UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
--------------
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
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(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
434,737,308 shares outstanding as of May 14, 2002
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands)
December 31, March 31,
2001 2002
----------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 567 $ 152
Investment in marketable securities (Note 6) 882 580
Accounts receivable, net (Note 6) 716 568
Inventories, net (Note 6) 1,385 1,153
Other current assets (Note 6) 773 754
----------------- -----------------
Total current assets 4,323 3,207
Property and equipment, net (Note 6) 1,844 1,638
Goodwill, net 7,184 7,184
Patent rights and other intangibles, net 4,088 3,984
Other assets (Note 6) 2,570 2,637
----------------- -----------------
$ 20,009 $ 18,650
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current liabilities:
Accounts payable $ 5,553 $ 5,618
Accrued expenses 12,093 14,045
Notes payable (Note 8) 3,208 2,670
Current maturities of convertible notes (Note 9) 11,710 13,535
Deferred revenue (Note 6) 4,616 4,053
Other current liabilities (Note 6) 19,779 19,900
----------------- -----------------
Total current liabilities 56,959 59,821
----------------- -----------------
Long term liabilities:
Deferred revenue (Note 6) 4,815 4,280
Convertible notes (Note 9) - 659
Other liabilities (Note 6) 2,950 2,806
----------------- -----------------
Total liabilities 7,765 7,745
----------------- -----------------
Commitments and contingencies
Minority interest in consolidated subsidiaries 8,748 8,727
----------------- -----------------
Stockholders' equity (capital deficit) (Notes 7 and 11):
Common stock, $.01 par value, authorized 645,000,000 shares,
issued 428,830,800 and 434,737,308 shares, respectively 4,288 4,347
Additional paid-in capital 164,621 163,932
Accumulated other comprehensive (loss) income 50 (215)
Accumulated deficit (219,459) (225,707)
Treasury stock, 6,078,065 and 0 shares, respectively (2,963) -
of common stock, at cost
----------------- -----------------
Total stockholders' equity (capital deficit) (53,463) (57,643)
----------------- -----------------
$ 20,009 $ 18,650
================= =================
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Notes 1 and 3)
(Unaudited)
(in thousands, except per share amounts)
Three months ended March 31,
----------------------------------------
2001 2002
----------------- --------------------
(Note 2)
REVENUE:
Technology licensing fees and royalties $ 913 $ 1,111
Product sales, net 1,084 877
Advertising/media 115 10
Engineering and development services 18 16
----------------- --------------------
Total revenue $ 2,130 2,014
----------------- --------------------
COSTS AND EXPENSES:
Cost of product sales 577 499
Cost of advertising/media 243 8
Selling, general and administrative 4,145 4,387
Research and development 1,250 1,046
Impairment of goodwill, net (Note 11) 533 300
Repurchased licenses, net 1,278 -
----------------- --------------------
Total operating costs and expenses 8,026 6,240
----------------- --------------------
Non-operating items:
Other (income) expense, net (Note 6) (34) 823
Interest expense, net 1,143 1,199
----------------- --------------------
Total costs and expenses 9,135 8,262
----------------- --------------------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (7,005) (6,248)
Cumulative effect of change in accounting principle (1,582) -
----------------- --------------------
NET LOSS $ (8,587) $ (6,248)
Beneficial conversion features 250 25
Preferred stock dividends (including penalties of $519 in 2002) 44 606
----------------- --------------------
LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (8,881) $ (6,879)
================= ====================
Loss per share -
Loss before cumulative effect of change
in accounting principle $ (0.02) $ (0.02)
Cumulative effect of change in accounting principle (0.01) -
----------------- --------------------
Basic and diluted $ (0.03) $ (0.02)
================= ====================
Weighted average common shares outstanding -
basic and diluted 331,660 425,842
================= ====================
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Note 4)
Three months ended March 31,
----------------------------------------
2001 2002
----------------- --------------------
NET LOSS $ (8,587) $ (6,248)
Other comprehensive income (loss):
Currency translation adjustment 59 22
Unrealized (loss)/adjustment of unrealized loss on marketable securities (657) (287)
----------------- --------------------
COMPREHENSIVE LOSS $ (9,185) $ (6,513)
================= ====================
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 6)
(Unaudited)
(in thousands)
Three months ended March 31,
-----------------------------------
2001 2002
--------------- ----------------
(Note 2)
Cash flows from operating activities:
Net loss $ (8,587) $ (6,248)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 616 289
Common stock, warrants and options issued as consideration for:
Compensation 5 169
Operating expenses - 921
Costs incurred related to convertible debt - 910
Provision for inventory - (55)
Provision for doubtful accounts and uncollectible amounts 295 68
Gain on disposition of fixed assets (6) -
Repurchased licenses, net 1,278 -
Impairment of goodwill, (Note 11) 533 300
Costs of exiting activities - 303
Realized (loss) gain on fair value of warrant 88 (6)
Cumulative effect of change in accounting principle 1,582 -
Amortization of debt discounts 997 668
Minority interest loss (61) (108)
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable 2,252 80
Decrease in inventories 95 286
(Increase) in other assets (1,735) (24)
Increase in accounts payable and accrued expenses 773 607
Increase (decrease) in other liabilities and deferred revenue 280 (1,188)
--------------- -----------------
Net cash used in operating activities $ (1,595) $ (3,028)
--------------- -----------------
Cash flows from investing activities:
Capital expenditures $ (326) $ (27)
Net cash paid for Artera Group International Limited acquisition (100) -
Proceeds from sale of capital equipment - 11
--------------- -----------------
Net cash (used in) provided by investing activities $ (426) $ (16)
--------------- -----------------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable (net) (Notes 8 and 9) $ 828 $ 2,883
Sale of subsidiary preferred stock (net) 420 -
Collection of subscription receivable 7 -
Repayment of notes - (253)
--------------- -----------------
Net cash provided by financing activities $ 1,255 $ 2,630
--------------- -----------------
Effect of exchange rate changes on cash $ (59) $ (1)
--------------- -----------------
Net decrease in cash and cash equivalents (825) (415)
Cash and cash equivalents - beginning of period 1,167 567
--------------- -----------------
Cash and cash equivalents - end of period $ 342 $ 152
=============== =================
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation:
Throughout this document, NCT Group, Inc. and its subsidiaries are referred
to as the "company," "we," "our," "us" or "NCT." The accompanying condensed
consolidated financial statements are unaudited but, in the opinion of
management, contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the consolidated
financial position and the results of operations and cash flows for the periods
presented in conformity with accounting principles generally accepted in the
United States of America applicable to interim periods. The results of
operations for the three months ended March 31, 2002 and cash flows for the
three months ended March 31, 2002 are not necessarily indicative of the results
that may be expected for any other interim period or the full year. These
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 2001.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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 prior period
financial statements to conform to the current period's presentation.
NCT has incurred substantial losses from operations since its inception
which cumulatively amounted to $225.7 million through March 31, 2002. Cash and
cash equivalents amounted to $0.2 million at March 31, 2002, decreasing from
$0.6 million at December 31, 2001. A working capital deficit of $56.6 million
exists at March 31, 2002. NCT is in default of $15.1 million of its convertible
notes at March 31, 2002. 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 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 revenues do not generate sufficient cash, management believes
additional working capital financing must be obtained. We are attempting to
raise additional capital to fund operations (see Note 13). 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 the company will continue as a going concern, which
contemplates continuity of operations, realization of assets and satisfaction of
liabilities in the ordinary course of business. The propriety of using the going
concern basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private financing and other funding sources to meet our
obligations. The uncertainties described in
5
the preceding paragraphs raise substantial doubt at March 31, 2002 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. Restatement of Prior Year Quarterly Statement of Operations:
The accompanying statement of operations for the three months ended March
31, 2001 has been retroactively adjusted to reflect the transactions described
below.
a) On March 7, 2001, the company decided to reacquire two DMC licenses held by
Eagle Assets and Brookepark for $4.0 million. As a result, we incurred an
aggregate charge of $1.3 million, net of a $2.7 million reduction of deferred
revenue to zero, included in repurchased licenses, net in our condensed
consolidated statement of operations. Concurrently, we ceased recognition of
revenue on these DMC licenses. The net change in license fee revenue was a
decrease of $0.1 million. The accounts receivable reserve was increased by $0.3
million resulting in an increase of selling, general and administrative expenses
for the first quarter of 2001.
b) On March 31, 2001, pursuant to the May 8, 2000 as amended by the June 30,
2000 license agreement with ITC, license fee revenue increased by $0.1 million
and research and engineering cost increased by $0.1 million for the first
quarter of 2001.
c) On May 5, 2000, Theater Radio Network, Inc. entered into an advertising
agreement with InsiderStreet.com, Inc. The advertising agreement required, among
other things, Theater Radio Network to play InsiderStreet's commercials in a
minimum of 8,500 theater screens at a cost of $20.58 per theater screen per
month, as further described in the agreement. The term of the agreement was two
years commencing on June 19, 2000. At the date of acquisition (August 18, 2000)
of Theater Radio Network by DMC Cinema, Theater Radio Network had remaining
475,595 shares of the originally issued 575,595 shares of InsiderStreet which
were valued at $2.5 million. At the time of the transaction, approximately $2.9
million was recorded as deferred revenue that was expected to be recognized as
revenue over the two-year term of the advertising agreement. Subsequent to our
acquisition of Theater Radio Network, we received notification that
InsiderStreet was canceling the advertising arrangement. We continued providing
services for a period of time after the termination. InsiderStreet agreed that
DMC Cinema could retain the shares. The recognition of deferred revenue ceased.
The net change in advertising/media revenue was a decrease of $0.4 million.
d) During the first quarter of 2001, step up acquisitions of NCT Audio were
adjusted to reflect the fact that our investment in this subsidiary had been
reduced to zero. The net change was $0.8 million as reduction in impairment of
goodwill.
e) Upon adoption of Statement of Financial Accounting Standards (SFAS) No. 138
on January 1, 2001, we realized a reduction in the carrying value of a warrant
from a licensee of approximately $1.6 million classified as cumulative effect of
change in accounting principle on the condensed consolidated statement of
operations. On March 31, 2001, we realized a reduction in the carrying value of
approximately $0.1 million classified as other (income) expense, net on the
condensed consolidated statement of operations.
6
(in thousands, except per share amounts)
Three months ended
March 31, 2001
-----------------------------
As
Reported Adjusted
------------- -------------
Revenue:
Technology licensing fees and royalties $ 910 $ 913 a, b
Product sales, net 1,084 1,084
Advertising/media 490 115 c
Engineering and development services 18 18
------------- -------------
Total revenue 2,502 2,130
------------- -------------
Costs and expenses:
Cost of product sales 578 577
Cost of advertising/media 243 243
Selling, general and administrative 3,895 4,145 a
Research and development 1,164 1,250 b
Impairment of goodwill, net 1,360 533 d
Repurchased licenses, net - 1,278 a
------------- -------------
Total operating costs and expenses 7,240 8,026
------------- -------------
Non-operating items:
Other (income) expense, net (58) (34)
Interest expense, net 1,143 1,143
------------- -------------
Total costs and expenses 8,325 9,135
------------- -------------
Loss before cumulative effect of change in accounting principle (5,823) (7,005)
Cumulative effect of change in accounting principle - (1,582) e
------------- -------------
Net loss $ (5,823) $ (8,587)
============= =============
Loss attributable to common stockholders $ (6,117) $ (8,881)
============= =============
Loss per share - basic and diluted $ (0.02) $ (0.03)
============= =============
Weighted average common shares outstanding - basic and diluted 337,738 337,738
============= =============
As of March 31, 2001
-----------------------------
As
Balance Sheet Data: Reported Adjusted
------------- -------------
Total assets $ 49,810 $ 57,589
Total current liabilities 32,634 38,355
Total long term liabilities 2,472 8,065
Accumulated deficit (147,622) (150,386)
Stockholders' equity 4,952 505
Working capital (deficit) (14,555) (13,450)
3. Loss Per Share:
We report loss per common share in accordance with SFAS No. 128, "Earnings
Per Share." The per share effects of potential common shares such as warrants,
options, convertible debt and convertible preferred stock have not been
included, as the effect would be antidilutive.
4. Comprehensive Income (Loss):
The company reports comprehensive loss in accordance with SFAS No. 130,
"Reporting Comprehensive Income." The provisions for SFAS 130 require the
company to report the changes in stockholders' equity (capital deficit) from all
sources during the period other than those resulting from investments by and
distributions to shareholders. Accordingly, the consolidated statements of
comprehensive loss are presented while the caption "accumulated other
comprehensive income (loss)" is included on the consolidated balance sheets as a
component of stockholders' equity (capital deficit). Due to availability of net
operating losses, there is no tax effect associated with any component of other
comprehensive loss. Comprehensive loss is comprised of net loss and other
comprehensive (loss) income. Other comprehensive (loss) income includes certain
changes in
7
stockholders' equity (capital deficit) that are excluded from net income,
including unrealized gains and losses on our available-for-sale securities and
foreign currency translation adjustments.
5. Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS 142, we will be
required to reassess the goodwill and other intangible assets previously
recorded in connection with prior acquisitions, as well as their useful lives.
SFAS 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually and whenever there is an impairment indicator. All acquired goodwill
must be assigned to reporting units for purposes of impairment testing and
segment reporting. Effective January 1, 2002, goodwill will no longer be subject
to amortization. Intangible assets with definite useful lives will continue to
be amortized over their respective estimated useful lives. The company has
adopted SFAS 142 effective January 1, 2002. Adoption of SFAS 142 required us to
evaluate the future cash flows. Using the guidelines in SFAS 142 for intangible
assets with finite lives, the estimated future cash flows were determined in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The estimated future cash flows were then compared to the
carrying value of our other intangible assets. As of January 1, 2002, we did not
have any impairment on other intangible assets. The adoption of SFAS 142
resulted in the elimination of the amortization of goodwill which would have
been $0.1 million and had no other impact on our financial statements. At March
31, 2002, we had $7.2 million of goodwill, net of amortization and $4.0 million
of patent rights and other intangibles, net of amortization. For the three
months ended March 31, 2001 and March 31, 2002, we had $0.3 million and zero of
goodwill amortization expense, respectively, and $0.2 million and $0.1 million
of other intangible asset amortization expense, respectively.
6. Other Financial Data:
Balance Sheet Items:
Investments in marketable securities include available-for-sale securities
at market value. The following table displays the fair value, cost basis, and
realized/unrealized gain (loss) of the company's available-for-sale securities
(in thousands):
December 31, 2001 March 31, 2002
----------------------------------------------------------- ------------------------------------------
Cost Realized Unrealized Market Cost Unrealized Market
Basis Gain/(Loss) Gain/(Loss) Value Basis Gain/(Loss) Value
------------ ---------------- -------------------------- ---------- ---------------- --------------
Available-for-sale:
ITC $ 4,696 $ (3,898) $ - $ 798 $ 798 $ (330) $ 468
Teltran 743 (659) - 84 84 28 112
InsiderStreet 2,479 (2,479) - - - - -
------------ ---------------- ---------- ----------- ---------- ---------------- --------------
Totals $ 7,918 $ (7,036) $ - $ 882 $ 882 $ (302) $ 580
============ ================ ========== =========== ========== ================ ==============
The company reviews declines in the value of its investment portfolio when
general market conditions change or specific information pertaining to an
industry or to an individual company becomes available. The company considers
all available evidence to evaluate the realizable value of its investments and
to determine whether the decline in realizable value may be
other-than-temporary.
8
Accounts receivable comprise the following (in thousands):
December 31, March 31,
2001 2002
--------------- --------------
Technology license fees and royalties $ 287 $ -
Joint ventures and affiliates 34 34
Other receivables 693 900
--------------- --------------
$ 1,014 $ 934
Allowance for doubtful accounts (298) (366)
--------------- --------------
Accounts receivable, net $ 716 $ 568
=============== ==============
Inventories comprise the following (in thousands):
December 31, March 31,
2001 2002
------------- -----------
Components $ 427 $ 362
Finished goods 1,749 1,527
------------- -----------
$ 2,176 $ 1,889
Reserve for obsolete & slow moving inventory (791) (736)
------------- -----------
Inventories, net $ 1,385 $ 1,153
============= ===========
Other current assets comprise the following (in thousands):
December 31, March 31,
2001 2002
------------- ----------------
Notes receivable $ 1,000 $ 1,000
Investment in warrant (Teltran) 152 159
Due from officer 105 105
Other 516 490
------------- ----------------
$ 1,773 $ 1,754
Reserve for uncollectible amounts (1,000) (1,000)
------------- ----------------
Other current assets $ 773 $ 754
============= ================
Other assets (long term) comprise the following (in thousands):
December 31, March 31,
2001 2002
--------------- --------------
Marketable ITC securities $ 1,304 $ 1,320
Advances and deposits 651 649
Deferred charges 537 575
Other 78 93
--------------- --------------
Other assets $ 2,570 $ 2,637
=============== ==============
9
Property and equipment comprise the following (in thousands):
December 31, March 31,
2001 2002
------------------- ----------------
Machinery and equipment $ 3,798 $ 2,020
Furniture and fixtures 623 621
Leasehold improvements 966 906
Tooling 619 619
Other 432 449
------------------- ----------------
$ 6,438 $ 4,615
Accumulated depreciation (4,594) (2,977)
------------------- ----------------
Property and equipment, net $ 1,844 $ 1,638
=================== ================
Deferred revenues comprise the following (in thousands):
December 31, March 31,
2001 2002
------------------ --------------
NXT $ 6,955 $ 6,420
Teltran 1,921 1,345
Other 555 568
------------------ --------------
$ 9,431 $ 8,333
Less: amount classified as current (4,616) (4,053)
------------------ --------------
Deferred revenue (classified as long term) $ 4,815 $ 4,280
================== ==============
Other current liabilities comprise the following (in thousands):
December 31, March 31,
2001 2002
------------------- -----------------------
License reacquisition payable $ 18,000 $ 18,000
Development fee payable 800 750
Royalty payable 766 910
Due to L&H 100 100
Other 113 140
------------------- -----------------------
Other current liabilities $ 19,779 $ 19,900
=================== =======================
Other liabilities (long term) comprise the following (in thousands):
December 31, March 31,
2001 2002
--------------- --------------
Due to ITC $ 1,422 $ 1,422
Royalty payable 958 814
Due to selling shareholders of Theater Radio Network 570 570
--------------- --------------
Other liabilities $ 2,950 $ 2,806
=============== ==============
10
Statement of Operations Information:
Other (income) expense, net comprise the following (in thousands):
Three months ended March 31,
----------------------------------
2001 2002
------------- ----------------
Finance costs associated with non-registration of common shares and
of common shares underlying convertible notes $ - $ 909
Minority share of loss in subsidiary - Pro Tech (61) (108)
Depreciation in fair value of warrant 88 (6)
Default penalties on debt - 25
Other (61) 3
----------------------------------
Total non-operating other (income) expense, net $ (34) $ 823
==================================
Supplemental Cash Flow Disclosures:
(in thousands)
Three months ended March 31,
--------------------------------------
Supplemental disclosures of cash flow information: 2001 2002
------------------- ----------------
Cash paid during the year for:
Interest $ - $ 3
=================== ================
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding gain on available-for-sale securities $ (3,379) $ (287)
=================== ================
Issuance of common stock upon conversion of notes $ - $ 375
=================== ================
Issuance of common stock in exchange for common stock of subsidiary $ 1,166 $ -
=================== ================
Receipt of Pro Tech common shares in lieu of cash to settle
accounts receivable $ 1,350 $ -
=================== ================
Issuance of preferred stock of subsidiary, Artera Group, Inc. $ 8,299 $ -
=================== ================
Issuance of notes for placement services rendered $ 17 $ 15
=================== ================
Issuance of common stock in exchange for preferred stock $ 175 $ -
=================== ================
Property and equipment financed through capitalized leases and notes payable $ - $ 6
=================== ================
Receipt of non-recourse notes as partial consideration for convertible
note of subsidiary $ 1,000 $ -
=================== ================
Receipt of Pro Tech common shares as partial consideration of convertible
note of subsidiary $ 500 $ -
=================== ================
11
7. Stockholders' Equity (Deficit):
The changes in stockholders' equity (deficit) during the three months ended
March 31, 2002 were as follows (in thousands):
Net
Issuance of Accumulated
Balance Common Stock, Other Balance
at Retirement of Options Net Comprehensive At
12/31/01 Treasury Stock and Warrants Loss Loss 3/31/02
------------ ---------------- ------------- --------- --------------- ------------
Common stock:
Shares 428,831 (6,078) 11,984 - - 434,737
Amount $ 4,288 (61) 120 - - $ 4,347
Treasury stock:
Shares 6,078 (6,078) - - - -
Amount $ (2,963) 2,963 - - - $ -
Additional paid-in capital $ 164,621 (2,902) 2,213 - - $ 163,932
Accumulated (deficit) $ (219,459) - - (6,248) - $ (225,707)
Accumulated other
Comprehensive loss $ 50 - - - (265) $ (215)
8. Notes Payable:
(In thousands)
December 31, March 31,
2001 2002
---------------------- ----------------------
Logical eBusiness Solutions Limited (f/k/a DataTec) $ 2,184 $ 2,161
Obligation of subsidiary to a prior owner of Web Factory;
due in two installments of 750 British pounds sterling on
August 31, 2000 and December 31, 2000; interest accrues at
4% above the base rate of National Westminister Bank plc
Bridge financing 465 -
$465 rolled into financing completed in January 2002;
notes bore interest at rates ranging from 3% to 6%
Note from stockholder of subsidiary 237 187
Interest at 8.5% per annum payable at maturity;
matured March 27, 2002; Upon maturity rolled into note
which matures March 27, 2003
Top Source Automotive 204 204
Default interest rate accrues at two times prime;
due April 16, 1999
Notes due former employees 118 118
$100 bears interest at 8.25%, compounded annually; due
in two equal installments on December 1, 1998 and March 1,
1999. $18 non-interest bearing due on demand.
---------------------- ----------------------
$ 3,208 $ 2,670
====================== ======================
12
9. Convertible Notes:
(In thousands)
December 31, March 31,
2001 2002
--------------------- ----------------------
Issued to Carole Salkind (a) $ 7,222 $ 9,607
Effective interest rate of 20.8%; secured by substantially all
of the assets of NCT; convertible into NCT common stock
at prices ranging from $0.071 - $0.12 or exchangeable for
common stock of NCT subsidiaries; due as follows:
March 27, 2002 $ 1,000
September 28, 2002 2,535
December 20, 2002 2,014
January 11, 2003 2,231
January 25, 2003 650
February 27, 2003 827
March 1, 2003 350
Issued to Crammer Road LLC (b) 1,000 1,000
Accrues interest at 2% per month from May 27, 2001 payable
at maturity; convertible at 93.75% of average five-day closing
bid price for the five trading days preceding conversion;
due December 31, 2001 (see Note 14)
8% Convertible Notes (c) 401 976
Convertible into NCT common stock at various
conversion rates; matures:
March 14, 2002 $ 17
April 12, 2002 9
January 10, 2004 550
March 11, 2004 400
6% Convertible Notes (d) 4,428 4,428
Convertible into NCT common stock at 100% of the five-day
average closing bid price preceding conversion; matures:
January 9, 2002 $ 2,222
April 4, 2002 875
May 25, 2002 81
June 29, 2002 1,250
--------------------- ----------------------
$ 13,051 $ 16,011
Less: unamortized debt discounts (1,341) (1,817)
Less: amounts classified as long term - (659)
--------------------- ----------------------
$ 11,710 $ 13,535
===================== ======================
13
Footnotes:
(a) During the three months ended March 31, 2002, NCT issued an aggregate of
$4.3 million of secured convertible notes to Carole Salkind, an accredited
investor and spouse of a former director of NCT. We defaulted on payment of
notes dated August 22, 2001 and January 25, 2002 for an aggregate of $1.9
million. The principal on the note dated August 22, 2001 ($1.7 million) was
rolled into a new note in 2002 along with default penalties aggregating $192,339
(10% of the principal in default), accrued interest and an aggregate of $2.4
million new funding from Carole Salkind. We recorded a discount of $0.3 million
to the notes based upon the relative fair values of the debt and warrants
granted to Ms. Salkind (see Note 11). In addition, beneficial conversion
features totaling $0.5 million have been recorded as a discount to the notes.
For the three months ended March 31, 2002, $0.5 million of amortization related
to these discounts is included in interest expense. Unamortized discounts of
$1.5 million have been reflected as a reduction to the convertible notes in our
condensed consolidated balance sheet as of March 31, 2002. The $0.8 million
secured convertible note is also secured by an interest in specific assets of
our subsidiary, NCT Video. The default provisions in these notes impose a
penalty of 10% of the principal payments in default and default interest from
the date of default on the principal in default at the stated rate plus 5%. On
February 6, 2002, due to a judgment in an unrelated case having been entered
against NCT and DMC in excess of the permitted maximum of $250,000 (see Note
10), an event of default occurred with respect to the notes outstanding. To
date, demand for payment has not been made. On March 27, 2002, the company did
not repay a $1.0 million note. This note was rolled into a note dated May 2,
2002 along with accrued interest and penalties thereon. See Note 13.
(b) The company did not repay this convertible note upon maturity. We are
obligated to register shares issuable upon conversion of this note.
(c) Notes totaling approximately $26,000 are convertible at 80% of the lowest
closing bid price for the five days preceding conversion; notes totaling $0.5
million are convertible at the lower of $0.07 per share or 80% of the lowest
closing bid price for the five days preceding conversion; and notes totaling
$0.5 million are convertible at $0.0647 per share. Beneficial conversion
features totaling $0.3 million have been recorded as a discount to the notes.
For the three months ended March 31, 2002, approximately $29,000 of amortization
related to these discounts is included in interest expense. Unamortized
discounts of $0.3 million have been reflected as a reduction to the convertible
notes in our condensed consolidated balance sheet as of March 31, 2002. The
company did not repay a convertible note for approximately $17,000 upon
maturity.
(d) Amortization of note discounts amounted to $0.1 million during the three
months ended March 31, 2002. Unamortized discounts of approximately $66,000 have
been reflected as a reduction to the convertible notes in our condensed
consolidated balance sheet as of March 31, 2002. On January 10, 2002, a security
interest was granted to certain holders on notes totaling $3.1 million. We were
obligated to register additional shares at various dates during 2001, which
despite our best efforts we were unable to accomplish. As a result, we have
recorded charges of $0.6 million in finance costs included in other (income)
expense for the three months ended March 31, 2002 (see Note 6). This failure
also triggered an event of default on the aggregate outstanding debt. We have
not received a demand for payment. The average effective interest rate on these
notes is 141.7% due to the amortization of original issue discounts and
conversions of principal.
10. Litigation:
On December 6, 2000, our subsidiary DMC Cinema (formerly known as Theater
Radio Network) filed suit against InsiderStreet.com, Inc. in the Circuit Court
of the Thirteenth Judicial
14
Circuit for Hillsborough County, Florida. The complaint alleges that
InsiderStreet breached a May 5, 2000 advertising agreement with Theater Radio
Network and seeks a declaratory judgment and specific performance of the
agreement. The agreement provided that, in exchange for advertising services
performed by Theater Radio Network, InsiderStreet would deliver to Theater Radio
Network $3 million in common stock of InsiderStreet, with an adjustment in the
number of shares to ensure that the total stock delivered was worth at least $2
million on May 10, 2001 and with registration of all stock delivered.
InsiderStreet has to date made only a partial delivery of shares and has not
registered any of the shares delivered. Discovery in this litigation has begun.
On October 23, 2001, Theater Radio Network terminated its representation by
outside counsel in this action due to a possible conflict of interest. On March
26, 2002, Theater Radio Network retained new counsel to continue this action.
Management believes that at this stage it cannot assess the likelihood of a
favorable outcome. Further, since the amount of damages, if any, DMC Cinema may
recover cannot be quantified until the legal process is complete, no amount has
been recorded in the financial statements.
On February 5, 2001, Steven Esrick, a former shareholder of Theater Radio
Network, filed suit against DMC Cinema (formerly known as Theater Radio Network)
and Theater Radio Network's former Chief Executive Officer and President in the
Circuit Court of the Sixth Judicial Circuit for Pinellas County, Florida. The
plaintiff's original complaint claimed that Theater Radio Network breached an
alleged oral escrow agreement with the plaintiff arising out of the sale of
Theater Radio Network stock to DMC Cinema by Theater Radio Network's
shareholders and sought unspecified damages. DMC Cinema denied the material
allegations of this complaint and moved to dismiss the case against it. On
November 8, 2001, while DMC Cinema's motion to dismiss was pending, Esrick
amended his complaint, substituting for his original claim the claim that DMC
Cinema breached an alleged agreement to deliver to him 50,000 registered shares
of stock of InsiderStreet.com, Inc. On December 13, 2001, DMC Cinema filed an
Answer to the amended complaint in which it denied the material allegations of
the amended complaint. DMC Cinema intends to defend the action vigorously.
Currently, the parties are conducting discovery. In April 2002, DMC Cinema
switched outside counsel in this action. Management, in consultation with legal
counsel, cannot at this stage determine the likelihood of an unfavorable outcome
in the action.
On June 6, 2001, Production Resource Group began legal proceedings against
NCT and our subsidiary Distributed Media Corporation in the Superior Court for
the Judicial District of Fairfield County, Connecticut. PRG alleged that NCT and
DMC breached a July 19, 1999 lease, promissory note and warrant entered into in
connection with the lease of some DMC Sight & Sound(TM) equipment, a January 11,
2001 agreement designed to settle disputes between the parties concerning the
July 19, 1999 transactions and a May 11, 2001 agreement designed to settle
disputes between the parties concerning the July 19, 1999 and January 11, 2001
transactions. PRG also alleged that NCT and DMC engaged in misrepresentations
and fraud in connection with these matters. On October 4, 2001, NCT and DMC
filed an answer to the plaintiff's complaint, generally denying the plaintiff's
allegations, seeking dismissal of the complaint and counterclaiming for breach
of PRG's obligation to deliver equipment. On July 26, 2001, the court issued a
pre-judgment remedy giving PRG the right to attach or garnish up to $2.1 million
of specified assets of NCT and DMC. On December 20, 2001, NCT and DMC accepted
an Offer of Judgment requiring NCT and DMC to pay PRG $2.0 million, which
judgment was entered on January 17, 2002. Under the pre-judgment remedy and
judgment, approximately $78,000 in NCT's cash or cash equivalent assets have
actually been attached, garnished or seized. PRG is currently conducting
post-judgment discovery regarding further enforcement of the judgment. To the
extent that further payment of the judgment is in cash, such payment could be
material to our cash position. As of March 31, 2002, we have recorded all
anticipated liability related to this judgment.
15
On January 2, 2002, outside the scope of the judgment entered into with NCT
and DMC, PRG amended its complaint to allege that NCT's Chairman and Chief
Executive Officer Michael Parrella, in dealing with PRG on behalf of NCT,
committed unfair trade practices, fraud and breaches of good faith and fair
dealing. Mr. Parrella has told NCT that he intends to deny the allegations. To
the extent that NCT may ultimately indemnify Mr. Parrella for any liabilities
arising out of these allegations and for related legal fees, we believe that our
directors and officers indemnification insurance (after payment of a $100,000
deductible) will be adequate to cover such payments.
On January 11, 2002, Broadcast Music, Inc. commenced arbitration
proceedings against Theater Radio Network and its successor-in-interest DMC
Cinema with the American Arbitration Association, for the respective amounts of
approximately $153,400 and $62,100. These proceedings were brought under
agreements with Theater Radio Network dated December 11, 1998 (amended December
22, 1998) and with DMC Cinema dated June 29, 2001. BMI's claims are for license
fees arising out of the alleged publication by Theater Radio Network and DMC
Cinema of music in the BMI repertoire. Theater Radio Network and DMC Cinema
denied the allegations of BMI. No further actions have occurred in the
arbitration proceedings, and the parties are attempting to reach a settlement of
all claims.
On or about January 31, 2002, an action was brought against NCT by West
Nursery Land Holding Limited Partnership in the District Court of Maryland for
Anne Arundel County. This action sought repossession of premises at 1025 West
Nursery Road, Linthicum, Maryland and an award of approximately $89,000 in
connection with NCT's shutdown of its offices at, and abandonment of, such
premises. On or about February 7, 2002, judgment as requested in the complaint
was entered by the court. As of May 15, 2002, approximately $27,000 in NCT's
cash or cash equivalent assets have been seized in enforcement of the judgment.
On February 21, 2002, an action was brought by Mesa Partners, Inc. against
NCT and Distributed Media Corporation in Supreme Court, New York, Suffolk County
for breach of an alleged contract for financial consulting services. The
complaint seeks approximately $430,000 plus interest, attorneys' fees and costs.
On April 22, 2002, NCT and DMC filed an answer to the complaint in which they
denied any liability. NCT and DMC intend to defend this action vigorously.
Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2001, for a discussion of the following matters:
On November 17, 1998, the company and NCT Hearing filed suit against Andrea
Electronics Corporation in the United States District Court, Eastern District of
New York. There were no material developments in this matter during the period
covered by this report.
On September 16, 1999, NCT Audio filed a demand for arbitration before the
American Arbitration Association in Wilmington, Delaware, against Top Source
Technologies (now known as Global Technovations, Inc. or GTI) and its subsidiary
Top Source Automotive. On or about December 18, 2001, GTI and TSA filed for
bankruptcy reorganization in a case now before the U.S. Bankruptcy Court for the
Eastern District of Michigan. There were no material developments in this matter
during the period covered by this report.
16
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 its financial position or results
of operations.
11. Capital Stock:
Authorized Capital Stock
Common shares available for future issuance
At March 31, 2002, the shares of common stock required to be reserved was
645,884,145 calculated at the $0.13 common stock price on that date (or the
discount therefrom as allowed under the applicable exchange or conversion
agreements). At the March 31, 2002 common stock price of $0.13, 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 NCT's Second Restated Certificate of Incorporation to increase
the number of shares of common stock authorized for NCT.
Shares Issued upon Conversion or Exchange of Indebtedness
On March 12, 2002, $0.4 million of the 8% convertible notes, plus interest,
were exchanged for 5,611,682 shares of NCT's common stock. At March 31, 2002,
$1.0 million of the 8% convertible note principal could be exchanged for NCT
common stock.
Shares Issued to Vendors and Others
During the three months ended March 31, 2002, NCT issued 300,000 shares of
our common stock to a consultant for services and recorded a cost of
approximately $23,000 for the three months ended March 31, 2002.
NCT Audio Products, Inc.
Initial Financing - exchange of common stock
In 1997, NCT Audio sold 2,145 shares of common stock for approximately $4.0
million in a private placement under Regulation D of the Securities Act of 1933
(the "Securities Act"). The terms of the sale allowed purchasers of NCT Audio's
common stock to exchange their shares for NCT common stock at 80% of the
five-day average closing bid price of NCT common stock for the five days
immediately preceding the exchange. The NCT share exchanges are accounted for as
step acquisitions of NCT Audio. In 1999, we changed the business strategy to
suspend NCT Audio's acquisition effort. Based upon that change in strategy and
the then current valuation, combined with the continuing inability of NCT Audio
to generate positive cash flows from operations, we began impairing goodwill
resulting from step acquisitions in exchanging the minority interests in NCT
Audio for NCT common stock. Included in impairment of goodwill in our condensed
consolidated statements of operations are charges attributable to step
acquisitions of NCT Audio aggregating $0.5 million and $0.3 million, for the
three months ended March 31, 2001 and 2002, respectively.
During the three months ended March 31, 2002, we issued an aggregate of
3,930,818 shares of our common stock in exchange for 160 shares of NCT Audio
common stock. At March 31, 2002, there were no shares of NCT Audio common stock
subject to exchange outstanding.
17
Distributed Media Corporation
Exchange of common stock
On February 28, 2002, we issued 2,142,073 shares of our common stock in
exchange for 6.435 shares of DMC common stock pursuant to an employment
termination agreement.
Artera Group, Inc. Preferred Stock
NCT is obligated to register shares of its common stock for the exchange of
Artera series A preferred stock. In 2002, we incurred a charge of $0.5 million
for non-registration of the underlying shares of NCT common stock. This amount
is included in preferred stock dividends and in the calculation of loss
attributable to common stockholders for the three months ended March 31, 2002.
Pursuant to the exchange rights agreement, NCT has the option at any time to
redeem any outstanding Artera series A preferred stock by paying the holder cash
equal to the aggregate stated value of the preferred stock being redeemed
(together with accrued and unpaid dividends thereon). For the three months ended
March 31, 2001 and 2002, we calculated the 4% dividends earned by holders of the
Artera series A preferred stock at $27,284 and $81,853, respectively. These
amounts are included in preferred stock dividends and in the calculation of loss
attributable to common stockholders.
Pro Tech Communications, Inc. Preferred Stock
For the three months ended March 31, 2001 and 2002, we calculated the 4%
dividends earned by holders of the Pro Tech series A convertible preferred stock
at $10,763 and $493, respectively. For the three months ended March 31, 2002, we
calculated the 4% dividends earned by holders of the Pro Tech series B
redeemable convertible preferred stock at $4,933. These amounts are included in
preferred stock dividends and in the calculation of loss attributable to common
stockholders.
For the three months ended March 31, 2002, the amortization of beneficial
conversion feature related to Pro Tech series B redeemable convertible preferred
stock was $25,262. This amount is included in beneficial conversion features and
in the calculation of loss attributable to common stockholders.
Treasury Stock
On March 1, 2002, all 6,078,065 shares of NCT treasury stock were retired
and cancelled.
Options
For the three months ended March 31, 2002, we granted non-plan options to
purchase an aggregate of 11,725,000 shares of our common stock at exercise
prices ranging from $0.079 to $0.13 as partial consideration for consulting
services. We estimated the fair value of these options using the following
assumptions in applying the Black-Scholes option pricing model: dividend yield
of 0%; risk-free interest rates of 3.5% to 3.61%; volatility of 100%, and an
expected life of four to five years. For the three months ended March 31, 2002,
we recorded a charge for consulting services of $0.7 million.
18
Warrants
During the three months ended March 31, 2002, in conjunction with the
issuance of convertible notes, NCT granted Carole Salkind warrants to acquire an
aggregate of 5,385,848 shares of its common stock at exercise prices ranging
from $0.071 to $0.09 per share. The fair value of these warrants was
approximately $0.3 million (determined using the Black-Scholes option pricing
model). Based upon allocation of the relative fair values of the instruments, we
recorded a discount of $0.3 million to the convertible notes issued to Carole
Salkind.
On January 10, 2002, NCT re-priced a warrant granted to a placement agent
on October 25, 2001 to acquire 20,000,000 shares of NCT common stock from an
exercise price of $0.09 per share to the lower of: $0.07 per share or the lowest
closing bid price from January 10, 2002 through June 28, 2002. The October 25,
2001 warrant was for advisory services with respect to equity placements during
2001 and resulted in no effect on the statement of operations for the three
months ended March 31, 2002. On January 10, 2002, we granted the same placement
agent a warrant to acquire 5,000,000 shares of NCT common stock as consideration
for advisory services on our $0.6 million financing then completed (see Note 9).
If the closing bid price of our common stock from the date of grant through June
28, 2002 is greater than $0.25 per share, 3,000,000 shares of the unexercised
warrant stock will be eliminated. During the three months ended March 31, 2002,
we also issued warrants to outside consultants for the right to acquire an
aggregate of 604,167 shares of our common stock at exercise prices ranging from
$0.13 to $0.20 per share. The vesting of 200,000 shares of this warrant stock is
contingent on the closing bid price of our common stock on any day from the date
of grant through December 31, 2002 being greater than $1.00 per share. For the
three months ended March 31, 2002, we recorded a charge for consulting services,
in connection with vested warrants totalling 2,404,167 shares, of $0.2 million
(determined using the Black-Scholes option pricing model). No charge was taken
with respect to the contingent protion of these warrants.
12. Business Segment Information:
Management views the company as being organized into three business
operating segments: Media, Communications and Technology. The Other operating
segment is used to reconcile the reportable segment data to the consolidated
financial statements and is segregated into two categories, Other-corporate and
Other-consolidating.
Other-corporate consists of items maintained at the company's corporate
headquarters and not allocated to the segments. This includes most of the
company's debt and related cash and equivalents and related net interest
expense, some litigation liabilities and non-operating fixed assets. Also
included in the components of revenues attributed to Other-corporate are license
fees and royalty revenues from subsidiaries which are offset (eliminated) in the
other-consolidating column. Other-consolidating consists of items eliminated in
consolidation, such as intercompany revenues.
During the three months ended March 31, 2002, no geographic information for
revenues 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 month period ended March 31, 2002 and
March 31, 2001 (see Note 2) is as follows (in thousands):
19
(in thousands)
Segment
-------------------------------------------------------------------------------------------
Reportable --------Other------------- Grand
Media Communications Technology Segments Corporate Consolidating Total
-------------------------------------------------------------------------------------------
For the three months ended
March 31, 2002:
- --------------
License Fees and Royalties $ 535 $ 576 $ - $ 1,111 $ 4 $ (4) $ 1,111
Other Revenue - External 29 874 - 903 - - 903
Other Revenue - Other Operating
Segments (27) 158 - 131 - (131) -
Income (Loss) before cumulative
effect of accounting change (1,243) (2,234) (70) (3,547) (3,150) 449 (6,248)
Cumulative effect of accounting change - - - - - - -
Net Income (Loss) (1,243) (2,234) (70) (3,547) (3,150) 449 (6,248)
(in thousands)
Segment
-------------------------------------------------------------------------------------------
Reportable --------Other------------- Grand
Media Communications Technology Segments Corporate Consolidating Total
-------------------------------------------------------------------------------------------
For the three months ended
March 31, 2002:
- --------------
License Fees and Royalties $ 228 $ 576 $ 115 $ 919 $ 9 $ (15) $ 913
Other Revenue - External 143 1,074 - 1,217 - - 1,217
Other Revenue - Other Operating
Segments 401 246 - 647 - (647) -
Income (Loss) before cumulative
effect of accounting change 556 (2,117) (78) (1,639) (5,822) 456 (7,005)
Cumulative effect of accounting change - (1,582) - (1,582 - - (1,582)
Net Income (Loss) 556 (3,699) (78) (3,221) (5,822) 456 (8,587)
13. Subsequent Events:
Transactions with Carole Salkind
On May 2, 2002, NCT issued two secured convertible notes payable to Ms.
Salkind for an aggregate of $2.7 million as aggregate consideration for $1.3
million related to curing the default on a convertible note dated March 27, 2000
and $1.4 million in cash. These notes mature on November 2, 2002 (approximately
$1.3 million) and May 2, 2003 (approximately $1.4 million) and bear interest at
8% per annum payable at maturity. These notes are convertible into shares of NCT
common stock (at $0.094 per share) and may be exchanged for shares of common
stock of Pro Tech (at $0.03 per share) or any other NCT subsidiary that has an
initial public offering (at the initial public offering price thereof). In
conjunction with these notes, two five-year warrants were issued to Ms. Salkind
to purchase an aggregate of approximately 6.8 million shares of our common stock
at $0.094 per share.
Other Notes
On May 14, 2002, we defaulted on the repayment of a convertible note for
$8,750.
20
Litigation
On May 9, 2002, an action was brought by Linford Group Limited against NCT
in the U.S. District Court for the District of Connecticut. In its complaint,
Linford alleges that NCT guaranteed an obligation of NCT's indirect subsidiary
Artera Group International Limited, said to be in the amount of $425,000 (plus
interest and late charges), for office refurbishment services claimed to have
been rendered in the United Kingdom. At this stage, NCT cannot assess the
likelihood of any liability ultimately being imposed upon it in this action.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002
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 and business segments that are dependent on our
ability to: achieve profitability; achieve a competitive position in design,
development, licensing, production and distribution of electronic systems;
produce a cost effective product that will gain acceptance in relevant consumer
and other product markets; increase revenues from products; realize funding from
technology licensing fees, royalties, product sales, and engineering and
development revenues to sustain 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 alliances; 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.
21
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
The company's operating revenues are comprised of technology licensing fees
and royalties, product sales, advertising/media revenue and engineering and
development services. Operating revenues for the three months ended March 31,
2002 consisted of approximately 55.2% in technology licensing fees and
royalties, 43.5% in product sales, 0.5% in advertising/media revenue and 0.8% 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 joint ventures and alliances 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 alliances, including: Ultra is installing production model aircraft cabin
quieting systems in the SAAB 340 turboprop aircraft; Oki is integrating the
ClearSpeech(R) algorithm into large scale integrated circuits for communications
applications; and BE Aerospace and Long Prosper are providing NoiseBuster(R)
components for United Airlines' and five other international carriers'
comprehensive in-flight entertainment and information systems.
NCT has continued to make substantial investments in its technology and
intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field tests of products. Management
believes that the investment in our technology has resulted in the expansion of
our intellectual property portfolio and improvement in the functionality, speed
and cost of components and products.
Management believes that currently available funds will not be sufficient
to sustain NCT. Such funds 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 for a further
discussion relating to continuity of operations.)
In 2002, the company entered into certain transactions which provided
additional funding. These transactions included the issuance of secured
convertible notes and issuance of shares of common stock to suppliers and
consultants for services rendered to the company. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources." See
Notes 9 and 11.
22
RESULTS OF OPERATIONS
Three months ended March 31, 2002 compared to three months ended March 31,
2001
Total revenues for the three months ended March 31, 2002 were $2.0 million
compared to $2.1 million for the same period in 2001, a decrease of $0.1 million
or 4.8%.
Technology licensing fees and royalties were $1.1 million in the three
months ended March 31, 2002 as compared to $0.9 million for the same period in
2001, an increase of $0.2 million. For both periods, the license fee revenue was
a result of our recognition of deferred revenue.
For the three months ended March 31, 2002, product sales were $0.9 million
compared to $1.1 million for three months ended March 31, 2001, an decrease of
$0.2 million or 18.2%. The decrease was primarily due to reduced purchases by
major customers.
Gross profit margin on product sales, as a percentage of product revenues,
decreased to 43.1% for the three months ended March 31, 2002 compared to 46.8%
for the three months ended March 31, 2001.
Advertising/media revenues were $10,000 for the three months ended March
31, 2002 compared to $0.1 million for the same period in 2001, a decrease of
90%. Advertising/media revenues are derived from the sale of audio and visual
advertising in the Sight & Sound locations. Cost of advertising/media revenue
was $8,000 for the three months ended March 31, 2002 compared to $0.2 million
for the same period in 2001, a decrease of 96%. These decreases are primarily
due to ceasing operations of DMC Cinema during the quarter.
For the three months ended March 31, 2002, selling, general and
administrative expenses totaled $4.4 million as compared to $4.1 million for the
three months ended March 31, 2001, an increase of $0.3 million or 7.3%. Our
selling, general and administrative expenses include compensation which
generally comprises from 36% to 50% of the total; professional fees and
expenses, including legal services; non-cash depreciation and amortization;
marketing and promotional costs; and travel, among other costs.
Total costs and expenses included non-cash expenditures of: (i)
depreciation and amortization of $0.3 million in the three months ended March
31, 2002 and $0.6 million in the same period in 2001; (ii) interest expense of
$1.2 million in the three months ended March 31, 2002 primarily due to
amortization of original issue discounts of $0.3 million, amortization of
beneficial conversion feature in convertible debt of $0.4 million and accrued
costs on certain convertible debt issued by the company of $0.1 million and $1.1
million during the same period in 2001; (iii) impairment of goodwill of $0.3
million in the three months ended March 31, 2002 and $0.5 million during the
same period in 2001 and (iv) repurchased licenses cost of zero in the three
months ended March 31, 2002 and $1.3 million during the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
NCT has incurred substantial losses from operations since its inception,
which have been recurring and amounted to $225.7 million on a cumulative basis
through March 31, 2002. These losses, which include the costs for development of
products for commercial use, have been funded primarily from:
23
o the sale of our and our subsidiaries' common stock;
o the sale of our and our subsidiaries' preferred stock convertible into our
common stock;
o the sale of our and our subsidiaries' debt instruments convertible into our
common stock;
o technology licensing fees;
o royalties;
o product sales;
o advertising revenues; and
o engineering and development funds received from strategic partners and
customers.
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 and engineering development revenue.
Reducing operating expenses and capital expenditures alone may not be
sufficient, and continuation as a going concern is dependent upon the level of
realization of funding from our revenue sources, all of which are presently
uncertain. In the event that our revenues are not realized as planned, then
management believes additional working capital financing must be obtained
through the private placement or public offering of additional equity of NCT or
its subsidiaries in the form of common stock, convertible preferred stock and/or
convertible debt. There is no assurance that any of these financings are or
would become available.
There can be no assurance that sufficient funding will be provided by
technology license fees, royalties, product sales, advertising revenue and
engineering and development revenue. In that event, NCT would have to
substantially reduce its level of operations. These reductions could have an
adverse effect on NCT's relationships with its customers and suppliers.
Uncertainty exists with respect to the adequacy of current funds to support
NCT's activities until positive cash flow from operations can be achieved and
with respect to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise substantial doubt at March 31, 2002
about NCT's ability to continue as a going concern.
We recently entered into financing transactions because internally
generated funding sources were insufficient. These financing transactions are
described in the notes to the condensed consolidated financial statements. Other
transactions entered into by NCT to fund its business pursuits during 2002 are
also described in the notes to the condensed consolidated financial statements.
At March 31, 2002, the company's cash and cash equivalents aggregated $0.1
million. NCT's working capital deficit was $56.6 million at March 31, 2002,
compared to a deficit of $52.6 million at December 31, 2001. This $4.0 million
increase in working capital deficit was primarily due to a the issuance of
convertible notes during the three months ended March 31, 2002 and an increase
in accounts payable and accrued expenses.
Operating Activities
Net cash used in operating activities for the three months ended March 31,
2002 and 2001 was $3.0 million and $1.6 million, respectively.
Our net accounts receivable decreased to $0.6 million at March 31, 2002
from $0.7 million at December 31, 2001. The decrease in net accounts receivable
was due to the collection of accounts receivable and a decline in the company's
entering into new technology license agreements in the 2002 period compared to
the 2001 period in all segments.
24
Our net inventory level decreased to $1.2 million at March 31, 2002 from
$1.4 million at December 31, 2001. Inventory management continues to be an area
of focus as the company balances the need to maintain strategic inventory levels
to ensure competitive lead times with the risk of inventory obsolescence due to
rapidly changing technology and customer requirements.
Research and development expenditures decreased to $1.0 million for the
three-month period ended March 31, 2002 compared to $1.3 million for the
three-month period ended March 31, 2001. The company continues to believe that a
strong commitment to research and development is required to drive long term
growth.
To improve its future operating cash flow, the company implemented
substantial cost reduction and product simplification plans in 2001. These plans
involved the evaluation and restructuring of unprofitable product offerings,
including some telephony products, and the consolidation of various duplicate
selling and general and administration expenses due to the acquisitions made.
Investing Activities
The most significant components of the company's investing activities are:
(i) capital expenditures; (ii) strategic acquisitions of, or investments in,
other companies; and (iii) proceeds from dispositions of investments.
Net cash used in investing activities was $16,000 for the three-month
period ended March 31, 2002, as compared to $0.4 million for the three-month
period ended March 31, 2001. The net cash used in investing activities for the
three-month period ended March 31, 2002 was primarily due to capital
expenditures.
Capital expenditures for the three-month period ended March 31, 2002
consumed $27,000, compared to $0.3 million for the three-month period ended
March 31, 2001. The company anticipates making additional investments during the
remainder of 2002.
In addition to available cash and cash equivalents, the company views its
available-for-sale securities as additional sources of liquidity. At December
31, 2001 and March 31, 2002, the company's available-for-sale securities had
approximate fair market values of $0.9 million and $0.6 million, respectively.
The majority of these securities represent investments in technology companies
and, accordingly, the fair market values of these securities are subject to
substantial price volatility, and, in general, have suffered a decline. In
addition, the realizable value of these securities is subject to market and
other conditions.
Financing Activities
Net cash provided by financing activities was $2.6 million for the
three-month period ended March 31, 2002, compared to $1.3 million for the
three-month period ended March 31, 2001. The increase in cash provided by
financing activities of $1.3 million was primarily due to the issuance and sale
of convertible notes.
At March 31, 2002, the company's short term debt was $17.8 million, net of
discounts of approximately $1.6 million (principally comprised of $15.1 million
of face value of outstanding
25
convertible notes and $2.7 million of outstanding notes payable), compared to
$16.3 million of short term debt at December 31, 2001. The cash proceeds were
used for general corporate purposes.
On January 10, 2002, Artera Group, Inc. privately placed a $550,000 secured
convertible note with Alpha Capital Aktiengesellschaft for $83,872 in cash and
the cancellation of a $65,000 NCT promissory note and a $400,000 NCT convertible
note along with accrued interest.
On January 11, 2002, NCT issued a secured convertible note ($2,231,265
principal amount) to Carole Salkind for $350,000 in cash and the cancellation of
a $1,673,393 NCT convertible note along with accrued interest and a default
penalty. The cash proceeds were used for general corporate purposes.
On January 25, 2002, NCT issued a secured convertible note ($650,000
principal amount) to Carole Salkind for $650,000 in cash. The cash proceeds were
used for general corporate purposes.
On January 25, 2002, NCT issued a secured convertible note ($250,000
principal amount) to Carole Salkind for $250,000 in cash. The cash proceeds were
used to fund an escrow account with an unrelated third party.
On February 27, 2002, NCT issued a secured convertible note ($827,412
principal amount) to Carole Salkind for $800,000 in cash and the accrued
interest and a default penalty on a $250,000 NCT convertible note dated January
25, 2002. The cash proceeds were used for general corporate purposes.
On March 1, 2002, NCT issued a secured convertible note ($350,000 principal
amount) to Carole Salkind for $350,000 in cash. The cash proceeds were used for
general corporate purposes.
On March 11, 2002, NCT privately placed a $400,000 convertible note with
Alpha Capital Aktiengesellschaft for $385,340 in cash and the cancellation of a
$14,628 Artera Group, Inc. promissory note along with accrued interest. The cash
proceeds were used for general corporate purposes.
The company expects that from time to time outstanding short term debt may
be replaced with new short or long term borrowings. Although the company
believes that it can continue to access the capital markets in 2002 on
acceptable terms and conditions, its flexibility with regard to long term
financing activity could be limited by: (i) the liquidity of our common stock on
the open market, (ii) the company's current level of short term debt, and (iii)
the company's credit ratings. In addition, many of the factors that affect the
company'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 the
company's control. There can be no assurances that the company will continue to
have access to the capital markets on favorable terms. In 2001, we finalized a
private equity credit agreement, which may provide us funds for operating
purposes, although we are currently in default under that agreement.
The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
26
Capital Expenditures
The company intends to continue its business strategy of working with
supply, manufacturing, and distribution and marketing partners to commercialize
its technology. The benefits of this strategy include: (1) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies; (2)
utilization of the manufacturing capacity of the company's allies, enabling the
company to integrate its active technology into products with limited capital
investment; and (3) access to well-established channels of distribution and
marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of March 31,
2002, and no material commitments are anticipated in the near future.
Quantitative Or Qualitative Disclosure About Market Risk
NCT's primary market risk exposures include fluctuations in interest rates
and foreign exchange rates. NCT is exposed to short term interest rate risk on
some of its obligations and trade accounts receivable sales. NCT does 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 ten percent proportionate increase in interest
rates from the average level of interest rates during the last twelve months,
and taking into consideration expected investment positions, 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.
27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 10 - Litigation and Note 14 -
Subsequent Events which are included herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
On January 1, 2002, NCT issued a five-year warrant to purchase 500,000
shares of our common stock to Piedmont Consulting, Inc. exercisable at $0.20 per
share, for consulting services. 300,000 of the warrant shares are subject to
contingent vesting.
On January 10, 2002, Artera Group, Inc. privately placed a $550,000 secured
convertible note with Alpha Capital Aktiengesellschaft for $83,872 in cash and
the cancellation and surrender of a $65,000 NCT promissory note and a $400,000
NCT convertible note along with accrued interest.
On January 10, 2002, NCT issued a five-year warrant to purchase 5,000,000
shares of our common stock to Libra Finance S.A. exercisable at the lower of:
$0.07 per share or the lowest closing bid price from date of issue though June
28, 2002. 3,000,000 of the warrant shares are subject to expiration based upon a
contingency.
On January 10, 2002, NCT repriced a five-year warrant to purchase
20,000,000 shares of our common stock to Libra Finance S.A. granted on October
25, 2001 from an exercise price of $0.09 per share to the lower of: $0.07 per
share or the lowest closing bid price from January 10, 2002 through June 28,
2002.
On January 11, 2002, NCT issued a secured convertible note ($2,231,265
principal amount) to Carole Salkind for $350,000 in cash and the cancellation of
a $1,673,393 NCT convertible note along with accrued interest and a default
penalty.
On January 11, 2002, NCT issued a five-year warrant to purchase 2,789,082
shares of our common stock to Carole Salkind exercisable at $0.079 per share.
Ms. Salkind was also granted a five-year option to purchase a 10% equity
interest in Artera Group, Inc. common stock at 10% of the net book value
adjusted for any third party equity investment.
On January 25, 2002, NCT issued a secured convertible note ($650,000
principal amount) to Carole Salkind for $650,000 in cash.
On January 25, 2002, NCT issued a secured five-year warrant to purchase
812,500 shares of our common stock to Carole Salkind exercisable at $0.09 per
share.
On January 25, 2002, NCT issued a secured convertible note ($250,000
principal amount) to Carole Salkind for $250,000 in cash.
On January 25, 2002, NCT issued a five-year warrant to purchase 312,500
shares of our common stock to Carole Salkind exercisable at $0.09 per share.
28
On January 25, 2002, NCT issued five-year options to purchase an aggregate
of 8,350,000 shares of our common stock to Leben Care, Inc. exercisable at a
range from $0.79 to $0.13 per share as partial consideration for consulting
services.
On January 31, 2002, NCT issued a five-year warrant to purchase 104,167
shares of our common stock to Robert C. Lau exercisable at $0.13 per share
pursuant to the settlement agreement with Clayton Dunning & Company, Inc.
On February 27, 2002, NCT issued a secured convertible note ($827,412
principal amount) to Carole Salkind for $800,000 in cash and the accrued
interest and a default penalty on a $250,000 NCT convertible note dated January
25, 2002.
On February 27, 2002, NCT issued a five-year warrant to purchase 1,034,266
shares of our common stock to Carole Salkind exercisable at $0.079 per share.
On February 27, 2002, NCT issued five-year options to purchase an aggregate
of 3,375,000 shares of our common stock to Stopnoise.com, Inc. exercisable at a
range from $0.79 to $0.12 per share as partial consideration for consulting
services.
On March 1, 2002, NCT retired 6,078,065 shares of treasury stock.
On March 1, 2002, NCT issued a convertible note ($350,000 principal amount)
to Carole Salkind for $350,000 in cash.
On March 1, 2002, NCT issued a five-year warrant to purchase 437,500 shares
of our common stock to Carole Salkind exercisable at $0.079 per share.
On March 11, 2002, NCT privately placed a $400,000 convertible note with
Alpha Capital Aktiengesellschaft for $385,340 in cash and upon the cancellation
and surrender of a $14,628 Artera Group, Inc. promissory note along with accrued
interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 6. EXHIBITS
4(a) Warrant dated January 1, 2002 issued to Piedmont Consulting, Inc. for the
purchase of 500,000 shares of NCT common stock at a purchase price of $0.20
per share.
4(b) Warrant dated January 10, 2002 issued to Libra Finance S.A. for the
purchase of 5,000,000 shares of NCT common stock at a purchase price of the
lower of $0.07 per share or the lowest closing bid price from January 10,
2002 through June 28, 2002.
4(c) Repricing of Warrant dated January 10, 2002 issued to Libra Finance S.A.
for the purchase of 20,000,000 shares of NCT common stock from a purchase
price of $0.09 per share to the lower of: $0.07 per share or the lowest
closing bid price from January 10, 2002 through June 28, 2002.
29
4(d) Warrant dated January 31, 2002 issued to Robert C. Lau for the purchase of
104,167 shares of NCT common stock at a purchase price of $0.13 per share.
4(e) Warrant dated March 1, 2002 issued to Carole Salkind for the purchase of
437,500 shares of NCT common stock at a purchase price of $0.079 per share.
4(f) Warrant dated May 2, 2002 issued to Carole Salkind for the purchase of
3,188,708 shares of NCT common stock at a purchase price of $0.094 per
share.
4(g) Warrant dated May 2, 2002 issued to Carole Salkind for the purchase of
3,562,500 shares of NCT common stock at a purchase price of $0.094 per
share.
4(h) Warrant dated January 11, 2002 issued to Carole Salkind for the purchase of
2,789,082 shares of common stock at an exercise price of $0.079 per share
incorporated herein by reference to Exhibit 4(m) to the Annual Report on
Form 10-K for the year ended December 31, 2001, filed on April 30, 2002.
4(i) Option dated January 11, 2002 granted to Carole Salkind to acquire a 10%
equity interest in Artera Group, Inc. incorporated herein by reference to
Exhibit 4(n) to the Annual Report on Form 10-K for the year ended December
31, 2001, filed on April 30, 2002.
4(j) Warrant dated January 25, 2002 issued to Carole Salkind for the purchase of
812,500 shares of NCT common stock at an exercise price of $0.09 per share
incorporated herein by reference to Exhibit 4(o) to the Annual Report on
Form 10-K for the year ended December 31, 2001, filed on April 30, 2002.
4(k) Warrant dated January 25, 2002 issued to Carole Salkind for the purchase of
312,500 shares of NCT common stock at an exercise price of $0.09 per share
incorporated herein by reference to Exhibit 4(p) to the Annual Report on
Form 10-K for the year ended December 31, 2001, filed on April 30, 2002.
4(l) Warrant dated February 27, 2002 issued to Carole Salkind for the purchase
of 1,034,226 shares of NCT common stock at an exercise price of $0.079 per
share incorporated herein by reference to Exhibit 4(q) to the Annual Report
on Form 10-K for the year ended December 31, 2001, filed on April 30, 2002.
10(a)Subscription Agreement dated January 10, 2002, between Artera Group, Inc.
and Alpha Capital Aktiengesellschaft.
10(b)Security Agreement dated January 10, 2002, between Artera Group, Inc. and
Alpha Capital Aktiengesellschaft.
10(c)Secured Convertible Note in the principal amount of $550,000 dated January
10, 2002, between Artera Group, Inc. and Alpha Capital Aktiengesellschaft.
10(d)Funds Escrow Agreement dated January 10, 2002, issued by Artera Group,
Inc. to Alpha Capital Aktiengesellschaft.
30
10(e)Secured Convertible Note in principal amount of $350,000 dated March 1,
2002 issued by the Company to Carole Salkind.
10(f)Subscription Agreement dated March 11, 2002, between the Company and Alpha
Capital Aktiengesellschaft.
10(g)Funds Escrow Agreement dated March 11, 2002, between the Company and Alpha
Capital Aktiengesellschaft.
10(h)Secured Convertible Note in the principal amount of $400,000 dated March
11, 2002, issued by the Company to Alpha Capital Aktiengesellschaft.
10(i)Secured Convertible Note in principal amount of $1,275,482.97 dated May 2,
2002 issued by the Company to Carole Salkind.
10(j)Secured Convertible Note in principal amount of $1,425,000 dated May 2,
2002 issued by the Company to Carole Salkind.
10(k)Secured Convertible Note in principal amount of $2,231,265.04 dated
January 11, 2002 issued by the Company to Carole Salkind incorporated
herein by reference to Exhibit 10(az) to the Annual Report on Form 10-K for
the year ended December 31, 2001, filed on April 30, 2002.
10(l)Secured Convertible Note in principal amount of $650,000 dated January 25,
2002 issued by the Company to Carole Salkind incorporated herein by
reference to Exhibit 10(az)(1) to the Annual Report on Form 10-K for the
year ended December 31, 2001, filed on April 30, 2002.
10(m)Secured Convertible Note in principal amount of $250,000 dated January 25,
2002 issued by the Company to Carole Salkind incorporated herein by
reference to Exhibit 10(az)(2) to the Annual Report on Form 10-K for the
year ended December 31, 2001, filed on April 30, 2002.
10(n)Secured Convertible Note in principal amount of $827,412 dated February
27, 2002 issued to Carole Salkind incorporated herein by reference to
Exhibit 10(az)(3) to the Annual Report on Form 10-K for the year ended
December 31, 2001, filed on April 30, 2002.
- -----------------------------------
(b) Reports filed on Form 8-K:
On February 14, 2002, the company filed a report on Form 8-K, dated
February 14, 2002 announcing a change in independent accountants.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /S/ MICHAEL J. PARRELLA
-------------------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
By: /S/ CY E. HAMMOND
-------------------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: May 15, 2002