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 March 31, 1999
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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
incorporation or organization) Identification No.)
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)
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.
174,237,793 shares outstanding as of May 10, 1999
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 Ended March 31,
---------------------------------------
1998 1999
---------- ----------
REVENUES:
Technology licensing fees and royalties $ 310 $ 2,722
Product sales, net 402 652
Engineering and development services 22 809
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Total revenues $ 734 $ 4,183
---------- ----------
COSTS AND EXPENSES:
Cost of product sales $ 303 $ 434
Cost of engineering and development services 22 508
Selling, general and administrative 2,677 2,985
Research and development 1,464 1,713
Equity in net loss of unconsolidated affiliates
(net of amortization of goodwill of $191) - 103
Interest income, net (121) (24)
---------- ----------
Total costs and expenses $ 4,345 $ 5,719
---------- ----------
NET (LOSS) $ (3,611) $ (1,536)
Preferred stock dividend requirement $ 1,690 $ 5,561
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock 385 159
---------- ----------
NET (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (5,686) $ (7,256)
========== ==========
Basic and diluted loss per share $ (0.04) $ (0.05)
========== ==========
Weighted average common shares outstanding 131,161 158,504
=========== ==========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS)
(in thousands, unaudited)
Three Months Ended March 31,
----------------------------
1998 1999
--------- --------
NET (LOSS) $ (3,611) $(1,536)
Other comprehensive income/(loss)
Currency translation adjustment (3) 24
--------- --------
COMPREHENSIVE (LOSS) $ (3,614) $(1,512)
========= ========
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, March 31,
1998 1999
------------ -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 529 $ 329
Accounts receivable:
Technology license fees and royalties 192 312
Other 691 1,236
Unbilled 61 198
Allowance for doubtful accounts (228) (255)
------------ -----------
Total accounts receivable, net $ 716 $ 1,491
Inventories, net of reserves (Note 2) 3,320 3,483
Other current assets 185 163
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Total current assets $ 4,750 $ 5,466
Property and equipment, net 997 890
Goodwill, net 1,506 1,400
Patent rights and other intangibles, net (Note 5) 2,881 2,735
Other assets (Note 4) 5,331 5,588
------------ -----------
$ 15,465 $ 16,079
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,226 $ 4,422
Accrued expenses 1,714 1,621
Accrued payroll, taxes and related expenses 241 307
Other liabilities (Note 5) 756 667
Customers' advances - 30
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Total current liabilities $ 5,937 $ 7,047
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Long term liabilities:
Note payable (Note 6) $ - $ 1,073
------------ -----------
Total long term liabilities $ - $ 1,073
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Commitments and contingencies
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 $308,121,
respectively) $ 6,102 $ 308
------------ -----------
Stockholders' equity (Note 3)
Preferred stock, $.10 par value, 10,000,000 shares authorized
Series C Preferred stock, 700 shares issued and outstanding
(redemption amount $731,222 and $738,126, (respectively) 702 709
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
6,980 shares, respectively (redemption amount $10,582,319
and $7,040,953, respectively) 3,298 6,676
Common stock, $.01 par value, 255,000,000 shares, authorized; issued
156,337,316 and 180,315,858 shares, respectively 1,563 1,803
Additional paid-in-capital 107,483 112,655
Unearned portion of compensatory stock, warrants and options (238) (184)
Accumulated deficit (107,704) (109,240)
Cumulative translation adjustment 45 69
Stock subscriptions receivable (4,000) (1,874)
Treasury stock (6,078,065 shares) (2,963) (2,963)
------------ -----------
Total stockholders' equity $ 3,426 $ 7,651
------------ -----------
$ 15,465 $ 16,079
============ ===========
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)
Three months ended March 31,
----------------------------
1998 1999
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Cash flows from operating activities:
Net (loss) $ (3,611) $ (1,536)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 241 362
Common stock options and warrants issued as
consideration for:
Compensation 68 54
Provision for tooling costs 3 6
Provision for doubtful accounts 4 27
Equity in net loss of unconsolidated affiliates,
net of amortization of goodwill (Note 4) - (103)
Preferred stock received for license fees - (2,000)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (446) (682)
(increase) decrease in license fees receivable 200 (120)
(Increase) in inventories, net (841) (164)
(Increase) decrease in other assets (157) 20
Increase in accounts payable and accrued expenses 375 976
Increase in other liabilities 22 298
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Net cash (used in) operating activities $ (4,142) $ (2,862)
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Cash flows from investing activities:
Capital expenditures $ (198) $ (12)
Acquisition of subsidiaries (Note 4) - (154)
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Net cash (used in) investing activities $ (198) $ (166)
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Cash flows from financing activities:
Proceeds from:
Convertible debt (net) $ - $ 1,000
Sale of Series C preferred stock (net) (9) -
Sale of subsidiary common stock (net) (10) -
Exercise of stock options and warrants 64 1
Stock subscription receivable - 1,799
----------- ----------
Net cash provided by financing activities $ 45 $ 2,800
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Effect of exchange rate changes on cash $ (10) $ 28
----------- ----------
Net (decrease) in cash and cash equivalents $ (4,305) $ (200)
Cash and cash equivalents - beginning of period 12,604 529
----------- $----------
Cash and cash equivalents - end of period $ 8,299 $ 329
=========== ===========
Cash paid for interest $ - $ -
=========== ===========
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. 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 March 31, 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 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 $109.2 million on a
cumulative basis through March 31, 1999. 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, the sale of preferred stock convertible into common
stock, technology licensing fees, royalties, product sales and engineering and
development funds received from strategic alliances.
Cash, cash equivalents and short-term investments amounted to $0.3 million
at March 31, 1999, decreasing 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, the funding derived from technology
licensing fees, royalties and 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 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 and 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 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 March 31, 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. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, March 31,
1998 1999
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Components $ 745 $ 755
Finished Goods 3,083 3,115
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Gross Inventories $ 3,828 $ 3,870
Reserve for Obsolete & Slow Moving Inventory (508) (387)
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Inventories, Net of Reserves $ 3,320 $ 3,483
============ ============
The reserve for obsolete and slow moving inventory at March 31, 1999 has
decreased to $387,000 due to the application of reserves to slow moving
inventory during the first three months of 1999.
3. Stockholders' Equity:
The changes in stockholders' equity during the three months ended March
31, 1999, were as follows:
(in thousands)
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Exchange Accretion/ Net Stock Unearned
Conver- Dividend Sale Subscrip- Compen- Transla-
Balance sion of of of tion satory tion Balance
at Preferred Preferred Common Receiv- Options/ Adjust- at
12/31/98 Stock Stock Stock able Warrants Net Loss ment 3/31/99
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Series C
Preferred
Stock:
Shares 1 - - - - - - - 1
Amount $ 702 $ - $ 7 $ - $ - $ - $ - $ - $ 709
Series D
Preferred
Stock:
Shares 6 (6) - - - - - - -
Amount $ 5,240 $ (5,273) $ 33 $ - $ - $ - $ - $ - $ -
Series E
Preferred
Stock:
Shares 11 (4) - - - - - - 7
Amount $ 3,298 $ (1,917) $ 5,622 $ - $ (327) $ - $ - $ - $ 6,676
Common
Stock:
Shares 156,337 23,974 - 5 - - - - 180,316
Amount $ 1,563 $ 240 $ - $ - $ - $ - $ - $ - $ 1,803
Treasury
Stock:
Shares 6,078 - - - - - - - 6,078
Amount $ (2,963) $ - $ - $ - $ - $ - $ - $ - $ (2,963)
Additional
Paid-in
Capital $ 107,483 $ 10,803 $(5,721) $ 90 $ - $ - $ - $ - $ 112,655
Accumulated
(Deficit) $(107,704) $ - $ - $ - $ - $ - $(1,536) $ - $ (109,240)
Cumulative
Translation
Adjustment $ 45 $ - $ - $ - $ - $ - $ - $ 24 $ 69
Stock
Subscription
Receivable $ (4,000) $ - $ - $ - $ 2,126 $ - $ - $ - $ (1,874)
Unearned
Compensatory
Stock
Option $ (238) $ - $ - $ - $ - $ 54 $ - $ - $ (184)
4. 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. Earlier on June 11, 1998, NCT Audio had paid a non-refundable deposit
of $1,450,000 towards the purchase price. The total purchase price is
$10,000,000 and up to $6,000,000 in possible future cash contingent payments.
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, 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 has an exclusive right, as extended, to purchase the assets of
TSA through May 28, 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
the 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 fails to pay the
note by April 16, 1999, (a) the note will begin to accrue interest on April 17,
1999 at the lower of the rate of two times prime rate or the highest rate
allowable by law; and (b) the $20,685 and $125,000 portion of the extension fee
will no longer be credited toward the $6.5 million purchase consideration due at
closing. If NCT Audio fails to pay the note by April 30, 1999, the $204,315
portion of the extension fee shall 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 fails to close the contemplated transaction by May 28, 1999, NCT Audio
will forfeit its minority earnings in TSA for the period June 1, 1999 through
May 30, 2000. In addition, due to NCT Audio's inability to close the transaction
by March 31, 1999, TST received $100,000 of NCT Audio's Convertible Preferred
Stock as a penalty premium.
The Company accounts for its 20% interest in TSA on the equity method. As
such, the Company's pro rata interest in TSA's net income, reduced by
amortization of the related goodwill, was recorded during the period.
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 for cash consideration 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 that is subordinate to senior indebtedness of PPI. On
August 18, 1998, NCT Audio provided PPI another working capital loan in the
amount of $1,000,000, which is evidenced by a similarly subordinated promissory
note. The unpaid principal balance of these notes is accruing 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.
On January 28, 1999, NCT Audio entered into a letter of intent to purchase
100% of the common stock of a premier speaker manufacturer (the "Third
Acquisition"). The proposed acquisition is subject to the approval by its
stockholder and certain other terms and conditions, including that NCT Audio
obtain adequate financing to consummate the transaction. The purchase price is
approximately $36.4 million. At closing, approximately $24.5 million will be
paid to the shareholder of the Third Acquisition. The balance of approximately
$11.9 million is to be paid by a four-year, straight-line amortization seller
note (payable quarterly) that will have a second lien on the assets of the Third
Acquisition.
5. 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 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 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 $454,000 at March 31, 1999 representing the difference between the
proceeds of the sale of the shares issued on June 5, 1998 and the balance due on
the license fee.
6. Convertible Note:
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 a predetermined
conversion price. The Holder shall purchase the remaining $3.0 million principal
amount of the secured convertible notes on or before June 30, 1999 on the same
terms as noted above.
7. 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 official text of the judgment will be available in a few weeks.
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 Products, Inc. ("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 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. There were no material
developments in this matter during the period covered by this report.
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.
8. Common Stock:
For the three-month period ended March 31, 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 a private placement in the third quarter of 1998
exempt from registration pursuant to Regulation D of the Securities Act of 1933.
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 three-month period ended March 31, 1999, 57 shares of NCT Audio
Series A Convertible Preferred Stock, issued in a private placement in the third
quarter of 1998 exempt from registration pursuant to Regulation D of the
Securities Act of 1933, had been exchanged for 5,700 shares of Series D
Preferred Stock, which was converted into 11,699,857 shares of the Company's
common stock. Reference is made to the Company's Annual Repoort on Form 10-K for
the fiscal year ended December 31, 1998, as amended, for further discussion.
As of March 31, 1999, no shares of the Company's Series E Convertible
Preferred Stock ("Series E Preferred Stock"), which were issued in a private
placement in the fourth quarter of 1998 exempt from registration pursuant to
Regulation D of the Securities Act of 1933, have been converted into NCT 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 three-month period ended March 31, 1999, the Company received
gross proceeds of $2.1 million less expenses of $0.3 million, representing a
portion of the $4.0 million subscription receivable related to the Series E
Preferred Stock recorded at December 31, 1998. Subsequently, on April 13, 1999,
the Company received the remaining proceeds of $1.9 million, less expenses of
$0.1 million.
On March 31, 1999, the Company signed a license agreement to exchange 3,600
shares of Series E Preferred Stock for four (4) DistributedMedia.com, Inc.
("DMC") network affiliate licenses incorporating the Digital Broadcasting
Station System ("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 only $2.0 million on
the issuance of such licenses in consideration of the receipt of 3,600 shares of
its Series E Convertible Preferred Stock in a related party transaction. As a
result, realization of revenue was limited to the related party's consideration
representing the Series E Convertible Preferred Stock.
At March 31, 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 30.4 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 11.4 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, and 30.0 million shares of common stock
reserved for the issuance upon conversion of Series E Preferred Stock. At March
31, 1999, 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 23.7 million shares were currently exercisable. Common
shares issued and issuable exceed the number of shares authorized at March 31,
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 until such
time as the Company's stockholders approve an increase in the number of shares
of common stock authorized. A vote on the matter is to be held at the Company's
next annual meeting, scheduled for June 24, 1999.
9. Business Segment Information:
During 1998, the Company adopted the Financial Accounting Standards
Board's Statements 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
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Advamcel
Logic Total Grand
Audio Hearing Communications Europe DMC Corp Segments Other Total
---------------------------------------------------------------------------------------------------
For the three months ended
March 31, 1999:
Net Sales - External $ 193 $ 226 $ 377 $ 2 $ - $ 663 1,461 $ - $ 1,461
Net Sales - Other
Operating Segments 15 - - 296 - - 311 (311) -
License Fees and Royalties 500 2 20 - 2,000 200 4,322 - 4,322
Equity in net loss of
unconsolidated affiliates -
net of amortization 103 - - - - - 103 - 103
Interest Income, net - - - - - - - 24 24
Depreciation/Amortization 3 - - 6 - 4 13 349 362
Operating Income (Loss) (1,447) (751) (1,472) 105 1,921 269 (1,375) (161) (1,536)
Segment Assets 6,689 2,738 485 221 3,454 1,423 15,010 1,069 16,079
Capital Expenditures 1 - - 4 2 1 8 4 12
For the three months ended
March 31, 1998:
Net Sales - External $ 12 $ 212 $ 172 $ 2 $ - $ - $ 398 $ 26 $ 424
Net Sales - Other
Operating Segments - - - 203 - - 203 (203) -
License Fees and Royalties 275 35 - - - - 310 - 310
Equity in net loss of
unconsolidated affiliates -
net of amortization - - - - - - - - -
Interest Income, net 9 - - - - - 9 112 121
Depreciation/Amortization - - - 16 - - 16 225 241
Operating Income (Loss) (1,177) (544) (772) (81) - - (2,574) (1,037) (3,611)
Segment Assets 1,051 1,886 532 412 - - 3,881 10,374 14,255
Capital Expenditures 133 - - 3 - - 136 62 198
Audio:
NCT Audio is engaged in the design, development, and marketing of products
which utilize innovative flat panel transducer technology. The products
available from NCT Audio include the Gekko(TM) flat speaker and ArtGekko(TM)
printed grille collection. The Gekko(TM) flat speaker is marketed primarily to
the home audio market, with potential in many other markets including the
professional audio systems market, the automotive audio aftermarket, the
aircraft industry, other transportation markets, as well as the multimedia
markets. The principal customers are end users, automotive OEM's and
manufacturers of integrated cabin management systems.
Hearing:
NCT Hearing designs, develops and markets ANR headset products to the
communications headset market and the telephony headset market. The products
consist of 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 OEM's, 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, a recently formed, wholly-owned subsidiary of the Company, develops,
installs and provides an audio/visual advertising medium within
commercial/professional settings. DMC installs flat panel transducer-based
speakers, a personal computer containing DMC's Sight and Sound Digital Broadcast
Station software, telephone access to the Internet, amplifiers and related
components. The Digital Broadcast Station 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 selected 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 Logic Corporation ("Advancel") is a participant in the native
Java(TM) (Java(TM) is a trademark of Sun Microsystems, Inc.) embedded
microprocessor market. The purpose of the Java(TM) platform is to simplify
application development by providing a platform for the same software to run on
many different kinds of computers and other smart devices. Advancel has been
developing a family of processor cores, which will execute instructions written
in both Java bytecode and C/C++ significantly enhancing the rate of instruction
execution, which opens up many new applications. The potential for applications
consists of the next generation home appliances and automotive applications,
smartcards for a variety of applications, hearing aids and mobile communications
devices.
Other:
The Net Sales - Other Operating Segments primarily consists of
inter-company sales and items eliminated in consolidation. Segment assets
consists primarily of corporate assets.
10. Subsequent Events
On April 12,1999, the Company signed a license agreement with Lernout &
Hauspie Speech Products N.V. ("L&H"). The agreement provides for combining any
of the present and future software and/or hardware platforms of L&H with any of
the present and future software and/or products of the Company's to exploit the
best market potential of both parties' product portfolios. The Company is to
recognize a non-refundable royalty fee in the second quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 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 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 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, 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. This is reflected in the
first three months of 1999, where 65% of the Company's revenue is from licensing
fees and royalties, 16% from product sales and 19% 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 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 March 31, 1999, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 25% in
product sales, 40% in engineering and development services and 35% 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 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 NoiseBuster(R) headsets,
Clearspeech(R) products and the Gekko(TM) flat speakers in 1999. The Company is
now selling 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 another major carrier for integrated
noise cancellation active-ready passenger headsets.
Product revenues for the three months ended March 31, 1998 and 1999 were:
PRODUCT REVENUES
(Thousands of dollars) Three Months Ended March 31,
----------------------------------------
Amount As a % of Total
------------------- -------------------
Product 1998 1999 1998 1999
------------------- -------- -------- -------- --------
Hearing $236 $209 58.7% 32.1%
Communications 147 249 36.6% 38.2%
Audio 12 193 3.0% 29.6%
Other 7 1 1.7% 0.1%
-------- -------- -------- --------
Total $402 $652 100.0% 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 and 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.
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 and 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, 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 three months of 1999 were $4.2 million
compared to $0.7 million for the same period in 1998, an increase of $3.5
million or 500%. Revenues for the first three months of 1999 included a net
license fee of $2.0 million for DBSS as noted below.
Consistent with the Company's objectives, product sales have generally
been increasing on a quarter-to-quarter basis, accompanied by increasing
margins. Product sales increased to $0.7 million for the first three months of
1999 versus $0.4 million for the same period in 1998, an increase of $0.3
million or 62% primarily reflecting increased sales of ClearSpeech(R) and
Gekko(TM) flat speakers. Primarily due to an agreement with STMicroelectronics
S.A., engineering and development services have increased to $0.8 million
compared to less than $0.1 million for the same period in 1998.
Technology licensing fees and royalties in the first three months of 1999
were $2.7 million versus $0.3 million for the same period in 1998, an increase
of $2.4 million primarily due to the $2.0 million net DBSS license fee. The
technology license fee consideration is occasioned by 3,600 shares of Series E
Preferred Stock returned to the Company in lieu of cash consideration. 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 Convertible Preferred Stock in a related party
transaction. As a result, realization of revenue was limited to the related
party's consideration representing the Series E Convertible Preferred Stock.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to 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 $0.4 million for the first three months of 1999
versus $0.3 million for the same period in 1998, an increase of $0.1 million or
43% primarily reflecting the increase in product sales. Product margin was 33%
for the first three months of 1999 versus 25% during the same period in 1998 due
to the sales mix of more profitable products, particularly the sales of
ClearSpeech(R) products and Gekko(TM) flat speakers. Cost of engineering and
development services increased to $0.5 million for the first three months of
1999 versus less than $0.1 million for the same period in 1998, due to the
agreement with STMicroelectronics S.A. The gross margin on engineering and
development services increased to 37% for the first three months of 1999 from 0%
during the same period in 1998 due to more profitable contracts in 1999.
Selling, general and administrative expenses for the first three months of
1999 were $3.0 million versus $2.7 million for the same period in 1998, an
increase of $0.3 million or 12% primarily due to an 17% increase in the number
of sales and marketing professionals and increased legal expenses.
Research and development expenditures for the first three months of 1999
were $1.7 million versus $1.5 million for the same period in 1998, an increase
of $0.2 million or 17% primarily due to the acquisition of Advancel Logic
Corporation, a subsidiary of the Company, and 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 September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $107.6 million on a
cumulative basis through March 31, 1999. 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, the sale of preferred stock convertible into common
stock, technology licensing fees, royalties, product sales and engineering and
development funds received from strategic alliances.
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 and 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 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 March 31, 1999, about the
Company's ability to continue as a going concern.
At March 31, 1999, cash was $0.3 million. The available 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.
The Company's deficit in working capital increased to $(1.6) million at
March 31, 1999, from $(1.2) million at December 31, 1998. This $0.4 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 three months of 1999, the net cash used in operating
activities was $2.9 million, compared to $4.1 million used in operating
activities during the same period of 1998. The decrease of $1.2 million was
primarily due to net income for the 1999 period versus a net loss for the same
period last year.
Net inventory increased during the first three months of 1999 by $0.2
million primarily due to stocking for anticipated sales of the NoiseBuster(R)
line of headsets and Gekko(TM) flat speakers.
The net cash provided by financing activities amounted to $2.8 million
primarily due to the $1.0 million convertible Note (see Note 6 - "Notes to the
Condensed Consolidated Financial Statements" for further details) and $1.8
million, representing receipt of a portion of the Series E Preferred Stock
Subscription receivable at December 31, 1998.
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 4 - "Notes to the Condensed Consolidated
Financial Statements", there were no material commitments for capital
expenditures as of March 31, 1999, and no other material commitments are
anticipated in the near future.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 7 - "Notes to the Condensed
Consolidated Financial Statements" which is included herein.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 27-1 Financial Data Schedule
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: May 21, 1999