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, 1998
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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)
1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
(410) 636-8700
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(Registrant's telephone number, including area code)
Noise Cancellation Technologies, Inc.
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(Former name, former address and former fiscal year,
if changed since last report)
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.
152,494,382 shares outstanding as of October 30, 1998
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,
--------------------------------------------
1997 1998 1997 1998
------------------- -------------------
(Note 11)
REVENUES:
Technology licensing fees and royalties $ 220 $ 29 $ 3,430 $ 375
Product sales, net 488 548 1,069 1,613
Engineering and development services 128 138 341 287
--------- --------- ---------- ---------
Total revenues $ 836 $ 715 $ 4,840 $ 2,275
--------- --------- ---------- ---------
COSTS AND EXPENSES:
Costs of sales $ 896 $ 383 $ 1,401 $ 1,252
Costs of engineering and development
services 96 65 295 193
Selling, general and administrative 1,483 3,159 3,734 7,613
Research and development 1,501 1,430 4,513 4,727
Other (income)/expense (Note 1) - 38 - (3,344)
Interest (income)/expense (Note 11) 28 (114) 1,495 (326)
--------- --------- ---------- ---------
Total costs and expenses $ 4,004 $ 4,961 $ 11,438 $ 10,115
--------- --------- ---------- ---------
NET(LOSS) $ (3,168) $ (4,246) $ (6,598) $ (7,840)
========== ========== =========== ==========
Preferred stock dividend requirement $ - $ 723 $ - $ 2,413
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock - 699 - 1,183
---------- ---------- ----------- ----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (3,168) $ (5,668) $ (6,598) $ (11,436)
========== ========== =========== ==========
Basic and diluted loss per share $ (0.02) $ (0.04) $ (0.05) $ (0.08)
========== ========== =========== ==========
Weighted average common shares outstanding -
basic and diluted 130,467 151,740 121,490 140,906
========== ========== =========== ===========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1998 1997 1998
------------------- -------------------
NET (LOSS) $ (3,168) $ (4,246) $ (6,598) $ (7,840)
Other comprehensive income/(loss)
Currency translation adjustment (21) (65) (25) (78)
--------- --------- --------- ---------
COMPREHENSIVE (LOSS) $ (3,189) $ (4,311) $ (6,623) $ (7,918)
========= ========= ========= =========
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,
1997 1998
------------ -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 12,604 $ 5,549
Accounts receivable:
Trade:
Technology license fees and royalties 200 60
Other 368 653
Allowance for doubtful accounts (38) (100)
------------ -------------
Total accounts receivable $ 530 $ 613
Inventories, net of reserves (Note 2) 1,333 3,923
Other current assets 213 356
------------ -------------
Total current assets $ 14,680 $ 10,441
Property and equipment, net 1,144 1,470
Goodwill (Note 7) - 598
Patent rights and other intangibles, net (Note 4) 1,488 2,404
Other assets (Note 5) 49 5,479
------------ -------------
$ 17,361 $ 20,392
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,324 $ 2,777
Accrued expenses 1,392 1,280
Accrued payroll, taxes and related expenses 181 151
Current maturities of LTD - 446
Customers' advances 87 38
------------ -------------
Total current liabilities $ 2,984 $ 4,692
------------ -------------
Commitments and contingencies
Minority interest in consolidated subsidiary
Preferred stock in subsidiary, $.10 par value, 1,000
shares authorized, 60 issued and outstanding
(redemption amount $6,041,616) $ - $ 6,042
------------ -------------
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, $.10 par value, 10,000,000 shares
authorized
Series C issued and outstanding 13,250 and
2,400 shares, respectively (redemption amount
$13,314,399 and $2,480,789, respectively) $ 10,458 $ 1,954
Series D Preferred stock, 6,000 shares issued and
outstanding (redemption amount $6,041,616) - 5,576
Common stock, $.01 par value, 185,000,000 shares,
authorized; issued and outstanding 133,160,212 and
155,337,316 shares, respectively 1,332 1,553
Additional paid-in-capital 96,379 104,065
Unearned portion of compensatory warrants and stock - (220)
Accumulated deficit (93,521) (101,361)
Cumulative translation adjustment 119 41
Common stock subscriptions receivable (390) -
Treasury stock (3,354,109 shares) - (1,950)
------------- -------------
Total stockholders' equity $ 14,377 $ 9,658
------------- -------------
$ 17,361 $ 20,392
============= =============
The accompanying notes are an integral part of the condensed consolidated financial statements.
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
(in thousands of dollars)
Nine months ended September 30,
-------------------------------
1997 1998
-------------------------------
(Note 11)
Cash flows from operating activities:
Net (loss) $ (6,598) $ (7,840)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 877 805
Common stock options and warrants issued as
consideration for:
Compensation 3 213
Interest on debentures 52 -
Patent rights - 446
Discount on beneficial conversion feature on
convertible debt 1,420 -
Provision for tooling costs - 39
Provision for doubtful accounts 148 62
Loss on disposition of fixed assets 63 35
Changes in operating assets and liabilities:
(Increase) in accounts receivable (412) (195)
Decrease in license fees receivable - 200
(Increase) in inventories (450) (2,583)
(Increase) decrease in other assets 167 (524)
Increase in accounts payable and accrued expenses 780 843
(Decrease) in other liabilities (48) (514)
---------- ----------
Net cash (used in) operating activities $ (3,998) $ (9,013)
---------- ----------
Cash flows from investing activities:
Capital expenditures $ (127) $ (462)
Acquisition of patent rights - (200)
Acquisition of subsidiaries (Note 5) - (4,900)
Sale of fixed assets - 44
---------- ----------
Net cash (used in) investing activities $ (127) $ (5,518)
---------- ----------
Cash flows from financing activities:
Proceeds from:
Convertible debt (net) $ 3,795 $ -
Sale of Series C preferred stock (net) - (36)
Sale of Series D preferred stock (net) - 5,164
Sale of subsidiary Series A preferred stock (net) - 5,164
Sale of common stock (net) 8 352
Sale of subsidiary common stock (net) 1,000 -
Treasury stock - (3,078)
---------- ----------
Net cash provided by financing activities $ 4,803 $ 7,566
---------- ----------
Effect of exchange rate changes on cash $ (8) $ (90)
---------- ----------
Net increase (decrease) in cash and cash equivalents $ 670 $ (7,055)
Cash and cash equivalents - beginning of period 368 12,604
---------- ----------
Cash and cash equivalents - end of period $ 1,038 $ 5,549
========== ==========
Cash paid for interest $ 2 $ 1
========== ==========
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 with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and certain adjustments to reserves and
allowances) considered necessary for a fair presentation have been included.
Operating results for the three months ended September 30, 1998 and the nine
months ended September 30, 1998, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the NCT Group, Inc. (formerly "Noise Cancellation
Technologies, Inc.") (the "Company" or "NCT") Annual Report on Form 10-K, for
the year ended December 31, 1997 as amended by Amendment No. 1 thereto filed on
April 30, 1998 and Amendment No. 2 thereto filed on May 4, 1998.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $101.4 million on a
cumulative basis through September 30, 1998. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing fees and engineering and
development funds received from joint venture and other strategic partners.
Cash, cash equivalents and short-term investments amounted to $5.5 million
at September 30, 1998, decreasing from $12.6 million at December 31, 1997.
Management believes that available cash and cash anticipated from the exercise
of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue, should be sufficient to sustain the Company's anticipated future level
of operations into 1999. However, the period during 1999 through which it can be
sustained is dependent upon the level of realization of funding from technology
licensing fees and royalties and product sales and engineering and development
revenue, all of which are presently uncertain.
Management believes that the funding provided by the sources referred to
above including the anticipated increased product sales, technology licensing
fees and royalties, if realized, should enable the Company to continue
operations into 1999. If the Company is not able to increase technology
licensing fees, royalties and product sales, or generate additional capital, it
will have to cut its level of operations substantially in order to conserve
cash. (Refer to "Liquidity and Capital Resources" below for a further discussion
relating to continuity of operations.)
On April 30, 1998, the Company completed the sale of 5.0 million ordinary
shares of Verity Group plc ("Verity") acquired upon the Company's exercise on
April 7, 1998 of the option it held to purchase such shares at a price of 50
pence per share. This option was acquired by the Company in connection with the
cross license agreement entered into by the Company, Verity and New Transducers
Ltd. ("NXT"), a wholly owned subsidiary of Verity. The Company realized a $3.2
million gain from the exercise of such option and the sale of the Verity
ordinary shares received therefrom, which is included in other income for the
nine months ended September 30, 1998.
On July 15, 1998 the Company transferred $5,000 and all of the business and
assets of its Hearing Products Division as then conducted by the Company and as
reflected on the business books and records of the Company to a newly
incorporated subsidiary company, NCT Hearing Products, Inc. ("NCT Hearing") in
consideration for 6,400 shares of NCT Hearing common stock whereupon NCT Hearing
became a wholly owned subsidiary of the Company. The Company also granted NCT
Hearing an exclusive worldwide license with respect to all of the Company's
relevant patented and unpatented technology relating to Hearing Products in
consideration for a license fee of $3,000,000 to be paid when proceeds are
available from the sale of NCT Hearing common stock and running royalties
payable with respect to NCT Hearing's sales of products incorporating the
licensed technology and its sublicensing of such technology. It is anticipated
that NCT Hearing will issue additional shares of its common stock in
transactions exempt from registration in order to raise additional working
capital.
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, 1998,
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. INVENTORIES:
Inventories comprise the following:
(thousands of dollars)
December 31, September 30,
1997 1998
------------ -------------
Components $ 514 $ 787
Finished Goods 1,291 3,299
------------ -------------
Gross Inventory $ 1,805 $ 4,086
Reserve for Obsolete & Slow Moving
Inventory (472) (163)
------------ -------------
Inventory, Net of Reserves $ 1,333 $ 3,923
============ =============
The reserve for obsolete and slow moving inventory at September 30, 1998
has decreased to $163,000 due to the application of reserves to slow moving
inventory during the first nine months of 1998.
3. STOCKHOLDERS' EQUITY:
The changes in stockholders' equity during the nine months ended September
30, 1998, were as follows:
Net Net Net Net
Sale of Sale of Sale of Sale Compen- Transla-
Balance Preferred Series C Series D of Stock satory Accumu- tion Balance
at Stock in Preferred Preferred Common Treasury Subscription Options/ lated Adjust- at
12/31/97 Subsidiary Stock Stock Stock Stock Receivable Warrants (Deficit) ment 9/30/98
-------- ---------- --------- --------- ------ -------- ------------ -------- --------- ------ -------
PREFERRED STOCK
IN SUBSIDIARY:
SHARES - - - - - - - - - - -
AMOUNT - 6,042 - - - - - - - - 6,042
PREFERRED STOCK:
SHARES 13 - (11) 6 - - - - - - 8
AMOUNT 10,458 - (8,504) 5,576 - - - - - - 7,530
COMMON STOCK:
SHARES 133,162 - 20,665 - 3,298 (1,787) - - - - 155,338
AMOUNT 1,332 - 206 - 15 - - - - - 1,553
TREASURY STOCK:
SHARES - - - - - 3,354 - - - - 3,354
AMOUNT - - - - - (1,950) - - - - (1,950)
ADDITIONAL
PAID-IN
CAPITAL 96,379 (878) 8,268 (412) 1,623 (1,110) - 195 - - 104,065
ACCUMULATED
SURPLUS
(DEFICIT) (93,521) - - - - - - - (7,840) - (101,361)
CUMULATIVE
TRANSLATION
ADJUSTMENT 119 - - - - - - - - (78) 41
STOCK
SUBSCRIPTION
RECEIVABLE (390) - - - - - 390 - - - -
UNEARNED
COMPENSATORY
STOCK OPTION - - - - - - - (220) - - (220)
4. 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 technologies, speech compression technologies and
speech identification and verification technology. The aggregate value of the
patented technology 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 valued at $0.65625
per share on June 5, 1998. At such time as IPI sells any of such shares, the
proceeds thereof will be allocated towards a fully paid-up license fee for the
technology rights noted above. In the event that the proceeds from the sale of
shares are less than the $1,100,000, the Company will record a liability
representing the cash payment due. 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. The Company has recorded a liability of
$446,000 at September 30, 1998 representing the difference between the market
value of the shares issued on June 5, 1998 and the balance due on the license
fee.
5. Other Assets
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
business assets of Top Source Automotive, Inc. ("TSA"), a tier one automotive
original equipment audio system supplier. On June 11, 1998, NCT Audio paid a
non-refundable deposit of $1,450,000 towards the purchase price, which is
recorded as an investment in unconsolidated subsidiaries. The total cash
purchase price is $10,000,000, and up to $6,000,000 in possible future
contingent payments to be paid in either NCT Audio common stock or cash, at the
seller's election. The transaction is subject to approval of the shareholders of
Top Source Technologies, Inc. ("TST"), TSA's parent company. On July 31,1998,
NCT Audio paid TST $2,050,000, to be held in escrow with securities and
documentation necessary to represent beneficial ownership of 35% of the total
equity rights and interests in TSA, until such time as TST's stockholders
approve the sale of the business assets of TSA. Upon such TST stockholder
approval, such $2,050,000 will be delivered to TSA and such securities and
documentation will be delivered to NCT Audio. If such approval is not obtained,
the $2,050,000 will be returned to NCT Audio and the securities and
documentation will be returned to TSA. TST's next stockholder meeting is
scheduled for December 15, 1998.
On August 17, 1998, NCT Audio agreed to acquire all of the members' interest
in Phase Audio LLC dba Precision Power, Inc. ("PPI"), a supplier of custom
automotive audio systems. In consideration, the members of PPI shall receive
registered shares of NCT Audio's common stock having an aggregate value of
$2,000,000 as calculated using the offering price of such stock in an initial
public offering being considered by NCT Audio as a means of raising acquisition
funding. NCT Audio also agreed to retire $8.5 million of PPI debt. This
acquisition is subject to NCT Audio's receipt of the necessary financing to
close the transaction. In addition to the above, on June 17, 1998, NCT Audio
provided a working capital loan in the amount of $500,000 to PPI, which is
evidenced by a demand promissory note. On August 18,1998, NCT Audio provided an
additional working capital loan in the amount of $1,000,000 to PPI, which is
also evidenced by a demand promissory note. The unpaid principal balance of
these notes bear interest at a rate equal to the prime lending rate plus one
percent (1.00%).
Both of the above noted acquisitions are subject to obtaining adequate
financing for each of the acquisitions.
6. 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, 1997, as amended, and
the Company's Quarterly report on Form 10-Q for the period ended March 31,1998,
as amended, for a discussion of the suit.In addition, at a hearing on May 19,
1998, the Discovery Judge established dates for the parties to submit final
pleadings and set September 22, 1998 as the date for the case to be presented
before the Tribunal of Milan sitting in full bench. As of November 4, 1998 the
Company had not been informed of any decision by the Tribunal. The Company's
Italian counsel anticipates a decision to be handed down by the Tribunal before
the end of 1998.
On September 16, 1997, Ally Capital Corporation ("Ally") filed suit
against the Company, John J. McCloy II, Michael J. Parrella, Jay M. Haft and
Alistair J. Keith, current and former directors of the Company, in the United
States District Court for the District of Connecticut (the "District Court").
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, as amended, and the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1998, as amended, for a discussion of
this suit. On July 15, 1998 the Company paid plaintiff, Ally, twenty-five
thousand ($25,000) dollars in settlement of the suit which was dismissed on
behalf of all defendants with prejudice and without costs on July 16, 1998.
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 Quarterly Report on Form 10-Q for
the period ended June 30, 1998, for a discussion of this suit. There were no
material developments in this suit during the period covered by this report.
7. Common Stock
On February 14, 1998, the Board of Directors authorized the issuance of
100,000 shares of the Company's common stock to a prospective employee in
connection with an offer of employment. The Company issued these shares to the
employee on April 20,1998, the date on which employment with the Company
commenced. In the second quarter of 1998, the Company recognized $78,000 of
expense in connection with the issuance of shares to this employee.
On July 27, 1998, the Company distributed subscription agreements (the
"Subscription Agreements") to sell 6,000 shares of the Company's Series D
Convertible Preferred Stock ("Series D Preferred Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act of 1933, as amended (respectively "Regulation D" and the
"Securities Act"), to six unrelated accredited investors through one dealer (the
"1998 Series D Preferred Stock Private Placement). The sale of 6,000 shares of
Series D Preferred Stock having an aggregate $6.0 million stated value was
completed on August 6, 1998. $5.2 million net proceeds were received by the
Company from the 1998 Series D Preferred Stock Private Placement. Each share of
the Series D 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 D Preferred Stock is
convertible into fully paid and nonassessable shares of the Company's common
stock subject to certain limitations. Under the terms of the Subscription
Agreements the Company is required to file a registration statement ("the
Registration Statement") covering the resale of all shares of common stock of
the Company issuable upon conversion of the Series D Preferred Stock then
outstanding within sixty (60) days after the completion of the 1998 Series D
Preferred Stock Private Placement (respectively, the "Filing Date" and the
"Closing Date"). The shares of Series D Preferred Stock become convertible into
shares of common stock at any time commencing after the earlier of (i) ninety
(90) days after the Closing Date; (ii) five (5) days after the Company receives
a "no review" status from the Securities and Exchange Commission ("SEC") in
connection with the Registration Statement; or (iii) the effective date of the
Registration Statement. The Registration Statement became effective on October
30, 1998, and shares of Series D Preferred Stock became convertible on that
date. Each share of Series D 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 greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by an
additional 2% for every 30 days 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; or (ii) $0.50.
The conversion terms of the Series D Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 12,000,000 shares of
its common stock in the aggregate in connection with the conversion of the 6,000
shares of Series D Preferred Stock issued under the 1998 Series D Preferred
Stock Private Placement. The Subscription Agreements also provide that the
Company will be required to make certain payments in the event of its failure to
effect conversion in a timely manner.
On July 27, 1998, NCT Audio distributed subscription agreements (the "NCT
Audio Subscription Agreements") to sell 60 shares of NCT Audio's Series A
Convertible Preferred Stock ("NCT Audio Series A Preferred Stock") having an
aggregate state value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 NCT Audio Series A Preferred Stock Private
Placement"). The sale of 60 shares of Series A Preferred Stock having an
aggregate $6.0 million stated value was completed on August 17, 1998. NCT Audio
received net proceeds of $5.2 million from the 1998 Series A Preferred Stock
Private Placement. Each share of the NCT Audio Series A Preferred Stock has a
par value of $.10 per share and a stated value of one hundred thousand dollars
($100,000) with an accretion rate of four percent (4%) per annum on the stated
value. Each share of NCT Audio Series A Preferred Stock is convertible into
fully paid and nonassessable shares of NCT Audio's common stock subject to
certain limitations. Under the terms of the NCT Audio Subscription Agreements
NCT Audio is required to file a registration statement ("NCT Audio Registration
Statement") covering the resale of all shares of common stock of NCT Audio
issuable upon conversion of the NCT Audio Series A Preferred Stock then
outstanding by a date (the "Filing Deadline") which is not later than thirty
(30) days after the Company becomes a "reporting company" under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The shares of NCT Audio
Series A Preferred Stock become convertible into shares of NCT Audio common
stock at any time after the date the Company becomes a "reporting company" under
the Exchange Act. Each share of NCT Audio Series A Preferred Stock is
convertible into a number of shares of common stock of NCT Audio as determined
in accordance with the following formula (the "NCT Audio Conversion Formula"):
[(.04) x (N/365) x (100,000)] + 100,000
Conversion Price
where
N = the number of days between (i) the date of completion
of the sale of the 60 shares of NCT Audio Series A
Preferred Stock being offered; and (ii) the conversion
date.
Conversion
Price = the greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by
an additional 2% for every 30 days that the NCT Audio
Registration Statement has not been filed by the
Filing Deadline) in effect as of such date times the
average market price for NCT Audio's common stock
for the (5) consecutive trading days immediately
preceding such date; or (ii) the "Floor Price" which
means the lowest number per share that will not cause
the total number of shares of NCT Audio common stock
issuable upon the conversion of 60 shares of NCT Audio
Series A Preferred Stock to equal or exceed twenty
percent (20%) of the issued and outstanding shares of
common stock of NCT Audio on the date of issuance
of the NCT Audio Series A Preferred Stock as long
as the common stock of NCT Audio is listed on the NASDAQ
National Market or the NASDAQ Small Cap Market
(there is no "Floor Price" if such listing is not so
maintained by NCT Audio).
The conversion terms of the NCT Audio Series A Preferred Stock also
provide that in the event that NCT Audio has not become a "reporting company"
under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") by
December 31, 1998, or the NCT Audio Registration Statement has not been declared
effective by the SEC by December 31, 1998, the holder shall be entitled to
exchange each share of NCT Audio Series A Preferred Stock for 100 shares of the
Company's Series D Convertible Preferred Stock and thereafter shall be entitled
to all rights and privileges of a holder of the Company's Series D Preferred
Stock.
On July 29, 1998, the Company initiated a plan to repurchase from time to
time up to 10 million shares of the Company's common stock in the open market
pursuant to Rule 10b-18 under the Exchange Act or through block trades. As of
September 30, 1998, the Company had repurchased 5,141,100 shares of the
Company's common stock at per share prices ranging from $0.5313 to $0.6563.
On September 4, 1998, the Company acquired the issued and outstanding
common stock of Advancel Logic Corporation ("Advancel"), a Silicon Valley-based
developer of chips that execute Sun Microsystems' Java(TM) code. The acquisition
was pursuant to a stock purchase agreement dated as of August 21, 1998 (the
"Stock Purchase Agreement") among the Company, Advancel and certain shareholders
of Advancel (the "Advancel Shareholders"). The consideration for the acquisition
of the Advancel common stock consisted of an initial payment of $1.0 million
payable by the delivery of 1,786,991 shares of the Company's authorized and
unissued common stock together with future payments, payable in cash or in
common stock of the Company at the election of the Advancel Shareholders
(individually, an "earnout payment" and collectively, the "earnout payments")
based on Advancel's earnings before interest, taxes, depreciation and
amortization (as defined in the Stock Purchase Agreement) for each of the
calendar years 1999, 2000, 2001 and 2002 (individually, an "earnout year" and
collectively, the "earnout years"). While each earnout payment may not be less
than $250,000 in any earnout year, there is no maximum earnout payment for any
earnout year or for all earnout years in the aggregate. To determine the number
of shares of the Company's common stock issuable in connection with an earnout
payment, each earnout payment is to be calculated using the average of the
closing prices of the Company's common stock for each of the twenty (20)
business days following the 21st day after the release of Advancel's audited
year-end financials for an earnout year. At that time, Advancel Shareholders
will elect to receive payment in cash or common stock of the Company. In the
event that the Company is unable to maintain the registration statement covering
the resale of 1,786,991 shares effective for at least thirty (30) days, each
Advancel Shareholder shall have the right, until April 15, 1999, to have the
Company redeem up to one-third of the initial payment shares acquired by such
Advancel Shareholder by paying in cash therefor a sum calculated by using the
formula used to determine the number of shares of the Company's common stock to
be delivered in payment of the initial payment of $1.0 million. The cost of the
acquisition has been allocated to the assets acquired and liabilities assumed
based on their fair values as follows:
Assets acquired and liabilities assumed:
Current assets $ 285,109
Property, plant and equipment 450,237
Goodwill 749,694
Current liabilities (485,040)
-----------
$1,000,000
===========
The acquisition has been accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the accounts of Advancel
from the date of acquisition.
On September 23, 1998, the Company exchanged 135,542 shares of its common
stock for 30 shares of the common stock of NCT Audio with the holder thereof.
This exchange was made in response to the exercise of certain exchange rights
granted to purchasers of NCT Audio common stock under the subscription
agreements pertaining to the fourth quarter 1997 private placement of 2,145
shares of NCT Audio common stock exempt from registration pursuant to Regulation
D of the Securities Act (the "1997 NCT Audio Financing").
Between April 30, 1998 and September 30, 1998, the Company issued
20,665,000 shares of the Company's common stock in connection with the
conversion of 10,850 shares of the Company's Series C Convertible Preferred
Stock ("Series C Preferred Stock") issued in a private placement in the fourth
quarter of 1997 exempt from registration pursuant to Regulation D of the
Securities Act.
At September 30, 1998, the aggregate number of shares of common stock
required to be reserved for issuance upon the exercise of all outstanding
options and warrants was 30.6 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 Series C Convertible Preferred Stock was 5.3 million
shares. The Company has also reserved 6.2 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. At September 30, 1998, the number of shares
available for the exercise of options and warrants was 39.3 million and of the
outstanding options and warrants, options and warrants to purchase 23.0 million
shares were currently exercisable.
At the Annual Meeting of Stockholders held on October 20, 1998, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock from
185 million to 255 million shares. Such action was deemed by the Board of
Directors to be in the best interest of the Company to make additional shares of
the Company's common stock available for an increase in the number of shares of
common stock covered by the Company's Stock Incentive Plan (the "1992 Plan")
pursuant to an amendment of the 1992 Plan approved by the stockholders at such
Annual Meeting, and for acquisitions, public or private financings involving
common stock or preferred stock or other securities convertible to common stock,
stock splits and dividends, present and future employee benefit programs and
other corporate purposes. The Company has reserved 30.6 million shares for
issuance upon the exercise of all outstanding options and warrants, 5.3 million
for the conversion of Series C Preferred Stock, 25.0 million for the conversion
of Series D Preferred Stock, and 9.3 million for the conversion of NCT Audio
common stock.
See Note 4 for other stock issuances.
8. Common Stock Options
On January 15, 1998, the Board of Directors amended the 1992 Plan, subject
to the approval of the Company's stockholders, to increase the aggregate number
of shares of the Company's common stock reserved for awards of restricted stock
and for issuance upon the exercise of stock options granted under the 1992 Plan
from 10,000,000 shares to 30,000,000 shares and to amend certain administrative
provisions of the 1992 Plan (the "1992 Plan Amendment").
On October 6, 1997, the Board of Directors had granted options to purchase
1.9 million shares of the Company's common stock to four officers of the Company
subject to the approval by the Company's stockholders of an increase in the
number of shares covered by the 1992 Plan.
On January 15, 1998, the Board of Directors granted options to purchase
6.6 million shares of the Company's common stock, in the aggregate, to the
Company's President and its four non-employee directors, subject to stockholder
approval of the 1992 Plan Amendment. Options to purchase 4.0 million of such
shares will not become vested and exercisable thereafter until the satisfaction
of additional vesting requirements.
On February 14, 1998, the Board of Directors granted options to purchase
3.6 million shares of the Company's common stock to certain officers, other
employees and consultants of the Company subject to stockholder approval of the
1992 Plan Amendment. Options to purchase 2.1 million of such shares will not
become vested or exercisable thereafter until the satisfaction of additional
vesting requirements based on the passage of time.
At the Company's Annual Meeting of Stockholders held on October 20, 1998,
the stockholders approved the 1992 Plan Amendment.
On February 14, 1998, the Board of Directors authorized the grant of an
option to purchase 500,000 shares of the Company's common stock under the 1992
Plan in connection with an offer of employment. Such option was granted on April
20, 1998, the date on which the optionee's employment with the Company
commenced, and became vested and exercisable on that date with respect to
125,000 shares and with respect to an additional 125,000 shares on each of the
first, second, and third anniversaries of the date of grant.
On June 3, 1998, the Company granted two options under the 1992 Plan to
purchase 4,000 shares in the aggregate of the Company's common stock in
connection with offers of employment. Such options vest and become exercisable
on December 3, 1998.
On July 15, 1998, the Company granted an option under the 1992 Plan to
purchase 150,000 shares of the Company's common stock to an employee of the
Company. The option was granted in connection with a promotion of the employee
and as a bonus.
On August 14, 1998, the Company granted three options under the 1992 Plan
to purchase 160,000 shares in the aggregate of the Company's common stock in
connection with offers of employment.
All of the foregoing options were granted with exercise prices equal to
the fair value of the Company's common stock on the date of grant. The fair
value of the Company's common stock was $0.6875 on October 6, 1997, $1.0625 on
January 15, 1998, $1.0313 on February 14, 1998, $0.7813 on April 20, 1998,
$0.6406 on June 3, 1998, $0.5625 on July 15, 1998 and $0.5625 on August 14, 1998
as determined from the last sale price of the Company's common stock as reported
by the NASDAQ National Market System on those dates.
At the time the Company received stockholder approval of the 1992 Plan
Amendment, the market value of the Company's stock did not exceed the exercise
price of the subject options noted above, therefore the Company did not incur a
non-cash charge to earnings on any options pending shareholder approval.
9. Recently Issued Accounting Pronouncements
The Company will be required to implement the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information", in the
fourth quarter of 1998. The Company has determined that the above
pronouncements may have a significant effect on the information presented in
the financial statements.
10. Net Income (Loss) Per Share of Common Stock
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Dilutive earnings per
share is very similar to the previously reported fully diluted earnings per
share. The Company adopted Statement No. 128 and has retroactively applied the
effects thereof for all periods presented. The impact on the per share amounts
previously reported was not significant. The effects of potential common shares
such as warrants, options, and convertible preferred stock has not been
included, as the effect would be antidilutive.
11. Restatement of Prior Year Quarterly Statements of Operations
Between January 15, 1997 and March 25, 1997, the Company issued and sold
an aggregate amount of $3.4 million of non-voting subordinated convertible
debentures in a private placement pursuant to Regulation S of the Securities
Act. In connection with these convertible debentures, the Company recognized a
$1.4 million non-cash charge in the fourth quarter of 1997. Had the non-cash
charge been allocated and recorded during each quarter of 1997 instead of
allocated and recorded entirely in the fourth quarter, the 1997 quarterly
results would have been reported as follows:
Three Months Ended Six Months Ended Nine Months Ended
March 31, 1997 June 30, 1997 September 30, 1997
------------------- ------------------- -------------------
As As As
(in thousands, except per share amounts Reported Adjusted Reported Adjusted Reported Adjusted
-------- -------- -------- -------- -------- --------
Interest (income) expense $ - $ 179 $ 47 $ 1,467 $ 75 $ 1,495
Net Income (Loss) $ 599 $ 420 $ (2,011) $ (3,431) $ (5,178) $ (6,598)
Weighted average number of common
shares outstanding 111,978 111,978 117,332 117,332 121,490 121,490
Net Income (Loss) Per Common Share $ 0.01 $ 0.00 $ (0.02) $ (0.03) $ (0.04) $ (0.05)
The accompanying Statement of Operations for the three months ended September
30, 1997, and the nine months ended September 30, 1997, have been retroactively
adjusted to reflect the above transaction in the correct periods.
12. Subsequent Events
On October 12, 1998, the Company exchanged 1,000,000 shares of its Common
Stock for 266 shares of the common stock of NCT Audio with the holder thereof in
an exchange exempt from registration under the Securities Act pursuant to
Section 4(2) thereof (the "October 1998 NCT Audio Common Stock Exchange"). The
October 1998 NCT Audio Common Stock Exchange was made in response to the
exercise of certain exchange rights granted to purchasers of NCT Audio common
stock in the 1997 NCT Audio Financing.
At the Annual Meeting of Stockholders of the Company held on October 20, 1998,
the stockholders approved an amendment to the Company's Restated Certificate of
Incorporation changing the name of the Company to "NCT Group, Inc." and
increasing the number of shares of common stock which the Company is authorized
to issue to 255,000,000 shares. Such amendment became effective on October 21,
1998, when the Company filed a Certificate of Amendment to its Restated
Certificate of Incorporation in the Office of the Secretary of the State of
Delaware pursuant to the requirements of the General Corporation Law of the
State of Delaware.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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 following
important factors, 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 1998 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 71% of the Company's
revenues in 1997; 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, and 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. With the exception of sales
of the Company's NoiseBuster(R) headsets, historically revenues from product
sales were limited to sales of specialty products and prototypes. During the
first nine months of 1998, the Company has introduced and is currently selling
over twenty-five new products and accessories in commercial quantities in
various markets. During the first nine months of 1998, the Company received 71%
of its revenue from product sales, 16% from license fees and royalties and only
13% from engineering and development services. Since 1991, excluding quarter to
quarter variations, revenues from product sales have been increasing and
management expects that technology licensing fees, royalties and product sales
will become the principal source of the Company's revenue as the
commercialization of its technology proceeds.
Note 1. to the accompanying Condensed Consolidated Financial Statements
and the liquidity and capital resources section which follows describe the
current status of the Company's available cash balances.
As previously disclosed, the Company implemented changes in its
organization and focus in late 1994. Additionally, 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 and awareness 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, 1998, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 25% in
product sales, 44% in engineering and development services and 31% in technology
licensing fees.
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 into their 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 ProActive(TM) and NoiseBuster(R)
headsets in 1998. The Company is now selling products through three 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; and Ultra Electronics, Limited ("Ultra") is
installing production model aircraft cabin quieting systems in turboprop
aircraft. The Company is entitled to receive royalties from Walker on its sales
of industrial silencers and from Ultra on its sales of aircraft cabin quieting
systems. 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 another major carrier for integrated noise cancellation
active-ready passenger headsets.
Product revenues for the nine months ended September 30, 1997 and 1998
were:
PRODUCT REVENUES
(thousands of dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
As a % of As a % of
Amount Total Amount Total
------------ ------------- --------------- --------------
Product 1997 1998 1997 1998 1997 1998 1997 1998
------- ---- ---- ----- ----- ------ ------ ----- -----
Headsets $482 $216 98.8% 39.4% $1,032 $ 977 96.5% 60.6%
Communications 5 215 1.0% 39.4% 16 428 1.5% 26.5%
Audio - 101 0.0% 18.4% - 186 0.0% 11.5%
Other 1 16 0.2% 2.8% 21 22 2.0% 1.4%
---- ---- ----- ----- ------ ------ ----- -----
Total $488 $548 100.0% 100.0% $1,069 $1,613 100.0% 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 April 30, 1998, the Company completed the sale of 5.0 million ordinary
shares of Verity acquired upon the Company's exercise on April 7, 1998 of the
option it held to purchase such shares at a price of 50 pence per share. This
option was acquired by the Company in connection with the cross license
agreement entered into by the Company, Verity and NXT. The Company realized a
$3.2 million gain from the exercise of such option and the sale of the Verity
ordinary shares received therefrom, which is included in other income for the
nine months ended September 30, 1998.
Management believes that available cash and cash anticipated from the
exercise of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue should be sufficient to sustain the Company's anticipated future level
of operations into 1999. However, the period during 1999 through which it can be
sustained is dependent upon the level of realization of funding from technology
licensing fees and royalties and product sales and engineering and development
revenue, all of which are presently uncertain. If the Company is not able to
increase technology licensing fees, royalties and product sales, or generate
additional capital, it will have to cut its level of operations substantially in
order to conserve cash. (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 1998 were $2.3 million
compared to $4.8 million for the same period in 1997, a decrease of $2.5 million
or 52%. The first nine months of 1997 revenue included a one-time $3.0 million
cross license fee from Verity. The timing and relative value of license fee
revenue can and has created significant variability in the Company's
period-to-period revenue comparisons. The absence of a license fee in the first
nine months of 1998 similar to the 1997 Verity cross license fee caused such
variability in the Company's period-to-period revenue performance. Such
variability is not uncommon given the high value and low frequency of receipt of
such sizable license fees.
Consistent with the Company's objectives, product sales have generally
been increasing on a quarter-to-quarter basis, accompanied by increasing
margins. Product sales are accounting for a greater share of the Company's total
revenues. Product sales increased to $1.6 million for the first nine months of
1998 versus $1.1 million for the same period in 1997, an increase of $0.5
million or 51% primarily reflecting increased NoiseBuster(R) sales and
ClearSpeech(TM) sales and the introduction by NCT Audio of Gekko(TM) flat
speakers. While product sales have been generally increasing, engineering and
development services, having little or no margins, have been decreasing on a
quarter-to-quarter basis and are accounting for a much lower share of the
Company's total revenues, reaching an insignificant level in the current
quarter. Engineering and development services remained flat at $0.3 million for
the first nine months of 1998 and 1997.
As discussed above, the timing of realization of technology license fees
often creates significant variability in the Company's period-to-period revenue
comparisons. Technology licensing fees and royalties in the first nine months of
1998 were $0.4 million versus $3.4 million for the same period in 1997, a
decrease of $3.0 million or 89% primarily due to the receipt in 1997 of the $3.0
million Verity license fee. While overall revenue in this category declined
significantly owing to the Verity cross license fee in 1997, the Company
continues to realize royalties from other existing licensees including Ultra
Electronics, Ltd. and United Airlines. Royalties from these and other licensees
are expected to account for a greater share of the Company's revenue in future
quarters.
Cost of product sales was $1.3 million for the first nine months
of 1998 versus $1.4 million for the same period in 1997, a decrease of $0.1
million or 11% primarily reflecting additional reserves taken in 1997 for price
reductions on certain headset products. Product margin was 22% for the
first nine months of 1998 versus (31%) during the same period in 1997 due to the
above noted reserves taken in 1997 and due to an increase in the margin on
NoiseBuster Extreme!(TM) sales and the introduction of ClearSpeech(TM) sales and
Gekko(TM) flat speaker sales by NCT Audio in 1998. Cost of engineering and
development services decreased to $0.2 million for the first nine months of 1998
versus $0.3 million for the same period in 1997, due to a reduction in contract
revenue. The gross margin on engineering and development services increased to
33% for the first nine months of 1998 from 13% during the same period in 1997
due to more profitable contracts in 1998.
Selling, general and administrative expenses for the first nine months of
1998 were $7.6 million versus $3.7 million for the same period in 1997, an
increase of $3.9 million or 104% primarily due to an 80% increase in the number
of sales and marketing professionals and an associated increase in sales and
marketing efforts, including advertising, to support the introduction of several
new product lines in 1998.
Research and development expenditures for the first nine months of 1998
were $4.7 million versus $4.5 million for the same period in 1997, an increase
of $0.2 million or 5% primarily due to continued efforts to focus on near-term
product sales and technology licensing fees. The Company continues to focus on
products utilizing its hearing products, audio, communications and microphone
technologies, products which have been developed within a short time period and
are targeted for rapidly emerging markets.
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 June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $101.4 million on a
cumulative basis through September 30, 1998. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock, including the exercise of warrants or options to
purchase common stock and the sale of preferred stock convertible into common
stock, and by technology licensing fees and engineering and development funds
received from joint venture and other strategic partners.
Management believes that available cash and cash anticipated from the
exercise of warrants and options, the funding derived from forecasted technology
licensing fees, royalties and product sales, and engineering and development
revenue, should be sufficient to sustain the Company's anticipated future level
of operations into 1999. However, the period during 1999 through which it can be
sustained is dependent upon the level of realization of funding from technology
licensing fees and royalties and product sales and engineering and development
revenue, all of which are presently uncertain.
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, 1998, about the
Company's ability to continue as a going concern.
At September 30, 1998, cash and short-term investments were $5.5 million.
The available resources were invested in interest bearing money market accounts
and commercial paper. The Company's investment objective is preservation of
capital while earning a moderate rate of return.
On June 16, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") notified the
Company that the Company's Common Stock had failed to maintain a closing bid
price of $1.00 or more for the previous thirty (30) consecutive trade dates in
accordance with Nasdaq's Marketplace Rule 4450(a)(5). Nasdaq also notified the
Company that no delisting action would be initiated at that time and that the
Company would be provided ninety (90) calendar days in which to regain
compliance with Marketplace Rule 4450(a)(5) which would be achieved if the
closing bid price of the shares of the Company's Common Stock equaled or
exceeded $1.00 for ten (10) consecutive days before the end of trading on
September 14, 1998. In this regard, Nasdaq advised the Company that in the event
the Company was unable to achieve compliance, it may seek further procedural
remedies. The Company was unable to achieve compliance by September 14, 1998,
and on that date delivered its request for a hearing on the matter together with
the requested fee to Nasdaq's Hearings Department. Such a hearing is presently
scheduled for November 5, 1998. Under Nasdaq's procedures delisting is stayed
pending the outcome of the hearing. While a delisting of the Company's common
stock is not anticipated to have an immediate effect on the Company's
operations, it may make it more difficult for the Company to raise additional
capital to fund future operations.
The Company's working capital decreased to $5.7 million at September 30,
1998, from $11.7 million at December 31, 1997. This decrease of $6.0 million was
primarily due to increasing efforts to develop and introduce new product lines
and to fund operations for the period.
During the first nine months of 1998, the net cash used in operating
activities was $9.0 million, compared to $4.0 million used in operating
activities during the same period of 1997. The increase of $5.0 million was
primarily due to a $2.6 million increase in inventory and a $1.2 million
increase in the net loss versus the same period last year.
Net inventory increased during the first nine months of 1998 by $2.6
million primarily due to stocking for anticipated sales of the NoiseBuster(R)
line of headsets and the Gekko(TM) flat speaker.
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, 1998, and no material commitments are
anticipated in the near future.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 6 - "Notes to the Condensed
Consolidated Financial Statements" which is incorporated by reference herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
(a) Securities Sold. On July 27, 1998, the Company issued and sold 4,000
shares of Series D Preferred Stock having an aggregate stated value of
$4,000,000, and on August 4, 1998, the Company issued and sold 2,000
shares of Series D Preferred Stock having an aggregate stated value of
$2,000,000.
(b) Purchasers. The purchasers of the 6,000 shares of Series D Preferred
Stock were:
Sovereign Partners, LLP
Dominion Capital Fund, Ltd.
Atlantis Capital Fund, Ltd.
Canadian Advantage, Limited Partnership
Advantage Bermuda Fund, Ltd.
The Endeavor Capital Fund, S.A.
The placement agent for the transaction was J.P. Carey, Inc.
(c) Consideration. The aggregate offering price for 6,000 shares of Series
D Preferred Stock having an aggregate stated value of $6,000,000 was
$5,700,000.
(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 D
Preferred Stock, each of the six purchasers is an "accredited investor" as
defined under Regulation D.
(e) Terms of Conversion. The shares of Series D Preferred Stock became
convertible into shares of common stock of the Company on October 30,
1998. Each share of Series D 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 greater of (i) the amount obtained by multiplying
the Conversion Percentage (which means 80% reduced by an
additional 2% for every 30 days 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; or (ii) $0.50.
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 D Preferred Stock.
The conversion terms of the Series D Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 12,000,000
shares of its Common Stock in the aggregate in connection with the
conversion of such 6,000 shares of Series D Preferred Stock.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 2 Stock Purchase Agreement dated August 21, 1998, among
Noise Cancellation Technologies, Inc., Advancel Logic
Corporation and the Holders of the Outstanding Capital
Stock of Advancel Logic Corporation incorporated by
reference to Exhibit 2 of the Company's Registration
Statement on Form S-3 (Registration No. 333-64967)
filed on September 30, 1998, as amended by Amendment
No. 1 thereto filed on October 30, 1998
Exhibit 4 Certificate of Designations, Preferences and Rights
of Series D Convertible Preferred Stock of Noise
Cancellation Technologies, Inc. filed on July 24, 1998
in the Office of the Secretary of State of the State
of Delaware incorporated by reference to Exhibit 4 of
the Company's Registration Statement on Form S-3
(Registration No. 333-64967) filed on September 30,
1998, as amended by Amendment No. 1 thereto filed on
October 30, 1998
Exhibit 10 License Agreement dated July 15, 1998, between Noise
Cancellation Technologies, Inc. and NCT Hearing
Products, Inc.
Exhibit 27-1 Financial Data Schedule
Exhibit 27-2 Restated Financial Data Schedule
(Third Quarter Ended September 30, 1997)
(b) The following reports on Form 8-K were filed during the quarter
ended September 30, 1998:
(i) A report on Form 8-K was filed on July 16, 1998,
reporting a change in the date for the next Annual
Meeting of Stockholders of the Company and the record
date relating to the Meeting.
(ii) A report on Form 8-K was filed on July 29, 1998,
reporting the Company's July 29, 1998 press release
announcing the Company's plan to repurchase up to 10.0
million shares of its common stock.
(iii) A report on Form 8-K was filed on August 21, 1998,
reporting a change in the date for the next Annual
Meeting of Stockholders of the Company and the record
date relating to the Meeting.
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
By: /s/ CY E. HAMMOND
-----------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: November 5, 1998