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 June 30, 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.
182,239,250 shares outstanding as of August 12, 1999
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(In thousands except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
REVENUES:
<S> <C> <C> <C> <C>
Technology licensing fees and royalties $ 36 $ 779 $ 346 $ 3,501
Product sales, net 664 576 1,065 1,228
Engineering and development services 128 366 149 1,175
--------- --------- --------- ---------
Total revenues $ 828 $ 1,721 $ 1,560 $ 5,904
--------- --------- --------- ---------
COSTS AND EXPENSES:
Costs of product sales $ 567 $ 649 $ 869 $ 1,083
Costs of engineering and development services 106 395 128 903
Selling, general and administrative 1,735 2,678 4,454 5,663
Research and development 1,833 1,745 3,297 3,458
Other (income)/expense (3,339) 204 (3,382) 307
Write down of investment in
unconsolidated subsidiary (Note 4) - 2,385 - 2,385
Interest (income)/expense (91) (33) (212) (57)
--------- --------- --------- ---------
Total costs and expenses $ 811 $ 8,023 $ 5,154 $ 13,742
--------- --------- --------- ---------
NET INCOME/(LOSS) $ 17 $ (6,302) $ (3,594) $ (7,838)
========= ========= ========= =========
Preferred stock dividend requirement $ - $ 134 $ 1,690 $ 5,240
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock 98 25 483 184
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (81) $ (6,461) $ (5,767) $(13,262)
========= ========= ========= =========
Basic and diluted loss per share $ 0.00 $ (0.04) $ (0.04) $ (0.08)
========= ========= ========= =========
Weighted average common shares outstanding -
basic and diluted 138,073 174,238 135,968 165,247
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS)
(in thousands, unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET INCOME/(LOSS) $ 17 $ (6,302) $ (3,594) $ (7,838)
Other comprehensive (loss)
Currency translation adjustment (10) (3) (13) 21
--------- --------- --------- ---------
COMPREHENSIVE INCOME/(LOSS) $ 7 $ (6,305) $ (3,607) $ (7,817)
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands of dollars)
December 31, June 30,
1998 1999
------------ ------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 529 $ 63
Accounts receivable:
Technology license fees and royalties 192 1,996
Other 691 917
Unbilled 61 -
Allowance for doubtful accounts (228) (171)
------------ ------------
Total accounts receivable, net $ 716 $ 2,742
Inventories, net of reserves (Note 2) 3,320 3,134
Other current assets 185 165
------------ ------------
Total current assets $ 4,750 $ 6,104
Property and equipment, net 997 805
Goodwill, net 1,506 4,605
Patent rights and other intangibles, net (Note 5) 2,881 3,466
Other assets (Note 4) 5,331 3,349
------------ ------------
$ 15,465 $ 18,329
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,226 $ 4,764
Accrued expenses 1,714 1,676
Accrued payroll, taxes and related expenses 241 456
Other liabilities (Note 5) 756 1,567
Customers' advances - 23
------------ ------------
Total current liabilities $ 5,937 $ 8,486
------------ ------------
Long term liabilities:
Convertible notes (Note 6) $ - $ 1,653
------------ ------------
Total long term liabilities $ - $ 1,653
------------ ------------
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 $311,113, respectively) $ 6,102 $ 311
------------ ------------
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
$745,107, respectively) $ 702 $ 716
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 8,854 shares, respectively (redemption
amount $10,582,319 and $8,984,924, respectively) 3,298 5,216
Common stock, $.01 par value, authorized 255,000,000 and
325,000,000 shares, respectively; issued 156,337,316 and
180,315,858 shares, respectively 1,563 1,803
Additional paid-in-capital 107,483 119,786
Unearned portion of compensatory stock, warrants and options (238) (353)
Accumulated deficit (107,704) (115,542)
Cumulative translation adjustment 45 66
Stock subscriptions receivable (4,000) -
Treasury stock (6,078,065 shares of common stock and
6,078,065 shares of common stock and 1,726 shares of
Series E preferred stock, respectively) (2,963) (3,813)
------------ ------------
Total stockholders' equity $ 3,426 $ 7,879
------------ ------------
$ 15,465 $ 18,329
============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited) (in thousands of dollars)
Six months ended June 30,
-------------------------
1998 1999
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $ (3,594) $ (7,838)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 480 900
Common stock options and warrants issued as
consideration for compensation 184 254
Provision for tooling costs 33 4
Provision for doubtful accounts 24 32
Loss on disposition of fixed assets 32 -
Write down of investment in unconsolidated subsidiary
(Note 4) - 2,385
Preferred stock received for license fees - (850)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (471) (254)
(Increase) decrease in license fees receivable 200 (1,804)
(Increase) decrease in inventories, net (1,535) 186
(Increase) decrease in other assets (2,007) 18
Increase (decrease) in accounts payable and
accrued expenses (458) 1,255
Increase (decrease) in other liabilities (145) 1,210
---------- ----------
Net cash (used in) operating activities $ (7,257) $ (4,502)
---------- ----------
Cash flows from investing activities:
Capital expenditures $ (390) $ (52)
Acquisition of patent rights (Note 5) (150) (900)
Sale of fixed assets 46 -
Interest on note receivable (Note 4) - (74)
---------- ----------
Net cash (used in) investing activities $ (494) $ (1,026)
---------- ----------
Cash flows from financing activities:
Proceeds from:
Convertible notes (net) (Note 6) $ - $ 1,500
Sale of preferred stock (net) (Note 8) (32) 3,529
Sale of subsidiary common stock (net) (17) -
Exercise of stock options and warrants - 1
Stock subscription receivable 390 -
---------- ----------
Net cash provided by financing activities $ 341 $ 5,030
---------- ----------
Effect of exchange rate changes on cash $ (10) $ 32
---------- ----------
Net (decrease) in cash and cash equivalents $ (7,420) $ (466)
Cash and cash equivalents - beginning of period 12,604 529
---------- ----------
Cash and cash equivalents - end of period $ 5,184 $ 63
========== ==========
Cash paid for interest $ 1 $ 1
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to instructions and rules of the
Securities and Exchange Commission. 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 June 30, 1999 and the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
NCT Group, Inc. (the "Company" or "NCT") Annual Report on Form 10-K, for the
year ended December 31, 1998, 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 $115.5 million on a
cumulative basis through June 30, 1999. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
(1) the sale of common stock, including the exercise of warrants or options to
purchase common stock, (2) the sale of preferred stock convertible into common
stock, (3) technology licensing fees, (4) royalties, (5) product sales and (6)
engineering and development funds received from strategic partners and
customers.
Cash, cash equivalents and short-term investments amounted to $0.1 million
at June 30, 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, 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. The expanded agreement also increased the
royalties due NCT Audio from NXT to 10% from 6% and increased the royalties due
NXT from NCT Audio to 7% from 6%. In consideration for granting NXT these
expanded license rights, NCT Audio received licensing fees of $0.5 million. Also
on February 9, 1999, NCT Audio and NXT amended the Master License Agreement to
include a minimum royalty payment of $160,000 in 1999, to be paid by NCT Audio
to NXT in equal quarterly installments. The Company has recorded a liability of
$53,333 at June 30, 1999.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In connection therewith, management expects to
negotiate with vendors and creditors to settle certain obligations.
On June 24, 1999, NCT Hearing Products, Inc. ("NCT Hearing"), a wholly
owned subsidiary of the Company, signed a letter of intent to acquire sixty
percent (60%) of the common stock of Pro Tech Communications, Inc. ("Pro Tech")
in exchange for rights to certain NCT Hearing technology. The acquisition is
pending $2.0 million of equity financing to be raised by NCT Hearing.
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 June 30, 1999, about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets or the amount of liabilities that might
result from the outcome of these uncertainties.
<PAGE>
2. Inventories:
Inventories comprise the following:
(thousands of dollars)
December 31, June 30,
1998 1999
------------ ------------
Components $ 745 $ 604
Finished Goods 3,083 3,092
------------ ------------
Gross Inventories $ 3,828 $ 3,696
Reserve for Obsolete & Slow Moving Inventory (508) (562)
------------ ------------
Inventories, Net of Reserves $ 3,320 $ 3,134
============ ============
The reserve for obsolete and slow moving inventory at June 30, 1999 has
increased to $0.6 million primarily due to a $0.2 million charge for slow moving
hearing product inventory during the first six months of 1999.
3. Stockholders' Equity:
The changes in stockholders' equity during the six months ended June 30,
1999, were as follows:
<TABLE>
<CAPTION>
(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/ Net Adjust- at
12/31/98 Stock Stock Stock able Warrants Loss ment 6/30/99
----------------------------------------------------------------------------------------------------------
Series C
Preferred
Stock:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares 1 - - - - - - - 1
Amount $ 702 $ - $ 14 $ - $ - $ - $ - $ - $ 716
Series D
Preferred
Stock:
Shares 6 (6) - - - - - - -
Amount $ 5,240 $ (5,273) 33 $ - $ - $ - $ - $ - $ -
Series E
Preferred
Stock:
Shares 11 (2) - - - - - - 9
Amount $ 3,298 $ (1,209) $ 3,127 $ - $ - $ - $ - $ - $ 5,216
Common
Stock:
Shares 156,337 23,974 - 5 - - - - 180,316
Amount $ 1,563 $ 240 $ - $ - $ - $ - $ - $ - $ 1,803
Treasury
Stock:
Shares 6,078 2 - - - - - - 6,080
Amount $ (2,963) $ (850) $ - $ - $ - $ - $ - $ - $ (3,813)
Additional
Paid-in
Capital $ 107,483 $ 11,622 $(3,235) $3,916 $ - $ - $ - $ - $ 119,786
Accumulated
(Deficit) $(107,704) $ - $ - $ - $ - $ - $(7,838) $ - $(115,542)
Cumulative
Translation
Adjustment $ 45 $ - $ - $ - $ - $ - $ - $ 21 $ 66
Stock
Subscription
Receivable $ (4,000) $ - $ - $ - $ 4,000 $ - $ - $ - $ -
Unearned
Compensatory
Stock Option $ (238) $ - $ - $ - $ - $ (115) $ - $ - $ (353)
</TABLE>
<PAGE>
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 for a purchase price of $10,000,000 and up to an additional $6,000,000
in possible future cash contingent payments. On June 11, 1998, NCT Audio had
paid a non-refundable deposit of $1,450,000 towards the purchase price. The
shareholders of Top Source Technologies, Inc., TSA's parent company, approved
the transaction on December 15, 1998.
NCT Audio then paid Top Source Technologies, Inc. $2,050,000 on July 31,
1998. The money was held in escrow with all of the necessary securities and
documents to evidence ownership of 20% of the total equity rights and interests
in TSA. When Top Source Technologies, Inc.'s shareholders approved the
transaction, the $2,050,000 was delivered to TSA. In return, NCT Audio took
ownership of the documentation and securities held in escrow.
NCT Audio had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay Top Source Technologies, Inc. $6.5 million on or before
March 31, 1999 to complete the acquisition of TSA's assets. As consideration for
an extension of such exclusive right from March 31, 1999 to May 28, 1999, NCT
Audio agreed to pay Top Source Technologies, Inc. a fee of $350,000 consisting
of $20,685 in cash, $125,000 of NCT Audio's minority interest in TSA earnings,
and a $204,315 note payable, due April 16, 1999. If NCT Audio failed to pay the
note by April 16, 1999, (a) the note would begin to accrue interest on April 17,
1999 at the lower of the rate of two times the prime rate or the highest rate
allowable by law; and (b) the $20,685 and $125,000 portion of the extension fee
would no longer be credited toward the $6.5 million purchase consideration due
at closing. If NCT Audio failed to pay the note by April 30, 1999, the $204,315
portion of the extension fee would no longer be credited toward the $6.5 million
closing amount due. To date, NCT Audio has not paid the note. Further, if NCT
Audio failed to close the contemplated transaction by May 28, 1999, NCT Audio
would forfeit its minority earnings in TSA for the period June 1, 1999 through
May 30, 2000. In addition, due to NCT Audio's failure to close the transaction
by March 31, 1999, NCT Audio must pay a penalty premium of $100,000 of NCT
Audio's Series A Preferred Stock. In exchange for an extension from May 28, 1999
to July 15, 1999, NCT Audio's interest in TSA was reduced from 20% to 15%.
On or about July 15, 1999, NCT Audio determined it would not proceed with
the purchase of the assets of TSA, as structured, primarily due to its
difficulty in raising the requisite cash consideration. As a result, NCT Audio
has reduced the net investment in TSA to $1.2 million, representing a 15%
minority interest (net of the above noted penalties and the minority interest in
TSA earnings), and recorded a $2.4 million write down to its estimated net
realizable value at June 30, 1999. If TSA is sold to another purchaser, NCT
Audio will receive its pro rata share (15%) of such consideration less the above
noted penalties.
On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC (doing business as Precision Power, Inc. or "PPI").
PPI supplies custom-made automotive audio systems. NCT Audio will acquire the
interest in exchange for shares of its common stock having an aggregate value of
$2,000,000. NCT Audio also agreed to retire $8.5 million of PPI debt, but NCT
Audio must obtain adequate financing before the transaction can be completed. In
addition, NCT Audio provided PPI a working capital loan on June 17, 1998 in the
amount of $500,000, which is evidenced by a demand promissory note. On August
18, 1998, NCT Audio provided PPI another working capital loan in the amount of
$1,000,000, which is also evidenced by a demand promissory note. The unpaid
principal balance of these notes bears interest at a rate equal to the prime
lending rate plus one percent (1.0%).
As noted, the transaction is contingent on NCT Audio obtaining outside
financing to retire the PPI debt. On January 6, 1999, the PPI members notified
NCT Audio that, while they remain willing to do the transaction, they may choose
at some point to abandon the transaction because NCT Audio has not obtained the
financing in a timely manner. They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock, they would insist that NCT Audio pay them
that amount in cash at any closing. Negotiations for NCT Audio's acquisition of
PPI are continuing.
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, speech compression and speech identification and
verification technologies. The aggregate value of the patented technologies is
$1,250,000, which was paid by a $150,000 cash payment and delivery of 1,250,000
shares of the Company's common stock 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 June 30, 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.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hasupie Speech Products N.V. ("L&H"). The agreement provides the Company with a
world-wide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. The Company recorded a $0.9 million
patent technology right and a $0.9 million liability at June 30, 1999.
On April 12, 1999, the Company granted a world-wide non-exclusive,
non-transferable license to L&H. The agreement provides L&H access to NCT's
noise and echo cancellation algorithms for use in L&H's technology. In
consideration of the Company's grant of a license to L&H, the Company recognized
a non-refundable royalty fee of $0.8 million.
6. Convertible Notes:
On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. A secured convertible note (the "Note") for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in The Wall Street Journal from the issue date until the Note becomes
due and payable. The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time, all or from time to time,
any part of the outstanding and unpaid amount of the Note into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price 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. The Company and Holder have agreed to extend such date for
the purchase of remaining installments of secured convertible notes to October
1, 1999. On each of June 4, 1999, June 11, 1999, July 2 1999 and July 23,1999
the Company received proceeds of $250,000, $250,000, $500,000 and $250,000,
respectively, from the Holder for other secured convertible notes with the same
terms and conditions of the Note described above.
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 Company is awaiting receipt of the official text of the judgement.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, as amended, for a discussion of this
matter. There were no material developments in this matter during the period
covered by this report.
On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott &
Co., Inc. and the Company in the United States District Court, Southern District
of New York. Reference is made to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, as amended. There were no material
developments in this matter during the period covered by this report.
On November 17, 1998, the Company and NCT Hearing 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 six-month period ended June 30, 1999, the Company issued
12,273,685 shares of the Company's common stock in connection with the
conversion of the Company's Series D Convertible Preferred Stock ("Series D
Preferred Stock") issued in the third quarter of 1998 in a private placement
exempt from registration pursuant to Regulation D of the Securities Act of 1933
(the "Securities Act"). Reference is made to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, as amended, for further
discussion.
For the six-month period ended June 30, 1999, 57 shares of NCT Audio
Series A Convertible Preferred Stock, issued in the third quarter of 1998 in a
private placement exempt from registration pursuant to Regulation D of the
Securities Act, were exchanged for 5,700 shares of Series D Preferred Stock,
which were converted into 11,699,857 shares of the Company's common stock.
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, as amended, for further discussion.
During the six-month period ended June 30, 1999, the Company received
gross proceeds of $4.0 million less expenses of $0.5 million in connection with
the Company's Series E Convertible Preferred Stock ("Series E Preferred Stock")
issued in the fourth quarter of 1998 in a private placement exempt from
registration pursuant to Regulation D of the Securities Act. As of July 31,
1999, 785 shares of the Company's Series E Preferred Stock had been converted
into 5.1 million shares of the Company's common stock. Reference is made to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended, for further discussion.
On March 31, 1999, the Company signed a license agreement to exchange
3,600 shares of Series E Preferred Stock for four (4) 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 $2.0 million on the
issuance of such licenses in consideration of the receipt of 3,600 shares of its
Series E Preferred Stock in a related party transaction. During the three months
ended June 30, 1999, the Company adjusted such revenue to $0.9 million based
upon the valuation of additional shares of Series E Preferred Stock issued
during the three months ended June 30, 1999. As a result, realization of revenue
was limited to the related party's consideration representing the Series E
Preferred Stock.
On April 13, 1999, the Board of Directors granted options to purchase 8.6
million shares of the Company's common stock to certain officers, other
employees and consultants of the Company. Options to purchase 3.4 million of
such options vest immediately. Options to purchase 5.2 million of such shares
will not become vested or exercisable thereafter until the satisfaction of
additional vesting requirements based on the passage of time. The foregoing
options were granted with the exercise price equal to the fair value of the
Company's common stock on April 13, 1999, or $0.41 per share, as determined from
the closing bid price as reported by NASDAQ OTC Bulletin Board.
At the annual meeting of stockholders of the Company on June 24, 1999, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 255,000,000 to 325,000,000. This
amendment became effective on July 29, 1999, when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware.
On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In connection therewith, management expects to
negotiate with vendors and creditors to settle certain obligations.
At June 30, 1999, the aggregate number of shares of common stock required
to be reserved for issuance upon the exercise of all outstanding options and
warrants was 37.8 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 18.8 million shares of common
stock for issuance to certain holders of NCT Audio common stock upon their
exercise of certain rights to exchange their shares of NCT Audio common stock
for shares of the Company's common stock, 0.7 million shares of common stock
reserved for the issuance upon exchange of the remaining Series A Preferred
Stock for Series D Preferred Stock, 26.6 million shares of common stock reserved
for the issuance upon conversion of Series E Preferred Stock and 6.5 million
shares of common stock reserved for the issuance upon conversion of the secured
convertible notes. At June 30, 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 25.5 million shares were
currently exercisable.
<PAGE>
9. Business Segment Information:
During 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information" ("SFAS No. 131"). The
provisions of SFAS No. 131 require the Company to disclose the following
information for each reporting segment: general information about factors used
to identify reportable segments, the basis of organization, and the sources of
revenues; information about reported profit or loss and segment assets; and
reconciliations of certain reported segment information to consolidated amounts.
<TABLE>
<CAPTION>
(In thousands of dollars)
Segment
---------------------------------------------------------------------------------------------------------
Advancel
Logic Total Grand
Audio Hearing Communications Europe DMC Corp Segments Other Total
---------------------------------------------------------------------------------------------------------
For the six
months ended
June 30, 1999:
Net Sales -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External $ 352 $ 432 $ 666 $ 2 $ - $ 943 $ 2,395 $ 8 $ 2,403
Net Sales -
Other Operating
Segments 2 - - 438 - - 440 (440) -
License Fees
and Royalties 500 156 863 - 850 1,100 3,469 32 3,501
Write down of
investment in
unconsolidated
subsidiary (2,385) - - - - - (2,385) - (2,385)
Interest
Income, net 91 - - 1 - - 92 (35) 57
Depreciation/
Amortization 6 - - 10 - 7 23 877 900
Operating
Income (Loss) (5,424) (1,683) (1,099) 46 (99) 778 (7,481) (357) (7,838)
Segment Assets 4,453 2,347 1,108 193 442 2,063 10,606 7,723 18,329
Capital
Expenditures - - 1 9 3 35 48 4 52
For the six
months ended
June 30, 1998:
Net Sales -
External $ 85 $ 763 $ 337 $ 7 $ - $ - $ 1,192 $ 22 $ 1,214
Net Sales -
Other Operating
Segments - 16 4 482 - - 502 (502) -
License Fees
and Royalties 275 71 - - - - 346 - 346
Equity in net
loss of
Unconsolidated
affiliates -
net of
amortization - - - - - - - - -
Interest
Income, net 13 - - - - - 13 199 212
Depreciation/
Amortization - - - 30 - - 30 450 480
Operating
Income (Loss) (1,564) (1,447) (2,055) (141) - - (5,207) 1,613 (3,594)
Segment Assets 3,252 2,475 446 232 - - 6,405 8,371 14,776
Capital
Expenditures 159 - 5 73 - - 237 153 390
</TABLE>
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 and multimedia
markets. The principal customers are end-users, automotive original equipment
manufacturers ("OEMs") and manufacturers of integrated cabin management systems.
Hearing:
NCT Hearing designs, develops and markets active noise reduction ("ANR")
headset products to the communications headset market and the telephony headset
market. The product lines include the NoiseBuster(R) product line and the
ProActive(R) product line. The NoiseBuster(R) products consist of the
NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a headset used for
in-flight passenger entertainment systems and communications headsets for
cellular, multimedia and telephony. The ProActive(R) products consist of noise
reduction headsets and communications headsets for noisy industrial
environments. The majority of NCT Hearing's sales are in North America.
Principal customers consist of end-users, retail stores, OEMs and the airline
industry.
Communications:
The Communications division of the Company focuses on the
telecommunications market and in particular the hands-free market. The
Communications technology includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression. ClearSpeech(R)-Acoustic Echo Cancellation removes
acoustic echoes in hands-free full-duplex communication systems. Applications
for this technology are cellular telephony, audio and video teleconferencing,
computer telephony and gaming and voice recognition. ClearSpeech(R)-Compression
maximizes bandwidth efficiency in wireless, satellite and intra- and internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. Applications for this technology are intranet and internet
telephony, audio and video conferencing, PC voice and music, telephone answering
devices, real-time multimedia multitasking, toys and games and playback devices.
The Communications products include the ClearSpeech(R)-Microphone and the
ClearSpeech(R)-Speaker. The majority of Communications' sales are in North
America. Principal markets for Communications are the telecommunications
industries and principal customers are OEMs, system integrators and end-users.
Europe:
The principal activity of NCT Europe is the provision of research and
engineering services in the field of active sound control technology to the
Company. NCT Europe provides research and engineering to Audio, Hearing and
Communications as needed. NCT Europe also provides a marketing and sales support
service to the Company for European sales.
DMC:
DMC, a wholly-owned subsidiary of the Company formed on November 24, 1998,
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"), acquired by the Company on
September 4, 1998, is a participant in the native Java(TM) (Java(TM) is a
trademark of Sun Microsystems, Inc.) embedded microprocessor market. The purpose
of the Java(TM) platform is to simplify application development by providing a
platform for the same software to run on many different kinds of computers and
other smart devices. Advancel has been developing a family of processor cores,
which will execute instructions written in both Java bytecode and C/C++
significantly enhancing the rate of instruction execution, which opens up many
new applications. The potential for applications consists of the next generation
home appliances and automotive applications, smartcards for a variety of
applications, hearing aids and mobile communications devices.
Other:
The Net Sales - Other Operating Segments primarily consists of
inter-company sales and items eliminated in consolidation. Segment assets
consist primarily of corporate assets.
10. Subsequent Events
On July 19, 1999, DMC signed a convertible guaranteed term promissory note
("PRG Note") with Production Resource Group ("PRG") in the amount of $1.0
million. PRG will provide lease financing to DMC for its Sight and Sound(TM)
systems (the "Systems") and will provide integration, installation and
maintenance services to DMC. A portion of the PRG Note ($125,000) was received
on July 22, 1999. Of the total amount, $750,000 will be deposited into an escrow
account and will be used to pay rental and installation costs due from DMC with
respect to the Systems. Further, DMC may draw an additional $125,000 provided
that PRG continues to have a good faith belief that the Systems are functioning
properly and that DMC has obtained at least one network-wide advertising client
providing annual advertising revenues of at least $250,000. The PRG Note matures
on July 19, 2001 and earns interest at ten percent (10%) per annum. PRG may
convert the PRG Note in whole or in part at the election of PRG into shares of
DMC's common stock, without par value, at any time during the period commencing
on the date of issuance and ending on the maturity date. DMC shall have the
right to lease from PRG additional Systems with an aggregate value of up to $9.5
million, provided that PRG is reasonably satisfied with the success of the DMC
business, including the technology and economics thereof and the likelihood of
the continued success thereof. In connection with this note, PRG was granted a
common stock warrant equal to either (i) the number of shares of the Company's
common stock which may be purchased for an aggregate purchase price of
$1,250,000 at the fair market value on July 19,1999 or (ii) the number of shares
representing five percent of the fully paid non-assessable shares of common
stock of DMC at the purchase price per share equal to either (i) if a DMC
qualified sale (a sale in one transaction in which the aggregate sales proceeds
to DMC equal or exceed $5,000,000) has closed on or before December 31, 1999,
the purchase price per share determined by multiplying the price per share of
DMC common stock or security convertible into DMC common stock by seventy-five
percent (75%) or (ii) if a DMC qualified sale has not closed on or before
December 31, 1999, at an aggregate price of $1,250,000.
On August 10, 1999, the Company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F Preferred Stock, in a private
placement pursuant to Regulation D of the Securities Act, to four unrelated
accredited investors through one dealer (the "1999 Series F Preferred Stock
Private Placement"). The Company received $1.0 million for the sale of 4,230
shares of Series F Preferred Stock having an aggregate of $4.2 million stated
value on August 10, 1999. At the Company's election, the investors may invest up
to an additional $4.0 million in cash or in kind, at a future date. Each share
of the Series F Preferred Stock has a par value of $.10 per share and a stated
value of one thousand dollars ($1,000) with an accretion rate of four percent
(4%) per annum on the stated value. Each share of Series F Preferred Stock is
convertible into fully paid and nonassessable shares of the Company's common
stock, subject to certain limitations. Under the terms of the Series F
Subscription Agreement, the Company is required to file a registration statement
("the Series F Registration Statement") on Form S-1 on or prior to a date which
is no more than forty-five (45) days from the date that the Company has issued a
total of 1,000 shares of Series F Preferred Stock, covering the resale of all of
the registrable securities (the "Series F Closing Date"). The shares of Series F
Preferred Stock become convertible into shares of common stock at any time
commencing after the earlier of (i) ninety (90) days after the Series F Closing
Date; (ii) five (5) days after the Company receives a "no review" status from
the SEC in connection with the Series F Registration Statement; or (iii) the
effective date of the Series F Registration Statement. Each share of Series F
Preferred Stock is convertible into a number of shares of common stock of the
Company as determined in accordance with the following formula (the "Series F
Conversion Formula"):
[(.04) x (N/365) x (1,000)] + 1,000
Conversion Price
where
N = the number of days between (i) the Series F 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 Series F 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 five (5) consecutive
trading days immediately preceding such date.
The conversion terms of the Series F Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 35,000,000 shares of
its common stock in the aggregate in connection with the conversion of the
12,500 shares of Series F Preferred Stock issued under the 1999 Series F
Preferred Stock Private Placement. The Company is also obligated to pay a 4% per
annum accretion on the stated value of Series F Preferred Stock. The Company is
given the right to pay the accretion in either cash or common stock. The Series
F Subscription Agreement also provides 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 the date hereof, no shares of Series F Preferred Stock have been
converted to NCT common stock.
In connection with the Series F Preferred Stock, the Company may be
obligated to redeem the excess of the stated value over the amount permitted to
be converted into common stock. Such obligation will be triggered in the event
that the Company issues 35,000,000 shares on conversion of Series F Preferred
Stock.
On August 16,1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. The Company reduced its
worldwide work force by 25%. Charges related to this amount to $0.1 million and
will be recorded in the third quarter of 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Forward-Looking Statements
Statements in this report which are not historical facts are
forward-looking statements under provisions of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. The Company wishes to caution readers that the 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, as well as
from technology licensing fees paid by such companies. The Company's strategy
generally has been to obtain technology licensing fees when initiating joint
ventures and alliances with new strategic partners. This is reflected in the
first six months of 1999, where 59% of the Company's revenue is from licensing
fees and royalties, 21% from product sales and 20% from engineering and
development services. There can be no assurance that technology licensing fees
will continue at that level.
Note 1 to the accompanying condensed consolidated financial statements and
the liquidity and capital resources section which follow describe the current
status of the Company's available cash 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 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 June 30, 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, 41% in engineering and development services and 34% in technology
licensing fees and royalties.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization of
its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and manufacturing operations. While
the Company works with these firms on product testing and integration, it is not
always able to influence how quickly this process can be completed.
The Company continues to sell and ship NoiseBuster(R) headsets,
Clearspeech(R) products and the Gekko(TM) flat speakers in 1999. The Company 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 other major carriers for integrated
noise cancellation active-ready passenger headsets.
Product revenues for the six months ended June 30, 1998 and 1999 were:
<TABLE>
<CAPTION>
PRODUCT REVENUES
(thousands of dollars)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ---------------------------------
As a % of As a % of
Amount Total Amount Total
--------------- --------------- --------------- ---------------
Product 1998 1999 1998 1999 1998 1999 1998 1999
- -------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Headsets $528 $199 79.5% 34.5% $ 761 $ 408 71.4% 33.2%
Communications 63 214 9.5% 37.2% 213 463 20.0% 37.7%
Audio 73 162 11.0% 28.1% 85 355 8.0% 28.9%
Other - 1 0.0% 0.2% 6 2 0.6% 0.2%
---- ---- ------ ------ ------ ------ ------ ------
Total $664 $576 100.0% 100.0% $1,065 $1,228 100.0% 100.0%
==== ==== ====== ====== ====== ====== ====== ======
</TABLE>
The Company has continued to make substantial investments in its
technology and intellectual property and has incurred development costs for
engineering prototypes, pre-production models and field testing of several
products. Management believes that the Company's investment in its technology
has resulted in the expansion of its intellectual property portfolio and
improvement in the functionality, speed and cost of components and products.
On February 9, 1999, NCT Audio and NXT expanded the Cross License
Agreement dated September 27, 1997 to increase NXT's fields of use to include
aftermarket ground based vehicles and aircraft sound systems. The expanded
agreement also increased the royalties due NCT Audio from NXT to 10% from 6% and
increased the royalties due NXT from NCT Audio to 7% from 6%. In consideration
for granting NXT these expanded licensing rights, NCT Audio received licensing
fees of $0.5 million. Also on February 9, 1999, NCT Audio and NXT amended the
Master License Agreement to include a minimum royalty payment of $160,000 in
1999, to be paid by NCT Audio to NXT in equal quarterly installments. The
Company has recorded a liability of $53,333 at June 30, 1999.
On March 31, 1999, the Company signed a license agreement with Lernout &
Hasupie Speech Products N.V. ("L&H"). The agreement provides the Company with a
world-wide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. The Company recorded a $0.9 million
patent technology right and a $0.9 million liability at June 30, 1999.
On April 12, 1999, the Company granted a world-wide non-exclusive,
non-transferable license to L&H. The agreement provides L&H access to NCT's
present and future noise and echo cancellation algorithms for use in L&H's
technology. In consideration of the Company's grant of a license to L&H, the
Company recognized a non-refundable royalty fee of $0.8 million.
On August 16,1999, the Company executed a plan to outsource logistics and
downsize its audio, hearing and product support groups. The Company reduced its
worldwide work force by 25%. Charges related to this amount to $0.1 million and
will be recorded in the third quarter of 1999.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties,
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales, and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
(Refer to "Liquidity and Capital Resources" below and to Note 1 - "Notes to the
Condensed Consolidated Financial Statements" above for a further discussion
relating to continuity of operations.)
RESULTS OF OPERATIONS
Total revenues for the first six months of 1999 were $5.9 million compared
to $1.6 million for the same period in 1998, an increase of $4.3 million or
278%. Revenues for the first six months of 1999 included a net license fee of
$0.9 million for DBSS technology and total revenue recognized from
STMicroelectronics S.A. ("ST") of $2.0 million.
Consistent with the Company's objectives, technology licensing fees and
royalties increased to $3.5 million in the first six months of 1999 versus $0.3
million for the same period in 1998, an increase of $3.2 million, primarily due
to a $0.9 million prepaid royalty and a $0.2 million license fee from ST and a
$0.9 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 Preferred Stock.
During the three months ended June 30, 1999, the Company adjusted such revenue
to $0.9 million, due to the valuation of additional shares of Series E Preferred
Stock issued during the period.
The Company continues to realize royalties from other existing licensees
including Ultra, Oki and suppliers to United Airlines and other carriers.
Royalties from these and other licensees are expected to account for a greater
share of the Company's revenue in future periods.
Product sales increased to $1.2 million for the first six months of 1999
versus $1.1 million for the same period in 1998, an increase of $0.1 million or
15%, primarily reflecting increased sales of ClearSpeech(R) and Gekko(TM) flat
speakers. Primarily due to an agreement with ST, engineering and development
services have increased to $1.2 million compared to $0.1 million for the same
period in 1998.
Cost of product sales was $1.1 million for the first six months of 1999
versus $0.9 million for the same period in 1998, an increase of $0.2 million or
25%, primarily reflecting the increase in product sales and an inventory reserve
of $0.2 million for slow moving hearing product inventory. Product margin was
12% for the first six months of 1999 versus 18% during the same period in 1998
due to the above noted inventory reserve offset by 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 $0.9 million for the first six months of 1999 versus $0.1 million for the
same period in 1998, due to the agreement with ST The gross margin on
engineering and development services increased to 23% for the first six months
of 1999 from 14% during the same period in 1998 due to more profitable contracts
in 1999.
Selling, general and administrative expenses for the first six months of
1999 were $5.7 million versus $4.5 million for the same period in 1998, an
increase of $1.2 million or 27% primarily due to an 11% increase in the number
of sales and marketing professionals, additional corporate and marketing efforts
in DMC, a new wholly-owned subsidiary of the Company and an increase of $0.5
million in legal expenses.
Research and development expenditures for the first six months of 1999
were $3.5 million versus $3.3 million for the same period in 1998, an increase
of $0.2 million or 5%, primarily due to costs attributable to Advancel Logic
Corporation, a subsidiary of the Company acquired in September 1998, and
continued efforts to focus on near-term product sales and technology licensing
fees. The Company continues to focus on products utilizing its hearing, audio,
communications and microphone technologies, products which have been developed
within a short time period and are targeted for rapidly emerging markets.
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 $115.5 million on a
cumulative basis through June 30, 1999. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
(1) the sale of common stock, including the exercise of warrants or options to
purchase common stock, (2) the sale of preferred stock convertible into common
stock, (3) technology licensing fees, (4) royalties, (5) product sales, and (6)
engineering and development funds received from strategic partners and
customers.
Management believes that currently available funds will not be sufficient
to sustain the Company for the next 12 months. Such funds consist of available
cash and cash from the exercise of warrants and options, the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties
product sales and engineering and development services, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development revenue.
In that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise substantial doubt at June 30, 1999, about the
Company's ability to continue as a going concern.
At June 30, 1999, cash was $0.1 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 $(2.4) million at
June 30, 1999, from $(1.2) million at December 31, 1998. This $1.2 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 six months of 1999, the net cash used in operating
activities was $4.5 million, compared to $7.3 million used in operating
activities during the same period of 1998. The decrease of $2.8 million was
primarily due to the write down of the estimated net realizable investment in
TSA.
Net inventory decreased during the first six months of 1999 by $0.2
million, primarily due to an increase in reserves for slow moving hearing
product inventory.
The net cash provided by financing activities amounted to $5.0 million,
primarily due to the $1.5 million convertible notes (see Note 6 - "Notes to the
Condensed Consolidated Financial Statements" for further details) and $3.5
million net proceeds from the Series E Preferred Stock financing (see Note 8 -
"Notes to the Condensed Consolidated Financial Statements" for further details).
The Company has no lines of credit with banks or other lending
institutions and therefore has no unused borrowing capacity.
CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with
supply, manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company to
integrate its active technology into products with limited capital investment in
production facilities and manufacturing personnel; and (iii) access to
well-established channels of distribution and marketing capability of leaders in
several market segments.
The Company's strategic agreements have enabled the Company to focus on
developing product applications for its technology and limit the Company's
capital requirements.
Other than as noted in Note 4 - "Notes to the Condensed Consolidated
Financial Statements", there were no material commitments for capital
expenditures as of June 30, 1999, and no other material commitments are
anticipated in the near future.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 7 - "Notes to the Condensed
Consolidated Financial Statements" which is included herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of stockholders of the Company was held on June 24,
1999. At the meeting, Jay M. Haft, Michael J. Parrella, John J. McCloy II , Sam
Oolie and Stephan Carlquist were elected directors, each to serve until the next
annual meeting of stockholders and until his successor is elected and qualified.
The stockholders also (1) approved an amendment of the Company's Restated
Certificate of Incorporation to increase the number of shares of common stock
authorized thereunder from 255,000,000 shares to 325,000,000 shares, (2)
approved the grant of options to certain directors of the Company, and (3)
ratified the appointment of Richard A. Eisner & Company, LLP as the Company's
independent auditors for the year ending December 31, 1999. The vote taken at
such meeting was as follows:
(a) With respect to the election of the directors:
FOR WITHHELD
Jay M. Haft 133,059,907 4,101,686
Michael J. Parrella 133,948,657 3,212,936
John J. McCloy II 133,084,687 4,076,906
Sam Oolie 133,069,692 4,091,901
Stephan Carlquist 134,041,831 3,119,762
(b) With respect to the proposal to approve the amendment of the
Company's Restated Certificate of Incorporation to increase the
number of shares of common stock authorized thereunder from
255,000,000 to 325,000,000 shares:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
123,084,720 13,401,269 675,603
(c) With respect to the proposal to approve the informal plan granting
options to four non-employee directors of the Company:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
122,140,645 10,770,871 883,390
(d) With respect to the proposal to ratify the selection of Richard A.
Eisner & Company, LLP independent auditors for the Company's fiscal
year ending December 31, 1999:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
134,800,339 1,460,686 900,568
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 3(h) Certificate of Amendment of the Restated
Certificate of Incorporation of the Company filed in the
Office of the Secretary of State of the State of
Delaware on July 29, 1999.
Exhibit 27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
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: August 16, 1999
Exhibit 3(h)
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
NCT GROUP, INC.
(formerly Noise Cancellation Technologies, Inc.)
NCT GROUP, INC., a Delaware corporation (the "Corporation") hereby certifies as
follows:
FIRST: That the Board of Directors of the Corporation, at a meeting of
such Board held on April 13, 1999, adopted a resolution proposing and declaring
advisable the following amendment to the Restated Certificate of Incorporation
of the Corporation, and declaring that such proposed amendment be submitted for
consideration by the stockholders of the Corporation entitled to vote in respect
thereof. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that paragraph (a) of Article IV of the Restated
Certificate of Incorporation of the Corporation, be amended to read as
follows:
(a) Authorized Shares. The total number of shares of stock which the
Corporation shall have authority to issue is 335,000,000 which shall
consist of 325,000,000 shares, $0.01 par value, designated as Common Stock
and 10,000,000 shares, $.10 par value, designated as Preferred Stock.
SECOND: Paragraph (a) of Article IV of the Restated Certificate of
Incorporation, relating to the capitalization of the Corporation, is hereby
deleted and amended to read in its entirety as follows:
(a) Authorized Shares. The total number of shares of stock which the
Corporation shall have authority to issue is 335,000,000 which shall
consist of 325,000,000 shares, $.01 par value, designated as Common Stock
and 10,000,000 shares, $.10 par value, designated as Preferred Stock.
THIRD: The amendment effected herein has been approved by the holders of
at least a majority of all the outstanding shares of the Corporation entitled to
vote thereon at the Annual Meeting of Stockholders of the Corporation held on
June 24, 1999.
FOURTH: The amendment effected herein was duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, NCT Group, Inc. has caused this Certificate of
Amendment to be signed by Michael J. Parrella, its President, and attested to by
Irene Lebovics, its Secretary, this 22nd day of July, 1999.
ATTEST: NCT Group, Inc.
By: /s/ IRENE LEBOVICS By: /s/ MICHAEL J. PARRELLA
------------------ -----------------------
Irene Lebovics, Secretary Michael J. Parrella, President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AND NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIOD ENDED
JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998, FILED ON MARCH 31, 1999, AS AMENDED MAY 3,
1999 (AMENDMENTS NOS. 1 AND 2).
</LEGEND>
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<NAME> NCT GROUP, INC.
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5,932
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