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, 2003
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 0-18267
-------------------------------
NCT Group, Inc.
---------------
(Exact name of registrant as specified in its charter)
Delaware 59-2501025
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
20 Ketchum Street, Westport, Connecticut 06880
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 226-4447
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes / / No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
/ / Yes /X/ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of common
stock, par value $.01 per share, outstanding as of November 13, 2003, was
641,970,392.
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at December 31, 2002 and September 30, 2003 3
(Unaudited)
Condensed Consolidated Statements of Operations (Unaudited) and Condensed Consolidated
Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months
Ended September 30, 2002 and 2003 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2002 and 2003 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative or Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 34
Part II Other Information
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 35
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 49
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Notes 1 and 6)
(in thousands, except share data)
December 31, September 30,
2002 2003
------------------- --------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 806 $ 530
Investment in available-for-sale marketable securities 102 100
Accounts receivable, net 245 423
Inventories, net 622 509
Other current assets (includes $108 due from officer) 358 289
------------------- --------------------
Total current assets 2,133 1,851
Property and equipment, net 954 681
Goodwill, net 7,184 7,184
Patent rights and other intangibles, net 1,519 1,314
Other assets 1,779 1,683
------------------- --------------------
$ 13,569 $ 12,713
=================== ====================
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 4,648 $ 3,267
Accrued expenses (includes $1,242 and $1,951, respectively, related parties) 16,916 13,199
Notes payable 3,540 3,222
Current maturities of convertible notes (includes $14,206 and $24,662,
respectively, related parties) 18,460 28,061
Deferred revenue 2,877 3,226
Shares of subsidiary subject to exchange or conversion into a variable
number of shares - 737
Other current liabilities 7,101 7,244
------------------- --------------------
Total current liabilities 53,542 58,956
------------------- --------------------
Long-term liabilities:
Deferred revenue 2,675 1,070
Convertible notes 779 675
Other liabilities 1,557 1,553
------------------- --------------------
Total long-term liabilities 5,011 3,298
------------------- --------------------
Commitments and contingencies
Minority interest in consolidated subsidiaries 8,689 8,229
------------------- --------------------
Capital deficit :
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Convertible series H preferred stock, issued and outstanding,
1,800 and 1,725 shares, respectively 18,377 18,127
Common stock, $.01 par value, 645,000,000 shares authorized:
issued and outstanding 483,474,345 and 641,970,392 shares, respectively 4,835 6,420
Additional paid-in capital 180,899 194,931
Accumulated other comprehensive loss (516) (680)
Accumulated deficit (259,564) (276,568)
Common stock payable, 29,248,170 and 3,029,608 shares, respectively 2,296 -
------------------- --------------------
Total capital deficit (53,673) (57,770)
------------------- --------------------
$ 13,569 $ 12,713
=================== ====================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
(in thousands, except per share amounts)
Three months ended September 30, Nine months ended September 30,
--------------------------------- -------------------------------
2002 2003 2002 2003
--------------- -------------- -------------- --------------
REVENUE:
Technology licensing fees and royalties $ 1,118 $ 711 $ 3,571 $ 2,022
Product sales, net 552 446 2,132 1,322
Advertising/media 43 33 55 53
Engineering and development services - - 24 25
--------------- -------------- -------------- --------------
Total revenue 1,713 1,190 5,782 3,422
--------------- -------------- -------------- --------------
COSTS AND EXPENSES:
Cost of product sales 285 215 1,189 603
Cost of advertising/media 5 5 13 9
Cost of engineering and development services 4 25 8 25
Selling, general and administrative (includes $2,375,
$941, $3,462, and $3,755, respectively, related party -
consulting expenses) 4,495 3,070 11,774 10,112
Research and development 1,224 845 3,284 2,677
Impairment of goodwill - - 300 -
Repurchased licenses, net (related party) - - 9,199 -
Other operating income (341) (80) (609) (102)
--------------- -------------- -------------- --------------
Total operating costs and expenses 5,672 4,080 25,158 13,324
Non-operating items:
Other (income) expense, net (includes related party
expenses of $3,214, $618, $3,735 and $1,090, respectively) 4,682 (3,636) 6,613 (2,205)
Interest expense, net (includes related party expenses
of $2,247, $2,862, $4,046 and $7,638, respectively) 2,520 3,058 5,148 9,307
--------------- -------------- -------------- --------------
Total costs and expenses 12,874 3,502 36,919 20,426
--------------- -------------- -------------- --------------
NET LOSS $ (11,161) $ (2,312) $ (31,137) $ (17,004)
Less: Beneficial conversion features 5 - 46 -
Preferred stock dividends (Note 9) 795 756 2,022 2,544
--------------- -------------- -------------- --------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (11,961) $ (3,068) $ (33,205) $ (19,548)
=============== ============== ============== ==============
Basic and diluted loss per share attributable to
common shareholders $ (0.03) $ (0.01) $ (0.08) $ (0.04)
=============== ============== ============== ==============
Weighted average common shares outstanding -
basic and diluted 436,256 570,030 432,364 536,092
=============== ============== ============== ==============
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three months ended September 30, Nine months ended September 30,
--------------------------------- -------------------------------
2002 2003 2002 2003
--------------- -------------- -------------- --------------
NET LOSS $ (11,161) $ (2,312) $ (31,137) $ (17,004)
Other comprehensive income (loss):
Currency translation adjustment 2 (158) 23 (162)
Unrealized loss on marketable securities 577 7 (56) (2)
--------------- -------------- -------------- --------------
COMPREHENSIVE LOSS $ (10,582) $ (2,463) $ (31,170) $ (17,168)
=============== ============== ============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
NCT GROUP, INC. SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 3)
(Unaudited)
(in thousands)
Nine months ended September 30,
---------------------------------
2002 2003
--------------- ---------------
Cash flows from operating activities:
Net loss $ (31,137) $ (17,004)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 903 571
Common stock, warrants and options issued as consideration for:
Compensation 169 -
Operating expenses (includes $3,357 and $3,665 of related party consulting,
respectively) 4,666 3,746
Provision for inventory (564) (105)
Provision for doubtful accounts and uncollectible amounts 3 20
Loss on disposition of fixed assets 5 33
Gain on settlement of lawsuit - (4,888)
Finance costs associated with non-registration of common shares 5,512 2,031
Preferred stock dividends as interest - 6
Default penalty on notes (related party) 313 1,090
Amortization of discounts on notes (includes $1,724 and $3,208 related party
amounts, respectively) 1,076 3,842
Amortization of beneficial conversion feature on convertible notes (includes
$1,472 and $3,027 related party amounts, respectively) 1,581 3,147
Issuance of convertible note for placement fees - 40
Repurchased licenses, net (related party) 9,199 -
Impairment of goodwill 300 -
Costs of exiting activities 303 -
Realized loss on fair value of warrant 135 1
Realized loss on available-for-sale securities 689 -
Settlement of debt - (231)
Minority interest loss (277) -
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 157 (213)
Decrease in inventories 1,060 218
Decrease in other assets 218 163
Increase in accounts payable and accrued expenses 1,508 983
Decrease in other liabilities and deferred revenue (3,558) (1,120)
--------------- ---------------
Net cash used in operating activities $ (7,739) $ (7,670)
--------------- ---------------
Cash flows from investing activities:
Capital expenditures $ - $ (127)
Proceeds from sale of capital equipment 11 -
--------------- ---------------
Net cash provided by (used in) investing activities $ 11 $ (127)
--------------- ---------------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable, net (Notes 5 and 6) $ 8,324 $ 7,820
Sale of preferred stock, net 110 -
Repayments of notes (479) (298)
--------------- ---------------
Net cash provided by financing activities $ 7,955 $ 7,522
--------------- ---------------
Effect of exchange rate changes on cash $ (1) $ (1)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 226 (276)
Cash and cash equivalents - beginning of period 567 806
--------------- ---------------
Cash and cash equivalents - end of period $ 793 $ 530
=============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
NCT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation:
Throughout this document, NCT Group, Inc. and its subsidiaries are referred
to as the "company," "we," "our," "us" or "NCT." The accompanying condensed
consolidated financial statements are unaudited but, in the opinion of
management, contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the consolidated
financial position and the results of operations and cash flows for the periods
presented in conformity with accounting principles generally accepted in the
United States of America applicable to interim periods. The results of
operations for the three and nine months ended September 30, 2003 and cash flows
for the nine months ended September 30, 2003 are not necessarily indicative of
the results that may be expected for any other interim period or the full year.
These condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2002 contained in the company's Annual Report on Form 10-K.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. We have reclassified some amounts in the
prior periods' financial statements to conform to the current periods'
presentation.
NCT has experienced substantial losses from operations since its inception,
which cumulatively amounted to $276.6 million through September 30, 2003. Cash
and cash equivalents amounted to $0.5 million at September 30, 2003, decreasing
from $0.8 million at December 31, 2002. A working capital deficit of $57.1
million exists at September 30, 2003. NCT is in default of $3.0 million of its
notes payable and $7.6 million of its convertible notes at September 30, 2003.
Management believes that currently available funds will not be sufficient to
sustain NCT at present levels. NCT's ability to continue as a going concern is
dependent on funding from several sources, including available cash and cash
equivalents and cash inflows generated from its revenue sources, particularly
technology licensing fees and royalties and product sales. The level of
realization of funding from our revenue sources is presently uncertain. If
anticipated revenue does not generate sufficient cash, management believes
additional working capital financing must be obtained. We are attempting to
raise additional capital through debt and equity financing in order to fund
operations. There is no assurance any of the financing is or would become
available.
In the event that funding from internal sources is insufficient, we would
have to substantially cut back our level of spending which could substantially
curtail our operations. Such reductions could have an adverse effect on our
relationships with licensees and customers. Uncertainty exists about the
adequacy of current funds to support NCT's activities until positive cash flow
from operations can be achieved, and uncertainty exists about the availability
of external financing sources to fund any cash deficiencies.
The accompanying condensed consolidated financial statements have been
prepared assuming that NCT will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The propriety of using the going concern
basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private financing and other funding sources to meet our
obligations. The uncertainties described in the preceding paragraphs raise
substantial doubt at September 30, 2003 about the company's ability to continue
as a going concern. The accompanying condensed consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of the carrying amount of recorded assets or the amount and classification of
liabilities that might result should the company be unable to continue as a
going concern.
2. Recent Accounting Pronouncements:
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 requires certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities and
equity to be classified as liabilities. The provisions of SFAS
6
No. 150 are effective for financial instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning of the
first interim financial reporting period commencing after June 15, 2003.
Effective July 1, 2003, we adopted SFAS No. 150 and the effect on our condensed
consolidated balance sheet was as follows: a $0.6 million decrease in minority
interest in consolidated subsidiaries, a $0.1 million decrease in additional
paid-in capital and a $0.7 million increase in current liabilities (see Note 7).
3. Other Financial Data:
Balance Sheet Items:
Investments in marketable securities include available-for-sale securities
at market value. The following table displays the market value, cost basis, and
realized/unrealized gain (loss) of the company's available-for-sale securities
(in thousands):
Cost Market Adjusted Market
Basis Realized Unrealized Value Cost Basis Unrealized Value
01/01/02 Loss Loss 12/31/02 01/01/03 Gain (Loss) 09/30/03
----------- ------------- -------------- ----------- -------------- ------------- --------------
Available-for-sale:
ITC $ 798 $ (689) $ (15) $ 94 $ 109 $ (20) $ 89
Teltran 84 (76) - 8 8 3 11
----------- ------------- -------------- ----------- -------------- ------------- --------------
Totals $ 882 $ (765) $ (15) $ 102 $ 117 $ (17) $ 100
=========== ============= ============== =========== ============== ============= ==============
The company reviews declines in the value of its investments when general
market conditions change or specific information pertaining to an industry or to
an individual company becomes available. The company considers all available
evidence to evaluate the realizable value of its investments and to determine
whether the decline in realizable value may be other-than-temporary.
Accounts receivable comprise the following (in thousands):
December 31, September 30,
2002 2003
-------------------- -----------------
Technology license fees and royalties $ 268 $ 434
Joint ventures and affiliates 34 34
Other receivables 283 315
-------------------- -----------------
$ 585 $ 783
Allowance for doubtful accounts (340) (360)
-------------------- -----------------
Accounts receivable, net $ 245 $ 423
==================== =================
Inventories comprise the following (in thousands):
December 31, September 30,
2002 2003
--------------- --------------
Finished goods $ 799 $ 631
Components 227 177
--------------- --------------
$ 1,026 $ 808
Reserve for obsolete and slow moving inventory (404) (299)
--------------- --------------
Inventories, net $ 622 $ 509
=============== ==============
7
Other current assets comprise the following (in thousands):
December 31, September 30,
2002 2003
--------------- --------------
Notes receivable $ 1,000 $ 1,000
Due from officer (Note 10) 108 108
Other 250 181
--------------- --------------
$ 1,358 $ 1,289
Reserve for uncollectible amounts (1,000) (1,000)
--------------- --------------
Other current assets $ 358 $ 289
=============== ==============
Other assets (long-term) comprise the following (in thousands):
December 31, September 30,
2002 2003
--------------- --------------
Marketable ITC securities $ 1,320 $ 1,320
Advances and deposits 75 74
Deferred charges 353 258
Other 31 31
--------------- --------------
Other assets (classified as long-term) $ 1,779 $ 1,683
=============== ==============
Property and equipment comprise the following (in thousands):
December 31, September 30,
2002 2003
--------------- --------------
Machinery and equipment $ 2,027 $ 2,124
Furniture and fixtures 642 654
Leasehold improvements 972 977
Tooling 631 632
Other 478 618
--------------- --------------
$ 4,750 $ 5,005
Accumulated depreciation (3,796) (4,324)
--------------- --------------
Property and equipment, net $ 954 $ 681
=============== ==============
Accrued expenses comprise the following (in thousands):
December 31, September 30,
2002 2003
--------------- --------------
Non-registration fees $ 7,005 $ 2,823
Interest 2,214 2,590
Judgments 2,124 2,072
Default penalties 288 412
Other 5,285 5,302
--------------- --------------
Accrued expenses $ 16,916 $ 13,199
=============== ==============
8
Deferred revenue comprise the following (in thousands):
December 31, September 30,
2002 2003
--------------- --------------
NXT $ 4,815 $ 3,210
FairPoint 143 479
Other 594 607
--------------- --------------
$ 5,552 $ 4,296
Less: amount classified as current (2,877) (3,226)
--------------- --------------
Deferred revenue (classified as long-term) $ 2,675 $ 1,070
=============== ==============
As of September 30, 2003, we do not expect to realize any cash from revenue
that has been deferred.
FairPoint Broadband, Inc., a wholly owned subsidiary of FairPoint
Communications, Inc., and Artera Group, Inc. executed an exclusive marketing
license on October 11, 2002 whereby FairPoint will serve as the exclusive master
distributor of Artera Turbo(TM) to certain rural local exchange carriers,
incumbent local exchange carriers and Internet service providers in the United
States and Canada and will have other non-exclusive rights with respect to
Artera Turbo. The terms of the agreement include a license fee (approximately
$2.0 million to be paid in cash in 24 monthly installments) and per unit
royalties based upon subscribers. This agreement has a ten-year term. FairPoint
may terminate the agreement at any time by giving advance written notice of 30
days. If FairPoint terminates the agreement during the first 24 months of the
agreement, FairPoint would not be required to pay any remaining license fee that
would otherwise accrue after the effective date of termination by FairPoint. In
conjunction with this agreement, FairPoint Communications, Inc., was issued a
five-year warrant to purchase 2.0 million shares of NCT common stock at an
exercise price of $0.15 per share.
On May 23, 2003, FairPoint Broadband and Artera entered into a memorandum
of understanding noting their mutual intent to amend, amend and restate or enter
into a new agreement to supersede the October 11, 2002 exclusive marketing
license agreement with respect to the royalties FairPoint will be obligated to
pay Artera and other matters. The memorandum of understanding provides that if
Artera and FairPoint do not execute a new agreement by June 30, 2003, then, from
July 1, 2003 to July 15, 2003, either party may terminate the October 11, 2002
license agreement via written notice to the other. If such termination occurs,
Artera shall be deemed to have waived its right to license fees (but not
royalties) from FairPoint for the period after April 30, 2003. The parties did
not execute a new agreement by June 30, 2003 but neither party gave written
notice of termination by July 15, 2003. However, we anticipate that Fairpoint
will not continue to pay the license fee after April 30, 2003. The parties
continue to negotiate a new agreement to amend or replace the October 11, 2002
agreement pursuant to their mutual intent. We have recorded approximately
$58,900 of revenue (through April 30, 2003 for the Fairpoint license fee portion
of the October 11, 2002 agreement), which has been reduced to zero for a portion
of the value of the warrant for the nine months ended September 30, 2003. The
measurement of the warrant and treatment as a contra-revenue item were in
accordance with Emerging Issues Task Force (EITF) Issue Nos. 96-18, 00-18 and
01-9. The remaining Fairpoint license fee through April 30, 2003 is reflected as
deferred revenue at September 30, 2003.
9
Other current liabilities comprise the following (in thousands):
December 31, September 30,
2002 2003
------------------- -------------------
License reacquisition payable $ 4,000 $ 4,000
Development fee payable 650 650
Royalty payable 1,695 1,679
Due to selling shareholders of Theater Radio Network 557 557
Due to L&H 100 100
Loan advance by investor 65 230
Other 34 28
------------------- -------------------
Other current liabilities $ 7,101 $ 7,244
=================== ===================
On September 23, 2003, the founding stockholders of Midcore made an
election to accept payment of the $1.7 million royalty due them in NCT common
stock. The election and calculation of the number of shares were provided for in
the Agreement and Plan of Merger dated August 29, 2000 under which NCT acquired
Midcore. This calculation is based upon the average closing bid price for the
ten days immediately preceding August 29, 2003 (the look back date), or $0.04914
per share. NCT is obligated to issue 34.2 million shares of its common stock to
fulfill its royalty obligation included in other current liabilities at
September 30, 2003. The shares have not yet been issued because we do not have
enough authorized shares. In addition, we are obligated to issue 26.2 million
shares (the look back shares) of NCT common stock to the founding stockholders
of Midcore because the value of shares issued upon the acquisition of Midcore,
related to a price guarantee, was less than $1.5 million on the third
anniversary of the acquisition. The additional shares have not been issued to
date because we do not have enough authorized shares. This issuance of
additional common stock based on a reduction in security prices will not affect
the cost of the acquired company in accordance with SFAS No. 141. We will record
the current fair value of the additional consideration issued and simultaneously
reduce the amount previously recorded for securities issued at the date of
acquisition.
Other liabilities (long-term) comprise the following (in thousands):
December 31, September 30,
2002 2003
--------------- --------------
Due to ITC $ 1,422 $ 1,422
Other 135 131
--------------- --------------
Other liabilities (classified as long-term) $ 1,557 $ 1,553
=============== ==============
Statements of Operations Information:
Other operating income comprise the following (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------ ----------------------
2002 2003 2002 2003
---------- ----------- ---------- ---------
Minority share of loss in subsidiary $ (74) $ - $ (277) $ -
Settlement of accounts payable - (31) - (49)
Other (267) (49) (332) (53)
---------- ----------- ---------- ---------
Total other operating income $ (341) $ (80) $ (609) $ (102)
========== =========== ========== =========
10
Non-operating other (income) expense, net comprise the following
(in thousands):
Three months ended Nine months ended
September 30, September 30,
---------------------------- ------------------------------
2002 2003 2002 2003
------------ ------------- ------------ --------------
Finance costs associated with non-registration
of common shares $ 3,700 $ 613 $ 5,512 $ 2,031
Settlement of notes payable - - - (27)
Litigation settlement (Note 12) - (4,888) - (5,317)
Depreciation in fair value of warrant 5 - 135 1
Other-than-temporary decline in value of securities
available-for-sale 689 - 689 -
Default penalties on debt 288 618 313 1,090
Other - 21 (36) 17
------------ ------------- ------------ --------------
Total non-operating other (income) expense, net $ 4,682 $ (3,636) $ 6,613 $(2,205)
=========== ============= ============ ==============
We include losses from our majority-owned subsidiaries in our condensed
consolidated statements of operations exclusive of amounts attributable to
minority shareholders' common equity interests only up to the basis of such
minority shareholders' interests. Losses in excess of that amount are borne by
NCT. Such amounts from our Pro Tech Communications, Inc. subsidiary borne by NCT
for the three and nine months ended September 30, 2003 were approximately
$35,000 and $126,000, respectively. Future earnings of our majority-owned
subsidiaries otherwise attributable to minority shareholders' interests will be
allocated again to minority shareholders only after future earnings are
sufficient to recover the cumulative losses previously absorbed by NCT ($2.1
million at September 30, 2003).
Supplemental Cash Flow Disclosures:
(in thousands)
Nine months ended
September 30,
-----------------------------
Supplemental disclosures of cash flow information: 2002 2003
------------- -------------
Cash paid during the year for:
Interest $ 17 $ 35
============= =============
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding loss on available-for-sale securities $ (56) $ (2)
============= =============
Issuance of common stock upon conversion of preferred stock and dividends $ - $ 785
============= =============
Issuance of common stock upon conversion of convertible notes $ 375 $ -
============= =============
Issuance of common stock upon exchange of convertible notes of subsidiary $ 200 $ 1,754
============= =============
Issuance of common stock to fulfill common stock payable obligation $ - $ 2,296
============= =============
Issuance of common stock to settle litigation $ - $ 4,125
============= =============
Finance costs associated with non-registration of common shares
on preferred stock of subsidiary $ - $ 1,749
============= =============
Issuance of series H preferred stock in exchange for previously accrued
acquisition of subsidiary $ 14,000 $ -
============= =============
Property and equipment financed through capitalized leases and notes payable $ 15 $ -
============= =============
11
4. Stockholders' Capital Deficit:
The changes in stockholders' capital deficit during the nine months ended
September 30, 2003 were as follows (in thousands):
Series H Accumulated
Convertible Additional Other
Preferred Stock Common Stock Paid-in Comprehensive
----------------- ------------------
Shares Amount Shares Amount Capital Loss
----------------- ------------------ ---------- -------------
Balance at December 31, 2002 2 $ 18,377 483,474 $4,835 $ 180,899 $ (516)
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - 535 - - (535) -
Conversion of preferred stock - (785) 23,058 231 554 -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - - - (260) -
Charges for the non-registration of the
underlying shares of NCT to subsidiary
preferred shareholders - - - - (1,749) -
Reversal of redemption adjustment
on subsidiary preferred - - - - 125 -
Exchange of subsidiary convertible debt
for common stock - - 42,093 421 1,333 -
Shares issued for settlement
obligations/prepayments - - 93,345 933 5,488 -
Warrants issued in conjunction with
convertible debt - - - - 2,873 -
Beneficial conversion feature on
convertible debt - - - - 2,609 -
Net loss - - - - - -
Accumulated other comprehensive
income (loss) - - - - - (164)
Compensatory stock options and warrants - - - - 3,746 -
Adjustment of monetary value on subsidiary
shares upon adoption of SFAS 150 - - - - (138) -
Expenses related to sale of stock - - - - (14) -
----------------- ------------------ ---------- -------------
Balance at September 30, 2003 2 $ 18,127 641,970 $6,420 $ 194,931 $ (680)
================= ================== ========== =============
Accumu- Common
lated Stock
Deficit Payable Total
----------- --------- ----------
Balance at December 31, 2002 $ (259,564) $ 2,296 $ (53,673)
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - - -
Conversion of preferred stock - - -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - (260)
Charges for the non-registration of the
underlying shares of NCT to subsidiary
preferred shareholders - - (1,749)
Reversal of redemption adjustment
on subsidiary preferred - - 125
Exchange of subsidiary convertible debt
for common stock - - 1,754
Shares issued for settlement
obligations/prepayments - (2,296) 4,125
Warrants issued in conjunction with
convertible debt - - 2,873
Beneficial conversion feature on
convertible debt - - 2,609
Net loss (17,004) - (17,004)
Accumulated other comprehensive
income (loss) - - (164)
Compensatory stock options and warrants - - 3,746
Adjustment of monetary value on subsidiary
shares upon adoption of SFAS 150 - - (138)
Expenses related to sale of stock - - (14)
----------- --------- ----------
Balance at September 30, 2003 $ (276,568) $ - $ (57,770)
=========== ========= ==========
12
5. Notes Payable:
(in thousands)
December 31, September 30,
2002 2003
------------------ -------------------
Logical eBusiness Solutions Limited (f/k/a DataTec) (a) $ 2,414 $ 2,491
Obligation of subsidiary to a prior owner of Web Factory;
past due; interest accrues at 4% per annum above the base rate
of National Westminister Bank plc
Note due investor (a) 385 385
Interest at 8% per annum payable at maturity; Effective interest rate
of 68.1% per annum related to the issuance of warrants; due April 7, 2003
Note due stockholder of subsidiary 171 149
Interest at 8.5% per annum; monthly payments (including interest)
of $3.5 through May 2003, remainder matures June 27, 2003.
Remainder rolled into note bearing interest at 8.5% per annum; monthly
payments (including interest) of $3.5 through May 2004, remainder
matures June 27, 2004.
Top Source Automotive 204 -
Default interest rate accrues at two times prime;
included in settlement (see Note 12)
Notes due former employees (a) 116 100
$100 bears interest at 8.25% per annum, compounded annually
Other financings 284 97
Interest ranging from 7% to 9% per annum;
$35 due July 15, 2003 (a); $62 all other
------------------ -------------------
$ 3,574 $ 3,222
Less: unamortized debt discounts (34) -
------------------ -------------------
$ 3,540 $ 3,222
================== ===================
Footnote:
(a) Notes payable are in default due to nonpayment.
13
6. Convertible Notes:
(in thousands)
December 31, September 30,
2002 2003
------------ -------------
Issued to Carole Salkind - related party (a) $ 18,064 $ 27,167
Weighted average effective interest rate of 46.2% per annum; accrues
interest at 8% per annum; collateralized by substantially all of the
assets of NCT; convertible into NCT common stock at prices ranging
from $0.029 - $0.077 or exchangeable for common stock of NCT
subsidiaries except Pro Tech; maturing for the quarter ending:
December 31, 2003 $14,254
March 31, 2004 11,563
June 30, 2004 1,350
8% Convertible Notes (b) 976 1,651
Weighted average effective interest rate of 20.6% per annum;
convertible into NCT common stock at various rates; matures:
March 14, 2002 $ 17
April 12, 2002 9
January 10, 2004 550
March 11, 2004 400
April 22, 2005 235
September 4, 2005 440
6% Convertible Notes (c) 4,228 2,474
Weighted average effective interest rate of 85.8% per annum;
convertible into NCT common stock at 100% of the five-day average
closing bid price preceding conversion; past due:
January 9, 2002 $ 818
April 4, 2002 325
May 25, 2002 81
June 29, 2002 1,250
------------ -------------
$ 23,268 $ 31,292
Less: unamortized debt discounts (4,029) (2,556)
Less: amounts classified as long-term (779) (675)
------------ -------------
$ 18,460 $ 28,061
============ =============
Footnotes:
(a) During the nine months ended September 30, 2003, NCT issued an
aggregate of $18.8 million of convertible notes to Carole Salkind, who is a
shareholder of NCT, an accredited investor and the spouse of a former director
of NCT. During the nine months ended September 30, 2003, we defaulted on payment
of notes dated January 11, 2002, January 25, 2002, February 27, 2002, March 1,
2002, May 2, 2002, May 29, 2002, June 2, 2002, November 21, 2002, July 3, 2002,
July 15, 2002, July 23, 2002, August 14, 2002 and August 29, 2002 for an
aggregate principal amount of $9.7 million. The principal on these notes was
rolled into new notes in 2003 along with $1.0 million of default penalties, $0.9
million of accrued interest and an aggregate of $7.2 million new funding from
Carole Salkind. During the nine months ended September 30, 2003, we recorded
original issue discounts of $2.3 million to the notes based upon the relative
fair values of the debt and warrants issued to Ms. Salkind (see Note 9). In
addition, beneficial conversion features totaling $2.6 million have been
recorded as a discount to the notes. These discounts are being amortized over
the term of the related notes. For the nine months ended September 30, 2003,
$6.2 million of amortization related to these discounts is classified as
interest expense in our condensed consolidated statement of operations.
Unamortized discounts of $2.5 million have been reflected as a reduction to the
convertible notes in our condensed consolidated balance sheet as of September
30, 2003. The convertible note dated February 27, 2002 for $0.8 million was
collateralized by an interest in specific assets of our subsidiary, NCT Video.
This interest was rolled over into a convertible note dated March 13, 2003 for
$1.0 million. The default provisions in these notes impose a penalty of 10% of
the principal amount in default and default interest from the date of default at
the stated interest rate plus 5%. The defaults of $2.9 million at December 31,
2002 (related to a judgment in an unrelated case entered against NCT and DMC in
excess of the permitted maximum of $0.25 million) were extinguished when the
notes were rolled over during the first quarter of 2003. As of September 30,
2003, we are in default of two notes dated September 9, 2002 and September 30,
2002 for an aggregate principal of $4.1 million. These defaults have
subsequently been cured (see Note 14).
14
(b) Notes totaling approximately $26,000 are convertible at 80% of the
lowest closing bid price for the five days preceding conversion; a note totaling
$0.6 million is convertible at the lower of $0.07 per share or 80% of the lowest
closing bid price for the five days preceding conversion; a note totaling $0.4
million is convertible at $0.0647 per share; a note totaling $0.2 million is
convertible at $0.04 per share and notes totaling approximately $0.4 million are
convertible at 80% of the average of the closing bid price for the five days
preceding conversion. The convertible note for $0.6 million is collateralized by
substantially all of the assets of our subsidiary, Artera Group. Beneficial
conversion features had been recorded as a discount to the notes and are being
amortized over the term of the notes. For the nine months ended September 30,
2003, $0.1 million of amortization related to these discounts is classified as
interest expense in our condensed consolidated statement of operations.
Unamortized discounts of $0.1 million have been reflected as a reduction to the
convertible notes in our condensed consolidated balance sheet as of September
30, 2003. We did not fulfill registration obligations and recorded finance costs
associated with non-registration of common shares of $0.1 million for the nine
months ended September 30, 2003 (see Note 3 - Non-operating other (income)
expense, net). The company settled $0.1 million of accrued interest payable and
approximately $0.1 million of accrued non-registration fees payable on
convertible notes with four holders through April 7, 2003 (see Note 12). The
notes included in the settlement are accruing interest from April 7, 2003 at the
stated rate of 8%. The company did not repay convertible notes aggregating
approximately $26,000 upon maturity, which are in default for non-payment. In
addition, on convertible notes aggregating approximately $1.0 million, we are in
default due to a cross default clause.
(c) Principal of $1.8 million was exchanged for NCT stock during the nine
months ended September 30, 2003 (see Note 10). Convertible notes totaling $1.9
million are collateralized by substantially all of the assets of our subsidiary,
Artera Group. We were obligated to register additional shares at various dates
during 2001, which, despite our best efforts, we were unable to accomplish. As a
result, we have recorded finance costs associated with non-registration of
common shares of $1.9 million for the nine months ended September 30, 2003 (see
Note 3 - Non-operating other (income) expense, net). The company settled $0.8
million of accrued interest payable and approximately $4.6 million of accrued
non-registration fees payable on convertible notes with four holders through
April 7, 2003 (see Note 12). The notes included in the settlement are accruing
interest from April 7, 2003 at the stated rate of 6%. The aggregate outstanding
principal amount of approximately $2.5 million is in default for non-payment.
These notes are senior debt of our subsidiary, Artera Group, Inc.
7. Shares of Subsidiary Subject to Exchange into a Variable Number of Shares:
Pro Tech Communications, Inc. Preferred Stock
Upon adoption of SFAS No. 150 on July 1, 2003, 550 shares in the aggregate
of Pro Tech series A and B convertible preferred stock were outstanding with
exchange rights into NCT common stock valued at $0.6 million, which was
reclassified from minority interest in consolidated subsidiaries to current
liabilities on our condensed consolidated balance sheet at a monetary value of
$0.7 million. An adjustment of monetary value on subsidiary shares of
approximately $0.1 million was charged to additional paid-in capital to reflect
the fair value of the shares required to be issued upon exchange.
For the three and nine months ended September 30, 2003, we calculated the
4% dividends earned by holders of the Pro Tech series A convertible preferred
stock and the Pro Tech series B convertible preferred stock at approximately
$6,000. Following adoption of SFAS No. 150 on July 1, 2003, this amount is
included in interest expense, net.
The monetary value of Pro Tech series A and B preferred stock was $0.7
million in our condensed consolidated balance sheet at September 30, 2003, which
is comprised of $0.7 million of shares plus the accrued dividends of
approximately $49,000. NCT would have to issue approximately 14.8 million shares
of our common stock if settlement of the stated value had occurred as of
September 30, 2003. NCT has the option to settle the accrued dividends in cash
or common stock. As of September 30, 2003, settlement in common stock for the
accrued dividends would require issuance of approximately 1.3 million shares of
our common stock. There is no limit on the number of shares that NCT could be
required to issue upon exchange of the Pro Tech series A and B preferred stock.
8. 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
15
stock may be sold to Crammer Road pursuant to put notices delivered by NCT. The
credit agreement obligates NCT to put a minimum of $5 million of its common
stock (the minimum commitment) to Crammer Road for cash. The agreement provides
for a discount to market of 10% on the puts. Our put notices are to commence
after we have an effective registration statement covering 112% of the shares
needed for $50 million of puts (among other conditions). If we fail to issue
shares for the minimum commitment during the commitment period (which terminates
24 months after effectiveness of a resale registration statement relating to the
shares or earlier as described in the agreement), we must pay Crammer Road, in
immediately available funds, an amount as described in the agreement (the
maximum would be $500,000).
9. Capital Stock:
Authorized Capital Stock
Common shares available for future issuance
At September 30, 2003, the shares of common stock required to be reserved
were 2,500,842,599 calculated at the $0.046 common stock price on that date (or
the discount therefrom as allowed under the applicable exchange or conversion
agreements). At the September 30, 2003 common stock price of $0.046, our common
shares issued and required to be reserved for issuance exceeded the number of
shares authorized at that date. As such, NCT will seek shareholder approval of
an amendment to its Restated Certificate of Incorporation to increase the number
of shares of common stock authorized for NCT.
During the three months ended September 30, 2003, NCT received requests to
issue shares of its common stock that it could not fulfill because the requests
were in excess of the number of shares of common stock currently authorized. As
such, we have included 3,029,608 shares (the remaining number authorized) in our
weighted average common shares outstanding on the accompanying condensed
consolidated statement of operations for the three and nine months ended
September 30, 2003. Shares issuable under the above requests, but not included
in shares payable as described have also not been included in the calculation of
weighted average shares used in the net loss per share as such inclusion would
be anti-dilutive.
Shares Issued for Settlements
Pursuant to the settlement agreement between NCT and West Nursery Holding
Limited Partnership, on or about April 1, 2003, the company issued 1,248,170
shares of its common stock (i.e., $56,000 in stock priced at $0.0448 per share)
to West Nursery (see Note 12).
Pursuant to the settlement agreement between NCT, Distributed Media
Corporation and Mesa Partners, Inc., on or about April 11, 2003, NCT issued
2,321,263 shares of its common stock (i.e., $125,000 in stock priced at $0.05385
per share) to Mesa (see Note 12).
On or about May 8, 2003, the company issued to Crammer Road LLC the
remaining 28,000,000 shares that were issuable under the October 30, 2002
settlement agreement between the parties (see Note 12).
Pursuant to the settlement agreement dated April 7, 2003 between NCT,
Artera Group, Inc. and Alpha Capital Aktiengesellschaft, Austost Anstalt Schaan,
Balmore S.A. and Libra Finance S.A., on September 18, 2003, NCT issued
61,776,067 shares of its common stock (i.e., $4,000,000 in stock priced at
$0.06475 per share) to the plaintiffs (see Note 12).
Shares Issued upon Conversion or Exchange of Indebtedness
During the nine months ended September 30, 2003, $1.8 million of the 6%
convertible notes were exchanged for 42,092,786 shares of NCT's common stock. At
September 30, 2003, $2.5 million of the 6% convertible note principal is
exchangeable for NCT common stock.
NCT Group, Inc. Preferred Stock
On March 10, 2003, NCT amended the number of designated shares of series H
convertible preferred stock from 1,800 shares to 2,100 shares.
16
For the three and nine months ended September 30, 2003, 75 shares of series
H preferred stock along with accrued dividends totaling approximately $0.8
million were converted into 23,057,761 shares of NCT's common stock.
For the nine months ended September 30, 2003, we calculated the 4%
dividends earned by the holder of the series H preferred stock at $0.5 million.
This amount is included in preferred stock dividends and in the calculation of
loss attributable to common stockholders.
Artera Group, Inc. Preferred Stock
NCT is obligated to register shares of its common stock for the exchange of
4,276 shares of Artera series A preferred stock. For the nine months ended
September 30, 2003, we incurred charges of approximately $1.7 million for
non-registration of the underlying shares of NCT common stock. As a result of a
settlement of a legal action, which included $3.3 million of accrued
non-registration fees payable relating to our inability to register the shares,
we recorded a gain of $2.0 million for the three and nine months ended September
30, 2003 included in non-operating other (income) expense, net (see Note 12).
Under the exchange rights agreement, NCT has the option at any time to redeem
any outstanding Artera series A preferred stock by paying the holder cash equal
to the aggregate stated value of the preferred stock being redeemed (together
with accrued and unpaid dividends thereon). Pursuant to an exchange rights and
release agreement dated April 10, 2003, three holders of an aggregate of 3,154
shares of Artera series A preferred stock received an additional right to
exchange into NCT preferred stock (a series to be designated) upon thirty days
prior written notice. For the nine months ended September 30, 2003, we
calculated the 4% dividends earned by holders of the 8,299 shares outstanding of
Artera series A preferred stock at approximately $0.2 million. The
non-registration charge and dividends are included in preferred stock dividends
and in the calculation of loss attributable to common stockholders.
Pro Tech Communications, Inc. Preferred Stock
Prior to the adoption of SFAS No. 150, for the nine months ended September
30, 2003, we calculated the 4% dividends earned by holders of the Pro Tech
series A convertible preferred stock and the Pro Tech series B redeemable
convertible preferred stock at approximately $11,000. This amount is included in
preferred stock dividends and in the calculation of loss attributable to common
stockholders.
As of December 31, 2002, under the terms of the Pro Tech series B
convertible preferred stock agreement dated July 30, 2001, the holder of those
shares may have had a right to require Pro Tech to redeem the shares and any
such redemption would not have been within the sole control of Pro Tech. The
redemption value was 125% of the stated value of $0.5 million or $125,000.
Accordingly, approximately $0.1 million redemption adjustment was recorded
during 2001 increasing the minority interest in consolidated subsidiaries. On
April 10, 2003, NCT and Pro Tech entered into an agreement with the holder of
the series B preferred stock whereby the holder agreed to waive certain
requirements of the registration rights agreement relating to the series B
preferred stock. This waiver released Pro Tech from the requirement to register
shares of Pro Tech's common stock for the conversion of the series B preferred
stock. This cancelled the triggering event, which may have placed the redemption
of the series B preferred stock at the holder's option. With the signing of this
agreement, such redemption is now within the control of Pro Tech. Pro Tech was
no longer required to carry the series B preferred stock at 125% of the stated
value. Accordingly, approximately $0.1 million redemption adjustment was
reversed during the nine months ended September 30, 2003.
Options
For the nine months ended September 30, 2003, we granted non-plan options
to purchase an aggregate of 125,550,000 shares of our common stock at exercise
prices ranging from $0.029 to $0.052 as partial consideration for consulting
services. We estimated the fair value of these options using the following
assumptions in applying the Black-Scholes option pricing model: dividend yield
of 0%; risk-free interest rates ranging from 1.39% to 2.25%; volatility of 100%;
and an expected life of five years. For the nine months ended September 30,
2003, we recorded a $3.6 million charge for the fair value of these options as
consulting services classified as selling, general and administrative expense
(see Note 10).
On September 10, 2003, pursuant to NCT's 2001 Stock and Incentive Plan, the
Board of Directors granted seven-year options to purchase shares of NCT common
stock to directors, officers and employees in the aggregate
17
amount of 26,290,000 shares at an exercise price of $0.054, the fair market
value of shares of NCT common stock on the date of grant. These grants to
directors, officers and employees were made subject to the approval by the
company's stockholders of sufficient increases in the number of shares of common
stock (1) authorized and (2) covered by the 2001 Plan. At the time of such
stockholder 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. On September 10,
2003, the Board of Directors deemed all options granted to directors, officers
and employees on October 25, 2002 as fully vested pending the stockholder
approval noted above. Although the acceleration of vesting schedules was a
modification of the original grants, there was no accounting consequence because
the market price on the date of the modification was lower than the original
exercise price of the grants.
Warrants
For the nine months ended September 30, 2003, in conjunction with the
issuance of convertible notes, NCT issued Carole Salkind warrants to acquire an
aggregate of 83,925,579 shares of its common stock at exercise prices ranging
from $0.029 to $0.055 per share. The fair value of these warrants was
approximately $2.6 million (determined using the Black-Scholes option pricing
model). Based upon allocation of the relative fair values of the instruments, we
recorded a discount to the convertible notes issued to Carole Salkind of $2.3
million for the nine months ended September 30, 2003.
On May 30, 2003, a warrant issued to Alpha Capital on December 6, 2002 to
acquire an aggregate of 15,000,000 shares of our common stock at an exercise
price of $0.01 per share vested. The vesting was contingent upon the following:
(a) NCT failing to pay by April 7, 2003 (later extended to May 30, 2003) any
amount owed by it to Alpha under the promissory note, dated December 6, 2002, in
the principal amount of $385,000, and (b) NCT failing to pay or otherwise
discharge by April 7, 2003 (later extended to May 30, 2003) any amount owed by
NCT under the registration penalty provisions of various 2001 and 2002
agreements of NCT. Both of these events occurred and we recorded the fair value
of this warrant (calculated as of May 30, 2003) as interest expense of $0.6
million (determined using the Black-Scholes option pricing model) for the nine
months ended September 30, 2003 as a result of this vesting. On September 4,
2003, 2,500,000 shares of the warrant issued to Alpha Capital on December 6,
2002 were cancelled resulting in no accounting effect.
On June 5, 2003, a warrant was issued, pursuant to an amended finders
agreement of the same date, to acquire an aggregate of 2,250,000 shares of our
common stock at an exercise price of $0.048 per share. The fair value of this
warrant was approximately $0.1 million (determined using the Black-Scholes
option pricing model). We recorded a charge of $0.1 million included in selling,
general and administrative expenses in our condensed consolidated statement of
operations for the nine months ended September 30, 2003.
On July 14, 2003, a warrant was issued, pursuant to a letter agreement of
the same date, to acquire an aggregate of 750,000 shares of our common stock at
an exercise price of $0.0312 per share. The fair value of this warrant was less
than $0.1 million (determined using the Black-Scholes option pricing model). We
recorded a charge of less than $0.1 million as consulting services included in
selling, general and administrative expenses in our condensed consolidated
statement of operations for the nine months ended September 30, 2003 (see Note
10).
10. Related Parties:
On January 6, 2003, NCT and Stop Noise, Inc. entered into a license
agreement with a term coinciding with the expiration of underlying patents
unless earlier terminated by the parties. The agreement allows Stop Noise, Inc.
to make use, develop and sell products incorporating NCT's noise canceling
patents and technology. Stop Noise will fund product development provided by NCT
and pay NCT per unit royalties based upon product sales. Carole Salkind's son is
the sole shareholder of Stop Noise, Inc. No amounts have been recorded with
respect to this agreement.
Spyder Technologies Group, LLC
On September 1, 2003, Artera Group, Inc. entered into a master distributor
agreement with Spyder Technologies Group, LLC under which Spyder will distribute
the Artera Turbo service on a non-exclusive basis in the United States, Canada,
South America and Central America. With respect to the United States, this
agreement was an amendment of an agreement dated October 29, 2002. The term of
the new agreement is five years.
18
Royalties to Artera are based on distribution volume and on the precise support
services provided by Artera. The royalty formulas and other material terms and
conditions in this agreement are comparable to those used by Artera with
similarly situated, unrelated master distributors.
On September 1, 2003, Artera Group, Inc. entered into a reseller agreement
with Spyder Technologies Group, LLC under which Spyder will resell the Artera
Turbo service in the United States, Canada, South America and Central America.
The term of the agreement is one year with possible renewals. Royalties to
Artera vary based upon the volume of Spyder's resales and on the precise support
services provided by Artera. The royalty formulas and other material terms and
conditions in this agreement are comparable to those used by Artera with
similarly situated, unrelated resellers.
In addition, from time to time on an "as needed" basis, Spyder provides
technical consulting services to Artera pertaining to Artera Turbo. Artera paid
Spyder an aggregate of $56,260 in technical consulting fees for the nine months
ended September 30, 2003.
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.
SpringerRun, Inc.
On July 2, 2003, NCT entered into a consulting agreement with SpringerRun,
Inc., under which SpringerRun provides consulting services to NCT and its
subsidiaries, consisting primarily of raising capital and debt financing,
identifying potential joint ventures and other strategic transactions and
finding distributors, licensees and end users for products and technologies. The
term of the SpringerRun agreement is one year, with possible renewals. Under the
agreement, NCT will pay SpringerRun the following: for capital raised, 6% of the
amount thereof plus 5% of the amount thereof in warrants to purchase NCT stock;
for debt financing raised, 1% of the amount thereof; for joint ventures or
distribution license or end user agreements entered into, 7% of NCT's net
revenues therefrom for three years, 5% thereafter. In lieu of cash, some of the
compensation described above may, at SpringerRun's request and if agreed to by
NCT, be given as stock of NCT or of a joint venture entered into by NCT. The
compensation formula and other material terms and conditions in this agreement
are comparable to those used by NCT with similarly situated, unrelated
consultants. To date, NCT has not paid SpringerRun any compensation under the
agreement, and none is owed to it. John McCloy II, a Director of NCT, is
Chairman, Chief Executive Officer, a Director and a 40% shareholder of
SpringerRun. John McCloy II's son John McCloy III is President, Treasurer,
Secretary, a Director and a 25% shareholder of SpringerRun. John McCloy II's son
Rush McCloy is a 25% shareholder of SpringerRun.
Indebtedness of Management
Effective May 1, 2002, Jonathan M. Charry, Ph.D., NCT's Senior Vice
President, Corporate Development, entered into a promissory note due January 15,
2003 for a principal amount owed to NCT of $107,960. The due date of this note
represents an extension from May 1, 2002 which itself was a product of prior
extensions. This note went into default on January 15, 2003. NCT is seeking to
collect on the May 1, 2002 note. The aggregate amount due NCT at September 30,
2003 for principal plus accrued interest is $120,213. However, NCT believes that
incentive compensation that is or will be due Dr. Charry may offset the amount
owed NCT. The note bears interest at an annual rate of 6.0% through its due date
of January 15, 2003, and at prime plus 5% thereafter. At September 30, 2003,
$24,000 was due Dr. Charry from other transactions; this amount, less payroll
taxes, plus interest on the net amount thereof will be offset against the note
obligation upon ultimate settlement.
Indemnification of Management
On or about December 5, 2002, NCT agreed to indemnify three individuals,
NCT directors and officers, who had each also served as a Director of Artera
Group International Limited, a U.K.-based subsidiary, prior to its liquidation
for any liabilities that may arise against them from claims under Section 214 of
the U.K. Insolvency Act and to provide them with legal representation with
respect to the claims. The amount asserted by the liquidator,
19
which we believe is the maximum amount of future payments that may be needed to
satisfy this indemnity, is approximately $6.5 million based upon the exchange
rate for pounds sterling at September 30, 2003 of $1.6643 (see Note 12).
Consulting Agreements
On January 23, 2003, NCT and Inframe, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
consideration of consulting services provided by Inframe to NCT. Such consulting
services are performed by Morton Salkind, husband of Carole Salkind, acting on
behalf of Inframe, Inc. Carole Salkind is the sole shareholder of Inframe, Inc.
The agreement expires on January 23, 2004 and is subject to a one-year renewal
unless cancelled after the initial period. Pursuant to the agreement, on January
23, 2003, NCT granted to Inframe, Inc. non-plan options to purchase 23,000,000
shares of NCT common stock at an exercise price of $0.042 per share (an
aggregate exercise price of $1.0 million). The five-year options vest on the
date of grant. We have recorded a charge of $0.7 million for the fair value of
the options and a $20,000 consulting fee as called for under the agreement for
consulting expenses included in selling, general and administrative expenses in
our condensed consolidated statement of operations for the nine months ended
September 30, 2003.
On February 11, 2003, NCT and Avant Interactive, Inc. entered into a
consulting agreement. The agreement calls for a monthly fee of $2,500, payable
at the end of the one-year term, and equity compensation in the form of options,
in consideration of consulting services provided by Avant to NCT. Such
consulting services are performed by Morton Salkind, husband of Carole Salkind,
acting on behalf of Avant Interactive, Inc. Carole Salkind is the sole
shareholder of Avant Interactive, Inc. The agreement expires on February 11,
2004 and is subject to a one-year renewal unless cancelled after the initial
period. The February 11, 2003 consulting agreement was amended on March 12,
2003, April 3, 2003 and April 11, 2003 to provide for additional consulting
services, with additional options as compensation. Pursuant to the agreement and
its subsequent amendments, on February 11, 2003, March 12, 2003, April 3, 2003
and April 11, 2003, NCT granted to Avant Interactive, Inc. non-plan options to
purchase 7,000,000 shares, 13,500,000 shares, 2,000,000 shares and 2,000,000
shares, respectively, of NCT common stock at exercise prices of $0.04 per share,
$0.031 per share, $0.029 per share and $0.031 per share, respectively (an
aggregate exercise price of $0.8 million). The five-year options vest on their
respective dates of grant. We have recorded an aggregate charge of $0.6 million
for the fair value of the options and a $20,000 consulting fee as called for
under the agreement for consulting expenses included in selling, general and
administrative expenses in our condensed consolidated statement of operations
for the nine months ended September 30, 2003.
On April 17, 2003, NCT and Turbo Networks, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
consideration of consulting services provided by Turbo to NCT. Such consulting
services are performed by Morton Salkind, husband of Carole Salkind, acting on
behalf of Turbo Networks, Inc. Carole Salkind is the sole shareholder of Turbo
Networks, Inc. The agreement expires on April 17, 2004 and is subject to a
one-year renewal unless cancelled after the initial period. The April 17, 2003
consulting agreement was amended on May 22, 2003 and June 28, 2003 to provide
for additional consulting services, with additional options as compensation.
Pursuant to the agreement and its subsequent amendments, on April 17, 2003, May
22, 2003 and June 28, 2003, NCT granted to Turbo Networks, Inc. non-plan options
to purchase 2,000,000 shares, 18,550,000 shares and 2,000,000 shares,
respectively, of NCT common stock at exercise prices of $0.037, $0.042 and
$0.04, respectively (an aggregate exercise price of $0.9 million). The five-year
options vest on their respective dates of grant. We have recorded an aggregate
charge of $0.7 million for the fair value of the options and a $12,500
consulting fee as called for under the agreement for consulting expenses
included in selling, general and administrative expenses in our condensed
consolidated statement of operations for the nine months ended September 30,
2003.
On June 12, 2003, NCT and Maple Industries, Inc. entered into a consulting
agreement. The agreement calls for a monthly fee of $2,500, payable at the end
of the one-year term, and equity compensation in the form of options, in
consideration of consulting services provided by Maple to NCT. Such consulting
services are performed by Morton Salkind, husband of Carole Salkind, acting on
behalf of Maple Industries, Inc. Carole Salkind is the sole shareholder of Maple
Industries, Inc. The agreement expires on June 12, 2004 and is subject to a
one-year renewal unless cancelled after the initial period. Pursuant to the
agreement, on June 12, 2003, NCT granted to Maple Industries, Inc. non-plan
options to purchase 23,000,000 shares of NCT common stock at an exercise price
of $0.044 (an aggregate exercise price of $1.0 million). The five-year option
vests on its date of grant. We have recorded an
20
aggregate charge of $0.8 million for the fair value of the options and a $10,000
consulting fee as called for under the agreement for consulting expenses
included in selling, general and administrative expenses in our condensed
consolidated statement of operations for the nine months ended September 30,
2003.
On July 14, 2003, NCT issued a warrant to John Harris, as designee for Stop
Noise, Inc. to satisfy health care coverage obligations under the consulting
agreement dated July 1, 2001, which expired on June 30, 2003. We have recorded a
charge for the fair value of the warrant of $17,500 for consulting expenses
included in selling, general and administrative expenses in our condensed
consolidated statement of operations for the nine months ended September 30,
2003 (see Note 9).
On September 30, 2002, NCT and Acme Associates, Inc. entered into a
consulting agreement. The consulting agreement calls for a monthly fee of
$2,500, payable at the end of the one-year term, and equity compensation in the
form of options. The September 30, 2002 consulting agreement was amended on July
14, 2003 and September 11, 2003 to provide for additional consulting services
with additional options as consideration. Pursuant to the amendments, on July
14, 2003 and September 11, 2003, NCT granted to Acme Associates, Inc. non-plan
options to purchase 25,000,000 shares and 7,500,000 shares of NCT common stock
at exercise prices of $0.0312 and $0.052 per share (an aggregate exercise price
of $1.2 million). The five-year options vested on their respective dates of
grant. We have recorded an aggregate charge of $0.8 million for the fair value
of the options as called for under the amendments to the agreement for
consulting expenses included in selling, general administrative expenses in our
condensed consolidated statement of operations for the three and nine months
ended September 30, 2003.
11. Stock-Based Compensation:
The company has elected to apply the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure."
Accordingly, the company accounts for stock-based compensation transactions with
employees using the intrinsic value method prescribed in Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Under APB No. 25, no compensation costs are recognized
if the option exercise price is equal to or greater than the fair market price
of the common stock on the date of the grant. Under SFAS No. 123, stock options
are valued at grant date using the Black-Scholes option pricing model and
compensation costs are recognized ratably over the vesting period. No
stock-based employee compensation cost is reflected in our net loss attributable
to common stockholders because options granted under our plans have an exercise
price equal to or greater than the market value of the underlying common stock
on the date of grant. At September 30, 2003, the company has four stock-based
compensation plans. The following table illustrates the effect on net loss
attributable to common stockholders and net loss per share if the company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
(in thousands, except per share amounts)
(in thousands, except share data)
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
Net loss attributable to common stockholders $ (11,961) $ (3,068) $ (33,205) $ (19,548)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (145) (876) (504) (1,011)
---------- ---------- ---------- ----------
Pro forma net loss attributable to common stockholders $ (12,106) $ (3,944) $ (33,709) $ (20,599)
========== ========== ========== ==========
Net loss per common share (basic and diluted):
As reported $ (0.03) $ (0.01) $ (0.08) $ (0.04)
========== ========== ========== ==========
Pro forma $ (0.03) $ (0.01) $ (0.08) $ (0.04)
========== ========== ========== ==========
Since options vest over several years and additional option grants are
expected to be made in future years, the pro forma impact on the results of
operations for the three and nine months ended September 30, 2002 and 2003,
respectively, is not necessarily representative of the pro forma effects on the
results of operations for future periods.
21
12. Litigation:
NCT Audio Arbitration and TST/TSA/GTI Bankruptcy
In the bankruptcy case of Global Technovations, Inc. (GTI) (formerly known
as Top Source Technologies, Inc. (TST)) and its subsidiary Top Source
Automotive, Inc. (TSA), on February 18, 2003, the bankruptcy court approved an
amended Plan of Reorganization and Disclosure Statement. Pursuant to the amended
Plan, NCT Audio Products, Inc. (i) was granted a release from all claims of GTI
and TSA (including NCT Audio's alleged obligations under a $204,000 principal
amount note due April 16, 1999 and its alleged obligation to issue $100,000 of
its preferred stock under an agreement with TST); (ii) received $125,000 from
the bankruptcy estate on March 25, 2003; (iii) has an allowable (i.e.,
uncontested) claim against the bankruptcy estate for $1,500,000 for which NCT
Audio is entitled to payments, if any, in the course of administration of the
estate under a formula set forth in the amended Plan; and (iv) released the
debtors and their officers and directors from all claims other than the claim
described in clause (iii) above. The amended Plan also provides for a $1,000,000
litigation fund for the bankruptcy estate's efforts to enforce a number of
claims it believes it has against third parties, the proceeds of which efforts
would, under the formula in the amended Plan, be used to pay the claims of NCT
Audio and the other creditors of the bankruptcy estate. In connection with the
settlement, we recorded income from litigation settlement of $429,000
(consisting of $125,000 cash received and release of obligations to: (a) repay a
note for $204,000 and (b) issue preferred stock for $100,000) included in
non-operating other (income) expense, net on the condensed consolidated
statement of operations for the nine months ended September 30, 2003 (see Notes
3 and 5).
West Nursery (Maryland Lease) Litigation
On March 3, 2003, the Connecticut court approved a December 31, 2002
settlement agreement between NCT and the plaintiff West Nursery Holding Limited
Partnership. Pursuant to the settlement agreement, on or about April 1, 2003,
the company issued 1,248,170 shares of its common stock (i.e., $56,000 in stock
priced at $0.0448 per share) to West Nursery. Dismissal of the Connecticut
action with prejudice occurred on August 18, 2003. Dismissal of the related
Maryland action with prejudice is expected shortly.
Mesa Partners Matter
On March 8, 2003, the court approved the settlement agreement between the
co-defendants NCT and Distributed Media Corporation and the plaintiff Mesa
Partners, Inc. Pursuant to the settlement agreement, on or about April 11, 2003,
NCT issued 2,321,263 shares of its common stock (i.e., $125,000 in stock priced
at $0.05385 per share) to Mesa. On May 7, 2003, the action was dismissed with
prejudice.
Artera International U.K. Section 214 Indemnification
In the United Kingdom liquidation case of Artera Group International
Limited, on March 25, 2003, Messrs. Parrella and Hammond and Ms. Lebovics filed
a joint response to the liquidator's claims in which they denied any liability
or wrongdoing. Messrs. Parrella and Hammond and Ms. Lebovics have told NCT that
they intend to defend against these claims vigorously. NCT has agreed to
indemnify Messrs. Parrella and Hammond and Ms. Lebovics for any liabilities that
may arise against them from these U.K. Section 214 claims and to provide them
with legal representation with respect to the claims. NCT does not have
directors and officers indemnification insurance coverage for the claims (see
Note 10). The Section 214 proceedings are at an early stage and we are unable to
predict the outcome of this action. As a result, no amount has been accrued at
September 30, 2003.
Production Resource Group Litigation
In the portion of the case against the company and Distributed Media
Corporation, on or about February 14, 2003, Production Resource Group, LLC (PRG)
served papers on the company seeking to enforce the judgment in the case against
the shares of stock of NCT Audio Products, Inc. owned by the company. On or
about June 6, 2003, in furtherance of its efforts to collect on the judgment,
PRG filed the judgment in the Circuit Court for Anne Arundel County, Maryland;
the Superior Court of New Jersey, Hudson County; and the Circuit Court of St.
Lucie County, Florida. Between August 8, 2003 and August 14, 2003, PRG also
served property executions relating to the judgment on NCT Audio Products, Inc.,
Advancel Logic Corporation and Midcore Software, Inc. as third parties to the
litigation. As of September 30, 2003, PRG had collected approximately $130,000
in NCT's and DMC's cash or
22
cash equivalent assets as a result of this judgment. To the extent that further
payment of the judgment is in cash, such payment could be material to our cash
position.
In the portion of the case against the company's Chairman and Chief
Executive Officer Michael Parrella (as to which the company has agreed to
indemnify Mr. Parrella), on February 25, 2003, the court granted in part Mr.
Parrella's July 15, 2002 motion, striking those portions of the PRG amended
complaint that allege a breach of an obligation of good faith and fair dealing,
but declining to strike those portions that allege unfair trade practices and
fraud. On August 8, 2003, Mr. Parrella filed a motion for summary judgment on
all remaining allegations. A decision on that motion is pending. Mr. Parrella
has told NCT that if any allegations in the amended complaint remain after the
court's decision on the summary judgment motion, he intends to deny such
allegations. To the extent that NCT may ultimately indemnify Mr. Parrella for
liabilities arising out of these allegations and for related legal fees, we
believe that our directors and officers indemnification insurance (subject to
certain exceptions under the insurance policy and after payment of a $100,000
deductible) will cover such payments. Discovery as to Mr. Parrella has begun.
Alpha, Austost, Balmore and Libra v. NCT and Artera
On or about April 7, 2003, before an answer was filed in this case, NCT,
Artera and the plaintiffs executed a settlement agreement. After hearings on May
15, 2003 and September 16, 2003, the court on September 16, 2003
approved the settlement agreement, thereby causing it to become effective.
Pursuant to the settlement agreement, the plaintiffs granted releases from the
monetary claims in the complaint (i) against NCT and Artera and pertaining to
interest allegedly accrued through April 7, 2003 on all notes described in the
complaint and (ii) against NCT for NCT's non-payment of liquidated damages
allegedly due as a result of a failure by NCT to register the shares of its
common stock for which the notes and preferred stock described in the complaint
are convertible or exchangeable. In consideration of these releases and as
required by the settlement agreement, on September 18, 2003, NCT issued to the
plaintiffs an aggregate of 61,776,067 new shares of its common stock,
representing $4.0 million in stock priced at $0.06475 per share (the average of
the ten closing prices of the common stock immediately preceding the initial
hearing for court approval of the settlement agreement). The settlement shares
were allocated as follows: 14,109,883 shares ($914,000 worth) to Alpha,
20,868,729 shares ($1,351,000 worth) to Austost, 21,076,266 shares ($1,365,000
worth) to Balmore and 5,721,189 shares ($370,000 worth) to Libra. Also included
in the settlement agreement was the release of claims, not originally asserted
in the complaint, (x) against Artera and pertaining to interest allegedly
accrued through April 7, 2003 on a May 25, 2001 note of Artera and (y) against
NCT for NCT's non-payment of liquidated damages allegedly due as a result of a
failure by NCT to register the shares of its common stock for which such May 25,
2001 note of Artera is exchangeable. On November 12, 2003, pursuant to the
settlement agreement, the action was dismissed, with prejudice as to the claims
released by the settlement agreement and without prejudice as to the claims not
so released (primarily, approximately $4.1 million in principal allegedly due
and payable on the notes described in the complaint). Upon court approval of the
settlement agreement, NCT issued common stock of $4.0 million, reduced
previously accrued interest payable of $0.9 million and liquidated damages for
non-registration of common shares underlying convertible and exchangeable notes
and preferred stock of $8.0 million. We recorded a $4.9 million gain on
litigation settlement included in non-operating other (income) expense for the
three and nine months ended September 30, 2003.
Crammer Road v. NCT
On or about May 8, 2003, the company issued to Crammer Road LLC the
remaining 28,000,000 shares that were issuable under the October 30, 2002
settlement agreement between the parties. Dismissal of the action so settled had
occurred on December 11, 2002.
Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2002, for further information regarding the foregoing
matters. The company believes there are no other patent infringement claims,
litigation, matters or unasserted claims other than the matters discussed above
that could have a material adverse effect on the financial position and results
of operations.
13. Segment Information:
Management views the company as being organized into three operating
segments: Communications, Media and Technology. The Other operating segment is
used to reconcile the reportable segment data to the consolidated financial
statements and is segregated into two categories, Other-corporate and
Other-consolidating.
23
Other-corporate consists of items maintained at the company's corporate
headquarters and not allocated to the segments. This includes most of the
company's debt and related cash and cash equivalents and related net interest
expense, some litigation liabilities and non-operating fixed assets. Also
included in the components of revenue attributed to Other-corporate are license
fees and royalty revenue from subsidiaries, which are offset (i.e., eliminated)
in the Other-consolidating column. Other-consolidating consists of items
eliminated in consolidation, such as intercompany revenue.
During the three and nine months ended September 30, 2003, no geographic
information for revenue from external customers or for long-lived assets is
disclosed, as our primary market and capital investments were concentrated in
the United States.
Reportable segment data for the three and nine months ended September 30,
2003 and 2002 is as follows (in thousands):
----------------------------------------------------------------------------------
Reportable -------- Other -------- Grand
Communications Media Technology Segments Corporate Consolidating Total
----------------------------------------------------------------------------------
For the three months ended September 30, 2003:
- -------------------------------------------------
License fees and royalties $ 160 $ 535 $ 14 $ 709 $ 2 $ - $ 711
Other revenue - external 440 39 - 479 - - 479
Other revenue - other operating
segments 266 3 - 269 1 (270) -
Net (loss) income (2,398) (897) 26 (3,269) 361 596 (2,312)
For the three months ended September 30, 2002:
- -------------------------------------------------
License fees and royalties $ 583 $ 535 $ - $ 1,118 $ 5 $ (5) $ 1,118
Other revenue - external 543 52 - 595 - - 595
Other revenue - other operating
segments 240 8 - 248 - (248) -
Net (loss) income (1,839) (5,182) (658) (7,679) (7,931) 4,449 (11,161)
For the nine months ended September 30, 2003:
- -------------------------------------------------
License fees and royalties $ 396 $ 1,605 $ 14 $ 2,015 $ 7 $ - $ 2,022
Other revenue - external 1,317 83 - 1,400 - - 1,400
Other revenue - other operating
segments 802 6 - 808 170 (978) -
Net (loss) income (8,367) (2,440) 84 (10,723) (8,070) 1,789 (17,004)
For the nine months ended September 30, 2002:
- -------------------------------------------------
License fees and royalties $ 1,959 $ 1,605 $ - $ 3,564 $ 20 $ (13) $ 3,571
Other revenue - external 2,100 111 - 2,211 - - 2,211
Other revenue - other operating
segments 667 (41) - 626 - (626) -
Net (loss) income (6,014) (7,163) (827) (14,004) (22,558) 5,425 (31,137)
24
14. Subsequent Events:
Transactions with Carole Salkind
On October 2, 2003, NCT issued a convertible note to Ms. Salkind in the
amount of approximately $0.8 million, as consideration for cash of $0.4 million
and curing the default and payment of the convertible note dated September 9,
2002 in the principal amount of $0.35 million plus accrued interest and
penalties thereon. The note matures on April 2, 2004 and bears interest at 8%
per annum payable at maturity. The note is convertible into shares of NCT common
stock at $0.043 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 thereof). In conjunction with issuance of the
note, a five-year warrant was issued to Ms. Salkind to purchase 4.0 million
shares of our common stock at an exercise price of $0.043 per share. The
relative estimated fair value of the warrant and the beneficial conversion
feature will be reflected as discounts to the note and amortized as interest
expense over the term of the note.
On October 14, 2003, NCT issued a convertible note to Ms. Salkind in the
amount of approximately $4.5 million, as consideration for curing the default
and payment of the convertible note dated September 30, 2002 in the principal
amount of $3.8 million plus accrued interest and penalties thereon. The note
matures on April 14, 2004 and bears interest at 8% per annum payable at
maturity. The note is convertible into shares of NCT common stock at $0.044 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 thereof). In conjunction with issuance of the note, a five-year
warrant was issued to Ms. Salkind to purchase 19.25 million shares of our common
stock at an exercise price of $0.044 per share. The relative estimated fair
value of the warrant and the beneficial conversion feature will be reflected as
discounts to the note and amortized as interest expense over the term of the
note.
On October 14, 2003, NCT issued a convertible note to Ms. Salkind in the
amount of $0.4 million, as consideration for cash. The note matures on April 14,
2004 and bears interest at 8% per annum payable at maturity. The note is
convertible into shares of NCT common stock at $0.044 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
thereof). In conjunction with issuance of the note, a five-year warrant was
issued to Ms. Salkind to purchase 2.0 million shares of our common stock at an
exercise price of $0.044 per share. The relative estimated fair value of the
warrant and the beneficial conversion feature will be reflected as discounts to
the note and amortized as interest expense over the term of the note.
On November 3, 2003, NCT issued a convertible note to Ms. Salkind in the
amount of $0.4 million, as consideration for cash. The note matures on May 3,
2004 and bears interest at 8% per annum payable at maturity. The note is
convertible into shares of NCT common stock at $0.044 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
thereof). In conjunction with issuance of the note, a five-year warrant was
issued to Ms. Salkind to purchase 2.0 million shares of our common stock at an
exercise price of $0.044 per share. The relative estimated fair value of the
warrant and the beneficial conversion feature will be reflected as discounts to
the note and amortized as interest expense over the term of the note.
On November 7, 2003, we defaulted on repayment of a convertible note
payable dated November 7, 2002 to Ms. Salkind for the principal amount of $0.4
million. We are currently in negotiation to cure this default.
Transactions with Other Related Parties
On each of October 3, 2003, October 14, 2003 and November 3, 2003, the
September 30, 2002 consulting agreement between NCT and Acme Associates, Inc.
was amended. Pursuant to the amendments, on each of October 3, 2003, October 14,
2003 and November 3, 2003, NCT granted to Acme Associates, Inc. non-plan options
to purchase 5,750,000, 44,000,000, and 2,000,000 shares, respectively, of NCT
common stock at exercise prices of $0.043, $0.044, and $0.045 per share,
respectively. We will record an aggregate charge of approximately $1.7 million
for the fair value of these options.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
Caution Concerning Forward-Looking Statements
This report on Form 10-Q contains statements, which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of any number of factors, many of which
are beyond the control of management. NCT operates in a highly competitive and
rapidly changing environment. Our business segments are dependent on our ability
to: achieve profitability; achieve a competitive position in design,
development, licensing, production and distribution of technologies and
applications; produce a cost effective product that will gain acceptance in
relevant consumer and other product markets; increase revenue from products;
realize funding from technology licensing fees, royalties, product sales, and
engineering and development revenue to sustain our current level of operation;
introduce, on a timely basis, new products; continue our current level of
operations to support the fees associated with our patent portfolio; maintain
satisfactory relations with our customers; attract and retain key personnel;
maintain and expand our strategic relationships; and protect our know-how,
inventions and other secret or unprotected intellectual property. NCT's actual
results could differ materially from management's expectations because of
changes in these factors. New risk factors may arise and it is not possible for
management to predict all of these risk factors, nor can management assess the
impact of all of these risk factors on the company's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
All references to years, unless otherwise noted, refer to our fiscal year,
which ends on December 31. All references to quarters, unless otherwise noted,
refer to the quarters of our fiscal year.
General Business Environment
NCT's operating revenue is comprised of technology licensing fees and
royalties, product sales, advertising/media revenue and engineering and
development services. Please see discussion of our critical accounting policies
below including our revenue recognition policies. 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
expect to realize any cash from the deferred revenue as of September 30, 2003
(approximately $4.3 million). Operating revenue for the nine months ended
September 30, 2003 consisted of approximately 59.1% in technology licensing fees
and royalties, 38.6% in product sales, 1.6% in advertising/media revenue and
0.7% in engineering and development services.
NCT continued its practice of marketing its technology through licensing to
third parties for fees, generally by obtaining technology license fees when
initiating relationships with new strategic partners, and subsequent royalties.
The company has entered into a number of alliances and strategic relationships
with established firms for the integration of its technology into products. The
speed with which the company can achieve the commercialization of its technology
depends, in large part, upon the time taken by these firms and their customers
for product testing and their assessment of how best to integrate the company's
technology into their products and manufacturing operations. While the company
works with these firms on product testing and integration, it is not always able
to influence how quickly this process can be completed. Presently, NCT is
selling products through several of its licensees, including: Ultra is
installing production model aircraft cabin quieting systems in the SAAB 340
turboprop aircraft and Oki is integrating the ClearSpeech(R) algorithm into
large scale integrated circuits for communications applications.
NCT has continued to make substantial investments in its technology and
intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field tests of products. Management
believes that the investment in our technology has resulted in the expansion of
our intellectual property portfolio and improvement in the functionality, speed
and cost of components and products.
26
Management believes that currently available funds will not be sufficient
to sustain NCT. Such funds consist of available cash and the funding derived
from technology licensing fees, royalties, product sales and engineering and
development revenue. Reducing operating expenses and capital expenditures alone
will not be sufficient and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees, royalties,
product sales and engineering and development revenue, all of which are
presently uncertain. In the event that anticipated technology licensing fees,
royalties, product sales and engineering and development services are not
realized, then management believes additional working capital financing must be
obtained. There is no assurance any financing is or would become available.
(Refer to "Liquidity and Capital Resources" below and to Note 1 - notes to the
condensed consolidated financial statements for further discussion relating to
continuity of operations.)
In 2003, the company entered into certain transactions which provided
additional funding. These transactions included the issuance of secured
convertible notes. In particular, we have been primarily dependent upon funding
from Carole Salkind to maintain our operations. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources" (see
also Note 6 - notes to the condensed consolidated financial statements).
Critical Accounting Policies
Revenue Recognition
Revenue is recognized when earned. Technology licensing fees are generally
recognized upon execution of the agreement but are deferred if subject to
completion of any performance criteria then recognized once the performance
criteria have been met. Revenue from royalties is recognized ratably over the
royalty period based upon periodic reports submitted by the royalty obligor or
based on minimum royalty requirements. Revenue from product sales is recognized
when the product is shipped. Revenue from advertising sales is recognized when
the advertisements are aired or displayed. Revenue from engineering and
development services is generally recognized and billed as the services are
performed. The mix of our revenue sources during any reporting period may have a
material impact on our results. In particular, our execution of technology
licensing agreements and the timing of the revenue recognized therefrom has not
been predictable. Our preference is to collect amounts due from the sale of our
technologies, services and products in cash. However, from time to time,
receivables may be settled by securities transferred to us by the customer in
lieu of cash payment.
At September 30, 2003, our deferred revenue aggregated $4.3 million. We do
not expect to realize any cash in connection with recognizing revenue from our
deferred revenue.
Marketable Securities
Marketable securities that are bought and held principally for the purpose
of selling them in the near-term are classified as trading securities. Trading
securities are recorded at fair value, with the change in market value during
the period included in the statements of operations. Marketable debt securities
that NCT has the positive intent and ability to hold to maturity are classified
as held-to-maturity securities and recorded at amortized cost. Securities not
classified as either held-to-maturity or trading securities are classified as
available-for-sale securities. Available-for-sale securities are generally
recorded at market value, with the change in market value during the period
excluded from the statements of operations unless it is occasioned by an
other-than-temporary decline in value and recorded net of income taxes as a
separate component of stockholders' equity (capital deficit). NCT reviews
declines in value of its investments when general market conditions change or
specific information pertaining to an industry or individual company becomes
available. The factors considered in assessing whether a decline is
other-than-temporary include: our evaluation of the length of the time and the
extent to which the market value of the industry has been depressed or the
market value of the security has been less than cost; evaluation of financial
condition and near-term prospects of the business, including cash sufficiency
and new product developments; assessment of observable marketplace-determined
values and trends; and our intent and ability to retain our investment in the
business for a sufficient period of time to allow for any anticipated recovery
in market value.
At September 30, 2003, all of NCT's marketable securities have been deemed
available-for-sale securities and aggregated $0.1 million.
27
Goodwill, Patent Rights, Other Intangible Assets:
The excess of the consideration paid over the fair value of net assets
acquired in business combinations is recorded as goodwill. Goodwill is also
recorded by NCT upon the acquisition of some or all of the stock held by
minority stockholders of a subsidiary, except where such accounting is, in
substance, the purchase of licenses previously sold to such minority
stockholders or their affiliates. Effective January 1, 2002, goodwill and
intangibles with indefinite lives are no longer amortized.
Annually, or if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount, the company tests its goodwill for impairment. At December 31, 2002, the
company evaluated the goodwill allocated to its Advancel reporting unit, NCT
Hearing reporting unit and Midcore/Artera reporting unit and determined no
impairment existed. Our annual evaluation is planned for December 31, 2003.
The company also recognizes an impairment loss on goodwill acquired upon
the acquisition of stock held by minority 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. Impairment of goodwill for the nine months ended September 30,
2002 and 2003 was $0.3 million and zero, respectively. At September 30, 2003,
our goodwill, net was $7.2 million.
Patent rights and other intangible assets with finite useful lives, which
includes the cost to acquire rights to patents and other rights under licenses,
are stated at cost and are amortized using the straight-line method over the
remaining useful lives, ranging from one to seventeen years. Amortization
expense for the nine months ended September 30, 2002 and 2003 was $0.3 million
and $0.2 million, respectively.
NCT evaluates the remaining useful life of intangible assets with finite
useful lives each reporting period to determine whether events and circumstances
warrant a revision to the remaining period of amortization. If the evaluation
determines that the intangible asset's remaining useful life has changed, the
remaining carrying amount of the intangible asset is amortized prospectively
over that revised remaining useful life. The company evaluates its intangible
assets with finite useful lives for impairment whenever events or other changes
in circumstances indicate that the carrying amount may not be recoverable. The
testing for impairment includes evaluating the undiscounted cash flows of the
asset and the remaining period of amortization or useful life. The factors used
in evaluating the undiscounted cash flows include: current operating results,
projected future operating results and cash flows and any other material factors
that may effect the continuity or the usefulness of the asset. If impairment
exists, the intangible asset is written down to its fair value based upon
discounted cash flows. There was no event or change in circumstances to require
an evaluation through September 30, 2003. At September 30, 2003, our patent
rights and other intangibles, net were $1.3 million.
RESULTS OF OPERATIONS
Three months ended September 30, 2003 compared to three months ended September
30, 2002
Total revenue for the three months ended September 30, 2003 was $1.2
million compared to $1.7 million for the same period in 2002, a decrease of $0.5
million, or 29.4%, reflecting decreases in all of our revenue sources as
described below.
Technology licensing fees and royalties were $0.7 million for the three
months ended September 30, 2003 as compared to $1.1 million for the same period
in 2002, a decrease of $0.4 million or 36.4%. The decrease was primarily due to
a $0.6 million decrease in license fee revenue related to Teltran, partially
offset by a $0.2 million increase in royalties related to Oki. Our recognition
of license fee revenue for the three months ended September 30, 2003 was due to
recognition of deferred revenue from the NXT license, which did not represent
cash. No additional cash is expected to be realized from our deferred revenue.
For the three months ended September 30, 2003, product sales were $0.4
million compared to $0.6 million for three months ended September 30, 2002, a
decrease of $0.2 million, or 33.3%. The decrease was primarily due to lower
sales of hearing products and due to decreased demand in the fast food market.
We expect sales to remain sluggish for the remainder of the year as a result of
the announced closure of fast-food franchises worldwide and
28
increased competition. For the three months ended September 30, 2003, hearing
products comprised approximately $0.3 million, or 73% of our product sales and
communication products comprised approximately $0.1 million, or 27% of our
product sales.
Advertising/media revenue was $33,000 for the three months ended September
30, 2003 compared to $43,000 for the same period in 2002. Advertising/media
revenue is derived from the sale of audio and visual advertising in the Sight &
Sound(R) locations. For the three months ended September 30, 2003 and 2002,
revenue from health venues comprised 100% of total advertising/media revenue.
Gross profit on product sales, as a percentage of product sales, improved
to 51.8% for the three months ended September 30, 2003 from 48.4% for the three
months ended September 30, 2002. The improvement is primarily related to hearing
products and is a result of reduced warranty costs (a component of cost of
sales). This improvement was partially offset by an increase in Artera's costs
of sales with the growth of the Artera Turbo data centers that has not been
accompanied by a parallel increase in sales.
For the three months ended September 30, 2003, selling, general and
administrative expenses totaled $3.1 million as compared to $4.5 million for the
three months ended September 30, 2002, a decrease of $1.4 million, or 31.1%. The
decrease was due primarily to a decrease in consulting expense from the issuance
of options.
For the three months ended September 30, 2003, research and development
expenditures totaled $0.8 million as compared to $1.2 million for the three
months ended September 30, 2002, a decrease of $0.4 million, or 33.3%. This
decrease was due primarily to a $0.1 million decrease in Artera Turbo
subscription service development cost and a $0.1 million decrease in
depreciation.
Total costs and expenses for the three months ended September 30, 2003 were
$3.5 million compared to $12.9 million for the same period in 2002, a decrease
of 72.9%, or $9.4 million, primarily due to a $4.9 million gain on litigation
settlement, a $1.5 million reduction in consulting expenses related to the
issuance of options and a $3.1 million reduction in finance costs associated
with non-registration of common shares. Total costs and expenses include
non-cash expenditures of $5.3 million for the three months ended September 30,
2003 and $9.2 million for the three months ended September 30, 2002. These
expenditures included: (i) interest expense of $3.1 million for the three months
ended September 30, 2003 (due primarily to amortization of original issue
discounts of $1.1 million; amortization of beneficial conversion features in
convertible debt of $1.3 million, and interest on convertible debt issued by the
company of $0.6 million and $2.5 million during the same period in 2002 (due to
amortization of original issue discounts of $0.4 million; amortization of
beneficial conversion features in convertible debt of $0.7 million, amortization
of additional debt issuance costs of $0.8 million, and interest on convertible
debt issued by the company of $0.6 million); (ii) finance costs of $0.6 million
associated with non-registration of common shares for the three months ended
September 30, 2003 and $3.7 million during the same period in 2002; (iii)
consulting expenses due to the issuance of $0.9 million of options for the three
months ended September 30, 2003 and $2.4 million for the same period in 2002;
(iv) default penalties on debt of $0.6 million for the three months ended
September 30, 2003 and $0.3 million for the same period in 2002, and (v)
depreciation and amortization of $0.1 million for the three months ended
September 30, 2003, and $0.3 million in the same period in 2002.
Nine months ended September 30, 2003 compared to nine months ended September 30,
2002
For the nine months ended September 30, 2003, total revenue amounted to
$3.4 million, compared to $5.8 million for nine months ended September 30, 2002,
a decrease of $2.4 million, or 41.4%, reflecting decreases in most of our
revenue sources as described below.
Technology licensing fees and royalties were $2.0 million for the nine
months ended September 30, 2003 as compared to $3.6 million for the same period
in 2002, a decrease of $1.6 million, or 44.4%. The decrease was primarily due to
a $1.7 million decrease in technology license fee revenue related to Teltran
(our revenue recognition was completed in October 2002). The technology
licensing fees for the nine months ended September 2003 were due to the
recognition of deferred revenue from the NXT license, which did not represent
cash. As of September 30, 2003, our deferred revenue for NXT and Fairpoint was
$3.2 million and $0.5 million, respectively. We do not expect to realize any
cash from our deferred revenue related to these licenses.
The company continues to realize royalties from other existing licensees
including Ultra, Oki and Sharp. Royalties from these and other licensees are
expected to account for a greater share of the company's revenue in
29
future periods. The company began to recognize royalties from the
STMicroelectronics agreement during the third quarter and although the amount
recognized is less than $0.1 million, we expect future growth.
For the nine months ended September 30, 2003, product sales were $1.3
million compared to $2.1 million for the nine months ended September 30, 2002, a
decrease of $0.8 million or 38.1%. The decrease was primarily due to $0.5
million of lower sales of hearing products primarily due to reduced fast-food
headset purchases by major distributors and a $0.2 million decrease as a result
of the cessation of operations of Artera Group International Limited in March
2002. Hearing products comprise approximately $1.0 million, or 72% of our
product sales for the nine months ended September 30, 2003; communication
products comprise approximately $0.3 million, or 22%.
Advertising/media revenue remained steady for the nine months ended
September 30, 2003 compared to the same period in 2002. Advertising/media
revenue is derived from the sale of audio and visual advertising in the Sight
and Sound(R) locations. We experienced an increase in revenue from health
venues, which was offset by a decrease in revenue from non-health venues.
Although our limited cash resources have reduced our expectations, we anticipate
increasing revenue from the Sight & Sound(R) locations in health venues. We
believe it is reasonable to expect revenue to increase in the future because (i)
our network of installed sites is growing and, as a result, our reach into the
market and number of impressions delivered is increasing which makes the network
more compelling to advertisers; (ii) each site is supported by at least one
paying advertiser, in most cases health insurance plans, and generally their
commitments are for one to two years; and (iii) additional site and advertiser
opportunities are in negotiation. Presently, nineteen sites in hospitals and
neighborhood family care centers are operational. Cost of advertising/media
revenue was $9,000 for the nine months ended September 30, 2003 compared to
$13,000 for the same period in 2002. These costs include the commissions paid to
advertising representative companies and agencies and communication expenses
related to the Sight and Sound(R) locations.
Gross profit on product sales, as a percentage of product revenue, improved
to 54.4% for the nine months ended September 30, 2003, from 44.2% for the nine
months ended September 30, 2002. The improvement is primarily related to hearing
products and is a result of reduced warranty costs (a component of cost of
sales). This improvement was partially offset by an increase in Artera's costs
of sales with the growth of the Artera Turbo data centers that has not been
accompanied by a parallel increase in sales.
For the nine months ended September 30, 2003, selling, general and
administrative expenses totaled $10.1 million as compared to $11.8 million for
the nine months ended September 30, 2002, a decrease of $1.7 million, or 14.4%.
This decrease was due primarily to: (i) a $0.8 million decrease in salary and
related benefit costs as a result of the reduction in workforce; (ii) a $0.5
million decrease in legal and patent expenses as a result of finalizing legal
matters; (iii) a $0.3 million decrease in consulting expenses; and (iv) a $0.1
million decrease in each of sales related, office related, and depreciation and
amortization expenses. These decreases were partially offset by a $0.3 million
accrual for asserted minimum royalties due to a licensor.
For the nine months ended September 30, 2003, research and development
expenditures totaled $2.7 million as compared to $3.3 million for the nine
months ended September 30, 2002, a decrease of $0.6 million, or 18.2%. Research
and development costs consist primarily of compensation and benefit costs
(ranging from 70% to 75% of total), depreciation (approximately 11% of total)
and development costs and services of outside firms. Our principal projects for
the nine months ended September 30, 2003 include development of other components
of our Artera Turbo subscription service, ClearSpeech algorithm development,
development of safety earmuff (next generation Active Noise Reduction (ANR)
ProActive) and development of in-the-ear (ear bud) ANR technology. This decrease
was due primarily to a $0.3 million decrease in salary and related benefits
costs attributed to a reduced workforce and a $0.2 million decrease in product
development costs.
Total costs and expenses for the nine months ended September 30, 2003 were
$20.4 million compared to $36.9 million for the same period in 2002, a decrease
of 44.7%, or $16.5 million, primarily due to a $9.2 million reduction in
repurchased licenses, net, a $5.3 million gain on litigation settlements and a
$3.5 million reduction in finance costs associated with non-registration of
common shares. Total costs and expenses include non-cash expenditures of $16.6
million for the nine months ended September 30, 2003 and $24.8 million for the
nine months ended September 30, 2002. These expenditures included: (i)
repurchased licenses cost of zero for the nine months ended September 30, 2003
and $9.2 million during the same period in 2002; (ii) impairment of goodwill of
zero in the nine months ended September 30, 2003 and $0.3 million during the
same period in 2002; (iii) interest expense of $9.3 million in the nine months
ended September 30, 2003 (due primarily to amortization of original issue
discounts of $2.8 million, amortization of beneficial conversion features of
$3.1 million, amortization of additional debt
30
discounts of $1.1 million, and interest on debt issued by the company of $2.2
million and $5.2 million during the same period in 2002 (due primarily to
amortization of original issue discounts of $1.1 million, amortization of
beneficial conversion features of $1.6 million, amortization of debt issuance
costs of $1.0 million and interest on debt issued by the company of $1.5
million); (iv) finance costs associated with non-registration of common shares
of $2.0 million for the nine months ended September 30, 2003 and $5.5 million
for the same period in 2002; (v) consulting expenses due to the issuance of $3.6
million of options for the nine months ended September 30, 2003 and $3.4 million
for the same period in 2002; (vi) default penalties on debt of $1.1 million for
the nine months ended September 30, 2003 and $0.3 million for the same period in
2002 and (vii) depreciation and amortization of $0.6 million in the nine months
ended September 30, 2003 and $0.9 million in the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
NCT has experienced substantial losses from operations since its inception,
which have been recurring and amounted to $276.6 million on a cumulative basis
through September 30, 2003. These losses, which include the costs for
development of technologies and products for commercial use, have been funded
primarily from:
o the sale of our and our subsidiaries' common stock;
o the sale of our and our subsidiaries' preferred stock convertible into
common stock;
o issuance of our and our subsidiaries' convertible debt;
o technology licensing fees;
o royalties;
o product sales;
o advertising/media revenue; and
o engineering and development services.
Management believes that currently available funds will not be sufficient
to sustain NCT through the next six months. Such funds consist of available cash
and the funding derived from our revenue sources: technology licensing fees and
royalties, product sales, advertising/media and engineering development
services. Reducing operating expenses and capital expenditures alone may not be
sufficient, and continuation as a going concern is dependent upon the level of
funding realized from our revenue sources, all of which are presently uncertain.
In the event that funding from our revenue sources is not realized as planned,
then management believes additional working capital financing must be obtained
through the private placement or public offering of additional equity of NCT or
its subsidiaries in the form of common stock, convertible preferred stock and/or
convertible debt. Proceeds from sales of our subsidiaries' securities are used
for the benefit of the issuing subsidiary, and there are generally contractual
restrictions to that effect. There is no assurance any financing is or would
become available.
In the event that external financing is not available or timely, NCT would
have to substantially reduce its level of operations. These reductions could
have an adverse effect on NCT's relationships with its customers and suppliers.
Uncertainty exists with respect to the adequacy of current funds to support
NCT's activities until positive cash flow from operations can be achieved and
with respect to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise substantial doubt at September 30,
2003 about NCT's ability to continue as a going concern.
We have entered into financing transactions because internally generated
funding sources were insufficient to maintain our operations. Such financing
transactions entered into by NCT to fund its business pursuits during the nine
months ended September 30, 2003 are described in the notes to the condensed
consolidated financial statements. We have been primarily dependant upon funding
from Carole Salkind. Although we do not have a formal agreement requiring her to
do so, we believe that Carole Salkind will continue to provide funds to NCT. Our
belief that funding from her will continue is based primarily upon her continued
funding of NCT during 2002 and 2003 despite NCT's failure to repay her notes as
the notes matured. Commencing January 2001, upon the maturity of Ms. Salkind's
initial note to NCT dated January 1999, NCT has established a history of
defaulting on the repayment of obligations owed to Carole Salkind as such
obligations become due. Ms. Salkind has allowed NCT to rollover maturing notes,
along with accrued interest and a default penalty (10% of the principal amount
in default), into new notes that generally mature six months from the date of
the rolled-over note. In addition to the financing provided by rolling over
maturing notes, Ms. Salkind has continued to provide NCT with new funds.
However, NCT has no legally binding assurance that Ms. Salkind will continue
funding NCT in the near-term or that the amount, timing and duration of funding
from her will be adequate to sustain our business operations.
31
At September 30, 2003, the company's cash and cash equivalents aggregated
$0.5 million. NCT's working capital deficit was $57.1 million at September 30,
2003, compared to a deficit of $51.4 million at December 31, 2002, a $5.7
million increase in working capital deficit. Current liabilities increased
primarily due to a $0.7 million reclassification and adjustment from additional
paid-in capital and minority interest in consolidated subsidiaries upon adoption
of SFAS No. 150 on July 1, 2003 and a net increase of convertible notes of $9.6
million (net of discounts), partially offset by the decrease in accrued expenses
for non-registration fees of $4.2 million. NCT is in default of $3.0 million of
its notes payable and $7.6 million of its convertible notes at September 30,
2003.
(in millions) New Defaults
Indebtedness Defaults Cured Indebtedness
In Default during during In Default
Notes Payable: 12/31/02 the period the period 09/30/03
-------------- ------------- ------------- ---------------
Obligation to prior owner
of Web Factory $ 2.4 (a) $ 0.1 (d) $ - $ 2.5 (a)
Top Source Automotive 0.2 (a) - (0.2) -
Former Employees / Other 0.3 (a) 0.4 (0.2) 0.5 (a)
-------------- ------------- ------------- ---------------
Subtotal $ 2.9 $ 0.5 $ (0.4) $ 3.0
-------------- ------------- ------------- ---------------
Convertible Notes:
Carole Salkind Notes $ 2.9 (b) $ 10.9 $ (9.7) $ 4.1
6% Notes 4.2 (a) - (1.7) 2.5 (a)
8% Notes 1.0 (c) - - 1.0 (c)
-------------- ------------- ------------- ---------------
Subtotal $ 8.1 $ 10.9 $ (11.4) $ 7.6
-------------- ------------- ------------- ---------------
Grand Total $ 11.0 $ 11.4 $ (11.8) $ 10.6
============== ============= ============= ===============
Footnotes:
(a) Default due to nonpayment.
(b) Default due to judgment in unrelated matter.
(c) Default due to cross default provision (default on other debt).
(d) Foreign exchange rate fluctuations.
Operating Activities
Net cash used in operating activities for the nine months ended September
30, 2003 was $7.7 million primarily due to funding the 2003 net loss, as
adjusted to reconcile to net cash. The operating cash flow characteristics of
our technology licensing efforts include the following:
o Our technology licensing activities have resulted in unpredictable streams
of revenue recognition, in part, due to the unpredictable timing of
executing new license agreements;
o Significant new license agreements usually result only after the
prospective licensee has made a lengthy review of our technologies;
o Receipt of licensing compensation and the related revenue recognition often
occur in different operating periods;
o From time to time, we accept licensing compensation in forms other than
cash, typically equity securities;
o Assets acquired in the past, as compensation for license agreements, have
lost value rapidly resulting in material write-offs;
o Most of our licensing agreements provide for one-time license fees and for
long-term royalty streams; and
o To date, most of our licensing activities have resulted in one-time
licensing fees and insignificant long-term royalty streams.
Our net accounts receivable increased to $0.4 million at September 30, 2003
from $0.2 million at December 31, 2002. The increase in net accounts receivable
was primarily due to an increase in technology licensing fees and royalties
receivable. This was primarily due to the increase in royalties receivable
related to Oki.
Our deferred revenue balance at September 30, 2003 was $4.3 million, $3.2
million of which was attributed to NXT and $0.5 million of which was attributed
to Fairpoint. We do not expect to realize any cash from our deferred revenue
balance. Our NXT deferred revenue balance originated at the value of the
securities received from our licensee, which was not realized in cash because
the value of the underlying securities declined before we sold
32
such securities.
Investing Activities
Net cash used in investing activities was $0.1 million for the nine-month
period ended September 30, 2003 due to the purchase of capital equipment. The
capital expenditures have been primarily for Artera Group as we expand the
Artera Turbo data centers in anticipation of future growth.
In addition to available cash and cash equivalents, the company views its
available-for-sale securities as additional sources of liquidity. At each of
September 30, 2003 and December 31, 2002, the company's available-for-sale
securities had approximate fair market values of $0.1 million. These securities
represent investments in technology companies and, accordingly, the fair market
values of these securities are subject to substantial price volatility. In
addition, the realizable value of these securities is subject to market and
other conditions.
Financing Activities
Net cash provided by financing activities was $7.5 million for the
nine-month period ended September 30, 2003 and was primarily due to the issuance
and sale of convertible notes.
At September 30, 2003, the company's short-term debt was $31.3 million,
(principally comprised of $28.1 million of outstanding convertible notes, net
and $3.2 million of outstanding notes payable), shown net of discounts of
approximately $2.6 million on the condensed consolidated balance sheet, compared
to $22.0 million of short-term debt at December 31, 2002. The increase in
short-term debt was primarily due to the issuance of debt to Carole Salkind. The
cash proceeds from debt issued in 2003 were primarily used for general corporate
purposes.
During the nine months ended September 30, 2003, NCT issued an aggregate of
$18.8 million of convertible notes to Carole Salkind, as consideration for $7.2
million of cash and the rollover of $9.7 million in principal of matured
convertible notes, $0.9 million of interest, and $1.0 million of default
penalties (10% of the principal amount in default).
As of September 30, 2003, we are in default on $10.6 million of our
indebtedness, including $3.0 million of notes payable and $7.6 million of
convertible notes (refer to Notes 5 and 6 - notes to the condensed consolidated
financial statements for disclosure of material defaults). NCT expects that from
time to time outstanding debt may be replaced with new short or long-term
borrowings. Although we believe that we can continue to access the capital
markets in 2003 on acceptable terms and conditions, our flexibility with regard
to long-term financing activity could be limited by: (i) the liquidity of our
common stock on the open market; (ii) our current level of short-term debt; and
(iii) our credit ratings. In addition, many of the factors that affect NCT's
ability to access the capital markets, such as the liquidity of the overall
capital markets and the current state of the economy, are outside of NCT's
control. There can be no assurances that NCT will continue to have access to the
capital markets on favorable terms.
From time to time, we may change the terms of options, warrants or other
securities. In some instances, this has been to generate cash.
The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
Capital Expenditures
NCT intends to continue its business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include:
o dependable sources of electronic and other components, which leverages on
their purchasing power, provides important cost savings and accesses the
most advanced technologies;
o utilization of the manufacturing capacity of our allies, enabling us to
integrate our technology into products with limited capital investment; and
o access to well-established channels of distribution and marketing
capability of leaders in several market segments.
33
At September 30, 2003, we have 35 of the 406 Barnes & Noble College
Bookstores operating our Sight & Sound(R) system and, as negotiated and as our
capital resources allow, may install the Sight & Sound(R) system in additional
stores. At September 30, 2003, we have a reasonable expectation of installing
our Sight & Sound(R) system within additional Barnes & Noble College Bookstores.
However, our average cost for outfitting a store is approximately $18,000 and we
have not identified the source of funding to proceed with these installations.
We have no assurance that sufficient capital will become available.
Other than this, there were no material commitments for capital
expenditures as of September 30, 2003, and no material commitments are
anticipated in the near future.
ITEM 3. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NCT's primary market risk exposures include fluctuations in interest rates
and foreign exchange rates. NCT is exposed to interest rate risk on some of its
obligations. We do not use derivative financial instruments to hedge cash flows
for such obligations. In the normal course of business, NCT employs established
policies and procedures to manage these risks.
Based upon a hypothetical 10% proportionate increase in interest rates from
the average level of interest rates during the last twelve months, and taking
into consideration commissions paid to selling agents, growth of new business
and the expected borrowing level of variable-rate debt, the expected effect on
net income related to our financial instruments would be immaterial.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the company carried
out an evaluation, under the supervision and with the participation of the
company's management, including the company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon that evaluation, the
company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
company (including its consolidated subsidiaries) required to be included in
this quarterly report on Form 10-Q.
(b) Changes in Internal Controls
There were no significant changes in the company's internal controls or in
other factors that could significantly affect
these controls subsequent to the date of their evaluation.
34
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of our legal proceedings, see Note 12 - Litigation
included in the notes to the condensed consolidated financial statements herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities by NCT Group, Inc. and its
Subsidiaries
The table below identifies the unregistered sales of our securities to
purchasers from January 1, 2003 through September 30, 2003, as well as the
amount and nature of the consideration paid by each purchaser. The issuance of
these securities, except as otherwise indicated, was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, as a sale by an issuer
not involving a public offering.
- -------------------------------------------------------------------- ------------------------------------- -------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- -------------------------------------------------------------------- ------------------------------------- -------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/15/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/15/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.041 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/23/03 NCT Convertible Note ($2,747,634.92 principal Carole Salkind Cancellation and
amount) surrender of
$2,231,265.04 convertible
note dated 1/11/02 along
with accrued interest and
default penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/23/03 Warrant for 11,775,579 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.04 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/23/03 Options to acquire 23,000,000 shares of NCT common Inframe, Inc. Exercisable for cash at
stock $0.042 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/30/03 NCT Convertible Note ($350,000 principal amount) Carole Salkind $350,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
1/30/03 Warrant for 1,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.041 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
2/11/03 NCT Convertible Note ($1,252,592.41 principal Carole Salkind Cancellation and
amount) surrender of $650,000
convertible note dated
1/25/02 along with
accrued interest and
default penalty and
$450,000 cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
2/11/03 Warrant for 5,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.04 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
2/11/03 Options to acquire 7,000,000 shares of NCT common Avant Interactive, Inc. Exercisable for cash at
stock $0.04 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/4/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/4/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.035 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/5/03 3,033,981 shares of NCT common stock Balmore S.A. Exchange for $125,000
Artera Group, Inc.
January 9, 2001
convertible note
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/12/03 Options to acquire 13,500,000 shares of NCT common Avant Interactive, Inc. Exercisable for cash at
stock $0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
35
- -------------------------------------------------------------------- ------------------------------------- -------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- -------------------------------------------------------------------- ------------------------------------- -------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/13/03 NCT Convertible Note ($980,802.25 principal amount) Carole Salkind Cancellation and
surrender of $827,412.26
convertible note dated
2/27/02 along with
accrued interest and
default penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/13/03 NCT Convertible Note ($864,615.56 principal amount) Carole Salkind Cancellation and
surrender of $350,000
convertible note dated
3/1/02 along with accrued
interest and default
penalty and $450,000 cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/13/03 Warrant for 4,250,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
3/13/03 Warrant for 3,750,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/1/03 1,248,170 shares of NCT common stock (exempt under West Nursery Land Holding Limited Settlement of legal actio
Section 3(a)(10) of the Securities Act of 1933) Partnership
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/2/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/2/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.029 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/3/03 Options to acquire 2,000,000 shares of NCT common Avant Interactive, Inc. Exercisable for cash at
stock $0.029 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/7/03 1,158,940 shares of NCT common stock Balmore S.A. Exchange for $35,000
Artera Group, Inc.
January 9, 2001
convertible note
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/11/03 2,321,263 shares of NCT common stock Mesa Partners, Inc. Settlement of legal
action
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/11/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/11/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/11/03 Options to acquire 2,000,000 shares of NCT common Avant Interactive, Inc. Exercisable for cash at
stock $0.031 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/15/03 3,164,556 shares of NCT common stock Alpha Capital Aktiengesellschaft Exchange for $100,000
Artera Group, Inc. April
4, 2001 convertible note
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/17/03 Options to acquire 2,000,000 shares of NCT common Turbo Networks, Inc. Exercisable for cash at
stock $0.037 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/21/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/21/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.037 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/22/03 NCT Convertible Note ($235,000 principal amount) Alpha Capital Aktiengesellschaft $235,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
4/30/03 3,703,704 shares of NCT common stock Alpha Capital Aktiengesellschaft Exchange for $200,000
Artera Group, Inc. April
4, 2001 convertible note
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/8/03 28,000,000 shares of NCT common stock (exempt Crammer Road LLC Settlement of legal
under Section 3(a)(10) of the Securities Act of action
1933)
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/15/03 NCT Convertible Note ($450,000 principal amount) Carole Salkind $450,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/15/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.046 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
36
- -------------------------------------------------------------------- ------------------------------------- -------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- -------------------------------------------------------------------- ------------------------------------- -------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/22/03 Options to acquire 18,550,000 shares of NCT common Turbo Networks, Inc. Exercisable for cash at
stock $0.042 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/22/03 NCT Convertible Note ($1,692,462.74 principal Carole Salkind Cancellation and
amount) surrender of $1,425,000
convertible note dated
5/2/02 along with accrued
interest and default
penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/22/03 Warrant for 7,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.042 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/28/03 NCT Convertible Note ($415,000 principal amount) Carole Salkind $415,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
5/28/03 Warrant for 1,900,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.044 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/05/03 Warrant for 2,250,000 shares of NCT common stock NATCO, LLC Exercisable for cash at
$0.048 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 NCT Convertible Note ($2,449,811.87 principal Carole Salkind Cancellation and
amount) surrender of $1,463,449,
$350,000, and $300,000
convertible notes dated
11/21/02, 5/29/02 and
6/2/02, respectively,
along with accrued
interest and default
penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 Warrant for 10,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.044 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 NCT Convertible Note ($435,000 principal amount) Carole Salkind $435,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.044 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/12/03 Options to acquire 23,000,000 shares of NCT common Maple Industries, Inc. Exercisable for cash at
stock $0.044 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/28/03 NCT Convertible Note ($410,000 principal amount) Carole Salkind $410,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/28/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.038 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
6/28/03 Options to acquire 2,000,000 shares of NCT common Turbo Networks, Inc Exercisable for cash at
stock $0.04 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/03/03 5,142,297 shares of NCT common stock Crammer Road LLC Conversion of 14 shares
of NCT series H preferred
stock
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/14/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.0312 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/14/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.0312 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/14/03 Warrant for 750,000 shares of NCT common stock John Harris (as designee for Stop Exercisable for cash at
Noise, Inc.) $0.0312 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/14/03 Option to acquire 25,000,000 shares of NCT common Acme Associates, Inc. Exercisable for cash at
stock $0.0312 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/14/03 NCT Convertible Note ($410,000 principal amount) Carole Salkind $410,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/14/03 NCT Convertible Note ($414,480.93 principal amount) Carole Salkind Cancellation and
surrender of $350,000
convertible note dated
7/3/02 along with accrued
interest and default
penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
37
- -------------------------------------------------------------------- ------------------------------------- -------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- -------------------------------------------------------------------- ------------------------------------- -------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/15/03 5,368,098 shares of NCT common stock Balmore S.A. Exchange of $175,000
1/9/01 Artera convertible
notes
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/28/03 NCT Convertible Note ($414,750.19 principal amount) Carole Salkind Cancellation and
surrender of $350,000
convertible note dated
7/15/02 along with
accrued interest and
default penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/28/03 NCT Convertible Note ($410,000 principal amount) Carole Salkind $410,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/28/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.042 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/28/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.042 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/28/03 5,924,171 shares of NCT common stock Alpha Capital Aktiengesellschaft Exchange of $250,000
4/4/01 Artera convertible
notes
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/28/03 4,739,336 shares of NCT common stock Balmore S.A. Exchange of $200,000
1/9/01 Artera convertible
notes
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/31/03 7,000,000 shares of NCT common stock Balmore S.A. Exchange of $312,200
1/9/01 Artera convertible
notes
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
7/31/03 8,000,000 shares of NCT common stock Austost Anstalt Schaan Exchange of $356,800
1/9/01 Artera convertible
notes
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/07/03 NCT Convertible Note ($622,529.18 principal amount) Carole Salkind Cancellation and
surrender of $525,000
convertible note dated
7/23/02 along with
accrued interest and
default penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/07/03 Warrant for 2,750,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.0539 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/18/03 NCT Convertible Note ($425,000 principal amount) Carole Salkind $425,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/18/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.045 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/22/03 15,080,938 shares of NCT common stock Crammer Road LLC Conversion of 51 shares
of NCT series H preferred
stock
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/28/03 NCT Convertible Note ($414,884.82 principal amount) Carole Salkind Cancellation and
surrender of $350,000
convertible note dated
8/14/02 along with
accrued interest and
default penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/28/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.055 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/28/03 NCT Convertible Note ($375,000 principal amount) Carole Salkind $375,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
8/28/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.055 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/04/03 NCT Convertible Notes ($440,000 aggregate Alpha Capital Aktiengesellschaft $390,000 in cash
principal amount) Libra Finance S.A. (as finder)
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
38
- -------------------------------------------------------------------- ------------------------------------- -------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- -------------------------------------------------------------------- ------------------------------------- -------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/04/03 Cancellation of 2,500,000 shares from the December Alpha Capital Aktiengesellschaft 12,500,000 shares of the
6, 2002 Warrant for 15,000,000 shares of NCT December 6, 2002 warrant
common stock vested on May 30, 2003
and remain in force. The
remaining 2,500,000
shares of the December 6,
2002 warrant vested on
May 30, 2003 and are
cancelled on September 4,
2003.
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/11/03 NCT Convertible Note ($580,650.27 principal amount) Carole Salkind Cancellation and
surrender of $490,000
convertible note dated
8/29/02 along with
accrued interest and
default penalty
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/11/03 Warrant for 2,500,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.050 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/11/03 Warrant for 7,500,000 shares of NCT common stock Acme Associates, Inc. Exercisable for cash at
$0.052 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/12/03 NCT Convertible Note ($400,000 principal amount) Carole Salkind $400,000 in cash
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/12/03 Warrant for 2,000,000 shares of NCT common stock Carole Salkind Exercisable for cash at
$0.050 per share
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/18/03 14,109,883 shares of NCT common stock (exempt Alpha Capital Aktiengesellschaft Settlement of legal
under Section 3(a) (10) of the Securities Act of action
1933)
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/18/03 20,868,729 shares of NCT common stock (exempt Austost Anstalt Schaan Settlement of legal
under Section 3(a) (10) of the Securities Act of action
1933)
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/18/03 21,076,266 shares of NCT common stock (exempt Balmore S.A. Settlement of legal
under Section 3(a) (10) of the Securities Act of action
1933)
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/18/03 5,721,189 shares of NCT common stock (exempt Libra Finance S.A. Settlement of legal
under Section 3(a) (10) of the Securities Act of action
1933)
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
9/22/03 2,834,526 shares of NCT common stock Crammer Road LLC Conversion of 10 shares
of NCT series H preferred
stock
- --------------- ---------------------------------------------------- ------------------------------------- -------------------------
39
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3(a) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series H Convertible Preferred Stock of NCT Group, Inc.
as filed in the office of the Secretary of State of the State of
Delaware on March 7, 2003, incorporated herein by reference to Exhibit
3(a) of the company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 filed on May 15, 2003.
4(a) Letter Agreement dated as of June 28, 2002 amending exercise price of
warrant dated October 25, 2001 for the purchase of 20,000,000 shares
of NCT common stock to the lesser of $0.07 or the lowest closing bid
price between January 10, 2002 and June 28, 2003 inclusive,
incorporated herein by reference to Exhibit 4(i)(3) to NCT's
Pre-Effective Amendment No. 8 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on September 16, 2003.
4(b) Letter Agreement dated as of June 28, 2002 amending exercise price of
warrant dated January 10, 2002 for the purchase of 5,000,000 shares of
NCT common stock to the lesser of $0.07 or the lowest closing bid
price between January 10, 2002 and June 28, 2003 inclusive,
incorporated herein by reference to Exhibit 4(i)(3) to NCT's
Pre-Effective Amendment No. 8 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on September 16, 2003.
4(c) Warrant dated December 11, 2002 issued to KEQ Partners III (as
designee for Kalkines, Arky Zall & Bernstein LLP, HealthNet
Connections LLC and HNC New York Representatives LLC) for the purchase
of 1,250,000 shares of NCT common stock at a purchase price of $0.063
per share, incorporated herein by reference to Exhibit 4(a) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(d) Warrant dated January 15, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.041 per share, incorporated herein by reference to Exhibit 4(by)
to NCT's Pre-Effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(e) Option granted to Inframe, Inc. dated January 23, 2003 for the
purchase of 23,000,000 shares of NCT common stock at an exercise price
of $0.042 per share, incorporated herein by reference to Exhibit 4
(bo) of the company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed on April 4, 2003.
4(f) Warrant dated January 23, 2003 issued to Carole Salkind for the
purchase of 11,775,579 shares of NCT common stock at a purchase price
of $0.04 per share, incorporated herein by reference to Exhibit 4(bz)
to NCT's Pre-Effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(g) Warrant dated January 30, 2003 issued to Carole Salkind for the
purchase of 1,500,000 shares of NCT common stock at a purchase price
of $0.041 per share, incorporated herein by reference to Exhibit 4(ca)
to NCT's Pre-Effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
4(h) Option granted to Avant Interactive, Inc. dated February 11, 2003 for
the purchase of 7,000,000 shares of NCT common stock at an exercise
price of $0.04 per share, incorporated herein by reference to Exhibit
4 (bp) of the company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed on April 4, 2003.
4(i) Warrant dated February 11, 2003 issued to Carole Salkind for the
purchase of 5,500,000 shares of NCT common stock at a purchase price
of $0.04 per share, incorporated herein by reference to Exhibit 4(cb)
to NCT's Pre-Effective Amendment No. 7 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on April 18, 2003.
40
4(j) Warrant dated March 4, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.035
per share, incorporated herein by reference to Exhibit 4(cc) to NCT's
Pre-Effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(k) Option granted to Avant Interactive, Inc. dated March 12, 2003 for the
purchase of 13,500,000 shares of NCT common stock at an exercise price
of $0.031 per share, incorporated herein by reference to Exhibit 4
(bq) of the company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed on April 4, 2003.
4(l) Warrant dated March 13, 2003 issued to Carole Salkind for the purchase
of 4,250,000 shares of NCT common stock at a purchase price of $0.031
per share, incorporated herein by reference to Exhibit 4(cd) to NCT's
Pre-Effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(m) Warrant dated March 13, 2003 issued to Carole Salkind for the purchase
of 3,750,000 shares of NCT common stock at a purchase price of $0.031
per share, incorporated herein by reference to Exhibit 4(ce) to NCT's
Pre-Effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(n) Warrant dated April 2, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.029
per share, incorporated herein by reference to Exhibit 4(cf) to NCT's
Pre-Effective Amendment No. 7 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on April 18, 2003.
4(o) Option granted to Avant Interactive, Inc. dated April 3, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.029 per share, incorporated herein by reference to Exhibit 4(m)
of the company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 filed on August 14, 2003.
4(p) Letter Agreement dated April 7, 2003 amending the vesting terms of a
December 6, 2002 warrant for 15,000,000 shares issued to Alpha Capital
Aktiengesellschaft, incorporated herein by reference to Exhibit 4(l)
of the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 filed on May 15, 2003.
4(q) Warrant dated April 11, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.031
per share, incorporated herein by reference to Exhibit 4(m) of the
company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2003 filed on May 15, 2003.
4(r) Option granted to Avant Interactive, Inc. dated April 11, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.031 per share, incorporated herein by reference to Exhibit 4(o)
of the company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 filed on August 14, 2003.
4(s) Option granted to Turbo Networks, Inc. dated April 17, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.037 per share, incorporated herein by reference to Exhibit 4(q)
of the company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 filed on August 14, 2003.
4(t) Warrant dated April 21, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.037
per share, incorporated herein by reference to Exhibit 4(n) of the
company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2003 filed on May 15, 2003.
41
4(u) Warrant dated May 15, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.046
per share, incorporated herein by reference to Exhibit 4(s) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(v) Option granted to Turbo Networks, Inc. dated May 22, 2003 for the
purchase of 18,550,000 shares of NCT common stock at an exercise price
of $0.042 per share, incorporated herein by reference to Exhibit 4(t)
of the company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 filed on August 14, 2003.
4(w) Warrant dated May 22, 2003 issued to Carole Salkind for the purchase
of 7,500,000 shares of NCT common stock at a purchase price of $0.042
per share, incorporated herein by reference to Exhibit 4(u) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(x) Warrant dated May 28, 2003 issued to Carole Salkind for the purchase
of 1,900,000 shares of NCT common stock at a purchase price of $0.044
per share, incorporated herein by reference to Exhibit 4(v) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(y) Warrant dated June 5, 2003 issued to NATO, LLC for the purchase of
2,250,000 shares of NCT common stock at a purchase price of $0.048 per
share, incorporated herein by reference to Exhibit 4(w) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(z) Warrant dated June 12, 2003 issued to Carole Salkind for the purchase
of 10,500,000 shares of NCT common stock at a purchase price of $0.044
per share, incorporated herein by reference to Exhibit 4(y) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(aa) Warrant dated June 12, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.044
per share, incorporated herein by reference to Exhibit 4(z) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(ab) Option granted to Maple Industries, Inc. dated June 12, 2003 for the
purchase of 23,000,000 shares of NCT common stock at an exercise price
of $0.044 per share, incorporated herein by reference to Exhibit 4(x)
of the company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 filed on August 14, 2003.
4(ac) Warrant dated June 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.038
per share, incorporated herein by reference to Exhibit 4(ab) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(ad) Option granted to Turbo Networks, Inc. dated June 28, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.04 per share, incorporated herein by reference to Exhibit 4(aa)
of the company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 filed on August 14, 2003.
4(ae) Warrant dated July 14, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.0312
per share, incorporated herein by reference to Exhibit 4(ad) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(af) Warrant dated July 14, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.0312
per share, incorporated herein by reference to Exhibit 4(ae) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
42
4(ag) Warrant dated July 14, 2003 issued to John Harris (as designee for
Stop Noise, Inc.) for the purchase of 750,000 shares of NCT common
stock at a purchase price of $0.0312 per share, incorporated herein by
reference to Exhibit 4(ac) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 filed on August 14, 2003.
4(ah) Option granted to Acme Associates, Inc. dated July 14, 2003 for the
purchase of 25,000,000 shares of NCT common stock at an exercise price
of $0.0312 per share, incorporated herein by reference to Exhibit
4(cm) to NCT's Pre-Effective Amendment No. 8 to Registration Statement
on Form S-1 (Registration No. 333-60574) filed on September 16, 2003.
4(ai) Warrant dated July 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.042
per share, incorporated herein by reference to Exhibit 4(af) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
4(aj) Warrant dated July 28, 2003 issued to Carole Salkind for the purchase
of 2,000,000 shares of NCT common stock at a purchase price of $0.042,
incorporated herein by reference to Exhibit 4(ag) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
4(ak) Warrant dated August 7, 2003 issued to Carole Salkind for the
purchase of 2,750,000 shares of NCT common stock at a purchase price
of $0.0539 per share, incorporated herein by reference to Exhibit
4(co) to NCT's Pre-Effective Amendment No. 8 to Registration Statement
on Form S-1 (Registration No. 333-60574) filed on September 16, 2003.
4(al) Warrant dated August 18, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.045 per share, incorporated herein by reference to Exhibit 4(cp)
to NCT's Pre-Effective Amendment No. 8 to Registration Statement on
Form S-1 (Registration No. 333-60574) filed on September 16, 2003.
4(am) Warrant dated August 28, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.055 per share, incorporated herein by reference to Exhibit
4(cq)(1) to NCT's Pre-Effective Amendment No. 8 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on September
16, 2003.
4(an) Warrant dated August 28, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.055 per share, incorporated herein by reference to Exhibit
4(cq)(2) to NCT's Pre-Effective Amendment No. 8 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on September
16, 2003.
4(ao) Option granted to Acme Associates, Inc. dated September 11, 2003 for
the purchase of 7,500,000 shares of NCT common stock at an exercise
price of $0.052 per share.
4(ap) Warrant dated September 11, 2003 issued to Carole Salkind for the
purchase of 2,500,000 shares of NCT common stock at a purchase price
of $0.05 per share.
4(aq) Warrant dated September 12, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.05 per share.
4(ar) Warrant dated October 2, 2003 issued to Carole Salkind for the
purchase of 4,000,000 shares of NCT common stock at a purchase price
of $0.043 per share.
4(as) Option granted to Acme Associates, Inc. dated October 3, 2003 for the
purchase of 5,750,000 shares of NCT common stock at an exercise price
of $0.043 per share.
4(at) Option granted to Acme Associates, Inc. dated October 14, 2003 for
the purchase of 44,000,000 shares of NCT common stock at an exercise
price of $0.044 per share.
43
4(au) Warrant dated October 14, 2003 issued to Carole Salkind for the
purchase of 19,250,000 shares of NCT common stock at a purchase price
of $0.044 per share.
4(av) Warrant dated October 14, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.044 per share.
4(aw) Warrant dated November 3, 2003 issued to Carole Salkind for the
purchase of 2,000,000 shares of NCT common stock at a purchase price
of $0.044 per share.
4(ax) Option granted to Acme Associates, Inc dated November 3, 2003 for the
purchase of 2,000,000 shares of NCT common stock at an exercise price
of $0.045 per share.
10(a) License Agreement dated August 10, 2001 between the company and Sharp
Corporation, acting through its Communication Systems Group and NCT
Group, Inc., incorporated herein by reference to Exhibit 10(a) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
10(b) Exclusive Marketing License Agreement dated October 11, 2002 between
FairPoint Broadband, Inc. and Artera Group, Inc.
10(c) License Agreement dated August 15, 2002 between Fairport
Communications, Inc. and Artera Group, Inc., incorporated herein by
reference to Exhibit 10(b) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 filed on August 14, 2003.
10(d) Settlement Agreement dated December 11, 2002 among Kalkines, Arky
Zall & Bernstein LLP, HealthNet Connections LLC and HNC New York
Representatives LLC, the company, Distributed Media Corporation and
DMC HealthMedia Inc., incorporated herein by reference to Exhibit
10(bm) to NCT's Pre-Effective Amendment No. 8 to Registration
Statement on Form S-1 (Registration No. 333-60574) filed on September
16, 2003.
10(e) License Agreement dated January 6, 2003 (October 1, 2002 was the date
inadvertently indicated on our Form 10-K) between NCT Group, Inc. and
Stop Noise, Inc., incorporated herein by reference to Exhibit 10(aj)
of the company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed on April 4, 2003.
10(f) Secured Convertible Note in principal amount of $450,000 dated
January 15, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(at) of the company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed on April 4,
2003.
10(g) Secured Convertible Note in principal amount of $2,747,634.92 dated
January 23, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(au) of the company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed on April 4,
2003.
10(h) Consulting Agreement dated January 23, 2003 between the company and
Inframe, Inc., incorporated herein by reference to Exhibit 10(f) of
the company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003 filed on August 14, 2003.
10(i) Secured Convertible Note in principal amount of $350,000 dated
January 30, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(av) of the company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed on April 4,
2003.
10(j) Secured Convertible Note in principal amount of $1,252,592.41 dated
February 11, 2003 issued by the company to Carole Salkind,
incorporated herein by reference to Exhibit 10(aw) of the company's
Annual Report on Form 10-K for the year ended December 31, 2002 filed
on April 4, 2003.
44
10(k) Consulting Agreement dated February 11, 2003 between the company and
Avant Interactive, Inc. and amendments thereto dated March 12, 2003,
April 3, 2003 and April 11, 2003, incorporated herein by reference to
Exhibit 10(i) of the company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 filed on August 14, 2003.
10(l) Settlement Agreement dated December 31, 2002 between West Nursery
Land Holding Limited Partnership and the company approved by the court
on March 3, 2003, incorporated herein by reference to Exhibit 10(f) of
the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 filed on May 15, 2003.
10(m) Secured Convertible Note in principal amount of $450,000 dated March
4, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(ax) of the company's Annual Report on Form
10-K for the year ended December 31, 2002 filed on April 4, 2003.
10(n) Secured Convertible Note in principal amount of $980,802.25 dated
March 13, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(ay) of the company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed on April 4,
2003.
10(o) Secured Convertible Note in principal amount of $864,615.56 dated
March 13, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(az) of the company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed on April 4,
2003.
10(p) Secured Convertible Note in principal amount of $450,000 dated April
2, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(cr) to NCT's Pre-Effective Amendment No. 7
to Registration Statement on Form S-1 (Registration No. 333-60574)
filed on April 18, 2003.
10(q) Settlement Agreement dated December 3, 2002 among Mesa Partners,
Inc., the company, and Distributed Media Corporation approved by the
court on April 8, 2003, incorporated herein by reference to Exhibit
10(k) of the company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 filed on May 15, 2003.
10(r) Exchange Rights and Release Agreement dated April 10, 2003 among the
company, Pro Tech Communications, Inc., Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore, S.A., and Libra
Finance, S.A., incorporated herein by reference to Exhibit 10(l) of
the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 filed on May 15, 2003.
10(s) Secured Convertible Note in principal amount of $450,000 dated April
11, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(m) of the company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003.
10(t) Consulting Agreement dated April 17, 2003 between the company and
Turbo Networks, Inc. and amendments thereto dated May 22, 2003 and
June 28, 2003, incorporated herein by reference to Exhibit 10(r) of
the company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003 filed on August 14, 2003.
10(u) Secured Convertible Note in principal amount of $450,000 dated April
21, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(n) of the company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003.
10(v) Subscription Agreement dated April 22, 2003 between the company and
Alpha Capital Aktiengesellschaft, incorporated herein by reference to
Exhibit 10(u) of the company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 filed on August 14, 2003.
10(w) Convertible Note in principal amount of $235,000 dated April 22, 2003
issued by the company to Alpha Capital Aktiengesellschaft,
incorporated herein by reference to Exhibit 10(t) of the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
filed on August 14, 2003.
45
10(x) Secured Convertible Note in principal amount of $450,000 dated May
15, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(v) of the company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 filed on August 14,
2003.
10(y) Secured Convertible Note in principal amount of $1,692,462.74 dated
May 22, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(w) of the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003 filed on August 14,
2003.
10(z) Memorandum of Understanding dated May 23, 2003 between Fairpoint
Broadband, Inc. and Artera Group, Inc., incorporated herein by
reference to Exhibit 10(x) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 filed on August 14, 2003
10(aa) Secured Convertible Note in principal amount of $415,000 dated May
28, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(y) of the company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 filed on August 14,
2003.
10(ab) Secured Convertible Note in principal amount of $2,449,811.87 dated
June 12, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(z) of the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003 filed on August 14,
2003.
10(ac) Secured Convertible Note in principal amount of $435,000 dated June
12, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(aa) of the company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 filed on August 14,
2003.
10(ad) Consulting Agreement dated June 12, 2003 between the company and
Maple Industries, Inc., incorporated herein by reference to Exhibit
10(ab) of the company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003 filed on August 14, 2003
10(ae) Secured Convertible Note in principal amount of $410,000 dated June
28, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(ac) of the company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 filed on August 14,
2003.
10(af) Secured Convertible Note in principal amount of $410,000 dated July
14, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(ad) of the company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 filed on August 14,
2003.
10(ag) Secured Convertible Note in principal amount of $414,480.93 dated
July 14, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(ae) of the company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 filed on
August 14, 2003.
10(ah) Amendment dated July 14, 2003 to Acme Associates, Inc. Consulting
Agreement, incorporated herein by reference to Exhibit 10(cr) to NCT's
Pre-Effective Amendment No. 8 to Registration Statement on Form S-1
(Registration No. 333-60574) filed on September 16, 2003.
10(ai) Secured Convertible Note in principal amount of $414,750.19 dated
July 28, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(ag) of the company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 filed on
August 14, 2003.
10(aj) Secured Convertible Note in principal amount of $410,000 dated July
28, 2003 issued by the company to Carole Salkind, incorporated herein
by reference to Exhibit 10(af) of the company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 filed on August 14,
2003.
10(ak) Secured Convertible Note in principal amount of $622,529.18 dated
August 7, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(cu) to NCT's Pre-Effective Amendment
No. 8 to Registration Statement on Form S-1 (Registration No.
333-60574) filed on September 16, 2003.
46
10(al) Secured Convertible Note in principal amount of $425,000 dated
August 18, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(cv) to NCT's Pre-Effective Amendment
No. 8 to Registration Statement on Form S-1 (Registration No.
333-60574) filed on September 16, 2003.
10(am) Secured Convertible Note in principal amount of $414,884.82 dated
August 28, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(cw) to NCT's Pre-Effective Amendment
No. 8 to Registration Statement on Form S-1 (Registration No.
333-60574) filed on September 16, 2003.
10(an) Secured Convertible Note in principal amount of $375,000 dated
August 28, 2003 issued by the company to Carole Salkind, incorporated
herein by reference to Exhibit 10(cx) to NCT's Pre-Effective Amendment
No. 8 to Registration Statement on Form S-1 (Registration No.
333-60574) filed on September 16, 2003.
10(ao) Reseller Agreement dated September 1, 2003 between Artera Group,
Inc. and Spyder Technologies Group, LLC.
10(ap) Master Distributor Agreement dated September 1, 2003 between Artera
Group, Inc. and Spyder Technologies Group, LLC.
10(aq) Amendments dated September 11, 2003, October 3, 2003 and October 14,
2003 to Consulting Agreement dated September 30, 2002 between the
company and Acme Associates, Inc.
10(ar) Secured Convertible Note in principal amount of $580,650.27 dated
September 11, 2003 issued by the company to Carole Salkind.
10(as) Secured Convertible Note in principal amount of $400,000.00 dated
September 12, 2003 issued by the company to Carole Salkind.
10(at) Secured Convertible Note in principal amount of $816,096.49 dated
October 2, 2003 issued by the company to Carole Salkind.
10(au) Secured Convertible Note in principal amount of $4,469,018.84 dated
October 14, 2003 issued by the company to Carole Salkind.
10(av) Secured Convertible Note in principal amount of $400,000.00 dated
October 14, 2003 issued by the company to Carole Salkind.
10(aw) Secured Convertible Note in principal amount of $400,000.00 dated
November 3, 2003 issued by the company to Carole Salkind.
10(ax) Amendment dated November 3, 2003 to Consulting Agreement dated
September 30, 2002 between the company and Acme Associates, Inc.
10(ay) Settlement Agreement dated April 7, 2003 among Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore, S.A., Libra
Finance, S.A., the company and Artera Group, Inc., approved by the
court on September 16, 2003.
10(az) Consulting Agreement dated July 2, 2003 between the company and
SpringerRun, Inc.
31(a) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30,
2003, incorporated herein by reference to Exhibit 31(a) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
31(b) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30,
2003, incorporated herein by reference to Exhibit 31(b) of the
company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003.
47
31(c) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended
September 30, 2003.
31(d) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended
September 30, 2003.
32(a) Certification of Form 10-Q for the quarterly period ended March 31,
2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, incorporated herein by
reference to Exhibit 99(a) of the company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 filed on May 15, 2003.
32(b) Certification of Form 10-Q for the quarterly period ended June 30,
2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, incorporated herein by
reference to Exhibit 32(b) of the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 filed on August 14, 2003.
32(c) Certification of Form 10-Q for the quarterly period ended September
30, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
___________________________________
(b) Reports filed on Form 8-K:
On April 4, 2003, the company filed a report on Form 8-K, dated April
4, 2003 disclosing financial results for the quarter and year ended
December 31, 2002.
On May 5, 2003, the company filed a report on Form 8-K, dated April
21, 2003 disclosing the agreement between our subsidiary Artera Group,
Inc. and Avaya Inc.
48
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 19, 2003
49