, 2001, filed
on August 15, 2001.
99(c) Employment Agreement by and between Midcore Software Limited and
Barry Marshall-Johnson, dated as of August 29, 2000, incorporated by
reference to Exhibit 99(f) of NCT's Quarterly Report filed on
Form 10-Q for the quarter ended June 30, 2001, filed on
August 15, 2001.
99(d) Employment Agreement by and between DMC Cinema, Inc. and Allan
Martin dated August 24, 2000, incorporated by reference to
Exhibit 99(g) of NCT's Quarterly Report filed on Form 10-Q for the
quarter ended June 30, 2001, filed on August 15, 2001.
.
99(e) Employment Agreement by and between DMC Cinema, Inc. and Robert
Crisp dated August 24, 2000, incorporated by reference to
Exhibit 99(h) of NCT's Quarterly Report filed on Form 10-Q for the
quarter ended June 30, 2001, filed on August 15, 2001.
- -----------------------------------
(b) Form 8-K
No Form 8-K was filed during the current reporting period.
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: November 19, 2001