UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2000
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COMMISSION FILE NUMBER: 0-18267
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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)
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(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.
323,444,437 shares outstanding as of November 14, 2000
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Technology licensing fees and royalties $ 8 $ 7,316 $ 3,509 $ 7,906
Product sales, net 574 422 1,802 1,205
Advertising revenue - 242 - 242
Engineering and development services 128 29 1,303 59
---------- ---------- ---------- ----------
Total revenues $ 710 $ 8,009 $ 6,614 $ 9,412
========== ========== ========== ==========
COSTS AND EXPENSES:
Cost of product sales $ 634 $ 268 $ 1,717 $ 1,045
Royalty expense - 177 - 363
Cost of media sales - 410 - 410
Cost of engineering and development servies 761 27 1,664 54
Selling, general and administrative 2,318 2,705 7,981 5,380
Research and development 1,644 720 5,102 3,351
Other (income)/expense, net 2,292 (222) 2,599 2,920
Write down of investment in unconsolidated
affiliate (Note 7) - - 2,385 -
Interest (income)/expense 16 284 (41) 1,655
---------- ---------- ---------- ----------
Total costs and expenses $ 7,665 $ 4,369 $ 21,407 $ 15,178
---------- ---------- ---------- ----------
NET (LOSS)/INCOME $ (6,955) $ 3,640 $ (14,793) $ (5,766)
========== ========== ========== ==========
Preferred stock beneficial conversion feature $ - $ 3,569 $ - $ 3,569
Preferred stock dividend requirement 5,327 375 10,567 1,104
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock 131 15 315 87
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (12,413) $ (319) $ (11,436) $ (10,526)
========== ========== ========== ==========
Basicand diluted income/(loss) per share $ (0.06) $ (0.00) $ (0.14) $ (0.04)
========== ========== ========== ==========
Weighted average common shares outstanding -
basic and diluted 188,009 296,377 173,453 281,815
========== ========== ========== ==========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
NET (LOSS)/INCOME $ (6,955) $ 3,640 $ (14,793) $ (5,766)
Other comprehensive income:
Currency translation adjustment 9 28 30 3
Unrealized loss on marketable securities - (397) - (397)
---------- ---------- ---------- ----------
COMPREHENSIVE (LOSS)/INCOME $ (6,946) $ 3,271 $ (14,763) $ (6,160)
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
<TABLE>
<CAPTION>
(in thousands of dollars)
December 31, September 30,
1999 2000
-------------- --------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 1,126 $ 367
Restricted cash 667 -
Accounts receivable, net of reserves (Note3) 237 5,835
Investment in marketable securities - 2,081
Inventories, net of reserves (Note 4) 2,265 2,309
Other current assets(Note 7) 152 313
-------------- --------------
Total current assets 4,447 10,905
Property and equipment, net 449 595
Goodwill, net 3,497 11,978
Patent rights and other intangibles, net (Note7) 2,296 5,231
Other assets (Note 6) 2,688 9,227
-------------- --------------
$ 13,377 $ 37,936
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,647 $ 2,410
Accrued expenses 3,253 5,675
Current maturities of convertible notes (Note 8) - 2,323
Deferred income - 2,142
Other liabilities (Notes 2 and 7) 828 2,119
Notes Payable(Note 7) - 458
-------------- --------------
Total current liabilities 7,728 15,127
-------------- --------------
Long term liabilities:
Deferred income - 1,945
Royalty payable - 1,150
Convertible notes (Note 8) 4,107 2,500
-------------- --------------
Total long term liabilities 4,107 5,595
-------------- --------------
Commitments and contingencies
Common stock subject to resale guarantee (Note11) 1,592 191
-------------- --------------
Minority interest in consolidated subsidiary - 1,472
Preferred stock in subsidiary, $.10 par value, 1,000 shares
authorized; issued and outstanding, 60 and 0 shares, respectively
(redemption amount $6,102,110 and $0, respectively) 317 -
Preferred stock in subsidiary, $.10 par value, 1,500 share
authorized; issued and outstanding, 0 and 1,500 shares,
respectively (redemption amount $0 and $1,500,329, respectively) - 1,500
Stockholders' equity(deficit) (Note 6):
Preferred stock, $.10 par value, 10,000,000 Series Fshares and
24,000,000 Series G shares authorized:
Series F preferred stock, issued and outstanding, 2,790 and 0
shares, respectively (redemption amount $4,789,407 and $0,
respectively 2,790 -
Series G preferred stock, issued and outstanding, 0 and
924 shares respectively (redemption amount $0 and $936,213,
respectively - 745
Common stock, $.01 par value, authorized 255,000,000 and
450,000,000 shares, respectively; issued 268,770,739 and
329,428,500 shares, respectively 2,688 3,294
Additional paid-in-capital 130,865 153,122
Unearned portion of compensatory stock, warrants and options (55) (41)
Unrealized loss on marketable securities - (397)
Expenses to be paid with common stock (1,282) (574)
Accumulated deficit (131,475) (137,241)
Cumulative translation adjustment 65 68
Stock subscriptions receivable (1,000) (1,962)
Treasury stock, 6,078,065 shares of common stock (2,963) (2,963)
-------------- --------------
Total stockholders' equity(deifict) (367) 14,051
-------------- --------------
$ 13,377 $ 37,936
============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
(in thousands of dollars)
Nine months ended September 30,
-------------------------------
1999 2000
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (14,793) $ (5,766)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 1,389 1,323
Common stock options and warrants issued as
consideration for:
Compensation 167 14
Operating expenses - 75
Provision for tooling costs 69 -
Provision for doubtful accounts 92 (10)
Loss on disposition of fixed assets - 31
Write down of investment in unconsolidated
affiliate (Note 7) 2,385 -
Preferred stock received for license fees (850) -
Impairment of goodwill (Note 12) - 3,073
Reserve for note receivable 1,624 -
Beneficial conversion feature on convertible
note (Note 8) 204 1,000
Common stock received for license fee - (6,030)
Amortization of debt discount 47 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 64 (345)
(Increase) decrease in license fees receivable (265) (4,633)
(Increase) decrease in inventories, net 460 512
(Increase) decrease in other assets 37 177
Increase (decrease) in accounts payable and
accrued expenses 2,351 (2,448)
Increase (decrease) in other liabiliti 453 5,728
--------------- --------------
Net cash (used in) operating activities $ (6,566) $ (7,299)
--------------- --------------
Cash flows from investing activities:
Capital expenditures (136) (108)
Decerase in restricted cash - 667
Acquisition of patent rights (900) -
Deferred charges - (411)
Cash and cash equivalents received from acquisitions $ - $ 88
--------------- --------------
Net cash (used in) investing activities $ (1,036) $ 236
--------------- --------------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) (Note8) 4,000 1,000
Notes payable - 1,250
Sale of preferred stock (net) (Note 12) 4,435 2,004
Sale of subsidiary common stock - 1,000
Sale of common stock (net) 1 -
Sale of common stock subject to resale (Note 11) - 620
Collection of subscription receivable - 1,000
Exercise of stock options, net - 748
Repayment of:
Promissory notes - (1,325)
--------------- --------------
Net cash provided by financing activities $ 8,436 $ 6,297
--------------- --------------
Effect of exchange rate changes on cash $ 31 $ 7
--------------- --------------
Net increase (decrease) in cash and cash equivalents $ 865 $ (759)
Cash and cash equivalents - beginning of period 529 1,126
--------------- --------------
Cash and cash equivalents - end of period $ 1,394 $ 367
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1 $ -
=============== ==============
Supplemental disclosures of non-cash investing and
financing activities:
Unrealized holding loss on available-for-sale
securities $ - $ (398)
=============== ==============
Issuances of common stock for acquisition of
Midcore Sofware, Inc. $ - $ 4,817
=============== ==============
Issuances of common stock for acquisition of
DMC Cinema, Inc. $ - $ 2,500
=============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to instructions and rules of the
Securities and Exchange Commission (the "SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and certain adjustments to
reserves and allowances) considered necessary for a fair presentation have been
included. Operating results for the three months and nine months ended September
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the NCT
Group, Inc. (the "Company" or "NCT") Annual Report on Form 10-K, for the year
ended December 31, 1999, filed on April 14, 2000.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $137.2 million on a
cumulative basis through September 30, 2000. These losses, which include the
cost for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) technology licensing fees, (4) royalties, (5) product sales
and (6) engineering and development funds received from strategic partners and
customers.
During the second quarter of 2000, retroactive to January 1, 2000, the
Company adopted the accounting policies of SEC Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101"). Adopting SAB 101
effective January 1, 2000, required the Company to restate its first quarter
2000 revenues, deferring recognition of $3.9 million of previously recognized
license fees. Such deferred revenue will be amortized over the next three years
in accordance with the Company's interpretation of SAB 101.
Cash, cash equivalents and short-term investments amounted to $0.4 million
at September 30, 2000, decreasing from $1.1 million at December 31, 1999.
Management believes that currently available funds will not be sufficient to
sustain the Company at present levels for the next 12 months. The Company's
ability to continue as a going concern is dependent on funding from several
internal sources, including available cash, cash from the exercise of warrants
and options, and cash inflows generated from the Company's revenue sources:
technology licensing fees and royalties, product sales, and engineering and
development services. The level of realization of funding from the Company's
revenue sources is presently uncertain. In the event that anticipated technology
licensing fees and royalties, product sales, and engineering and development
services do not generate sufficient cash, management believes additional working
capital financing must be obtained. There is no assurance any such financing is
or would become available.
In the event that funding from internal sources is insufficient, the
Company would have to substantially cut back its level of spending which could
substantially curtail the Company's operations. These reductions could have an
adverse effect on the Company's relations with its strategic partners and
customers. Uncertainty exists about the adequacy of current funds to support the
Company's activities until positive cash flow from operations can be achieved,
and uncertainty exists about the availability of financing from other sources to
fund any cash deficiencies. See Notes 8, 11 and 12 with respect to recent
financing.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which
contemplates continuity of operations, realization of assets and satisfaction of
liabilities in the ordinary course of business. The propriety of using the going
concern basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private financing and other funding sources to meet its
obligations. The uncertainties described above raise substantial doubt at
September 30, 2000, about the Company's ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include any
adjustments relating to the recoverability of the carrying amount of recorded
assets or the amount of liabilities that might result from the outcome of these
uncertainties.
2. Acquisitions:
On August 18, 2000, the Company acquired 100% of the outstanding capital
stock of Theater Radio Network, Inc. ("TRN"), a provider of entertainment audio
programming in multiplex cinemas nationwide, through a merger with DMC Cinema,
Inc. ("Cinema"), a newly formed subsidiary of the Company's wholly- owned
subsidiary, Distributed Media Corporation ("DMC"). The acquisition included the
Company's issuance of 7,405,214 restricted shares of its common stock based upon
a trailing market price (as defined in the stock purchase agreement) of $0.3376
per share, for a total value of $2.5 million and a 7.5% equity interest in
Cinema. The acquisition was accounted for using the purchase method and resulted
in goodwill of approximately $2.8 million which is being amortized over 20 years
on a straight-line basis. Cinema produces a radio show that is broadcast in
movie theaters nationwide. Theaters that are part of the Cinema network include
Sony, Loews, Cineplex Odeon, Regal, United Artists and others. Advertisers
include America Online, ABC Television, DreamWorks, Warner Bros., IBM, and
Amoco, among others.
On August 29, 2000, the Company acquired 100% of the outstanding capital
stock of Midcore Software, Inc. ("MSI"), provider of Internet infrastructure
software for business networks, through a merger with NCT Midcore, Inc., a newly
formed, wholly-owned subsidiary of the Company, and now known as Midcore
Software, Inc. ("Midcore"). In connection therewith, the Company issued
13,913,355 restricted shares of its common stock based upon a 10-day weighted
average closing bid price of $0.34626 per share, for an aggregate value of $4.8
million. In addition, the purchase consideration includes $1.7 million to be
paid by the Company in cash based upon earned royalties, as defined in the
merger agreement, over 36 months. If after 36 months, the total royalty has not
been earned then the parties have the right to collect the remaining unpaid
balance through the issuance of the Company's common stock. The acquisition was
accounted for using the purchase method, and the resulting goodwill of
approximately $6.4 million is being amortized over 20 years on a straight-line
basis. Midcore is a developer of innovative software-based solutions that
address the multitude of challenges facing businesses implementing Internet
strategies. Its MidPoint product is a single, scalable software package that
provides on-demand Internet connections, a software router, a high performance
shared cache, content control, scheduled retrieval of information and e-mail and
usage accounting, among other features.
On September 12, 2000, the Company's wholly-owned subsidiary, NCT Hearing
Products, Inc. ("NCT Hearing"), granted an exclusive license to Pro Tech
Communications, Inc. ("Pro Tech") for rights to certain NCT technologies for use
in light weight cellular, multimedia and telephony headsets. In consideration
for this license, NCT Hearing received 23.4 million shares of Pro Tech's common
stock representing approximately 84% of the common shares issued and
outstanding. During the quarter ended September 30, 2000, the Company recognized
approximately $2.5 million of license fee revenue with respect to this
transaction. Such amount represents the license fee revenue applicable to the
minority interest shareholders. As a condition precedent to the transaction, NCT
Hearing had arranged $1.5 million in equity financing for Pro Tech in the form
of convertible preferred stock of Pro Tech. Such convertible preferred stock is
convertible into shares of Pro Tech's common stock or exchangeable for shares of
NCT's common stock, at the investors' election. The acquisition was accounted
for using the purchase method and the resulting negative goodwill of
approximately $0.1 million is being amortized over 20 years on a straight-line
basis.
The operating results of these acquired businesses have been included in
the Condensed Consolidated Statement of Operations from the dates of
acquisition. All material intercompany balances have been eliminated.
3. Accounts Receivable:
Accounts receivable comprise the following:
(thousands of dollars)
December 31, September 30,
1999 2000
-------------- --------------
Technology license fees and royalties $ - $ 4,633
Advertising - 160
Engineering and development services 33 8
Trade 287 1,107
Allowance for doubtful accounts (83) (73)
-------------- --------------
Accounts receivable, net $ 237 $ 5,835
============== ==============
On March 7, 2000, the Company and DMC signed an agreement to license the
use of Digital Broadcasting Station Software ("DBSS") systems and related
technology in two station areas in the New York DMA territory to Eagle Assets
Limited. The total amount of the license fee was $2.0 million of which
approximately $1.6 million has been deferred at September 30, 2000. At September
30, 2000, the amount remaining in accounts receivable totaled $1.5 million.
On March 30, 2000, the Company and DMC signed an agreement to license the
use of DBSS systems and related technology in Israel to Brookepark Limited. The
amount of the license fee was $2.0 million of which approximately $1.6 million
has been deferred at September 30, 2000. At September 30, 2000, the amount
remaining in accounts receivable totaled $1.0 million.
On September 29, 2000, the Company and DMC signed separate agreements to
license the use of certain technology for $1.0 million each with Vidikron of
America, Inc. ("Vidikron"). The total amount of the license fees were $2.0
million and is included in accounts receivable at September 30, 2000. The
License fee revenue recognized was limited to $1.0 million due to the Company's
compliance with EITF 86-29 "NonMonetary Tranactions: Magnitude of Boot and the
Exceptions to the use of the Fair Value".
4. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, September 30,
1999 2000
-------------- --------------
Components $ 360 $ 491
Finished goods 2,434 2,416
-------------- --------------
Gross inventories $ 2,794 $ 2,907
Reserve for obsolete & slow moving inventory (529) (598)
-------------- --------------
Inventories, net of reserves $ 2,265 $ 2,309
============== ==============
The reserve for obsolete and slow moving inventory at September 30, 2000
has increased to $0.6 million primarily due to a $0.3 million charge for slow
moving hearing product inventory recorded during the first nine months of 2000,
net of applications of reserve.
5. Recent Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133"). As amended by SFAS No. 137, the
Company is required to adopt SFAS 133 for the year ending December 31, 2001.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
SFAS 133 is expected to have no material impact on the Company's financial
condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. In March 2000, the SEC issued
SAB No. 101A to defer for one quarter the effective date of implementation of
SAB 101 and in June 2000, issued SAB 101B to further defer its implementation
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999 with earlier application encouraged. As noted in Note 1, the
Company elected early application of SAB 101 in the quarter ended March 2000.
The effect of the adoption of SAB 101 in the first quarter of 2000 was a
reduction of revenue and net income of $3.9 million and a corresponding increase
in deferred revenue.
6. Stockholders' Equity:
The changes in stockholders' equity during the nine months ended September
30, 2000, were as follows:
<TABLE>
<CAPTION>
(in thousands)
Unearned Expenses
Accretion Net Compen- To be Trans-
Balance Sale of Exchange/ Dividend of Sale of Stock satory paid with lation Balance
at Preferred Conversion of Preferred Common Subscription Options/ Net Common Adjust- At
12/31/99 Stock Preferred Stock Stock Stock Receivable Warrants Loss Stock ment 9/30/00
---------- --------- --------------- ----------- -------- ------------ -------- -------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series F
Preferred:
Stock:
Shares 5 - (5) -
Amount $ 2,790 $ - $ (2,871) $ 81 $ - $ - $ - $ - $ - $ - $ -
Series G
Preferred:
Stock:
Shares - 2 (1) - - - - - - 1
Amount - $ 1,709 (985) 21 - - - - - - 745
Common Stock:
Shares 268,771 - - - 60,650 - - - - - 329,421
Amount $ 2,688 - - - 607 - - - - - $ 3,294
Treasury Stock:
Shares 6,078 - - - - - - - - - 6,078
Amount $ (2,963) - - - - - - - - - $ (2,963)
Additional
Paid in
Capital $ 130,865 - 3,886 (101) 17,872 - - - 600 - $ 153,122
Accumulated
(Deficit) $(131,475) - - - - - - (5,766) - - $(137,241)
Cumulative
Translation
Adjustment $ 65 - - - - - - - - 3 $ 68
Stock
Subscription
Receivable $ (1,000) - - - - (962) - - - - $ (1,962)
Expenses to be
Paid with
Common Stock $ (1,282) - - - - - - - 708 - $ (574)
Unearned
Compensatory
Stock Option $ (55) - - - - - 14 - - - $ (41)
</TABLE>
<PAGE>
7. Other Assets:
On August 14, 1998, NCT Audio Products, Inc. ("NCT Audio") agreed to
acquire substantially all of the assets of Top Source Automotive, Inc. ("TSA"),
an automotive audio system supplier. In 1998, NCT Audio had paid deposits of
$3.5 million towards the purchase price. On or about July 15, 1999, NCT Audio
determined it would not proceed with the purchase of the assets of TSA, as
structured, due primarily to its difficulty in raising the requisite cash
consideration. Consequently, NCT Audio reduced its investment in TSA to $1.5
million, representing its 15% minority interest. In addition the Company
recorded a penalty premium of $0.1 million, and a note payable of $0.2 million,
and recorded a $2.4 million charge in the quarter ended June 30, 1999 for the
write-down of its investment to its estimated net realizable value. The $0.1
million is included on the balance sheet at September 30, 2000 in accrued
expenses and the $0.2 million is included in notes payable.
On May 10, 2000, the Company announced a license agreement with Infinite
Technology Corporation ("ITC"). Under the agreement, Advancel Logic Corporation
("Advancel"), a majority owned subsidiary of the Company, granted ITC exclusive
rights to create, make, market, sell and license products and intellectual
property based upon Advancel's Java Turbo-J(TM) technology. Advancel also
granted ITC non-exclusive rights to Advancel's Java smartcard core. In
consideration for this license, the Company received 1.2 million shares of ITC's
common stock valued at $6.0 million and on-going unit royalties. With the
exception of certain rights granted to ST Microelectronics in 1998, the license
granted ITC an exclusive irrevocable worldwide license to design, make, use,
transfer, market and sell products and intellectual property incorporating or
based upon Advancel's TJ and T2J technology.
Effective June 30, 2000, the Company, Advancel and ITC entered into a
Strategic Alliance and Technology Development Amendment pursuant to which the
Company will fund specific product application research and engineering
development related to microprocessor and semiconductor chips for which the
Company will pay ITC $2.5 million. On September 7, 2000, the Company issued
9,523,810 shares of its common stock having a market value of $3.0 million to
ITC as prepaid research and engineering costs. In the event ITC does not receive
$2.5 million in proceeds from the sale of the Company shares, the Company is
required to make up any shortfall in cash or return to ITC a sufficient number
of ITC shares of common stock received by the Company as outlined above.
Conversely, if ITC receives $2.5 million in proceeds from the sale of the
Company shares and there are Company shares remaining, ITC must return the
unsold share excess to the Company. Though the forementioned license agreement
and the Strategic Alliance and Technology Development Amendment, both with ITC,
are separate and unrelated it has been determined that they should be accounted
for as a single transaction, thereby, both agreements are combined for financial
reporting purposes. At September 30, 2000 the Company recognized $3.6 million of
license fee revenue which represents the net of the two transactions and $0.5
million as amounts due from ITC.
On September 29, 2000, NCT Video Displays, Inc. ("NCT Video"), a newly
formed, wholly-owned subsidiary of the Company, entered into a product
development and license agreement with Advanced Display Technologies, LLP
("ADT"). Under the agreement, NCT Video is granted by ADT exclusive right and
license to make, have made, use, sell, lease, license, or otherwise commercially
dispose of all Licensed Products and Components, as defined in the agreement.
Such Licensed Products are defined as ViewBeam(TM) Display(s), which employ the
Licensed Technology, as defined in the agreement. In addition, as part of this
agreement, NCT Video and ADT have entered into a product development arrangement
whereby work is to be performed by ADT in developing the Prototype and
production design for the Licensed Products. In return, NCT Video agreed to pay
a "development fee" of $0.9 million for performing such development work. At
September 30, 2000, such $0.9 million was included in other current liabilities.
8. Convertible Notes:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed to and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. The Company entered into secured convertible notes (the "Notes") for
$4.0 million between January 26, 1999 and March 27, 2000. The Notes mature two
years from their respective inception dates and earn interest at the prime rate
as published from day to day in The Wall Street Journal. At September 30, 2000,
$1.5 million was included in current maturities of convertible notes with the
balance of $2.5 million included as part of the long-term portion of convertible
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 July 19, 1999, DMC entered into a convertible guaranteed term promissory
note ("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. Of the $1.0 million note, $750,000 was deposited into an escrow account
restricted in its use to pay rental and installation costs of DBSS systems. At
September 30, 2000, the balance in the escrow account, classified as restricted
cash, was $0. The PRG Note matures on July 19, 2001 and earns interest at ten
percent (10%) per annum. PRG may convert the PRG Note in whole or in part at its
election into shares of DMC's common stock, without par value, at any time
during the period commencing on the date of issuance and ending on the maturity
date. In connection with the PRG Note, PRG was granted a common stock warrant.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"("FAS
123"), the Company estimated the fair value of this warrant to be $0.4 million.
Such amount is being amortized to interest expense over the two-year period of
the related promissory note. Amortization amounted to $0.2 million for the nine
months ended September 30, 2000. Unamortized discount of $0.2 million has been
reflected as a reduction of the related note payable amount in the accompanying
September 30, 2000 condensed consolidated financial statements. Such note
payable balance included as part of the current portion of convertible notes at
September 30, 2000 was $0.8 million.
9. Commitments:
In connection with the acquisition of MIS by Midcore, the Company entered
into employment agreements ("the agreements") with Jerry Metcoff, David Wilson
and Barry Marshall-Johnson, the principal shareholders of MSI. The agreements
are each for a term of three years. Compensation and benefits called for in the
agreements for Jerry Metcoff and David Wilson are an annual base salary of
$100,000, an annual bonus of at least $50,000, subject to the achievement of
certain bonus criteria and at the discretion of the board of directors of NCT,
granting of incentive stock options to purchase common shares of NCT.
Compensation and benefits called for in the agreement for Barry Marshall-Johnson
include an annual base salary of (pound)52,236, commissions of 5% of the face
amount of purchase orders for Midcore's or affiliates' products or services
derived from a predetermined territory and at the discretion of the board of
directors of NCT, and granting of incentive stock options to purchase common
shares of NCT.
10. Litigation:
Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, for a discussion of the following matters:
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, then the President, Chief Executive
Officer and a Director of the Company, in the Circuit Court for Anne Arundel
County, Maryland. During the second quarter of 2000, the Company and SCI have
had verbal discussions regarding a settlement. The Court has scheduled a
pre-trial conference in this case for March 2001. Aside from such verbal
settlement discussions, there were no material developments in this matter
during the period covered by this report.
On November 17, 1998, the Company and NCT Hearing filed suit against Andrea
Electronics Corporation in the United States District Court, Eastern District of
New York. There were no material developments in this matter during the period
covered by this report.
On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against Top Source
Technologies, Inc. and TSA (the "Respondents") alleging, among other things,
breach of the asset purchase agreement by which TSA was to sell its assets to
NCT Audio, breach of fiduciary duty to a majority shareholder, NCT Audio, which
holds 15% of the outstanding stock of TSA, and breach of obligation of good
faith and fair dealing. There were no material developments in this matter
during the period covered by this report.
The Company believes there are no other patent infringement litigation
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on the consolidated financial position and
consolidated results of operations.
11. Common Stock Subject to Resale Guarantee:
During 2000, the Company issued 912,674 shares of common stock to certain
consultants and suppliers to settle current obligations of $0.1 million and
future or anticipated obligations of $0.3 million due to them by the Company.
On September 24, 1999, the Company issued 12,005,847 shares of common stock
to suppliers and consultants to settle current obligations of $1.8 million and
future or anticipated obligations of $0.5 million. On October 27, 1999, the
Company issued an additional 1,148,973 shares of common stock to suppliers and
consultants to settle obligations of $0.2 million. During 1999, suppliers and
vendors sold $1.5 million of such shares. During the nine months ended September
30, 2000, suppliers and vendors sold $0.9 million and surrendered 776,316
previously issued shares. At September 30, 2000, common stock subject to resale
guarantee included $0.1 million for suppliers and vendors.
The Company had certain contingent obligations under a securities purchase
agreement, dated as of December 27, 1999 (the "Purchase Agreement"), among the
Company, Austost Anstalt Schaan("Austost"), Balmore S.A.("Balmore") and Nesher,
Inc. ("Nesher"). Based on an offer as of November 9, 1999, the Company, Austost,
Balmore and Nesher entered into the Purchase Agreement whereby the Company, on
December 28, 1999, issued a total of 3,846,155 shares (the "SPA Shares") to
Austost, Balmore and Nesher for a total purchase price of $500,000. In addition,
the Company issued 288,461 shares of its common stock to the placement agent for
the transaction. The price of the SPA Shares was $0.13 per share, which was
$0.03, or 19%, less than the closing bid price of the Company's common stock as
reported by the OTC Bulletin Board on November 8, 1999, and $0.015, or 10%, less
than the closing bid price of the Company's common stock as reported by the OTC
Bulletin Board on December 27, 1999. At September 30, 2000 the shares were no
longer subject to a resale quarantee provision.
Under a reset provision contained in the Purchase Agreement, on June 26,
2000, and again on September 25, 2000, the Company might have been required to
issue additional shares to one or more of Austost, Balmore or Nesher if the sum
of certain items on those dates was less than 120% of the total purchase price
paid by Austost, Balmore and Nesher for the SPA Shares. Those items were: (i)
the aggregate market value of the SPA Shares held by Austost, Balmore and Nesher
(based on the per share closing bid price on those dates); (ii) the market value
of any SPA Shares transferred by Austost, Balmore and Nesher as permitted under
the Purchase Agreement (based on the per share closing bid price on the date of
transfer); and (iii) any amounts realized by Austost, Balmore and Nesher from
sales of any such shares prior to June 26, 2000 or September 25, 2000, as the
case may be. The number of additional shares of common stock that the Company
would have been obligated to issue in such case would have been a number of
shares having an aggregate market value (based on the per share closing bid
price on such date) that, when added to the sum of items (i), (ii) and (iii) set
forth above, would equal 120% of the total purchase price paid for the SPA
Shares. The 20% of the total purchase price paid ($100,000) was deemed a
preferred return over the initial reset period. At both June 26 and September
25, 2000, no additional shares were required to be issued in accordance with
such reset provision and the 20% of the total purchase price paid ($100,000) is
no longer considered a preferred return.
Common stock subject to resale guarantee was $0.2 million at September 30,
2000, which represented the outstanding shares of common stock valued at the
date of issuance to suppliers and vendors.
12. Capital Stock:
On January 19, 2000, the Board of Directors amended the NCT Group, Inc.
Stock Incentive Plan (the "1992 Plan"), subject to stockholder approval, to
increase the aggregate number of shares of the Company's common stock reserved
for issuance upon the exercise of stock options granted under the 1992 Plan from
30,000,000 shares to 50,000,000 shares (the "1992 Plan Amendment"). At the
annual meeting of stockholders held on July 13, 2000, the stockholders approved
such amendment.
On January 19, 2000, the Board of Directors granted options to purchase 9.9
million shares of the Company's common stock to certain officers and employees
of the Company, subject to the approval by the Company's stockholders of an
increase in the number of shares authorized and subject to the approval by the
Company's stockholders of an increase in the number of shares covered by the
1992 Plan. Such increases were approved by the Stockholders at the Company's
annual meeting on July 13, 2000. Options to purchase 3.9 million of such shares
vest upon approval by the stockholders of the above noted increases. Options to
purchase 6.0 million of such shares will not become vested or exercisable until
the satisfaction of additional vesting requirements based on profitability of
the Company or the passage of time. The foregoing options were granted with the
exercise price equal to the fair market value of the Company's common stock on
January 18, 2000, or $0.41 per share, as determined from the last sale price as
reported by the NASDAQ OTC Bulletin Board.
During the first quarter of 2000, the Board of Directors also granted
options to purchase 2.9 million shares of the Company's common stock to certain
new employees and consultants of the Company for services rendered to the
Company, subject to the approval by the Company's stockholders of an increase in
the number of shares authorized and subject to the approval by the Company's
stockholders of an increase in the number of shares covered by the 1992 Plan.
Such options were granted at or above the fair market value of the Company's
common stock on the date of grant.
On January 25, 2000, the Board of Directors designated a new series of
preferred stock based upon a negotiated term sheet, the Series G Convertible
Preferred Stock ("Series G Preferred Stock"). The Series G Preferred Stock
consists of 5,000 designated shares, par value of $0.10 per share and a stated
value of one thousand dollars ($1,000) per share with a cumulative dividend of
four percent (4%) per annum on the stated value payable upon conversion in
either cash or common stock. On March 6, 2000, as amended March 10, 2000, the
Company and an accredited investor entered into an agreement under which the
Company sold an aggregate stated value of $2.0 million (2,004 shares) of Series
G Preferred Stock, in a private placement pursuant to Regulation D of the
Securities Act of 1933 (the "Securities Act") for an aggregate of $1.750
million. The Company received proceeds, net of expenses, of $1.7 million. Each
share of Series G Preferred Stock is convertible into fully paid and
nonassessable shares of the Company's common stock pursuant to a predetermined
conversion formula which provides that the conversion price will be the lesser
of (i) the average of the closing bid price for the common stock on the
securities market on which the common stock is being traded for five (5)
consecutive trading days prior to the date of conversion; or (ii) the fixed
conversion price of $0.71925. The Company filed a registration statement on
April 20, 2000, (amended on June 13, 2000), to register such shares of common
stock for the conversion of the Series G Preferred Stock and the related
warrant. In connection with the Series G Preferred Stock transaction, on March
6, 2000, the Company granted a warrant for 150,000 shares of the Company's
common stock with an expiration date of March 31, 2005 and an exercise price of
$0.71925. In accordance with SFAS No. 123, the Company estimated the fair market
value of this warrant to be $0.1 million, using the following assumptions in
applying the Black-Scholes valuation method: risk-free interest rates of 6.14%,
volatility of 1, and a term of three years. Such amount is included in the
preferred stock dividend requirement for the nine months ended September 30,
2000.
During the nine months ended September 30, 2000, the Company issued
23,470,081 shares of the Company's common stock in connection with the
conversion of 4,715 shares of the Company's Series F Convertible Preferred Stock
("Series F Preferred Stock") which had been issued in the third quarter of 1999
in a private placement exempt from registration pursuant to Regulation D of the
Securities Act. At September 30, 2000 all Series F Preferred Stock have been
converted to common shares of the Company. . In March 2000, 3 shares of NCT
Audio Series A Convertible Preferred Stock, which had been issued in the third
quarter of 1998 in a private placement exempt from registration pursuant to
Regulation D of the Securities Act, were exchanged for 3,000 shares of the
Company's Series D Preferred Stock, which were converted into 634,915 shares of
the Company's common stock. Subsequently, the Company recorded a one-time,
non-cash charge of $0.2 million for the impairment of goodwill based on the
valuation of NCT Audio, which is included in other expense.
On March 7, 2000, the Company, Balmore and Austost agreed to amend certain
of the terms and conditions of the exchange agreement. Under the exchange
agreement, Austost and Balmore were obligated to return to the Company
13,671,362 shares of NCT common stock ("Returnable Shares"). This amendment was
agreed to in order to (1) allow Austost and Balmore to retain 3,611,111
Returnable Shares in exchange for an additional 533 shares of NCT Audio common
stock from a third party investor (the "Third Party Shares"), which Austost and
Balmore would deliver to NCT, and (2) substitute cash payments by Austost and
Balmore to the Company in lieu of Austost's and Balmore's obligation to return
the remaining Returnable Shares to the Company pursuant to the exchange
agreement. Austost and Balmore would agree to pay the Company up to $10,000,000
in cash subject to monthly limitations from proceeds Austost and Balmore would
realize from their disposition of such remaining Returnable Shares. Balmore and
Austost would realize a 10% commission on the proceeds from the sale of shares.
Subsequently, the Company recorded a one-time, non-cash charge of $2.9 million
for the impairment of goodwill based on the valuation of NCT Audio, which is
included in other expense. During the quarter ending September 30, 2000, the
Company sold approximately 4.2 million Returnable Shares totaling $1.4 million
of which $0.8 million was used to repay three promissory notes and the balance
of $0.6 million was used to meet working capital requirements.
On April 21, 2000, the Board of Directors approved the re-granting of
replacement grants for forfeit options that would otherwise expire in 2000. Such
replacement grants totaled approximately 565,000 options.
On June 2, 2000, the Company granted a common stock warrant to Roth Bros,
Inc. ("Roth") to purchase 0.3 million shares of the Company's common stock in
connection with the installation of DBSS systems for DMC by Roth. In accordance
with SFAS No. 123, the Company estimated the fair value of this warrant to be
$0.1 million. Such amount is being amortized to interest expense over the
three-year period of the related work agreement between Roth and DMC.
Amortization amounted to approximately $10,000 for the nine months ended
September 30, 2000.
On July 13, 2000 at the Company's annual meeting of shareholders, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 325 million to 450 million. Such
amendment became effective on July 18, 2000 when the Company filed a Certificate
of Amendment to its Restated Certificate of Incorporation with the Office of the
Secretary of State of Delaware to comply with applicable Delaware General
Corporation Law.
Also on July 13, 2000, the Company's stockholders approved an amendment to
the 1992 Plan to increase the number of shares thereunder from 30 million to 50
million.
On August 10, 2000, the Company entered into an agreement with three
accredited investors for the financing of its subsidiary, Connect Clearly.com,
Inc.("CCC"). In connection with the initial funding of CCC, the Company issued
1,000 shares of CCC common stock to these investors in consideration for $0.5
million in cash and conversion of promissory notes payable, due to two of the
investors, totaling $0.5 million. These investors have agreed to acquire 1,000
additional shares of CCC common stock for another $1.0 million in August 2001.
These CCC common shares are exchangeable for shares of NCT common stock.
On August 18, 2000, the Company acquired 100% of the outstanding capital
stock of TRN, through a merger with Cinema. In connection with this acquisition,
the Company issued 7,405,214 restricted shares of its common stock based upon a
trailing market price (as defined in the stock purchase agreement) of $0.3376
per share, for a total value of $2.5 million and a 7.5% equity interest in
Cinema. (see Note 2 to the Condensed Consolidated Financial Statements for
further details).
On August 29, 2000, the Company acquired all of the outstanding capital
stock of MSI through a merger with Midcore. In connection therewith, the Company
issued 13,913,355 restricted shares of its common stock. (See Note 2 to the
Condensed Consolidated Financial Statements for further details).
On September 7, 2000, the Company issued 9,523,810 shares of its common
stock having a market value of $3.0 million to ITC with respect to the Strategic
Alliance and Technology Development Amendment with ITC. Such shares are subject
to adjustment as outlined in Note 8 to these Condensed Consolidated Financial
Statements.
As described in Note 2, NCT Hearing had arranged $1.5 million in equity
financing for Pro Tech in the form of convertible preferred stock. Such
convertible preferred stock is convertible into shares of Pro Tech's common
stock or exchangeable for shares of NCT's common stock, at the investors'
election.
On September 26, 2000, the Company's Board of Directors approved an
amendment to the Series G Certificate of Designations, Rights and Preferences to
increase the maximum share issuance amounts thereunder from 10 million shares to
24 million shares. This action was considered in the best interest of the
Company and its investor relationships. The amendment became effective on
September 27, 2000 when the Company filed it with the Office of the Secretary of
State of Delaware.
On September 27, 2000, the Company entered into a private equity line with
Crammer Road LLC ("Crammer"), pursuant to which the Company may issue its common
stock to be sold by Crammer and Crammer would retain a portion of the proceeds
received for NCT common stock sold. In conjunction with this transaction, the
Company issued Crammer a warrant for 250,000 shares of the Company's common
stock. In accordance with SFAS No. 123, the Company estimated the fair value of
this warrant to be $0.1 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 6.03%, volatility of
1, and a term of three years. The Company and Crammer are currently in
renegotiations regarding amendments to certain details of the Private Equity
Credit Agreement.
On September 29, 2000, Pro Tech entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with the Company, Austost, Balmore and
Zakeni Limited, (Austost, Balmore and Zakeni Limited collectively the "Pro Tech
Investors") to consummate the $1.5 million financing arranged by the Company for
Pro Tech in connection with its sale of 1,500 shares of Pro Tech Series A
Convertible Preferred Stock ("Pro Tech Preferred") to the Pro Tech Investors.
The Pro Tech Preferred consists of 1,500 designated shares, par value $0.01 per
share and a stated value of one thousand dollars ($1,000) per share with an
accretion rate of four percent (4%) per annum on the stated value. Each share of
such stock, in addition to being exchangeable for shares of the Company's common
stock, is convertible into fully paid and nonassessable shares of the Pro Tech's
common stock pursuant to a predetermined conversion formula. In connection with
the execution of the Securities Purchase and Supplemental Exchange Rights
Agreement, Pro Tech issued warrants to the Pro Tech Investors to acquire 4.5
million shares of Pro Tech's common stock. Such warrants are exercisable at
$0.50 per share and expire on October 28, 2003. In addition, Pro Tech has the
right to require the warrant holders to exercise upon a call from Pro Tech. In
accordance with SFAS No. 123, Pro Tech estimated the fair value of this warrant
to be $3.6 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 5.97%, volatility of
1, and a term of three years. Such amount is included in the preferred stock
beneficial conversion feature at September 30, 2000.
Pursuant to a consulting agreement dated as of March 15, 1999, as amended
as of June 1, 1999, and as modified as of July 29, 1999, between Pro Tech and
Union Atlantic LC("UALC"), Pro Tech would be obligated to issue two percent (2%)
of its outstanding common stock to UALC upon the consummation of the Pro Tech
transaction with NCT Hearing. In order to comply with the consulting agreement,
Pro Tech agreed to issue 279,688 shares and NCT Hearing agreed to issue 279,687
shares of Pro Tech's common stock to UALC, totaling an aggregate of 559,375
shares in full settlement of all obligations under the consulting agreement
between Pro Tech and UALC.
At September 30, 2000, the number of shares required to be reserved for the
exercise of options and warrants was 60.1 million. The aggregate number of
shares of common stock required to be reserved for issuance upon the exercise of
all outstanding options and warrants granted was 59.6 million shares, of which
options and warrants to purchase 41.1 million shares were currently exercisable.
The aggregate number of shares of common stock required to be reserved for
issuance upon conversion of issued and outstanding shares of Series G Preferred
Stock was 3.8 million. The Company has reserved 5.9 million shares of common
stock for issuance to certain holders of NCT Audio common stock upon exchange of
their shares of NCT Audio common stock for shares of the Company's common stock.
The Company also reserved 32.1 million shares of common stock for issuance upon
conversion of the Notes. Common shares issued and required to be reserved for
issuance exceed the number of shares authorized at September 30, 2000. Pro Tech
has reserved 5.5 million shares of common stock for issuance upon the exercise
of all-outstanding options and warrants granted, of which options and warrants
to purchase 5.5 million shares were currently exercisable.
In September 2000, the Company issued warrants for 10 million shares of
common stock to the placement agent for certain of the Company's recent
financing transactions.
13. Business Segment Information:
During 1998, the Company adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS No. 131"). The provisions of
SFAS No. 131 require the Company to disclose the following information for each
reporting segment: general information about factors used to identify reportable
segments, the basis of organization, and the sources of revenues; information
about reported profit or loss and segment assets; and reconciliation of certain
reported segment information to consolidated amounts.
<PAGE>
Segment Information follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
Segment
--------------------------------------------------------------------
Total Grand
Media Communication Technolgy Segments Other Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the nine months ended
September 30, 2000:
Net Sales - External $ 533 $ 850 $ - $ 1,383 $ 123 $ 1,506
Net Sales - Other Operating
Segments 131 434 - 565 (565) -
License Fees and Royalti1ties 1,724 2,851 3,550 8,125 (219) 7,906
Interest Income/(Expense) net (258) (5) (115) (378) (1,277) (1,655)
Depreciation/Amortization (18) (55) (17) (90) (1,233) (1,321)
Operating Income (Loss) (4,024) (2,864) 3,349 (3,539) (2,227) (5,766)
Segment Assets 11,921 17,645 6,644 36,210 1,726 37,936
Capital Expenditures 17 - - 17 91 108
For the nine months ended
September 30, 1999:
Net Sales - External $ 627 $ 1,402 $ 1,070 $ 3,099 $ 6 $ 3,105
Net Sales - Other Operating
Segments 11 650 - 661 (661) -
License Fees and Royalties 1,354 1,019 1,100 3,473 36 3,509
Write down of Investment in
Unconsolidated Subsidiary (2,385) - - (2,385) - (2,385)
Interest Income, net 127 1 - 128 (87) 41
Depreciation/Amortization 9 33 12 54 1,335 1,389
Operating Income (Loss) (10,042) (4,334) (397) (14,773) (20) (14,793)
Segment Assets 7,515 2,504 1,360 11,379 7,916 19,295
Capital Expenditures 11 6 35 52 84 136
</TABLE>
<PAGE>
MEDIA:
NCT Audio:
NCT Audio is engaged in the design, development and marketing of products,
which utilize innovative flat panel transducer technology. The products
available from NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM)
printed grille collection. The Gekko(TM) flat speaker is marketed primarily to
the home audio market, with potential in other markets, including the
professional audio systems market, the automotive audio aftermarket, the
aircraft industry, other transportation markets and multimedia markets. The
principal customers are DMC, end-users, automotive original equipment
manufacturers ("OEMs") and manufacturers of integrated cabin management systems.
DMC:
DMC provides place-based broadcast and billboard advertising through a
microbroadcasting network of Sight and Sound(TM) systems within
commercial/professional settings. The Sight and Sound(TM) systems consist of
flat panel transducer-based speakers (provided by NCT Audio), a personal
computer containing DMC's Sight and Sound DBSS software, telephone access to the
Internet, amplifiers and related components. The DBSS software schedules
advertisers' customized broadcast messages, which are downloaded via the
Internet, with the respective music genre choice to the commercial/professional
establishments. DMC will develop private networks for large customers with
multiple outlets such as large fast food chains and retail chains.
Cinema:
Cinema provides entertainment audio programming in multiplex cinemas
nationwide All programming now being delivered to each theater will be converted
to the Sigh and Sound system which allows for remote delivery of programming and
advertising to all sites, improving efficiency and enabling the quick execution
of programming changes. The Site and Sound system also continually adjusts
volume based on background noise so that the audio is always maintained at a
foreground level.
COMMUNICATIONS:
NCT Hearing:
NCT Hearing designs, develops and markets active noise reduction ("ANR")
headset products to the communications headset market and the telephony headset
market. The product lines include the NoiseBuster(R) product line and the
ProActive(R) product line. The NoiseBuster(R) products consist of the
NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a headset used for
in-flight passenger entertainment systems and communications headsets for
cellular, multimedia and telephony. The ProActive(R) products consist of noise
reduction headsets and communications headsets for noisy industrial
environments. The majority of NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
Pro Tech:
The principal activity of Pro Tech is the design, development and
manufacture of light-weight telecommunications headsets and new audio
technologies for applications in fast food, telephone and other commercial
applications. It currently has marketing agreements with major companies in the
fast food industry and catalog and Internet site distributors of telephone
equipment, primarily in North America.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
Company. NCT Europe provides research and engineering to NCT Audio, NCT Hearing,
DMC and other business units as needed. NCT Europe also provides a marketing and
sales support service to the Company for European sales.
Midcore:
The principal activity of Midcore is as a developer of innovative software
based solutions that address the multitude of challenges facing businesses
implementing Internet strategies. Midcore is the provider of MidPoint Internet
infrastructure software that allows multiple users to share one Internet
connection without degrading efficiency and provides on-demand connections, a
software router, a high-performance shared cache, content control, scheduled
retrieval of information and e-mail and usage accounting. Midcore sales are
derived from North America and Europe.
ConnectClearly:
CCC was established for the purpose of focusing on 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(R)-Acoustic Echo Cancellation removes acoustic echoes in hands-free
full-duplex communication systems. Applications for this technology are cellular
telephony, audio and video teleconferencing, computer telephony and gaming and
voice recognition. ClearSpeech(R)-Compression maximizes bandwidth efficiency in
wireless, satellite and intra- and Internet transmissions and creates smaller,
more efficient voice files while maintaining speech quality. Applications for
this technology are intranet and internet telephony, audio and video
conferencing, PC voice and music, telephone answering devices, real-time
multimedia multitasking, toys and games and playback devices. CCC products
include the ClearSpeech(R)-Microphone and the ClearSpeech(R)-Speaker. The
majority of CCC's sales are in North America. Principal markets for CCC are the
telecommunications industries and principal customers are OEMs, system
integrators and end-users.
TECHNOLOGY:
Advancel Logic Corporation:
Advancel is a participant in the native Java(TM) (Java(TM) is a trademark
of Sun Microsystems, Inc.) embedded microprocessor market. The purpose of the
Java(TM) platform is to simplify application development by providing a platform
for the same software to run on many different kinds of computers and other
smart devices. Advancel has been developing a family of processor cores, which
will execute instructions written in both Java bytecode and C/C++ significantly
enhancing the rate of instruction execution, which opens up many new
applications. The potential for applications consists of the next generation
home appliances and automotive applications, smartcards for a variety of
applications, hearing aids and mobile communications devices. (See Note 6 -
Notes to the Condensed Consolidated Financial Statements above for further
details.)
Other:
The Net Sales - Other Operating Segments primarily consist of inter-company
sales and items eliminated in consolidation.
Certian items are maintained at the Company's corporate headquarters
(Corporate) and are not allocated to the segments. They primarily include most
of the Company's debt and related cash and equivalants and related net interest
expense, certain litigation liabilities and certain non operating fixed assets.
With respect to depreciation and amortization the differneces between the
segment totals and consolidated totals relates to assets maintained at
corporate.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Forward-Looking Statements
Statements in this report, which are not historical facts, are
forward-looking statements under provisions of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. The Company wishes to caution readers that the important factors
listed below, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause its actual results in
fiscal 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems; produce a cost effective product that will
gain acceptance in relevant consumer and other product markets; increase
revenues from products; realize funding from technology licensing fees,
royalties, product sales, and engineering and development revenues to sustain
the Company's current level of operation; timely introduce new products;
continue its current level of operations to support the fees associated with the
Company's patent portfolio; maintain satisfactory relations with its two
customers that accounted for 42% of the Company's revenues in 1999; attract and
retain key personnel; prevent invalidation, abandonment or expiration of patents
owned or licensed by the Company and expand its patent holdings to diminish
reliance on core patents; have its products utilized beyond noise attenuation
and control; maintain and expand its strategic alliances; and protect Company
know-how, inventions and other secret or unprotected intellectual property.
GENERAL BUSINESS ENVIRONMENT
The Company is focused on the commercialization of its technology through
technology licensing fees, royalties and product sales. The Company's strategy
generally has been to obtain technology licensing fees when initiating joint
ventures and alliances with new strategic partners. Also, as distribution
channels are established and as product sales and market acceptance of the
commercial applications of the Company's technologies build as anticipated by
management, revenues from technology licensing fees, royalties and product sales
are forecasted to fund an increasing share of the Company's requirements. The
revenue from these sources, if realized, will reduce the Company's dependence on
engineering and development services. This is reflected in the three and nine
months ended September 30, 2000, where 91% and 84%, respectively, of the
Company's revenue has been from licensing fees and royalties and 5% and 15%,
respectively for each period from product sales. There can be no assurance that
technology licensing fees will continue at that level.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and manufacturing operations. While
the Company works with these firms on product testing and integration, it is not
always able to influence how quickly this process can be completed.
Through the acquisition of Pro Tech, the Company has expanded its presence
in the telecommunications headset market. Pro Tech is currently expanding its
headset product line for telephony, cellular and multimedia communications and
is positioning itself to increase market share in the lightweight headset
market. The Company continues to sell and ship NoiseBuster(R) headsets,
Clearspeech(R) products and the Gekko(TM) flat speakers. The Company presently
sells products through three of its alliances: Walker Electronic Silencing, Inc.
("Walker") is manufacturing and selling industrial silencers; Ultra Electronics,
Limited ("Ultra") is installing aircraft cabin quieting systems in turboprop
aircraft; and Oki Electric Industry Co., Ltd. ("Oki") has incorporated the
Company's Clearspeech(R) noise cancellation algorithm for integration into
large-scale integrated circuits for communications products. The Company is
entitled to receive royalties from Walker on its sales of industrial silencers,
from Ultra on its sales of aircraft cabin quieting systems and from Oki on its
sales of communications products. In addition, the Company is entitled to
royalties from NXT on its sale of certain audio products and from suppliers to
United Airlines and other major carriers for integrated noise cancellation
active-ready passenger headsets.
From the Company's inception through September 30, 2000, its operating
revenues, including technology licensing fees and royalties, product sales,
engineering and development services and other sources, have consisted of
approximately 23% in product sales, 34% in engineering and development services,
0.4% in other revenue including advertising and 42.6% in technology licensing
fees and royalties.
Product revenues for the three and nine months ended September 30, 1999 and
2000 were:
<PAGE>
PRODUCT REVENUES
(thousands of dollars)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
Amount As a % of Total Amount As a % of Total
------------- ------------------ -------------- -----------------
Product 1999 2000 1999 2000 1999 2000 1999 2000
------------- ------ ------ -------- --------- ------- ------- -------- -------
Headsets $ 116 $ 213 20.2% 50.4% $ 524 $ 493 29.1% 40.9%
Communications 184 69 32.1% 16.3% 647 382 35.9% 31.7%
Audio 282 102 49.1% 24.1% 637 288 35.3% 23.9%
Other (8) 39 (1.4%) 9.2% (6) 42 (0.3%) 3.5%
------ ------ -------- --------- ------- ------- -------- -------
Total $ 574 $ 423 100.0% 100.0% $1,802 $1,205 100.0% 100.0%
====== ====== ======== ========= ======= ======= ======== =======
The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products.
Management believes that the Company's investment in its technology has resulted
in the expansion of its intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties,
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales, and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
(Refer to "Liquidity and Capital Resources" below and to Note 1 - "Notes to the
Condensed Consolidated Financial Statements" above for a further discussion
relating to continuity of operations.)
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Total revenues for the three months ended September 30, 2000 totaled $8.0
million, compared to $0.7 million for three months ended September 30, 1999, or
an increase of $8.3 million.
The Company's technology licensing fees and royalties recognized totaled
$7.3 million for the three months ended September 30, 2000 compared to $8,000
for the three months ended September 30, 1999, an increase of $7.3 million,
primarily due to the Company's technology licensing fees agreements with ITC,
Vidikron and Pro Tech. In the ITC transaction, the Company combined both its
$6.0 million license agreement and its Strategic Alliance and Technology
Development Amendment which calls for future payment of $2.5 million to ITC, for
financial reporting purposes and recognized a net $3.6 million of revenue. In
the Vidikron transaction, compliance with EITF No. 86-29, "Nonmonetary
Transactions: Magnitude of Boot and the Exceptions to the Use of the Fair
Value", whereby the revenue recognized from the sale of two (2) technology
licenses to Vidikron was limited to $1.0 million as compared to the fair value
of such licenses of approximately $2.0 million. In addition, the Company
recognized approximately $2.5 million in license revenue, as limited by EITF
86-29, in the Company's acquisition of Pro Tech. In the transaction with Pro
Tech the Company granted an exclusive license to Pro Tech for rights to certain
NCT technologies for use in lightweight headsets in cellular, multimedia and
telephony markets. The Company received 23.4 million shares of Pro Tech's common
stock, net of shares issued to an outside consultant, representing approximately
83% of the common stock issued and outstanding. The amounts recognized on these
three licenses represent the license fee revenue applicable to the minority
interest shareholders.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
The Company continues its efforts to expand its media business segment and
for the three months ended September 30, 2000, generated advertising revenue of
$0.2 million and media revenue of $0.2 million with cost of sales associated
with such revenue amounting to approximately $0.4 million and $0.02 million,
respectively, for the same period.
Product sales were $0.4 million for the three months ended September 30,
2000 compared to $0.6 million for the three months ended September 30, 1999, a
decrease of $0.2 million primarily due to lack of cash to fund advertising and
the acquisition of new product inventory.
For the three months ended September 30, 2000 cost of product sales was
$0.3 million compared to $0.6 million for the three months ended September 30,
1999, a decrease of $0.3 million, or 50 %. The decrease was primarily due to
lower sales for the quarter ending September 30, 2000.
For the three months ended September 30, 2000, selling, general and
administrative expenses amounted to $2.7 million as compared to $2.3 million for
the three months ended September 30, 1999, an increase of $0.4 million, or
17.4%, primarily due to the costs associated with the growth of DMC.
For the three months ended September 30, 2000, research and development
expenditures amounted to $0.7 million as compared to $1.6 million for the three
months ended September 30, 1999, a decrease of $0.9 million or 56.3%. Research
and development formerly conducted at Advancel has been outsourced to ITC
commencing in the third quarter of 2000. The Company continues to focus on
products utilizing its hearing, audio, communications and microphone
technologies, products which have been developed within a short time period and
are targeted for rapidly emerging markets.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
For the nine months ended September 30, 2000, total revenues amounted to
$9.4 million, compared to $6.6 million for the nine months ended September 30,
1999, or an increase of 42.4%.
Consistent with the Company's objectives, technology licensing fees and
royalties increased to $7.9 million in the first nine months of 2000 as compared
to $3.5 million for the same period in 1999, an increase of $4.4 million,
primarily due to the technology license fee for the licensing of the Company's
TJ and T2J Technology to ITC and the licensing agreements with Pro Tech and
Vidikron. In the ITC transaction, the Company combined both its $6.0 million
license agreement and its Strategic Alliance and Technology Development
Amendment which calls for future payment of $2.5 million to ITC, for financial
reporting purposes and recognized a net $3.6 million of revenue. In the
transaction with Pro Tech, the Company granted an exclusive license to Pro Tech
for rights to certain NCT technologies for use in lightweight headsets in
cellular, multimedia and telephony markets. The Company received 23.3 million
shares of Pro Tech's common stock representing approximately 84% of the common
stock issued and outstanding. At September 30, 2000, the Company recognized
approximately $2.5 million of license fee revenue with respect to this
transaction as limited by EITF 86-29, in the Company's acquisition of Pro Tech.
In the transaction with Vidikron, the Company and DMC signed separate agreements
to license the use of certain technology for $1.0 million each with Vidikron.
The fair value of the license fees was $2.0 million but due to the Company's
compliance with EITF No. 86-29, the revenue the Company was allowed to recognize
from the sale of these two (2) technology licenses to Vidikron was limited to
$1.0 million. Such amounts recognized on each of these three licenses represent
the license fee revenue applicable to the minority interest shareholders.
During the second quarter of 2000, retroactive to January 1, 2000, the
Company adopted the accounting policies of SAB 101. Adopting SAB 101 effective
January 1, 2000, required the Company to restate its first quarter 2000
revenues, deferring recognition of $3.9 million of previously recognized DMC
license fees. Such deferred revenue is being amortized over three years in
accordance with the Company's interpretation of SAB 101. The Company has
recognized $0.8 million of such revenue in the nine months ended September 30,
2000.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
For the nine months ended September 30, 2000, product sales were $1.2
million compared to $1.8 million for nine months ended September 30, 1999, a
decrease of $0.6 million or 33.3%, primarily due to lack of cash to fund
advertising and the acquisition of new product inventory.
For the nine months ended September 30, 2000, cost of product sales
amounted to $1.0 million versus $1.7 million for nine months ended September 30,
1999, a decrease of $0.7 million or 41.2%. The decrease was primarily due to a
reduction of product sales for the nine months ended September 30, 2000 as
compared to the nine months ended September 30, 1999. For the nine months ended
September 30, 2000 product margin increased to 13.3% as compared to 4.7% during
the nine months ended September 30, 1999 due primarily to the sale of product
inventory and reduction of new product manufacture.
The gross margin on engineering and development services increased to 8.5%
for the nine months ended September 30, 2000 from (27.7%) for the same period in
1999 due primarily through attrition of Advancel employees and completion of
certain on going contracts.
For the nine months ended September 30, 2000, selling, general and
administrative expenses totaled $5.4 million as compared to $8.0 million for the
nine months ended September 30, 1999, a decrease of $2.6 million or 32.5%,
primarily due to a decrease in litigation and patent expenses as well as a
decrease in selling and marketing related expenses, primarily advertising and
headcount and travel related expenses.
For the nine months ended September 30, 2000, research and development
expenditures totaled $3.4 million as compared to $5.1 million for the nine
months ended September 30, 1999, a decrease of $1.7 million or 33.3%, primarily
through attrition of Advancel employees in 1999. Commencing in the third quarter
of 2000, research and development formerly conducted at Advancel has been
outsourced to ITC. The Company continues to focus on products utilizing its
hearing, audio, communications and microphone technologies, products which have
been developed within a short time period and are targeted for rapidly emerging
markets.
For the nine months ended September 30, 2000, other expenses include
one-time, non-cash charges of $3.1 million for impairment of goodwill. This is
related to the Company's ownership of NCT Audio, and results from conversions
and exchanges of NCT Audio's common stock and preferred stock for the Company's
common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $137.2 million on a
cumulative basis through September 30, 2000. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) technology licensing fees, (4) royalties, (5) product sales,
and (6) engineering and development funds received from strategic partners and
customers.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties,
product sales and engineering and development services, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, and engineering and development
revenue. In that event, the Company would have to substantially cut back its
level of operations. These reductions could have an adverse effect on the
Company's relations with its strategic partners and customers. Uncertainty
exists with respect to the adequacy of current funds to support the Company's
activities until positive cash flow from operations can be achieved, and with
respect to the availability of financing from other sources to fund any cash
deficiencies. These uncertainties raise substantial doubt at September 30, 2000
about the Company's ability to continue as a going concern.
Pursuant to the amended exchange agreement between the Company and Austost
and Balmore, the Company (See Note 12 - "Notes to the Condensed Consolidated
Financial Statements" for further details) would retain 10,060,251 shares of the
Company's Common Stock (the "Remaining Returnable Shares"), and Austost and
Balmore would agree to pay the Company up to $10.0 million in cash , subject to
monthly limitations, from proceeds that Austost and Balmore would realize from
their disposition of such Remaining Returnable Shares. Austost and Balmore would
realize a 10% commission on the proceeds from the sale of these shares. The fair
market value of such shares at September 30, 2000 was approximately $1.8 million
net of commissions.
At September 30, 2000, cash and cash equivalents were $0.4 million. Cash
balances are invested in interest bearing money market accounts. The Company's
investment objective is preservation of capital while earning a moderate rate of
return.
The Company's working capital deficit was $(4.2) million at September 30,
2000, compared to a deficit of $(3.3) million at December 31, 1999. This $0.9
million increase was primarily due to additional DBSS installation expenses
which utilized the remainder of the restricted cash at September 30, 2000.
For the nine months ended September 30, 2000, the net cash used in
operating activities was $7.3 million compared to $6.6 million for the nine
months ended September 30, 1999. The increase in net cash used in operating
activities for the nine months ended September 30, 2000 of $0.7 million is
primarily due to the reduction of accounts payable and accrued expenses.
At September 30, 2000, net inventory increased $0.5 million from June 30,
2000 due primarily from the acquisition of Pro Tech.
The net cash provided by financing activities amounted to $6.3 million,
primarily due to the additional $1.0 million secured convertible note (see Note
8 - "Notes to the Condensed Consolidated Financial Statements" for further
details), net proceeds of $2.0 million from the Series G Preferred Stock
financing (see Note 12 - "Notes to the Condensed Consolidated Financial
Statements" for further details), and $1.0 million proceeds from the sale of
subsidiary common stock (see Note 12- "Notes to the Condensed Consolidated
Financial Statements" for further details).
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with
supply, manufacturing, and distribution and marketing partners to commercialize
its technology. The benefits of this strategy include: (i) dependable sources of
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company to
integrate its active technology into products with limited capital investment in
production facilities and manufacturing personnel; and (iii) access to
well-established channels of distribution and marketing capability of leaders in
several market segments.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
There were no material commitments for capital expenditures as of September
30, 2000, and no other material commitments are anticipated in the near future.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 9 - "Notes to the Condensed
Consolidated Financial Statements" which is included herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
(a) On September 29, 2000, Pro Tech entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with the Company, Austost, Balmore and
Zakeni Limited, (Austost, Balmore and Zakenie Limited collectively the "Pro Tech
Investors") to sell an aggregate value of up to $1,500,000 (1,500 shares) of Pro
Tech Series A Convertible Preferred Stock ("Pro Tech Preferred") to the Pro Tech
Investors. On such a date Pro Tech issued and sold 1,500 shares of Pro Tech
Preferred having an aggregate state value of $1,500,000.
(b) Purchasers. The purchaser of the 1,500 shares of Pro Tech Preferred
was:
Austost Anstalt Schaan 375 shares
Balmore Funds S.A. 375 shares
Zakenie Limited 750 shares
(c) Consideration. The aggregate offering price for 1,500 shares of Pro
Tech Preferred having an aggregate stated value of $1,500,000 was $1,500,000.
(d) Exemption from Registration Claimed. Exemption from registration is
claimed under Regulation D promulgated under the Securities Act. To the best of
the Company's knowledge and belief and in accordance with representations and
warranties made by the purchasers of Pro Tech Preferred, the purchaser is an
"accredited investor" as defined under Regulation D.
(e) Terms of Conversion. Each share of Pro Tech Preferred is convertible
into a number of shares of common stock of Pro Tech or the Company as determined
in accordance with the following formula (the "Exchange Rate"):
Face Value Number of Shares of
------------------ = NCT Common Stock
Exchange Price
provided that NCT shall have the option to pay the 4% Accretion accrued on each
Pro Tech Preferred 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
------------------ = NCT Common Stock
Exchange Price
where
(i) "Face Value" equals the Stated Value plus the 4% Accretion accrued
on each share of Pro Tech Preferred;
(ii) "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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of stockholders of the Company was held on July 13, 2000.
At the meeting, Jay M. Haft, Michael J. Parrella, John J. McCloy II and Sam
Oolie were elected directors, each to serve until the next annual meeting of
stockholders and until his successor is elected and qualified. The stockholders
also (1) approved an amendment of the Company's Restated Certificate of
Incorporation to increase the number of shares of common stock authorized
thereunder from 325,000,000 shares to 450,000,000 shares and (2) approved the
amendment to the Company's 1992 Stock Incentive Plan to increase the aggregate
number of shares of the Company's reserved for awards of restricted stock and
for issuance upon the exercise of stock options granted under the 1992 Plan from
30,000,000 shares to 50,000,000 shares. The vote taken at such meeting was as
follows:
(a) With respect to the election of the directors:
FOR WITHHELD
Jay M. Haft 238,962,963 5,857,259
Michael J. Parrella 240,517,118 4,303,104
John J. McCloy II 239,204,999 5,615,223
Sam Oolie 239,221,074 5,599,148
(b) With respect to the proposal to approve the amendment of the
Company's Restated Certificate of Incorporation to increase the
number of shares of common stock authorized thereunder from
325,000,000 to 450,000,000 shares:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
229,954,354 13,770,375 1,095,493
(c) With respect to the proposal to approve the amendment to the
Company's 1992 Stock Incentive Plan to increase the aggregate number
of shares of the Company's reserved for awards of restricted stock
and for the issuance upon the exercise of stock options under the
1992 Plan from 30,000,000 to 50,000,000 shares:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
229,954,354 13,770,375 1,095,493
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 10 License Agreement Amendment dated June 30, 2000, between NCT
Group, Inc., Advancel Logic Corporation and Infinite
Technology Corporation
Exhibit 10 Strategic Alliance and Technology Development Amendment dated
June 30, 2000, between NCT Group, Inc., Advancel Logic
Corporation and Infinite Technology Corporation
Exhibit 10 License Agreement dated September 29, 2000, between NCT Group,
Inc. and Vidikron of America, Inc.
Exhibit 10 License Agreement dated September 29, 2000, between Distributed
Media Corporation and Vidikron of America, Inc.
Exhibit 27 Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
Registrant
By: /s/ MICHAEL J. PARRELLA
----------------------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ CY E. HAMMOND
----------------------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: November 20, 2000
