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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 0-18267
NCT Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 59-2501025
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
20 Ketchum Street, Westport, Connecticut 06880
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 226-4447
- --------------------------------------------------------------------------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
/_/ Yes /X/ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of common
stock, par value $.01 per share, outstanding as of May 13, 2003, was
526,104,959.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Notes 1 and 5)
(in thousands, except share data)
December 31, March 31,
2002 2003
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 806 $ 335
Investment in available-for-sale marketable securities 102 103
Accounts receivable, net 245 419
Inventories, net 622 569
Other current assets 358 371
------------ ------------
Total current assets 2,133 1,797
Property and equipment, net 954 789
Goodwill, net 7,184 7,184
Patent rights and other intangibles, net 1,519 1,441
Other assets 1,779 1,740
------------ ------------
$ 13,569 $ 12,951
============ ============
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 4,648 $ 4,011
Accrued expenses 16,916 18,676
Notes payable 3,540 3,173
Current maturities of convertible notes 18,460 22,314
Deferred revenue 2,877 3,092
Other current liabilities 7,101 7,268
------------ ------------
Total current liabilities 53,542 58,534
------------ ------------
Long-term liabilities:
Deferred revenue 2,675 2,140
Convertible notes 779 -
Other liabilities 1,557 1,587
------------ ------------
Total long-term liabilities 5,011 3,727
------------ ------------
Commitments and contingencies
Minority interest in consolidated subsidiaries 8,689 8,776
------------ ------------
Capital deficit :
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Convertible series H preferred stock, issued and outstanding, 1,800 shares,
(redemption amount $18,376,767 and $18,554,302, respectively) 18,377 18,554
Common stock, $.01 par value, authorized 645,000,000 shares
issued and outstanding 483,474,345 and 486,508,326 shares, respectively 4,835 4,865
Additional paid-in capital 180,899 183,059
Accumulated other comprehensive loss (516) (509)
Accumulated deficit (259,564) (266,351)
Shares payable, 29,248,170 shares 2,296 2,296
------------ ------------
Total capital deficit (53,673) (58,086)
------------ ------------
$ 13,569 $ 12,951
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(in thousands, except per share amounts)
Three months ended March 31,
----------------------------------------
2002 2003
---------------- --------------
REVENUE:
Technology licensing fees and royalties $ 1,111 $ 706
Product sales, net 877 467
Advertising/media 10 9
Engineering and development services 16 -
---------------- --------------
Total revenue 2,014 1,182
---------------- --------------
COSTS AND EXPENSES:
Cost of product sales 499 208
Cost of advertising/media 8 3
Selling, general and administrative 4,387 3,572
Research and development 1,046 929
Impairment of goodwill 300 -
---------------- --------------
Total operating costs and expenses 6,240 4,712
Non-operating items:
Other (income) expense, net 823 390
Interest expense, net 1,199 2,867
---------------- --------------
Total costs and expenses 8,262 7,969
---------------- --------------
NET LOSS $ (6,248) $ (6,787)
Less: Beneficial conversion features 25 -
Preferred stock dividends (Note 7) 606 963
---------------- --------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (6,879) $ (7,750)
================ ==============
Basic and diluted loss per share attributable to
common shareholders $ (0.02) $ (0.02)
Weighted average common shares outstanding - ================ ==============
basic and diluted 425,842 513,633
================ ==============
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three months ended March 31,
----------------------------------------
2002 2003
---------------- --------------
NET LOSS $ (6,248) $ (6,787)
Other comprehensive income (loss):
Currency translation adjustment 22 6
Unrealized (loss)/adjustment of unrealized loss on marketable securities (287) 1
---------------- --------------
COMPREHENSIVE LOSS $ (6,513) $ (6,780)
================ ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 2)
(Unaudited)
(in thousands)
Three months ended March 31,
---------------------------------------------
2002 2003
--------------------- ---------------------
Cash flows from operating activities:
Net loss $ (6,248) $ (6,787)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 289 232
Common stock, warrants and options issued as consideration for:
Compensation 169 -
Operating expenses 921 1,228
Provision for inventory (55) (75)
Provision for doubtful accounts and uncollectible amounts 68 7
Loss on disposition of fixed assets - 33
Impairment of goodwill 300 -
Costs of exiting activities 303 -
Realized loss on fair value of warrant (6) -
Forgiveness of debt - (224)
Finance costs associated with non-registration of common shares
and of common shares underlying convertible notes 909 729
Default penalty on notes 25 118
Amortization of discounts on notes 284 1,137
Amortization of beneficial conversion feature on convertible notes 384 874
Minority interest loss (108) -
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 80 (180)
Decrease in inventories 286 127
(Increase) decrease in other assets (24) 26
Increase in accounts payable and accrued expenses 583 543
Decrease in other liabilities and deferred revenue (1,188) (153)
--------------------- ---------------------
Net cash used in operating activities $ (3,028) $ (2,365)
--------------------- ---------------------
Cash flows from investing activities:
Capital expenditures $ (27) $ (23)
Proceeds from sale of capital equipment 11 -
--------------------- ---------------------
Net cash used in investing activities $ (16) $ (23)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable, net $ 2,883 $ 2,150
Repayment of notes (253) (239)
--------------------- ---------------------
Net cash provided by financing activities $ 2,630 $ 1,911
--------------------- ---------------------
Effect of exchange rate changes on cash $ (1) $ 6
--------------------- ---------------------
Net decrease in cash and cash equivalents (415) (471)
Cash and cash equivalents - beginning of period 567 806
--------------------- ---------------------
Cash and cash equivalents - end of period $ 152 $ 335
===================== =====================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation:
Throughout this document, NCT Group, Inc. and its subsidiaries are referred
to as the "company," "we," "our," "us" or "NCT." The accompanying condensed
consolidated financial statements are unaudited but, in the opinion of
management, contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the consolidated
financial position and the results of operations and cash flows for the periods
presented in conformity with accounting principles generally accepted in the
United States of America applicable to interim periods. The results of
operations and cash flows for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for any other interim
period or the full year. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 2002 contained in the company's Annual
Report of Form 10-K.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. We have reclassified some amounts in the
prior periods' financial statements to conform to the current periods'
presentation.
NCT has experienced substantial losses from operations since its inception
which cumulatively amounted to $266.4 million through March 31, 2003. Cash and
cash equivalents amounted to $0.3 million at March 31, 2003, decreasing from
$0.8 million at December 31, 2002. A working capital deficit of $56.7 million
exists at March 31, 2003. NCT is in default of $2.5 million of its notes payable
and $5.1 million of its convertible notes at March 31, 2003. Management believes
that currently available funds will not be sufficient to sustain NCT at present
levels. NCT's ability to continue as a going concern is dependent on funding
from several sources, including available cash and cash equivalents and cash
inflows generated from its revenue sources, particularly technology licensing
fees and royalties and product sales. The level of realization of funding from
our revenue sources is presently uncertain. If anticipated revenue does not
generate sufficient cash, management believes additional working capital
financing must be obtained. We are attempting to raise additional capital
through debt and equity financing in order to fund operations. There is no
assurance any of the financing is or would become available.
In the event that funding from internal sources is insufficient, we would
have to substantially cut back our level of spending which could substantially
curtail our operations. Such reductions could have an adverse effect on our
relationships with licensees and customers. Uncertainty exists about the
adequacy of current funds to support NCT's activities until positive cash flow
from operations can be achieved, and uncertainty exists about the availability
of external financing sources to fund any cash deficiencies.
The accompanying condensed consolidated financial statements have been
prepared assuming that NCT 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 financing and other funding sources to meet our
obligations. The uncertainties described in the preceding paragraphs raise
substantial doubt at March 31, 2003 about the company's ability to continue as a
going concern. The accompanying condensed consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
the carrying amount of recorded assets or the amount and classification of
liabilities that might result should the company be unable to continue as a
going concern.
5
2. Other Financial Data:
Balance Sheet Items:
- --------------------
Investments in marketable securities include available-for-sale securities
at market value. The following table displays the market value, cost basis, and
realized/unrealized gain (loss) of the company's available-for-sale securities
(in thousands):
December 31, 2002 March 31, 2003
---------------------------------------------- --------------------------------------
Cost Realized Unrealized Market Cost Unrealized Market
Basis Loss Loss Value Basis Gain/(Loss) Value
---------- ----------- ------------ ---------- ----------- ----------- ------------
Available-for-sale:
ITC $ 798 $ (689) $ (15) $ 94 $ 94 $ (5) $ 89
Teltran 84 (76) - 8 8 6 14
---------- ----------- ------------ ---------- ----------- ----------- ------------
Totals $ 882 $ (765) $ (15) $ 102 $ 102 $ 1 $ 103
========== =========== ============ ========== =========== =========== ============
The company reviews declines in the value of its investment portfolio when
general market conditions change or specific information pertaining to an
industry or to an individual company becomes available. The company considers
all available evidence to evaluate the realizable value of its investments and
to determine whether the decline in realizable value may be
other-than-temporary.
Accounts receivable comprise the following (in thousands):
December 31, March 31,
2002 2003
----------------- -----------------
Technology license fees and royalties $ 268 $ 422
Joint ventures and affiliates 34 34
Other receivables 283 310
----------------- -----------------
$ 585 $ 766
Allowance for doubtful accounts (340) (347)
----------------- -----------------
Accounts receivable, net $ 245 $ 419
================= =================
Inventories comprise the following (in thousands):
December 31, March 31,
2002 2003
----------------- -----------------
Components $ 227 $ 235
Finished goods 799 663
----------------- -----------------
$ 1,026 $ 898
Reserve for obsolete and slow moving inventory (404) (329)
----------------- -----------------
Inventories, net $ 622 $ 569
================= =================
6
Other current assets comprise the following (in thousands):
December 31, March 31,
2002 2003
--------------- ---------------
Notes receivable $ 1,000 $ 1,000
Due from officer 108 108
Other 250 263
--------------- ---------------
$ 1,358 $ 1,371
Reserve for uncollectible amounts (1,000) (1,000)
--------------- ---------------
Other current assets $ 358 $ 371
=============== ===============
Other assets (long-term) comprise the following (in thousands):
December 31, March 31,
2002 2003
--------------- ---------------
Marketable ITC securities $ 1,320 $ 1,320
Advances and deposits 75 75
Deferred charges 353 314
Other 31 31
--------------- ---------------
Other assets (classified as long-term) $ 1,779 $ 1,740
=============== ===============
Property and equipment comprise the following (in thousands):
December 31, March 31,
2002 2003
--------------- ---------------
Machinery and equipment $ 2,027 $ 1,989
Furniture and fixtures 642 640
Leasehold improvements 972 971
Tooling 631 631
Other 478 478
--------------- ---------------
$ 4,750 $ 4,709
Accumulated depreciation (3,796) (3,920)
--------------- ---------------
Property and equipment, net $ 954 $ 789
=============== ===============
Accrued expenses comprise the following (in thousands):
December 31, March 31,
2002 2003
--------------- ---------------
Non-registration fees $ 7,005 $ 8,431
Interest 2,214 2,575
Judgments 2,124 2,124
Default penalties 288 -
Other 5,285 5,546
--------------- ---------------
Accrued expenses $ 16,916 $ 18,676
=============== ===============
7
Deferred revenue comprise the following (in thousands):
December 31, March 31,
2002 2003
--------------- ---------------
NXT $ 4,815 $ 4,280
FairPoint 143 353
Other 594 599
--------------- ---------------
$ 5,552 $ 5,232
Less: amount classified as current (2,877) (3,092)
--------------- ---------------
Deferred revenue (classified as long-term) $ 2,675 $ 2,140
=============== ===============
As of March 31, 2003, we do not expect to realize any additional cash from
revenue that has been deferred.
Other current liabilities comprise the following (in thousands):
December 31, March 31,
2002 2003
--------------- ---------------
License reacquisition payable $ 4,000 $ 4,000
Development fee payable 650 650
Royalty payable 1,695 1,695
Due to selling shareholders of Theater Radio Network 557 557
Due to L&H 100 100
Loan advance by investor 65 230
Other 34 36
--------------- ---------------
Other current liabilities $ 7,101 $ 7,268
=============== ===============
Other liabilities (long-term) comprise the following (in thousands):
December 31, March 31,
2002 2003
--------------- ---------------
Due to ITC $ 1,422 $ 1,422
Other 135 165
--------------- ---------------
Other liabilities (classified as long-term) $ 1,557 $ 1,587
=============== ===============
Statements of Operations Information:
- ------------------------------------
Other (income) expense, net comprise the following (in thousands):
Three months ended March 31,
---------------------------
2002 2003
------------ -------------
Finance costs associated with non-registration of common shares and
of common shares underlying convertible notes $ 909 $ 729
Minority share of loss in subsidiary - Pro Tech (108) -
Forgiveness of notes and accounts payable - (45)
Litigation settlement (Note 10) - (429)
Default penalties on debt 25 118
Other (3) 17
------------ -------------
Total non-operating other (income) expense, net $ 823 $ 390
============ =============
8
Supplemental Cash Flow Disclosures:
- -----------------------------------
(in thousands)
Three months ended March 31,
----------------------------------
Supplemental disclosures of cash flow information: 2002 2003
----------------- --------------
Cash paid during the year for:
Interest $ 3 $ 10
================= ==============
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding gain on available-for-sale securities $ (287) $ (1)
================= ==============
Issuance of common stock upon conversion of notes $ 375 $ 125
================= ==============
Issuance of notes for placement services rendered $ 15 $ -
================= ==============
Property and equipment financed through capitalized leases and notes payable $ 6 $ -
================= ==============
3. Stockholders' Capital Deficit:
The changes in stockholders' capital deficit during the three months ended
March 31, 2003 were as follows (in thousands):
Series H Accumulated
Convertible Additional Accumu- Other
Preferred Stock Common Stock Paid-in lated Comprehensive Shares
-------------- ---------------
Shares Amount Shares Amount Capital Deficit Income/(Loss) Payable Total
-------------- --------------- --------- -------- ------------- ------- --------
Balance at December 31, 2002 2 $18,377 483,474 $4,835 $180,899 $(259,564) $(516) $2,296 $(53,673)
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - 177 - - (177) - - - -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - - - (87) - - - (87)
Charges for the non-registration of the
underlying shares of NCT to subsidiary
preferred shareholders - - - - (699) - - - (699)
Exchange of subsidiary convertible debt
for common stock - - 3,034 30 95 - - - 125
Warrants issued in conjunction with
convertible debt - - - - 795 - - - 795
Beneficial conversion feature on
convertible debt - - - - 1,021 - - - 1,021
Net loss - - - - - (6,787) - - (6,787)
Accumulated other comprehensive
income (loss) - - - - - - 7 - 7
Compensatory stock options and warrants - - - - 1,228 - - - 1,228
Expenses related to sale of stock - - - - (16) - - - (16)
-------------- --------------- --------- -------- ------------- ------- --------
Balance at March 31, 2003 2 $18,554 486,508 $4,865 $183,059 $(266,351) $(509) $2,296 $(58,086)
============== =============== ========= ======== ============= ======= ========
9
4. Notes Payable:
(in thousands)
December 31, March 31,
2002 2003
------------- -------------
Logical eBusiness Solutions Limited (f/k/a DataTec) (a) $ 2,414 $ 2,414
Obligation of subsidiary to a prior owner of Web Factory;
past due; payable in 1,500 British Pounds Sterling;
interest accrues at 4% per annum above the base rate
of National Westminister Bank plc
Note due investor 385 385
Interest at 8% per annum payable at maturity; Effective interest rate
of 68.1% per annum related to the issuance of warrants; due April 7, 2003
Note due stockholder of subsidiary 171 164
Interest at 8.5% per annum; monthly payments (including interest)
of $3.5 through May 2003, remainder matures June 27, 2003
Top Source Automotive 204 -
Default interest rate accrues at two times prime;
included in settlement (see Note 10)
Notes due former employees 116 116
$100 bears interest at 8.25% per annum, compounded annually;
past due (a). Remainder bears interest at 12% per annum, due on demand.
Other financings 284 96
Interest ranging from 7% to 9% per annum;
$35 due July 15, 2003; $61 all other
------------- -------------
$ 3,574 $ 3,175
Less: unamortized debt discounts (34) (2)
------------- -------------
$ 3,540 $ 3,173
============= =============
Footnote:
(a) Notes payable are in default due to nonpayment.
10
5. Convertible Notes:
(in thousands)
December 31, March 31,
2002 2003
----------- -------------
Issued to Carole Salkind (a) $ 18,064 $ 21,101
Weighted average effective interest rate of 41.1% per annum; accrues
interest at 8% per annum; collateralized by substantially all of the
assets of NCT; convertible into NCT common stock at prices ranging
from $0.031 - $0.097 or exchangeable for common stock of NCT
subsidiaries except Pro Tech; maturing by quarter as follows:
June 30, 2003 $ 3,538
September 30, 2003 6,185
December 31, 2003 4,282
March 31, 2004 7,096
8% Convertible Notes (b) 976 976
Weighted average effective interest rate of 25% per annum;
convertible into NCT common stock at various rates; matures:
March 14, 2002 $ 17
April 12, 2002 9
January 10, 2004 550
March 11, 2004 400
6% Convertible Notes (c) 4,228 4,103
Weighted average effective interest rate of 85.8% per annum;
convertible into NCT common stock at 100% of the five-day average
closing bid price preceding conversion; past due:
January 9, 2002 $ 1,897
April 4, 2002 875
May 25, 2002 81
June 29, 2002 1,250
----------- -------------
$ 23,268 $ 26,180
Less: unamortized debt discounts (4,029) (3,866)
Less: amounts classified as long-term (779) -
----------- -------------
$ 18,460 $ 22,314
=========== =============
Footnotes:
- ----------
(a) During the three months ended March 31, 2003, NCT issued an aggregate of
$7.1 million of convertible notes to Carole Salkind, a shareholder of NCT, an
accredited investor and spouse of a former director of NCT. During the three
months ended March 31, 2003, we defaulted on payment of notes dated January 11,
2002, January 25, 2002, February 27, 2002 and March 1, 2002 for an aggregate of
$4.1 million. The principal on these notes was rolled into new notes in 2003
along with default penalties and accrued interest aggregating $0.8 million and
an aggregate of $2.2 million new funding from Carole Salkind. During the three
months ended March 31, 2003, we recorded original issue discounts of $0.8
million to the notes based upon the relative fair values of the debt and
warrants granted to Ms. Salkind (see Note 7). In addition, beneficial conversion
features totaling $1.0 million have been recorded as a discount to the notes.
These discounts are being amortized over the term of the related notes. For the
three months ended March 31, 2003, $1.9 million of amortization related to these
discounts is classified as interest expense in our condensed consolidated
statement of operations. Unamortized discounts of $3.7 million have been
reflected as a reduction to the convertible notes in our condensed consolidated
balance sheet as of March 31, 2003. The convertible note dated February 27, 2002
for $0.8 million was collateralized by an interest in specific
11
assets of our subsidiary, NCT Video. This interest was rolled over into a
convertible note for $1.0 million during this quarter. The default provisions in
these notes impose a penalty of 10% of the principal payments in default and
default interest from the date of default on the principal in default at the
interest rate stated in the note plus 5%. The defaults of $2.9 million at
December 31, 2002, related to a judgment in an unrelated case being entered
against NCT and DMC in excess of the permitted maximum of $0.25 million were
extinguished when the notes were rolled over during this quarter.
(b) Notes totaling approximately $26,000 are convertible at 80% of the lowest
closing bid price for the five days preceding conversion; a note totaling $0.6
million is convertible at the lower of $0.07 per share or 80% of the lowest
closing bid price for the five days preceding conversion; and a note totaling
$0.4 million is convertible at $0.0647 per share. The convertible note for $0.6
million is collateralized by substantially all of the assets of our subsidiary,
Artera Group. Beneficial conversion features had been recorded as a discount to
the notes and are being amortized over the term of the notes. For the three
months ended March 31, 2003, approximately $40,000 of amortization related to
these discounts is classified as interest expense in our condensed consolidated
statement of operations. Unamortized discounts of $0.1 million have been
reflected as a reduction to the convertible notes in our condensed consolidated
balance sheet as of March 31, 2003. We did not fulfill registration obligations
and recorded charges of approximately $0.1 million as a component of finance
costs associated with non-registration of common shares and of common shares
underlying convertible notes included in other (income) expense, net for the
three months ended March 31, 2003 (see Note 2). The company did not repay
convertible notes aggregating approximately $26,000 upon maturity and has
recorded default interest at 18% from respective the dates of default. In
addition, on convertible notes aggregating $1.0 million, we are in default due
to a cross default clause.
(c) Principal of $0.1 million was exchanged for NCT stock during the three
months ended March 31, 2003 (see Note 7). We were obligated to register
additional shares at various dates during 2001, which, despite our best efforts,
we were unable to accomplish. As a result, we have recorded charges of $0.6
million as a component of finance costs associated with non-registration of
common shares and of common shares underlying convertible notes included in
other (income) expense, net for the three months ended March 31, 2003 (see Note
2). The aggregate outstanding debt of $4.1 million is in default for
non-payment. These notes are senior debt of our subsidiary, Artera Group, Inc.
We have not received a demand for payment.
6. Commitments and Contingencies:
On July 25, 2002, NCT and Crammer Road LLC entered into a private equity
credit agreement and related registration rights agreement. This equity credit
agreement provides that shares of up to $50 million of our common stock may be
sold to Crammer Road pursuant to put notices delivered by NCT. The credit
agreement obligates NCT to put a minimum of $5 million of its common stock (the
minimum commitment) to Crammer Road for cash. The agreement provides for a
discount to market of 10% on the puts. Our put notices are to commence after we
have an effective registration statement covering 112% of the shares needed for
$50 million of puts (among other conditions). If we fail to issue shares for the
minimum commitment amount during the commitment period we must pay Crammer Road,
in immediately available funds, an amount as described in the agreement.
7. Capital Stock:
Authorized Capital Stock
Common shares available for future issuance
At March 31, 2003, the shares of common stock required to be reserved were
2,893,252,897 calculated at the $0.03 common stock price on that date (or the
discount therefrom as allowed under the applicable exchange or conversion
agreements). At the March 31, 2003 common stock price of $0.03, our common
shares issued and required to be reserved for issuance exceeded the number of
shares authorized at that date. As such, NCT will seek shareholder approval of
an amendment to its Restated Certificate of Incorporation to increase the number
of shares of common stock authorized for NCT.
Shares Issued upon Conversion or Exchange of Indebtedness
During the three months ended March 31, 2003, $0.1 million of the 6%
convertible notes was exchanged for 3,033,981 shares of NCT's common stock. At
March 31, 2003, $4.1 million of the 6% convertible note principal
12
is exchangeable for NCT common stock.
NCT Group, Inc. Preferred Stock
NCT amended the number of designated shares of series H convertible
preferred stock from 1,800 shares to 2,100 shares. This amendment was filed with
the State of Delaware on March 7, 2003. For the three months ended March 31,
2003, we calculated the 4% dividends earned by the holder of the 1,800 shares
outstanding of series H preferred stock at approximately $0.2 million. Such
cumulative dividend amount is included in preferred stock dividends and in the
calculation of loss attributable to common stockholders.
Artera Group, Inc. Preferred Stock
NCT is obligated to register shares of its common stock for the exchange of
Artera series A preferred stock. For the three months ended March 31, 2003, we
incurred a charge of $0.7 million for non-registration of the underlying shares
of NCT common stock. Pursuant to the exchange rights agreement, NCT has the
option at any time to redeem any outstanding Artera series A preferred stock by
paying the holder cash equal to the aggregate stated value of the preferred
stock being redeemed (together with accrued and unpaid dividends thereon). For
the three months ended March 31, 2003, we calculated the 4% dividends earned by
holders of the Artera series A preferred stock at $0.1 million. The
non-registration charge and dividends are included in preferred stock dividends
and in the calculation of loss attributable to common stockholders.
Pro Tech Communications, Inc. Preferred Stock
For the three months ended March 31, 2003, we calculated the 4% dividends
earned by holders of the Pro Tech series A convertible preferred stock and the
Pro Tech series B redeemable convertible preferred stock at approximately
$5,000. This amount is included in preferred stock dividends and in the
calculation of loss attributable to common stockholders.
Options
For the three months ended March 31, 2003, we granted non-plan options to
purchase an aggregate of 43,500,000 shares of our common stock at exercise
prices of $0.031, $0.04 and $0.042 as partial consideration for consulting
services. We estimated the fair value of these options using the following
assumptions in applying the Black-Scholes option pricing model: dividend yield
of 0%; risk-free interest rates of 1.85% to 2.10%; volatility of 100%; and an
expected life of five years. For the three months ended March 31, 2003, we
recorded a charge for consulting services of $1.2 million classified as selling,
general and administrative expense (see Note 8).
Warrants
During the three months ended March 31, 2003, in conjunction with the
issuance of convertible notes, NCT granted Carole Salkind warrants to acquire an
aggregate of 30,775,579 shares of its common stock at exercise prices ranging
from $0.031 to $0.041 per share. The fair value of these warrants for the three
months ended March 31, 2003 was approximately $0.9 million (determined using the
Black-Scholes option pricing model). Based upon allocation of the relative fair
values of the instruments, we recorded a discount to the convertible notes
issued to Carole Salkind of $0.8 million for the three months ended March 31,
2003.
8. Related Parties:
On January 6, 2003, NCT and Stop Noise, Inc. entered into a license
agreement. Carole Salkind's son is the sole shareholder of Stop Noise, Inc. No
amounts have been recorded with respect to this agreement.
13
Consulting Agreements
On January 23, 2003, NCT granted to Inframe, Inc. non-plan options to
purchase 23,000,000 shares of NCT common stock at an exercise price of $0.042
per share (an aggregate exercise price of $966,000). The five-year options vest
on the date of grant and expire on January 23, 2008. The options were granted in
partial consideration of consulting services provided by Inframe to NCT. Such
consulting services are performed by Morton Salkind, husband of Carole Salkind,
acting on behalf of Inframe, Inc. Carole Salkind is the sole shareholder of
Inframe, Inc. We have recorded a charge of $0.7 million for the fair value of
the options and a $5,000 consulting fee as called for under the agreement for
consulting expenses included in selling, general and administrative expenses in
our statement of operations for the three months ended March 31, 2003.
On February 11, 2003 and March 12, 2003, NCT granted to Avant Interactive,
Inc. non-plan options to purchase 13,500,000 shares and 7,000,000 shares,
respectively, of NCT common stock at exercise prices of $0.031 and $0.04,
respectively (an aggregate exercise price of $698,500). The five-year options
vest at their respective dates of grant and expire on February 11, 2008 and
March 12, 2008. The options were granted in partial consideration of consulting
services provided by Avant to NCT. Such consulting services are performed by
Morton Salkind, husband of Carole Salkind, acting on behalf of Avant
Interactive, Inc. Carole Salkind is the sole shareholder of Avant Interactive,
Inc. We have recorded an aggregate charge of $0.5 million for the fair value of
the options and a $5,000 consulting fee as called for under the agreement for
consulting expenses included in selling, general and administrative expenses in
our statement of operations for the three months ended March 31, 2003.
9. Stock-Based Compensation
The company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Accordingly, the company
accounts for stock-based compensation transactions with employees using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Under APB No. 25, no compensation costs are recognized if the option exercise
price is equal to or greater than the fair market price of the common stock on
the date of the grant. Under SFAS No. 123, stock options are valued at grant
date using the Black-Scholes option pricing model and compensation costs are
recognized ratably over the vesting period. No stock-based employee compensation
cost is reflected in our net loss attributable to common stockholders, as
options granted under our plans have an exercise price equal to or greater than
the market value of the underlying common stock on the date of grant. At March
31, 2003, the company has four stock-based compensation plans. The following
table illustrates the effect on net loss attributable to common stockholders and
net loss per share if the company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
(in thousands, except share data)
Three Months Ended March 31,
------------------------------------
2002 2003
----------------- -----------------
Net loss attributable to common stockholders $ (6,879) $ (7,750)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (268) (69)
----------------- -----------------
Pro forma net loss attributable to common stockholders $ (7,147) $ (7,819)
================= =================
Net loss per common share (basic and diluted):
As reported $ (0.02) $ (0.02)
================= =================
Pro forma $ (0.02) $ (0.02)
================= =================
Since options vest over several years and additional option grants are
expected to be made in future years, the pro forma impact on the results of
operations for the three months ended March 31, 2002 and 2003, respectively, is
not necessarily representative of the pro forma effects on the results of
operations for future periods.
14
10. Litigation:
NCT Audio Arbitration and TST/TSA/GTI Bankruptcy
- ------------------------------------------------
In the bankruptcy case of Global Technovations, Inc. (formerly known as Top
Source Technologies, Inc.) (GTI) and its subsidiary Top Source Automotive, Inc.
(TSA), on February 18, 2003, the bankruptcy court approved an amended Plan of
Reorganization and Disclosure Statement. Pursuant to the amended Plan, NCT Audio
Products, Inc. (i) was granted a release from all claims of GTI and TSA
(including NCT Audio's alleged obligations under a $204,315 principal amount
note due April 16, 1999 and its alleged obligation to issue $100,000 of its
preferred stock under an agreement with TST); (ii) received $125,000 from the
bankruptcy estate on March 25, 2003; (iii) has an allowable (i.e., uncontested)
claim against the bankruptcy estate for $1,500,000 for which NCT Audio is
entitled to payments, if any, in the course of administration of the estate
under a formula set forth in the amended Plan; and (iv) released the debtors and
their officers and directors from all claims other than the claim described in
clause (iii) above. The amended Plan also provides for a $1,000,000 litigation
fund for the bankruptcy estate's efforts to enforce a number of claims it
believes it has against third parties, the proceeds of which efforts would,
under the formula in the amended Plan, be used to pay the claims of NCT Audio
and the other creditors of the bankruptcy estate.
Maryland Lease Litigation
- -------------------------
On March 3, 2003, the Connecticut court approved the settlement agreement
between NCT and the plaintiff West Nursery Holding Limited Partnership. Pursuant
to the settlement agreement, on or about April 1, 2003, the company issued
1,248,170 shares of its common stock (i.e., $55,918 in stock priced at $.0448
per share) to West Nursery. Dismissal of the Connecticut and Maryland actions
with prejudice is expected shortly.
Mesa Partners Matter
- --------------------
On March 8, 2003, the court approved the settlement agreement between the
co-defendants NCT and Distributed Media Corporation and the plaintiff Mesa
Partners, Inc. Pursuant to the settlement agreement, on or about April 11, 2003,
NCT issued 2,321,263 shares of its common stock (i.e., $125,000 in stock priced
at $.05385 per share) to Mesa. Dismissal of the action with prejudice is
expected shortly.
Artera International U.K. Section 214 Indemnification
- -----------------------------------------------------
In the United Kingdom liquidation case of Artera Group International
Limited, on March 25, 2003, Messrs. Parrella and Hammond and Ms. Lebovics filed
a joint response to the Liquidator's claims in which they denied any liability
or wrongdoing.
Production Resource Group Litigation
- ------------------------------------
In the portion of the case against the company and Distributed Media
Corporation, on or about February 14, 2003, Production Resource Group, L.L.C.
(PRG) served papers on the company seeking to enforce the judgment in the case
against the shares of stock of NCT Audio owned by the company. In the portion of
the case against the company's Chairman and Chief Executive Officer Michael
Parrella (as to which the company has agreed to indemnify Mr. Parrella), on
February 25, 2003, the court granted in part Mr. Parrella's July 15, 2002
motion, striking those portions of the PRG amended complaint that allege a
breach of an obligation of good faith and fair dealing, but declining to strike
those portions that allege unfair trade practices and fraud.
Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2002, for further information regarding the foregoing
matters. The company believes there are no other patent infringement claims,
litigation, 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.
11. Segment Information:
Management views the company as being organized into three operating
segments: Communications,
15
Media and Technology. The Other operating segment is used to reconcile the
reportable segment data to the consolidated financial statements and is
segregated into two categories, Other-corporate and Other-consolidating.
Other-corporate consists of items maintained at the company's corporate
headquarters and not allocated to the segments. This includes most of the
company's debt and related cash and equivalents and related net interest
expense, some litigation liabilities and non-operating fixed assets. Also
included in the components of revenue attributed to Other-corporate are license
fees and royalty revenue from subsidiaries, which are offset (eliminated) in the
Other-consolidating column. Other-consolidating consists of items eliminated in
consolidation, such as intercompany revenue.
During the three months ended March 31, 2003, no geographic information for
revenue from external customers or for long-lived assets is disclosed, as our
primary market and capital investments were concentrated in the United States.
Reportable segment data for the three months ended March 31, 2003 and March
31, 2002 is as follows (in thousands):
For the three months ended Reportable ---------- Other ---------- Grand
March 31, 2003: Communications Media Technology Segments Corporate Consolidating Total
- ------------------------------------- ---------------------------------------------------------------------------------------------
License fees and royalties - external $ 170 $ 535 $ - $ 705 $ 1 $ - $ 706
Other revenue - external 455 21 - 476 - - 476
Other revenue - other operating
segments 275 1 - 276 127 (403) -
Net income (loss) (2,994) (800) 31 (3,763) (3,620) 596 (6,787)
For the three months ended Reportable ---------- Other ---------- Grand
March 31, 2002: Communications Media Technology Segments Corporate Consolidating Total
- ------------------------------------- ---------------------------------------------------------------------------------------------
License fees and royalties - external $ 576 $ 535 $ - $ 1,111 $ - $ - $ 1,111
Other revenue - external 874 29 - 903 - - 903
Other revenue - other operating
segments 158 (27) - 131 4 (135) -
Net income (loss) (2,234) (1,243) (70) (3,547) (3,150) 449 (6,248)
12. Subsequent Events:
Transactions with Carole Salkind
On April 2, April 11 and April 21, 2003, NCT issued convertible notes to
Ms. Salkind, each in the amount of $0.45 million, as consideration for $1.35
million in cash. The notes mature on the anniversaries of the respective dates
of issuances and bear interest at 8% per annum payable at maturity. The notes
are convertible into shares of NCT common stock at $0.029, $0.031 and $0.037 per
share, respectively, and may be exchanged for shares of common stock of any NCT
subsidiary (except Pro Tech) that has an initial public offering (at the initial
public offering price thereof). In conjunction with issuance of these notes,
three five-year warrants were issued to Ms. Salkind each to purchase 2.0 million
shares of our common stock at exercise prices of $0.029, $0.031 and $0.037 per
share, respectively. The relative estimated fair value of these warrant will be
reflected as an original issue discount to the notes and amortized over the term
of the notes.
As of May 2, 2003, we were in default for non-payment of a secured
convertible note dated May 2, 2002 for the principal amount of $1.4 million. We
are currently in negotiation to cure this default.
Litigation
Alpha, Austost, Balmore and Libra v. NCT and Artera
- ---------------------------------------------------
16
On or about April 7, 2003, the company, Artera Group, Inc. and the
plaintiffs executed a settlement agreement, which is subject to court approval.
Under the settlement agreement, the plaintiffs grant releases from the monetary
claims in the complaint (i) against the company and Artera and pertaining to
interest allegedly accrued through April 7, 2003 on all notes described in the
complaint and (ii) against the company for the company's non-payment of
liquidated damages allegedly due as a result of a failure by the company to
register the shares of its common stock for which the notes and preferred stock
described in the complaint are convertible or exchangeable. In consideration of
these releases, the company is to issue to the plaintiffs an aggregate of
$4,000,000 worth of new shares of its common stock (priced at the average of the
ten closing prices of the common stock immediately preceding the hearing for
court approval of the settlement agreement). Also included in the settlement
agreement is the release of claims, not originally asserted in the complaint,
(x) against Artera and pertaining to interest allegedly accrued through April 7,
2003 on a May 25, 2001 note of Artera and (y) against the company for the
company's non-payment of liquidated damages allegedly due as a result of a
failure by the company to register the shares of its common stock for which such
May 25, 2001 note of Artera is exchangeable. After issuance of the new company
shares, the action would be dismissed, with prejudice as to the claims released
under the settlement agreement and without prejudice as to the claims not so
released (primarily, principal allegedly due and payable on the notes described
in the complaint). Upon court approval of the settlement agreement, the company
expects to record a reversal of previously accrued liquidated damages for
non-registration of common shares underlying convertible and exchangeable notes
and preferred stock ranging from approximately $3.0 million to $4.0 million. A
hearing for court approval of the settlement agreement is scheduled for May 15,
2003.
Crammer Road v. NCT
- -------------------
On or about May 8, 2003, the company issued to Crammer Road LLC the
remaining 28,000,000 shares that were issuable under the October 30, 2002
settlement agreement between the parties. Dismissal of the action with prejudice
is expected shortly.
Theater Radio Network - InsiderStreet (Neometrix) Litigation
- ------------------------------------------------------------
On or about April 14, 2003, Neometrix Corp. (formerly known as
InsiderStreet.com, Inc.) changed its name to Neometrix Technology Group, Inc.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
Caution Concerning Forward-Looking Statements
This report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of any number of factors, many of which
are beyond the control of management. NCT operates in a highly competitive and
rapidly changing environment. Our business segments are dependent on our ability
to: achieve profitability; achieve a competitive position in design,
development, licensing, production and distribution of technologies and
applications; produce a cost effective product that will gain acceptance in
relevant consumer and other product markets; increase revenue from products;
realize funding from technology licensing fees, royalties, product sales, and
engineering and development revenue to sustain our current level of operation;
introduce, on a timely basis, new products; continue our current level of
operations to support the fees associated with our patent portfolio; maintain
satisfactory relations with our customers; attract and retain key personnel;
maintain and expand our strategic relationships; and protect our know-how,
inventions and other secret or unprotected intellectual property. NCT's actual
results could differ materially from management's expectations because of
changes in these factors. New risk factors may arise and it is not possible for
management to predict all of these risk factors, nor can management assess the
impact of all of these risk factors on the company's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
All references to years, unless otherwise noted, refer to our fiscal year,
which ends on December 31. All references to quarters, unless otherwise noted,
refer to the quarters of our fiscal year.
General Business Environment
NCT's operating revenue are comprised of technology licensing fees and
royalties, product sales, advertising/media revenue and engineering and
development services. Please see our discussion of our critical accounting
policies below. From time to time, we receive securities or other consideration
rather than cash payment from our customers and such other consideration may or
may not be realized by us in cash. We do not anticipate that any cash will be
realized from the revenue deferred at March 31, 2003 (approximately $5.2
million). Operating revenue for the three months ended March 31, 2003 consisted
of approximately 59.7% in technology licensing fees and royalties, 39.5% in
product sales and 0.8% in advertising/media revenue.
NCT continued its practice of marketing its technology through licensing to
third parties for fees, generally by obtaining technology license fees when
initiating relationships with new strategic partners, and subsequent 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 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. Presently, NCT is
selling products through several of its licensees, including: Ultra is
installing production model aircraft cabin quieting systems in the SAAB 340
turboprop aircraft and Oki is integrating the ClearSpeech(R) algorithm into
large scale integrated circuits for communications applications.
NCT 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 tests of products. Management
believes that the investment in our technology has resulted in the expansion of
our intellectual property portfolio and improvement in the functionality, speed
and cost of components and products.
Management believes that currently available funds will not be sufficient
to sustain NCT. Such funds
18
consist of available cash and 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 financing
is or would become available. (Refer to "Liquidity and Capital Resources" below
and to Note 1 - notes to the condensed consolidated financial statements for
further discussion relating to continuity of operations.)
In 2003, the company entered into certain transactions which provided
additional funding. These transactions included the issuance of secured
convertible notes. In particular, we have been primarily dependent upon funding
from Carole Salkind to maintain our operations. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources" (see
also Note 5 - notes to the condensed consolidated financial statements).
Critical Accounting Policies
Revenue Recognition
Revenue is recognized when earned. Technology licensing fees are generally
recognized upon execution of the agreement but are deferred if subject to
completion of any performance criteria then recognized once the performance
criteria have been met. Revenue from royalties is recognized ratably over the
royalty period based upon periodic reports submitted by the royalty obligor or
based on minimum royalty requirements. Revenue from product sales is recognized
when the product is shipped. Revenue from advertising sales is recognized when
the advertisements are aired or displayed. Revenue from engineering and
development services is generally recognized and billed as the services are
performed. The mix of our revenue sources during any reporting period may have a
material impact on our results. In particular, our execution of technology
licensing agreements and the timing of the revenue recognized therefrom has not
been predictable. Our preference is to collect amounts due from the sale of our
technologies, services and products in cash. However, from time to time,
receivables may be settled by securities transferred to us by the customer in
lieu of cash payment.
At March 31, 2003, our deferred revenue aggregated $5.2 million. We do not
expect to realize any additional cash in connection with recognizing revenue
from our deferred revenue.
Marketable Securities
Marketable securities that are bought and held principally for the purpose
of selling them in the near-term are classified as trading securities. Trading
securities are recorded at fair value, with the change in market value during
the period included in the statements of operations. Marketable debt securities
that NCT has the positive intent and ability to hold to maturity are classified
as held-to-maturity securities and recorded at amortized cost. Securities not
classified as either held-to-maturity or trading securities are classified as
available-for-sale securities. Available-for-sale securities are generally
recorded at market value, with the change in market value during the period
excluded from the statements of operations unless it is occasioned by an
other-than-temporary decline in value and recorded net of income taxes as a
separate component of stockholders' equity (capital deficit). NCT reviews
declines in value of its portfolio when general market conditions change or
specific information pertaining to an industry or individual company becomes
available. The factors considered in assessing whether a decline is
other-than-temporary include: our evaluation of the length of the time and the
extent to which the market value of the industry has been depressed or the
market value of the security has been less than cost; evaluation of financial
condition and near-term prospects of the business, including cash sufficiency
and new product developments; assessment of observable marketplace-determined
values and trends; and our intent and ability to retain our investment in the
business for a sufficient period of time to allow for any anticipated recovery
in market value.
At March 31, 2003, all of NCT's marketable securities have been deemed
available-for-sale securities and aggregated $0.1 million.
Goodwill, Patent Rights, Other Intangible Assets:
19
The excess of the consideration paid over the fair value of net assets
acquired in business combinations is recorded as goodwill. Goodwill is also
recorded by NCT upon the acquisition of some or all of the stock held by
minority stockholders of a subsidiary, except where such accounting is, in
substance, the purchase of licenses previously sold to such minority
stockholders or their affiliates. Effective January 1, 2002, goodwill and
intangibles with indefinite lives were no longer amortized.
Annually, or if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount, the company tests its goodwill for impairment. The company also
recognizes an impairment loss on goodwill acquired upon the acquisition of stock
held by minority shareholders of subsidiaries if the subsidiary's minority
interest has no carrying value, the subsidiary has a capital deficit and the
projected future operating results of the subsidiary are not positive.
Impairment of goodwill for the three months ended March 31, 2002 and 2003 was
$0.3 million and zero, respectively. At March 31, 2003, our goodwill, net was
$7.2 million.
Patent rights and other intangible assets with finite useful lives, which
includes the cost to acquire rights to patents and other rights under licenses,
are stated at cost and are amortized using the straight-line method over the
remaining useful lives, ranging from one to seventeen years. Amortization
expense for each of the three months ended March 31, 2002 and 2003 was $0.1
million.
NCT evaluates the remaining useful life of intangible assets with finite
useful lives each reporting period to determine whether events and circumstances
warrant a revision to the remaining period of amortization. If the evaluation
determines that the intangible asset's remaining useful life has changed, the
remaining carrying amount of the intangible asset is amortized prospectively
over that revised remaining useful life. The company evaluates its intangible
assets with finite useful lives for impairment whenever events or other changes
in circumstances indicate that the carrying amount may not be recoverable. The
testing for impairment includes evaluating the undiscounted cash flows of the
asset and the remaining period of amortization or useful life. The factors used
in evaluating the undiscounted cash flows include: current operating results,
projected future operating results and cash flows and any other material factors
that may effect the continuity or the usefulness of the asset. If impairment
exists, the intangible asset is written down to its fair value based upon
discounted cash flows. At March 31, 2003, our patent rights and other
intangibles, net were $1.4 million.
RESULTS OF OPERATIONS
Three months ended March 31, 2003 compared to three months ended March 31, 2002
Total revenue for the three months ended March 31, 2003 was $1.2 million
compared to $2.0 million for the same period in 2002, a decrease of $0.8
million, or 40%, reflecting decreases in each of our revenue sources. Total
costs and expenses for the three months ended March 31, 2003 was $8.0 million
compared to $8.3 million for the same period in 2002, a decrease of 3.6%, or
$0.3 million, primarily due to a $0.3 million reduction in goodwill impairment.
Technology licensing fees and royalties were $0.7 million for the three
months ended March 31, 2003 as compared to $1.1 million for the same period in
2002, a decrease of $0.4 million. The decrease was primarily due to a $0.6
million decrease in license fee revenue related to Teltran (as our revenue
recognition was completed during 2002) offset by an increase of $0.2 million in
royalties. Our recognition of license fee revenue for the three months ended
March 31, 2003 was primarily due to recognition of deferred revenue from the NXT
license. At March 31, 2003, our deferred revenue related to NXT and Fairpoint
was $4.3 million and $0.4 million, respectively. No additional cash will be
realized from our deferred revenue related to these licenses.
For the three months ended March 31, 2003, product sales were $0.5 million
compared to $0.9 million for three months ended March 31, 2002, a decrease of
$0.4 million, or 44.4%. The decrease was primarily due to the cessation of
operations of Artera Group International Limited in March 2002 for
under-performance. No Artera International product revenue was recognized for
the three months ended March 31, 2003 as compared to $0.2 million for the same
period in 2002. In addition, sales of NCT Hearing products decreased $0.1
million primarily due to decreased demand in the fast food market. NCT Hearing
products comprise approximately $0.4 million, or 78% of our product sales for
the three months ended March 31, 2003; communication products comprise
approximately $0.1 million, or 16%.
20
Gross profit on product sales, as a percentage of product sales, improved
to 55.5% for the three months ended March 31, 2003 from 43.1% for the three
months ended March 31, 2002, primarily due to the cessation of operations of
Artera Group International Limited in March 2002 for under-performance.
Excluding Artera International's contribution to gross profit for 2002, gross
profit improved to 55.6% from 48.8%. This improvement resulted primarily from
lower costs of sales due to lower sales volume.
Advertising/media revenue was $9,000 for the three months ended March 31,
2003 compared to $10,000 for the same period in 2002. Advertising/media revenue
is derived from the sale of audio and visual advertising in the Sight & Sound(R)
locations. The increase in revenue is due to new advertising contracts in health
venues offset by the decrease in revenue from non-health venues despite the
overall advertising market recession. Although constrained by our limited cash
resources, we anticipate increasing revenue from the Sight & Sound(R) locations
in health venues. For the three months ended March 31, 2003, revenue from health
venues was 100% of total advertising/media revenue as compared to zero for the
same period in 2002.
For the three months ended March 31, 2003, selling, general and
administrative expenses totaled $3.6 million as compared to $4.4 million for the
three months ended March 31, 2002, a decrease of $0.8 million, or 18.2%. This
decrease was due primarily to: (i) a $0.7 million decrease in salary and related
benefit costs attributable to a reduced workforce; (ii) a $0.3 million decrease
in legal and patent expenses; and (iii) a $0.1 million decrease which represents
an overall reduction in office related costs, such as telephone, and supplies.
These decreases were partially offset with a $0.3 million accrual for asserted
minimum royalties due to a licensor and a $0.1 million increase in consulting
expense primarily due to the increased non-cash charges from the issuance of
warrants and options.
For the three months ended March 31, 2003, research and development
expenditures totaled $0.9 million as compared to $1.0 million for the three
months ended March 31, 2002, a decrease of $0.1 million, or 10%. This decrease
was due primarily to a $0.1 million decrease in salary and related benefits
costs attributed to a reduced workforce.
Total costs and expenses include non-cash expenditures of $3.8 million in
the three months ended March 31, 2003 and $2.4 million in the three months ended
March 31, 2002. These expenditures included: (i) depreciation and amortization
of $0.2 million in the three months ended March 31, 2003 and $0.3 million in the
same period in 2002; (ii) interest expense of $2.9 million in the three months
ended March 31, 2003 (due to amortization of original issue discounts of $0.8
million; amortization of beneficial conversion features in convertible debt of
$0.9 million, amortization of additional debt issuance costs of $0.3 million,
and interest on convertible debt issued by the company of $0.9 million) and $1.2
million during the same period in 2002; and (iii) finance costs of $0.7 million
associated with non-registration of common shares and common shares underlying
convertible notes in the three months ended March 31, 2003 and $0.9 million
during the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
NCT has experienced substantial losses from operations since its inception,
which have been recurring and amounted to $266.4 million on a cumulative basis
through March 31, 2003. These losses, which include the costs for development of
technologies and products for commercial use, have been funded primarily from:
o the sale of our and our subsidiaries' common stock;
o the sale of our and our subsidiaries' preferred stock convertible into
common stock;
o issuance of our and our subsidiaries' convertible debt;
o technology licensing fees;
o royalties;
o product sales;
o advertising/media revenue; and
o engineering and development services.
Management believes that currently available funds will not be sufficient
to sustain NCT through the next six months. Such funds consist of available cash
and the funding derived from our revenue sources: technology licensing fees and
royalties, product sales, advertising/media and engineering development
services. Reducing operating expenses and capital expenditures alone may not be
sufficient, and continuation as a going concern is
21
dependent upon the level of funding realized from our revenue sources, all of
which are presently uncertain. In the event that funding from our revenue are
not realized as planned, then management believes additional working capital
financing must be obtained through the private placement or public offering of
additional equity of NCT or its subsidiaries in the form of common stock,
convertible preferred stock and/or convertible debt. Proceeds from sales of our
subsidiaries' securities are used for the benefit of the issuing subsidiary, and
there are generally contractual restrictions to that effect. There is no
assurance any financing is or would become available.
In the event that external financing is not available or timely, NCT would
have to substantially reduce its level of operations. These reductions could
have an adverse effect on NCT's relationships with its customers and suppliers.
Uncertainty exists with respect to the adequacy of current funds to support
NCT's activities until positive cash flow from operations can be achieved and
with respect to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise substantial doubt at March 31, 2003
about NCT's ability to continue as a going concern.
We recently entered into financing transactions because internally
generated funding sources were insufficient to maintain our operations. Such
financing transactions entered into by NCT to fund its business pursuits during
the three months ended March 31, 2003 are described in the notes to the
condensed consolidated financial statements. We have been primarily dependant
upon funding from Carole Salkind. Although we have no formal agreement, we
believe that additional funding will be available from Ms. Salkind in the
short-term. We have no assurance that the amount, timing and duration of the
funding will be adequate to sustain our business operations.
At March 31, 2003, the company's cash and cash equivalents aggregated $0.3
million. NCT's working capital deficit was $56.7 million at March 31, 2003,
compared to a deficit of $51.4 million at December 31, 2002, a $5.3 million
increase in working capital deficit. Current liabilities increased primarily due
to the issuance of convertible notes of $3.8 million (net of discounts) and
non-registration fees of $1.4 million. NCT is in default of $2.5 million of its
notes payable and $5.1 million of its convertible notes at March 31, 2003.
(in millions)
Total
Notes Convertible Indebtedness
Payable Notes In Default
------------ ------------- ---------------
Obligation to prior owner
of Web Factory $ 2.4 (a) $ - $ 2.4
Former Employees / Other 0.1 (a) - 0.1
------------ ------------- ---------------
Subtotal $ 2.5 $ - $ 2.5
------------ ------------- ---------------
6% Notes $ - $ 4.1 (a) $ 4.1
8% Notes - 1.0 (b) 1.0
------------ ------------- ---------------
Subtotal $ - $ 5.1 $ 5.1
------------ ------------- ---------------
Grand Total $ 2.5 $ 5.1 $ 7.6
============ ============= ===============
Footnotes:
----------
(a) Default due to nonpayment.
(b) Default due to cross default provision (default on other debt).
Operating Activities
Net cash used in operating activities for the three months ended March 31,
2003 was $2.4 million primarily due to funding the 2003 net loss, as adjusted to
reconcile to net cash. The operating cash flow characteristics of our technology
licensing efforts include the following:
o Our technology licensing activities have resulted in unpredictable streams
of revenue recognition, in part, due to the unpredictable timing of
executing new license agreements;
o Significant new license agreements usually result only after the
prospective licensee has made a lengthy review of our technologies;
22
o Receipt of licensing compensation and the related revenue recognition often
occur in different operating periods;
o From time to time, we accept licensing compensation in forms other than
cash, typically equity securities;
o Assets acquired in the past, as compensation for license agreements, have
lost value rapidly resulting in material write-offs;
o Most of our licensing agreements provide for one-time license fees and for
long-term royalty streams; and
o To date, most of our licensing activities have resulted in one-time
licensing fees and insignificant long-term royalty streams.
Our net accounts receivable increased to $0.4 million at March 31, 2003
from $0.2 million at December 31, 2002. The increase in net accounts receivable
was primarily due to an increase in royalties receivable.
Our deferred revenue balance at March 31, 2003 was $5.2 million, $4.3
million of which was attributed to NXT and $0.4 million of which was attributed
to Fairpoint. No additional cash is expected from our deferred revenue balance.
Our NXT deferred revenue balance originated at the value of the securities
received from our licensee, which was not realized in cash because the value of
the underlying securities declined before we sold such securities.
Investing Activities
Net cash provided by investing activities was less than $0.1 million for
the three-month period ended March 31, 2003 due to purchase of capital
equipment.
In addition to available cash and cash equivalents, the company views its
available-for-sale securities as additional sources of liquidity. At each of
March 31, 2003 and December 31, 2002, the company's available-for-sale
securities had approximate fair market values of $0.1 million. The majority of
these securities represent investments in technology companies and, accordingly,
the fair market values of these securities are subject to substantial price
volatility, and, in general, have suffered a decline. In addition, the
realizable value of these securities is subject to market and other conditions.
Financing Activities
Net cash provided by financing activities was $1.9 million for the
three-month period ended March 31, 2003 and was primarily due to the issuance
and sale of convertible notes.
At March 31, 2003, the company's short term debt was $29.4 million,
(principally comprised of $26.2 million of face value of outstanding convertible
notes and $3.2 million of outstanding notes payable), shown net of discounts of
approximately $3.9 million on the condensed consolidated balance sheet, compared
to $26.9 million of short term debt at December 31, 2002. The cash proceeds from
debt issued in 2003 were primarily used for general corporate purposes.
During the three months ended March 31, 2003, NCT issued an aggregate of
$7.1 million of convertible notes to Carole Salkind, as consideration for $2.2
million of cash and the rollover of $4.1 million in principal of matured
convertible notes, $0.4 million of interest, and $0.4 million of default
penalties (10% of the principal in default).
As of March 31, 2003, we are in default (primarily from non-payment) on
$7.6 million of our indebtedness, including $2.5 million of notes payable and
$5.1 million of convertible notes (refer to Notes 4 and 5 - notes to the
condensed consolidated financial statements for disclosure of material
defaults). NCT expects that from time to time outstanding short-term debt may be
replaced with new short or long-term borrowings. Although we believe that we can
continue to access the capital markets in 2003 on acceptable terms and
conditions, its flexibility with regard to long term financing activity could be
limited by: (i) the liquidity of our common stock on the open market; (ii) our
current level of short term debt; and (iii) our credit ratings. In addition,
many of the factors that affect NCT's ability to access the capital markets,
such as the liquidity of the overall capital markets and the current state of
the economy, are outside of NCT's control. There can be no assurances that NCT
will continue to have access to the capital markets on favorable terms.
23
From time to time, we may change the terms of options, warrants or other
securities. In some instances, this has been to generate cash.
The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
Capital Expenditures
NCT 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:
o dependable sources of electronic and other components, which leverages on
their purchasing power, provides important cost savings and accesses the
most advanced technologies;
o utilization of the manufacturing capacity of our allies, enabling us to
integrate our technology into products with limited capital investment; and
o access to well-established channels of distribution and marketing
capability of leaders in several market segments.
At March 31, 2003, we have a reasonable expectation of installing our Sight
& Sound(R) system within additional Barnes & Noble College Bookstores. At March
31, 2003, we have 35 of the 406 Barnes & Noble College Bookstores operating our
Sight & Sound(R) system, and as negotiated and as our capital resources allow,
may install the Sight & Sound(R) system in additional stores. Our average cost
for outfitting a store is approximately $18,000. We have not identified the
source of funding to proceed with these installations. We have no assurance that
sufficient capital will become available.
Other than this, there were no material commitments for capital
expenditures as of March 31, 2003, and no material commitments are anticipated
in the near future.
24
ITEM 3. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NCT's primary market risk exposures include fluctuations in interest rates
and foreign exchange rates. NCT is exposed to short-term interest rate risk on
some of its obligations. We do not use derivative financial instruments to hedge
cash flows for such obligations. In the normal course of business, NCT employs
established policies and procedures to manage these risks.
Based upon a hypothetical 10% proportionate increase in interest rates from
the average level of interest rates during the last twelve months, and taking
into consideration commissions paid to selling agents, growth of new business
and the expected borrowing level of variable-rate debt, the expected effect on
net income related to our financial instruments would be immaterial.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the company carried
out an evaluation, under the supervision and with the participation of the
company's management, including the company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon that evaluation, the
company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
company (including its consolidated subsidiaries) required to be included in
this quarterly report on Form 10-Q.
(b) Changes in Internal Controls
There were no significant changes in the company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
25
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of our legal proceedings, see Note 10 - Litigation
included in the notes to the condensed consolidated financial statements herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities by NCT Group, Inc. and its Subsidiaries
- --------------------------------------------------------------------------------
The table below identifies the unregistered sales of our securities to
purchasers from January 1, 2003 through March 31, 2003, as well as the amount
and nature of the consideration paid by each purchaser. The issuance of these
securities, except as otherwise indicated, was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, as a sale by an issuer
not involving a public offering.
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- ------------------------------------------------------------------------------------------------------------------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- ------------------------------------------------------------------------------------------------------------------------------------
1/15/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/15/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.041 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/23/03 NCT Convertible Note ($2,747,634.92 principal Carole Salkind Cancellation and
amount) surrender of
$2,231,265.01 convertible
note dated 1/11/02 along
with accrued interest and
default penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/23/03 Warrant for 11,775,579 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.04 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/23/03 Options to acquire 23,000,000 shares of NCT common Inframe, Inc. Exercisable for cash at
stock $0.042 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/30/03 NCT Convertible Note ($350,000 principal amount) Carole Salkind $350,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/30/03 Warrant for 1,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.041 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
2/11/03 NCT Convertible Note ($1,252,592.41 principal Carole Salkind Cancellation and
amount) surrender of $650,000
convertible note dated
1/25/02 along with
accrued interest and
default penalty and
$450,000 cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
2/11/03 Warrant for 5,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.04 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
2/11/03 Options to acquire 7,000,000 shares of NCT common Avant Interactive, Inc. Exercisable for cash at
stock $0.04 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/4/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/4/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.035 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/5/03 3,033,981 shares of NCT common stock Balmore S.A. Exchange for $125,000
Artera Group, Inc.
January 9, 2001
convertible note
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/12/03 Options to acquire 13,500,000 shares of NCT common Avant Interactive, Inc. Exercisable for cash at
stock $0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
26
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- ------------------------------------------------------------------------------------------------------------------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- ------------------------------------------------------------------------------------------------------------------------------------
3/13/03 NCT Convertible Note ($980,802.25 principal amount) Carole Salkind Cancellation and
surrender of $827,412.26
convertible note dated
2/27/02 along with
accrued interest and
default penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/13/03 NCT Convertible Note ($864,615.56 principal amount) Carole Salkind Cancellation and
surrender of $350,000
convertible note dated
3/1/02 along with accrued
interest and default
penalty and $450,000 cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/13/03 Warrant for 4,250,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/13/03 Warrant for 3,750,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3(a) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series H Convertible Preferred Stock of NCT Group, Inc.
as filed in the office of the Secretary of State of the State of
Delaware on March 7, 2003.
4(a) Option granted to Inframe, Inc. dated January 23, 2003 for an
aggregate of 23,000,000 shares of NCT common stock at an exercise
price of $0.042 per share, incorporated herein by reference to Exhibit
4 (bo) of the company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed on April 4, 2003.
4(b) Option granted to Avant Interactive, Inc. dated February 11, 2003 for
an aggregate of 7,000,000 shares of NCT common stock at an exercise
price of $0.04 per share, incorporated herein by reference to Exhibit
4 (bp) of the company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed on April 4, 2003.
4(c) Option granted to Avant Interactive, Inc. dated March 12, 2003 for an
aggregate of 13,500,000 shares of NCT common stock at an exercise
price of $0.031 per share, incorporated herein by reference to Exhibit
4 (bq) of the company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed on April 4, 2003.
4(d) Warrant dated January 15, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.041 per share, incorporated herein by reference to Exhibit 4(by)
to NCT's Pre-Effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(e) Warrant dated January 23, 2003 issued to Carole Salkind for the
purchase of 11,775,579 shares of NCT common stock at a purchase price
of $0.04 per share, incorporated herein by reference to Exhibit 4(bz)
to NCT's Pre-Effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(f) Warrant dated January 30, 2003 issued to Carole Salkind for the
purchase of 1,500,000 shares of NCT common stock at a purchase price
of $0.041 per share, incorporated herein by reference to Exhibit 4(ca)
to NCT's Pre-Effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(g) Warrant dated February 11, 2003 issued to Carole Salkind for the
purchase of 5,500,000 shares of NCT common stock at a purchase price
of $0.04 per share, incorporated herein by reference to Exhibit 4(cb)
to NCT's Pre-Effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(h) Warrant dated March 4, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.035
per share, incorporated herein by reference to Exhibit 4(cc) to NCT's
Pre-Effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(i) Warrant dated March 13, 2003 issued to Carole Salkind for the purchase
of 4,250,000 shares of NCT common stock at a purchase price of $0.031
per share, incorporated herein by reference to Exhibit 4(cd) to NCT's
Pre-Effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(j) Warrant dated March 13, 2003 issued to Carole Salkind for the purchase
of 3,750,000 shares of NCT common stock at a purchase price of $0.031
per share, incorporated herein by reference to Exhibit 4(ce) to NCT's
Pre-Effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
28
4(k) Warrant dated April 2, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.029
per share, incorporated herein by reference to Exhibit 4(cf) to NCT's
Pre-Effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(l) Letter Agreement dated April 7, 2003 amending the vesting terms of a
December 6, 2002 warrant issued to Alpha Capital Aktiengesellschaft.
4(m) Warrant dated April 11, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.031
per share.
4(n) Warrant dated April 21, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.037
per share.
10(a) License Agreement dated January 6, 2003 (October 1, 2002 was the date
inadvertently indicated on our Form 10-K) between NCT Group, Inc. and
Stop Noise, Inc., incorporated herein by reference to Exhibit 10(aj)
of the company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed on April 4, 2003.
10(b) Secured Convertible Note in principal amount of $450,000 dated
January 15, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(at) of the company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed on April 4,
2003.
10(c) Secured Convertible Note in principal amount of $2,747,635 dated
January 23, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(au) of the company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed on April 4,
2003.
10(d) Secured Convertible Note in principal amount of $350,000 dated
January 30, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(av) of the company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed on April 4,
2003.
10(e) Secured Convertible Note in principal amount of $1,252,592 dated
February 11, 2003 issued by the company to Carole Salkind,
incorporated herein by reference to Exhibit 10(aw) of the company's
Annual Report on Form 10-K for the year ended December 31, 2002 filed
on April 4, 2003.
10(f) Settlement Agreement dated December 31, 2002 between West Nursery
Land Holding Limited Partnership and the company approved by the court
on March 3, 2003.
10(g) Secured Convertible Note in principal amount of $450,000 dated March
4, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(ax) of the company's Annual Report on Form
10-K for the year ended December 31, 2002 filed on April 4, 2003.
10(h) Secured Convertible Note in principal amount of $980,802 dated March
13, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(ay) of the company's Annual Report on Form
10-K for the year ended December 31, 2002 filed on April 4, 2003.
10(i) Secured Convertible Note in principal amount of $864,616 dated March
13, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(az) of the company's Annual Report on Form
10-K for the year ended December 31, 2002 filed on April 4, 2003.
10(j) Secured Convertible Note in principal amount of $450,000 dated April
2, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(cr) to NCT's Pre-Effective Amendment No. 7
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on April 18, 2003.
10(k) Settlement Agreement dated December 3, 2002 among Mesa Partners,
Inc., the company, and Distributed Media Corporation approved by the
court on April 8, 2003. 10(l) Exchange Rights and Release Agreement
dated April 10, 2003 among the company, Pro Tech Communications, Inc.,
Alpha Capital Aktiengesellschaft, Austost Anstalt Schaan, Balmore,
S.A., and Libra Finance, S.A.
29
10(m) Secured Convertible Note in principal amount of $450,000 dated April
11, 2003 issued by the company to Carole Salkind.
10(n) Secured Convertible Note in principal amount of $450,000 dated April
21, 2003 issued by the company to Carole Salkind.
99(a) Certification of Form 10-Q for the quarterly period ended March 31,
2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------------------------------
(b) Reports filed on Form 8-K:
On April 4, 2003, the company filed a report on Form 8-K, dated April
4, 2003 disclosing financial results for the quarter and year ended
December 31, 2002.
On May 5, 2003, the company filed a report on From 8-K, dated April
21, 2003 disclosing the agreement between our subsidiary Artera Group, Inc.
and Avaya Inc.
30
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
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ Cy E. Hammond
----------------------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: May 15, 2003
31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Parrella, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NCT Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ MICHAEL J. PARRELLA
----------------------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
32
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
I, Cy E. Hammond, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NCT Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ CY E. HAMMOND
----------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
33