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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 June 30, 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 August 12, 2003, was
547,278,861.
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at December 31, 2002 and June 30, 2003 (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited) and Condensed Consolidated
Statements of Comprehensive Loss (Unaudited) for the Three and Six Months
Ended June 30, 2002 and 2003 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months
Ended June 30, 2002 and 2003 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative or Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
Part II Other Information
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 39
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Notes 1 and 6)
(in thousands, except share data)
December 31, June 30,
2002 2003
------------------ --------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 806 $ 496
Investment in available-for-sale marketable securities 102 93
Accounts receivable, net 245 271
Inventories, net 622 517
Other current assets (includes $108, due from officer) 358 342
------------------ --------------------
Total current assets 2,133 1,719
Property and equipment, net 954 738
Goodwill, net 7,184 7,184
Patent rights and other intangibles, net 1,519 1,371
Other assets 1,779 1,710
------------------ --------------------
$ 13,569 $ 12,722
================== ====================
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 4,648 $ 3,079
Accrued expenses (includes $1,097 and $949, respectively, related parties) 16,916 20,092
Notes payable 3,540 3,158
Current maturities of convertible notes (includes $14,206 and $21,193,
respectively, related parties) 18,460 25,846
Deferred revenue 2,877 3,230
Other current liabilities 7,101 7,219
------------------ --------------------
Total current liabilities 53,542 62,624
------------------ --------------------
Long-term liabilities:
Deferred revenue 2,675 1,605
Convertible notes 779 235
Other liabilities 1,557 1,564
------------------ --------------------
Total long-term liabilities 5,011 3,404
------------------ --------------------
Commitments and contingencies
Minority interest in consolidated subsidiaries 8,689 8,739
------------------ --------------------
Capital deficit :
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Convertible series H preferred stock, issued and outstanding, 1,800 shares, 18,377 18,734
Common stock, $.01 par value, 645,000,000 shares authorized:
issued and outstanding 483,474,345 and 526,104,959 shares, respectively 4,835 5,261
Additional paid-in capital 180,899 188,745
Accumulated other comprehensive loss (516) (529)
Accumulated deficit (259,564) (274,256)
Common stock payable, 29,248,170 and zero shares, respectively 2,296 -
------------------ --------------------
Total capital deficit (53,673) (62,045)
------------------ --------------------
$ 13,569 $ 12,722
================== ====================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(in thousands, except per share amounts)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2003 2002 2003
------------ ------------ ------------ -----------
REVENUE:
Technology licensing fees and royalties $ 1,342 $ 605 $ 2,453 $ 1,311
Product sales, net 703 409 1,580 876
Advertising/media 2 11 12 20
Engineering and development services 8 25 24 25
------------ ------------ ------------ -----------
Total revenue $ 2,055 $ 1,050 $ 4,069 $ 2,232
------------ ------------ ------------ -----------
COSTS AND EXPENSES:
Cost of product sales 405 180 904 388
Cost of advertising/media - 1 8 4
Cost of engineering and development services 4 - 4 -
Selling, general and administrative (includes $260, $1,564, $1,087,
and $2,814, respectively, related party consulting expenses) 2,892 3,470 7,279 7,042
Research and development 1,014 903 2,060 1,832
Impairment of goodwill - - 300 -
Repurchased licenses, net (related party) 9,199 - 9,199 -
Other operating income (95) - (203) (22)
------------ ------------ ------------ -----------
Total operating costs and expenses 13,419 4,554 19,551 9,244
Non-operating items:
Other (income) expense, net (includes related party expenses
of $248, $354, $521 and $472, respectively) 935 1,019 1,866 1,431
Interest expense, net (includes related party expenses
of $987, $2,436, $1,653 and $4,776, respectively) 1,429 3,382 2,628 6,249
------------ ------------ ------------ -----------
Total costs and expenses 15,783 8,955 24,045 16,924
------------ ------------ ------------ -----------
NET LOSS $ (13,728) $ (7,905) $ (19,976) $ (14,692)
Less: Beneficial conversion features (Note 8) 16 - 41 -
Preferred stock dividends (Note 8) 621 825 1,227 1,788
------------ ------------ ------------ -----------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (14,365) $ (8,730) $ (21,244) $ (16,480)
============ ============ ============ ===========
Basic and diluted loss per share attributable to
common shareholders $ (0.03) $ (0.02) $ (0.05) $ (0.03)
============ ============ ============ ===========
Weighted average common shares outstanding -
basic and diluted 434,881 523,993 430,386 518,841
============ ============ ============ ===========
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three months ended June 30, Six months ended June 30,
------------ ------------ ------------ -----------
2002 2003 2002 2003
------------ ------------ ------------ -----------
NET LOSS $ (13,728) $ (7,905) $ (19,976) $ (14,692)
Other comprehensive income (loss):
Currency translation adjustment (1) (10) 21 (4)
Unrealized loss on marketable securities (346) (10) (633) (9)
------------ ------------ ------------ -----------
COMPREHENSIVE LOSS $ (14,075) $ (7,925) $ (20,588) $ (14,705)
============ ============ ============ ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 3)
(Unaudited)
(in thousands)
Six months ended June 30,
---------------------------------------------
2002 2003
-------------------- --------------------
Cash flows from operating activities:
Net loss $ (19,976) $ (14,692)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 602 451
Common stock, warrants and options issued as consideration for:
Compensation 169 -
Operating expenses (includes $982 and $2,770 of related party consulting,
respectively) 1,463 2,851
Provision for inventory (270) (89)
Provision for doubtful accounts and uncollectible amounts 63 -
Loss on disposition of fixed assets - 33
Finance costs associated with non-registration of common shares 1,812 1,418
Default penalty on notes (related party) 25 472
Amortization of discounts on notes (includes $459 and $2,099 related party
amounts, respectively) 639 2,731
Amortization of beneficial conversion feature on convertible notes (includes
$840 and $1,807 related party amounts, respectively) 908 1,887
Repurchased licenses, net (related party) 9,199 -
Impairment of goodwill 300 -
Costs of exiting activities 303 -
Realized loss on fair value of warrant 130 1
Settlement of debt - (231)
Minority interest loss (203) -
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 186 (26)
Decrease in inventories 618 194
Decrease in other assets 131 84
Increase in accounts payable and accrued expenses 1,389 192
Decrease in other liabilities and deferred revenue (2,492) (599)
-------------------- --------------------
Net cash used in operating activities $ (5,004) $ (5,323)
-------------------- --------------------
Cash flows from investing activities:
Capital expenditures $ (67) $ (120)
Proceeds from sale of capital equipment 11 -
-------------------- --------------------
Net cash used in investing activities $ (56) $ (120)
-------------------- --------------------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable, net (Notes 5 and 6) $ 5,074 $ 5,410
Sale of preferred stock, net 110 -
Repayments of notes (256) (273)
-------------------- --------------------
Net cash provided by financing activities $ 4,928 $ 5,137
-------------------- --------------------
Effect of exchange rate changes on cash $ (3) $ (4)
-------------------- --------------------
Net decrease in cash and cash equivalents (135) (310)
Cash and cash equivalents - beginning of period 567 806
-------------------- --------------------
Cash and cash equivalents - end of period $ 432 $ 496
==================== ====================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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 for the three and six months ended June 30, 2003 and cash flows for
the six months ended June 30, 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 on 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 $274.3 million through June 30, 2003. Cash and
cash equivalents amounted to $0.5 million at June 30, 2003, decreasing from $0.8
million at December 31, 2002. A working capital deficit of $60.9 million exists
at June 30, 2003. NCT is in default of $2.9 million of its notes payable and
$4.7 million of its convertible notes at June 30, 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 June 30, 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.
2. Recent Accounting Prouncements:
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 requires certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities and
equity to be classified as liabilities. The provisions of SFAS No. 150 are
effective for financial instruments entered into or modified after May 31, 2003
and to all other
6
instruments that exist as of the beginning of the first interim financial
reporting period commencing after June 15, 2003. Effective July 1, 2003, we will
adopt SFAS No. 150 and do not expect a material impact on our financial
statements.
3. 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 loss of the company's available-for-sale securities (in
thousands):
December 31, 2002 June 30, 2003
-------------------------------------------- ------------------------------------
Cost Realized Unrealized Market Cost Unrealized Market
Basis Loss Loss Value Basis Loss Value
-------- --------- ---------- -------- --------- ---------- -----------
Available-for-sale:
ITC $ 798 $ (689) $ (15) $ 94 $ 94 $ (9) $ 85
Teltran 84 (76) - 8 8 - 8
-------- --------- ---------- -------- --------- ---------- -----------
Totals $ 882 $ (765) $ (15) $ 102 $ 102 $ (9) $ 93
======== ========= ========== ======== ========= ========== ===========
The company reviews declines in the value of its investments 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, June 30,
2002 2003
----------------- ---------------
Technology license fees and royalties $ 268 $ 314
Joint ventures and affiliates 34 34
Other receivables 283 263
----------------- ---------------
$ 585 $ 611
Allowance for doubtful accounts (340) (340)
----------------- ---------------
Accounts receivable, net $ 245 $ 271
================= ===============
Inventories comprise the following (in thousands):
December 31, June 30,
2002 2003
-------------- -------------
Finished goods $ 799 $ 646
Components 227 186
-------------- -------------
$ 1,026 $ 832
Reserve for obsolete and slow moving inventory (404) (315)
-------------- -------------
Inventories, net $ 622 $ 517
============== =============
7
Other current assets comprise the following (in thousands):
December 31, June 30,
2002 2003
----------------- --------------
Notes receivable $ 1,000 $ 1,000
Due from officer 108 108
Other 250 234
----------------- --------------
$ 1,358 $ 1,342
Reserve for uncollectible amounts (1,000) (1,000)
----------------- --------------
Other current assets $ 358 $ 342
================= ==============
Other assets (long-term) comprise the following (in thousands):
December 31, June 30,
2002 2003
----------------- --------------
Marketable ITC securities $ 1,320 $ 1,320
Advances and deposits 75 75
Deferred charges 353 283
Other 31 32
----------------- --------------
Other assets (classified as long-term) $ 1,779 $ 1,710
================= ==============
Property and equipment comprise the following (in thousands):
December 31, June 30,
2002 2003
---------------- --------------
Machinery and equipment $ 2,027 $ 2,082
Furniture and fixtures 642 650
Leasehold improvements 972 974
Tooling 631 632
Other 478 479
---------------- --------------
$ 4,750 $ 4,817
Accumulated depreciation (3,796) (4,079)
---------------- --------------
Property and equipment, net $ 954 $ 738
================ ==============
Accrued expenses comprise the following (in thousands):
December 31, June 30,
2002 2003
---------------- --------------
Non-registration fees $ 7,005 $ 8,431
Interest 2,214 3,053
Judgments 2,124 2,124
Default penalties 288 -
Other 5,285 6,484
---------------- --------------
Accrued expenses $ 16,916 $ 20,092
================ ==============
8
Deferred revenue comprise the following (in thousands):
December 31, June 30,
2002 2003
--------------- -------------
NXT $ 4,815 $ 3,745
FairPoint 143 479
Other 594 611
--------------- -------------
$ 5,552 $ 4,835
Less: amount classified as current (2,877) (3,230)
--------------- -------------
Deferred revenue (classified as long-term) $ 2,675 $ 1,605
=============== =============
As of June 30, 2003, we expect to realize less than $0.1 million of cash
from revenue that has been deferred.
FairPoint Broadband, Inc., a wholly owned subsidiary of FairPoint
Communications, Inc., and Artera Group, Inc. executed an exclusive marketing
license on October 11, 2002 whereby FairPoint will serve as the exclusive master
distributor of Artera Turbo(TM) to certain rural local exchange carriers,
incumbent local exchange carriers and Internet service providers in the United
States and Canada and will have other non-exclusive rights with respect to
Artera Turbo. The terms of the agreement include a license fee (approximately
$2.0 million to be paid in cash in 24 monthly installments) and per unit
royalties based upon subscribers. This agreement has a ten-year term. FairPoint
may terminate the agreement at any time by giving advance written notice of 30
days. If FairPoint terminates the agreement during the first 24 months of the
agreement, FairPoint would not be required to pay any remaining license fee that
would otherwise accrue after the effective date of termination by FairPoint. In
conjunction with this agreement, FairPoint Communications, Inc., was issued a
five-year warrant to purchase 2.0 million shares of NCT common stock at an
exercise price of $0.15 per share.
On May 23, 2003, FairPoint Broadband and Artera entered into a memorandum
of understanding noting their mutual intent to amend, amend and restate or enter
into a new agreement to supersede the October 11, 2002 exclusive marketing
license agreement with respect to the royalties FairPoint will be obligated to
pay Artera and other matters. The memorandum of understanding provides that if
Artera and FairPoint do not execute a new agreement by June 30, 2003, then, from
July 1, 2003 to July 15, 2003, either party may terminate the October 11, 2002
license agreement via written notice to the other. If such termination occurs,
Artera shall be deemed to have waived its right to license fees (but not
royalties) from FairPoint for the period after April 30, 2003. The parties did
not execute a new agreement by June 30, 2003. Neither Artera nor Fairpoint
Broadband gave written notice of termination of the October 11, 2002 exclusive
marketing license agreement by July 15, 2003. Negotiations are ongoing for a new
agreement to amend or replace the October 11, 2002 agreement. We have recorded
approximately $58,900 of revenue (through April 30, 2003 for the Fairpoint
license fee portion of the October 11, 2002 agreement) which has been reduced to
zero for a portion of the value of the warrant for the six months ended June 30,
2003 in accordance with EITF 01-9. The remaining Fairpoint license fee is
reflected as deferred revenue at June 30, 2003.
Other current liabilities comprise the following (in thousands):
December 31, June 30,
2002 2003
-------------- -------------
License reacquisition payable $ 4,000 $ 4,000
Development fee payable 650 650
Royalty payable 1,695 1,680
Due to selling shareholders of Theater
Radio Network 557 557
Due to L&H 100 100
Loan advance by investor 65 230
Other 34 2
-------------- -------------
Other current liabilities $ 7,101 $ 7,219
============== =============
9
Other liabilities (long-term) comprise the following (in thousands):
December 31, June 30,
2002 2003
------------- -------------
Due to ITC $ 1,422 $ 1,422
Other 135 142
------------- -------------
Other liabilities (classified as long-term) $ 1,557 $ 1,564
============= =============
Statements of Operations Information:
- ------------------------------------
Operating other income comprise the following (in thousands):
Three months ended June 30, Six months ended June 30,
------------------------------------ ------------------------------------
2002 2003 2002 2003
--------------- ----------------- --------------- -----------------
Minority share of loss in subsidiary $ (95) $ - $ (203) $ -
Settlement of accounts payable - - - (18)
Other - - - (4)
--------------- ----------------- --------------- -----------------
Total operating other income $ (95) $ - $ (203) $ (22)
=============== ================= =============== =================
Non-operating other (income) expense, net comprise the following
(in thousands):
Three months ended June 30, Six months ended June 30,
------------------------------------ ------------------------------------
2002 2003 2002 2003
--------------- ----------------- --------------- -----------------
Finance costs associated with non-registration
of common shares $ 903 $ 690 $ 1,812 $ 1,418
Settlement of notes payable - (7) - (27)
Litigation settlement (Note 11) - - - (429)
Depreciation in fair value of warrant 136 1 130 1
Default penalties on debt - 354 25 472
Other (104) (19) (101) (4)
--------------- ----------------- --------------- -----------------
Total non-operating other (income) expense, net $ 935 $ 1,019 $ 1,866 $ 1,431
=============== ================= =============== =================
We include losses from our majority-owned subsidiaries in our condensed
consolidated statements of operations exclusive of amounts attributable to
minority shareholders' common equity interests only up to the basis of such
minority shareholders' interests. Losses in excess of that amount are borne by
NCT. Such amounts from our Pro Tech Communications, Inc. subsidiary borne by NCT
for the three and six months ended June 30, 2003 were approximately $44,000 and
$91,000, respectively. Future earnings of our majority-owned subsidiaries
otherwise attributable to minority shareholders' interests will be allocated
again to minority shareholders only after future earnings are sufficient to
recover the cumulative losses previously absorbed by NCT ($2.1 million at June
30, 2003).
Supplemental Cash Flow Disclosures:
- ----------------------------------
(in thousands)
Six months ended June 30,
--------------------------------------------
Supplemental disclosures of cash flow information: 2002 2003
--------------------- -------------------
Cash paid during the year for:
Interest $ 6 $ 15
===================== ===================
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding loss on available-for-sale securities $ (633) $ (9)
===================== ===================
Issuance of common stock upon conversion of convertible notes $ 375 $ -
===================== ===================
Issuance of common stock upon exchange of convertible notes of subsidiary $ 25 $ 460
===================== ===================
Issuance of common stock to fulfill common stock payable obligation $ - $ 2,296
===================== ===================
Issuance of common stock to settle litigation $ - $ 125
===================== ===================
Issuance of series H preferred stock in exchange for previously accrued
acquisition of subsidiary $ 14,000 $ -
===================== ===================
Property and equipment financed through capitalized leases and notes payable $ 15 $ -
===================== ===================
10
4. Stockholders' Capital Deficit:
The changes in stockholders' capital deficit during the six months ended
June 30, 2003 were as follows (in thousands):
Series H Accumulated
Convertible Additional Other Accumu- Common
Preferred Stock Common Stock Paid-in Comprehensive lated Stock
----------------- ---------------
Shares Amount Shares Amount Capital Loss Deficit Payable Total
----------------- --------------- ----------- ------------- -------- -------- --------
Balance at December 31, 2002 2 $18,377 483,474 $4,835 $180,899 $ (516) $(259,564) $ 2,296 $(53,673)
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - 357 - - (357) - - - -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - - - (176) - - - (176)
Charges for the non-registration of the
underlying shares of NCT to subsidiary
preferred shareholders - - - - (1,255) - - - (1,255)
Reversal of redemption adjustment
on subsidiary preferred - - - - 125 - - - 125
Exchange of subsidiary convertible debt
for common stock - - 11,061 111 349 - - - 460
Shares issued for settlement
obligations/prepayments - - 31,570 315 2,106 - - (2,296) 125
Warrants issued in conjunction with
convertible debt - - - - 2,263 - - - 2,263
Beneficial conversion feature on
convertible debt - - - - 1,955 - - - 1,955
Net loss - - - - - - (14,692) - (14,692)
Accumulated other comprehensive
income (loss) - - - - - (13) - - (13)
Compensatory stock options and warrants - - - - 2,851 - - - 2,851
Expenses related to sale of stock - - - - (15) - - - (15)
----------------- --------------- ----------- ------------- -------- -------- --------
Balance at June 30, 2003 2 $18,734 526,105 $5,261 $188,745 $ (529) $(274,256) $ - $(62,045)
================= =============== =========== ============= ======== ======== ========
11
5. Notes Payable:
(in thousands)
December 31, June 30,
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; interest accrues at 4% per annum above the base rate
of National Westminister Bank plc
Note due investor (a) 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 171 157
Interest at 8.5% per annum; monthly payments (including interest)
of $3.5 through May 2003, remainder matures June 27, 2003.
Remainder rolled into note bearing interest at 8.5% per annum;
monthly payments (including interest) of $3.5 through May 2004,
remainder matures June 27, 2004.
Top Source Automotive 204 -
Default interest rate accrues at two times prime;
included in settlement (see Note 11)
Notes due former employees (a) 116 100
$100 bears interest at 8.25% per annum, compounded annually
Other financings 284 102
Interest ranging from 7% to 9% per annum;
$35 due July 15, 2003; $67 all other
--------------------- ---------------------
$ 3,574 $ 3,158
Less: unamortized debt discounts (34) -
--------------------- ---------------------
$ 3,540 $ 3,158
===================== =====================
Footnote:
--------
(a) Notes payable are in default due to nonpayment.
12
6. Convertible Notes:
(in thousands)
December 31, June 30,
2002 2003
------------------ ------------------
Issued to Carole Salkind - related party (a) $ 18,064 $ 24,764
Weighted average effective interest rate of 42.9% 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 $0.029 - $0.082 or exchangeable for common stock of NCT
subsidiaries except Pro Tech; maturing by quarter as follows:
September 30, 2003 $ 6,185
December 31, 2003 10,134
March 31, 2004 7,095
June 30, 2004 1,350
8% Convertible Notes (b) 976 1,211
Weighted average effective interest rate of 23.2% 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
April 22, 2005 235
6% Convertible Notes (c) 4,228 3,768
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 $ 1,862
April 4, 2002 575
May 25, 2002 81
June 29, 2002 1,250
------------------ ------------------
$ 23,268 $ 29,743
Less: unamortized debt discounts (4,029) (3,662)
Less: amounts classified as long-term (779) (235)
------------------ ------------------
$ 18,460 $ 25,846
================== ==================
Footnotes:
- ---------
(a) During the six months ended June 30, 2003, NCT issued an aggregate of $14.3
million of convertible notes to Carole Salkind, who is a shareholder of NCT, an
accredited investor and the spouse of a former director of NCT. During the six
months ended June 30, 2003, we defaulted on payment of notes dated January 11,
2002, January 25, 2002, February 27, 2002, March 1, 2002, May 2, 2002, May 29,
2002, June 2, 2002 and November 21, 2002 for an aggregate principal amount of
$7.6 million. The principal on these notes was rolled into new notes in 2003
along with $0.8 million of default penalties, $0.7 million of accrued interest
and an aggregate of $5.2 million new funding from Carole Salkind. During the six
months ended June 30, 2003, we recorded original issue discounts of $1.7 million
to the notes based upon the relative fair values of the debt and warrants
issued to Ms. Salkind (see Note 8). In addition, beneficial conversion features
totaling $1.9 million have been recorded as a discount to the notes. These
discounts are being amortized over the term of the related notes. For the six
months ended June 30, 2003, $3.9 million of amortization related to these
discounts is classified as interest expense in our condensed consolidated
statement of operations. Unamortized discounts of $3.6 million have been
reflected as a reduction to the convertible notes in our condensed consolidated
balance sheet as of June 30, 2003. The convertible note dated February 27, 2002
for $0.8 million was collateralized by an interest in specific assets of our
subsidiary, NCT Video. This interest was rolled over into a convertible note
dated March 13, 2003 for $1.0 million during the first quarter of 2003. The
default provisions in these notes impose a penalty of 10% of the principal
amount in default and default interest from the date of default at the stated
interest rate plus 5%. The defaults of $2.9 million at December 31, 2002
13
(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 the first quarter of 2003.
(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; a note totaling $0.4
million is convertible at $0.0647 per share; and a note totaling $0.2 million is
convertible at $0.04 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 six months
ended June 30, 2003, $0.1 million 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 June 30, 2003. We did not fulfill registration obligations and recorded
finance costs associated with non-registration of common shares of $0.1 million
for the six months ended June 30, 2003 (see Note 3 - Non-operating other
(income) expense, net). The company did not repay convertible notes aggregating
approximately $26,000 upon maturity and has recorded default interest at 18%
from the respective dates of default. In addition, on convertible notes
aggregating approximately $1.0 million, we are in default due to a cross default
clause.
(c) Principal of $0.5 million was exchanged for NCT stock during the six months
ended June 30, 2003 (see Note 8). 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 finance costs associated
with non-registration of common shares of $1.3 million for the six months ended
June 30, 2003 (see Note 3 - Non-operating other (income) expense, net). The
aggregate outstanding principal amount of approximately $3.8 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.
7. 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 during the commitment period, as defined, we must pay Crammer
Road, in immediately available funds, an amount as described in the agreement
(the maximum would be $500,000).
8. Capital Stock:
Authorized Capital Stock
Common shares available for future issuance
At June 30, 2003, the shares of common stock required to be reserved were
2,711,486,805 calculated at the $0.037 common stock price on that date (or the
discount therefrom as allowed under the applicable exchange or conversion
agreements). At the June 30, 2003 common stock price of $0.037, 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 for Settlements
Pursuant to the settlement agreement between NCT and West Nursery Holding
Limited Partnership, 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 (see Note 11).
14
Pursuant to the settlement agreement between NCT, Distributed Media
Corporation and Mesa Partners, Inc., 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 (see Note 11).
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 (see Note 11).
Shares Issued upon Conversion or Exchange of Indebtedness
During the six months ended June 30, 2003, $0.5 million of the 6%
convertible notes was exchanged for 11,061,181 shares of NCT's common stock. At
June 30, 2003, $3.8 million of the 6% convertible note principal 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 Secretary of State of Delaware on March 7, 2003. For the six months ended
June 30, 2003, we calculated the 4% dividends earned by the holder of the 1,800
shares outstanding of series H preferred stock at approximately $0.3 million.
This 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
4,026 shares of Artera series A preferred stock. For the six months ended June
30, 2003, we incurred charges of approximately $1.3 million for non-registration
of the underlying shares of NCT common stock. Under 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 six months ended June 30, 2003, we calculated the 4%
dividends earned by holders of the 8,999 shares outstanding of Artera series A
preferred stock of approximately $0.2 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 six months ended June 30, 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
$11,000. This amount is included in preferred stock dividends and in the
calculation of loss attributable to common stockholders.
Under the terms of the Pro Tech series B redeemable convertible preferred
stock agreement dated July 30, 2001, the holder of those shares may have had a
right to require Pro Tech to redeem the shares and any such redemption would not
have been within the sole control of Pro Tech. The redemption value was 125% of
the stated value of $0.5 million or $125,000. Accordingly, approximately $0.1
million redemption adjustment was recorded during 2001 increasing the minority
interest in consolidated subsidiaries. On April 10, 2003, Pro Tech entered into
an agreement with the holder of the series B preferred stock whereby the holder
agreed to waive certain requirements of the registration rights agreement
relating to the series B preferred stock. This waiver released Pro Tech from the
requirement to register shares of Pro Tech's common stock for the conversion of
the series B preferred stock. This cancelled the triggering event, which had
placed the redemption of the series B preferred stock at the holder's option.
With the signing of this agreement, such redemption is now within the control of
Pro Tech. Pro Tech is no longer required to carry the series B preferred stock
at 125% of the stated value. Accordingly, approximately $0.1 million redemption
adjustment was reversed during the six months ended June 30, 2003 decreasing the
minority interest in consolidated subsidiaries on the accompanying condensed
consolidated balance sheet as of June 30, 2003.
15
Options
For the six months ended June 30, 2003, we granted non-plan options to
purchase an aggregate of 93,050,000 shares of our common stock at exercise
prices ranging from $0.029 to $0.044 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 ranging from 1.39% to 2.10%; volatility of 100%;
and an expected life of five years. For the six months ended June 30, 2003, we
recorded a $2.8 million charge for the fair value of these options as consulting
services classified as selling, general and administrative expense (see Note 9).
Warrants
For the six months ended June 30, 2003, in conjunction with the issuance of
convertible notes, NCT issued Carole Salkind warrants to acquire an aggregate of
62,675,579 shares of its common stock at exercise prices ranging from $0.029 to
$0.046 per share. The fair value of these warrants was approximately $1.9
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 $1.7 million for
the six months ended June 30, 2003.
On May 30, 2003, a warrant issued to Alpha Capital on December 6, 2002 to
acquire an aggregate of 15,000,000 shares of our common stock at an exercise
price of $0.01 per share vested. The vesting was contingent upon the following:
(a) NCT failing to pay by April 7, 2003 (later extended to May 30, 2003) any
amount owed by it to Alpha under the promissory note, dated December 6, 2002, in
the principal amount of $385,000, and (b) NCT failing to pay or otherwise
discharge by April 7, 2003 (later extended to May 30, 2003) any amount owed by
NCT under the registration penalty provisions of various 2001 and 2002
agreements of NCT. Both of these events occurred and we recorded the fair value
of this warrant (calculated as of May 30, 2003) as interest expense of $0.6
million (determined using the Black-Scholes option pricing model) for the three
and six months ended June 30, 2003 as a result of this vesting.
On June 5, 2003, a warrant was issued, pursuant to an amended finders
agreement of the same date, to acquire an aggregate of 2,250,000 shares of our
common stock at an exercise price of $0.048 per share. The fair value of this
warrant was approximately $0.1 million (determined using the Black-Scholes
option pricing model). We recorded a charge of $0.1 million included in selling,
general and administrative expenses in our condensed consolidated statement of
operations for the three and six months ended June 30, 2003.
9. Related Parties:
On January 6, 2003, NCT and Stop Noise, Inc. entered into a license
agreement with a term coinciding with the expiration of underlying patents
unless earlier terminated by the parties. The agreement allows Stop Noise, Inc.
to make use, develop and sell products incorporating NCT's noise canceling
patents and technology. Stop Noise will fund product development provided by NCT
and pay NCT per unit royalties based upon product sales. Carole Salkind's son is
the sole shareholder of Stop Noise, Inc. No amounts have been recorded with
respect to this agreement.
Consulting Agreements
On January 23, 2003, NCT and Inframe, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
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.
The agreement expires on January 23, 2004 and is subject to a one-year renewal
unless cancelled after the initial period. Pursuant to the agreement, 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. We have recorded a charge of $0.7 million for the fair value of the
options and a $12,500 consulting fee as called for under the agreement for
consulting expenses included in selling, general and administrative expenses in
our condensed consolidated statement of operations for the six months ended June
30, 2003.
16
On February 11, 2003, NCT and Avant Interactive, Inc. entered into a
consulting agreement. The agreement calls for a monthly fee of $2,500, payable
at the end of the one-year term, and equity compensation in the form of options,
in 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. The agreement expires on February 11,
2004 and is subject to a one-year renewal unless cancelled after the initial
period. The February 11, 2003 consulting agreement was amended on March 12,
2003, April 3, 2003 and April 11, 2003 to provide for additional consulting
services, with additional options as compensation. Pursuant to the agreement and
its subsequent amendments, on February 11, 2003, March 12, 2003, April 3, 2003
and April 11, 2003, NCT granted to Avant Interactive, Inc. non-plan options to
purchase 7,000,000 shares, 13,500,000 shares, 2,000,000 shares and 2,000,000
shares, respectively, of NCT common stock at exercise prices of $0.04 per share,
$0.031per share, $0.029 per share and $0.031 per share, respectively (an
aggregate exercise price of $818,500). The five-year options vest on their
respective dates of grant. We have recorded an aggregate charge of $0.6 million
for the fair value of the options and a $12,500 consulting fee as called for
under the agreement for consulting expenses included in selling, general and
administrative expenses in our condensed consolidated statement of operations
for the six months ended June 30, 2003.
On April 17, 2003, NCT and Turbo Networks, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
consideration of consulting services provided by Turbo to NCT. Such consulting
services are performed by Morton Salkind, husband of Carole Salkind, acting on
behalf of Turbo Networks, Inc. Carole Salkind is the sole shareholder of Turbo
Networks, Inc. The agreement expires on April 17, 2004 and is subject to a
one-year renewal unless cancelled after the initial period. The April 17, 2003
consulting agreement was amended on May 22, 2003 and June 28, 2003 to provide
for additional consulting services, with additional options as compensation.
Pursuant to the agreement and its subsequent amendments, on April 17, 2003, May
22, 2003 and June 28, 2003, NCT granted to Turbo Networks, Inc. non-plan options
to purchase 2,000,000 shares, 18,550,000 shares and 2,000,000 shares,
respectively, of NCT common stock at exercise prices of $0.037, $0.042 and
$0.04, respectively (an aggregate exercise price of $933,100). The five-year
options vest on their respective dates of grant. We have recorded an aggregate
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 condensed consolidated
statement of operations for the six months ended June 30, 2003.
On June 12, 2003, NCT and Maple Industries, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
consideration of consulting services provided by Maple to NCT. Such consulting
services are performed by Morton Salkind, husband of Carole Salkind, acting on
behalf of Maple Industries, Inc. Carole Salkind is the sole shareholder of Maple
Industries, Inc. The agreement expires on June 12, 2004 and is subject to a
one-year renewal unless cancelled after the initial period. Pursuant to the
agreement, on June 12, 2003, NCT granted to Maple Industries, Inc. non-plan
options to purchase 23,000,000 shares of NCT common stock at an exercise price
of $0.044 (an aggregate exercise price of $1,012,000). The five-year option
vests on its date of grant. We have recorded an aggregate charge of $0.8 million
for the fair value of the options and a $2,500 consulting fee as called for
under the agreement for consulting expenses included in selling, general and
administrative expenses in our condensed consolidated statement of operations
for the six months ended June 30, 2003.
10. Stock-Based Compensation:
The company has elected to apply the disclosure-only provisions of 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 because 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 June 30, 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.
17
(in thousands, except per share amounts)
Three months ended June 30, Six months ended June 30,
------------------------------ ------------------------------------
2002 2003 2002 2003
------------- ------------- -------------- ----------------
Net loss attributable to common stockholders $ (14,365) $ (8,730) $ (21,244) $ (16,480)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (459) (67) (724) (135)
------------- ------------- -------------- ----------------
Pro forma net loss attributable to common stockholders $ (14,824) $ (8,797) $ (21,968) $ (16,615)
============= ============= ============== ================
Net loss per common share (basic and diluted):
As reported $ (0.03) $ (0.02) $ (0.05) $ (0.03)
============= ============= ============== ================
Pro forma $ (0.03) $ (0.02) $ (0.05) $ (0.03)
============= ============= ============== ================
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 and six months ended June 30, 2002 and 2003,
respectively, is not necessarily representative of the pro forma effects on the
results of operations for future periods.
11. Litigation:
NCT Audio Arbitration and TST/TSA/GTI Bankruptcy
- ------------------------------------------------
In the bankruptcy case of Global Technovations, Inc. (formerly known as Top
Source Technologies, Inc. (TST)) (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. In connection with the
settlement, we recorded income from litigation settlement of $429,315 included
in other (income) expense, net on the condensed consolidated statement of
operations for the six months ended June 30, 2003.
West Nursery (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. On May 7, 2003, the action was dismissed with
prejudice.
18
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. NCT does not have directors and officers indemnification
insurance coverage for the claims. The Section 214 proceedings are at an early
stage and we are unable to predict the outcome of this action.
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, LLC (PRG)
served papers on the company seeking to enforce the judgment in the case against
the shares of stock of NCT Audio Products, Inc. owned by the company. On or
about June 6, 2003, in furtherance of its efforts to collect on the judgment,
PRG filed the judgment in the Circuit Court for Anne Arundel County, Maryland;
the Superior Court of New Jersey, Hudson County; and the Circuit Court of St.
Lucie County, Florida. As of June 30, 2003, PRG had collected approximately
$78,000 in NCT's and DMC's cash or cash equivalent assets as a result of this
judgment. To the extent that further payment of the judgment is in cash, such
payment could be material to our cash position.
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. On August 8, 2003, Mr. Parrella filed a motion for summary judgment on
all remaining allegations. A decision on that motion is pending. Mr. Parrella
has told NCT that if any allegations in the amended complaint remain after a
decision on the summary judgment motion, he intends to deny such allegations. To
the extent that NCT may ultimately indemnify Mr. Parrella for liabilities
arising out of these allegations and for related legal fees, we believe that our
directors and officers indemnification insurance (subject to certain exceptions
under the insurance policy and after payment of a $100,000 deductible) will
cover such payments. Discovery as to Mr. Parrella has begun.
Alpha, Austost, Balmore and Libra v. NCT and Artera
- ---------------------------------------------------
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). A hearing for court approval of the settlement agreement was
held on May 15, 2003, but the court has yet to render its decision. The
settlement agreement, by its terms, becomes of no force or effect on either
party on August 5, 2003 because the court did not approve it by that date. The
parties are currently negotiating for an extension of that deadline. If an
extension agreement is not reached (or if the court in any event does not
approve the settlement agreement), then the action would be revived. The company
has assessed that the amounts recorded under non-registration fees and interest
included in accrued expenses along with note principal on the condensed
consolidated balance sheet at June 30, 2003 are sufficient for this matter and
we believe that the probability of additional loss is remote. The company
continues to accrue non-registration fees and interest under these agreements.
If the court approves the settlement agreement, the company expects to record a
reversal of previously accrued liquidated damages for non-registration of common
shares underlying convertible and
19
exchangeable notes and preferred stock in excess of the $4.0 million proposed
settlement (at June 30, 2003, approximately $4.0 million).
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 so settled had
occurred on December 11, 2002.
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.
12. Segment Information:
Management views the company as being organized into three operating
segments: Communications, 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 cash 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 (i.e., eliminated)
in the Other-consolidating column. Other-consolidating consists of items
eliminated in consolidation, such as intercompany revenue.
During the three and six months ended June 30, 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 and six months ended June 30, 2003
and 2002 is as follows (in thousands):
Reportable ------- Other -------- Grand
Communications Media Technology Segments Corporate Consolidating Total
---------------------------------------------------------------------------------------
For the three months ended
June 30, 2003:
- -----------------------------------------
License fees and royalties $ 66 $ 535 $ - $ 601 $ 4 $ - $ 605
Other revenue - external 422 23 - 445 - - 445
Other revenue - other operating
segments 261 2 - 263 42 (305) -
Net (loss) income (2,975) (743) 27 (3,691) (4,811) 597 (7,905)
For the three months ended
June 30, 2002:
- -----------------------------------------
License fees and royalties $ 800 $ 535 $ - $ 1,335 $ 7 $ - $ 1,342
Other revenue - external 682 31 - 713 - - 713
Other revenue - other operating
segments 270 (22) - 248 4 (252) -
Net (loss) income (1,941) (737) (99) (2,777) (11,477) 526 (13,728)
20
Reportable ------- Other -------- Grand
Communications Media Technology Segments Corporate Consolidating Total
---------------------------------------------------------------------------------------
For the six months ended
June 30, 2003:
- -----------------------------------------
License fees and royalties $ 236 $ 1,070 $ - $ 1,306 $ 5 $ - $ 1,311
Other revenue - external 877 44 - 921 - - 921
Other revenue - other operating
segments 536 3 - 539 169 (708) -
Net (loss) income (5,969) (1,543) 58 (7,454) (8,431) 1,193 (14,692)
For the six months ended
June 30, 2002:
- -----------------------------------------
License fees and royalties $ 1,376 $ 1,070 $ - $ 2,446 $ 7 $ - $ 2,453
Other revenue - external 1,556 60 - 1,616 - - 1,616
Other revenue - other operating
segments 428 (49) - 379 8 (387) -
Net (loss) income (4,175) (1,980) (169) (6,324) (14,627) 975 (19,976)
13. Subsequent Events:
Transactions with Carole Salkind
On each of July 3, 2003 and July 15, 2003, NCT defaulted on the repayment
of convertible notes dated July 3, 2002 and July 15, 2002, respectively, to Ms.
Salkind. On July 14, 2003 and July 28, 2003, NCT issued convertible notes to Ms.
Salkind each in the amount of approximately $0.4 million, as consideration for
curing the default and payment of the convertible notes dated July 3, 2002 and
July 15, 2002, respectively, each in the principal amount of $0.35 million plus
accrued interest and penalties thereon. The notes mature on January 14, 2004 and
January 28, 2004, respectively, and bear interest at 8% per annum payable at
maturity. The notes are convertible into shares of NCT common stock at $0.031
and $0.042 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 the notes, five-year warrants were issued to Ms. Salkind each to
purchase 2.0 million shares of our common stock at exercise prices of $0.0312
per share and $0.042 per share, respectively. The relative estimated fair value
of the warrants will be reflected as original issue discount to the notes and
amortized as interest expense over the term of the notes.
On each of July 14, 2003 and July 28, 2003, NCT issued convertible notes to
Ms. Salkind each in the amount of approximately $0.4 million, as consideration
for cash. The notes mature on January 14, 2004 and January 28, 2004,
respectively, and bear interest at 8% per annum payable at maturity. The notes
are convertible into shares of NCT common stock at $0.0312 and $0.042 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 the notes,
five-year warrants were issued to Ms. Salkind each to purchase 2.0 million
shares of our common stock at an exercise price of $0.0312 per share and $0.042
per share, respectively. The relative estimated fair value of the warrants will
be reflected as original issue discount to the notes and amortized as interest
expense over the term of the notes.
On July 23, 2003, we defaulted on repayment of a convertible note payable
dated July 23, 2002 to Ms. Salkind for the principal amount of $0.5 million. We
are currently in negotiation to cure this default.
Other
On July 15, 2003, we defaulted on repayment of a promissory note payable
dated July 15, 2002 for the principal amount of $35,000. We are currently in
negotiation to cure this default.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 is 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 anticipate less than $0.1 million cash
will be realized from the deferred revenue as of June 30, 2003 (approximately
$4.8 million). Operating revenue for the six months ended June 30, 2003
consisted of approximately 58.7% in technology licensing fees and royalties,
39.3% in product sales, 0.9% in advertising/media revenue and 1.1% in
engineering and development services.
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.
22
Management believes that currently available funds will not be sufficient
to sustain NCT. Such funds 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 6 - 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 June 30, 2003, our deferred revenue aggregated $4.8 million. We expect
to realize less than $0.1 million of 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 investments 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 June 30, 2003, all of NCT's marketable securities have been deemed
available-for-sale securities and aggregated $0.1 million.
23
Goodwill, Patent Rights, Other Intangible Assets:
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
shareholders 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. At December 31, 2002, the
company evaluated the goodwill allocated to its Advancel reporting unit, NCT
Hearing reporting unit and Midcore/Artera reporting unit and determined no
impairment existed. Our annual evaluation is planned for December 31, 2003.
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 six months ended June 30, 2002 and
2003 was $0.3 million and zero, respectively. At June 30, 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 the six months ended June 30, 2002 and 2003 was $0.2 million and
$0.1 million, respectively.
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. There was no event or change in circumstances to require
an evaluation through June 30, 2003. At June 30, 2003, our patent rights and
other intangibles, net were $1.4 million.
RESULTS OF OPERATIONS
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Total revenue for the three months ended June 30, 2003 was $1.1 million
compared to $2.1 million for the same period in 2002, a decrease of $1.0
million, or 47.6%, reflecting decreases in our technology licensing fees and
royalties and product sales revenue sources.
Technology licensing fees and royalties were $0.6 million for the three
months ended June 30, 2003 as compared to $1.3 million for the same period in
2002, a decrease of $0.7 million or 53.8%. The decrease was primarily due to a
$0.6 million decrease in license fee revenue related to Teltran with the
remainder due to a decrease in royalties. Our recognition of license fee revenue
for the three months ended June 30, 2003 was due to recognition of deferred
revenue from the NXT license.
For the three months ended June 30, 2003, product sales were $0.4 million
compared to $0.7 million for three months ended June 30, 2002, a decrease of
$0.3 million, or 42.9%. The decrease was primarily due to the decreased demand
in the fast food market related to hearing products. We expect sales to remain
sluggish for the remainder of the year as a result of the announced closure of
fast food franchises worldwide and increased competition from Far East
competitors. For the three months ended June 30, 2003, hearing products
comprised
24
approximately $0.3 million, or 65% of our product sales and communication
products comprised approximately $0.1 million, or 23% of our product sales.
Gross profit on product sales, as a percentage of product sales, improved
to 56% for the three months ended June 30, 2003 from 42.4% for the three months
ended June 30, 2002. The improvement is primarily related to hearing products
and is a result of a decrease in the cost of sales because of reduced warranty
costs. This improvement was partially offset by an increase in Artera's costs of
sales with the growth of the Artera Turbo data centers that has not been
accompanied by a parallel increase in sales.
Advertising/media revenue was $11,000 for the three months ended June 30,
2003 compared to $2,000 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. For the three months ended June 30, 2003 and 2002, revenue from
health venues comprised 100% of total advertising/media revenue.
For the three months ended June 30, 2003, selling, general and
administrative expenses totaled $3.5 million as compared to $2.9 million for the
three months ended June 30, 2002, an increase of $0.6 million, or 20.7%. This
increase was due primarily to a $1.0 million increase in consulting expense
primarily due to the increased non-cash charges from the issuance of warrants
and options. This increase was partially offset by (i) a $0.1 million decrease
in salary and related benefit costs attributable to a reduced workforce and (ii)
a $0.2 million decrease in legal and patent expenses.
For the three months ended June 30, 2003, research and development
expenditures totaled $0.9 million as compared to $1.0 million for the three
months ended June 30, 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 for the three months ended June 30, 2003 were $9.0
million compared to $15.8 million for the same period in 2002, a decrease of
43.0%, or $6.8 million, primarily due to a $9.2 million reduction in repurchased
licenses, net. Total costs and expenses include non-cash expenditures of $5.8
million for the three months ended June 30, 2003 and $12.1 million for the three
months ended June 30, 2002. These expenditures included: (i) repurchased
licenses, net of zero for the three months ended June 30, 2003 and $9.2 million
for the same period in 2002; (ii) interest expense of $3.4 million for the three
months ended June 30, 2003 (due to amortization of original issue discounts of
$0.9 million; amortization of beneficial conversion features in convertible debt
of $1.0 million, amortization of additional debt discounts of $0.8 million, and
interest on convertible debt issued by the company of $0.7 million) and $1.4
million during the same period in 2002 (due to amortization of original issue
discounts of $0.4 million; amortization of beneficial conversion features in
convertible debt of $0.5 million, and interest on convertible debt issued by the
company of $0.5 million); (iii) finance costs of $0.7 million associated with
non-registration of common shares for the three months ended June 30, 2003 and
$0.9 million during the same period in 2002; (iv) consulting expenses due to the
issuance of $1.5 million of options for the three months ended June 30, 2003 and
$0.3 million for the same period in 2002; and (v) depreciation and amortization
of $0.2 million for the three months ended June 30, 2003 and $0.3 million in the
same period in 2002.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
For the six months ended June 30, 2003, total revenue amounted to $2.2
million, compared to $4.1 million for six months ended June 30, 2002, a decrease
of $1.9 million, or 46.3%, reflecting decreases in our technology licensing fees
and royalties and product sales revenue sources.
Technology licensing fees and royalties were $1.3 million for the six
months ended June 30, 2003 as compared to $2.5 million for the same period in
2002, a decrease of $1.2 million, or 48%. The decrease was primarily due to a
$1.2 million decrease in technology license fee revenue related to Teltran (our
recognition was completed in October 2002). The technology licensing fees for
the six months ended June 2003 were due to the recognition of deferred revenue
from the NXT license. As of June 30, 2003, our deferred revenue for NXT and
Fairpoint was $3.7 million and $0.5 million, respectively. We anticipate that
less than $0.1 million of cash will be realized from our deferred revenue
related to these licenses.
The company continues to realize royalties from other existing licensees
including Ultra, Oki and Sharp. Royalties from these and other licensees are
expected to account for a greater share of the company's revenue in
25
future periods.
For the six months ended June 30, 2003, product sales were $0.9 million
compared to $1.6 million for the six months ended June 30, 2002, a decrease of
$0.7 million or 43.8%. The decrease was primarily due to $0.4 million of lower
sales of hearing products due to reduced fast-food headset purchases by major
distributors and a $0.2 million decrease as a result of the cessation of
operations of Artera Group International Limited in March 2002. Hearing products
comprise approximately $0.6 million, or 72% of our product sales for the six
months ended June 30, 2003; communication products comprise approximately $0.2
million, or 19%.
Gross profit on product sales, as a percentage of product revenue, improved
to 55.7% for the six months ended June 30, 2003, from 42.8% for the six months
ended June 30, 2002. The improvement is primarily related to hearing products
and is a result of a decrease in the cost of sales because of reduced warranty
costs. This improvement was partially offset by an increase in Artera's costs of
sales with the growth of the Artera Turbo data centers that has not been
accompanied by a parallel increase in sales.
Advertising/media revenue was $20,000 for the six months ended June 30,
2003 compared to $12,000 for the same period in 2002. Advertising/media revenue
is derived from the sale of audio and visual advertising in the Sight and
Sound(R) locations. The increase in revenue is due to health venues, which is
offset by the decrease in revenue from non-health venues. Although our limited
cash resources have reduced our expectations, we anticipate increasing revenue
from the Sight & Sound(R) locations in health venues. Cost of advertising/media
revenue was $4,000 for the six months ended June 30, 2003 compared to $8,000 for
the same period in 2002. These costs include the commissions paid to advertising
representative companies and agencies and communication expenses related to the
Sight and Sound(R) locations.
For the six months ended June 30, 2003, selling, general and administrative
expenses totaled $7.0 million as compared to $7.3 million for the six months
ended June 30, 2002, a decrease of $0.3 million, or 4.1%. This decrease was due
primarily to: (i) a $0.8 million decrease in salary and related benefit costs as
a result of the reduction in workforce; (ii) a $0.5 million decrease in legal
and patent expenses as a result of finalizing legal matters and (iii) a $0.1
million decrease in each of sales related, office related, and depreciation and
amortization expenses. These decreases were partially offset by a $1.1 million
increase in consulting expenses due to charges from warrants and options and a
$0.3 million accrual for asserted minimum royalties due to a licensor.
For the six months ended June 30, 2003, research and development
expenditures totaled $1.8 million as compared to $2.1 million for the six months
ended June 30, 2002, a decrease of $0.3 million, or 14.3%. This decrease was due
primarily to a $0.2 million decrease in salary and related benefits costs
attributed to a reduced workforce.
Total costs and expenses for the six months ended June 30, 2003 were $16.9
million compared to $24.0 million for the same period in 2002, a decrease of
29.6%, or $7.1 million, primarily due to a $9.2 million reduction in repurchased
licenses, net. Total costs and expenses include non-cash expenditures of $11.0
million for the six months ended June 30, 2003 and $15.5 million for the six
months ended June 30, 2002. These expenditures included: (i) repurchased
licenses cost of zero for the six months ended June 30, 2003 and $9.2 million
during the same period in 2002; (ii) impairment of goodwill of zero in the six
months ended June 30, 2003 and $0.3 million during the same period in 2002;
(iii) interest expense of $6.3 million in the six months ended June 30, 2003
(due primarily to amortization of original issue discounts of $1.7 million,
amortization of beneficial conversion features of $1.9 million, amortization of
additional debt discounts of $1.1 million and interest on debt issued by the
company of $1.6 million) and $2.6 million during the same period in 2002 (due
primarily to amortization of original issue discounts of $0.6 million,
amortization of beneficial conversion features of $0.9 million, amortization of
debt issuance costs of $0.2 million and interest on debt issued by the company
of $0.9 million); (iv) finance costs associated with non-registration of common
shares of $1.4 million for the six months ended June 30, 2003 and $1.8 million
for the same period in 2002; (v) consulting expenses due to the issuance of $2.8
million of options for the six months ended June 30, 2003 and $1.0 million for
the same period in 2002; and (vi) depreciation and amortization of $0.5 million
in the six months ended June 30, 2003 and $0.6 million in the same period in
2002.
26
LIQUIDITY AND CAPITAL RESOURCES
NCT has experienced substantial losses from operations since its inception,
which have been recurring and amounted to $274.3 million on a cumulative basis
through June 30, 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 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 sources is 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 June 30, 2003
about NCT's ability to continue as a going concern.
We have 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 six
months ended June 30, 2003 are described in the notes to the condensed
consolidated financial statements. We have been primarily dependant upon funding
from Carole Salkind. Although we do not have a formal agreement requiring her to
do so, we believe that Carole Salkind will continue to provide funds to NCT. Our
belief that funding from her will continue is based primarily upon her continued
funding of NCT during 2002 and 2003 despite NCT's failure to repay her notes as
the notes matured. Commencing January 2001, upon the maturity of Ms. Salkind's
initial note to NCT dated January 1999, NCT has established a history of
defaulting on the repayment of obligations owed to Carole Salkind as such
obligations become due. Ms. Salkind has allowed NCT to rollover maturing notes,
along with accrued interest and a default penalty (10% of the principal amount
in default), into new notes that generally mature from six months to one year
from the date of the rolled-over note. In addition to the financing provided by
rolling over maturing notes, Ms. Salkind has continued to provide NCT with new
funds. However, NCT has no legally binding assurance that Ms. Salkind will
continue funding NCT in the near-term or that the amount, timing and duration of
funding from her will be adequate to sustain our business operations.
At June 30, 2003, the company's cash and cash equivalents aggregated $0.5
million. NCT's working capital deficit was $60.9 million at June 30, 2003,
compared to a deficit of $51.4 million at December 31, 2002, a $9.5 million
increase in working capital deficit. Current liabilities increased primarily due
to the net increase of convertible notes of $7.4 million (net of discounts) and
non-registration fees of $1.4 million. NCT is in default of $2.9 million of its
notes payable and $4.7 million of its convertible notes at June 30, 2003.
27
(in millions) New Defaults
Indebtedness Defaults Cured Indebtedness
In Default during during In Default
Notes Payable: 12/31/02 the period the period 06/30/03
----------------- ----------------- ----------------- -----------------
Obligation to prior owner
of Web Factory $ 2.4 (a) $ - $ - $ 2.4 (a)
Top Source Automotive 0.2 (a) - (0.2) -
Former Employees / Other 0.3 (a) 0.4 (0.2) 0.5 (a)
----------------- ----------------- ----------------- ---------------------
Subtotal $ 2.9 $ 0.4 $ (0.4) $ 2.9
----------------- ----------------- ----------------- ---------------------
Convertible Notes:
Carole Salkind Notes $ 2.9 (b) $ 4.7 $ (7.6) $ -
6% Notes 4.2 (a) - (0.5) 3.7 (a)
8% Notes 1.0 (c) - - 1.0 (c)
----------------- ----------------- ----------------- ---------------------
Subtotal $ 8.1 $ 4.7 $ (8.1) $ 4.7
----------------- ----------------- ----------------- ---------------------
Grand Total $ 11.0 $ 5.1 $ (8.5) $ 7.6
================= ================= ================= =====================
Footnotes:
----------
(a) Default due to nonpayment.
(b) Default due to judgment in unrelated matter.
(c) Default due to cross default provision (default on other debt).
Operating Activities
Net cash used in operating activities for the six months ended June 30,
2003 was $5.3 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;
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 $0.3 million at June 30, 2003 from
$0.2 million at December 31, 2002. The increase in net accounts receivable was
primarily due to an increase in technology licensing receivable. This was
primarily due to the increase in license fee receivable from our Fairpoint
license.
Our deferred revenue balance at June 30, 2003 was $4.8 million, $3.7
million of which was attributed to NXT and $0.5 million of which was attributed
to Fairpoint. We expect less than $0.1 million of cash 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 used in investing activities was $0.1 million for the six-month
period ended June 30, 2003 due to the purchase of capital equipment. The capital
expenditures have been primarily for Artera Group as we expand the Artera Turbo
data centers in anticipation of future growth.
28
In addition to available cash and cash equivalents, the company views its
available-for-sale securities as additional sources of liquidity. At each of
June 30, 2003 and December 31, 2002, the company's available-for-sale securities
had approximate fair market values of $0.1 million. These securities represent
investments in technology companies and, accordingly, the fair market values of
these securities are subject to substantial price volatility. In addition, the
realizable value of these securities is subject to market and other conditions.
Financing Activities
Net cash provided by financing activities was $5.1 million for the
six-month period ended June 30, 2003 and was primarily due to the issuance and
sale of convertible notes.
At June 30, 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 increase in
short-term debt was primarily due to the issuance of debt to Carole Salkind. The
cash proceeds from debt issued in 2003 were primarily used for general corporate
purposes.
During the six months ended June 30, 2003, NCT issued an aggregate of $14.3
million of convertible notes to Carole Salkind, as consideration for $5.2
million of cash and the rollover of $7.6 million in principal of matured
convertible notes, $0.7 million of interest, and $0.8 million of default
penalties (10% of the principal amount in default).
As of June 30, 2003, we are in default on $7.6 million of our indebtedness,
including $2.9 million of notes payable and $4.7 million of convertible notes
(refer to Notes 5 and 6 - notes to the condensed consolidated financial
statements for disclosure of material defaults). NCT expects that from time to
time outstanding 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, our 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.
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 June 30, 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.
At June 30, 2003, we have a reasonable expectation of installing our Sight &
Sound(R) system within additional Barnes & Noble College Bookstores. However,
our average cost for outfitting a store is approximately $18,000 and we have not
identified the source of funding to proceed with these installations. We have no
assurance that sufficient capital will become available.
29
Other than this, there were no material commitments for capital
expenditures as of June 30, 2003, and no material commitments are anticipated in
the near future.
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 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.
30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of our legal proceedings, see Note 11 - 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 June 30, 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 Amount and Type Name of Person/Entity to whom Aggregate Amount and
Sale securities were sold Type
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
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
$2,231,265.04 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
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
31
- -------------------------------------------------------------------- ------------------------------------- -------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
Date of Amount and Type Name of Person/Entity to whom Aggregate Amount and
Sale securities were sold Type
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
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
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/1/03 1,248,170 shares of NCT common stock (exempt under West Nursery Land Holding Limited Settlement of legal
Section 3(a)(10) of the Securities Act of 1933) Partnership action
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/2/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/2/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.029 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/3/03 Options to acquire 2,000,000 shares of NCT common Avant Interactive, Inc. Exercisable for cash at
stock $0.029 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/7/03 1,158,940 shares of NCT common stock Balmore S.A. Exchange for $35,000
Artera Group, Inc.
January 9, 2001
convertible note
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/11/03 2,321,263 shares of NCT common stock (exempt under Mesa Partners, Inc. Settlement of legal
Section 3(a)(10) of the Securities Act of 1933) action
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/11/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/11/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/11/03 Options to acquire 2,000,000 shares of NCT common Avant Interactive, Inc. Exercisable for cash at
stock $0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/15/03 3,164,556 shares of NCT common stock Alpha Capital Aktiengesellschaft Exchange for $100,000
Artera Group, Inc. April
4, 2001 convertible note
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/17/03 Options to acquire 2,000,000 shares of NCT common Turbo Networks, Inc. Exercisable for cash at
stock $0.037 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/21/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/21/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.037 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/22/03 NCT Convertible Note ($235,000 principal amount) Alpha Capital Aktiengesellschaft $235,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/30/03 3,703,704 shares of NCT common stock Alpha Capital Aktiengesellschaft Exchange for $200,000
Artera Group, Inc. April
4, 2001 convertible note
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/8/03 28,000,000 shares of NCT common stock (exempt Crammer Road LLC Settlement of legal
under Section 3(a)(10) of the Securities Act of action
1933)
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/15/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
32
- -------------------------------------------------------------------- ------------------------------------- -------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
Date of Amount and Type Name of Person/Entity to whom Aggregate Amount and
Sale securities were sold Type
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/15/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.046 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/22/03 Options to acquire 18,550,000 shares of NCT common Turbo Networks, Inc. Exercisable for cash at
stock $0.042 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/22/03 NCT Convertible Note ($1,692,462.74 principal Carole Salkind Cancellation and
amount) surrender of $1,425,000
convertible note dated
5/2/02 along with accrued
interest and default
penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/22/03 Warrant for 7,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.042 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/28/03 NCT Convertible Note ($415,000 principal amount) Carole Salkind $415,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/28/03 Warrant for 1,900,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.044 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/05/03 Warrant for 2,250,000 shares of NCT common stock NATCO, LLC Exercisable for cash at
$0.048 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 NCT Convertible Note ($2,449,811.87 principal Carole Salkind Cancellation and
amount) surrender of $1,463,449,
$350,000, and $300,000
convertible notes dated
11/21/02, 5/29/02 and
6/2/02, respectively,
along with accrued
interest and default
penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 Warrant for 10,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.044 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 NCT Convertible Note ($435,000 principal amount) Carole Salkind $435,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.044 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 Options to acquire 23,000,000 shares of NCT common Maple Industries, Inc. Exercisable for cash at
stock $0.044 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/28/03 NCT Convertible Note ($410,000 principal amount) Carole Salkind $410,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/28/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.038 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/28/03 Options to acquire 2,000,000 shares of NCT common Turbo Networks, Inc Exercisable for cash at
stock $0.04 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
33
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, incorporated herein by reference to Exhibit
3(a) of the company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 filed on May 15, 2003.
4(a) Warrant dated December 11, 2002 issued to KEQ Partners III (as
designee for Kalkines, Arky Zall & Bernstein LLP) for the purchase of
1,250,000 shares of NCT common stock at a purchase price of $0.063 per
share.
4(b) 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(c) 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(d) 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(e) 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(f) 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(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) 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(j) 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.
34
4(k) 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.
4(l) 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(m) Option granted to Avant Interactive, Inc. dated April 3, 2003 for an
aggregate of 2,000,000 shares of NCT common stock at an exercise price
of $0.029 per share.
4(n) Letter Agreement dated April 7, 2003 amending the vesting terms of a
December 6, 2002 warrant issued to Alpha Capital Aktiengesellschaft,
incorporated herein by reference to Exhibit 4(l) of the company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003
filed on May 15, 2003.
4(o) Option granted to Avant Interactive, Inc. dated April 11, 2003 for an
aggregate of 2,000,000 shares of NCT common stock at an exercise price
of $0.031 per share.
4(p) 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, incorporated herein by reference to Exhibit 4(m) of the
company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2003 filed on May 15, 2003.
4(q) Option granted to Turbo Networks, Inc. dated April 17, 2003 for an
aggregate of 2,000,000 shares of NCT common stock at an exercise price
of $0.037 per share.
4(r) 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, incorporated herein by reference to Exhibit 4(n) of the
company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2003 filed on May 15, 2003.
4(s) Warrant dated May 15, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.046
per share.
4(t) Option granted to Turbo Networks, Inc. dated May 22, 2003 for an
aggregate of 18,550,000 shares of NCT common stock at an exercise
price of $0.042 per share.
4(u) Warrant dated May 22, 2003 issued to Carole Salkind for the purchase
of 7,500,000 shares of NCT common stock at a purchase price of $0.042
per share.
4(v) Warrant dated May 28, 2003 issued to Carole Salkind for the purchase
of 1,900,000 shares of NCT common stock at a purchase price of $0.044
per share.
4(w) Warrant dated June 5, 2003 issued to NATO, LLC for the purchase of
2,250,000 shares of NCT common stock at a purchase price of $0.048 per
share.
4(x) Option granted to Maple Industries, Inc. dated June 12, 2003 for an
aggregate of 23,000,000 shares of NCT common stock at an exercise
price of $0.044 per share.
4(y) Warrant dated June 12, 2003 issued to Carole Salkind for the purchase
of 10,500,000 shares of NCT common stock at a purchase price of $0.044
per share.
4(z) Warrant dated June 12, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.044
per share.
35
4(aa) Option granted to Turbo Networks, Inc. dated June 28, 2003 for an
aggregate of 2,000,000 shares of NCT common stock at an exercise price
of $0.04 per share.
4(ab) Warrant dated June 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.038
per share.
4(ac) Warrant dated July 14, 2003 issued to John Harris (as designee for
Stop Noise, Inc.) for the purchase of 750,000 shares of NCT common
stock at a purchase price of $0.0312 per share.
4(ad) Warrant dated July 14, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.0312
per share.
4(ae) Warrant dated July 14, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.0312
per share.
4(af) Warrant dated July 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.042
per share.
4(ag) Warrant dated July 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.042
10(a) License Agreement dated August 10, 2001 between the company and Sharp
Corporation, acting through its Communication Systems Group.
10(b) License Agreement dated August 15, 2002 between Fairport
Communications, Inc. and Artera Group, Inc.
10(c) 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(d) 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(e) 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(f) Consulting Agreement dated January 23, 2003 between the company and
Inframe, Inc.
10(g) 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(h) 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(i) Consulting Agreement dated February 11, 2003 between the company and
Avant Interactive, Inc. and amendments thereto dated March 12, 2003,
April 3, 2003 and April 11, 2003.
10(j) Settlement Agreement dated December 31, 2002 between West Nursery
Land Holding Limited Partnership and the company approved by the court
on March 3, 2003, incorporated herein by reference to Exhibit 10(f) of
the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 filed on May 15, 2003.
10(k) Secured Convertible Note in principal amount of $450,000 dated March
4, 2003 issued by the company to
36
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(l) 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(m) 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(n) 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(o) Settlement Agreement dated December 3, 2002 among Mesa Partners,
Inc., the company, and Distributed Media Corporation approved by the
court on April 8, 2003, incorporated herein by reference to Exhibit
10(k) of the company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 filed on May 15, 2003.
10(p) 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., incorporated herein by reference to Exhibit 10(l) of
the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 filed on May 15, 2003.
10(q) Secured Convertible Note in principal amount of $450,000 dated April
11, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(m) of the company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003.
10(r) Consulting Agreement dated April 17, 2003 between the company and
Turbo Networks, Inc. and amendments thereto dated May 22, 2003 and
June 28, 2003.
10(s) Secured Convertible Note in principal amount of $450,000 dated April
21, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(n) of the company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003.
10(t) Convertible Note in principal amount of $235,000 dated April 22, 2003
issued by the company to Alpha Capital Aktiengesellschaft.
10(u) Subscription Agreement dated April 22, 2003 between the company and
Alpha Capital Aktiengesellschaft.
10(v) Secured Convertible Note in principal amount of $450,000 dated May
15, 2003 issued by the company to Carole Salkind.
10(w) Secured Convertible Note in principal amount of $1,692,463 dated May
22, 2003 issued by the company to Carole Salkind.
10(x) Memorandum of Understanding dated May 23, 2003 between Fairpoint
Broadband, Inc. and Artera Group, Inc.
10(y) Secured Convertible Note in principal amount of $415,000 dated May
28, 2003 issued by the company to Carole Salkind.
10(z) Secured Convertible Note in principal amount of $2,449,812 dated June
12, 2003 issued by the company to Carole Salkind.
10(aa) Secured Convertible Note in principal amount of $435,000 dated June
12, 2003 issued by the company to Carole Salkind.
37
10(ab) Consulting Agreement dated June 12, 2003 between the company and
Maple Industries, Inc.
10(ac) Secured Convertible Note in principal amount of $410,000 dated June
28, 2003 issued by the company to Carole Salkind.
10(ad) Secured Convertible Note in principal amount of $410,000 dated July
14, 2003 issued by the company to Carole Salkind.
10(ae) Secured Convertible Note in principal amount of $414,481 dated July
14, 2003 issued by the company to Carole Salkind.
10(af) Secured Convertible Note in principal amount of $410,000 dated July
28, 2003 issued by the company to Carole Salkind.
10(ag) Secured Convertible Note in principal amount of $414,750 dated July
28, 2003 issued by the company to Carole Salkind.
31(a) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30,
2003.
31(b) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30,
2003.
32(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, incorporated herein by
reference to Exhibit 99(a) of the company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 filed on May 15, 2003.
32(b) Certification of Form 10-Q for the quarterly period ended June 30,
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 Form 8-K, dated April
21, 2003 disclosing the agreement between our subsidiary Artera Group,
Inc. and Avaya Inc.
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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: August 14, 2003
39