SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A2
AMENDMENT NO. 2 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission File Number: 0-18267
NCT Group, Inc.
(formerly known as
Noise Cancellation Technologies, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 59-2501025
(State or other jurisdiction of (IRS Employer
incorporation organization) Identification No.)
1025 West Nursery Road, Linthicum, Maryland 21090
(Address of principal executive office) (Zip Code)
(410) 636-8700
(Registrant's telephone number, including area code)
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
Statements in this filing 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 customers; 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.
Overview
On April 7, 1999, the Company issued a news release including information
about $3.6 million of technology license fees and net profit of $0.1 million for
the first quarter of 1999. Such revenue recognition and the resulting net profit
were not audited. In the circumstances, the amount that may be recognized for
such technology license fees is dependent on a definitive license agreement and
certain valuation considerations. 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 Company is continuing the transition initiated in 1995 from a firm
focused principally on research and development of new technology to a firm
focused on the commercialization of its technology through technology licensing
fees, royalties and product sales. Prior to 1995, 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. In 1998, the Company received approximately 13% of its
operating revenues from engineering and development funding, compared with 6% in
1997. Revenues from product sales were limited to sales of specialty products
and prototypes. Since 1991, revenues from product sales have generally
increased, although in 1996 product sales declined slightly due to delays in
production and reduced pricing of certain products. In 1998, revenues from
product sales resumed their year-to-year increase. 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.
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As a result of the 1994 acquisition of certain ANVT assets, the Company
became the exclusive licensee of ten seminal patents, the Chaplin Patents,
through its wholly-owned subsidiary, CPH. The Company's ability to license the
Chaplin Patents directly to unaffiliated third parties provides the Company with
a greater ability to earn technology licensing fees and royalties from such
patents. Further, the Company believes that its intellectual property portfolio
prevents other competitors and potential competitors in the field of Active Wave
Management from participating in certain commercial areas without licenses from
the Company.
Note 1 to the accompanying Financial Statements and the "Liquidity and
Capital Resources" section which follows describes 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 ratio and/or enhance sound quality. This
redefinition is the result of the development of new technologies, as previously
noted, such as ASF, TDSS, FPT, and the SMM, 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. The redefinition of
corporate mission is reflected in the revised business plan, which the Company
began to implement during the first quarter of 1996 and has continued through
1998.
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.
In January 1998, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1999.
The Company did not meet the plan's revenue targets and as noted below, found it
necessary to raise additional capital to fund it's operations for 1998 and
beyond. Refer to "Liquidity and Capital Resources" below and to Notes 1 and 8 -
Notes to Financial Statements.
Success in generating technology licensing fees, royalties and product sales
is significant and critical to the Company's success. The Company cannot predict
whether it will be successful in obtaining market acceptance of its new products
or in completing its current negotiations with respect to licenses and royalty
revenues.
From the Company's inception through December 31, 1998, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 26%
product sales, 43% engineering and development services and 31% technology
licensing fees and royalties.
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The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the Company's technology into their products and manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed.
The Company continues to sell NoiseBuster Extreme!(TM) consumer headsets and
began shipping Gekko(TM) flat speakers in the third quarter of 1998. The Company
is presently selling products through six of its alliances: Walker is
manufacturing and selling industrial silencers; Siemens is buying and
contracting with the Company to install quieting headsets for patient use in
Siemens' MRI machines; in the fourth quarter of 1994 Ultra began installing
production model aircraft cabin quieting systems in the SAAB 340 turboprop
aircraft; OKI is integrating ClearSpeech(R) algorithm into large scale
integrated circuits for communications applications; and BE Aerospace and Long
Prosper are providing NoiseBuster(R) components into United Airlines'
comprehensive in-flight entertainment and information systems. Management
believes these developments and those previously disclosed help demonstrate the
range of commercial potential for the Company's technology and will contribute
to the Company's transition from engineering and development to technology
licensing fees, royalties and product sales.
The availability of high-quality, low-cost electronic components for
integration into the Company's products also is critical to the
commercialization of the Company's technology. The Company is working with its
strategic partners and other suppliers to reduce the size and cost of the
Company's systems, so that the Company will be able to offer low-cost
electronics and other components suitable for high-volume production.
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. During
1994, the Company acquired a license to two patents in the field of
micro-machined microphones and concluded the acquisition of all of the patents,
know-how and intellectual property of a former competitor, ANVT. During 1995 the
Company acquired several U.S. patents dealing with adaptive speech filtering
which is used in the Company's ClearSpeech(R) product line. Since 1996, the
Company has been granted 197 new patents for various applications in the field
of Active Wave Management. 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.
The Company has become certified under the International Standards
Organization product quality program known as "ISO 9000", and continues to
successfully maintain its certification. Since the third quarter of 1994, the
Company has reduced its worldwide work force by 40% from 173 to 104 current
employees as of February 28, 1999.
NCT Audio, a majority owned subsidiary of the Company, has signed three
letters of intent, one agreement to purchase, and one definitive purchase
agreement pursuant to which it will acquire 100% of the stock or assets of the
companies outlined below. Management believes the consummation of these
acquisitions will provide significant value creation opportunities. By acquiring
companies that specialize in different segments of the audio market in various
locations around the world, management believes it can improve profitability of
the combined companies by sharing some resources, eliminating redundant expenses
and increasing revenue by leveraging each company's distribution channels. Some
of the synergistic opportunities that will be achieved with the acquisitions
include the ability to (i) leverage the extensive dealer network; (ii) gain
access to worldwide consumer audio markets and establish automotive audio
aftermarket accounts; (iii) increase product distribution of all acquisition
companies in world markets; (iv) cross-sell the acquisition companies' products
among distribution channels; and (v) maximize the warehousing and distribution
facilities. Overall, these opportunities are expected to significantly
strengthen the distribution network of NCT Audio's product line into the
worldwide market.
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), a wholly-owned subsidiary of Top
Source Technologies, Inc. ("TST"). TSA, located in Troy, Michigan, specializes
in the design and manufacture of speaker enclosures that maximize audio output
for automotive OEMs, Tier One suppliers, and key aftermarket accounts. TSA's
systems are factory installed on Chrysler Corporation's ("Chrysler") Wrangler
model line and are also offered as dealer installed accessory packages. 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 contingent payments. The seller has elected to
receive the possible future contingent payments in cash. The shareholders of TST
approved the transaction on December 15, 1998.
NCT Audio then paid TST $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 TST's shareholders
approved the transaction, the $2,050,000 was delivered to TST. In return, NCT
Audio took ownership of the documentation and securities.
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 TST $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 TST
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. NCT Audio did not pay the note by
April 16, 1999. 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. 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 Series A Convertible Preferred Stock as a
penalty premium.
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, located in Phoenix, Arizona, designs and manufactures high performance
amplifiers, preamplifiers, subwoofers, signal processors and speakers for the
automotive audio aftermarket. PPI has a network of over 600 dealers for its
products throughout the United States. NCT Audio will acquire the interest in
exchange for shares of its common stock having an aggregate value of $2,000,000.
NCT Audio also agreed to pay approximately $8.5 million of PPI debt, but NCT
Audio must obtain adequate financing before the transaction can be completed. In
addition, NCT Audio provided PPI a working capital loan on June 17, 1998 in the
amount of $500,000 which is evidenced by a demand promissory note. On August 18,
1998, NCT Audio provided PPI another working capital loan in the amount of
$1,000,000, which is also evidenced by a demand promissory note. The unpaid
principal balance of these notes bear 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 pay the PPI debt. On January 6, 1999, the PPI members notified NCT
Audio that, while they remain willing to do the transaction, they may choose at
some point to abandon the transaction because NCT Audio has not obtained the
financing in a timely manner. They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock, they would insist that NCT Audio pay them
that amount in cash at any closing.
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 the
stockholders of the Third Acquisition and certain other terms and conditions,
including that NCT Audio obtain adequate financing to consummate the
transaction. Shareholders who hold all of the outstanding shares of common stock
of the Third Acquisition have agreed to vote their shares in favor of the
proposed acquisition.
The purchase price is approximately $36.4 million. At closing, approximately
$24.5 million will be paid to shareholders of the Third Acquisition in cash. 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.
The Third Acquisition is a premier speaker manufacturer for the home consumer
market. Ranking among the ten largest speaker manufacturers in the world, the
Third Acquisition sells its well-established speaker lines in over fifty
countries worldwide. The Third Acquisition's dedication to a continuous cycle of
new products for its speaker line allows it to remain a dominant speaker player
in the world market.
Because the Company did not meet its revenue targets for 1998, it entered
into certain transactions, which provided additional funding as follows:
On July 27, 1998, the Company entered into subscription agreements (the
"Series D 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 Series D
Subscription Agreements, the Company is required to file a registration
statement ("the Series D 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 "Series D
Filing Date" and the "Series D 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 Series D Closing Date; (ii)
five (5) days after the Company receives a "no review" status from the SEC in
connection with the Series D Registration Statement; or (iii) the effective date
of the Series D Registration Statement. The Series D 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 "Series D Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
Conversion Price
where
N = the number of days between (i) the Series D 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 Series D 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 Series D 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. Including shares of common
stock issued for accretion, as of March 12, 1999, all shares of Series D
Preferred Stock have been converted to 12,273,685 shares of NCT common stock.
On July 27, 1998, NCT Audio entered into 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 stated 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 NCT Audio 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 NCT Audio 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 "Series A Filing Deadline") which is not
later than thirty (30) days after the company becomes a "reporting company"
under the 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 Series A 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
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. As of December 31, 1998, no NCT Audio Series A
Preferred Stock shareholders have exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Preferred Stock.
On December 30, 1998, the Company entered into a series of subscription
agreements (the " Series E Subscription Agreements") to sell an aggregate stated
value of up to $8.2 million of Series E Convertible Preferred Stock (the "Series
E Preferred Stock") in consideration of $4.0 million, in a private placement,
pursuant to Regulation D of the Securities Act, to six unrelated accredited
investors through one dealer (the "1998 Series E Preferred Stock Private
Placement"). The sale of 8,145 shares of Series E Preferred Stock having an
aggregate of $8.1 million stated value was completed on March 12, 1999. In 1999,
the Company received net proceeds of $1.8 million from the 1998 Series E
Preferred Stock Private Placement. In addition to the above noted Series E
Subscription Agreements, the Company issued and sold an aggregate amount of $1.7
million of Series E Preferred Stock to three accredited investors through the
above noted dealer, in exchange for an aggregate stated value of $1.7 million of
the Company's Series C Preferred Stock held by the three accredited investors.
The Company also issued and sold an aggregate amount of $0.7 million of Series E
Preferred Stock to four accredited investors through the above noted dealer, in
exchange and consideration for an aggregate of 2.1 million shares of the
Company's common stock held by the four accredited investors. Each share of the
Series E 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 E 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 Series E Subscription Agreements,
the Company is required to file a registration statement ("the Series E
Registration Statement") on (i) Form S-3 (currently not eligible to use) on or
prior to the date which is no more than sixty (60) days from the date that the
Company has issued a total of 7,438 shares of Series E Preferred Stock if filed
or (ii) Form S-1 on or prior to a date which is no more than ninety (90) days
from the date that the Company has issued a total of 7,438 shares of Series E
Preferred Stock, covering the resale of all of the Registrable Securities (the
"Series E Closing Date"). The shares of Series E Preferred Stock become
convertible into shares of common stock at any time commencing after the earlier
of (i) ninety (90) days after the Series E Closing Date; (ii) five (5) days
after the Company receives a "no review" status from the SEC in connection with
the Registration Statement; or (iii) the effective date of the Series E
Registration Statement. Each share of Series E Preferred Stock is convertible
into a number of shares of common stock of the Company as determined in
accordance with the following formula (the "Series E Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
Conversion Price
where
N = the number of days between (i) the Series E 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 beyond 60 days from the
issuance that the Registration Statement has not been
filed by the Company) in effect as of the conversion
date times the average market price for the Company's
common stock for the (5) consecutive trading days
immediately preceding such date.
The conversion terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 10,580
shares of Series E Preferred Stock issued under the 1998 Series E Preferred
Stock Private Placement. The Series E 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. As of December 31, 1998, no
shares of Series E Preferred Stock have been converted to NCT common stock.
In connection with the Series E Preferred Stock, the Company may be obligated
to redeem the excess of the stated value over the amount permitted to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.
Cash and cash equivalents amounted to $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
may not be sufficient, and continuation as a going concern 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. In the event that technology licensing fees, royalties,
product sales and engineering and development revenue are not realized as
planned, 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 license
fees, royalties and product sales and engineering and development revenue. In
that event, the Company would have to substantially reduce 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.
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 was held on
November 5, 1998. Under Nasdaq's procedures delisting was stayed pending the
outcome of the hearing. On January 6, 1999, Nasdaq notified the Company that the
Company's securities were delisted from Nasdaq effective with the close of
business, January 6, 1999. On January 20, 1999, the Company requested a review
of the Nasdaq decision. On February 16, 1999, Nasdaq advised the Company that
the issuance of a review decision will likely occur in July 1999. 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 accompanying consolidated Financial Statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The propriety of using the going concern
basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private financings and other funding sources to meet its
obligations. The uncertainties described in the preceding paragraphs raise
substantial doubt at December 31, 1998 about the Company's ability to continue
as a going concern. The accompanying consolidated Financial Statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amount of liabilities that might result from the outcome
of these uncertainties.
Results of Operations
Year ended December 31, 1998 compared with year ended December 31, 1997.
Total revenues in 1998 decreased by 42% to $3.3 million from $5.7 million in
1997. Total expenses during the same period increased by 12% or $1.9 million,
primarily reflecting the increasing efforts in sales and marketing to introduce
new products.
Technology licensing fees and royalties decreased by 78% or $2.8 million to
$0.8 million from $3.6 million in 1997. The 1997 amount is primarily due to the
$3.0 million technology license fee from Verity and other technology licensing
fees aggregating $0.6 million. See Note 3 - "Notes to Financial Statements".
Product sales increased in 1998 by 22% to $2.1 million from $1.7 million in
1997 reflecting the introduction of the Gekko(TM) flat speakers and increased
sales in the NoiseBuster(R) product line and the ClearSpeech(R) product line.
Revenue from engineering and development services remained constant at $0.4
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company.
Cost of product sales decreased 2% to $2.2 million from $2.3 million in 1997
and the product margin increased to (7)% from (32)% in 1997. The negative margin
of $0.1 million and $0.6 million in 1998 and 1997, respectively, were primarily
due to reserves for inventory slow movement and tooling obsolescence in the
amount of $0.5 million and $0.7 million in 1998 and 1997, respectively, related
to the aviation and industrial headset product lines.
Cost of engineering and development services remained constant at $0.3
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company as noted above.
Selling, general and administrative expenses for the year increased by 115%
or $6.0 million to $11.2 million from $5.2 million for 1997 which was primarily
due to increased efforts in sales and marketing to introduce new products. Sales
and marketing personnel increased by 43% from 1997. In addition, there has been
an increase in consultants for the Company's focus on international sales.
Advertising increased by 227% or $1.2 million to $1.7 million from $0.5 million
primarily due to the introduction of new products through catalogs, mailings and
increased participation in trade shows.
Research and development expenditures for 1998 increased by 16% to $7.2
million from $6.2 million in 1997, primarily due to the acquisition of Advancel.
Included in the Company's total expenses were non-cash expenditures for
depreciation and amortization of $1.0 million for 1998 and $0.9 million in 1997.
Other income in 1998 was $3.3 million compared to zero in 1997. The 1998
other income consists of the gain the Company realized upon the exercise of a
stock option and the subsequent sale of NXT plc ordinary shares. The option had
been acquired by the Company in connection with a cross license agreement among
the Company, NXT plc and NXT.
In 1998, interest income increased to $0.4 million from $0.1 million in 1997
principally from funds on hand at the end of 1997.
The Company has net operating loss carryforwards of $85.8 million and
research and development credit carryforwards of $1.6 million for federal income
tax purposes at December 31, 1998. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
Year ended December 31, 1997 compared with year ended December 31, 1996.
Total revenues in 1997 increased by 81% to $5.7 million from $3.2 million in
1996. Total expenses during the same period increased by 11% or $1.6 million,
primarily reflecting the one-time $1.4 million non-cash interest charge
associated with the First Quarter 1997 Financing. See Note 8 - "Notes to
Financial Statements."
Technology licensing fees and royalties increased by 193% or $2.4 million to
$3.6 million from $1.2 million in 1996. The 1996 amount was derived principally
from numerous technology license fees reflecting the Company's continuing
emphasis on expanding technology license fee revenue. The 1997 amount is
primarily due to the $3.0 million technology license fee from Verity and other
technology licensing fees aggregating $0.6 million. See Note 3 - "Notes to the
Financial Statements".
Product sales increased in 1997 by 25% to $1.7 million from $1.4 million in
1996 reflecting increases in NoiseBuster Extreme!(TM) and aviation headset
sales.
Engineering and development services decreased by 33% to $0.4 million from
$0.5 million in 1996, primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company.
Cost of product sales increased 44% to $2.3 million from $1.6 million in 1996
and the product margin decreased to (32)% from (15)% in 1996. The negative
margin of $0.6 million in 1997 was primarily due to reserves for inventory
movement and tooling obsolescence in the amount of $0.7 million related to the
industrial headset product lines. The negative margin in 1996 was primarily due
to a lower sales price of the NoiseBuster(R) and a reserve for tooling
obsolescence in the amount of $0.3 million.
Cost of engineering and development services increased 26% to $0.3 million
from $0.2 million in 1996 primarily due to the de-emphasis of engineering
development funding as a primary source of revenue for the Company as noted
above.
Selling, general and administrative expenses for the year increased by 7% or
$0.3 million to $5.2 million from $4.9 million for 1996 which was primarily due
to increased professional fees and related expenses.
Depreciation and amortization included in selling, general and administrative
expenses decreased from $0.5 million in 1996 to $0.4 million primarily due to an
increase in fully depreciated machinery and equipment.
Research and development expenditures for 1997 decreased by 11% to $6.2
million from $7.0 million in 1996, primarily due to limited cash resources
during most of 1997 to fund internal development projects.
In 1997, interest income increased to $0.1 million from near zero in 1996
reflecting the increase in late 1997 of available funds to invest.
Under all of the Company's existing joint venture agreements at the end of
1997, the Company was not required to fund any capital requirements of these
joint ventures beyond its initial capital contribution. In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its investment and the Company has no obligation or intention to
fund such additional losses, the Company suspends applying the equity method of
accounting for its investment.
<PAGE>
The Company has net operating loss carryforwards of $76.9 million and
research and development credit carryforwards of $1.3 million for federal income
tax purposes at December 31, 1997. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.
Liquidity and Capital Resources
The Company's proceeds from the exercise of stock purchase warrants and
options were nominal in 1998, $1.1 million in 1997 and $1.0 million in 1996.
In January 1998, the Company adopted a plan that management believed would
generate sufficient funds for the Company to continue its operations into 1999.
The Company did not meet the plan's revenue targets for 1998 and as noted below,
found it necessary to raise additional capital to fund it's operations for 1998
and beyond (refer to Notes 1 and 8 Notes to Financial Statements.).
Because the Company did not meet its revenue targets for 1998, it entered
into certain transactions, which provided additional funding as follows:
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 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 (1) a
license fee of $3,000,000 to be paid when proceeds are available from the sale
of NCT Hearing common stock, and (2) 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.
On July 27, 1998, the Company entered into subscription agreements to sell
6,000 shares of the Company's 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, to six unrelated accredited investors through one dealer.
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
Series D Subscription Agreements, the Company is required to file a 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. 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 Series D Closing Date; (ii) five (5) days after the
Company receives a "no review" status from the SEC in connection with the Series
D Registration Statement; or (iii) the effective date of the Series D
Registration Statement. The Series D 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
Conversion Formula described above under "Overview".
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 Series D 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. Including shares of common
stock issued for accretion, as of March 12, 1999, all shares of Series D
Preferred Stock have been converted to 12,273,685 shares of NCT common stock.
<PAGE>
On July 27, 1998, NCT Audio distributed subscription agreements to sell 60
shares of NCT Audio's Series A Preferred Stock having an aggregate stated 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
sale of 60 shares of NCT Audio 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 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 which is not later than thirty (30) days after
the company becomes a "reporting company" under 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 Series A Preferred Stock is
convertible into a number of shares of Series D Preferred Stock of the Company
as determined in accordance with the Conversion Formula described above under
"Overview".
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
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. As of December 31, 1998, no NCT Audio Series A
Preferred Stock shareholders have exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Convertible 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
December 31, 1998, the Company had repurchased 5,607,100 shares of the Company's
common stock at per share prices ranging from $0.3438 to $0.6563. The stock
repurchase program was terminated on December 30, 1998.
On September 4, 1998, the Company acquired the issued and outstanding common
stock of Advancel, a Silicon Valley-based developer of microprocessor cores that
execute Sun Microsystems' Java(TM) code. The acquisition was pursuant to a stock
purchase agreement dated as of August 21, 1998 among the Company, Advancel and
certain shareholders of Advancel. 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 treasury stock together with
future payments, payable in cash or in common stock of the Company at the
election of the Advancel Shareholders 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. 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:
<PAGE>
Asset acquired and liabilities assumed:
Current assets $ 368,109
Property, plant and equipment 4,095
Goodwill 1,018,290
Other assets 13,486
Current liabilities (485,040)
Unearned portion of compensatory stock 141,251
-------------
Cost of acquisition (including expenses of $60,191) $ 1,060,191
=============
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 November 24, 1998, the Company paid $1,000 in consideration for a
wholly-owned subsidiary, DistributedMedia.com, Inc. ("DMC"). DMC was formed to
develop, install, and provide an audio/visual advertising medium within
commercial/professional settings.
On December 30, 1998, the Company entered into a series of subscription
agreements to sell an aggregate stated value of up to $8.2 million of Series E
Preferred Stock in consideration of $4.0 million, in a private placement,
pursuant to Regulation D of the Securities Act, to six unrelated accredited
investors through one dealer. The sale of 8,145 shares of Series E Preferred
Stock having an aggregate of $8.1 million stated value was completed on March
12, 1999. In 1999, the Company received net proceeds of $1.8 million from the
1998 Series E Preferred Stock Private Placement. In addition to the above noted
Series E Subscription Agreements, the Company issued and sold an aggregate
amount of $1.7 million of Series E Preferred Stock to three accredited investors
through the above noted dealer, in exchange for an aggregate stated value of
$1.7 million of the Company's Series C Preferred Stock held by the three
accredited investors. The Company also issued and sold an aggregate amount of
$0.7 million of Series E Preferred Stock to four accredited investors through
the above noted dealer, in exchange and consideration for an aggregate of 2.1
million shares of the Company's common stock held by the four accredited
investors. Each share of the Series E 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 E
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
Series E Subscription Agreements, the Company is required to file a registration
statement covering the resale of all shares of common stock of the Company
issuable upon conversion of the Series E Preferred Stock then outstanding within
sixty (60) days after the completion of the 1998 Series E Preferred Stock
Private Placement. The shares of Series E Preferred Stock become convertible
into shares of common stock at any time commencing after the earlier of (i)
ninety (90) days after the Series E Closing Date; (ii) five (5) days after the
Company receives a "no review" status from the SEC in connection with the
Registration Statement; or (iii) the effective date of the Series E Registration
Statement. Each share of Series E Preferred Stock is convertible into a number
of shares of Common Stock of the Company as determined in accordance with the
Conversion Formula described above under "Overview".
The conversion terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the aggregate in connection with the conversion of the 10,580
shares of Series E Preferred Stock issued under the 1998 Series E Preferred
Stock Private Placement. The Series E 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. As of December 31, 1998, no
shares of Series E Preferred Stock have been converted to NCT common stock.
In connection with the Series E Preferred Stock, the Company may be obligated
to redeem the excess of the stated value over the amount permitted to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. A secured convertible note (the "Note"), for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in the Wall Street Journal from the issue date until the Note becomes
due and payable. The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time, all or from time to time,
any part of the outstanding and unpaid amount of the Note, into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price shall be the lesser of (i) the average of the closing bid
prices for the common stock on the securities market on which the common stock
is being traded, for five (5) consecutive trading days prior to the date of
conversion or (ii) the fixed conversion price of $0.237. In no event will the
conversion price be less than $0.15 per share. The Holder shall purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999.
<PAGE>
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 expenditure alone
may not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties and
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that technology licensing fees, royalties,
product sales and engineering and development revenue are not realized as
planned, 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 license
fees, royalties and product sales and engineering and development revenue. In
that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
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 in the preceding paragraphs raise substantial doubt at
December 31, 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.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $107.7 million on a
cumulative basis through December 31, 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 and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the license fees and engineering and development funds provided to the venture
or the Company are recovered.
In early 1999, the Company implemented a plan that management believes should
generate sufficient additional funds for the Company to continue its operations
into 1999. Under this plan, the Company needs to generate approximately $22.7
million to fund its operations in 1999. Included in such amount is approximately
$10.8 million in sales of new products and approximately $11.9 million of
technology licensing fees and royalties. This amount excludes any revenues or
cash inflows from the anticipated pending acquisitions of the Company's
subsidiary, NCT Audio. The Company believes that it can generate these funds
from 1999 operations, although there is no certainty that the Company will
achieve this goal. Success in generating technology licensing fees, royalties
and product sales is significant and critical to the Company's ability to
succeed. The Company cannot predict whether it will be successful in obtaining
market acceptance of its new products or in completing its current negotiations
with respect to licenses and royalty revenues. If, during the course of 1999,
management of the Company determines that it will be unable to meet or exceed
the plan discussed above, the Company will consider cost reductions and/or
additional financing alternatives. The Company will monitor its performance
against the plan on a monthly basis and, if necessary, reduce its level of
operations accordingly. The Company believes that the plan discussed above
constitutes a viable plan for the continuation of the Company's business into
2000. See "Forward Looking Statements" above.
<PAGE>
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties and product sales and engineering and
development revenue or additional capital. In that event, the Company would have
to cut back its level of operations substantially in order to conserve cash.
These reductions could have an adverse effect on the Company's relations with
its strategic partners and customers. See Note 1 Notes to Financial Statements.
At December 31, 1998, cash and cash equivalents were $0.5 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 working capital decreased from $11.7 million at December 31,
1997, to $(1.2) million as of December 31, 1998. This decrease was due primarily
to a decrease in cash and cash equivalents due to increasing efforts to develop
and introduce new product lines and to fund operations.
During 1998, the net cash used in operating activities was $12.8 million.
This utilization reflects the emphasis on the commercial development of its
technology into several product applications, which were scheduled for
introduction in 1998 and 1999.
The net cash used in investing activities amounted to $6.4 million. Of this
amount, $5.1 million was attributable to the acquisition related activities of
the Company's subsidiary, NCT Audio. Such investments included $3.5 million for
a 20% interest in TSA and a total of $1.5 million, which was loaned to PPI under
two demand promissory notes. The Company has signed letters of intent from both
TSA and PPI. See "Overview" above for further information. The net cash provided
by financing activities amounted to $7.2 million primarily from the 1998
financings noted above.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
The Company believes that the level of financial resources available to it is
an essential competitive factor. The Company may elect to raise additional
capital, from time to time, through equity or debt financing in order to
capitalize on business opportunities and market conditions.
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
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies;
(ii) utilization of the manufacturing capacity of the Company's allies, enabling
the Company to integrate its active technology into products with limited
capital investment; and (iii) access to well-established channels of
distribution and marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of December
31, 1998, and no material commitments are anticipated in the near future.
Year 2000 Compliance
The Company believes the cost of administrating its Year 2000 Compliance
program will not have a material adverse impact on future earnings. However, the
potential costs and uncertainties associated with any Year 2000 Compliance
program will depend on a number of factors, including software, hardware and the
nature of the industry in which the Company, its subsidiaries, suppliers and
customers operate. In addition, companies must coordinate with other entities
with which they electronically interact, such as customers, suppliers, financial
institutions, etc. The Company estimates that potential costs will not exceed
$0.1 million.
Although the Company's evaluation of its systems is still in process, there
has been no indication that the Year 2000 Compliance issue, as it relates to
internal systems, will have a material impact on future earnings. While the
Company is not aware of any material Year 2000 Compliance issues at its
customers and suppliers, 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /s/ CY E. HAMMOND
-----------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
May 3, 1999
Exhibit 23(a)
RICHARD A. EISNER & COMPANY, LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements of
NCT Group, Inc. (the "Company")(formerly Noise Cancellation Technologies, Inc.)
on Forms S-1 (File Nos. 33-19926, 33-38584 and 33-44790) and on Forms S-8 (File
Nos. 33-64792, 333-11209 and 333-11213) of our report, which includes an
explanatory paragraph about the Company's ability to continue as a going
concern, dated March 11, 1999 (with respect to Note 8, March 24, 1999), on our
audits of the consolidated financial statements and schedule of the Company as
of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997
and 1996 which report is included in this Annual Report on Form 10-K/A2.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
April 29, 1999
Exhibit 99(a)
PETERS ELWORTHY & MOORE
NCT Group, Inc.
1025 West Nursery Road, Suite 120 Our Ref: PRC/J
Linthicum, Maryland 21090
USA Date: April 29, 1999
Dear Sirs
We consent to the incorporation by reference to Form 10-K/A2 (Amendment No. 2 to
the Annual Report on Form 10-K) of our report dated February 23, 1999, on the
financial statements and schedule of Noise Cancellation Technologies (Europe)
Limited (the "Company") as at December 31, 1998 and December 31, 1997 and for
each of the years in the three year period ended December 31, 1998, included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
