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 September 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number: 0-18267
NCT Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 59-2501025
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
20 Ketchum Street, Westport, Connecticut 06880
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(Address of principal executive offices) (Zip Code)
- --------------------------------------------------------------------------------
(203) 226-4447
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(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.
443,474,345 shares outstanding as of November 12, 2002
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(in thousands, except share data)
December 31, September 30,
2001 2002
------------- --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 567 $ 793
Investment in marketable securities (Note 5) 882 122
Accounts receivable, net (Note 5) 716 556
Inventories, net (Note 5) 1,385 889
Other current assets (Note 5) 773 544
------------- --------------
Total current assets 4,323 2,904
Property and equipment, net (Note 5) 1,844 1,254
Goodwill, net (Note 3) 7,184 7,184
Patent rights and other intangibles, net (Note 3) 4,088 3,748
Other assets (Note 5) 2,570 2,449
------------- --------------
$ 20,009 $ 17,539
============= ==============
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 5,553 $ 5,332
Accrued expenses 12,093 20,023
Notes payable (Note 7) 3,208 2,943
Current maturities of convertible notes (Note 8) 11,710 16,996
Deferred revenue (Note 5) 4,616 2,944
Other current liabilities (Note 5) 19,779 6,533
------------- --------------
Total current liabilities 56,959 54,771
------------- --------------
Long-term liabilities:
Deferred revenue (Note 5) 4,815 3,210
Convertible notes (Note 8) - 739
Other liabilities (Note 5) 2,950 2,092
------------- --------------
Total long-term liabilities 7,765 6,041
------------- --------------
Commitments and contingencies (Note 9)
Minority interest in consolidated subsidiaries 8,748 8,781
------------- --------------
Stockholders' capital deficit (Notes 6 and 11):
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 $18,195,288, respectively) - 18,195
Common stock, $.01 par value, authorized 645,000,000 shares,
issued 428,830,800 and 437,536,264 shares, respectively 4,288 4,375
Additional paid-in capital 164,621 175,955
Accumulated other comprehensive income (loss) 50 17
Accumulated deficit (219,459) (250,596)
Treasury stock, 6,078,065 and 0 shares, respectively
of common stock, at cost (2,963) -
------------- --------------
Total stockholders' capital deficit (53,463) (52,054)
------------- --------------
$ 20,009 $ 17,539
============= ==============
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 September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
2001 2002 2001 2002
--------------- ---------------- --------------- ---------------
Restated (Note 2) Restated (Note 2)
REVENUE:
Technology licensing fees and royalties $ 1,565 $ 1,118 $ 4,039 $ 3,571
Product sales, net 1,209 552 3,522 2,132
Advertising/media 22 43 275 55
Engineering and development services 75 - 115 24
--------------- ---------------- --------------- ---------------
Total revenue $ 2,871 $ 1,713 $ 7,951 $ 5,782
--------------- ---------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of product sales $ 771 $ 285 $ 1,817 $ 1,189
Cost of advertising/media (129) 5 209 13
Cost of engineering and development services - 4 1 8
Selling, general and administrative 5,026 4,495 14,437 11,774
Research and development 1,348 1,224 4,248 3,284
Impairment of goodwill, net (Note 11) - - 606 300
Repurchased licenses, net - - 19,278 9,199
--------------- ---------------- --------------- ---------------
Total operating costs and expenses
7,016 6,013 40,596 25,767
Non-operating items:
Other (income) expense, net (Note 5) 2,691 4,341 6,377 6,004
Interest expense, net 1,491 2,520 4,345 5,148
--------------- ---------------- --------------- ---------------
Total costs and expenses $ 11,198 $ 12,874 $ 51,318 $ 36,919
--------------- ---------------- --------------- ---------------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (8,327) (11,161) (43,367) (31,137)
Cumulative effect of change in accounting principle - - (1,582) -
--------------- ---------------- --------------- ---------------
NET LOSS $ (8,327) $ (11,161) $ (44,949) $ (31,137)
Beneficial conversion features (Note 11) 105 5 355 46
Preferred stock dividends (Note 11) 88 795 220 2,022
--------------- ---------------- --------------- ---------------
LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (8,520) $ (11,961) $ (45,524) $ (33,205)
=============== ================ =============== ===============
Loss per share -
Loss before cumulative effect of change
in accounting principle $ (0.02) $ (0.03) $ (0.11) $ (0.08)
Cumulative effect of change in accounting principle - - (0.01) -
--------------- ---------------- --------------- ---------------
Basic and diluted $ (0.02) $ (0.03) $ (0.12) $ (0.08)
=============== ================ =============== ===============
Weighted average common shares outstanding -
basic and diluted 391,683 436,256 365,777 432,364
=============== ================ =============== ===============
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited) (in thousands)
Three months ended September 30, Nine months ended September 30,
--------------------------------- -------------------------------
2001 2002 2001 2002
--------------- ------------- --------------- -------------
Restated (Note 2) Restated (Note 2)
NET LOSS $ (8,327) $ (11,161) $ (44,949) $ (31,137)
Other comprehensive income (loss):
Currency translation adjustment (160) 2 (63) 23
Unrealized (loss)/adjustment of unrealized loss on marketable securities (3,102) 577 (821) (56)
----------------- -------------- ---------------- -------------
COMPREHENSIVE LOSS $ (11,589) $ (10,582) $ (45,833) $ (31,170)
=============== ============== ================ =============
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)
Nine months ended September 30,
--------------------------------
2001 2002
--------------- ---------------
Restated (Note 2)
Cash flows from operating activities:
Net loss $ (44,949) $ (31,137)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,086 903
Common stock, warrants and options issued as consideration for:
Compensation 14 169
Operating expenses 1,116 4,666
Costs incurred related to non-registration of shares 1,187 5,825
Provision for inventory - (564)
Provision for doubtful accounts and uncollectible amounts 268 3
(Gain)/loss on disposition of fixed assets (6) 5
Repurchased licenses, net 19,278 9,199
Impairment of goodwill, net (Note 11) 606 300
Costs of exiting activities - 303
Convertible note induced conversion expense 190 -
Loss on sale of NXT ordinary shares 2,301 -
Realized loss on available-for-sale securities 3,067 689
Unrealized loss on fair value of derivative instrument 1,216 135
Cumulative effect of change in accounting principle 1,582 -
Amortization of debt discounts 2,074 2,657
Minority interest loss (298) (277)
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable 3,298 157
Decrease in inventories 9 1,060
(Increase) decrease in other assets (1,033) 218
Increase in accounts payable and accrued expenses 2,869 1,508
Decrease in other liabilities and deferred revenue (4,728) (3,558)
--------------- ---------------
Net cash used in operating activities $ (9,853) $ (7,739)
--------------- ---------------
Cash flows from investing activities:
Capital expenditures $ (1,498) $ -
Net cash paid for Artera Group International Limited acquisition (100) -
Proceeds from sale of capital equipment - 11
Proceeds from sale of NXT ordinary shares 6,858 -
--------------- ---------------
Net cash provided by investing activities $ 5,260 $ 11
--------------- ---------------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable, net (Notes 7 and 8) $ 3,781 $ 8,324
Sale of common stock, net 186 -
Sale of preferred stock, net (Note 11) 457 110
Sale of excess exchange shares 164 -
Collection of subscription receivable 213 -
Repayments of notes (348) (479)
--------------- ---------------
Net cash provided by financing activities $ 4,453 $ 7,955
--------------- ---------------
Effect of exchange rate changes on cash $ (63) $ (1)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (203) 226
Cash and cash equivalents - beginning of period 1,167 567
--------------- ---------------
Cash and cash equivalents - end of period $ 964 $ 793
=============== ===============
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 nine months ended September 30, 2002 and cash flows
for the nine months ended September 30, 2002 are not necessarily indicative of
the results that may be expected for any other interim period or the full year.
These condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2001.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. We have reclassified some amounts in the
prior periods' financial statements to conform to the current periods'
presentation.
NCT has incurred substantial losses from operations since its inception
which cumulatively amounted to $250.6 million through September 30, 2002. Cash
and cash equivalents amounted to $0.8 million at September 30, 2002, increasing
from $0.6 million at December 31, 2001. A working capital deficit of $51.9
million exists at September 30, 2002. NCT is in default of $2.5 million of its
notes payable and $11.1 million of its convertible notes at September 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. There is no assurance any of the financing is or would become
available.
In the event that funding from internal sources is insufficient, we would
have to substantially cut back our level of spending which could substantially
curtail our operations. Such reductions could have an adverse effect on our
relationships with licensees and customers. Uncertainty exists about the
adequacy of current funds to support NCT's activities until positive cash flow
from operations can be achieved, and uncertainty exists about the availability
of external financing sources to fund any cash deficiencies.
The accompanying condensed consolidated financial statements have been
prepared assuming that NCT will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The propriety of using the going concern
basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private
5
financing and other funding sources to meet our obligations. The uncertainties
described in the preceding paragraphs raise substantial doubt at September 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 condensed consolidated statements of operations, the condensed
consolidated statements of comprehensive loss and the condensed consolidated
statement of cash flows for the 2001 periods presented herein have been
retroactively restated to reflect the transactions described below. A comparison
of the statements of operations for the three and nine months ended September
30, 2001 as reported and as restated by the transactions described below
follows.
(in thousands, except per share amounts)
Three months ended
September 30, 2001
------------------------
As Transaction
Reported Restated Reference
----------- ----------- -----------
Revenue:
Technology licensing fees and royalties $ 1,759 $ 1,565 a, b
Product sales, net 1,209 1,209
Advertising/media 22 22
Engineering and development services 75 75
----------- -----------
Total revenue $ 3,065 $ 2,871
----------- -----------
Costs and expenses:
Cost of product sales $ 771 $ 771
Cost of advertising/media (128) (129)
Cost of engineering and development services - -
Selling, general and administrative 5,026 5,026
Research and development 1,251 1,348 b, f
Impairment of goodwill, net - -
Repurchased licenses, net - -
----------- -----------
Total operating costs and expenses 6,920 7,016
Non-operating items:
Other (income) expense, net 2,712 2,691
Interest expense, net 1,491 1,491
----------- -----------
Total costs and expenses $ 11,123 $ 11,198
----------- -----------
Loss before cumulative effect of change in accounting principle (8,058) (8,327)
Cumulative effect of change in accounting principle - -
----------- -----------
Net loss $ (8,058) $ (8,327)
=========== ===========
Loss attributable to common stockholders $ (8,251) $ (8,520)
=========== ===========
Loss per share - basic and diluted $ (0.02) $ (0.02)
=========== ===========
Weighted average common shares outstanding - basic and diluted 397,761 391,683
=========== ===========
6
Nine months ended Transaction
September 30, 2001 Reference
---------------------------- ------------
As
Reported Restated
------------- -------------
Revenue:
Technology licensing fees and royalties $ 5,710 $ 4,039 a, b
Product sales, net 3,522 3,522
Advertising/media 1,025 275 c
Engineering and development services 115 115
------------- -------------
Total revenue 10,372 7,951
------------- -------------
Costs and expenses:
Cost of product sales $ 1,817 $ 1,817
Cost of advertising/media 210 209
Cost of engineering and development services 1 1
Selling, general and administrative 14,187 14,437 a
Research and development 5,256 4,248 b, f
Impairment of goodwill, net 1,494 606 d
Repurchased licenses, net - 19,278 a, e
------------- -------------
Total operating costs and expenses 22,965 40,596
Non-operating items:
Other (income) expense, net 6,437 6,377 a, f
Interest expense, net 4,345 4,345
------------- -------------
Total costs and expenses $ 33,747 $ 51,318
------------- -------------
Loss before cumulative effect of change in accounting principle (23,375) (43,367)
Cumulative effect of change in accounting principle (1,582) (1,582)
------------- -------------
Net loss $ (24,957) $ (44,949)
============= =============
Loss attributable to common stockholders $ (25,815) $ (45,524)
============= =============
Loss per share - basic and diluted $ (0.07) $ (0.12)
============= =============
Weighted average common shares outstanding - basic and diluted 371,855 365,777
============= =============
As of September 30, 2001
----------------------------
As
Balance Sheet Data: Reported Restated
------------- -------------
Total assets $ 42,030 $ 42,553
Total current liabilities 37,093 54,243
Total long term liabilities 7,255 6,644
Accumulated deficit (166,756) (186,748)
Total stockholders' capital deficit (11,186) (27,114)
Working capital (deficit) (28,941) (46,843)
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 nine months ended September 30, 2001. Concurrently, we
ceased recognition of revenue on these DMC licenses. License fee revenue
decreased by $0.3 million and $0.8 million for the three and nine months ended
September 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 nine months ended September 30, 2001. The fair value adjustment
of $0.5 million on Pro Tech Communications, Inc. (Pro Tech) common shares
received in settlement of a license fee receivable during the first quarter of
2001 was recorded as a step acquisition of Pro Tech. As a result, other (income)
expense, net decreased by $0.5 million for the nine months ended September 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 $0.1
million and decreased by $0.9 million and research and engineering cost
increased by $0.1 million and decreased by $0.9 million for the three and nine
months ended September 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
7
play InsiderStreet's commercials in a minimum of 8,500 theater screens at a cost
of $20.58 per theater screen per month, as further described in the agreement.
The term of the agreement was two years commencing on June 19, 2000. At the date
of acquisition (August 18, 2000) of Theater Radio Network by DMC Cinema, Theater
Radio Network had remaining 475,595 shares of the originally issued 575,595
shares of InsiderStreet 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. Advertising/media revenue
decreased by $0.8 million for the nine months ended September 30, 2001
(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 $0.9 million as reduction in impairment of goodwill, net for the
nine months ended September 30, 2001.
(e) 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 the nine months ended September 30, 2001, repurchased
licenses, net increased by $18.0 million.
(f) 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 less than
$0.1 million and $0.1 million decrease in research and development expense for
the three and nine months ended September 30, 2001, respectively, and an
increase in other income (expense), net of $0.4 million for the nine months
ended September 30, 2001.
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
(an operating segment or a component of an operating segment that constitutes a
business for which discrete financial information is available; our reporting
units with goodwill consist of Advancel Logic Corporation within the technology
operating segment, Pro Tech within the communications operating segment and
Midcore Software, Inc./Artera Group, Inc. within the communications operating
segment) 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" by projecting future estimated revenues and costs and
comparing the resultant cash flows to the carrying amount of the intangible
asset. 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 and had no other impact on our financial statements. At September
30, 2002, we had $7.2 million of goodwill, net of amortization and $3.7 million
of patent rights and other intangibles, net of amortization. For the three
months ended September 30, 2001 and 2002, we had $0.4 million and
8
zero of goodwill amortization expense, respectively. For the nine months ended
September 30, 2001 and 2002, we had $1.2 million and zero of goodwill
amortization expense, respectively. For each of the three months ended September
30, 2001 and 2002, we had $0.1 million of other intangible asset amortization
expense. For the nine months ended September 30, 2001 and 2002, we had $0.4
million and $0.3 million of other intangible asset amortization expense,
respectively.
The effects on net loss and loss per share of excluding such goodwill
amortization from the three and nine months ended September 30, 2001 as compared
to the three and nine months ended September 30, 2002 follow.
(in thousands, except per share amounts)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2001 2002 2001 2002
------------- ------------- ------------- ------------
Restated (Note 2) Restated (Note 2)
Reported loss before cumulative effect
of change in accounting principle $ (8,327) $ (11,161) $ (43,367) $ (31,137)
Cumulative effect of change in accounting principle - - (1,582) -
Add back: Goodwill amortization 447 - 1,243 -
------------ ------------- ------------- -----------
Adjusted net loss $ (7,880) $ (11,161) $ (43,706) $ (31,137)
============ ============= ============= ===========
Basic and diluted loss per share
Reported net loss $ (0.02) $ (0.03) $ (0.11) $ (0.08)
Cumulative effect of change in accounting principle - - (0.01) -
Goodwill amortization - - - -
------------ ------------- ------------- -----------
Adjusted net loss $ (0.02) $ (0.03) $ (0.12) $ (0.08)
============ ============= ============= ===========
The other intangibles subject to amortization are categorized below with an
estimate of the amortization expense for the year ended December 31, 2002 and
the five years thereafter.
(in thousands) September 30, 2002
-------------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------- ----------------
Amortized intangible assets
Patents $ 4,147 $ (3,650)
Licensed technology 3,827 (576)
----------------- ----------------
Total $ 7,974 $ (4,226)
================= ================
Estimated amortization expense for the years ended:
- --------------------------------------------------
December 31, 2002 (October 1 to December 31, 2002) $ 94
December 31, 2003 $ 368
December 31, 2004 $ 379
December 31, 2005 $ 334
December 31, 2006 $ 334
December 31, 2007 $ 333
Goodwill balances by operating segment follow.
(in thousands) Media Communications Technology
Segment Segment Segment Total
------------- --------------- ------------ -----------
Balance as of
January 1, 2002 $ - $ 6,845 $ 339 $ 7,184
Goodwill acquired 300 - - 300
Impairment losses (300) - - (300)
------------- --------------- ------------ -----------
Balance as of
September 30, 2002 $ - $ 6,845 $ 339 $ 7,184
============= =============== ============ ===========
9
4. Acquisitions:
On June 21, 2002, NCT completed its 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 11). 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 nine months ended September 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 metropolitan area
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.
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 September 30, 2002
---------------------------------- ---------------------------------------------------
Cost Realized Market Cost Realized Unrealized Market
Basis Gain/(Loss) Value Basis Gain/(Loss) Gain/(Loss) Value
---------- ------------ ---------- ---------- ----------- ------------ ----------
Available-for-sale:
ITC $ 4,696 $ (3,898) $ 798 $ 798 $ (689) $ (15) $ 94
Teltran 743 (659) 84 84 - (56) 28
InsiderStreet 2,479 (2,479) - - - - -
---------- ------------ ---------- ---------- ----------- ------------ ----------
Totals $ 7,918 $ (7,036) $ 882 $ 882 $ (689) $ (71) $ 122
========== ============ ========== ========== =========== ============ ==========
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. At September 30, 2002, we concluded that the decline in
the value of ITC did require a write down to a new cost basis because of the
lack of recent market information available to assess the financial condition
and near term prospects.
10
Accounts receivable comprise the following (in thousands):
December 31, September 30,
2001 2002
----------------- -----------------
Technology license fees and royalties $ 287 $ 8
Joint ventures and affiliates 34 34
Other receivables 693 815
----------------- -----------------
$ 1,014 $ 857
Allowance for doubtful accounts (298) (301)
----------------- -----------------
Accounts receivable, net $ 716 $ 556
================= =================
Inventories comprise the following (in thousands):
December 31, September 30,
2001 2002
----------------- -----------------
Components $ 427 $ 234
Finished goods 1,749 882
----------------- -----------------
$ 2,176 $ 1,116
Reserve for obsolete & slow moving inventory (791) (227)
----------------- -----------------
Inventories, net $ 1,385 $ 889
================= =================
Other current assets comprise the following (in thousands):
December 31, September 30,
2001 2002
----------------- -----------------
Notes receivable $ 1,000 $ 1,000
Investment in warrant (Teltran) 152 17
Due from officer 105 111
Other 516 416
----------------- -----------------
$ 1,773 $ 1,544
Reserve for uncollectible amounts (1,000) (1,000)
----------------- -----------------
Other current assets $ 773 $ 544
================= =================
Other assets (long term) comprise the following (in thousands):
December 31, September 30,
2001 2002
----------------- -----------------
Marketable ITC securities $ 1,304 $ 1,319
Advances and deposits 651 638
Deferred charges 537 395
Other 78 97
----------------- -----------------
Other assets $ 2,570 $ 2,449
================= =================
Property and equipment comprise the following (in thousands):
December 31, September 30,
2001 2002
----------------- ------------------
Machinery and equipment $ 3,786 $ 1,971
Furniture and fixtures 623 634
Leasehold improvements 966 911
Tooling 631 631
Other 432 432
----------------- ------------------
$ 6,438 $ 4,579
Accumulated depreciation (4,594) (3,325)
----------------- ------------------
Property and equipment, net $ 1,844 $ 1,254
================= ==================
11
Deferred revenues comprise the following (in thousands):
December 31, September 30,
2001 2002
----------------- -----------------
NXT $ 6,955 $ 5,350
Teltran 1,921 192
Other 555 612
----------------- -----------------
$ 9,431 $ 6,154
Less: amount classified as current (4,616) (2,944)
----------------- -----------------
Deferred revenue (classified as long term) $ 4,815 $ 3,210
================= =================
We do not expect to realize any additional cash in connection
with recognition of our deferred revenues.
Other current liabilities comprise the following (in thousands):
December 31, September 30,
2001 2002
----------------- -----------------
License reacquisition payable $ 18,000 $ 4,000
Development fee payable 800 650
Royalty payable 766 1,198
Due to selling shareholders of Theater Radio Network - 557
Due to L&H 100 100
Other 113 28
----------------- -----------------
Other current liabilities $ 19,779 $ 6,533
================= =================
Other liabilities (long term) comprise the following (in thousands):
December 31, September 30,
2001 2002
----------------- -----------------
Due to ITC $ 1,422 $ 1,422
Royalty payable 959 527
Due to selling shareholders of Theater Radio Network 569 -
Other - 143
----------------- -----------------
Other liabilities $ 2,950 $ 2,092
================= =================
Statements of Operations Information:
- -------------------------------------
Other (income) expense, net comprise the following (in thousands):
Three months ended September 30, Nine months ended September 30,
--------------------------------- -----------------------------------
2001 2002 2001 2002
-------------- -------------- --------------- ---------------
Finance costs associated with non-registration of common
shares and of common shares underlying convertible notes $ - $ 3,700 $ - $ 5,512
Minority share of loss in subsidiary - Pro Tech (142) (74) (298) (277)
Depreciation in fair value of derivative instrument 199 5 1,216 135
Realized loss on sale of trading securities - NXT 2,874 - 2,302 -
Unrealized gain on trading securities - NXT (482) - - -
Other-than-temporary decline in value of securities
available-for-sale 98 689 3,067 689
Default penalties on debt 261 288 411 313
Inducement charge - - 190 -
Other (117) (267) (511) (368)
-------------- -------------- -------------- --------------
Total non-operating other (income) expense, net $ 2,691 $ 4,341 $ 6,377 $ 6,004
============== ============== ============== ==============
12
Supplemental Cash Flow Disclosures:
- -----------------------------------
(in thousands)
Nine months ended September 30,
------------------------------------
Supplemental disclosures of cash flow information: 2001 2002
------------------ ---------------
Cash paid during the year for:
Interest $ - $ 17
================== ===============
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding loss on available-for-sale securities $ (821) $ (56)
================== ===============
Issuance of common stock upon conversion of principal portion of convertible notes $ 500 $ 375
================== ===============
Issuance of common stock upon exchange of principal portion of convertible notes of subsidiary $ 2,459 $ 200
================== ===============
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 $ 261 $ -
================== ===============
Property and equipment financed through capitalized leases and notes payable $ 356 $ 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 $ -
================== ===============
Investment in DMC New York and repurchase of licenses $ 21,000 $ -
================== ===============
Receipt of NXT shares for license fee $ 9,160 $ -
================== ===============
Settlement of liability as offset against patent $ 405 $ -
================== ===============
13
6. Stockholders' Capital Deficit:
The changes in stockholders' capital deficit during the nine months ended
September 30, 2002 were as follows (in thousands):
Series H Accumulated
Convertible Additional Accumu- Other
Preferred Stock Common Stock Paid-in lated Comprehensive Treasury Stock
--------------- --------------- ---------- ---------- ------------- --------------------
Shares Amount Shares Amount Capital Deficit Income/(Loss) Shares Amount
--------------- --------------- --------- ---------- ------------ --------------------
Balance at December 31, 2001 - $ - 428,831 $ 4,288 $ 164,621 $ (219,459) $ 50 6,078 $(2,963)
Sale of preferred stock, net 2 18,000 - - 5,309 - - - -
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - 195 - - (195) - - - -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - - - (311) - - - -
Charges for the non-registration of the
underlying shares of NCT to subsidiary
preferred shareholders - - - - (1,562) - - - -
Exchange of subsidiary common stock
for common stock - - 6,073 61 409 - - - -
Conversion of convertible debt - - 5,611 56 348 - - - -
Exchange of subsidiary convertible debt
for common stock - - 2,599 26 193 - - - -
Shares issued for settlement
obligations/prepayments - - 500 5 40 - - - -
Retirement of treasury stock - - (6,078) (61) (2,902) - - (6,078) 2,963
Warrants issued in conjunction with
convertible debt and related rights - - - - 3,671 - - - -
Beneficial conversion feature on
convertible debt - - - - 2,549 - - - -
Net loss - - - - - (31,137) - - -
Accumulated other comprehensive
income (loss) - - - - - - (33) - -
Compensatory stock options and warrants - - - - 3,785 - - - -
--------------- --------------- --------- ----------- ----------- ----------------------
Balance at September 30, 2002 2 $18,195 437,536 $ 4,375 $ 175,955 $ (250,596) $ 17 - $ -
=============== =============== ========= =========== =========== ======================
14
7. Notes Payable:
(in thousands)
December 31, September 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; Subsequent maturities rolled into
note which matures June 27, 2003
Top Source Automotive 204 204
Default interest rate accrues at two times prime;
due April 16, 1999
Notes due former employees 118 116
$100 bears interest at 8.25%, compounded annually; due
in two equal installments on December 1, 1998 and March 1,
1999. $16 bears interest at 12%, due on demand.
Other financings 11 285
Interest ranging from 7% to 12%; $220 matures November 1, 2002;
$35 due July 15, 2003; $30 all other
---------------- ---------------
$ 3,208 $ 2,943
================ ===============
15
8. Convertible Notes:
(in thousands)
December 31, September 30,
2001 2002
------------ -------------
Issued to Carole Salkind (a) $ 7,222 $ 15,609
Accrues interest at 8% per annum; weighted effective interest rate
of 41.4%; secured by substantially all of the assets of NCT;
convertible into NCT common stock at prices ranging from
$0.059 - $0.097 or exchangeable for common stock of NCT
subsidiaries except for Pro Tech; maturing by quarter as follows:
December 31, 2002 $ 3,290
March 31, 2003 4,059
June 30, 2003 2,075
September 30, 2003 6,185
Issued to Crammer Road LLC (b) 1,000 1,000
Accrues interest at 2% per month from May 27, 2001 payable
at maturity; weighted effective interest rate of 30.3%; 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
Weighted effective interest rate of 25%; 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 4,228
Weighted effective interest rate of 85.8%; convertible into
NCT common stock at 100% of the five-day average
closing bid price preceding conversion; matures:
January 9, 2002 $ 2,022
April 4, 2002 875
May 25, 2002 81
June 29, 2002 1,250
------------ -------------
$ 13,051 $ 21,813
Less: unamortized debt discounts (1,341) (4,078)
Less: amounts classified as long term - (739)
------------ -------------
$ 11,710 $ 16,996
============ =============
Footnotes:
(a) During the nine months ended September 30, 2002, NCT issued an
aggregate of $13.8 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, March 27, 2000 and
September 28, 2001 for an aggregate of $5.4 million. The principal on the notes
dated August 22, 2001, March 27, 2000 and September 28, 2001 ($5.2 million) was
rolled into new notes in 2002 along with default penalties aggregating $0.5
million, accrued interest and an aggregate of $7.7 million new funding from
Carole Salkind. During the nine months ended September 30, 2002, we recorded
original issue discounts of $2.0 million to the notes based upon the relative
fair values of the debt and warrants granted to Ms. Salkind (see Note 11). We
recorded discounts of $1.6 million for warrants issued as consideration for
irrevocable waivers relating to Pro Tech common stock whereby the original
instrument was a convertible note or a warrant issued in conjunction with a
convertible note (see Note 11). In addition, beneficial conversion features
totaling $2.2 million have been recorded as a discount to the notes. These
discounts are being amortized over the term of the related notes. For the three
and nine months ended September 30, 2002, $1.9 million and $3.2 million,
respectively, of amortization related to these discounts is included in interest
expense. Unamortized discounts of $3.9 million have been reflected as a
reduction to the convertible notes in our condensed consolidated balance sheet
as of September 30, 2002. The secured convertible note for $0.8 million is also
secured by an interest in specific assets of our subsidiary, NCT Video. The
default provisions in these notes impose a penalty of 10% of the principal
payments in default and default interest from the date of default on the
principal in default at the 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 10), an event of default occurred with respect to $4.9
million of the notes outstanding. These notes are senior to all other
indebtedness of the company. To date, demand for
16
payment has not been made.
(b) The company did not repay this convertible note upon maturity, which
resulted in default for non-payment. We are also obligated to register shares
issuable upon conversion of this note. Crammer Road has brought an action to
collect on this note, but a settlement of that action has been reached pending
court approval (see Note 10).
(c) Notes totaling approximately $26,000 are convertible at 80% of the
lowest closing bid price for the five days preceding conversion; a note totaling
$0.6 million is convertible at the lower of $0.07 per share or 80% of the lowest
closing bid price for the five days preceding conversion; and a note totaling
$0.4 million is convertible at $0.0647 per share. On January 10, 2002, a
security interest was granted in substantially all of the assets of our
subsidiary Artera Group, Inc., to a holder of a $0.6 million note. Beneficial
conversion features totaling $0.3 million have been recorded as a discount to
the notes and are being amortized over the term of the notes. For the three and
nine months ended September 30, 2002, approximately $40,000 and $0.1 million,
respectively, of amortization related to these discounts is included in interest
expense. Unamortized discounts of $0.2 million have been reflected as a
reduction to the convertible notes in our condensed consolidated balance sheet
as of September 30, 2002. The company did not repay convertible notes
aggregating 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 zero and $0.2 million during
the three and nine months ended September 30, 2002, respectively. Principal of
$0.2 million was exchanged for NCT stock for the nine months ended September 30,
2002 (see Note 11). On January 10, 2002, a security interest was granted in
substantially all of the assets of our subsidiary Artera Group, Inc., 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
$1.9 million as a component of finance costs associated with non-registration of
common shares and of common shares underlying convertible notes included in
other (income) expense, net for the three and nine months ended September 30,
2002, respectively (see Note 5). The aggregate outstanding debt of $4.2 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.
9. Commitments and Contingencies:
On July 25, 2002, NCT and Crammer Road LLC entered into a private equity
credit agreement and related registration rights agreement. This equity credit
agreement provides that shares of up to $50 million of our common stock may be
sold to Crammer Road pursuant to put notices delivered by NCT. The credit
agreement obligates NCT to put a minimum of $5 million of its common stock (the
minimum commitment) to Crammer Road for cash. The agreement provides for a
discount to market of 10% on the puts. Our put notices are to commence after we
have an effective registration statement covering 112% of the shares needed for
$50 million of puts (among other conditions). 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
was not cancelled by the July 25, 2002 private equity credit agreement. Under
the April 12, 2001 agreement, the minimum commitment was $17 million, of which
approximately $14 million was to be used to acquire 12,000 shares of DMC NY. We
had a disagreement with Crammer Road regarding whether any amounts were owed by
NCT under the minimum commitment and penalty provisions of this 2001 agreement.
We estimate the penalty for late effectiveness would have been approximately
$3.5 million. On or about September 16, 2002, Crammer Road brought an action
against NCT for amounts allegedly owed to it by NCT under this 2001 agreement. A
settlement of this action has been reached pending court approval (see Note 10).
17
10. Litigation:
On December 6, 2000, our subsidiary DMC Cinema (formerly known as Theater
Radio Network) filed suit against InsiderStreet.com, Inc. in the Circuit Court
of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The
complaint alleges that InsiderStreet breached a May 5, 2000 advertising
agreement with Theater Radio Network and seeks a declaratory judgment and
specific performance of the agreement. The agreement provided that, in exchange
for advertising services performed by Theater Radio Network, InsiderStreet would
deliver to Theater Radio Network $3 million in common stock of InsiderStreet,
with an adjustment in the number of shares to ensure that the total stock
delivered was worth at least $2 million on May 10, 2001 and with registration of
all stock delivered. InsiderStreet has to date made only a partial delivery of
shares and has not registered any of the shares delivered. Discovery in this
litigation has begun. On October 23, 2001, 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 or about October 9, 2002,
InsiderStreet.com, Inc. changed its name to Neometrix Corp.
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 valued at approximately $19,000.
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
18
and gave Production Resource Group the right to attach or garnish up to $2.1
million of specified assets of NCT and DMC. As of September 30, 2002,
approximately $78,000 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 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
ceased operations on February 28, 2002.) Theater Radio Network denied the
allegations of BMI in the arbitration proceedings. On September 26, 2002, the
parties reached a settlement of the proceedings. Under the settlement, in
consideration of a full release for Theater Radio Network and its affiliates,
Theater Radio Network's parent company, Distributed Media Corporation, will pay
BMI $2,500 per month for 62 months for a total of $155,000. At September 30,
2002, the amounts due BMI were included in notes payable and other liabilities
(long term). As a result of the settlement, the company realized a reduction in
liabilities previously recorded of approximately $64,000. On October 2, 2002,
BMI caused the dismissal of the arbitrations with prejudice.
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 September 30, 2002, West Nursery had collected approximately
$27,000 on this judgment. 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 $62,000 of the Maryland
judgment against NCT in Connecticut. On August 5, 2002, the Connecticut court
issued a pre-judgment remedy prohibiting NCT from disposing of its assets other
than in the ordinary course of business. On September 23, 2002, West Nursery
moved for a default judgment on its Connecticut complaint. On October 29, 2002,
NCT filed an objection to the motion
19
for default judgment and filed an answer to that complaint in which it denied
the material allegations of the complaint. On November 4, 2002, the Connecticut
court in the action by West Nursery Land Holding Limited Partnership issued a
supplemental order of attachment relating to a specific bank account. Currently,
the parties are actively negotiating in an attempt to settle their Connecticut
and Maryland proceedings.
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. NCT and DMC had contracted with Mesa
Partners for Mesa to develop general, marketing and financial strategies for
NCT, advise management in presentations and negotiations, make introductions to
Mesa's clientele, and advise on new sales opportunities and possible joint
ventures and strategic partnerships. Mesa's 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. The parties are actively
negotiating in an attempt to settle these proceedings. At this stage, management
cannot determine the likelihood of success of the plaintiff's claims, should the
case go to trial.
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. On October 17, 2002, Linford and
NCT entered into a settlement agreement under which all claims of Linford
against NCT and Artera International are being dismissed in consideration of the
issuance by NCT of 5,938,081 shares of its common stock ($479,500 in stock
priced at $.08075 per share). On or about October 17, 2002, such shares were
issued by NCT to Linford. At September 30, 2002, our current liabilities include
$479,500 for this settlement.
On September 16, 1999, following a series of transactions (some
unconsummated) between the companies, 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. On July 1, 2002, NCT filed proofs of
claim against GTI and TSA in that case.
On November 17, 1998, in connection with a patent and trademark
dispute, the company and NCT Hearing filed suit against Andrea Electronics
Corporation in the United States District Court, Eastern District of New York.
On or about December 30, 1998, Andrea brought counterclaims against the company
and NCT Hearing. 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 September 16, 2002, an action was brought by Crammer Road LLC
against NCT in the U.S. District Court for the District of Connecticut. In its
complaint, Crammer Road alleges that NCT breached a series of agreements entered
into by Crammer Road and NCT on April 12, 2001, namely, a Private Equity Credit
Agreement, a Registration Rights Agreement relating thereto, an Exchange
Agreement, a Registration Rights Agreement relating thereto, two convertible
notes
20
and an additional side letter agreement. The aggregate amount sought under the
complaint was $6.9 million plus interest and costs. On October 30, 2002, Crammer
Road and NCT executed a settlement agreement pursuant to which all claims in the
lawsuit between them would be dismissed in consideration of the issuance by NCT
to Crammer Road of 68 million shares of NCT common stock (approximately $5.4
million based upon the last sale price on October 30, 2002). The settlement
agreement takes effect upon court approval, which is expected soon. At September
30, 2002, we have recorded a liability of $5.4 million.
Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2001. The company believes there are no other patent
infringement claims, litigation, matters or unasserted claims other than the
matters discussed above that could have a material adverse effect on its
financial position or results of operations.
11. Capital Stock:
Authorized Capital Stock
Common shares available for future issuance
At September 30, 2002, the shares of common stock required to be reserved
was 921,429,984 calculated at the $0.071 common stock price on that date (or the
discount therefrom as allowed under the applicable exchange or conversion
agreements). At the September 30, 2002 common stock price of $0.071, our common
shares issued and required to be reserved for issuance exceeded the number of
shares authorized at that date. As such, NCT will seek shareholder approval of
an amendment to its 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 September 30,
2002, $1.0 million of the 8% convertible note principal could be converted into
NCT common stock.
During the nine months ended September 30, 2002, $0.2 million of the 6%
convertible notes, plus interest was exchanged for 2,598,956 shares of NCT's
common stock. At September 30, 2002, $4.2 million of the 6% convertible note
principal could be exchanged for NCT common stock.
Shares Issued to Vendors and Others
During the nine months ended September 30, 2002, NCT recorded charges
totaling $45,000 for the issuance of 500,000 shares of our common stock based
upon the closing bid price on the date of the respective agreements; 200,000
shares valued at approximately $19,000 to settle a legal matter (see Note 10)
and 300,000 shares valued at approximately $26,000 for a partial payment of
consulting services.
NCT Audio Products, Inc.
Initial Financing - exchange of common stock
21
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 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 nine months ended September 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 September 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 of $0.3
million for the nine months ended 2002.
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 included in our statement of
operations for the nine months ended September 30, 2002 classified as 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 NY common stock. The series H
preferred stock is senior in rank to our common stock and has preferences with
respect to dividends and as to the liquidation, dissolution or winding up of
NCT. The holders of our series H preferred stock have no voting rights (except
as may be required by law). 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 each of the three and nine months ended September
30, 2002, we calculated the 4% dividends earned by the holder of the series H
preferred stock at approximately $0.2 million. Such cumulative dividend amount
is included in preferred stock dividends and in the calculation of loss
attributable to common stockholders. 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 nine months ended September 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 our shareholders at the next annual
meeting.
22
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 nine months ended September
30, 2002, we incurred a charge of $0.5 million and $1.6 million, respectively,
for non-registration of the underlying shares of NCT common stock. These amounts
are 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 nine months ended September 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 nine months ended September 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 $6,000 and $16,000, respectively. These amounts are included in
preferred stock dividends and in the calculation of loss attributable to common
stockholders.
For the three and nine months ended September 30, 2002, the amortization of
beneficial conversion feature related to Pro Tech series B redeemable
convertible preferred stock was approximately $5,000 and $46,000, 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 three months ended September 30, 2002, we granted non-plan options
to purchase an aggregate of 51,500,000 shares of our common stock at exercise
prices of $0.07 and $0.078 and cancelled non-plan options to purchase an
aggregate of 15,500,000 shares of our common stock at exercise prices ranging
from $0.078 to $0.08 as partial consideration for consulting services. For the
nine months ended September 30, 2002, we granted non-plan options to purchase an
aggregate of 77,225,000 shares of our common stock at exercise prices ranging
from $0.07 to $0.13 and cancelled non-plan options to purchase an aggregate of
15,500,000 shares of our common stock at exercise prices ranging from $0.078 to
$0.08 as partial consideration for consulting services (see Note 12). The value
of the 50,000,000 options granted in exchange for both the cancellation of
15,500,000 options and consulting services to the company in excess of the value
previously recorded for the 15,500,000 options has been recorded as consulting
expense. 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 2.07% to 3.61%; volatility of 100%; and an
expected life of four to five years. For the three and nine months ended
September 30, 2002, we recorded a charge for consulting services of $2.4 million
and $3.4 million, respectively, classified as selling, general and
administrative expense.
23
On June 13, 2002, NCT's 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
2.8 million shares at September 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 common stock on June 13, 2002 or
$0.081 per share as determined by the last sale price as reported by the NASD
OTC Bulletin Board. As of September 30, 2002, 2.8 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 excess unauthorized
shares (2.8 million).
Warrants
During the three and nine months ended September 30, 2002, in conjunction
with the issuance of convertible notes, NCT granted Carole Salkind warrants to
acquire an aggregate of 26,507,565 shares and 41,644,621 shares, respectively,
of its common stock at exercise prices ranging from $0.07 to $0.097 per share.
The fair value of these warrants for the three and nine months ended September
30, 2002 was approximately $1.4 million and $2.5 million, respectively
(determined using the Black-Scholes option pricing model). Based upon allocation
of the relative fair values of the instruments, we recorded a discount to the
convertible notes issued to Carole Salkind of $1.2 million and $2.0 million for
the three and nine months ended September 30, 2002, 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. On September 30,
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 10.0 million shares
of our common stock at an exercise price of $0.07 per share. As consideration,
Ms. Salkind irrevocably waived her right to purchase up to an aggregate of $0.5
million of Pro Tech common stock under a warrant dated February 13, 2001. We
recorded a discount to the convertible notes of $1.6 million based upon the fair
value of these warrants. The discount is being recognized over the remaining
term of the related secured convertible notes.
On January 10, 2002, NCT repriced 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 services with respect to equity placements during 2001 and
resulted in no charge to the statement of operations for the three and nine
months ended September 30, 2002.
On July 25, 2002, a warrant was granted to Crammer Road LLC to acquire 1.0
million shares of NCT common stock at an exercise price of $0.0738 per share.
This warrant was issued in conjunction with the private equity credit agreement
of the same date and resulted in no charge to
24
the statement of operations for the three and nine months ended September 30,
2002.
During the nine months ended September 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 nine months ended September 30, 2002, we
recorded a charge for consulting services, in connection with vested warrants
totaling 6,554,167 shares, of $ 0.4 million (determined using the Black-Scholes
option pricing model), classified as selling, general and administrative
expense. A charge will be taken on the contingent portion of these warrants when
the contingency has been met.
12. Related Parties:
Options Granted
On September 30, 2002, NCT granted to Acme Associates, Inc. a five-year
option to purchase 50,000,000 shares of NCT common stock at an exercise price of
$0.07 per share (an aggregate exercise price of $3.5 million). The options
vested on the date of grant and resulted in a 10.3% beneficial ownership in NCT
for Acme Associates as of September 30, 2002. The options were granted in
consideration of financial consulting services provided by Acme Associates to
NCT. Five-year options granted to Acme Associates, Inc. to purchase 15,500,000
shares (14,000,000 during the quarter ended June 30, 2002; and 1,500,000 during
the quarter ended September 30, 2002) of NCT common stock at exercise prices
ranging from $0.078 to $0.08 per share on July 3, 2002 were cancelled as a
result of the September 30, 2002 grant of 50,000,000 options (see Note 11).
Carole Salkind is the sole shareholder of Acme Associates; with Acme Associates'
option shares attributed to Carole Salkind, her beneficial ownership in NCT as
of September 30, 2002 is 46.3%.
On January 25, 2002, NCT granted to Leben Care, Inc. options to purchase
8,350,000 shares of NCT common stock at exercise prices ranging from $0.079 to
$0.13 (an aggregate exercise price of $809,000). The options vested on the date
of grant and resulted in a 1.9% beneficial ownership in NCT for Leben Care as of
September 30, 2002. The options expire on dates ranging from May 22, 2006 and
January 24, 2007. The options were granted in consideration of financial
consulting services provided by Leben Care to NCT (see Note 11). Carole
Salkind's son Steven Salkind is the sole shareholder of Leben Care.
On February 27, 2002, NCT granted to Stopnoise.com, Inc. five-year options
to purchase 3,375,000 shares of NCT common stock at exercise prices ranging from
$0.079 to $0.12 (an aggregate exercise price of $312,500). The options vested on
June 30, 2002 and resulted in less than 1.0% beneficial ownership in NCT for
Stopnoise.com as of September 30, 2002. The options expire on dates ranging from
June 30, 2006 to February 26, 2007. The options were granted in consideration of
financial consulting services provided by Stopnoise.com to NCT (see Note 11).
Carole Salkind's son Steven Salkind is the sole shareholder of Stopnoise.com.
13. 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-
25
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 nine months ended September 30, 2002, no geographic
information for revenues from external customers or for long-lived assets is
disclosed, as our primary market and capital investments were concentrated in
the United States.
Reportable segment data for the three and nine months ended September 30,
2001 (restated, see Note 2), and September 30, 2002 is as follows (in
thousands):
-------------------------------------------------------------------------------------
Reportable --------- Other ---------- Grand
Media Communications Technology Segments Corporate Consolidating Total
-------------------------------------------------------------------------------------
For the three months ended
September 30, 2001:
- ------------------------------------------
License fees and royalties $ 535 $ 685 $ 312 $ 1,532 $ 38 $ (5) $ 1,565
Other revenue - external 32 1,274 - 1,306 - - 1,306
Other revenue - other operating
segments 38 184 - 222 - (222) -
Income (loss) before cumulative effect of
accounting change (4,431) (3,625) (172) (8,228) (497) 398 (8,327)
Cumulative effect of accounting change - - - - - - -
Net income (loss) (4,431) (3,625) (172) (8,228) (497) 398 (8,327)
-------------------------------------------------------------------------------------
Reportable --------- Other ---------- Grand
Media Communications Technology Segments Corporate Consolidating Total
-------------------------------------------------------------------------------------
For the three months ended
September 30, 2002:
- ------------------------------------------
License fees and royalties $ 535 $ 583 $ - $ 1,118 $ 5 $ (5) $ 1,118
Other revenue - external 52 543 - 595 - - 595
Other revenue - other operating
segments 8 240 - 248 - (248) -
Income (loss) before cumulative effect of
accounting change (5,182) (1,839) (658) (7,679) (7,931) 4,449 (11,161)
Cumulative effect of accounting change - - - - - - -
Net income (loss) (5,182) (1,839) (658) (7,679) (7,931) 4,449 (11,161)
-------------------------------------------------------------------------------------
Reportable --------- Other ---------- Grand
Media Communications Technology Segments Corporate Consolidating Total
-------------------------------------------------------------------------------------
For the nine months ended
September 30, 2001:
- ------------------------------------------
License fees and royalties $ 1,298 $ 1,894 $ 763 $ 3,955 $ 10,111 $ (10,027) $ 4,039
Other revenue - external 326 3,586 - 3,912 - - 3,912
Other revenue - other operating
segments 441 605 - 1,046 - (1,046) -
Income (loss) before cumulative effect of
accounting change (8,064) (10,591) (356) (19,011) (15,692) (8,664) (43,367)
Cumulative effect of accounting change - (1,582) - (1,582) - - (1,582)
Net income (loss) (8,064) (12,173) (356) (20,593) (15,692) (8,664) (44,949)
26
-------------------------------------------------------------------------------------
Reportable --------- Other --------- Grand
Media Communications Technology Segments Corporate Consolidating Total
-------------------------------------------------------------------------------------
For the nine months ended
September 30, 2002:
- ------------------------------------------
License fees and royalties $ 1,605 $ 1,959 $ - $ 3,564 $ 20 $ (13) $ 3,571
Other revenue - external 111 2,100 - 2,211 - - 2,211
Other revenue - other operating
segments (41) 667 - 626 - (626) -
Income (loss) before cumulative effect of
accounting change (7,163) (6,014) (827) (14,004) (22,558) 5,425 (31,137)
Cumulative effect of accounting change - - - - - - -
Net income (loss) (7,163) (6,014) (827) (14,004) (22,558) 5,425 (31,137)
14. Subsequent Events:
Agreements
On October 11, 2002, Artera Group, Inc. entered into a ten-year exclusive
marketing license agreement with FairPoint Broadband, Inc. for Artera licensed
products and services in the United States and Canada (except for reserved
customers). Also on October 11, 2002, NCT issued a five-year warrant to
FairPoint Communications, Inc., the parent company of FairPoint Broadband, Inc.,
to purchase an aggregate of 2.0 million shares of our common stock at an
exercise price of $0.15 per share. In accordance with EITF 01-9, we will record
a charge against revenue for the estimated fair value of this warrant of
approximately $0.1 million.
On October 24, 2002, NCT's subsidiary, Artera Group, Inc. entered into a
Master Distributor Agreement with Spyder Technologies Group, LLC under which
Spyder will distribute the Artera Turbo service in Puerto Rico, the U.S. Virgin
Islands and a number of countries in the Caribbean region. The term of the
agreement is five years and four months. Compensation to Spyder consists of a
commission of 50% of gross revenues on sales originated by local distributors
brought to Artera by Spyder, although the Spyder commission is debited for
further commissions payable to those local distributors. With some exceptions in
Puerto Rico and the U.S. Virgin Islands, Spyder's distribution rights are
exclusive, although Artera may terminate the exclusivity after the first 16
months of the term if specified revenue thresholds are not met. In addition,
Artera and Spyder are negotiating a non-exclusive distribution agreement for the
United States and Canada. Jonathan Parrella, the son of NCT's Chairman and Chief
Executive Officer, is President of and holds a 45% ownership interest in Spyder.
Bulldog Communications, Inc. holds a 25% ownership interest in Spyder. Bulldog
Communications, Inc. is owned 20% by each of Michael Parrella, Karen Parrella,
Michael Parrella, Jr., Jonathan Parrella and Daniel Parrella (the Chairman and
Chief Executive Officer of NCT, and, respectively, his wife and three sons).
Michael Parrella is also the Chairman of the Board, and Karen Parrella is the
President, of Bulldog Communications.
Transactions with Carole Salkind
As of November 2, 2002, we were in default for non-payment of a secured
convertible note dated May 2, 2002 for the principal amount of $1.3 million. We
are currently in negotiation to cure this default.
On November 7, 2002, NCT issued a secured convertible note payable to Ms.
Salkind for $0.4 million as consideration for $0.4 million in cash. The note
matures on November 7, 2003 and bears interest at 8% per annum payable at
maturity. The note is convertible into shares of NCT common stock at $0.072 per
share 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
27
thereof). In conjunction with this note, a five-year warrant was issued to Ms.
Salkind to purchase approximately 1.8 million shares of our common stock at an
exercise price of $0.072 per share. The relative estimated fair value of the
warrant will be reflected as an original issue discount to the note and
amortized over the term of the note.
Other notes
As of November 1, 2002, we were in default for non-payment of promissory
notes dated July 11, 2002 for the aggregate principal amount of $0.2 million.
Options
On October 25, 2002, the Board of Directors granted options to purchase
approximately 21 million shares of NCT's 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 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.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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
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
NCT's operating revenues are comprised of technology licensing fees and
royalties, product sales, advertising/media revenue and engineering and
development services. Please see our discussion of our critical accounting
policies below. From time to time, we receive securities or other consideration
rather than cash payment from our customers and such other consideration may or
may not be realized by us in cash. We do not anticipate that any cash will be
realized from the revenues deferred at September 30, 2002 (approximately $6.2
million). Operating revenues for the nine months ended September 30, 2002
consisted of approximately 61.8% in technology licensing fees and royalties,
36.9% in product sales, 0.9% in advertising/media revenue and 0.4% 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
29
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 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 consultants for
services rendered to the company. In particular, we have been primarily
dependent upon funding from Carole Salkind to maintain our operations. All of
these transactions are described in greater detail below under "Liquidity and
Capital Resources" (see also Notes 8, 11 and 14 - notes to the condensed
consolidated financial statements).
Critical Accounting Policies
Revenue Recognition
Revenue is recognized when earned. Technology licensing fees are generally
recognized upon execution of the agreement but are deferred if subject to
completion of any performance criteria then recognized once the performance
criteria have been met. Revenue from royalties is recognized ratably over the
royalty period based upon periodic reports submitted by the royalty obligor or
based on minimum royalty requirements. Revenue from product sales is recognized
when the product is shipped. Revenue from advertising sales is recognized when
the advertisements are aired or displayed. Revenue from engineering and
development services is generally recognized and billed as the services are
performed. The mix of our revenue sources during any reporting period may have a
material impact on our results. In particular, our execution of technology
licensing agreements and the timing of the revenue recognized therefrom has not
been predictable. Our
30
preference is to collect amounts due from the sale of our technologies, services
and products in cash. However, from time to time, receivables may be settled by
securities transferred to us by the customer in lieu of cash payment.
At September 30, 2002, our deferred revenue aggregated $6.2 million. We do
not expect to realize any additional cash in connection with recognizing revenue
from our deferred revenues.
Marketable Securities
Marketable securities that are bought and held principally for the purpose
of selling them in the near-term are classified as trading securities. Trading
securities are recorded at fair value, with the change in market value during
the period included in the statements of operations. Marketable debt securities
that NCT has the positive intent and ability to hold to maturity are classified
as held-to-maturity securities and recorded at amortized cost. Securities not
classified as either held-to-maturity or trading securities are classified as
available-for-sale securities. Available-for-sale securities are generally
recorded at market value, with the change in market value during the period
excluded from the statements of operations unless it is occasioned by an
other-than-temporary decline in value and recorded net of income taxes as a
separate component of stockholders' equity (capital deficit). NCT reviews
declines in value of its portfolio when general market conditions change or
specific information pertaining to an industry or individual company becomes
available. The factors considered in assessing whether a decline is
other-than-temporary include: our evaluation of the length of the time and the
extent to which the market value of the industry has been depressed or the
market value of the security has been less than cost; evaluation of financial
condition and near-term prospects of the business, including cash sufficiency
and new product developments; assessment of observable marketplace-determined
values and trends; and our intent and ability to retain our investment in the
business for a sufficient period of time to allow for any anticipated recovery
in market value.
At September 30, 2002, all of NCT's marketable securities have been deemed
available-for-sale securities. Based upon the above factors, we have concluded
that the decline in value of our ITC marketable securities at September 30, 2002
is other-than-temporary and recorded approximately $0.7 million charge included
in other income (expense), net (see Note 5 - notes to the condensed consolidated
financial statements).
Goodwill, Patent Rights, Other Intangible Assets and Impairment:
The excess of the consideration paid over the fair value of net assets
acquired in business combinations is recorded as goodwill. Goodwill is also
recorded by NCT upon the acquisition of some or all of the stock held by
minority stockholders of a subsidiary, except where such accounting is, in
substance, the purchase of licenses previously sold to such minority
stockholders or their affiliates. Effective January 1, 2002, goodwill and
intangibles with indefinite lives are no longer amortized.
Patent rights and other intangible assets with determinable lives, which
includes the cost to acquire rights to patents and other rights under licenses,
are stated at cost and are amortized using the straight-line method over the
remaining useful lives, ranging from one to seventeen years.
At each balance sheet date, NCT evaluates its intangible assets with
definite lives for impairment. The evaluation for impairment includes evaluating
the estimated fair value of the asset and the remaining period of amortization
or useful life. The company evaluates the remaining useful
31
life of an intangible asset to determine whether events and circumstances
warrant a revision to the remaining period of amortization. The factors used in
evaluating the useful life are evaluated at the reporting unit level and
include: current operating results, projected future operating results and cash
flows and any other material factors that may effect the continuity of the
usefulness of the asset. If the evaluation determines that the intangible
asset's remaining useful life has changed, the remaining carrying amount of the
intangible asset is amortized prospectively over that revised remaining useful
life.
Annually, or if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount, the company tests its goodwill for impairment. The company also
recognizes an impairment loss on goodwill acquired upon the acquisition of stock
held by minority stockholders of subsidiaries if the subsidiary's minority
interest has no carrying value, the subsidiary has a capital deficit and the
projected future operating results of the subsidiary are not positive.
For the three months ended September 30, 2001 and 2002, we had $0.4 million
and zero of goodwill amortization expense, respectively. For the nine months
ended September 30, 2001 and 2002, we had $1.2 million and zero of goodwill
amortization expense, respectively. For each of the three months ended September
30, 2001 and 2002, we had $0.1 million of other intangible asset amortization
expense. For the nine months ended September 30, 2001 and 2002, we had $0.4
million and $0.3 million of other intangible asset amortization expense,
respectively.
RESULTS OF OPERATIONS
Three months ended September 30, 2002 compared to three months ended
September 30, 2001
Total revenues for the three months ended September 30, 2002 were $1.7
million compared to $2.9 million for the same period in 2001, a decrease of $1.2
million, or 41.4%, reflecting decreases in each of our revenue sources except
for advertising/media.
Technology licensing fees and royalties were $1.1 million for the three
months ended September 30, 2002 as compared to $1.6 million for the same period
in 2001, a decrease of $0.5 million. The decrease was primarily due to a $0.3
million decrease in license fee revenue related to ITC with the remainder due to
a decrease in royalties. Our recognition of license fee revenue for each period
was primarily due to recognition of deferred revenue from the Teltran and NXT
licenses. No additional cash is expected to be realized from our deferred
revenues related to these licenses.
For the three months ended September 30, 2002, product sales were $0.6
million compared to $1.2 million for three months ended September 30, 2001, a
decrease of $0.6 million, or 50.0%. The decrease was primarily due to the
cessation of operations of Artera Group International Limited in March 2002 for
under-performance. No Artera International product revenue was recognized for
the three months ended September 30, 2002 as compared to $0.5 million for the
same period in 2001. In addition, sales of communication products decreased $0.1
million due to decreased demand. NCT Hearing products comprise approximately
$0.5 million, or 85% of our product sales for the three months ended September
30, 2002; communication products comprise approximately $0.1 million, or 12%.
Gross profit on product sales, as a percentage of product revenues,
increased to 48.4% for the three months ended September 30, 2002 from 36.2% for
the three months ended September 30, 2001, primarily due to the cessation of
operations of Artera Group International Limited in March
32
2002 for under-performance. Excluding Artera International's contribution to
gross profit for 2001, gross profit increased to 48.4% from 41.1%. This increase
resulted primarily from lower costs of sales due to inventory reserve
adjustments during the fourth quarter of 2001 of goods sold during the current
quarter, which more than offset Pro Tech's lower sales volume at lower per unit
prices and higher costs resulting from domestic production of goods.
Advertising/media revenues were $43,000 for the three months ended
September 30, 2002 compared to $22,000 for the same period in 2001.
Advertising/media revenues are derived from the sale of audio and visual
advertising in the Sight & Sound locations. The increase in revenues is due to
new advertising contracts in health venues of $43,000 despite the overall
advertising market recession and no revenue contribution from DMC Cinema in 2002
as compared to revenue of $22,000 in 2001. We ceased operations of DMC Cinema in
February 2002 due to a declining demand for our services. We concentrated our
efforts to obtain new business from the Sight & Sound health venues during 2002
and will continue to focus on the growth of this revenue source.
For the three months ended September 30, 2002, selling, general and
administrative expenses totaled $4.5 million as compared to $5.0 million for the
three months ended September 30, 2001, a decrease of $0.5 million, or 10%. This
decrease was due primarily to: (i) a $0.7 million decrease in salary and related
benefit costs attributable to a reduced workforce; (ii) a $0.5 million decrease
in legal and patent expenses; (iii) a $0.6 million decrease in depreciation and
amortization related to the adoption of SFAS 142 effective January 1, 2002; and
(iv) a $0.3 million decrease which represents an overall reduction in sales
related costs, such as travel, trade shows and commissions. These decreases were
partially offset with a $1.9 million increase in consulting expense primarily
due to the increased non-cash charges from the issuance of warrants and options.
For the three months ended September 30, 2002, research and development
expenditures totaled $1.2 million as compared to $1.3 million for the three
months ended September 30, 2001, a decrease of $0.1 million, or 7.7%. This
decrease was due primarily to: (i) a $0.2 million decrease in product
development costs related to ITC; (ii) a $0.1 million decrease in rent related
to the closing of our Maryland facility; and (iii) a $0.1 million decrease in
salary and related benefits attributed to a reduced workforce. These decreases
were partially offset with a $0.3 million increase in salaries and related
benefit costs as no amounts were required to be capitalized as software
development costs in 2002, whereas $0.3 million was required to be capitalized
for the same period in 2001.
Total costs and expenses include non-cash expenditures of $9.9 million in
the three months ended September 30, 2002 and $5.3 million in the three months
ended September 30, 2001. These expenditures included: (i) depreciation and
amortization of $0.3 million in the three months ended September 30, 2002 and
$0.8 million in the same period in 2001; (ii) interest expense of $2.5 million
in the three months ended September 30, 2002 (due to amortization of original
issue discounts of $0.4 million; amortization of beneficial conversion features
in convertible debt of $0.7 million, amortization of additional debt issuance
costs of $0.8 million, and interest on convertible debt issued by the company of
$0.6 million) and $1.5 million during the same period in 2001; (iii) finance
costs of $3.7 million associated with non-registration of common shares and
common shares underlying convertible notes in the three months ended September
30, 2002 and zero during the same period in 2001; (iv) a realized loss on
marketable securities deemed other-than-temporary of $0.7 million for the three
months ended September 30, 2002 and $0.1 million during the same period in 2001;
and (v) a derivative fair value adjustment of zero for the three months ended
September 30, 2002 and $0.2 million for the same period in 2001.
Nine months ended September 30, 2002 compared to nine months ended
September 30, 2001
33
For the nine months ended September 30, 2002, total revenues amounted to
$5.8 million, compared to $8.0 million for the nine months ended September 30,
2001, a decrease of $2.2 million, or 27.5%, reflecting decreases in each of our
revenue sources.
Technology licensing fees and royalties were $3.6 million for the nine
months ended September 30, 2002 compared to $4.0 million for the nine months
ended September 30, 2001, a decrease of $0.4 million, or 10.0%. The decrease was
primarily due to an $0.8 million decrease in license fee revenue related to ITC
and an aggregate $0.2 million decrease in Brookepark and Eagle Assets license
fee revenue, partially offset by a $0.5 million increase in NXT license fee
revenue. The NXT license was signed on March 31, 2001, and as such, was in
effect for a longer period of time during the nine months ended September 30,
2002 as compared to 2001. We ceased revenue recognition on the Brookepark and
Eagle Assets licenses in the first quarter of 2001 due to our decision to
reacquire these DMC licenses. The technology license fees for the nine months
ended September 30, 2002 and 2001 were primarily due to recognition of deferred
revenue from NXT and Teltran. At September 30, 2002, deferred revenue balances
for NXT and Teltran were $5.4 million and $0.2 million, respectively. No
additional cash is expected to be realized from our deferred revenues related to
these licenses.
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 nine months ended September 30, 2002, product sales were $2.1
million compared to $3.5 million for nine months ended September 30, 2001, a
decrease of $1.4 million, or 40.0%. 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 $0.7 million decrease as a result
of the cessation of operations of Artera Group International Limited in March
2002. Product revenue recognized by Artera International was $0.2 million for
the nine months ended September 30, 2002 as compared to $0.9 million for the
same period in 2001. NCT Hearing products comprise approximately $1.5 million,
or 68% of our product sales for the nine months ended September 30, 2002;
communication products comprise approximately $0.3 million, or 14%.
Gross profit on product sales, as a percentage of product revenues,
decreased to 44.2% for the nine months ended September 30, 2002 from 48.4% for
the nine months ended September 30, 2001. Excluding Artera International's
contribution to gross profit, gross profit decreased to 46.3% from 55.8%. This
decrease was primarily due to Pro Tech's lower sales volume at lower per unit
prices and higher costs resulting from domestic production of goods.
Advertising/media revenues were $55,000 for the nine months ended September
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
& Sound locations. Cost of advertising/media revenue was $13,000 for the nine
months ended September 30, 2002 compared to $0.2 million for the same period in
2001. These costs include the commissions paid to advertising representative
companies and agencies and communication expenses related to the Sight & Sound
locations. These decreases are primarily due to the termination of operations of
DMC Cinema in February 2002 (we ceased operations because of the decline in
demand for our services). We anticipate increasing revenues from the Sight &
Sound locations in health venues.
For the nine months ended September 30, 2002, selling, general and
administrative expenses
34
totaled $11.8 million as compared to $14.4 million for the nine months ended
September 30, 2001, a decrease of $2.6 million, or 18.1%. This decrease was due
primarily to: (i) a $1.5 million decrease in depreciation and amortization
expense related to the adoption of SFAS 142 effective January 1, 2002; (ii) a
$1.2 million decrease in legal and patent expenses; (iii) a $1.3 million
decrease in salary and related benefit costs as a result of the reduction in
workforce; (iv) an $0.8 million decrease which represents an overall reduction
in sales related costs, such as travel, trade shows and commissions; and (v) a
$0.3 million decrease in the provision for doubtful accounts. These decreases
were partially offset with a $2.8 million increase in consulting expenses due
primarily to non-cash charges from the issuance of warrants and options.
For the nine months ended September 30, 2002, research and development
expenditures totaled $3.3 million as compared to $4.2 million for the nine
months ended September 30, 2001, a decrease of $0.9 million, or 21.4%. This
decrease was due primarily to: (i) an $0.8 million decrease in product
development costs related to ITC; (ii) a $0.5 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. These
decreases were partially offset with a $0.3 million increase in salaries and
related benefit costs as no amounts were required to be capitalized as software
development costs in 2002, whereas $0.3 million was required to be capitalized
for the same period in 2001. The company expects research and development
expenditures in 2002 will continue to be less than 2001.
Total costs and expenses include non-cash expenditures of $26.0 million for
the nine months ended September 30, 2002 and $35.6 million for the nine months
ended September 30, 2001. These expenditures included: (i) depreciation and
amortization of $0.9 million in the nine months ended September 30, 2002 and
$2.1 million in the same period in 2001; (ii) impairment of goodwill of $0.3
million in the nine months ended September 30, 2002 and $0.6 million during the
same period in 2001; (iii) interest expense of $5.2 million in the nine months
ended September 30, 2002 (due to amortization of original issue discounts of
$1.1 million, amortization of beneficial conversion features in convertible debt
of $1.6 million, amortization of additional debt issuance costs of $1.0 million,
and interest on convertible debt issued by the company of $1.5 million) and $4.4
million during the same period in 2001 (due primarily to amortization of
discounts of $2.6 million, amortization of beneficial conversion features in
convertible debt of $0.4 million and interest on debt issued by the company of
$1.4 million); (iv) finance costs associated with non-registration of common
shares of $5.5 million in 2002 and zero for the same period in 2001; (v) a
derivative fair value adjustment of $0.1 million for the nine months ended
September 30, 2002 and $1.2 million for the same period in 2001; (vi) a realized
loss on marketable securities deemed other-than-temporary of $0.7 million for
the nine months ended September 30, 2002 and $3.1 million during the same period
in 2001; and (vii) repurchased licenses cost of $9.2 million for the nine months
ended September 30, 2002 and $19.3 million, net during the same period in 2001
(see Notes 2 and 4 - notes to the condensed consolidated financial statements).
The impairment of goodwill results from the acquisition in 2002 and 2001 of
stock held by minority stockholders of certain of our subsidiaries, primarily
NCT Audio. We recognized an impairment because the subsidiary's minority
interest has no carrying value, the subsidiary has a capital deficit and the
projected future operating results of the subsidiary are not positive.
LIQUIDITY AND CAPITAL RESOURCES
NCT has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $250.6 million on a
cumulative basis through September 30, 2002. These losses, which include the
costs for development of technologies and products for commercial use, have been
funded primarily from:
35
o the sale of our and our subsidiaries' common stock;
o the sale of our and our subsidiaries' preferred stock convertible into
common stock;
o issuance of our and our subsidiaries' convertible debt;
o technology licensing fees;
o royalties;
o product sales;
o advertising/media revenues; and
o engineering and development services.
Management believes that currently available funds will not be sufficient
to sustain NCT through the next six months. Such funds consist of available cash
and the funding derived from our revenue sources: technology licensing fees and
royalties, product sales, advertising/media and engineering development
services. Reducing operating expenses and capital expenditures alone may not be
sufficient, and continuation as a going concern is dependent upon the level of
funding realized from our revenue sources, all of which are presently uncertain.
In the event that funding from our 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. Proceeds from sales of our subsidiaries' securities are used
for the benefit of the issuing subsidiary, and there are generally contractual
restrictions to that effect. There is no assurance any financing is or would
become available.
In the event that external financing is not available or timely, NCT would
have to substantially reduce its level of operations. These reductions could
have an adverse effect on NCT's relationships with its customers and suppliers.
Uncertainty exists with respect to the adequacy of current funds to support
NCT's activities until positive cash flow from operations can be achieved and
with respect to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise substantial doubt at September 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 to maintain our operations. Such
financing transactions entered into by NCT to fund its business pursuits during
the nine months ended September 30, 2002 are described in the notes to the
condensed consolidated financial statements. We have been primarily dependant
upon funding from Carole Salkind. Although we have no formal agreement, we
believe that additional funding will be available from Ms. Salkind in the
short-term. We have no assurance that the amount, timing and duration of the
funding will be adequate to sustain our business operations.
At September 30, 2002, the company's cash and cash equivalents aggregated
$0.8 million. NCT's working capital deficit was $51.9 million at September 30,
2002, compared to a deficit of $52.6 million at December 31, 2001, a $0.7
million decrease in working capital deficit. Current liabilities increased
primarily due to the issuance of convertible notes of $5.3 million (net of
discounts) and non-registration fees of $7.1 million. These increases in current
liabilities were more than offset by a decrease in our current liabilities of
$14.0 million for the issuance of series H preferred stock and a decrease in our
current assets due to available-for-sale securities of $0.8 million. NCT is in
default of $2.5 million of its notes payable and $11.1 million of its
convertible notes at September 30, 2002.
Operating Activities
36
Net cash used in operating activities for the nine months ended September
30, 2002 was $7.7 million primarily due to funding the nine months ended
September 30, 2002 net loss, as adjusted to reconcile to net cash.
The operating cash flow characteristics of our technology licensing efforts
include the following:
o We often accept compensation in forms other than cash, typically equity
securities;
o Assets acquired in the past, as a result of licensing, have lost value
rapidly resulting in material writeoffs;
o Receipt of licensing compensation and the related revenue recognition often
occurs in different operating periods;
o Most of our licensing activities to date have resulted in one-time fees
rather than long-term royalty streams.
Our net accounts receivable decreased to $0.6 million at September 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
entering into new technology license agreements in the 2002 period compared to
the 2001 period in all segments, partially offset by a $0.3 million reduction in
the provision for doubtful accounts.
Our net inventory level decreased to $0.9 million at September 30, 2002
from $1.4 million at December 31, 2001 primarily due to Pro Tech's inability to
replenish its inventory as a result of reduced cash flows.
Our deferred revenue balance at September 30, 2002 was $6.2 million, $5.4
million of which was attributed to NXT. We sold all of the NXT shares in 2001
for approximately $6.9 million net proceeds. Approximately two thirds of the
proceeds, or $4.6 million, were used in DMC operations, including $1.2 million
for payroll and benefits, travel and entertainment; $0.5 million for
professional fees and expenses; $0.2 million for advertising, promotion and
commission expenses; $0.2 million for office operating costs; $0.2 million for
expenses related to the digital broadcasting station; and the balance of $2.3
million to decrease DMC's working capital deficit. No additional cash is
expected from our deferred revenue balances. From time to time, our deferred
revenue balances originate at the value of securities received from our
licensees which would not be realized in cash if the value of the underlying
securities declines before we sell such securities.
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.
Investing Activities
Net cash provided by investing activities was less than $0.1 million for
the nine-month period ended September 30, 2002 due to sale of capital equipment.
In addition to available cash and cash equivalents, the company views its
available-for-sale securities as additional sources of liquidity. At September
30, 2002 and December 31, 2001, the company's available-for-sale securities had
approximate fair market values of $0.1 million and $0.9
37
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 $8.0 million for the
nine-month period ended September 30, 2002 and was primarily due to the issuance
and sale of convertible notes.
At September 30, 2002, the company's short term debt was $24.0 million,
shown net of discounts of approximately $4.1 million on the condensed
consolidated balance sheet (principally comprised of $21.1 million of face value
of outstanding convertible notes and $2.9 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 primarily used for general corporate
purposes.
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 to serve as
collateral for a prospective NCT venture that did not materialize. The note
matured on February 8, 2002. This note was satisfied as to the principal due by
the release of $0.25 million from escrow to Carole Salkind.
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.
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 an 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.
38
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 its 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.
On July 3, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On July 15, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On July 23, 2002, NCT issued a secured convertible note ($0.5 million
principal amount) to Carole Salkind for $0.5 million in cash.
On August 14, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On August 29, 2002, NCT issued a secured convertible note ($0.5 million
principal amount) to Carole Salkind for $0.5 million in cash.
On September 9, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On September 30, 2002, NCT issued a secured convertible note ($3.8 million
principal amount) to Carole Salkind for $0.8 million in cash and the accrued
interest and a default penalty on a $2.5 million NCT convertible note dated
September 28, 2001.
As of September 30, 2002, we are in default (primarily from non-payment) on
$13.6 million of our indebtedness, including $2.5 million of notes payable and
$11.1 million of convertible notes (refer to Notes 7 and 8 - notes to the
condensed consolidated financial statements for disclosure of material
defaults). NCT expects that from time to time outstanding short-term debt may be
replaced with new short or long-term borrowings. Although we believe that we can
continue to access the capital markets in 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) our
current level of short term debt; and (iii) our credit ratings. In addition,
many of the factors that affect NCT's ability to access the capital markets,
such as the liquidity of the overall capital markets and the current state of
the economy, are outside of NCT's control. There can be no assurances that NCT
will continue to have access to the capital markets on favorable terms.
From time to time, we may change the terms of options, warrants or other
securities. In some instances, this has been to generate cash. For example, in
2001, we reduced the warrant exercise price for the acquisition of an aggregate
of 10 million shares of our common stock from $0.32 per share to $0.08 per
share, the then current market price. Upon exercise, $0.8 million cash was
generated. In other instances, such reductions have been to promote investor
goodwill. Also, in
39
2001, we reduced the exercise price on four warrants previously granted to
Carole Salkind in consideration of her continued financing of NCT.
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 September
30, 2002, and no material commitments are anticipated in the near future.
ITEM 3. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NCT's primary market risk exposures include fluctuations in interest rates
and foreign exchange rates. NCT is exposed to 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the company carried
out an evaluation, under the supervision and with the participation of the
company's management, including the company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon that evaluation, the
company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
company (including its consolidated subsidiaries) required to be included in
this quarterly report on Form 10-Q.
(b) Changes in Internal Controls
40
There were no significant changes in the company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
41
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of our legal proceedings, see Note 10 - Litigation which
is included in notes to the condensed consolidated financial statements 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. 200,000 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 were subject to expiration based upon
a contingency, and the right to acquire 3,000,000 of the warrant shares was
extinguished because the contingency was not met.
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.
42
On January 25, 2002, NCT issued a five-year warrant to purchase 312,500
shares of our common stock to Carole Salkind exercisable at $0.09 per share.
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.
43
On May 2, 2002, NCT issued a five-year warrant to purchase 3,562,500 shares
of our common 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.
On July 3, 2002, NCT issued five-year options to purchase an aggregate of
15,500,000 shares of our common stock to Acme Associates, Inc. exercisable at a
range from $0.78 to $0.08 per share as partial consideration for consulting
services. These options were cancelled by an option grant dated September 30,
2002.
On July 3, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On July 3, 2002, NCT issued a five-year warrant to purchase 1,500,000
shares of our common stock to Carole Salkind exercisable at $0.078 per share.
On July 12, 2002, NCT issued a five-year warrant to purchase 20,000,000
shares of our common stock to Carole Salkind exercisable at $0.075 per share.
On July 15, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
44
On July 15, 2002, NCT issued a five-year warrant to purchase 1,500,000
shares of our common stock to Carole Salkind exercisable at $0.075 per share.
On July 23, 2002, NCT issued a secured convertible note ($0.5 million
principal amount) to Carole Salkind for $0.5 million in cash.
On July 23, 2002, NCT issued a five-year warrant to purchase 2,250,000
shares of our common stock to Carole Salkind exercisable at $0.059 per share.
On August 14, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On August 14, 2002, NCT issued a five-year warrant to purchase 1,500,000
shares of our common stock to Carole Salkind exercisable at $0.082 per share.
On August 29, 2002, NCT issued a secured convertible note ($0.5 million
principal amount) to Carole Salkind for $0.5 million in cash.
On August 29, 2002, NCT issued a five-year warrant to purchase 2,100,000
shares of our common stock to Carole Salkind exercisable at $0.076 per share.
On September 9, 2002, NCT issued a secured convertible note ($0.35 million
principal amount) to Carole Salkind for $0.35 million in cash.
On September 9, 2002, NCT issued a five-year warrant to purchase 1,500,000
shares of our common stock to Carole Salkind exercisable at $0.077 per share.
On September 30, 2002, NCT issued a five-year warrant to purchase
10,000,000 shares of our common stock to Carole Salkind exercisable at $0.07 per
share.
On September 30, 2002, NCT issued a secured convertible note ($3.8 million
principal amount) to Carole Salkind for $0.8 million in cash and the accrued
interest and a default penalty on a $2.5 million NCT convertible note dated
September 28, 2001.
On September 30, 2002, NCT issued a five-year warrant to purchase
16,157,565 shares of our common stock to Carole Salkind exercisable at $0.07 per
share.
On September 30, 2002, NCT issued five-year options to purchase an
aggregate of 50,000,000 shares of our common stock to Acme Associates, Inc.
exercisable at $0.7 per share as partial consideration for consulting services.
Prior options dated July 3, 2002 to Acme Associates, Inc. were cancelled by this
new grant.
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 in notes to the
condensed consolidated financial statements herein.
45
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 NCT's
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 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) Agreement dated January 10, 2002 repricing Warrant dated October 25,
2001 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 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(e) 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(f) Options dated January 25, 2002 granted to Leben Care, Inc. to acquire
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 NCT's Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
4(g) Warrant dated January 25, 2002 issued to Carole Salkind for the
purchase of 812,500 shares of NCT common stock at an exercise price of
$0.09 per share, incorporated herein by reference to Exhibit 4(o) to
the Annual Report on Form 10-K for the year ended December 31, 2001,
filed on April 30, 2002.
4(h) Warrant dated January 25, 2002 issued to Carole Salkind for the
purchase of 312,500
46
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(i) 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(j) 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(k) Options dated February 27, 2002 granted to Stopnoise.com, Inc. to
acquire 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 NCT's Pre-Effective Amendment
No. 5 to Registration Statement on Form S-1 (Registration No.
333-60574) filed on August 9, 2002.
4(l) 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(m) 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(n) 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(o) 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 NCT's
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 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 NCT's
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 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
NCT's Pre-Effective Amendment No. 5 to
47
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002.
4(r) 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 herein by reference to Exhibit 4(ae) to NCT's
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 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
NCT's 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 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 NCT's
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 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 NCT's
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(v) 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 NCT's
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(w) 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 NCT's
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
4(x) Options dated July 3, 2002 granted to Acme Associates, Inc. to acquire
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 NCT's Pre-Effective Amendment No. 5 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on August 9, 2002. These options were cancelled by an option dated
September 30, 2002. See Exhibit 4(ae).
4(y) Warrant dated July 23, 2002 issued to Carole Salkind for the purchase
of 2,250,000 shares of NCT common stock at a purchase price of $0.059
per share, incorporated herein by reference to Exhibit 4(aj) of NCT's
Pre-effective Amendment No. 6 to
48
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
4(z) Warrant dated August 14, 2002 issued to Carole Salkind for the
purchase of 1,500,000 shares of NCT common stock at a purchase price
of $0.082 per share, incorporated herein by reference to Exhibit 4(ak)
of NCT's Pre-effective Amendment No. 6 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on November 4, 2002.
4(aa) Warrant dated August 29, 2002 issued to Carole Salkind for the
purchase of 2,100,000 shares of NCT common stock at a purchase price
of $0.076 per share, incorporated herein by reference to Exhibit 4(al)
of NCT's Pre-effective Amendment No. 6 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on November 4, 2002.
4(ab) Warrant dated September 9, 2002 issued to Carole Salkind for the
purchase of 1,500,000 shares of NCT common stock at a purchase price
of $0.077 per share, incorporated herein by reference to Exhibit 4(am)
of NCT's Pre-effective Amendment No. 6 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on November 4, 2002.
4(ac) Warrant dated September 30, 2002 issued to Carole Salkind for the
purchase of 10,000,000 shares of NCT common stock at a purchase price
of $0.07 per share, incorporated herein by reference to Exhibit 4(an)
of NCT's Pre-effective Amendment No. 6 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on November 4, 2002.
4(ad) Warrant dated September 30, 2002 issued to Carole Salkind for the
purchase of 16,157,565 shares of NCT common stock at a purchase price
of $0.07 per share, incorporated herein by reference to Exhibit 4(ao)
of NCT's Pre-effective Amendment No. 6 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on November 4, 2002.
4(ae) Option granted to Acme Associates, Inc. dated September 30, 2002 for
an aggregate of 50,000,000 shares of NCT common stock at an exercise
price of $0.070 per share, incorporated herein by reference to Exhibit
4(ap) of NCT's Pre-effective Amendment No. 6 to Registration Statement
on Form S-1 (Registration No. 333-60574) filed on November 4, 2002.
Prior options to Acme Associates, Inc, were cancelled by this new
grant. See Exhibit 4(x).
4(af) Warrant dated November 7, 2002 issued to Carole Salkind for the
purchase of 1,750,000 shares of NCT common stock at a purchase price
of $0.072 per share.
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
49
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 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 $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(f) 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(g) 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(h) Secured Convertible Note in principal amount of $827,412 dated
February 27, 2002 issued to Carole Salkind, incorporated herein by
reference to Exhibit 10(az)(3) to the Annual Report on Form 10-K for
the year ended December 31, 2001, filed on April 30, 2002.
10(i) 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(j) 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.
0(k) 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(l) 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
50
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(m) 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(n) 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(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 NCT's 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 NCT's 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 NCT's 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 NCT's 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 NCT's 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 NCT's 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 NCT's
Pre-Effective Amendment No. 5 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on August 9, 2002.
51
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 NCT's 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 NCT's Pre-Effective Amendment No. 5 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on August 9,
2002.
10(x) Secured Convertible Note in principal amount of $525,000 dated July
23, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(br) of NCT's Pre-effective Amendment No. 6
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on November 4, 2002.
10(y) Secured Convertible Note in principal amount of $350,000 dated August
14, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(bs) of NCT's Pre-effective Amendment No. 6
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on November 4, 2002.
10(z) Secured Convertible Note in principal amount of $490,000 dated August
29, 2002 issued by the Company to Carole Salkind, incorporated herein
by reference to Exhibit 10(bt) of NCT's Pre-effective Amendment No. 6
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on November 4, 2002.
10(aa) Secured Convertible Note in principal amount of $350,000 dated
September 9, 2002 issued by the Company to Carole Salkind,
incorporated herein by reference to Exhibit 10(bu) of NCT's
Pre-effective Amendment No. 6 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 4, 2002.
10(ab) Secured Convertible Note in principal amount of $3,770,098.38 dated
September 30, 2002 issued by the Company to Carole Salkind,
incorporated herein by reference to Exhibit 10(bv) of NCT's
Pre-effective Amendment No. 6 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 4, 2002.
10(ac) Agreement dated September 30, 2002 relating to Pro Tech Exchange
Rights among the Company, Pro Tech Communications, Inc., and Carole
Salkind, incorporated herein by reference to Exhibit 10(bw) of NCT's
Pre-effective Amendment No. 6 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on November 4, 2002.
10(ad) Master Distribution Agreement dated October 24, 2002, between Artera
Group, Inc. and Spyder Technologies Group, LLC, incorporated herein by
reference to Exhibit 10(by) of NCT's Pre-effective Amendment No. 6 to
Registration Statement on Form S-1 (Registration No. 333-60574) filed
on November 4, 2002.
10(ae) Settlement Agreement and Release dated October 30, 2002 made by and
between Crammer Road LLC and NCT, incorporated herein by reference to
Exhibit 10(bx) of NCT's Pre-effective Amendment No. 6 to Registration
Statement on Form S-1
52
(Registration No. 333-60574) filed on November 4, 2002.
10(af) Secured Convertible Note in principal amount of $400,000 dated
November 7, 2002 issued by the Company to Carole Salkind.
99(a) Certification of Form 10Q for the quarterly period ended June 30,
2002 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 incorporated herein by
reference to Exhibit 99(a) of NCT's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002 filed on August 14, 2002.
99(b) Certification of Form 10Q for the quarterly period ended September
30, 2002 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.
53
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: November 14, 2002
54
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Parrella, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NCT Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and b)
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ MICHAEL J. PARRELLA
----------------------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
55
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
I, Cy E. Hammond, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NCT Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ CY E. HAMMOND
---------------------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
56