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, 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
- --------------------------------------------------------------------------------
(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.
435,881,009 shares outstanding as of August 12, 2002
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands)
December 31, June 30,
2001 2002
------------------ -------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 567 $ 432
Investment in marketable securities (Note 5) 882 234
Accounts receivable, net (Note 5) 716 467
Inventories, net (Note 5) 1,385 1,037
Other current assets (Note 5) 773 566
------------------ -------------------
Total current assets 4,323 2,736
Property and equipment, net (Note 5) 1,844 1,498
Goodwill, net 7,184 7,184
Patent rights and other intangibles, net 4,088 3,862
Other assets (Note 5) 2,570 2,533
------------------ -------------------
$ 20,009 $ 17,813
================== ===================
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 5,553 $ 5,725
Accrued expenses 12,093 15,616
Notes payable (Note 7) 3,208 3,058
Current maturities of convertible notes (Note 8) 11,710 15,554
Deferred revenue (Note 5) 4,616 3,503
Other current liabilities (Note 5) 19,779 5,832
------------------ -------------------
Total current liabilities 56,959 49,288
------------------ -------------------
Long-term liabilities:
Deferred revenue (Note 5) 4,815 3,745
Convertible notes (Note 8) - 699
Other liabilities (Note 5) 2,950 2,662
------------------ -------------------
Total long-term liabilities 7,765 7,106
------------------ -------------------
Commitments and contingencies
Minority interest in consolidated subsidiaries 8,748 8,719
------------------ -------------------
Stockholders' capital deficit (Notes 6 and 10):
Preferred stock, $.10 par value,
10,000,000 shares authorized:
Series H preferred stock, issued and outstanding, 0 and 1,800 shares,
respectively (redemption amount $0 and $18,013,808 respectively) - 18,014
Common stock, $.01 par value, authorized 645,000,000 shares,
issued 428,830,800 and 435,218,842 shares, respectively 4,288 4,352
Additional paid-in capital 164,621 170,331
Accumulated other comprehensive income (loss) 50 (562)
Accumulated deficit (219,459) (239,435)
Treasury stock, 6,078,065 and 0 shares, respectively
of common stock, at cost (2,963) -
------------------ -------------------
Total stockholders' capital deficit (53,463) (47,300)
------------------ -------------------
$ 20,009 $ 17,813
================== ===================
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(in thousands, except per share amounts)
Three months ended June 30, Six months ended June 30,
----------------------------- ------------------------------
2001 2002 2001 2002
--------------- ----------- -------------- -------------
(Note 2) (Note 2)
REVENUE:
Technology licensing fees and royalties $ 1,561 $ 1,342 $ 2,474 $ 2,453
Product sales, net 1,229 703 2,313 1,580
Advertising/media 138 2 253 12
Engineering and development services 22 8 40 24
--------------- ----------- -------------- -------------
Total revenue $ 2,950 2,055 $ 5,080 4,069
--------------- ----------- -------------- -------------
COSTS AND EXPENSES:
Cost of product sales 469 405 1,046 904
Cost of engineering and development services 1 4 1 4
Cost of advertising/media 95 - 338 8
Selling, general and administrative 5,265 2,892 9,410 7,279
Research and development 1,650 1,014 2,900 2,060
Impairment of goodwill, net (Note 10) 73 - 606 300
Repurchased licenses, net 18,000 9,199 19,278 9,199
--------------- ----------- -------------- -------------
Total operating costs and expenses 25,553 13,514 33,579 19,754
Non-operating items:
Other (income) expense, net (Note 5) 3,721 840 3,687 1,663
Interest expense, net 1,711 1,429 2,854 2,628
--------------- ----------- -------------- -------------
Total costs and expenses 30,985 15,783 40,120 24,045
--------------- ----------- -------------- -------------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (28,035) (13,728) (35,040) (19,976)
Cumulative effect of change in accounting principle - - (1,582) -
--------------- ----------- -------------- -------------
NET LOSS $ (28,035) $ (13,728) $ (36,622) $ (19,976)
Beneficial conversion features (Note 10) - 16 250 41
Preferred stock dividends (Note 10) 88 621 132 1,227
--------------- ----------- -------------- -------------
LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (28,123) $ (14,365) $ (37,004) $ (21,244)
=============== =========== ============== =============
Loss per share -
Loss before cumulative effect of change
in accounting principle $ (0.07) $ (0.03) $ (0.09) $ (0.05)
Cumulative effect of change in accounting principle - - (0.01) -
--------------- ----------- -------------- -------------
Basic and diluted $ (0.07) $ (0.03) $ (0.10) $ (0.05)
=============== =========== ============== =============
Weighted average common shares outstanding -
basic and diluted 373,329 434,881 352,609 430,386
=============== =========== ============== =============
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three months ended June 30, Six months ended June 30,
----------------------------- ------------------------------
2001 2002 2001 2002
--------------- ----------- -------------- -------------
NET LOSS $ (28,035) $ (13,728) $ (36,622) $ (19,976)
Other comprehensive income (loss):
Currency translation adjustment 38 (1) 97 21
Unrealized (loss)/adjustment of unrealized loss on
marketable securities 2,939 (346) 2,281 (633)
--------------- ----------- -------------- -------------
COMPREHENSIVE LOSS $ (25,058) $ (14,075) $ (34,244) $ (20,588)
=============== =========== ============== =============
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 5)
(Unaudited)
(in thousands)
Six months ended June 30,
-------------------------------------------
2001 2002
------------------- ------------------
(Note 2)
Cash flows from operating activities:
Net loss $ (36,622) $ (19,976)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,310 602
Common stock, warrants and options issued as consideration for:
Compensation 10 169
Operating expenses 896 1,463
Costs incurred related to convertible debt 150 1,837
Provision for inventory - (270)
Provision for doubtful accounts and uncollectible amounts 283 63
Gain on disposition of fixed assets (6) -
Repurchased licenses, net 19,278 9,199
Impairment of goodwill, net (Note 10) 606 300
Costs of exiting activities - 303
Convertible note induced conversion expense 190 -
Gain on sale of NXT ordinary shares (572) -
Unrealized loss on trading securities 482 -
Realized loss on available-for-sale securities 2,969 -
Realized loss on fair value of warrant 1,017 130
Cumulative effect of change in accounting principle 1,582 -
Amortization of debt discounts 1,310 1,547
Minority interest loss (156) (203)
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable 1,342 186
Decrease in inventories 50 618
(Increase) decrease in other assets (105) 131
Increase in accounts payable and accrued expenses 2,438 1,389
Decrease in other liabilities and deferred revenue (2,931) (2,492)
------------------- ------------------
Net cash used in operating activities $ (6,479) $ (5,004)
------------------- ------------------
Cash flows from investing activities:
Capital expenditures $ (839) $ (67)
Net cash paid for Artera Group International Limited acquisition (100) -
Proceeds from sale of capital equipment - 11
Proceeds from sale of NXT ordinary shares 3,869 -
------------------- ------------------
Net cash provided by (used in) investing activities $ 2,930 $ (56)
------------------- ------------------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable (net) (Notes 7 and 8) $ 2,945 $ 5,074
Sale of preferred stock (net) - 110
Sale of excess exchange shares 164 -
Collection of subscription receivable 213 -
Repayments of notes (40) (256)
------------------- ------------------
Net cash provided by financing activities $ 3,282 $ 4,928
------------------- ------------------
Effect of exchange rate changes on cash $ (151) $ (3)
------------------- ------------------
Net decrease in cash and cash equivalents (418) (135)
Cash and cash equivalents - beginning of period 1,167 567
------------------- ------------------
Cash and cash equivalents - end of period $ 749 $ 432
=================== ==================
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 and six months ended June 30, 2002 and cash flows for
the six months ended June 30, 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 the prior periods'
financial statements to conform to the current periods' presentation.
NCT has incurred substantial losses from operations since its inception
which cumulatively amounted to $239.4 million through June 30, 2002. Cash and
cash equivalents amounted to $0.4 million at June 30, 2002, decreasing from $0.6
million at December 31, 2001. A working capital deficit of $46.6 million exists
at June 30, 2002. NCT is in default of $2.9 million of its notes payable and
$13.8 million of its convertible notes at June 30, 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 12). 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
5
private financing and other funding sources to meet our obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
June 30, 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 Statements of Operations:
The accompanying statements of operations for the three and six months
ended June 30, 2001 have been retroactively adjusted to reflect the transactions
described below.
(in thousands, except per share amounts)
Three months ended
June 30, 2001
------------------------------
As Transaction
Reported Adjusted Reference
-------------- ------------- -------------
Revenue:
Technology licensing fees and royalties $ 1,023 $ 1,561 a, b, f
Product sales, net 1,229 1,229
Advertising/media 513 138 c
Engineering and development services 22 22
-------------- -------------
Total revenue $ 2,787 $ 2,950
-------------- -------------
Costs and expenses:
Cost of product sales 468 469
Cost of engineering and development services 1 1
Cost of advertising/media 95 95
Selling, general and administrative 5,331 5,265 a, i
Research and development 1,358 1,650 b, h
Impairment of goodwill, net 113 73 d
Repurchased licenses, net - 18,000 g
-------------- -------------
Total operating costs and expenses 7,366 25,553
-------------- -------------
Non-operating items:
Other (income) expense, net 5,321 3,721 e, i
Interest expense, net 1,711 1,711
-------------- -------------
Total costs and expenses 14,398 30,985
-------------- -------------
Loss before cumulative effect of change in accounting principle (11,611) (28,035)
Cumulative effect of change in accounting principle - -
-------------- -------------
Net loss $ (11,611) $ (28,035)
============== =============
Loss attributable to common stockholders $(11,982) $ (28,123)
============== =============
Loss per share - basic and diluted $ (0.03) $ (0.07)
============== =============
Weighted average common shares outstanding - basic and diluted 379,407 373,329
============== =============
6
Six months ended Transaction
June 30, 2001 Reference
------------------------------ ------------------
As
Reported Adjusted
-------------- -------------
Revenue:
Technology licensing fees and royalties $ 1,933 $ 2,474 a, b, f
Product sales, net 2,313 2,313
Advertising/media 1,003 253 c
Engineering and development services 40 40
-------------- -------------
Total revenue 5,289 5,080
-------------- -------------
Costs and expenses:
Cost of product sales 1,046 1,046
Cost of engineering and development services 1 1
Cost of advertising/media 338 338
Selling, general and administrative 7,756 9,410 a, i
Research and development 2,522 2,900 b, h
Impairment of goodwill, net 1,494 606 d
Repurchased licenses, net - 19,278 a, g
-------------- -------------
Total operating costs and expenses 13,157 33,579
-------------- -------------
Non-operating items:
Other (income) expense, net 6,712 3,687 e, h, i
Interest expense, net 2,854 2,854
-------------- -------------
Total costs and expenses 22,723 40,120
-------------- -------------
Loss before cumulative effect of change in accounting principle (17,434) (35,040)
Cumulative effect of change in accounting principle - (1,582) e
-------------- -------------
Net loss $ (17,434) $(36,622)
============== =============
Loss attributable to common stockholders $ (18,099) $(37,004)
============== =============
Loss per share - basic and diluted $ (0.05) $ (0.10)
============== =============
Weighted average common shares outstanding - basic and diluted 358,687 352,609
============== =============
As of June 30, 2001
-----------------------------
As
Balance Sheet Data: Reported Adjusted
------------- -------------
Total assets $ 51,711 $ 51,360
Total current liabilities 37,482 53,371
Total long term liabilities 7,443 7,803
Accumulated deficit (159,233) (178,421)
Total stockholders' capital deficit (1,693) (18,205)
Working capital (deficit) (19,979) (37,279)
Footnotes:
- ----------
a) On March 7, 2001, the company decided to reacquire two Distributed Media
Corporation (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 $2.7
million reduction of deferred revenue to zero, included in repurchased licenses,
net for the six months ended June 30, 2001. Concurrently, we ceased recognition
of revenue on these DMC licenses. The net change in license fee revenue was a
decrease of $0.3 million and $0.4 million for the three and six months ended
June 30, 2001, respectively. The accounts receivable reserve was increased by
$0.3 million resulting in an increase of selling, general and administrative
expenses for the six months ended June 30, 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 $0.3
million and $0.4 million and research and engineering cost increased by $0.3
million and $0.4 million for the three and six months ended June 30, 2001,
respectively.
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
7
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 common stock 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 and $0.8 million for the three and six
months ended June 30, 2001, respectively.
d) During 2001, step 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 $0.1 million and $0.9 million as reduction in impairment of goodwill,
net for the three and six months ended June 30, 2001, respectively.
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. The charge was classified
as cumulative effect of change in accounting principle for the six months ended
June 30, 2001 from other (income) expense, net. The net change of this
reclassification coupled with the first quarter 2001 valuation decrease of $0.1
million was a decrease in other (income) expense, net of $1.7 million and $1.6
million for the three and six months ended June 30, 2001, respectively.
f) On March 31, 2001, NXT plc, New Transducers Limited (NXT) and NCT Audio
and the company entered into several agreements terminating the cross license
agreement dated September 27, 1997. Under the new agreements, NCT received 2.0
million ordinary NXT plc shares in consideration for the cancellation of the 6%
royalty payable by NXT to NCT Audio. The NXT plc shares issued had a value of
approximately $9.2 million. For each of the three and six months ended June 30,
2001, license fee revenue increased by $0.5 million.
g) On April 12, 2001, we acquired a 25% interest in DMC New York, Inc. for
$4.0 million from Crammer Road LLC, the sole shareholder, and agreed to acquire
the remaining 75% interest pursuant to a private equity credit agreement. The
acquisition resulted in a charge to operations because DMC New York had not
commenced operations. For each of the three and six months ended June 30, 2001,
repurchased licenses, net increased by $18.0 million.
h) On February 9, 2001, accounts payable relating to the acquisition of a
patent was forgiven in the amount of $0.4 million. The cost of the patent was
reduced and the amortization thereon adjusted. This change resulted in a
decrease in research and development expense of $0.1 million for the three and
six months ended June 30, 2001, respectively, and an increase in other income
(expense), net of $0.4 million for the six months ended June 30, 2001.
i) We have reclassified amounts from other (income) expense, net to
selling, general and administrative expenses to conform to the current periods'
presentation. The reclassification resulted in an increase of $0.1 million and a
decrease of $1.4 million in other (income) expense, net for the three and six
months ended June 30, 2001. The reclassification resulted in a decrease of $0.1
million and an increase of $1.4 million in selling, general and administrative
expenses for the three and six months ended June 30, 2001, respectively.
8
3. 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 are required
to reassess the goodwill and other intangible assets recorded in connection with
acquisitions, as well as their useful lives. SFAS 142 required 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. Intangible assets with
definite useful lives are amortized over their respective estimated useful
lives. The company adopted SFAS 142 effective January 1, 2002. Adoption of SFAS
142 required us to evaluate the future cash flows related to goodwill and other
intangible assets. 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
of 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 $0.2
million for the three and six months ended June 30, 2002, respectively, and had
no other impact on our financial statements. At June 30, 2002, we had $7.2
million of goodwill, net of amortization and $3.9 million of patent rights and
other intangibles, net of amortization. For the three and six months ended June
30, 2001 and June 30, 2002, we had $0.5 million and zero, and $0.8 million and
zero of goodwill amortization expense, respectively. For the three and six
months ended June 30, 2001 and June 30, 2002, we had $0.1 and $0.1 million, and
$0.3 million and $0.2 million of other intangible asset amortization expense,
respectively.
4. Acquisitions:
On June 21, 2002, NCT completed our planned acquisition of the remaining
75% of DMC New York, Inc. (DMC NY), for $18.0 million, $14.0 million of which
had been accrued in the second quarter of 2001. DMC NY is the owner of 16
licenses previously purchased from our subsidiary, Distributed Media
Corporation, in 1999. We acquired the 12,000 remaining outstanding shares of DMC
NY common stock and received $0.1 million net proceeds from Crammer Road LLC in
exchange for 1,800 shares of our series H preferred stock with a stated value of
$18.0 million (see Note 10). The purchase of the remaining 75% of DMC NY has
been valued at the estimated fair value of the NCT common stock underlying the
$18 million stated value of our series H preferred stock which includes an
additional $5.3 million of value resulting from the conversion rate of 75% of
the average closing bid price for the five days prior to acquisition, compared
to the closing bid price on the day of acquisition. We recorded an aggregate
charge of $9.2 million for the three and six months ended June 30, 2002
classified as repurchased licenses, net because DMC NY has not commenced
operations. DMC NY has not recorded any revenue and apart from its New York
Metro license rights, has no other assets or operations. The aggregate cost for
this acquisition (16,000 shares), including the 25% purchased in 2001, was $27.2
million. The purchase price was arrived at in various negotiations between NCT
and Crammer Road. The acquisition resulted in our control of the number one
designated market area. We did not obtain an independent valuation.
9
5. 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 June 30, 2002
------------------------------------------- ---------------------------------------------
Cost Realized Market Cost Unrealized Market
Basis Gain/(Loss) Value Basis Gain/(Loss) Value
------------ ------------- -------------- --------- --------------- ---------------
Available-for-sale:
ITC $ 4,696 $ (3,898) $ 798 $ 798 $ (592) $ 206
Teltran 743 (659) 84 84 (56) 28
InsiderStreet 2,479 (2,479) - - - -
------------ ------------- -------------- --------- --------------- ---------------
Totals $ 7,918 $ (7,036) $ 882 $ 882 $ (648) $ 234
============ ============= ============== ========= =============== ===============
The company reviews declines in the value of its investment portfolio when
general market conditions change or specific information pertaining to an
industry or to an individual company becomes available. The company considers
all available evidence to evaluate the realizable value of its investments and
to determine whether the decline in realizable value may be
other-than-temporary.
Accounts receivable comprise the following (in thousands):
December 31, June 30,
2001 2002
------------- --------------
Technology license fees and royalties $ 287 $ 8
Joint ventures and affiliates 34 34
Other receivables 693 786
------------- --------------
$ 1,014 $ 828
Allowance for doubtful accounts (298) (361)
------------- --------------
Accounts receivable, net $ 716 $ 467
============= ==============
Inventories comprise the following (in thousands):
December 31, June 30,
2001 2002
------------- ----------
Components $ 427 $ 263
Finished goods 1,749 1,295
------------- ----------
$ 2,176 $ 1,558
Reserve for obsolete & slow moving inventory (791) (521)
------------- ----------
Inventories, net $ 1,385 $ 1,037
============= ==========
10
Other current assets comprise the following (in thousands):
December 31, June 30,
2001 2002
------------- ---------------
Notes receivable $ 1,000 $ 1,000
Investment in warrant (Teltran) 152 22
Due from officer 105 109
Other 516 435
------------- ---------------
$ 1,773 $ 1,566
Reserve for uncollectible amounts (1,000) (1,000)
------------- ---------------
Other current assets $ 773 $ 566
============= ===============
Other assets (long term) comprise the following (in thousands):
December 31, June 30,
2001 2002
------------------ ---------------
Marketable ITC securities $ 1,304 $ 1,319
Advances and deposits 651 637
Deferred charges 537 480
Other 78 97
------------------ ---------------
Other assets $ 2,570 $ 2,533
================== ===============
Property and equipment comprise the following (in thousands):
December 31, June 30,
2001 2002
---------------- ---------------
Machinery and equipment $ 3,798 $ 2,020
Furniture and fixtures 623 630
Leasehold improvements 966 910
Tooling 619 619
Other 432 499
---------------- ---------------
$ 6,438 $ 4,678
Accumulated depreciation (4,594) (3,180)
---------------- ---------------
Property and equipment, net $ 1,844 $ 1,498
================ ===============
Deferred revenues comprise the following (in thousands):
December 31, June 30,
2001 2002
-------------- -----------
NXT $ 6,955 $ 5,885
Teltran 1,921 768
Other 555 595
-------------- -----------
$ 9,431 $ 7,248
Less: amount classified as current (4,616) (3,503)
-------------- -----------
Deferred revenue (classified as long term) $ 4,815 $ 3,745
============== ===========
11
Other current liabilities comprise the following (in thousands):
December 31, June 30,
2001 2002
------------------ -----------------
License reacquisition payable $ 18,000 $ 4,000
Development fee payable 800 650
Royalty payable 766 1,054
Due to L&H 100 100
Other 113 28
------------------ -----------------
Other current liabilities $ 19,779 $ 5,832
================== =================
Other liabilities (long term) comprise the following (in thousands):
December 31, June 30,
2001 2002
----------------- --------------
Due to ITC $ 1,422 $ 1,422
Royalty payable 959 671
Due to selling shareholders of Theater Radio Network 569 569
----------------- --------------
Other liabilities $ 2,950 $ 2,662
================= ==============
Statements of Operations Information:
Other (income) expense, net comprise the following (in thousands):
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
2001 2002 2001 2002
---------- ----------- ----------- ----------
Finance costs associated with non-registration of common shares and
of common shares underlying convertible notes $ - $ 903 $ - $ 1,812
Minority share of loss in subsidiary - Pro Tech (95) (95) (156) (203)
Depreciation in fair value of warrant 929 136 1,017 130
Realized gain on sale of trading securities - NXT (572) - (572) -
Unrealized loss on trading securities - NXT 482 - 482 -
Other-than-temporary decline in value of securities
available-for-sale 2,969 - 2,969 -
Default penalties on debt 150 - 150 25
Inducement charge 190 - 190 -
Other (332) (104) (393) (101)
--------------------------- --------------------------
Total non-operating other (income) expense, net $ 3,721 $ 840 $ 3,687 $ 1,663
=========================== ==========================
Supplemental Cash Flow Disclosures:
(in thousands)
Six months ended June 30,
--------------------------------------
Supplemental disclosures of cash flow information: 2001 2002
---------------- ------------------
Cash paid during the year for:
Interest $ - $ 6
================ ==================
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding gain (loss) on available-for-sale securities $ 2,281 $ (633)
================ ==================
Issuance of common stock upon conversion of convertible notes $ 500 $ 375
================ ==================
Issuance of common stock upon exchange of convertible notes of subsidiary $ 1,830 $ 25
================ ==================
Issuance of common stock in exchange for common stock of subsidiary $ 984 $ -
================ ==================
Receipt of Pro Tech common shares in lieu of cash to settle accounts receivable $ 1,350 $ -
================ ==================
Issuance of series H preferred stock in exchange for previously accrued
acquisition of subsidiary $ - $ 14,000
================ ==================
Issuance of preferred stock of subsidiary, Artera Group, Inc. $ 8,299 $ -
================ ==================
Issuance of common stock in exchange for preferred stock $ 582 $ -
================ ==================
Issuance of common stock in exchange for preferred stock of subsidiary $ 229 $ -
================ ==================
Property and equipment financed through capitalized leases and notes payable $ - $ 15
================ ==================
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 $ -
================ ==================
12
6. Stockholders' Capital Deficit:
The changes in stockholders' capital deficit during the six months ended
June 30, 2002 were as follows (in thousands):
Amortization
of Beneficial
Conversion
Features and
Dividends on
Net Preferred
Retirement Issuance Stock and Net Issuance Accumulated
Balance of of Preferred of Common Stock, Other Balance
at Treasury Preferred Stock of Options Net Comprehensive At
12/31/01 Stock Stock Subsidiaries and Warrants Loss Loss 6/30/02
----------- ------------ ----------- ---------- --------------- ------ ------------- --------
Preferred stock - Series H:
Shares - - 2 - - - - 2
Amount $ - - 18,000 14 - - - $ 18,014
Common stock:
Shares 428,831 (6,078) - - 12,466 - - 435,219
Amount $ 4,288 (61) - - 125 - - $ 4,352
Treasury stock:
Shares 6,078 (6,078) - - - - - -
Amount $ (2,963) 2,963 - - - - - $ -
Additional paid-in capital $ 164,621 (2,902) 5,309 (1,268) 4,571 - - $170,331
Accumulated deficit $ (219,459) - - - - (19,976) - $(239,435)
Accumulated other
Comprehensive income (loss) $ 50 - - - - - (612) $ (562)
13
7. Notes Payable:
(in thousands)
December 31, June 30,
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 convertible note financing completed in
January 2002; notes bore interest at rates ranging from 3% to 6%
Note from stockholder of subsidiary 226 177
Interest at 8.5% per annum payable at maturity;
matured March 27, 2002; Upon maturity rolled into note
which matured June 27, 2002
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.
Other financings 11 398
Interest ranging from 7% to 12%; $273 matured June 15, 2002;
$116 due July 8, 2002; $9 all other
--------------- --------------
$ 3,208 $ 3,058
=============== ==============
14
8. Convertible Notes:
(in thousands)
December 31, June 30,
2001 2002
------------------- -----------------
Issued to Carole Salkind (a) $ 7,222 $ 11,959
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 certain NCT subsidiaries; due as follows:
September 28, 2002 $ 2,536
November 2, 2002 1,276
December 20, 2002 2,014
January 11, 2003 2,231
January 25, 2003 650
February 27, 2003 827
March 1, 2003 350
May 2, 2003 1,425
May 29, 2003 350
June 2, 2003 300
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
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 4,403
Convertible into NCT common stock at 100% of the five-day
average closing bid price preceding conversion; matures:
January 9, 2002 $ 2,197
April 4, 2002 875
May 25, 2002 81
June 29, 2002 1,250
------------------- -----------------
$ 13,051 $ 18,338
Less: unamortized debt discounts (1,341) (2,085)
Less: amounts classified as long term - (699)
------------------- -----------------
$ 11,710 $ 15,554
=================== =================
Footnotes:
- ----------
(a) During the six months ended June 30, 2002, NCT issued an aggregate of
$7.7 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, January 25, 2002 and March 27, 2000 for an
aggregate of $2.9 million. The principal on the notes dated August 22, 2001 and
March 27, 2000 ($2.7 million) were rolled into new notes in 2002 along with
default penalties aggregating $0.3 million, accrued interest and an aggregate of
$4.5 million new funding from Carole Salkind.
15
We recorded a discount of $0.9 million to the notes based upon the relative fair
values of the debt and warrants granted to Ms. Salkind (see Note 10). In
addition, beneficial conversion features totaling $1.1 million have been
recorded as a discount to the notes. For the three and six months ended June 30,
2002, $0.8 and $1.3 million, respectively, of amortization related to these
discounts is included in interest expense. Unamortized discounts of $1.8 million
have been reflected as a reduction to the convertible notes in our condensed
consolidated balance sheet as of June 30, 2002. The secured convertible note for
$0.8 million is also secured by an interest in specific assets of our
subsidiary, NCT Video. Secured convertible notes aggregating $0.7 million,
issued during the three months ended June 30, 2002, exclude the right to
exchange into Pro Tech common stock (see Note 12). The default provisions in
these notes impose a penalty of 10% of the principal payments in default and
default interest from the date of default on the principal in default at the
interest rate stated in the note plus 5%. On February 6, 2002, due to a judgment
in an unrelated case having been entered against NCT and DMC on January 17, 2002
in excess of the permitted maximum of $0.25 million (see Note 9), an event of
default occurred with respect to $7.4 million of the notes outstanding. These
notes are senior to all other indebtedness of the company. To date, demand for
payment has not been made.
(b) The company did not repay this convertible note upon maturity, which
resulted in default for non-payment. We have not received a demand for payment.
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 $0.6
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
$0.4 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 and six months ended June 30, 2002, approximately $40,000 and
$69,000, respectively, 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 June 30, 2002. The company did not repay convertible notes for
approximately $26,000 upon maturity and has recorded default interest at 18%
from the dates of default. In addition, on convertible notes aggregating $0.9
million, we are in default due to a cross default clause.
(d) Amortization of note discounts amounted to $0.1 million and $0.2 million
during the three and six months ended June 30, 2002, respectively. 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 and $1.2 million in finance
costs associated with non-registration of common shares and of common shares
underlying convertible notes included in other (income) expense, net for the
three and six months ended June 30, 2002, respectively (see Note 5). The
aggregate outstanding debt of $4.4 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. The average effective interest rate on these notes is
141.7% due to the amortization of original issue discounts and conversions of
principal into NCT common stock.
9. 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 Circuit for Hillsborough County, Florida. The
complaint alleges that InsiderStreet breached a May
16
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, DMC Cinema
terminated its representation by outside counsel in this action due to a
possible conflict of interest. On March 26, 2002, DMC Cinema 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. On or about June 4, 2002, a settlement agreement was
reached between Steven Esrick and DMC Cinema. Under the settlement agreement,
Mr. Esrick released DMC Cinema from all claims raised in the amended complaint
and NCT issued 200,000 shares of common stock. Dismissal of the action with
prejudice, as to DMC Cinema, occurred on or about July 10, 2002.
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. Production Resource
Group's complaint alleges that NCT and DMC breached the terms of a July 19, 1999
lease, promissory note and warrant entered into in connection with the lease of
some DMC Sight & Sound(TM) equipment. The complaint also alleges that NCT and
DMC breached a January 11, 2001 resolution agreement designed to settle disputes
between the parties concerning the July 19, 1999 transactions, that we breached
a May 11, 2001 agreement designed to settle disputes between the parties
concerning the July 19, 1999 transactions and the January 11, 2001 resolution
agreement, and that we engaged in misrepresentations and fraud in connection
with these matters. The plaintiff filed an application for pre-judgment remedy
seeking to attach or garnish $2.25 million of our assets. On July 26, 2001, the
court returned an order for pre-judgment remedy having found probable cause to
sustain the validity of Production Resource Group's claim and gave Production
Resource Group the right to attach or garnish up to $2.1 million of specified
assets of NCT and Distributed Media Corporation. As of June 30, 2002,
approximately $85,000 in NCT's and DMC's cash or cash equivalent assets have
actually been attached or garnished. On October 4, 2001, we filed an answer to
the plaintiff's complaint, generally denying the plaintiff's allegations,
seeking dismissal of the complaint and counterclaiming for breach of Production
Resource Group's obligation to deliver equipment. On December 20, 2001, NCT and
DMC accepted an Offer of Judgment requiring NCT and DMC to pay Production
Resource Group $2.0
17
million. That judgment was entered on January 17, 2002 along with other costs of
$0.2 million. Production Resource Group is currently conducting post-judgment
discovery regarding enforcement of that judgment. To the extent that payment of
the judgment is in cash, such payment could be material to our cash position. We
have recorded all anticipated liability related to payment of this judgment. On
January 2, 2002, outside the scope of the judgment entered into with NCT,
Production Resource Group amended its complaint to allege that NCT's Chairman
and Chief Executive Officer Michael Parrella, in dealing with Production
Resource Group on behalf of NCT, committed unfair trade practices, fraud and
breaches of good faith and fair dealing. Mr. Parrella has a motion pending with
the court to strike Production Resource Group's amended complaint as it pertains
to him. Mr. Parrella has told NCT that, if the amended complaint is not stricken
as to him, he intends to deny the allegations in that amended complaint. 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 (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.
On January 11, 2002, Broadcast Music, Inc. ("BMI") commenced two
arbitration proceedings against Theater Radio Network with the American
Arbitration Association, for the respective amounts of approximately $153,000
and $62,000. These proceedings were brought under agreements with Theater Radio
Network dated December 11, 1998 (amended December 22, 1998) and June 29, 2001.
BMI's claims are for license fees arising out of the alleged publication by
Theater Radio Network of music in the BMI repertoire. Theater Radio Network
denied the allegations of BMI. No further actions have occurred in these
proceedings.
On or about January 31, 2002, West Nursery Land Holding Limited Partnership
brought an action against NCT in the District Court of Maryland for Anne Arundel
County. This action sought repossession of premises at 1025 West Nursery Road,
Linthicum, MD 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. Through June 30, 2002, West Nursery had collected approximately $27,000
on this judgment.
On February 21, 2002, an action was brought by Mesa Partners, Inc. against
NCT and DMC 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. At this stage, management cannot
yet determine the likelihood of success of the claims.
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. On July 12, 2002, NCT filed an answer to
the complaint in which it denied any liability. At this stage, NCT cannot assess
the likelihood of any liability ultimately being imposed upon it in this action.
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:
18
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 (see Note 12).
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 (see Note 12).
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.
10. Capital Stock:
Authorized Capital Stock
Common shares available for future issuance
At June 30, 2002, the shares of common stock required to be reserved was
1,079,078,131 calculated at the $0.079 common stock price on that date (or the
discount therefrom as allowed under the applicable exchange or conversion
agreements). At the June 30, 2002 common stock price of $0.079, 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
was converted into 5,611,682 shares of NCT's common stock. At June 30, 2002,
$1.0 million of the 8% convertible note principal could be converted into NCT
common stock.
On May 31, 2002, $25,000 of the 6% convertible notes, plus interest, was
exchanged for 281,534 shares of NCT's common stock. At June 30, 2002, $4.4
million of the 6% convertible note principal could be exchanged for NCT common
stock.
Shares Issued to Vendors and Others
During the six months ended June 30, 2002, NCT issued 500,000 shares of our
common stock to settle a legal matter and for consulting services and recorded a
cost of approximately $19,000 and $45,000 for the three and six months ended
June 30, 2002.
19
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.
During the six months ended June 30, 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 June 30, 2002, there were no shares of NCT Audio common stock
subject to exchange for NCT common stock outstanding. Included in impairment of
goodwill, net in our condensed consolidated statements of operations are charges
attributable to step acquisitions of NCT Audio aggregating $0.1 million and
zero, for the three months ended June 30, 2001 and 2002, respectively and $0.5
million and $0.3 million, for the six months ended June 30, 2001 and 2002,
respectively.
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. We recorded a charge based on the fair value of our
common stock at that date of $0.2 million for the six months ended June 30, 2002
classified as in selling, general and administrative expense.
NCT Group, Inc. Preferred Stock
On June 21, 2002, the company entered into an exchange agreement under
which, on June 24, 2002, it sold 1,800 shares of series H convertible preferred
stock in a private placement. The aggregate net proceeds to the company were
$0.1 million cash and 12,000 shares of DMC New York, Inc. common stock. Each
share of series H preferred stock has a par value of $0.10 and a stated value of
$10,000 with a dividend rate of 4% per annum on the stated value. For the three
and six months ended June 30, 2002, we calculated the 4% dividends earned by the
holder of the series H preferred stock at approximately $14,000. These
cumulative dividend amounts are included in preferred stock dividends and in the
calculation of loss attributable to common stockholders. The series H preferred
stock is convertible into shares of our common stock at a 25% discount to the
five-day average closing bid price. For the three and six months ended June 30,
2002, we recorded an additional charge of $5.3 million related to the
acquisition of DMC NY shares (see Note 4). We are required to reserve 100
million shares of our common stock for the conversion of series H preferred
stock until additional authorized shares of common stock are approved by
shareholders at the next annual meeting.
20
Artera Group, Inc. Preferred Stock
NCT is obligated to register shares of its common stock for the exchange of
Artera series A preferred stock. For the three and six months ended June 30,
2002, we incurred a charge of $0.5 million and $1.0 million, respectively, 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. 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 and six months ended June 30, 2002, we calculated the 4%
dividends earned by holders of the Artera series A preferred stock at $0.1
million and $0.2 million, 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 and six months ended June 30, 2002, we calculated the 4%
dividends earned by holders of the Pro Tech series A convertible preferred stock
and the Pro Tech series B redeemable convertible preferred stock at
approximately $5,000 and $11,000, respectively. These amounts are included in
preferred stock dividends and in the calculation of loss attributable to common
stockholders.
For the three and six months ended June 30, 2002, the amortization of
beneficial conversion feature related to Pro Tech series B redeemable
convertible preferred stock was approximately $16,000 and $41,000, respectively.
These amounts are 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 six months ended June 30, 2002, we granted non-plan options to
purchase an aggregate of 25,725,000 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 3.38% to 3.75%; volatility of 100%; and an
expected life of four to five years. For the three and six months ended June 30,
2002, we recorded a charge for consulting services of $0.3 and $1.0 million,
respectively, classified as selling, general and administrative expense. The
company will adjust compensation relative to these options at each balance sheet
date and when they vest at the then market price.
On June 13, 2002, the Board of Directors granted options to purchase 11.0
million shares of our common stock to officers and employees of the company,
subject to the approval by our shareholders of an increase in the number of
shares authorized and subject to the approval by our shareholders of an increase
in the number of shares covered by the NCT Group, Inc. 2001 Stock and Incentive
Plan (2001 Plan). The 2001 Plan has exceeded its maximum of 18 million shares by
3.2 million shares at June 30, 2002. NCT will seek shareholder approval of an
amendment to the 2001 Plan. These options were granted with the exercise price
equal to the fair market value of our
21
common stock on June 13, 2002 or $0.081 per share as determined by the last sale
price as reported by the NASDAQ OTC Bulletin Board. As of June 30, 2002, 3.2
million options have been granted but are not exercisable until such time as the
company's shareholders approve an increase in the number of shares of the
company's common stock included in the 2001 Plan. At the time of such
shareholder approval, if the market value of the company's common stock exceeds
the exercise price of the subject options, the company will incur a non-cash
charge to earnings equal to the spread between the exercise price of the option
and the market price, times the number of options involved. If the increase is
not approved, options granted to the company's officers will be reduced pro rata
for the unauthorized shares.
Warrants
During the six months ended June 30, 2002, in conjunction with the issuance
of convertible notes, NCT granted Carole Salkind warrants to acquire an
aggregate of 15,137,056 shares of its common stock at exercise prices ranging
from $0.079 to $0.097 per share. The fair value of these warrants was
approximately $1.0 million (determined using the Black-Scholes option pricing
model). Based upon allocation of the relative fair values of the instruments, we
recorded a discount to the convertible notes issued to Carole Salkind of $0.9
million for the six months ended June 30, 2002.
On January 10, 2002, NCT re-priced a warrant granted to a placement agent
on October 25, 2001 to acquire 20.0 million shares of NCT common stock from an
exercise price of $0.09 per share to $0.07 per share. The October 25, 2001
warrant was for advisory services with respect to equity placements during 2001
and resulted in no charge to the statement of operations for the six months
ended June 30, 2002. During the six months ended June 30, 2002, we issued
warrants to outside consultants for the right to acquire an aggregate of
6,754,167 shares of our common stock at exercise prices ranging from $0.07 to
$0.20 per share. The vesting of 200,000 shares of these warrants are contingent
on the closing bid price of our common stock from the date of grant through
December 31, 2002 exceeding $1.00 per share. For the three and six months ended
June 30, 2002, we recorded a charge for consulting services, in connection with
vested warrants totaling 6,554,167 shares, of $0.3 million and $0.4 million
(determined using the Black-Scholes option pricing model), respectively,
classified as selling, general and administrative expense. No charge was taken
with respect to the contingent portion of these warrants.
11. Segment Information:
Management views the company as being organized into three 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 and six months ended June 30, 2002, no geographic
information for revenues from external customers or for long-lived assets is
disclosed, as our primary market and
22
capital investments were concentrated in the United States.
Reportable segment data for the three and six months ended June 30, 2001
(see Note 2), and June 30, 2002 is as follows (in thousands):
Reportable -------- Other --------- Grand
Media Communications Technology Segments Corporate Consolidating Total
--------------------------------------------------------------------------------
For the three months ended June 30, 2001:
- -----------------------------------------------
License fees and royalties $ 535 $ 633 $ 335 $ 1,503 $ 10,063 $ (10,005) $ 1,561
Other revenue - external 151 1,238 - 1,389 - - 1,389
Other revenue - other operating
segments 2 175 - 177 - (177) -
Income (loss) before cumulative effect of
accounting change (4,189) (4,849) (106) (9,144) (9,372) (9,519) (28,035)
Cumulative effect of accounting change - - - - - - -
Net income (loss) (4,189) (4,849) (106) (9,144) (9,372) (9,519) (28,035)
Segment
---------------------------------------------------------------------------------
Reportable -------- Other --------- Grand
Media Communications Technology Segments Corporate Consolidating Total
--------------------------------------------------------------------------------
For the three months ended June 30, 2002:
- -----------------------------------------------
License fees and royalties $ 535 $ 800 $ - $ 1,335 $ 11 $ (4) $ 1,342
Other revenue - external 31 682 - 713 - - 713
Other revenue - other operating
segments (22) 270 - 248 - (248) -
Income (loss) before cumulative effect of
accounting change (737) (1,941) (99) (2,777) (11,477) 526 (13,728)
Cumulative effect of accounting change - - - - - - -
Net income (loss) (737) (1,941) (99) (2,777) (11,477) 526 (13,728)
Segment
---------------------------------------------------------------------------------
Reportable -------- Other --------- Grand
Media Communications Technology Segments Corporate Consolidating Total
--------------------------------------------------------------------------------
For the six months ended June 30, 2001:
- -----------------------------------------------
License fees and royalties $ 764 $1,209 $ 450 $ 2,423 $ 10,073 $ (10,022) $ 2,474
Other revenue - external 294 2,312 - 2,606 - - 2,606
Other revenue - other operating
segments 403 421 - 824 - (824) -
Income (loss) before cumulative effect of
accounting change (3,632) (6,966) (185) (10,783) (15,195) (9,062) (35,040)
Cumulative effect of accounting change - (1,582) - (1,582) - - (1,582)
Net income (loss) (3,632) (8,548) (185) (12,365) (15,195) (9,062) (36,622)
23
Segment
---------------------------------------------------------------------------------
Reportable -------- Other --------- Grand
Media Communications Technology Segments Corporate Consolidating Total
--------------------------------------------------------------------------------
For the six months ended June 30, 2002:
- -----------------------------------------------
License fees and royalties $1,070 $1,376 $ - $ 2,446 $ 15 $ (8) $ 2,453
Other revenue - external 60 1,556 - 1,616 - - 1,616
Other revenue - other operating
segments (49) 428 - 379 - (379) -
Income (loss) before cumulative effect of
accounting change (1,980) (4,175) (169) (6,324) (14,627) 975 (19,976)
Cumulative effect of accounting change - - - - - - -
Net income (loss) (1,980) (4,175) (169) (6,324) (14,627) 975 (19,976)
12. Subsequent Events:
Transactions with Carole Salkind
On July 23, 2002, we received a cash advance of $0.5 million and are
negotiating repayment terms.
On July 3 and 15, 2002, NCT issued two secured convertible notes payable to
Ms. Salkind for an aggregate of $0.7 million as aggregate consideration for $0.7
million in cash. These notes mature on July 3, 2003 (approximately $0.35
million) and July 15, 2003 (approximately $0.35 million) and bear interest at 8%
per annum payable at maturity. These notes are convertible into shares of NCT
common stock (at rates of $0.075 and $0.078 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 these notes, two five-year warrants were issued to Ms.
Salkind to purchase an aggregate of approximately 3.0 million shares of our
common stock at exercise prices of $0.075 and $0.078 per share, respectively.
On July 12, 2002, we entered into an agreement with Ms. Salkind under which
we issued a five-year warrant to Ms. Salkind to purchase an aggregate of 20.0
million shares of our common stock at an exercise price of $0.075 per share. As
consideration, Ms. Salkind irrevocably waived her rights to exchange eight
secured convertible notes of NCT for Pro Tech common stock. We will record a
charge for the issuance of this warrant of approximately $1.2 million.
Other Notes
On July 18, 2002, we issued two promissory notes for an aggregate of
approximately $0.2 million as consideration for curing the default on $0.3
million of promissory notes. These notes mature on November 1, 2002 and bear
interest at 7% per annum.
On July 15, 2002, we issued a promissory note for $35,000 as consideration
for $35,000 in cash. This note matures on July 15, 2003 and bears interest at 9%
per annum.
On July 11, 2002, we received a cash advance of approximately $0.1 million
from a placement agent and are negotiating repayment terms.
24
Private Equity Credit Agreement
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 amount) 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). Each put notice must specify a
put amount ranging from $50,000 to $1.0 million. Our April 12, 2001 private
equity credit agreement with Crammer Road LLC remains in effect. Under that
agreement, the minimum commitment was $17 million of which approximately $14
million was to be used to reacquire the 12,000 DMC NY shares. We are in
disagreement regarding whether any amounts are owed under the minimum commitment
and penalty provisions of this agreement by NCT.
Litigation
On July 29, 2002, a settlement agreement was executed by NCT, NCT Hearing
and Andrea. Pursuant to the settlement agreement, all claims and counterclaims
in the suit were dismissed on or about August 8, 2002. No cash payments by
either side are involved in the settlement.
On or about July 11, 2002, West Nursery brought an action against NCT in
the Superior Court for the Judicial District of Fairfield County, Connecticut
seeking to enforce the remaining $62,131 of the Maryland judgment against NCT in
Connecticut. Simultaneously with the start of the Connecticut action, West
Nursery requested that the Connecticut court grant it a pre-judgment remedy
attaching and garnishing NCT assets sufficient for collection of this $62,131
amount. We expect to learn of the court's decision on that request soon.
On July 1, 2002, NCT filed proofs of claim against Global Technovations,
Inc. and Top Source Automotive in those companies' bankruptcy case.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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. 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
25
applications; 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 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
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 six months ended June 30, 2002
consisted of approximately 60.3% in technology licensing fees and royalties,
38.8% in product sales, 0.3% in advertising/media revenue and 0.6% 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.
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
26
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 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
also Notes 8, 10 and 12 - notes to the condensed consolidated financial
statements).
RESULTS OF OPERATIONS
Three months ended June 30, 2002 compared to three months ended June 30,
2001
Total revenues for the three months ended June 30, 2002 were $2.1 million
compared to $3.0 million for the same period in 2001, a decrease of $0.9 million
or 30.0%, reflecting decreases in each of our revenue sources.
Technology licensing fees and royalties were $1.3 million for the three
months ended June 30, 2002 as compared to $1.6 million for the same period in
2001, a decrease of $0.3 million. No new technology licenses were entered into
during the three months ended June 30, 2002. The decrease was primarily due to a
$0.3 million decrease in license fee revenue related to ITC which was partially
offset by an increase in royalties of $0.1 million.
For the three months ended June 30, 2002, product sales were $0.7 million
compared to $1.2 million for three months ended June 30, 2001, a decrease of
$0.5 million, or 41.7%. The decrease was primarily due to the cessation of
operations of Artera Group International, Ltd. in March 2002 (no product revenue
was recognized for the three months ended June 30, 2002 as compared to $0.3
million for the same period in 2001) and $0.2 million lower product sales
recognized by Pro Tech due to reduced fast-food headset purchases by major
distributors.
Gross profit margin on product sales, as a percentage of product revenues,
decreased to 42.4% for the three months ended June 30, 2002 compared to 61.8%
for the three months ended June 30, 2001, primarily due to the change in product
mix.
Advertising/media revenues were $2,000 for the three months ended June 30,
2002 compared to $0.1 million for the same period in 2001, a decrease of 98%.
Advertising/media revenues are derived from the sale of audio and visual
advertising in the Sight & Sound locations. Cost of advertising/media revenue
was zero for the three months ended June 30, 2002 compared to $0.1 million for
the same period in 2001, a decrease of 100%. These decreases are primarily due
to the termination of operations of DMC Cinema in February 2002 and the absence
of new advertising contracts signed reflecting an overall advertising recession.
For the three months ended June 30, 2002, selling, general and
administrative expenses totaled $2.9 million as compared to $5.3 million for the
three months ended June 30, 2001, a decrease of $2.4 million, or 45.3%. This
decrease was due primarily to: (i) a $1.1 million decrease in salary and related
benefit costs related to a reduced workforce; (ii) a $0.6 million decrease in
legal
27
and patent expenses; and (iii) a $0.5 million decrease in depreciation and
amortization in conjunction with the adoption of SFAS 142 effective January 1,
2002.
For the three months ended June 30, 2002, research and development
expenditures totaled $1.0 million as compared to $1.7 million for the three
months ended June 30, 2001, a decrease of $0.6 million, or 41.2%. This decrease
was due primarily to: (i) a $0.3 million decrease in salary and related benefit
costs related to a reduced workforce; (ii) a $0.3 million decrease in product
development costs related to ITC; and (iii) a $0.1 million decrease in rent
related to the closing of our Maryland facility.
Total costs and expenses included non-cash expenditures of: (i)
depreciation and amortization of $0.3 million in the three months ended June 30,
2002 and $0.7 million in the same period in 2001; (ii) interest expense of $1.4
million in the three months ended June 30, 2002 (primarily due to amortization
of original issue discounts of $0.4 million and amortization of beneficial
conversion features in convertible debt of $0.5 million) and $1.7 million during
the same period in 2001; (iii) impairment of goodwill of zero in the three
months ended June 30, 2002 and $0.1 million during the same period in 2001; and
(iv) repurchased licenses cost of $9.2 million in the three months ended June
30, 2002 and $18.0 million during the same period in 2001 (see Notes 2 and 4 -
notes to the condensed consolidated financial statements).
Six months ended June 30, 2002 compared to six months ended June 30, 2001
For the six months ended June 30, 2002, total revenues amounted to $4.1
million, compared to $5.1 million for six months ended June 30, 2001, or a
decrease of 19.6%, reflecting decreases in each of our revenue sources.
Technology licensing fees and royalties decreased marginally to
approximately $2.5 million in the first six months of 2002 and for the same
period in 2001. The technology licensing fees and royalties for the six months
ended June 2002 were due primarily to recognition of deferred revenue. No new
technology licenses were entered into for the six months ended June 30, 2002 as
compared to one new technology license for the same period in 2001.
The company continues to realize royalties from other existing licensees
including Ultra and Oki. Royalties from these and other licensees are expected
to account for a greater share of the company's revenue in future periods.
For the six months ended June 30, 2002, product sales were $1.6 million
compared to $2.3 million for six months ended June 30, 2001, a decrease of $0.7
million or 30.4%. The decrease was primarily due to $0.4 million of lower
product sales recognized by Pro Tech 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, Ltd. in March 2002.
Gross profit margin on product sales, as a percentage of product revenues,
decreased to 42.8% for the six months ended June 30, 2002, from 54.8% for the
six months ended June 30, 2001. The decrease in product margin was primarily due
to the change in product mix.
Advertising/media revenues were $12,000 for the six months ended June 30,
2002 compared to $0.3 million for the same period in 2001. Advertising/media
revenues are derived from the sale of audio and visual advertising in the Sight
and Sound locations. Cost of advertising/media revenue was $8,000 for the six
months ended June 30, 2002 compared to $0.3 million for the same period in
28
2001. These costs include the commissions paid to advertising representative
companies and agencies and communication expenses related to the Sight and Sound
locations. These decreases are primarily due to the termination of operations of
DMC Cinema in February 2002 and the absence of new advertising contracts signed
reflecting an overall advertising recession.
For the six months ended June 30, 2002, selling, general and administrative
expenses totaled $7.3 million as compared to $9.4 million for the six months
ended June 30, 2001, a decrease of $2.1 million, or 22.3%. This decrease was due
primarily to: (i) a $0.9 million decrease in depreciation and amortization
expense in conjunction with the adoption of SFAS 142 effective January 1, 2002;
(ii) a $0.7 million decrease in legal and patent expenses; and (iii) a $0.6
million decrease in salary and related benefit costs as a result of the
reduction in workforce. These decreases were partially offset with a $1.0
million increase in consulting expenses due to charges from warrants and
options.
For the six months ended June 30, 2002, research and development
expenditures totaled $2.1 million as compared to $2.9 million for the six months
ended June 30, 2001, a decrease of $0.8 million, or 27.6%. This decrease was due
primarily to: (i) a $0.5 million decrease in product development costs related
to ITC; (ii) a $0.2 million decrease in salary and related benefit costs related
to a reduced workforce; and (iii) a $0.2 million decrease in rent related to the
closing of our Maryland facility. The company expects research and development
expenditures in 2002 will be less than in 2001.
Included in the company's total costs and expenses were non-cash
expenditures including: (i) depreciation and amortization of $0.6 million in the
six months ended June 30, 2002 and $1.3 million in the same period in 2001; (ii)
impairment of goodwill of $0.3 million in the six months ended June 30, 2002 and
$0.6 million during the same period in 2001; (iii) interest expense of $2.6
million in the six months ended June 30, 2002 (due primarily to amortization of
original issue discount of $0.6 million, amortization of beneficial conversion
feature in convertible debt of $0.9 million and interest on convertible debt
issued by the company of $0.9 million) and $2.9 million during the same period
in 2001 (due primarily to amortization of original issue discount of $1.4
million, amortization of beneficial conversion feature in convertible debt of
$0.2 million and interest on debt issued by the company of $1.0 million); (iv)
finance costs associated with non-registration of common shares of $1.8 million
and zero for the same period in 2001; (v) a warrant fair value adjustment of
$0.1 million for the six months ended June 30, 2002 and $1.0 million for the
same period in 2001 and realized loss on marketable securities deemed
other-than-temporary of zero for the six months ended June 30, 2002 and $3.0
million during the same period in 2001; and (iv) repurchased licenses cost of
$9.2 million for the six months ended June 30, 2002 and $19.3 million during the
same period in 2001 (see Notes 2 and 4 - notes to the condensed consolidated
financial statements). The impairment of goodwill is based upon continuing
operating losses incurred in 2002 and 2001 of NCT's majority-owned subsidiary,
NCT Audio.
LIQUIDITY AND CAPITAL RESOURCES
NCT has incurred substantial losses from operations since its inception,
which have been recurring and amounted to $239.4 million on a cumulative basis
through June 30, 2002. These losses, which include the costs for development of
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 our
common stock;
o the sale of our and our subsidiaries' debt instruments convertible into our
common stock;
29
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 June 30, 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.
At June 30, 2002, the company's cash and cash equivalents aggregated $0.4
million. NCT's working capital deficit was $46.6 million at June 30, 2002,
compared to a deficit of $52.6 million at December 31, 2001. This $6.0 million
decrease in working capital deficit was primarily due to the issuance of series
H preferred stock for liabilities of $14.0 million which decreased our current
liabilities during the six months ended June 30, 2002. NCT is in default of $2.9
million of its notes payable and $13.8 million of its convertible notes at June
30, 2002.
Operating Activities
Net cash used in operating activities for the six months ended June 30,
2002 was $5.0 million primarily due to funding the six months ended June 30,
2002 net loss, as adjusted to reconcile to net cash.
Our net accounts receivable decreased to $0.5 million at June 30, 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.
Our net inventory level decreased to $1.0 million at June 30, 2002 from
$1.4 million at December 31, 2001.
30
To improve its future operating cash flow, the company implemented
substantial cost reduction and product simplification plans in 2001 and early
2002. These plans involved the evaluation and restructuring of unprofitable
offerings, including some speaker products, headset products, ISP services and
call center operations. In addition, we reduced our workforce approximately 46%
since September 1, 2001.
Investing Activities
Net cash used in investing activities was approximately $0.1 million for
the six-month period ended June 30, 2002 and primarily due to minimal capital
expenditures. The company anticipates making additional minimal 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 June 30,
2002 and December 31, 2001, the company's available-for-sale securities had
approximate fair market values of $0.2 million and $0.9 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 $4.9 million for the
six-month period ended June 30, 2002 and was primarily due to the issuance and
sale of convertible notes.
At June 30, 2002, the company's short term debt was $20.4 million, net of
discounts of approximately $1.8 million (principally comprised of $17.3 million
of face value of outstanding convertible notes and $3.1 million of outstanding
notes payable), compared to $16.3 million of short term debt at December 31,
2001. The cash proceeds from debt issued in 2002 were used for general corporate
purposes unless otherwise stated.
On January 10, 2002, Artera Group, Inc. privately placed a $0.6 million
secured convertible note with Alpha Capital Aktiengesellschaft for $0.1 million
in cash and the cancellation of a $0.1 million NCT promissory note and a $0.4
million NCT convertible note along with accrued interest.
On January 11, 2002, NCT issued a secured convertible note ($2.2 million
principal amount) to Carole Salkind for $0.35 million in cash and the
cancellation of a $1.7 million NCT convertible note along with accrued interest
and a default penalty.
On January 25, 2002, NCT issued a secured convertible note ($0.65 million
principal amount) to Carole Salkind for $0.65 million in cash.
On January 25, 2002, NCT issued a secured convertible note ($0.25 million
principal amount) to Carole Salkind for $0.25 million in cash. The cash proceeds
were used to fund an escrow account with an unrelated third party. This note was
paid.
On February 27, 2002, NCT issued a secured convertible note ($0.8 million
principal amount) to Carole Salkind for $0.8 million in cash and the accrued
interest and a default penalty on a $0.25 million NCT convertible note dated
January 25, 2002.
31
On March 1, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On March 11, 2002, NCT privately placed a $0.4 million convertible note
with Alpha Capital Aktiengesellschaft for $0.4 million in cash and the
cancellation of approximately $15,000 Artera Group, Inc. promissory note along
with accrued interest.
On May 2, 2002, NCT issued a secured convertible note ($1.3 million
principal amount) to Carole Salkind for the cancellation of a $1.0 million NCT
secured convertible note along with accrued interest and a default penalty.
On May 2, 2002, NCT issued a secured convertible note ($1.4 million
principal amount) to Carole Salkind for $1.4 million in cash.
On May 29, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On June 2, 2002, NCT issued a secured convertible note ($0.3 million
principal amount) to Carole Salkind for $0.3 million in cash.
On June 24, 2002, NCT issued 1,800 shares of our Series H Convertible
Preferred Stock to Crammer Road LLC in exchange for $0.1 million cash, net of
fees and 12,000 shares of DMC New York, Inc. common stock.
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.
The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
Capital Expenditures
The company intends to continue its business strategy of working with
supply, manufacturing, and distribution and marketing partners to commercialize
its technology. The benefits of this strategy include: (i) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies;
(ii) utilization of the manufacturing capacity of the company's allies, enabling
the company to integrate its active technology into products with limited
capital investment; and (iii) access to well-established channels of
distribution and marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of June 30,
2002, and no
32
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.
33
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 9 - Litigation and Note 12 -
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. NCT also issued 300,000 shares of our common stock to
Piedmont Consulting pursuant to a consulting agreement.
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 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
34
common stock to Carole Salkind exercisable at $0.09 per share.
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 February 28, 2002, NCT issued 2,142,073 shares of common stock in
exchange for 6.43 shares of Distributed Media Corporation.
On March 1, 2002, NCT retired 6,078,065 shares of treasury stock.
On March 1, 2002, NCT issued a secured 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.
On March 12, 2002, Alpha Capital Aktiengesellschaft converted an aggregate
of $350,000 8% convertible notes for 5,611,682 shares of our common stock.
On May 2, 2002, NCT issued a secured convertible note ($1,275,483 principal
amount) to Carole Salkind for the cancellation of a $1,000,000 NCT secured
convertible note along with accrued interest and a default penalty.
On May 2, 2002, NCT issued a secured convertible note ($1,425,000 principal
amount) to Carole Salkind for $1,425,000 in cash.
On May 2, 2002, NCT issued a five-year warrant to purchase 3,188,708 shares
of our common stock to Carole Salkind exercisable at $0.094 per share.
On May 2, 2002, NCT issued a five-year warrant to purchase 3,562,500 shares
of our common
35
stock to Carole Salkind exercisable at $0.094 per share.
On May 29, 2002, NCT issued a secured convertible note ($350,000 principal
amount) to Carole Salkind for $350,000 in cash.
On May 29, 2002, NCT issued a five-year warrant to purchase 1,500,000
shares of our common stock to Carole Salkind exercisable at $0.095 per share.
On May 31, 2002, Amro International, S.A. exchanged $25,000 of Artera
Group, Inc. 6% convertible notes for 281,534 shares of our common stock.
On June 2, 2002, NCT issued a secured convertible note ($300,000 principal
amount) to Carole Salkind for $300,000 in cash.
On June 2, 2002, NCT issued a five-year warrant to purchase 1,500,000
shares of our common stock to Carole Salkind exercisable at $0.097 per share.
On June 6, 2002, NCT issued 200,000 shares of our common stock to Steven M.
Esrick for settlement of a lawsuit.
On June 17, 2002, NCT issued a three-year warrant to purchase 400,000
shares of our common stock to Barry Chappel exercisable at $0.081 per share.
On June 17, 2002, NCT issued a three-year warrant to purchase 400,000
shares of our common stock to John Capozzi exercisable at $0.081 per share.
On June 17, 2002, NCT issued a three-year warrant to purchase 350,000
shares of our common stock to Thomas Cotton exercisable at $0.081 per share.
On June 24, 2002, NCT issued 1,800 shares of our Series H Convertible
Preferred Stock to Crammer Road LLC for $120,000 cash and 12,000 shares of DMC
New York, Inc. common stock.
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
For discussion of defaults on the senior securities, see Note 1 - Basis of
Presentation and Note 8 - Convertible Notes which are included herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 6. EXHIBITS
3(a) 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 June 21, 2002,
incorporated herein by reference to Exhibit 3(c) to the Pre-Effective
Amendment No. 5 to Registration Statement on Form S-1 (Registration
No. 333-60574) filed on August 9, 2002.
4(a) Warrant dated January 1, 2002 issued to Piedmont Consulting, Inc. for
the purchase
36
of 500,000 shares of NCT common stock at a purchase price of $0.20 per
share, incorporated herein by reference to Exhibit 4(a) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
filed on May 15, 2002.
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, incorporated herein by
reference to Exhibit 4(b) of NCT's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 filed on May 15, 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, incorporated herein by reference to Exhibit 4(c) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
filed on May 15, 2002.
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, incorporated herein by reference to Exhibit 4(d) of
NCT's Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 filed on May 15, 2002.
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, incorporated herein by reference to Exhibit 4(e) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
filed on May 15, 2002.
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, incorporated herein by reference to Exhibit 4(f) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
filed on May 15, 2002.
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, incorporated herein by reference to Exhibit 4(g) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
filed on May 15, 2002.
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
37
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.
4(m) Warrant dated May 29, 2002 issued to Carole Salkind for the purchase
of 1,500,000 shares of NCT common stock at a purchase price of $0.095
per share, incorporated herein by reference to Exhibit 4(y) to the
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(n) Warrant dated June 2, 2002 issued to Carole Salkind for the purchase
of 1,500,000 shares of NCT common stock at a purchase price of $0.097
per share, incorporated herein by reference to Exhibit 4(z) to the
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(o) Warrant dated July 3, 2002 issued to Carole Salkind for the purchase
of 1,500,000 shares of NCT common stock at a purchase price of $0.078
per share, incorporated herein by reference to Exhibit 4(aa) to the
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(p) Warrant dated July 12, 2002 issued to Carole Salkind for the purchase
of 20,000,000 shares of NCT common stock at a purchase price of $0.075
per share, incorporated herein by reference to Exhibit 4(ab) to the
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(q) Warrant dated July 15, 2002 issued to Carole Salkind for the purchase
of 1,500,000 shares of NCT common stock at a purchase price of $0.075
per share, incorporated herein by reference to Exhibit 4(ac) to the
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(r) Warrant dated June 13, 2002 issued to Blue Future, Inc. for the
purchase of 250,000 shares of NCT common stock at a purchase price of
$0.16 per share, incorporated herein by reference to Exhibit 4(ad) to
the Pre-Effective Amendment No. 5 to Registration Statement on Form
S-1 (Registration No. 333-60574) filed on August 9, 2002.
4(s) Warrant dated June 17, 2002 issued to Thomas Cotton for the purchase
of 350,000 shares of NCT common stock at a purchase price of $0.081
per share, incorporated
38
herein by reference to Exhibit 4(ae) to the Pre-Effective Amendment
No. 5 to Registration Statement on Form S-1 (Registration No.
333-60574) filed on August 9, 2002.
4(t) Warrant dated June 17, 2002 issued to Barry H. Chappel for the
purchase of 400,000 shares of NCT common stock at a purchase price of
$0.081 per share, incorporated herein by reference to Exhibit 4(af) to
the Pre-Effective Amendment No. 5 to Registration Statement on Form
S-1 (Registration No. 333-60574) filed on August 9, 2002.
4(u) Warrant dated June 17, 2002 issued to John Capozzi for the purchase of
400,000 shares of NCT common stock at a purchase price of $0.081 per
share, incorporated herein by reference to Exhibit 4(ag) to the
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(v) Option granted to Leben Care, Inc. dated January 25, 2002 for an
aggregate of 8,350,000 shares of NCT common stock at exercise prices
ranging from $0.079 to $0.13 per share, incorporated herein by
reference to Exhibit 4(ah) to the Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
4(w) Option granted to Stopnoise.com, Inc. dated February 27, 2002 for an
aggregate of 3,375,000 shares of NCT common stock at exercise prices
ranging from $0.079 to $0.12 per share, incorporated herein by
reference to Exhibit 4(ai) to the Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
4(x) Option granted to Acme Associates, Inc. dated as of July 3, 2002 for
an aggregate of 15,500,000 shares of NCT common stock at exercise
prices ranging from $0.078 to $0.08 per share, incorporated herein by
reference to Exhibit 4(aj) to the Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
10(a) Subscription Agreement dated January 10, 2002, between Artera Group,
Inc. and Alpha Capital Aktiengesellschaft, incorporated herein by
reference to Exhibit10 (a) of NCT's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 filed on May 15, 2002.
10(b) Security Agreement dated January 10, 2002, between Artera Group, Inc.
and Alpha Capital Aktiengesellschaft, incorporated herein by reference
to Exhibit 10(b) of NCT's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002 filed on May 15, 2002.
10(c) Secured Convertible Note in the principal amount of $550,000 dated
January 10, 2002, between Artera Group, Inc. and Alpha Capital
Aktiengesellschaft, incorporated herein by reference to Exhibit 10(c)
of NCT's Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 filed on May 15, 2002.
10(d) Funds Escrow Agreement dated January 10, 2002, issued by Artera
Group, Inc. to
39
Alpha Capital Aktiengesellschaft, incorporated herein by reference to
Exhibit 10(d) of NCT's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002 filed on May 15, 2002.
10(e) Secured Convertible Note in principal amount of $350,000 dated March
1, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(e) of NCT's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002 filed on May 15, 2002.
10(f) Subscription Agreement dated March 11, 2002, between the Company and
Alpha Capital Aktiengesellschaft, incorporated herein by reference to
Exhibit 10(f) of NCT's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002 filed on May 15, 2002.
10(g) Funds Escrow Agreement dated March 11, 2002, between the Company and
Alpha Capital Aktiengesellschaft, incorporated herein by reference to
Exhibit10(g) of NCT's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002 filed on May 15, 2002.
10(h) Secured Convertible Note in the principal amount of $400,000 dated
March 11, 2002, issued by the Company to Alpha Capital
Aktiengesellschaft, incorporated herein by reference to Exhibit 10(h)
of NCT's Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 filed on May 15, 2002.
10(i) Secured Convertible Note in principal amount of $1,275,482.97 dated
May 2, 2002 issued by the Company to Carole Salkind, incorporated
herein by reference to Exhibit 10(i) of NCT's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002 filed on May 15, 2002.
10(j) Secured Convertible Note in principal amount of $1,425,000 dated May
2, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(j) of NCT's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002 filed on May 15, 2002.
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
40
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.
10(o) Secured Convertible Note in principal amount of $350,000 dated May
29, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(bk) to the Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
10(p) Secured Convertible Note in principal amount of $300,000 dated June
2, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(bl) to the Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
10(q) Exchange Agreement between the company and Crammer Road LLC dated as
of June 21, 2002, incorporated herein by reference to Exhibit 10(bm)
to the Pre-Effective Amendment No. 5 to Registration Statement on Form
S-1 (Registration No. 333-60574) filed on August 9, 2002.
10(r) Registration Rights Agreement (Exhibit B to the Exchange Agreement
dated as of June 21, 2002) dated as of June 21, 2002 between the
company and Crammer Road LLC., incorporated herein by reference to
Exhibit 10(bm)(1) to the Pre-Effective Amendment No. 5 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on August 9,
2002.
10(s) Secured Convertible Note in principal amount of $350,000 dated July
3, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(bn) to the Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
10(t) Secured Convertible Note in principal amount of $350,000 dated July
15, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(bo) to the Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
10(u) Agreement dated July 12, 2002 relating to Pro Tech Exchange Rights
among the Company, Pro Tech Communications, Inc., and Carole Salkind,
incorporated herein by reference to Exhibit 10(bp) to the
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
10(v) Private Equity Credit Agreement dated as of July 25, 2002 between NCT
Group, Inc. and Crammer Road LLC., incorporated herein by reference to
Exhibit 10(bq) to the Pre-Effective Amendment No. 5 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on August 9,
2002.
10(w) Registration Rights Agreement (Exhibit A to Private Equity Credit
Agreement) dated as of July 25, 2002 between NCT Group, Inc. and
Crammer Road LLC., incorporated herein by reference to Exhibit
10(bq)(1) to the Pre-Effective Amendment No. 5 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on August 9,
2002.
41
99(a) Certification 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:
No form 8-K was filed during the current reporting period.
42
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, 2002
43