UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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
incorporation or organization) Identification
Number)
1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
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(410) 636-8700
(Registrant's telephone number, including area code)
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(In thousands except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ------------------------
1998 1999 1998 1999
----------- ----------- ---------- -----------
REVENUES:
Technology licensing fees and royalties $ 29 $ 8 $ 375 $ 3,509
Product sales, net 548 574 1,613 1,802
Engineering and development services 138 128 287 1,303
----------- ----------- ---------- -----------
Total revenues $ 715 $ 710 $ 2,275 $ 6,614
----------- ----------- ---------- -----------
COSTS AND EXPENSES:
Cost of product sales $ 383 $ 634 $ 1,252 $ 1,717
Cost of engineering and development services 65 761 193 1,664
Selling, general and administrative 3,159 2,318 7,613 7,981
Research and development 1,430 1,644 4,727 5,102
Other (income)/expense (Note 5) 38 2,292 (3,344) 2,599
Write down of investment inunconsolidated
affiliate (Note 5) - - - 2,385
Interest (income)/expense (114) 16 (326) (41)
----------- ----------- ---------- -----------
Total costs and expenses $ 4,961 $ 7,665 $ 10,115 $ 21,407
----------- ----------- ---------- -----------
NET LOSS $ (4,246) $ (6,955) $ (7,840) $ (14,793)
=========== =========== ========== ===========
Preferred stock dividend requirement $ 723 $ 5,327 $ 2,413 $ 10,567
Accretion of difference between carrying amount
and redemption amount of redeemable
preferred stock 699 131 1,183 315
----------- ----------- ---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (5,668) $ (12,413) $ (11,436) $ (25,675)
=========== =========== ========== ===========
Basic and diluted loss per share $ (0.04) $ (0.06) $ (0.08) $ (0.14)
=========== =========== ========== ===========
Weighted average common shares
outstanding - basic and diluted 151,740 188,009 140,906 173,453
=========== =========== ========== ===========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(in thousands, unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ------------------------
1998 1999 1998 1999
----------- ----------- ---------- -----------
NET LOSS $ (4,246) $ (6,955) $ (7,840) $ (14,793)
Other comprehensive income/(loss):
Currency translation adjustment (65) 9 (78) 30
----------- ----------- ---------- -----------
COMPREHENSIVE LOSS $ (4,311) $ (6,946) $ (7,918) $ (14,763)
=========== =========== ========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1) (in thousands of dollars)
December 31, September 30,
1998 1999
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ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 529 $ 547
Restricted cash (Note 7) - 847
Accounts receivable, net of reserves (Note 2) 716 825
Inventories, net of reserves (Note 3) 3,320 2,860
Other current assets 185 152
------------ -------------
Total current assets $ 4,750 $ 5,231
Property and equipment, net 997 633
Goodwill, net 1,506 4,411
Patent rights and other intangibles, net (Note 6) 2,881 3,305
Other assets (Note 5) 5,331 1,715
------------ -------------
$ 15,465 $ 15,295
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,226 3,602
Accrued expenses 1,714 2,248
Accrued payroll, taxes and related expenses 241 320
Other liabilities (Note 6) 756 769
Customers' advances - 23
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Total current liabilities $ 5,937 $ 6,962
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Long term liabilities:
Convertible notes and accrued interest (Note 7) $ - $ 3,864
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Total long term liabilities $ - $ 3,864
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Commitments and contingencies
------------ -------------
Common stock subject to resale guarantee (Note 9) $ - $ 1,756
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Minority interest in consolidated subsidiary
Preferred stock in subsidiary, $.10 par value, 1,000 shares authorized,
issued and outstanding, 60 and 3 shares, respectively (redemption amount
$6,102,110 and $314,138, respectively) $ 6,102 $ 314
------------ -------------
Stockholders' equity (Note 4)
Preferred stock, $.10 par value, 10,000,000 shares authorized
Series C preferred stock, 700 shares issued and outstanding
(redemption amount $731,222 and $752,164, respectively) $ 702 $ 723
Series D preferred stock, issued and outstanding, 6,000 and 0 shares,
respectively (redemption amount $6,102,110 and $0, respectively) 5,240 -
Series E preferred stock, issued and outstanding, 10,580 and 5,171
shares, respectively (redemption amount $10,582,319 and $5,326,870,
respectively) 3,298 3,062
Series F preferred stock, issued and outstanding, 0 and 8,500 shares,
respectively (redemption amount $0 and $8,546,575 respectively) - 4,970
Common stock, $.01 par value, authorized 255,000,000 and 325,000,000 shares,
respectively; issued 156,337,316 and 217,893,010 shares, respectively 1,563 2,179
Additional paid-in-capital 107,483 124,089
Unearned portion of compensatory stock, warrants and (238) (104)
Expenses to be paid with common stock - (2,285)
Accumulated deficit (107,704) (122,497)
Cumulative translation adjustment 45 75
Stock subscriptions receivable (4,000) (4,000)
Treasury stock (6,078,065 shares of common stock , 0 shares of preferred
stock and 6,078,065 shares of common stock, 1,726 shares of Series E
preferred stock, respectively) (2,963) (3,813)
------------ ------------
Total stockholders' equity $ 3,426 $ 2,399
------------ ------------
$ 15,465 $ 15,295
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited) (in thousands of dollars)
Nine months ended September 30,
-------------------------------
1998 1999
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Cash flows from operating activities:
Net (loss) $ (7,840) $ (14,793)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 805 1,389
Common stock options and warrants issued as consideration for:
Compensation 213 167
Patent rights 446 -
Provision for tooling costs 39 69
Provision for doubtful accounts 62 92
Loss on disposition of fixed assets 35 -
Write down of investment in unconsolidated affiliate (Note 5) - 2,385
Preferred stock received for license fees (Note 9) - (850)
Reserve for note receivable (Note 5) - 1,624
Beneficial conversion feature on convertible note (Note 7) - 204
Amortization of debt discount (Note 7) - 47
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (195) 64
(Increase) decrease in license fees receivable 200 (265)
(Increase) decrease in inventories, net (2,583) 460
(Increase) decrease in other assets (524) 37
Increase in accounts payable and accrued expenses 843 2,351
Increase (decrease) in other liabilities (514) 453
----------- -----------
Net cash (used in) operating activities $ (9,013) $ (6,566)
----------- -----------
Cash flows from investing activities:
Capital expenditures $ (462) $ (136)
Acquisition of patent rights (Note 6) (200) (900)
Sale of fixed assets 44 -
Acquisition of affiliates (Note 5) (4,900) -
----------- -----------
Net cash (used in) investing activities $ (5,518) $ (1,036)
----------- -----------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) (Note 7) $ - $ 4,000
Sale of preferred stock (net) (Note 9) 10,292 4,435
Sale of common stock (net) 352 1
Purchase of treasury shares (3,078) -
----------- -----------
Net cash provided by financing activities $ 7,566 $ 8,436
----------- -----------
Effect of exchange rate changes on cash $ (90) $ 31
----------- -----------
Net increase (decrease) in cash and cash equivalents $ (7,055) $ 865
Cash and cash equivalents - beginning of period 12,604 529
----------- -----------
Cash and cash equivalents - end of period $ 5,549 $ 1,394
=========== ===========
Cash paid for interest $ 1 $ 1
=========== ===========
Non-cash transactions:
Common stock subject to resale guarantee $ - $ 1,756
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NCT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to instructions and rules of the
Securities and Exchange Commission (the "Commission"). Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and certain
adjustments to reserves and allowances) considered necessary for a fair
presentation have been included. Operating results for the three months and the
nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. 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, 1998, filed on March 31, 1999 as
amended by Amendment No. 1 thereto filed on May 3, 1999 and Amendment No. 2
thereto filed on May 3, 1999.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $122.5 million on a
cumulative basis through September 30, 1999. 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.
Cash, cash equivalents and short-term investments amounted to $1.4 million
at September 30, 1999, increasing from $0.5 million at December 31, 1998.
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 and the funding derived from
technology licensing fees, royalties, product sales and engineering 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, management
believes additional working capital financing must be obtained. There is no
assurance any such financing is or would become available.
On January 25, 1999, the Company granted DistributedMedia.com, Inc.
("DMC"), a wholly owned subsidiary of the Company formed on November 24, 1998,
an exclusive worldwide license with respect to all of the Company's relevant
patented and unpatented technology relating to DMC products in consideration for
a license fee of $3.0 million (eliminated in consolidation). Such license fee is
to be paid when proceeds are available from the sale of DMC common stock. In
addition, running royalties will be payable to the Company with respect to DMC's
sales of products incorporating the licensed technology and its sublicensing of
such technology. It is anticipated that DMC will issue shares of its common
stock in transactions exempt from registration in order to raise additional
working capital.
On February 9, 1999, NCT Audio Products, Inc. ("NCT Audio") and New
Transducers Ltd. ("NXT") expanded the Cross License Agreement dated September
27, 1997 to increase NXT's fields of use to include aftermarket ground based
vehicles and aircraft sound systems. The expanded agreement also increased the
royalties due NCT Audio from NXT to 10% from 6% and increased the royalties due
NXT from NCT Audio to 7% from 6%. In consideration for granting NXT these
expanded license rights, NCT Audio received licensing fees of $0.5 million. Also
on February 9, 1999, NCT Audio and NXT amended the Master License Agreement to
include a minimum royalty payment of $160,000 in 1999, to be paid by NCT Audio
to NXT in equal quarterly installments. The Company has recorded a liability of
$0.1 million at September 30, 1999.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of 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 obligations of $0.5 million and filed a
Form S-1 resale registration statement with the Commission covering such shares.
The current obligations of $1.8 million are reflected as common stock subject to
resale guarantee. On October 27, 1999, the Company issued an additional
1,148,973 shares of common stock to suppliers and consultants to settle future
obligations of $0.2 million. On October 28, 1999, the Company filed a
pre-effective amendment to the Form S-1 resale registration statement to include
such additional shares. The registration statement, as amended, also included
those shares of the Company's common stock that were issued in exchange for NCT
Audio common stock to Balmore (as defined on page 12). The registration
statement (File No. 333-87757) was declared effective by the Commission on
November 2, 1999.
On June 24, 1999, NCT Hearing Products, Inc. ("NCT Hearing"), a wholly
owned subsidiary of the Company, signed a letter of intent to acquire sixty
percent (60%) of the common stock of Pro Tech Communications, Inc. ("Pro Tech")
in exchange for rights to certain NCT Hearing technology. Consummation of the
transaction is contingent upon NCT Hearing raising $2.0 million of equity
financing.
On August 16, 1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. The Company reduced its
worldwide work force by approximately 25%. Charges related to this amount to
$0.1 million and were recorded in the third quarter of 1999.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described above raise substantial doubt at September 30, 1999,
about the Company'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. Accounts Receivable:
Accounts receivable comprise the following:
(thousands of dollars)
December 31, September 30,
1998 1999
-------------- --------------
Technology license fees and royalties $ 192 $ 457
Engineering and development services 200 99
Other 552 444
Allowance for doubtful accounts (228) (175)
-------------- --------------
Accounts receivable, net of
reserves $ 716 $ 825
============== ==============
3. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, September 30,
1998 1999
-------------- --------------
Components $ 745 $ 588
Finished Goods 3,083 2,824
-------------- --------------
Gross Inventories $ 3,828 $ 3,412
Reserve for Obsolete & Slow Moving
Inventory (508) (552)
-------------- --------------
Inventories, Net of Reserves $ 3,320 $ 2,860
============== ==============
The reserve for obsolete and slow moving inventory at September 30, 1999
has increased to $0.6 million primarily due to a $0.3 million charge for slow
moving hearing product inventory during the first nine months of 1999 net of
applications of reserve.
4. Stockholders' Equity:
The changes in stockholders' equity during the nine months ended September
30, 1999, were as follows:
(in thousands)
-------------------------------------------------------------------------------------------------------------
Accre- Expenses
Exchange/ tion/ Net Unearned To Be
Conver- Dividend Sale Stock Compen- Paid Transla-
Balance sion of of of Subcrip- satory With tion Balance
at Preferred Preferred Common tion Options/ Net Common Adjust- at
12/31/98 Stock Stock Stock Receivable Warrants Loss Stock ment 9/30/99
-------------------------------------------------------------------------------------------------------------
Series C
Preferred
Stock:
Shares 1 - - - - - - - - 1
Amount $ 702 $ - $ 21 $ - $ - $ - $ - $ - $ - $ 723
Series D
Preferred
Stock:
Shares 6 (6) - - - - - - - -
Amount $ 5,240 $(5,273) $ 33 $ - $ - $ - $ - $ - $ - $ -
Series E
Preferred
Stock:
Shares 11 (6) - - - - - - - 5
Amount $ 3,298 $(3,438) $ 3,202 $ - $ - $ - $ - $ - $ - $ 3,062
Series F
Preferred
Stock:
Shares - 9 - - - - - - - 9
Amount $ - $ 4,924 $ 46 $ - $ - $ - $ - $ - $ - $ 4,970
Common
Stock:
Shares 156,337 49,549 - 5 - - - 12,007 - 217,898
Amount $ 1,563 $ 496 $ - $ - $ - $ - $ - $ 120 $ - $ 2,179
Treasury
Stock:
Shares 6,078 2 - - - - - - - 6,080
Amount $ (2,963) $ (850) $ - $ - $ - $ - $ - $ - $ - $ (3,813)
Additional
Paid-in
Capital $ 107,483 $13,577 $(3,366) $4,230 $ - $ - $ - $ 2,165 $ - $ 124,089
Accumulated
(Deficit) $(107,704) $ - $ - $ - $ - $ - $(14,793) $ - $ - $(122,497)
Cumulative
Translation
Adjustment $ 45 $ - $ - $ - $ - $ - $ - $ - $ 30 $ 75
Stock
Subscription
Receivable $ (4,000) $ - $ - $ - $ - $ - $ - $ - $ - $ (4,000)
Expenses
to be
Paid with
Common Stock $ - $ - $ - $ - $ - $ - $ - $(2,285) $ - $ (2,285)
Unearned
Compensatory
Stock Option $ (238) $ - $ - $ - $ - $ 134 $ - $ - $ - $ (104)
5. Other Assets:
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), an automotive audio system
supplier, for a purchase price of $10,000,000 and up to an additional $6,000,000
in possible future cash contingent payments. On June 11, 1998, NCT Audio paid a
non-refundable deposit of $1,450,000 towards the purchase price. The
shareholders of Top Source Technologies, Inc., TSA's parent company, approved
the transaction on December 15, 1998.
NCT Audio then paid Top Source Technologies ("TST"), Inc. $2,050,000 on
July 31, 1998. The money was held in escrow with all of the necessary securities
and documents to evidence ownership of 20% of the total equity rights and
interests in TSA. When Top Source Technologies, Inc.'s shareholders approved the
transaction, the $2,050,000 was delivered to TSA. In return, NCT Audio took
ownership of the documentation and securities held in escrow.
NCT Audio had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay Top Source Technologies, Inc. $6.5 million on or before
March 31, 1999 to complete the acquisition of TSA's assets. As consideration for
an extension of such exclusive right from March 31, 1999 to May 28, 1999, NCT
Audio agreed to pay Top Source Technologies, Inc. a fee of $350,000 consisting
of $20,685 in cash, $125,000 of NCT Audio's minority interest in TSA earnings,
and a $204,315 note payable, due April 16, 1999. If NCT Audio failed to pay the
note by April 16, 1999, (a) the note would begin to accrue interest on April 17,
1999 at the lower of the rate of two times the prime rate or the highest rate
allowable by law; and (b) the $20,685 and $125,000 portion of the extension fee
would no longer be credited toward the $6.5 million purchase consideration due
at closing. If NCT Audio failed to pay the note by April 30, 1999, the $204,315
portion of the extension fee would no longer be credited toward the $6.5 million
closing amount due. To date, NCT Audio has not paid the note. Further, if NCT
Audio failed to close the contemplated transaction by May 28, 1999, NCT Audio
would forfeit its minority earnings in TSA for the period June 1, 1999 through
May 30, 2000. In addition, due to NCT Audio's failure to close the transaction
by March 31, 1999, NCT Audio must pay a penalty premium of $100,000 of NCT
Audio's preferred stock. In exchange for an extension from May 28, 1999 to July
15, 1999, NCT Audio relinquished 25% of its minority equity ownership in TSA. As
a result, NCT Audio now has a 15% minority interest in TSA.
On or about July 15, 1999, NCT Audio determined it would not proceed with
the purchase of the assets of TSA, as structured, primarily due to its
difficulty in raising the requisite cash consideration. As a result, NCT Audio
has reduced its net investment in TSA to $1.2 million, representing a 15%
minority interest (net of the above noted penalties and the minority interest in
TSA earnings), and recorded a $2.4 million write down to its estimated net
realizable value at September 30, 1999. On September 30, 1999, Onkyo America
purchased substantially all of the assets of TSA and certain assets of TST used
in the business of TSA. NCT Audio is seeking a minimum of its pro rata share
(15%) of such consideration less the above noted penalties.
On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC (doing business as Precision Power, Inc. or "PPI").
PPI supplies custom-made automotive audio systems. NCT Audio will acquire the
interest in exchange for shares of its common stock having an aggregate value of
$2,000,000. NCT Audio also agreed to retire $8.5 million of PPI debt, but NCT
Audio must obtain adequate financing before the transaction can be completed. In
addition, NCT Audio provided PPI a working capital loan on June 17, 1998 in the
amount of $500,000, which is evidenced by a demand promissory note. On August
18, 1998, NCT Audio provided PPI another working capital loan in the amount of
$1,000,000, which is also evidenced by a demand promissory note. The unpaid
principal balance of these notes bears interest at a rate equal to the prime
lending rate plus one percent (1.0%).
As noted, the transaction is contingent on NCT Audio obtaining outside
financing to retire the PPI debt. On January 6, 1999, the PPI members notified
NCT Audio that, while they remain willing to do the transaction, they may choose
at some point to abandon the transaction because NCT Audio has not obtained the
financing in a timely manner. They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock, they would insist that NCT Audio pay them
that amount in cash at any closing. To date, NCT Audio has not been able to
obtain the financing to consummate this transaction, and PPI is currently
experiencing significant organizational changes which have resulted in
cancellation of the agreement for NCT Audio to acquire the members' interest in
PPI. During the third quarter of 1999, NCT Audio fully reserved the promissory
note plus interest due from PPI ($1.6 million) but continues seeking repayment
of the note. NCT Audio is currently seeking a substitute acquisition.
6. Other Liabilities:
On June 5, 1998, Interactive Products, Inc. ("IPI") entered into an
agreement with the Company granting the Company a license to, and an option to
purchase, a joint ownership interest in patents and patents pending which relate
to IPI's speech recognition, speech compression and speech identification and
verification technologies. The aggregate value of the patented technologies is
$1,250,000, which was paid by a $150,000 cash payment and delivery of 1,250,000
shares of the Company's common stock. On July 5, 1998, the Company paid IPI
$50,000, which was held in escrow as security for the fulfillment of the
Company's obligations towards the liability. IPI received $596,000 from the
proceeds of the sale of the Company's shares. The Company has recorded a
liability of $454,000 at September 30, 1999.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hasupie Speech Products N.V. ("L&H"). The agreement provides the Company with a
worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. The Company recorded a $0.9 million
patent technology right.
On April 12, 1999, the Company granted a worldwide non-exclusive,
non-transferable license to L&H. The agreement provides L&H access to NCT's
noise and echo cancellation algorithms for use in L&H's technology. In
consideration of the Company's grant of a license to L&H, the Company recognized
a non-refundable royalty fee of $0.8 million.
During the third quarter, L&H and the Company agreed to offset the
balances due each other. Consequently, the Company's balance due L&H at
September 30, 1999 is $0.1 million.
7. Convertible Notes:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. A secured convertible note (the "Note") for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in The Wall Street Journal from the issue date until the Note becomes
due and payable. The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time, all or from time to time,
any part of the outstanding and unpaid amount of the Note into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price, as amended by the parties on September 19, 1999, on the
notes and any future notes, shall be the lesser of (i) the lowest closing
transaction price for the common stock on the securities market on which the
common stock is being traded, at any time during September 1999; (ii) the
average of the closing bid prices 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 (iii) the fixed conversion price of $0.17.
In no event will the conversion price be less than $0.12 per share. The Company
and Holder have agreed to extend the date for the purchase of the remaining
installments of secured convertible notes to December 1, 1999. On each of June
4, 1999, June 11, 1999, July 2, 1999, July 23, 1999, August 25, 1999 and
September 19, 1999, the Company received proceeds of $250,000, $250,000,
$500,000, $250,000, $500,000 and $250,000, respectively, from the Holder for
other secured convertible notes with the same terms and conditions of the Note
described above. The Company recorded a $0.2 million non-cash interest expense
for the period ended September 30, 1999 in connection with the secured
convertible notes.
On July 19, 1999, DMC signed a convertible guaranteed term promissory note
("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. PRG will provide lease financing to DMC for its Sight and Sound(TM)
systems (the "Systems") and will provide integration, installation and
maintenance services to DMC. DMC received a portion of the PRG Note ($125,000)
on July 22, 1999. Of the total amount, $750,000 has been deposited into an
escrow account and will be used to pay rental and installation costs due from
DMC with respect to the Systems. Further, DMC may draw an additional $125,000
provided that PRG continues to have a good faith belief that the Systems are
functioning properly and that DMC has obtained at least one network-wide
advertising client providing annual advertising revenues of at least $250,000.
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. DMC also has
the right to lease from PRG additional Systems with an aggregate value of up to
$9.5 million, provided that PRG is reasonably satisfied with the success of the
DMC business, including the technology and economics thereof and its likelihood
of the continued success. In connection with the PRG Note, PRG was granted a
common stock warrant equal to either (i) the number of shares of the Company's
common stock which may be purchased for an aggregate purchase price of
$1,250,000 at the fair market value on July 19, 1999 or (ii) the number of
shares representing five percent of the fully paid non-assessable shares of
common stock of DMC at the purchase price per share equal to either (x) if a DMC
qualified sale (a sale in one transaction in which the aggregate sales proceeds
to DMC equal or exceed $5,000,000) has closed on or before December 31, 1999,
the purchase price per share determined by multiplying the price per share of
DMC common stock or security convertible into DMC common stock by seventy-five
percent (75%) or (y) if a DMC qualified sale has not closed on or before
December 31, 1999, at an aggregate price of $1,250,000. The Company allocated a
portion of the proceeds to the warrant, which is being treated as debt discount
($0.4 million) and amortized over the period of the note. The Company recorded a
$47,000 non-cash interest expense for the period ended September 30, 1999 in
connection with the PRG Note.
8. Litigation:
On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. Reference is made to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as amended, for
a discussion of this suit. On May 4, 1999, the Company's Italian law firm
informed the Company that the Tribunal of Milan had verbally granted the
Company's objection to lack of venue and had consequently rejected Mr. Valerio's
claim and awarded the Company expenses in the amount of approximately $7,000.
The Company is awaiting receipt of the official text of the judgement.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, as amended, for a discussion of this
matter. There were no material developments in this matter during the period
covered by this report.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott &
Co., Inc. and the Company in the United States District Court, Southern District
of New York. Reference is made to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, as amended. 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. Reference is made to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, as amended. There were no
material developments in this matter during the period covered by this report.
On December 15, 1998, Balmore Funds, S.A. and Austost Anstalt Schaan
("Balmore") filed suit against the Company's subsidiary, NCT Audio, and the
Company in the Supreme Court of the State of New York, County of New York.
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, as amended, for a discussion of this matter.
On October 9, 1999, the Company, NCT Audio, Balmore, and LH Financial
agreed, in principle, to settle all legal charges, claims and counterclaims
which have individually or jointly been asserted against the parties. On October
9, 1999, pursuant to the NCT Audio stock agreement, the Company, NCT Audio and
Balmore also agreed to exchange 532 shares of NCT Audio common stock held by
Balmore into 17,333,334 shares of common stock of the Company. The issuance of
such shares of common stock was ratified by the Board of Directors on October
22, 1999.
On September 16, 1999, certain former shareholders and optionees (the
"Claimants") of Advancel filed a Demand for Arbitration against the Company with
the American Arbitration Association in San Francisco, California. The primary
remedy the Claimants seek is recision of the Stock Purchase Agreement, the
return of the Advancel stock surrendered in conjunction with the purchase of
Advancel by the Company and damages to be determined by arbitration. The Company
filed a response and counterclaim on October 13, 1999. After consultation with
outside legal counsel, management recognizes that the Company may lose some or
all of its claims, encountering significant liability. In the event this Demand
for Arbitration does result in a substantial judgment against the Company, said
judgment could have a material effect on the Company's quarterly or annual
operating results. Outside legal counsel has indicated that it is impossible to
estimate a range of potential liability at this early stage with any degree of
certainty. The parties have agreed on an arbitrator who has scheduled late March
2000 for an arbitration hearing. Discovery is currently taking place in the
action.
On September 16, 1999, the Company filed a Demand for Arbitration before
the American Arbitration Association in Wilmington, Delaware, against TST and
TSA (the "Respondents") alleging, among other things, breach of the asset
purchase agreement, breach of fiduciary duty as a majority shareholder and
breach of obligation of good faith and fair dealing. The Company seeks recission
of the purchase agreement and recovery of monies paid to TST for TSA's assets.
Concurrently, the Company commenced a preliminary injunction proceeding in the
Delaware Court of Chancery, seeking to prevent TST from selling TSA's assets to
Onkyo America pending completion of the arbitration proceeding. Such court
action was subsequently withdrawn by the Company.
On December 8, 1999, Respondents filed an answer and counterclaim in
connection with the arbitration proceeding. Respondents asserted their
counterclaim to recover (i) the monies and stock owned under the extension
agreements; (ii) the $1 million differential between the $9 million purchase
price paid by Onkyo America for TSA's assets and the $10 million purchase price
that NCT Audio had been obligated to pay; (iii) expenses associated with
extending NCT Audio's time to close the transaction; and (iv) certain legal
expenses incurred by Respondents.
The Company believes there are no other patent infringement litigations,
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.
9. Common Stock:
For the nine-month period ended September 30, 1999, the Company issued
12,273,685 shares of the Company's common stock in connection with the
conversion of the Company's Series D Convertible Preferred Stock ("Series D
Preferred Stock") issued in the third quarter of 1998 in a private placement
exempt from registration pursuant to Regulation D of the Securities Act of 1933
(the "Securities Act"). Reference is made to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, as amended, for further
discussion.
For the nine-month period ended September 30, 1999, 57 shares of NCT Audio
Series A Convertible Preferred Stock, 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 5,700 shares of Series D Preferred Stock,
which were converted into 11,699,857 shares of the Company's common stock.
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, as amended, for further discussion.
During the nine-month period ended September 30, 1999, the Company
received gross proceeds of $4.0 million less expenses of $0.6 million in
connection with the Company's Series E Convertible Preferred Stock ("Series E
Preferred Stock") issued in the fourth quarter of 1998 in a private placement
exempt from registration pursuant to Regulation D of the Securities Act. As of
October 31, 1999, 3,827 shares of the Company's Series E Preferred Stock had
been converted into 26.6 million shares of the Company's common stock. Reference
is made to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, as amended, for further discussion.
On March 31, 1999, the Company signed a license agreement to exchange
3,600 shares of Series E Preferred Stock for four (4) DMC network affiliate
licenses incorporating DBSS. The exchange of shares of Series E Preferred Stock
is in lieu of cash consideration. The DBSS technology was developed by DMC, a
wholly-owned subsidiary of the Company. DMC was incorporated to develop, install
and provide an audio/visual advertising medium within commercial/professional
settings. DBSS schedules advertisers' customized broadcast messages, which are
downloaded via the internet with the respective music genre of choice to the
commercial/professional establishments.
The Company anticipates the sale of such licenses to approximate $1.0
million each based on regional and commercial/professional settings. The Company
has developed standard license agreements to coincide with its current business
plan and delineate the extent and nature of the rights and duties of the Company
and its licensees. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized $2.0 million on the
issuance of such licenses in consideration of the receipt of 3,600 shares of its
Series E Preferred Stock in a related party transaction. During the three months
ended June 30, 1999, the Company adjusted such revenue to $0.9 million based
upon the valuation of additional shares of Series E Preferred Stock issued
during the three months ended June 30, 1999. As a result, realization of revenue
was limited to the related party's consideration representing the Series E
Preferred Stock.
On April 13, 1999, the Board of Directors granted options to purchase 8.6
million shares of the Company's common stock to certain officers, other
employees and consultants of the Company. Options to purchase 1.8 million of
such shares vest immediately. Options to purchase 6.8 million of such shares
will not become vested or exercisable until the satisfaction of additional
vesting requirements based on the passage of time. The foregoing options were
granted with the exercise price equal to the fair value of the Company's common
stock on April 13, 1999, or $0.41 per share, as determined from the closing bid
price as reported by the NASDAQ OTC Bulletin Board.
At the annual meeting of stockholders of the Company on June 24, 1999, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 255,000,000 to 325,000,000. This
amendment became effective on July 29, 1999, when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of 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 obligations of $0.5 million. The current
obligations of $1.8 million are reflected as common stock subject to resale
guarantee. On October 27, 1999, the Company issued an additional 1,148,973
shares of common stock to suppliers and consultants to settle future obligations
of $0.2 million. On October 28, 1999, the Company filed a pre-effective
amendment to the Form S-1 resale registration statement to include such
additional shares. The registration statement, as amended, also included those
shares of the Company's common stock that were issued in exchange for NCT Audio
common stock to Balmore (as defined on page 15). The registration statement
(File No. 333-87757) was declared effective by the Commission on November 2,
1999.
On August 10, 1999, the Company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F Convertible Preferred Stock (the
"Series F Preferred Stock"), in a private placement pursuant to Regulation D of
the Securities Act, to five unrelated accredited investors through one dealer
(the "1999 Series F Preferred Stock Private Placement"). On August 10, 1999, the
Company received $1.0 million for the sale of 8,500 shares of Series F Preferred
Stock having an aggregate stated value of $8.5 million. At the Company's
election, the investors may invest up to an additional $4.0 million in cash or
in kind at a future date. Each share of the Series F Preferred Stock has a par
value of $.10 per share and a stated value of one thousand dollars ($1,000) with
an accretion rate of four percent (4%) per annum on the stated value. Each share
of Series F Preferred Stock is convertible into fully paid and non-assessable
shares of the Company's common stock, subject to certain limitations. Under the
terms of the Series F Subscription Agreement, the Company was required to file a
registration statement on Form S-1 on or prior to a date which is no more than
forty-five (45) days from the date that the Company has issued a total of 1,000
shares of Series F Preferred Stock, covering the resale of all of the
registrable securities (the "Series F Closing Date"). The shares of Series F
Preferred Stock become convertible into shares of common stock at any time
commencing after the earlier of (i) forty-five (45) days after the Series F
Closing Date; (ii) five (5) days after the Company receives a "no review" status
from the SEC in connection with the Series F registration statement; or (iii)
the effective date of the Series F registration statement. Each share of Series
F Preferred Stock is convertible into a number of shares of common stock of the
Company as determined in accordance with a formula (the "Series F Conversion
Formula"), as defined in the agreement. The conversion formula provides that the
stated value of the preferred stock plus 4% accretion thereon for the number of
days between (i) the Series F Closing Date and (ii) the conversion date be
divided by the amount obtained by multiplying the 80% times the average market
price for the Company's common stock for the five (5) consecutive trading days
immediately preceding such date. The conversion terms of the Series F Preferred
Stock also provide that in no event shall the Company be obligated to issue more
than 35,000,000 shares of its common stock in the aggregate in connection with
the conversion of up to 12,500 shares of Series F Preferred Stock. The Company
is also obligated to pay a 4% per annum accretion on the stated value of Series
F Preferred Stock in either cash or common stock, at the Company's election. The
Company registered an aggregate of 25,744,000 shares of common stock issuable
upon conversion and payment for accretion. In connection with the Series F
Preferred Stock, the Company may be obligated to redeem the excess of the stated
value over the amount permitted to be converted into common stock. Such
additional amounts will be treated as obligations of the Company. On September
10, 1999, the Company received $4.0 million for four DMC network affiliate
licenses from four accredited investors. While the investors agreed upon the
exchange of 8,500 shares of Series F Preferred Stock having aggregate stated
value of $8.5 million, for consideration of $1.0 million, the Company has
treated the additional $4.0 million for the DMC licenses as additional
consideration for the Series F Preferred Stock.
At September 30, 1999, the aggregate number of shares of common stock
required to be reserved for issuance upon the exercise of all outstanding
options and warrants was 38.6 million shares, and the aggregate number of shares
of common stock required to be reserved for issuance upon conversion of issued
and outstanding shares of the remaining Series C Convertible Preferred Stock was
1.5 million shares. The Company has also reserved 24.8 million shares of common
stock for issuance to certain holders of NCT Audio common stock upon their
exercise of certain rights to exchange their shares of NCT Audio common stock
for shares of the Company's common stock, 0.7 million shares of common stock
reserved for the issuance upon exchange of the remaining Series A Preferred
Stock for Series D Preferred Stock, 0.2 million shares of common stock reserved
for the issuance upon conversion of Series E Preferred Stock, 25.7 million
shares of common stock reserved for the issuance upon conversion of Series F
Preferred Stock and 24.3 million shares of common stock reserved for the
issuance upon conversion of the secured convertible notes. At September 30,
1999, the number of shares available for the exercise of options and warrants
was 39.2 million and of the outstanding options and warrants, options and
warrants to purchase 24.7 million shares were currently exercisable. Common
shares issued and issuable exceed the number of shares authorized at September
30, 1999. However, should shares of common stock issued reach the authorized
limit, shares in excess of the limit will be borrowed from the 1992 Plan.
10. Business Segment Information:
During 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information" ("SFAS No. 131"). The
provisions of SFAS No. 131 require the Company to disclose the following
information for each reporting segment: general information about factors used
to identify reportable segments, the basis of organization, and the sources of
revenues; information about reported profit or loss and segment assets; and
reconciliations of certain reported segment information to consolidated amounts.
(In thousands of dollars)
Segment
--------------------------------------------------------------------------------------------
Advancel
Communi- Logic Total Grand
Audio Hearing cations Europe DMC Corp Segments Other Total
--------------------------------------------------------------------------------------------
For the nine months ended
September 30, 1999:
Net Sales - External $ 627 $ 549 $ 850 $ 3 $ - $ 1,070 $ 3,099 $ 6 $ 3,105
Net Sales - Other Operating
Segments 11 - - 650 - - 661 (661) -
License Fees and Royalties 504 156 863 - 850 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) (8,628) (2,390) (1,996) 52 (1,414) (397) (14,773) (20) (14,793)
Segment Assets 2,580 2,147 171 186 935 1,360 7,379 7,916 15,295
Capital Expenditures - - 1 5 11 35 52 84 136
For the nine months ended
September 30, 1998:
Net Sales - External $ 185 $ 960 $ 616 $ 16 $ - $ 72 $ 1,849 $ 51 $ 1,900
Net Sales - Other Operating
Segments 1 22 5 693 - - 721 (721) -
License Fees and Royalties 275 59 9 - - - 343 32 375
Equity in net loss of
Unconsolidated affiliates -
net of amortizations - - - - - - - - -
Interest Income, net 52 - - 11 - - 63 263 326
Depreciation/Amortization - - - 40 - - 40 765 805
Operating Income (Loss) (2,594) (2,297) (3,201) (93) - (35) (8,220) 380 (7,840)
Segment Assets 8,414 3,013 365 226 - 686 12,704 7,688 20,392
Capital Expenditures 168 - 18 83 - - 269 193 462
Audio:
NCT Audio is engaged in the design, development and marketing of products,
that utilize innovative flat panel transducer technology. The products available
from NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM) printed
grille collection. The Gekko(TM) flat speaker is marketed primarily to the home
audio market, with potential in many other markets, including the professional
audio systems market, the automotive audio aftermarket, the aircraft industry,
other transportation markets and multimedia markets. The principal customers are
end-users, automotive original equipment manufacturers ("OEMs") and
manufacturers of integrated cabin management systems.
Hearing:
NCT Hearing designs, develops and markets active noise reduction ("ANR")
headset products to the communications headset market and the telephony headset
market. The product lines include the NoiseBuster(R) product line and the
ProActive(R) product line. The NoiseBuster(R) products consist of the
NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a headset used for
in-flight passenger entertainment systems and communications headsets for
cellular, multimedia and telephony. The ProActive(R) products consist of noise
reduction headsets and communications headsets for noisy industrial
environments. The majority of NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
Communications:
The Communications division of the Company focuses on the
telecommunications market and in particular the hands-free market. The
Communications technology includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression. ClearSpeech(R)-Acoustic Echo Cancellation removes
acoustic echoes in hands-free full-duplex communication systems. Applications
for this technology are cellular telephony, audio and video teleconferencing,
computer telephony and gaming and voice recognition. ClearSpeech(R)-Compression
maximizes bandwidth efficiency in wireless, satellite and intra- and internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. Applications for this technology are intranet and internet
telephony, audio and video conferencing, PC voice and music, telephone answering
devices, real-time multimedia multitasking, toys and games and playback devices.
The Communications products include the ClearSpeech(R)-Microphone and the
ClearSpeech(R)-Speaker. The majority of Communications' sales are in North
America. Principal markets for Communications are the telecommunications
industries and principal customers are OEMs, system integrators and end-users.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
Company. NCT Europe provides research and engineering to Audio, Hearing and
Communications as needed. NCT Europe also provides a marketing and sales support
service to the Company for European sales.
DMC:
DMC develops, installs and provides an audio/visual advertising medium within
commercial/professional settings. DMC currently has outsourced the installation
of flat panel transducer-based speakers, 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 has
focused on four vertical markets for initial network development: health,
fitness, education and hospitality. DMC will also develop private networks for
large customers with multiple outlets such as large fast food chains and retail
chains.
Advancel Logic Corporation:
Advancel , acquired by the Company on September 4, 1998, 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.
Other:
The Net Sales - Other Operating Segments primarily consists of
inter-company sales and items eliminated in consolidation. Segment assets
consist primarily of corporate assets.
11. Revision of Statements of Operations
The Company reported final 1999 results, which included a
recharacterization of $4.0 million of third quarter revenue from license fee to
equity and a corresponding reduction in current assets and equity. In addition,
the loss per share for the third quarter, as previously reported on November 15,
1999, remains unchanged.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
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 1999 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 for Active Wave Management; 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 five customers that accounted for 34% of the Company's
revenues in 1998; 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. In prior years, the
Company derived the majority of its revenues from engineering and development
funding provided by established companies willing to assist the Company in the
development of its active noise and vibration control technology, as well as
from technology licensing fees paid by such companies. The Company's strategy
generally has been to obtain technology licensing fees when initiating joint
ventures and alliances with new strategic partners. This is reflected in the
first nine months of 1999, where 53% of the Company's revenue has been from
licensing fees and royalties, 27% from product sales and 20% from engineering
and development services. There can be no assurance that technology licensing
fees will continue at that level.
Note 1 to the accompanying condensed consolidated financial statements and
the liquidity and capital resources section which follow describe the current
status of the Company's available cash resources.
In late 1995 the Company redefined its corporate mission to be the
worldwide leader in the advancement and commercialization of Active Wave
Management technology. Active Wave Management is the electronic and/or
mechanical manipulation of sound or signal waves to reduce noise, improve
signal-to-noise ratios and/or enhance sound quality. This redefinition is the
result of the development of new technologies, which the Company believes can
produce products for fields beyond noise and vibration reduction and control.
These technologies and products are consistent with shifting the Company's focus
to technology licensing and product marketing in more innovative industries
having greater potential for near term revenue generation.
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 funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding. The beginning of
this process is shown in the shifting percentages of operating revenue discussed
below.
From the Company's inception through September 30, 1999, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 26% in
product sales, 40% in engineering and development services and 34% in technology
licensing fees and 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 technology into their products and manufacturing operations. While
the Company works with these firms on product testing and integration, it is not
always able to influence how quickly this process can be completed.
The Company continues to sell and ship NoiseBuster(R) headsets,
Clearspeech(R) products and the Gekko(TM) flat speakers in 1999. The Company
presently sells products through four of its alliances: Walker Electronic
Silencing, Inc. ("Walker") is manufacturing and selling industrial silencers;
Siemens Medical Systems, Inc. ("Siemens") is buying and contracting with the
Company to install quieting headsets for patient use in Siemens' MRI machines;
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. The Company also is
entitled to receive direct product sales revenue from Siemens' purchase of
headsets. 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.
Product revenues for the nine months ended September 30, 1998 and 1999
were:
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 1998 1999 1998 1999 1998 1999 1998 1999
------- ---- ---- ---- ---- ---- ---- ---- ----
Headsets $216 $116 39.4% 20.2% $ 977 $ 524 60.6% 29.1%
Communications 215 184 39.4% 32.1% 428 647 26.5% 35.9%
Audio 101 282 18.4% 49.1% 186 637 11.5% 35.3%
Other 16 (8) 2.8% (1.4%) 22 (6) 1.4% (0.3%)
---- ---- ----- ----- ------ ------ ----- -----
Total $548 $574 100.0% 100.0% $1,613 $1,802 100.0% 100.0%
==== ==== ===== ===== ====== ====== ===== =====
The Company has continued to make substantial investments in its
technology and intellectual property and has incurred development costs for
engineering prototypes, pre-production models and field testing of several
products. Management believes that the Company's investment in its technology
has resulted in the expansion of its intellectual property portfolio and
improvement in the functionality, speed and cost of components and products.
On February 9, 1999, NCT Audio and NXT expanded the Cross License
Agreement dated September 27, 1997 to increase NXT's fields of use to include
aftermarket ground based vehicles and aircraft sound systems. The expanded
agreement also increased the royalties due NCT Audio from NXT to 10% from 6% and
increased the royalties due NXT from NCT Audio to 7% from 6%. In consideration
for granting NXT these expanded licensing rights, NCT Audio received licensing
fees of $0.5 million. Also on February 9, 1999, NCT Audio and NXT amended the
Master License Agreement to include a minimum royalty payment of $160,000 in
1999, to be paid by NCT Audio to NXT in equal quarterly installments. The
Company's liability to NXT was $0.1 million at September 30, 1999.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hasupie Speech Products N.V. ("L&H"). The agreement provides the Company with a
worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. The Company recorded a $0.9 million
patent technology right.
On April 12, 1999, the Company granted a worldwide non-exclusive,
non-transferable license to L&H. The agreement provides L&H access to NCT's
present and future noise and echo cancellation algorithms for use in L&H's
technology. In consideration of the Company's grant of a license to L&H, the
Company recognized a non-refundable royalty fee of $0.8 million.
On August 16, 1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. The Company reduced its
worldwide work force by approximately 25%. Charges related to this amount to
$0.1 million and were recorded in the third quarter of 1999.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties,
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales, and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
(Refer to "Liquidity and Capital Resources" below and to Note 1 - "Notes to the
Condensed Consolidated Financial Statements" above for a further discussion
relating to continuity of operations.)
RESULTS OF OPERATIONS
Total revenues for the first nine months of 1999 were $6.6 million compared
to $2.3 million for the same period in 1998, an increase of $4.3 million or
191%. The increase is attributable to total revenue recognized from
STMicroelectronics S.A. ("ST") of $2.2 million.
Consistent with the Company's objectives, technology licensing fees and
royalties increased to $3.5 million in the first nine months of 1999 from $0.4
million for the same period in 1998, an increase of $3.1 million, primarily due
to a $0.9 million prepaid royalty and a $0.2 million license fee from ST and
$0.9 million of DBSS license fees. The DBSS license includes the rights to
exploit the DBSS technology in a specific geographical area within one of four
networks. The technology includes hardware, software, rights to practice the
intellectual property and the license to deliver music along with advertising
content. The Company anticipates the sale of such licenses to approximate $1.0
million each based on regional and commercial/professional settings. During the
three months ended March 31, 1999, the Company, in accordance with its revenue
recognition policy, realized only $2.0 million on the issuance of such licenses
in consideration of the receipt of 3,600 shares of its Series E Preferred Stock.
During the three months ended June 30, 1999, the Company adjusted such revenue
to $0.9 million, due to the valuation of additional shares of Series E Preferred
Stock issued during the period.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
Product sales increased to $1.8 million for the first nine months of 1999
from $1.6 million for the same period in 1998, an increase of $0.2 million or
12%, primarily reflecting increased sales of ClearSpeech(R) and Gekko(TM) flat
speakers. Primarily due to an agreement with ST, engineering and development
services have increased to $1.3 million compared to $0.3 million for the same
period in 1998.
Cost of product sales was $1.7 million for the first nine months of 1999
versus $1.3 million for the same period in 1998, an increase of $0.4 million or
37%. The increase in 1999 was primarily due to a reserve of $0.3 million for
slow moving hearing product inventory, a reserve of $0.1 million for tooling
used in the production of NCT Audio's subwoofers and royalty expense of $0.3
million. Product margin was 5% for the first nine months of 1999 versus 22%
during the same period in 1998 due to the above noted inventory reserve and
royalty expenses. Cost of engineering and development services increased to $1.7
million for the first nine months of 1999 versus $0.2 million for the same
period in 1998, due to the agreement with ST. The gross margin on engineering
and development services was a loss of (28%) for the first nine months of 1999
compared to 33% during the same period in 1998 due to the recording of a reserve
for estimated expenses to complete the ST project.
Selling, general and administrative expenses for the first nine months of
1999 were $8.0 million versus $7.6 million for the same period in 1998, an
increase of $0.4 million or 5%, primarily due to an increase in litigation and
patent expenses.
Research and development expenditures for the first nine months of 1999
were $5.1 million versus $4.7 million for the same period in 1998, an increase
of $0.4 million or 8%, primarily due to costs attributable to Advancel, a
subsidiary of the Company acquired in September 1998. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $122.5 million on a
cumulative basis through September 30, 1999. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) technology licensing fees, (4) royalties, (5) product sales,
and (6) engineering and development funds received from strategic partners and
customers.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties
product sales and engineering and development services, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development revenue.
In that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise substantial doubt at September 30, 1999, about the
Company's ability to continue as a going concern.
At September 30, 1999, cash was $1.4 million. Restricted cash of $0.8
million was attributed to the proceeds from the PRG Note, which is restricted to
rental and installation costs of DBSS Systems. The remaining resources were
invested in interest bearing money market accounts. The Company's investment
objective is preservation of capital while earning a moderate rate of return.
On January 6, 1999, NASDAQ notified the Company that it was delisting the
Company's stock at the close of trading that day. On January 20, 1999, the
Company requested a review of the delisting decision. On August 9, 1999, the
NASDAQ Review Counsel denied that appeal. Thus, NCT's common stock will continue
to be listed on the OTC Bulletin Board.
The Company's deficit in working capital increased to $(1.7) million at
September 30, 1999, from $(1.2) million at December 31, 1998. This $0.5 million
deterioration was primarily due to a decrease in cash and cash equivalents due
to increasing efforts to develop and introduce new product lines and to fund
operations for the period.
During the first nine months of 1999, the net cash used in operating
activities was $6.6 million, compared to $9.0 million used in operating
activities during the same period of 1998. The decrease of $2.4 million was
primarily due to the write down of the estimated net realizable investment in
TSA, the reserve recorded on the promissory note due from PPI and an increase in
accrued legal expenses.
Net inventory decreased during the first nine months of 1999 by $0.5
million, primarily due to a $0.3 million increase in reserves for slow moving
hearing product inventory.
The net cash provided by financing activities amounted to $8.4 million,
primarily due to the $4.0 million convertible notes (see Note 7 - "Notes to the
Condensed Consolidated Financial Statements" for further details) and $4.4
million net proceeds from the Series E Preferred Stock financing and the Series
F Preferred Stock financing (see Note 9 - "Notes to the Condensed Consolidated
Financial Statements" for further details).
The Company has no lines of credit with banks or other lending
institutions and therefore has no unused borrowing capacity.
CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with
supply, manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company to
integrate its active technology into products with limited capital investment in
production facilities and manufacturing personnel; and (iii) access to
well-established channels of distribution and marketing capability of leaders in
several market segments.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
Other than as noted in Note 5 - "Notes to the Condensed Consolidated
Financial Statements", there were no material commitments for capital
expenditures as of September 30, 1999, and no other material commitments are
anticipated in the near future.
YEAR 2000 COMPLIANCE
The Company believes the cost of administrating its Year 2000 Compliance
program will not have a material adverse impact on future earnings. However, the
potential costs and uncertainties associated with any Year 2000 Compliance
program will depend on a number of factors, including software, hardware and the
nature of the industry in which the Company, its subsidiaries, suppliers and
customers operate. In addition, companies must coordinate with other entities
with which they electronically interact, such as customers, suppliers, financial
institutions, etc. The Company estimates that potential costs will not exceed
$0.1 million.
Although the Company's evaluation of its systems is still in process,
there has been no indication that the Year 2000 Compliance issue, as it relates
to internal systems, will have a material impact on future earnings. After a
survey of its suppliers, the Company has determined that there are no material
Year 2000 Compliance supplier issues. The Company is currently conducting a
survey of its customers to determine if material Year 2000 Compliance issues
exist. Although unlikely, such potential problems remain a possibility and could
have a material adverse impact on the Company's future results. The Company
estimates completion of the evaluation process by December 1, 1999.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 8 - "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) Securities Sold. On August 10, 1999, the Company entered into a
subscription agreement to sell an aggregate stated value of up to
$12,500,000 (12,500 shares) of Series F Preferred Stock. On August 10,
1999, the Company issued and sold 8,500 shares of Series F Preferred Stock
having an aggregate stated value of $8,500,000.
(b) Purchasers. The purchasers of the 8,500 shares of Series F Preferred
Stock were:
Sovereign Partners, LP
Dominion Capital Fund, Ltd.
Atlantis Capital Fund, Ltd.
Canadian Advantage, Limited Partnership
The Endeavour Capital Fund, S.A.
The placement agent for the transaction was J.P. Carey, Inc.
(c) Consideration. The aggregate offering price for 8,500 shares of Series
F Preferred Stock having an aggregate stated value of $8,500,000 was
$1,000,000.
(d) Exemption from Registration Claimed. Exemption from registration is
claimed under Regulation D promulgated under the Securities Act. To the
best of the Company's knowledge and belief and in accordance with
representations and warranties made by the purchasers of Series F
Preferred Stock, each of the five purchasers is an "accredited investor"
as defined under Regulation D.
(e) Terms of Conversion. The shares of Series F Preferred Stock became
convertible into shares of common stock of the Company on September 24,
1999. Each share of Series F Convertible Preferred Stock is convertible
into a number of shares of common stock of the Company as determined in
accordance with the following formula (the "Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
-----------------------------------
Conversion Price
where
N = the number of days between (i) the Closing Date, and
(ii) the conversion date.
Conversion
Price = the amount obtained by multiplying the Conversion
Percentage (which means 80% reduced by an additional 2%
for every 30 days beyond 60 days from the issuance that
the Registration Statement has not been filed by the
Filing Date) in effect as of the conversion date times
the average market price for the Company's common stock
for the (5) consecutive trading days immediately
preceding such date.
The "Registration Statement" referred to in the foregoing formula was
filed prior to the "Filing Date" as those terms are defined in the
conversion terms of the Series F Preferred Stock.
The conversion terms of the Series F Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 35,000,000
shares of its Common Stock in the aggregate in connection with the
conversion of up to 12,500 shares of Series F Preferred Stock.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 4(i) Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock of NCT Group,
Inc. filed on September 8, 1999 in the Office of the
Secretary of State of the State of Delaware incorporated
by reference to Exhibit 4(i) of the Company's
Registration Statement on Form S-1 (Registration No.
333-87757) filed on September 24, 1999, as amended by
Amendment No. 1 thereto filed on October 28, 1999.
Exhibit 4(j) Term Sheet - Share Exchange, incorporated by
reference to Exhibit 4(j) of the Company's Registration
Statement on Form S-1 (Registration No. 333-87757) filed
on September 24, 1999, as amended by Amendment No. 1
thereto filed on October 28, 1999.
Exhibit 10 License Agreement dated January 25, 1999, between NCT
Group, Inc. and DistributedMedia.com, Inc.
Exhibit 27 Financial Data Schedule.
Exhibit 99(h) Term Sheet - Litigation Settlement, incorporated
by reference to Exhibit 99(h) of the Company's
Registration Statement on Form S-1 (Registration No.
333-87757) filed on September 24, 1999, as amended by
Amendment No. 1 thereto filed on October 28, 1999.
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
President and Chief Executive Officer
By: /s/ CY E. HAMMOND
-----------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: April 14, 2000