UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
--------------
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 May 13, 2004, was
641,970,392.
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at December 31, 2003 and March 31, 2004 (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited) and Condensed Consolidated
Statements of Comprehensive Loss (Unaudited) for the Three Months
Ended March 31, 2003 and 2004 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2003 and 2004 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative or Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
Part II Other Information
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 30
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, March 31,
2003 2004
--------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 988 $ 747
Investment in available-for-sale marketable securities 49 88
Accounts receivable, net 255 318
Inventories, net 509 480
Other current assets (includes $138 and $108, respectively, due from officers) 310 345
--------------- --------------
Total current assets 2,111 1,978
Property and equipment, net 641 584
Goodwill, net 7,184 7,184
Patent rights and other intangibles, net 1,223 1,170
Other assets 1,616 272
--------------- --------------
$ 12,775 $ 11,188
=============== ==============
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 2,905 $ 3,907
Accrued expenses (includes $1,128 and $1,556, respectively, related parties) 13,799 14,703
Notes payable 3,403 3,483
Related party convertible notes (due to a stockholder) 28,650 34,779
Current maturities of convertible notes 3,438 3,450
Deferred revenue 2,763 2,782
Shares of subsidiary subject to exchange into a variable number of shares 742 748
Other current liabilities 7,227 7,219
--------------- --------------
Total current liabilities 62,927 71,071
--------------- --------------
Long-term liabilities:
Deferred revenue 535 -
Convertible notes 675 675
Other liabilities 1,536 96
--------------- --------------
Total long-term liabilities 2,746 771
--------------- --------------
Commitments and contingencies
Minority interest in consolidated subsidiaries 8,313 8,395
--------------- --------------
Capital deficit:
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Convertible series H preferred stock, issued and outstanding, 1,725 shares,
(redemption amount $20,700,000) (liquidation amount $18,300,822
and $18,472,849, respectively) 18,301 18,473
Common stock, $.01 par value, authorized 645,000,000 shares:
issued and outstanding, 641,970,392 shares 6,420 6,420
Additional paid-in capital 205,102 212,973
Accumulated other comprehensive loss (1,170) (1,311)
Accumulated deficit (289,864) (305,604)
Common shares payable, 3,029,608 shares - -
--------------- --------------
Total capital deficit (61,211) (69,049)
--------------- --------------
$ 12,775 $ 11,188
=============== ==============
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 March 31,
---------------------------------
2003 2004
------------- ------------
REVENUE:
Technology licensing fees and royalties $ 706 $ 721
Product sales, net 467 441
Advertising 9 32
------------- ------------
Total revenue 1,182 1,194
------------- ------------
COSTS AND EXPENSES:
Cost of product sales 208 239
Cost of advertising 3 4
Selling, general and administrative 3,572 2,088
Research and development 929 1,070
------------- ------------
Total operating costs and expenses 4,712 3,401
Non-operating items:
Other expense, net 390 1,247
Interest expense, net 2,867 12,286
------------- ------------
Total costs and expenses 7,969 16,934
------------- ------------
NET LOSS $ (6,787) $ (15,740)
Less: Preferred stock dividend 264 255
Non-registration charges related to preferred stock of subsidiary 699 146
------------- ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (7,750) $ (16,141)
============= ============
Basic and diluted loss per share attributable to
common shareholders $ (0.02) $ (0.03)
============= ============
Weighted average common shares outstanding -
basic and diluted 513,633 645,000
============= ============
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three months ended March 31,
------------------------------
2003 2004
------------- ------------
NET LOSS $ (6,787) $ (15,740)
Other comprehensive income (loss):
Currency translation adjustment 6 (167)
Adjustment of unrealized loss/unrealized gain on marketable securities 1 26
------------- ------------
COMPREHENSIVE LOSS $ (6,780) $ (15,881)
============= ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Unaudited)
(in thousands)
Three months ended March 31,
-------------------------------
2003 2004
-------------- -------------
Cash flows from operating activities:
Net loss $ (6,787) $ (15,740)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 232 114
Common stock, warrants and options issued as consideration for:
Operating expenses 1,228 64
Provision for inventory (75) (28)
Provision for doubtful accounts and uncollectible amounts 7 (17)
Loss on disposition of fixed assets 33 -
Finance costs associated with non-registration of common shares 729 175
Preferred stock dividends as interest - 5
Default penalty on notes (related party) 118 1,116
Amortization of discounts on notes (includes $1,104 and $5,443,
respectively with related parties) 1,137 5,443
Amortization of beneficial conversion feature on convertible notes (includes
$834 and $5,878, respectively with related parties) 874 5,889
Settlement of debt (224) -
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (180) (46)
Decrease in inventories 127 57
Decrease (increase) in other assets 26 (11)
Increase in accounts payable and accrued expenses 543 1,949
Decrease in other liabilities and deferred revenue (153) (538)
-------------- -------------
Net cash used in operating activities $ (2,365) $ (1,568)
-------------- -------------
Cash flows from investing activities:
Capital expenditures $ (23) $ (3)
-------------- -------------
Net cash used in investing activities $ (23) $ (3)
-------------- -------------
Proceeds from:
Convertible notes and notes payable, net $ 2,150 $ 1,425
Repayment of notes (239) (26)
-------------- -------------
Net cash provided by financing activities $ 1,911 $ 1,399
-------------- -------------
Effect of exchange rate changes on cash $ 6 $ (69)
-------------- -------------
Net decrease in cash and cash equivalents (471) (241)
Cash and cash equivalents - beginning of period 806 988
-------------- -------------
Cash and cash equivalents - end of period $ 335 $ 747
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 10 $ 10
============== =============
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding gain on available-for-sale securities $ (1) $ (26)
============== =============
Issuance of common stock upon conversion of notes $ 125 $ -
============== =============
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 and cash flows for the three months ended March 31, 2004 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, 2003 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.
NCT has experienced substantial losses from operations since its inception
which cumulatively amounted to $305.6 million through March 31, 2004. Cash and
cash equivalents amounted to $0.7 million at March 31, 2004, decreasing from
$1.0 million at December 31, 2003. A working capital deficit of $69.1 million
exists at March 31, 2004. NCT is in default of $3.3 million of its notes payable
and $7.0 million of its convertible notes at March 31, 2004 and is subject to a
judgment of approximately $2.1 million. 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 or to pay judgments
against the company 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 March 31, 2004 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. Stock-Based Compensation:
The company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards ("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
6
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, as 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. On March 17, 2004, we granted options under
the 2001 Stock and Incentive Plan (2001 Plan) to purchase an aggregate of
29,010,000 shares of our common stock at an exercise price of $0.048 (see Note
9). Of these grants, 27,010,000 were granted to officers, directors and
employees. At March 31, 2004, the company has options outstanding under its 1992
Stock Incentive Plan and 2001 Plan. In addition, options are outstanding that
have been granted outside of shareholder approved stock-based compensation plans
(non-plan). 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, as amended by SFAS 148, to
stock-based employee compensation.
(in thousands, except share data)
Three Months Ended March 31,
------------------------------------
2003 2004
----------------- -----------------
Net loss attributable to common stockholders $ (7,750) $ (16,141)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (69) (452)
----------------- -----------------
Pro forma net loss attributable to common stockholders $ (7,819) $ (16,593)
================= =================
Net loss per common share (basic and diluted):
As reported $ (0.02) $ (0.03)
================= =================
Pro forma $ (0.02) $ (0.03)
================= =================
Since options vest over several years and additional option grants are
expected to be made in future years, the pro forma impact on the results of
operations for the three months ended March 31, 2003 and 2004, respectively, is
not necessarily representative of the pro forma effects on the results of
operations for future periods.
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):
Adjusted Market Market
Cost Basis Unrealized Value Unrealized Value
01/01/03 Gain (Loss) 12/31/03 Additions Gain 03/31/04
-------------- ------------ ------------ ---------- ------------ ------------
Available-for-sale:
ITC $ 94 $ (56) $ 38 $ 13(a) $ 9 $ 60
Teltran 8 3 11 - 17 28
-------------- ------------ ------------ ---------- ------------ ------------
Totals $ 102 $ (53) $ 49 $ 13 $ 26 $ 88
============== ============ ============ ========== ============ ============
Footnote:
- ---------
(a) Represents shares previously classified as "Other assets" valued at $5
per share as such shares were, by contract, available to offset an
amount due to Infinite Technology Corporation (ITC). As a result of
the cross-release entered into on March 31, 2004 (see below), NCT was
released from the amount due and such shares were reclassified as
marketable securities at their market value at such date.
7
The company reviews declines in the value of its investment portfolio when
general market conditions change or specific information pertaining to an
industry or to an individual company becomes available. The company considers
all available evidence to evaluate the realizable value of its investments and
to determine whether the decline in realizable value may be
other-than-temporary.
Accounts receivable comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
Technology license fees and royalties $ 278 $ 333
Joint ventures and affiliates 34 34
Other receivables 284 275
------------ ------------
$ 596 $ 642
Allowance for doubtful accounts (341) (324)
------------ ------------
Accounts receivable, net $ 255 $ 318
============ ============
Inventories comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
Finished goods $ 588 $ 539
Components 203 196
------------ ------------
$ 791 $ 735
Reserve for obsolete and slow moving inventory (282) (255)
------------ ------------
Inventories, net $ 509 $ 480
============ ============
Other current assets comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
Notes receivable $ 1,000 $ 1,000
Due from officers (Note 10) 138 108
Other 172 237
------------ ------------
$ 1,310 $ 1,345
Reserve for uncollectible amounts (1,000) (1,000)
------------ ------------
Other current assets $ 310 $ 345
============ ============
Other assets (long-term) comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
Marketable ITC securities (a) $ 1,320 $ -
Advances and deposits 73 73
Deferred charges 223 199
------------ ------------
Other assets (classified as long term) $ 1,616 $ 272
============ ============
Footnote:
- ---------
(a) Valued at agreed amount of $5.00 per share returnable to ITC in
settlement of obligation at December 31, 2003. The market value of
these shares at December 31, 2003 had they not been returnable in
settlement of the obligation would be less than $0.1 million.
8
On March 31, 2004, ITC, Advancel and NCT entered into a cross-release
agreement that released the parties from any and all claims, through the date of
the cross-release under prior agreements and acknowledges the ownership of ITC
common stock. The agreement resulted in the elimination of $1.4 million as an
obligation of Advancel and the reduction in the carrying amount of the ITC
common stock to its fair value (see other liabilities below). The effects of
such release was a decrease in liabilities and other assets of $1.4 million and
$1.3 million, respectively, and an increase in paid-in capital of $0.1 million.
Property and equipment comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
Machinery and equipment $ 1,210 $ 1,212
Furniture and fixtures 622 630
Leasehold improvements 392 393
Tooling 632 632
Other 429 430
------------ ------------
$ 3,285 $ 3,297
Accumulated depreciation (2,644) (2,713)
------------ ------------
Property and equipment, net $ 641 $ 584
============ ============
Depreciation expense for the three months ended March 31, 2003 and 2004 was
$0.2 million and $0.1 million, respectively.
Accrued expenses comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
Non-registration fees $ 3,147 $ 3,467
Interest 1,484 1,682
Interest due to a related party 818 913
Judgments 2,072 2,066
Default penalties due to a related party - 288
Consulting fees due to a related party 310 355
Other 5,968 5,932
------------ ------------
Accrued Expenses $ 13,799 $ 14,703
============ ============
Deferred revenue comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
NXT $ 2,675 $ 2,140
Other 623 642
------------ ------------
$ 3,298 $ 2,782
Less: amount classified as current (2,763) (2,782)
------------ ------------
Deferred revenue (classified as long term) $ 535 $ -
============ ============
As of March 31, 2004, we do not expect to realize any additional cash from
revenue that has been deferred.
9
Other current liabilities comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
License reacquisition payable $ 4,000 $ 4,0000
Development fee payable 650 650
Royalty payable 1,679 1,679
Due to selling shareholders of Theater Radio
Network 557 557
Due to L&H 100 100
Loan advance by investor 230 230
Other 11 3
------------ ------------
Other current liabilities $ 7,227 $ 7,219
============ ============
Other liabilities (long-term) comprise the following (in thousands):
December 31, March 31,
2003 2004
------------ ------------
Due to ITC $ 1,422 $ -
Other 114 96
------------ ------------
Other liabilities (classified as long term) $ 1,536 $ 96
============ ============
Statements of Operations Information:
- -------------------------------------
Other expense, net comprise the following (in thousands):
Three months ended March 31,
----------------------------
2003 2004
------------ -----------
Finance costs associated with non-registration of common shares
underlying convertible notes $ 729 $ 175
Litigation settlement (429) -
Default penalties on debt 118 1,116
Other (28) (44)
------------ -----------
Total non-operating other expense, net $ 390 $ 1,247
============ ===========
10
4. Capital Deficit:
The changes in capital deficit during the three months ended March 31, 2004
were as follows (in thousands):
Series H Accumulated
Convertible Additional Accumu- Other Common
Preferred Stock Common Stock Paid-in lated Comprehensive Shares
--------------- ---------------
Shares Amount Shares Amount Capital Deficit Loss Payable Total
--------------- --------------- -------- ---------- ------------- ------- ---------
Balance at December 31, 2003 2 $18,301 641,970 $6,420 $205,102 $(289,864) $(1,170) $ - $(61,211)
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - 172 - - (172) - - - -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - - - (83) - - - (83)
Charges for the non-registration of the
underlying shares of NCT to subsidiary
preferred shareholders - - - - (146) - - - (146)
Warrants issued in conjunction with
convertible debt - - - - 4,053 - - - 4,053
Beneficial conversion feature on
convertible debt - - - - 4,053 - - - 4,053
Liability for make up value on shares
issued to ITC - - - - 102 - - - 102
Net loss - - - - - (15,740) - - (15,740)
Accumulated other comprehensive loss - - - - - - (141) - (141)
Compensatory stock options and warrants - - - - 64 - - - 64
--------------- --------------- -------- ---------- ------------- ------- ---------
Balance at March 31, 2004 2 $18,473 641,970 $6,420 $212,973 $(305,604) $(1,311) $ - $(69,049)
=============== =============== ======== ========== ============= ======= =========
11
5. Notes Payable:
(in thousands)
December 31, March 31,
2003 2004
------------------ -----------------
Logical eBusiness Solutions Limited (f/k/a DataTec) (a) $ 2,679 $ 2,766
Obligation of subsidiary to a prior owner of Web Factory;
past due; payable in 1,500,000 British Pounds Sterling;
interest accrues at 4% per annum above the base rate
of National Westminister Bank plc.
Note due investor 385 385
Interest at 8% per annum payable at maturity; effective interest rate
of 80.3% per annum resulting from the issuance of warrants and finders
fees; matured April 7, 2003 (a); default interest accrues at 18% per annum.
Note due stockholder of subsidiary 142 134
Interest at 8.5% per annum; monthly payments (including interest)
of $3.5 through May 2004, remainder matures June 27, 2004.
Note due former employee 100 100
Interest at 8.25% per annum, compounded annually;
past due (a).
Other financings 97 98
Interest ranging from 7% to 9% per annum;
$35 due July 15, 2003 (a); $63 all other.
------------------ -----------------
$ 3,403 $ 3,483
================== =================
Footnote:
- ---------
(a) Notes payable are in default due to nonpayment.
6. Convertible Notes Payable:
December 31, March 31,
Related Party Convertible Notes (in thousands): 2003 2004
------------------ -----------------
Issued to Carole Salkind - related party (a) $ 33,824 $ 36,740
Weighted average effective interest rate of 65.3% per annum; accrues
interest 8% per annum; collateralized by substantially all of the
assets of NCT; convertible into NCT common stock at prices ranging
from $0.029 - $0.05 or exchangeable for common stock of NCT
subsidiaries except for Pro Tech; maturing by quarter as follows:
2003 2004
------------- -------------
Past due $ - $ 2,876
On demand 3,050 14,253
March 31 11,163 -
June 30 19,611 19,611
Less: unamortized debt discounts (5,174) (1,961)
------------------ -----------------
$ 28,650 $ 34,779
================== =================
12
December 31, March 31,
Convertible Notes (in thousands): 2003 2004
------------------ -----------------
8% Convertible Notes (b) $ 1,651 $ 1,651
Weighted average effective interest rate of 20.6% per annum;
convertible into NCT common stock at various rates; matures:
2003 2004
------------- -------------
March 14, 2002 $ 17 $ 17
April 12, 2002 9 9
January 10, 2004 550 550
March 11, 2004 400 400
April 22, 2005 235 235
September 4, 2005 440 440
6% Convertible Notes (c) 2,474 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:
2003 2004
------------- -------------
January 9, 2002 $ 818 $ 818
April 4, 2002 325 325
May 25, 2002 81 81
June 29, 2002 1,250 1,250
------------------ -----------------
$ 4,125 $ 4,125
Less: unamortized debt discounts (12) -
Less: amounts classified as long term (675) (675)
------------------ -----------------
$ 3,438 $ 3,450
================== =================
Footnotes:
- ---------
(a) During the three months ended March 31, 2004, NCT issued an aggregate
of $11.2 million of convertible notes to Carole Salkind, a shareholder
of NCT, an accredited investor and spouse of a former director of NCT.
These notes are secured by substantially all the assets of the
company. During the three months ended March 31, 2004, we defaulted on
payment of all notes that matured during the three months ended March
31, 2004, an aggregate of $11.2 million due Carole Salkind. The
principal on the notes that matured in January and February 2004, an
aggregate principal of $8.3 million, was rolled into new notes in 2004
along with default penalties ($0.8 million) and accrued interest ($0.7
million) aggregating $9.8 million. We are currently in negotiation to
cure the remaining $2.9 million principal in default on the notes that
matured in March 2004. In addition, we issued notes aggregating $1.4
million in consideration of new funding from Carole Salkind. During
the three months ended March 31, 2004, we recorded original issue
discounts of $4.1 million to the notes based upon the relative fair
values of the debt and warrants granted to Ms. Salkind (see Note 9).
In addition, beneficial conversion features totaling $4.1 million have
been recorded as a discount to the notes. These discounts are
amortized over the term of the related notes. The notes entered into
during the first quarter of 2004 were payable on demand requiring an
immediate expensing of their related discounts. For the three months
ended March 31, 2004, $11.3 million of amortization related to these
and prior discounts is classified as interest expense in our condensed
consolidated statement of operations. Unamortized discounts of $2.0
million have been reflected as a reduction to the convertible notes in
our condensed consolidated balance sheet as of March 31, 2004. The
default provisions in these notes impose a penalty of 10% of the
principal payments in default and interest calculated from the date of
default on the principal in default at the stated interest rate of the
note plus 5%. As of March 31, 2004, $0.3 million of accrued default
penalties are included in accrued expenses on our condensed
consolidated balance sheet.
(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
13
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
three months ended March 31, 2004, approximately $11,000 of
amortization related to these discounts is classified as interest
expense in our condensed consolidated statement of operations. We did
not fulfill registration obligations and settled finance costs
associated with non-registration of common shares underlying
convertible notes during 2003. The company is in default on
convertible notes aggregating $1.0 million due to a cross default
provision and non-payment. In addition, the company is in default on
convertible notes aggregating $0.6 million due to a cross default
provision.
(c) We were obligated but unable to register shares of our common stock at
various dates during 2001. For the three months ended March 31, 2004,
we have recorded charges of approximately $0.2 million as a component
of finance costs associated with non-registration of common shares
underlying convertible notes included in other expense, net (see Note
3). The aggregate outstanding debt of $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:
The monetary value of Pro Tech series A and B preferred stock was $0.7
million in our consolidated balance sheet at March 31, 2004, which is comprised
of approximately $0.7 million of shares plus the accrued dividends of
approximately $60,000. NCT would have to issue approximately 13.0 million shares
of our common stock if settlement of the stated value had occurred as of March
31, 2004. NCT has the option to settle the accrued dividends in cash or common
stock. As of March 31, 2004, settlement in common stock for the accrued
dividends would require issuance of approximately 1.4 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.
For the three months ended March 31, 2004, we calculated the 4% dividends
earned by holders of the Pro Tech series A and B preferred stock at
approximately $5,000. Following adoption of SFAS No. 150, this amount is
included in interest expense.
8. Commitments and Contingencies:
Under the July 25, 2002 private equity credit agreement with Crammer Road,
we are required to put at least $5 million (the minimum commitment amount) of
our common stock, in exchange for cash, at a discount to market of 10%. This
credit agreement provides that shares of up to $50 million (the maximum
commitment amount) of our common stock may be sold to Crammer Road pursuant to
put notices delivered by the company to Crammer Road. The company is obligated
to register for resale no less than 112% of the shares issuable for the maximum
commitment amount. If we fail to issue shares for the minimum commitment amount
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 equal to: (i) the minimum commitment amount less the aggregate shares of
our common stock actually delivered to Crammer Road under the equity credit
line; multiplied by (ii) the 10% discount. The maximum amount would be $0.5
million.
9. Capital Stock:
Authorized Capital Stock
Common shares available for future issuance
At March 31, 2004, the shares of common stock required to be reserved were
3,105,173,713 calculated at the $0.053 common stock price on that date (or the
discount therefrom as allowed under the applicable exchange or conversion
agreements). At the March 31, 2004 common stock price, 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 first quarter of 2004, NCT
received a request to convert $1.9 million stated value series H preferred stock
plus accrued dividends into 54.4 million shares of our common stock that it
could not
14
fulfill because this request along with prior outstanding requests were in
excess of the number of shares of common stock currently authorized. At March
31, 2004, demands for approximately 155.5 million shares have not been able to
be filled.
NCT Group, Inc. Preferred Stock
NCT's series H convertible preferred stock is comprised of 2,100 designated
shares. NCT is obligated to register shares of its common stock for the
conversion of the 1,725 issued and outstanding shares of series H preferred
stock. For the three months ended March 31, 2004, we calculated the 4% dividends
earned by the holder of the outstanding series H preferred stock at
approximately $0.2 million. Such cumulative dividend amount is included 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 three months ended
March 31, 2004, we incurred a charge of approximately $0.1 million for
non-registration of the underlying shares of NCT common stock. Pursuant to the
exchange rights agreement, NCT has the option at any time to redeem any
outstanding Artera series A preferred stock by paying the holder cash equal to
the aggregate stated value of the preferred stock being redeemed (together with
accrued and unpaid dividends thereon). 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 three months ended March 31, 2004, we calculated
the 4% dividends earned by holders of the Artera series A preferred stock at
$0.1 million. The non-registration charge and dividends are included in the
calculation of loss attributable to common stockholders.
Options
On March 17, 2004, NCT granted options under the 2001 Plan to purchase an
aggregate of 29,010,000 shares of our common stock at an exercise price of
$0.048 per share subject to shareholder approval of sufficient increases in the
number of shares of common stock (i) authorized and (ii) 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. Of these grants, 27,010,000 were granted to directors, officers and
employees (see Note 2) and 2,000,000 were granted 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 rate of 1.94%; volatility of 100%; and
an expected life of three and one-half years. For the three months ended March
31, 2004, we recorded a charge for consulting services of approximately $0.1
million classified as selling, general and administrative expense. On March 17,
2004, the Board of Directors deemed all options granted to directors, officers
and employees on September 10, 2003 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
During the three months ended March 31, 2004, in conjunction with the
issuance of convertible notes, NCT granted Carole Salkind warrants to acquire an
aggregate of 178,250,000 shares of its common stock at exercise prices ranging
from $0.047 to $0.050 per share. The fair value of these warrants for the three
months ended March 31, 2004 was approximately $6.3 million (determined using the
Black-Scholes option pricing model). Based upon allocation of the relative fair
values of the instruments, we recorded a discount to the convertible notes
issued to Carole Salkind of $4.1 million for the three months ended March 31,
2004.
15
10. Related Parties:
Carole Salkind
During the three months ended March 31, 2004, NCT issued $11.2 million of
8% convertible notes due upon demand to Carole Salkind (see Note 6) along with
five-year warrants to acquire an aggregate of 178,250,000 shares of NCT common
stock (see Note 9). Consideration paid for these notes included approximately
$1.4 million cash and cancellation and surrender of matured notes aggregating
approximately $8.3 million, along with default penalty and accrued interest.
Indebtedness of Management
On January 30, 2002, NCT's Chairman of the Board of Directors and Chief
Executive Officer, entered into a promissory note in the principal amount of
$29,510 to borrow funds from the company in anticipation of cash overrides due
under his incentive compensation arrangement. The note matured on January 31,
2004. The note bore interest at 5.75% per annum payable at maturity and default
interest at the stated rate plus 5%. The note plus accrued interest was paid in
February of 2004.
Indemnification of Management
On or about January 14, 2004, NCT agreed to indemnify five individuals, NCT
directors and officers, for any liabilities that may arise against them in a
lawsuit brought in Delaware against them, NCT and NCT's subsidiary Distributed
Media Corporation by Production Resource Group (PRG) and to provide them with
legal representation in the suit. This Delaware suit is separate from but
related to the Connecticut suit brought by PRG (see Note 11).
11. Litigation:
Production Resource Group Litigation
On June 6, 2001, PRG began legal proceedings against NCT and our
subsidiary, Distributed Media Corporation, in the Superior Court for the
Judicial District of Fairfield County, Connecticut. On December 20, 2001, NCT
and DMC accepted an Offer of Judgment requiring NCT and DMC to pay PRG $2.0
million. On January 2, 2002, outside the scope of the judgment entered into with
NCT and DMC, PRG amended its Connecticut complaint to allege that NCT's Chairman
and Chief Executive Officer Michael Parrella, in dealing with PRG on behalf of
NCT, committed breaches of good faith and fair dealing, unfair trade practices
and fraud. In June 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. On or about December 15, 2003, PRG filed a
complaint in the Delaware Chancery Court in and for New Castle County against
NCT, DMC, Michael J. Parrella (Chairman and Chief Executive Officer of NCT),
Irene Lebovics (President and a Director of NCT), John J. McCloy II (a Director
of NCT) and Sam Oolie (a Director of NCT).
In the portion of the Connecticut case against NCT and DMC, on February 25,
2004, NCT surrendered NCT's 5,876 shares of common stock of NCT Audio Products,
Inc. representing 100% of the issued and outstanding shares of NCT Audio, for
possible sale for the benefit of PRG. Such surrender may adversely affect NCT's
right to any further proceeds from the TSA/TST bankruptcy estate. At the same
time, DMC surrendered DMC's 20,000 shares of common stock of DMC Cinema, Inc.
representing 84% of the issued and outstanding shares of DMC Cinema, its 100
shares of common stock of DMC HealthMedia Inc. representing 100% of the issued
and outstanding shares of DMC HealthMedia, a $153,956 principal amount
promissory note from (and related security agreement with) DMC Cinema and a
$1,388,666 principal amount promissory note from (and related security agreement
with) DMC HealthMedia, for possible sale for the benefit of PRG. NCT reported to
the court that all of the other equity and debt securities NCT owns could not be
so surrendered because they are covered by security interests in favor of Carole
Salkind and are in her possession. At December 31, 2003, the net liabilities
included in our condensed consolidated balance sheet related to NCT Audio, DMC
Cinema and DMC HealthMedia were $16.1 million, $4.9 million and $1.7 million,
respectively. At March 31, 2004, the net liabilities included in our condensed
consolidated balance sheet related to NCT Audio, DMC Cinema and DMC HealthMedia
were $15.7 million, $4.9 million and $1.8 million, respectively. For the three
months ended March 31, 2003, the net earnings (loss) before income taxes
included in our condensed consolidated statement of operation related to NCT
Audio, DMC Cinema and DMC
16
HealthMedia were $0.8 million, less than $(0.1) million and $(0.1) million,
respectively. For the three months ended March 31, 2004, the net earnings (loss)
before income taxes included in our condensed consolidated statement of
operation related to NCT Audio, DMC Cinema and DMC HealthMedia were $0.4
million, less than $(0.1) million and $(0.2) million, respectively.
In the portion of the Connecticut case against NCT Chairman and Chief
Executive Officer Michael Parrella (as to which NCT has agreed to indemnify Mr.
Parrella), on March 11, 2004, the court denied Mr. Parrella's motion to dismiss
all pending claims against him in the case. Trial has been tentatively scheduled
for September 2004. Mr. Parrella has told NCT that he intends to deny and defend
against all pending allegations.
In the Delaware case, on or about January 6, 2004, PRG amended its
complaint dated December 15, 2003 to add Cy E. Hammond (Chief Financial Officer
of NCT and, as of March 17, 2004, a Director of NCT) as a defendant. PRG's
amended complaint alleges that NCT and DMC are insolvent, that during the
insolvency the individual named defendants owe a fiduciary duty to PRG as a
judgment creditor of NCT and DMC in the Connecticut litigation described above,
and breached that duty. The amended complaint seeks money damages against the
individual defendants in an amount at least equal to the amount of the
Connecticut judgment remaining unsatisfied. NCT has agreed to indemnify the
individual defendants, to the extent permitted by NCT's Certificate of
Incorporation and applicable law, for any liabilities (including legal fees)
they may incur as a result of the PRG claims against them in this Delaware
action. NCT has added Mr. Hammond to the submission of claims for director and
officer indemnification insurance coverage by two insurers along with the other
previously named individual defendants. On February 25, 2004 and May 5, 2004,
the insurers, respectively, initially denied coverage. NCT is considering
whether to challenge those initial denials. On February 13, 2004, the defendants
filed a motion to dismiss all claims in the amended complaint. On or about March
30, 2004, PRG again amended its complaint, this time to refine and expand some
of its claims relating to the alleged mismanagement of the affairs of NCT and
its subsidiaries (including DMC). On April 12, 2004, the defendants amended
their motion to dismiss to cover these amended allegations. The defendants'
amended motion to dismiss is pending. Discovery in the action has begun. NCT and
DMC intend, and the individual defendants have told NCT that they intend, to
deny and defend against all allegations.
Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2003, for further information regarding the foregoing matter.
The company believes there are no other patent infringement claims, litigation,
matters or unasserted claims other than the matters discussed above that could
have a material adverse effect on the financial position and results of
operations.
12. Segment Information:
Management views the company as being organized into three operating
segments: communications, media and technology. The other operating segment is
used to reconcile the reportable segment data to the consolidated financial
statements and is segregated into two categories, other-corporate and
other-consolidating.
Other-corporate consists of items maintained at the company's corporate
headquarters and not allocated to the segments. This includes most of the
company's debt and related cash and 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 (eliminated) in the
other-consolidating column. Other-consolidating consists of items eliminated in
consolidation, such as intercompany revenue.
During the three months ended March 31, 2004, 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.
17
Reportable segment data for the three months ended March 31, 2004 and March
31, 2003 is as follows (in thousands):
For the three months ended Reportable -------- Other ---------- Grand
March 31, 2004: Communications Media Technology Segments Corporate Consolidating Total
- --------------------------------------- ------------------------------------------------------------------------------------------
License fees and royalties - external $ 84 $ 535 $ 102 $ 721 $ - $ - $ 721
Other revenue - external 436 37 - 473 - - 473
Other revenue - other operating
segments 305 1 - 306 3 (309) -
Net income (loss) (2,720) (926) 70 (3,576) (12,753) 589 (15,740)
For the three months ended Reportable -------- Other ---------- Grand
March 31, 2003: Communications Media Technology Segments Corporate Consolidating Total
- --------------------------------------- ------------------------------------------------------------------------------------------
License fees and royalties - external $ 170 $ 535 $ - $ 705 $ 1 $ - $ 706
Other revenue - external 455 21 - 476 - - 476
Other revenue - other operating
segments 275 1 - 276 127 (403) -
Net income (loss) (2,994) (800) 31 (3,763) (3,620) 596 (6,787)
13. Subsequent Events:
Transactions with Carole Salkind
On each of April 1, 2004 and April 14, 2004, NCT issued convertible notes
to Ms. Salkind, for approximately $0.4 million, as consideration for an
aggregate of approximately $0.8 million in cash. The notes are due upon demand
and bear interest at 8% per annum. The notes are convertible into shares of NCT
common stock at $0.053 per share and $0.0501 per share, respectively, and may be
exchanged for shares of common stock of any NCT subsidiary (except Pro Tech)
that has an initial public offering (at the initial public offering price
thereof). In conjunction with issuance of these notes, five-year warrants were
issued to Ms. Salkind to purchase an aggregate of 13.5 million shares of our
common stock at exercise prices of $0.053 and $0.0501 per share, respectively.
The relative estimated fair value of the warrants will be reflected as original
issue discounts and beneficial conversion features to the notes. These will be
expensed immediately as interest expense because the term of the notes are upon
demand.
We defaulted on for re-payment of the Carole Salkind convertible notes that
matured in April 2004 in aggregate principal amount of $5.8 million. We are
currently in negotiation to cure these defaults.
Litigation
Founding Midcore Shareholder Litigation
On or about April 16, 2004, Jerrold Metcoff and David Wilson brought an
action against NCT, its subsidiaries Midcore Software, Inc. and Artera Group,
Inc. and its Chairman and Chief Executive Officer Michael Parrella in the
Superior Court for the Judicial District of Waterbury, Connecticut. The action
arose out of the August 29, 2000 Agreement and Plan of Merger pursuant to which
Messrs. Metcoff, Wilson and others sold to NCT 100% of the outstanding shares of
a corporation that was merged into and became Midcore Software, Inc. A look-back
provision in the agreement provides that NCT issue additional shares of common
stock to Messrs. Metcoff and Wilson to guarantee a fixed value to a prior share
issuance by NCT that served as partial consideration under the agreement. Under
the formula in the agreement, 26,193,025 common shares were to have been issued
for the look-back. In addition, the agreement provides for a minimum royalty
amount through August 29, 2003, with a payment of cash or shares of common stock
by NCT to reach the minimum amount for that date. On September 23, 2003, Messrs.
Metcoff and Wilson elected to receive this royalty payment in shares. Under the
formula in the agreement, the number of shares to have been issued was
34,166,551. NCT did not issue any of the total of 60,359,576 shares to Messrs.
Metcoff or Wilson. After demand for the shares was made, the parties attempted
to reach a settlement of this matter, but with no settlement reached, Messrs.
Metcoff and Wilson brought this action. The complaint alleges
18
breaches of the August 29, 2000 agreement and related improper acts and
omissions, including (i) failure by NCT to issue the look-back and royalty
shares; (ii) breach by NCT and Midcore of representations and warranties in or
relating to the agreement; (iii) "unjust enrichment" of Artera in its use of
intellectual property owned by the entity that became Midcore; (iv)
misrepresentations by Mr. Parrella in connection with the agreement and the
operation of Midcore since August 29, 2000; (v) tortious interference by Artera
and Mr. Parrella with Messrs. Metcoff and Wilson's contractual relations with
NCT and Midcore; and (vi) failure by NCT to deliver documents pertaining to
resales by Messrs. Metcoff and Wilson of the NCT shares they did receive under
the August 29, 2000 agreement. The complaint seeks damages, punitive damages,
interest and attorneys' fees, all in unspecified amounts. NCT has agreed to
indemnify Mr. Parrella, to the extent permitted by NCT's Certificate of
Incorporation and applicable law, for any liabilities (including legal fees) Mr.
Parrella may incur as a result of the claims against him in this action. NCT
intends to submit the claims against Mr. Parrella to its directors and officers
indemnification insurance carrier. NCT intends to defend against all claims
against it in the action. Midcore and Artera intend to deny and defend against
all claims against them in the action. Mr. Parrella has told NCT that he intends
to deny and defend against all claims against him in the action.
Other
At March 31, 2004, NCT Hearing Inc., a wholly owned subsidiary of NCT,
owned approximately 82% of the common stock outstanding of Pro Tech
Communications, Inc. In April 2004, NCT Hearing converted $0.6 million of its
notes receivable due from Pro Tech into 27.8 million shares of Pro Tech common
stock. In addition, NCT Hearing transferred approximately 2.0 million shares of
its common stock of Pro Tech to outside consultants for consulting services.
Also in April, NCT Hearing expanded its existing license with Pro Tech to
include patents, patents pending and innovations relating to active noise
reduction and noise and echo cancellation and included the right to use NCT
Hearing's NoiseBuster(R), Pro Active(R), and ClearSpeech(R) brands. As
consideration, NCT Hearing was issued 9.8 million shares of Pro Tech common
stock. On April 27, 2004, Pro Tech received notification for conversion of 40
shares, plus accrued dividends, of its series B preferred stock, resulting in
the issuance of approximately 2.5 million shares of Pro Tech common stock. At
the end of April 2004, NCT Hearing holds approximately 85% of the common stock
outstanding of Pro Tech.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
Caution Concerning Forward-Looking Statements
This report on Form 10-Q contains statements that 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. Additional
information regarding these factors is contained in our SEC filings, including,
without limitation, our Annual Report on Form 10-K for the year ended December
31, 2003. 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 revenue and engineering and development
services. Please see our discussion of our critical accounting policies below.
From time to time, we receive securities or other consideration rather than cash
payment from our customers and such other consideration may or may not be
realized by us in cash. We do not anticipate that any cash will be realized from
the revenue deferred at March 31, 2004 (approximately $2.8 million). Operating
revenue for the three months ended March 31, 2004 consisted of approximately
60.4% in technology licensing fees and royalties, 36.9% in product sales and
2.7% in advertising revenue.
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 Electronics
Ltd. is installing production model aircraft cabin quieting systems in the SAAB
340 turboprop aircraft, Sharp Corporation is incorporating the ClearSpeech(R)
adaptive speech filter algorithm into third generation cellular telephones and
Oki Electronic Industry Co., Ltd. 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.
20
Management believes that the investment in our technology has resulted in
the expansion of our intellectual property portfolio and improvement in the
functionality, speed and cost of components and products.
Management believes that currently available funds will not be sufficient
to sustain NCT. Such funds consist of available cash and the funding derived
from technology licensing fees, royalties, product sales, advertising 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, advertising 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 2004, the company entered into certain transactions that provided
additional funding. These transactions included the issuance of 8% convertible
notes to Carole Salkind. In particular, we have been primarily dependent upon
funding from Carole Salkind to maintain our operations. These financing
transactions are described in greater detail below under "Liquidity and Capital
Resources" (also refer to Note 6 - notes to the condensed consolidated financial
statements).
Critical Accounting Policies
The preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based upon assumptions about matters that are highly
uncertain at the time the estimate is made, and if different estimates that
reasonably could have been used, or changes in the accounting estimates that are
reasonably likely to occur periodically, could materially impact the financial
statements. Management believes the following critical accounting policies
reflect its more significant estimates and assumptions used in the preparation
of the condensed consolidated financial statements. Additional information
regarding our critical accounting policies and significant accounting policies
are contained in our SEC filings, including, without limitation, our Annual
Report on Form 10-K for the year ended December 31, 2003.
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 March 31, 2004, our deferred revenue aggregated $2.8 million. We do not
expect to realize any additional cash in connection with recognizing revenue
from our deferred revenue.
21
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.
Annually, or if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount, the company tests its goodwill for impairment. The company also
recognizes an impairment loss on goodwill acquired upon the acquisition of stock
held by minority stockholders of subsidiaries if the subsidiary's minority
interest has no carrying value, the subsidiary has a capital deficit and the
projected future operating results of the subsidiary are not positive. At
December 31, 2003, 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 next annual evaluation is planned for
December 31, 2004. At March 31, 2004, 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 each of the quarters ended March 31, 2003 and 2004 was $0.1 million.
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. At March 31, 2004, our patent rights and other
intangibles, net were $1.2 million.
RESULTS OF OPERATIONS
Three months ended March 31, 2004 compared to three months ended March 31,
2003.
Total revenue remained consistent at $1.2 million for the three months
ended March 31, 2004 and 2003. Total costs and expenses for the three months
ended March 31, 2004 were $16.9 million compared to $8.0 million for the same
period in 2003, an increase of $8.9 million, or 111.3%, primarily due to higher
non-operating items, particularly interest expense.
Technology licensing fees and royalties were $0.7 million for the three
months ended March 31, 2004 and 2003. An increase in technology licensing fees
of $0.1 million related to the cross-release entered into with Infinite
Technology Corporation was offset by a decrease in royalties of $0.1 million for
the three months ended March 31, 2004 compared to the same period in 2003. Our
recognition of license fee revenue for both periods was primarily due to
recognition of deferred revenue from the New Transducers Ltd. (NXT) license. At
March 31, 2004, our deferred revenue related to NXT was $2.1 million. No
additional cash will be realized from our deferred revenue. Our recognition of
royalties for the three months ended March 31, 2004 was primarily due to Sharp
and for the same period in 2003 was primarily due to Oki.
For the three months ended March 31, 2004, product sales were $0.4 million
compared to $0.5 million for three months ended March 31, 2003, a decrease of
$0.1 million, or 20.0%. The decrease was primarily due to a decrease of $0.1
million in NCT Hearing product sales primarily due to decreased demand in the
fast food market. NCT Hearing products comprise approximately $0.3 million, or
60.8%, of our product sales for the three months ended March 31, 2004;
communication products comprise approximately $0.1 million, or 24.3%.
22
Advertising revenue was $32,000 for the three months ended March 31, 2004
compared to $10,000 for the same period in 2003. Advertising revenue is derived
from the sale of audio and visual advertising in the Sight & Sound(R) locations.
Although constrained by our limited cash resources, we anticipate increasing
revenue from the Sight & Sound(R) locations in health venues. For each of the
three months ended March 31, 2004 and 2003, revenue from health venues was 100%
of total advertising revenue recognized.
For the three months ended March 31, 2004, selling, general and
administrative expenses totaled $2.1 million as compared to $3.6 million for the
three months ended March 31, 2003, a decrease of $1.5 million, or 41.7%. This
decrease was due primarily to: (i) a $1.1 million decrease in consulting expense
primarily due to the decreased non-cash charges from the issuance of warrants
and options; (ii) a $0.3 million decrease in royalty expense and (iii) a $0.1
million decrease in legal and patent expenses.
For the three months ended March 31, 2004, research and development
expenditures totaled $1.1 million as compared to $0.9 million for the three
months ended March 31, 2003, an increase of $0.2 million, or 22.2%. This
increase was due primarily to: (i) a $0.1 million increase in Artera Turbo
development and (ii) a $0.1 million increase related to the cross-release
entered into with Infinite Technology Corporation. Our research and development
efforts during the three months ended March 31, 2004 included development of
other components of our Artera Turbo subscription service, particularly with
respect to developments for the enterprise market version of Artera Turbo.
Total costs and expenses include non-cash expenditures of $13.7 million in
the three months ended March 31, 2004 and $3.9 million in the three months ended
March 31, 2003. These expenditures included: (i) depreciation and amortization
of $0.1 million in the three months ended March 31, 2004 and $0.2 million in the
same period in 2003; (ii) interest expense of $12.3 million in the three months
ended March 31, 2004 and $2.9 million during the same period in 2003; (iii)
default penalties on debt of $1.1 million in the three months ended March 31,
2004 and $0.1 million during the same period in 2003; and (iv) finance costs of
$0.2 million associated with non-registration of common shares underlying
convertible notes in the three months ended March 31, 2004 and $0.7 million
during the same period in 2003. The increase in interest expense is attributable
to the immediate expensing of the relative fair value of warrants allocated to
the related debt that is due upon demand. Interest expense for the three months
ended March 31, 2004 includes amortization of original issue discounts of $5.4
million; amortization of beneficial conversion features in convertible debt of
$5.9 million, and interest on convertible debt issued by the company of $0.9
million.
LIQUIDITY AND CAPITAL RESOURCES
NCT has experienced substantial losses from operations since its inception,
which have been recurring and amounted to $305.6 million on a cumulative basis
through March 31, 2004. 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 revenue; and
o engineering and development services.
We believe our internally generated funds are insufficient to meet our
short-term and long-term requirements. Such funds consist of available cash and
the funding derived from our revenue sources: technology licensing fees and
royalties, product sales, advertising and engineering development 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 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
23
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 March 31, 2004
about NCT's ability to continue as a going concern.
We recently entered into financing transactions because internally
generated funding sources were insufficient to maintain our operations. Such
financing transactions entered into by NCT to fund its business pursuits during
the three months ended March 31, 2004 are described in the notes to the
condensed consolidated financial statements. In 2004, we have continued to be
primarily dependent 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, 2003 and 2004
despite NCT's failure to repay her notes as the notes matured. However, we have
no legally binding assurance that Ms. Salkind will continue to funding NCT in
the short-term or that the amount, timing and duration of the funding from her
will be adequate to sustain our business operations.
At March 31, 2004, the company's cash and cash equivalents aggregated $0.7
million. NCT's working capital deficit was $69.1 million at March 31, 2004,
compared to a deficit of $60.8 million at December 31, 2003, an $8.3 million
increase in working capital deficit. Our current assets were approximately $2.0
million at March 31, 2004 compared to approximately $2.1 million at December 31,
2003. The decline in current assets was primarily due to the decrease in our
cash and cash equivalents balance of approximately $0.2 million. Excluding the
cash and cash equivalents balances, the mix of our assets included in current
assets changed only slightly. Our current liabilities were approximately $71.1
million at March 31, 2004 compared to approximately $62.9 million at December
31, 2003. The increase in current liabilities was primarily due to the issuance
and rollover of convertible notes to Carole Salkind of $6.1 million (net of
discounts) and an increase in accounts payable of $1.0 million. NCT is in
default of $3.3 million of its notes payable and $7.0 million of its convertible
notes at March 31, 2004 and is subject to a judgment of approximately $2.1
million. The following table summarizes our indebtedness in default at March 31,
2004.
(in millions)
New Defaults
Indebtedness Defaults Cured Indebtedness
In Default during during In Default
Notes Payable: 12/31/03 the Period the Period 03/31/04
-------------- ------------- ------------- --------------
Obligation to prior owner
of Web Factory $ 2.7 (a) $ 0.1 (c) $ - $ 2.8 (a)
Former Employee / Other 0.5 (a) - - 0.5 (a)
-------------- ------------- ------------- --------------
Subtotal $ 3.2 $ 0.1 $ - $ 3.3
-------------- ------------- ------------- --------------
Convertible Notes Payable:
Carole Salkind Notes $ - $ 11.2 $ (8.3) $ 2.9 (a)
8% Notes 1.0 (b) 0.6 - 1.6 (a,b)
6% Notes 2.5 (a) - - 2.5 (a)
-------------- ------------- ------------- --------------
Subtotal $ 3.5 $ 11.8 $ (8.3) $ 7.0
-------------- ------------- ------------- --------------
Grand Total $ 6.7 $ 11.9 $ (8.3) $ 10.3
============== ============= ============= ==============
Footnotes:
- ----------
(a) Default due to non-payment.
(b) Default due to cross default provision (default on other debt).
(c) Foreign exchange rate fluctuations
Net cash used in operating activities for the three months ended March 31,
2004 was $1.6 million primarily due to funding the 2004 net loss of $15.7
million, as adjusted to reconcile to net cash.
24
Our deferred revenue balance at March 31, 2004 was $2.8 million, primarily
attributed to NXT. No additional cash will be realized from our deferred revenue
balance. Our NXT deferred revenue balance originated at the value of the
securities received from our licensee, which was not realized in cash because
the value of the underlying securities declined before we sold such securities.
Net cash used in investing activities was less than $0.1 million for the
three-month period ended March 31, 2004 due to purchase of capital equipment.
At each of March 31, 2004 and December 31, 2003, the company's
available-for-sale securities had approximate fair market values of less than
$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.
Net cash provided by financing activities was $1.4 million for the
three-month period ended March 31, 2004 and was primarily due to the issuance
and sale of convertible notes to Ms. Salkind.
At March 31, 2004, the company's short-term debt was $41.7 million, shown
net of discounts of approximately $2.0 million on the condensed consolidated
balance sheet, compared to $35.5 million of short-term debt, net at December 31,
2003. The cash proceeds from debt issued in 2004 were primarily used for general
corporate purposes.
During the three months ended March 31, 2004, NCT issued an aggregate of
$11.2 million of convertible notes to Carole Salkind, as consideration for $1.4
million of cash and the rollover of $8.3 million in principal of matured
convertible notes along with $0.7 million of interest, and $0.8 million of
default penalties (10% of the principal in default).
As of March 31, 2004, we are in default (primarily from non-payment) on
$10.3 million of our indebtedness, including $3.3 million of notes payable and
$7.0 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 short-term debt may be
replaced with new short- or long-term borrowings. Although we believe that we
can continue to access the capital markets in 2004 on acceptable terms and
conditions, its flexibility with regard to long-term financing activity could be
limited by: (i) the liquidity of our common stock on the open market; (ii) our
current level of short-term debt; and (iii) our credit ratings. In addition,
many of the factors that affect NCT's ability to access the capital markets,
such as the liquidity of the overall capital markets and the current state of
the economy, are outside of NCT's control. There can be no assurances that NCT
will continue to have access to the capital markets on favorable terms.
From time to time, we may change the terms of options, warrants or other
securities. In some instances, this has been to generate cash.
The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
Capital Expenditures
NCT intends to continue its business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include:
o dependable sources of electronic and other components, which leverages on
their purchasing power, provides important cost savings and accesses the
most advanced technologies;
o utilization of the manufacturing capacity of our allies, enabling us to
integrate our technology into products with limited capital investment; and
o access to well-established channels of distribution and marketing
capability of leaders in several market segments.
At March 31, 2004, we have a reasonable expectation of installing our Sight
& Sound(R) system within additional Barnes & Noble College Bookstores. At March
31, 2004, we have 33 of the approximately 400 Barnes &
25
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. Our average cost for outfitting a store is
approximately $18,000. We have not identified the source of funding to proceed
with these installations. We have no assurance that sufficient capital will
become available.
At March 31, 2004, in connection with the proposed release of a new
product, we anticipate incurring approximately $0.1 million in tooling costs
payable as follows: one-third at inception with the remainder based upon unit
production, not to exceed eighteen months.
Other than the above-mentioned expenditures, there were no material
commitments for capital expenditures as of March 31, 2004, and no material
commitments are anticipated in the near future.
ITEM 3. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NCT's primary market risk exposures include fluctuations in interest rates
and foreign exchange rates. NCT is exposed to short-term interest rate risk on
some of its obligations. 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
Evaluation of disclosure controls and procedures
NCT's principal executive officer and its principal financial officer,
based on their evaluation of the company's disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this Quarterly Report on Form
10-Q, have concluded that the company's disclosure controls and procedures are
effective for ensuring that information required to be disclosed by the company
in the reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
Changes in internal controls
There were no changes in the company's internal control over financial
reporting that occurred during the company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
company's internal control over financial reporting.
26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of our legal proceedings, see Note 11 - Litigation and
Note 13 - Subsequent Events 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, 2004 through March 31, 2004, 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
- --------------- -------------------------------------- ----------------------------------- --------------------------------
02/13/04 NCT Convertible Note ($425,000.00 Carole Salkind $425,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
02/13/04 Warrant for 6,750,000 shares of NCT Carole Salkind Exercisable for cash at $0.050
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/05/04 NCT Convertible Note ($410,000.00 Carole Salkind $410,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/05/04 Warrant for 6,750,000 shares of NCT Carole Salkind Exercisable for cash at $0.049
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/15/04 NCT Convertible Note ($6,171,275.69 Carole Salkind Cancellation and surrender of
principal amount) $450,000, $2,747,634.92,
$350,000, $410,000, $414,480.93,
$414,750.19 and $410,000
convertible notes dated
01/15/03, 01/23/03, 01/30/03,
07/14/03, 07/14/03, 07/28/03
and 07/28/03 along with accrued
interest and default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/15/04 Warrant for 96,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.047
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/15/04 NCT Convertible Note ($3,606,526.83 Carole Salkind Cancellation and surrender of
principal amount) $1,252,592.41, $622,529.18,
$425,000, $414,884.82 and
$375,000 convertible notes dated
02/11/03, 08/07/03, 08/18/03,
08/28/03, and 08/28/03 along
with accrued interest and
default penalty
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/15/04 Warrant for 56,500,000 shares of NCT Carole Salkind Exercisable for cash at $0.047
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/15/04 NCT Convertible Note ($410,000.00 Carole Salkind $410,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/15/04 Warrant for 6,750,000 shares of NCT Carole Salkind Exercisable for cash at $0.047
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
27
- ------------------------------------------------------ ----------------------------------- --------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- --------------- -------------------------------------- ----------------------------------- --------------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/15/04 NCT Convertible Note ($180,000.00 Carole Salkind $180,000 in cash
principal amount)
- --------------- -------------------------------------- ----------------------------------- --------------------------------
03/15/04 Warrant for 5,000,000 shares of NCT Carole Salkind Exercisable for cash at $0.047
common stock per share
- --------------- -------------------------------------- ----------------------------------- --------------------------------
ITEM 5. OTHER INFORMATION
NCT did not have an annual meeting of shareholders during 2002 or 2003. We
intend to hold a shareholder meeting during the second half of 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4(a) Warrant dated February 13, 2004 issued to Carole Salkind for the
purchase of 6,750,000 shares of NCT common stock at a purchase price
of $0.05 per share, incorporated by reference to Exhibit 4(dk) of the
company's Annual Report on Form 10-K for the year ended December 31,
2003, filed April 8, 2004.
4(b) Warrant dated March 5, 2004 issued to Carole Salkind for the purchase
of 6,750,000 shares of NCT common stock at a purchase price of $0.049
per share, incorporated by reference to Exhibit 4(dl) of NCT's
Pre-Effective Amendment No. 10 to Registration Statement on Form S-1
(Registration No. 333-60574), filed on May 7, 2004.
4(c) Warrant dated March 15, 2004 issued to Carole Salkind for the purchase
of 96,500,000 shares of NCT common stock at a purchase price of $0.047
per share, incorporated by reference to Exhibit 4(dm) of NCT's
Pre-Effective Amendment No. 10 to Registration Statement on Form S-1
(Registration No. 333-60574), filed on May 7, 2004.
4(d) Warrant dated March 15, 2004 issued to Carole Salkind for the purchase
of 56,500,000 shares of NCT common stock at a purchase price of $0.047
per share, incorporated by reference to Exhibit 4(dn) of NCT's
Pre-Effective Amendment No. 10 to Registration Statement on Form S-1
(Registration No. 333-60574), filed on May 7, 2004.
4(e) Warrant dated March 15, 2004 issued to Carole Salkind for the purchase
of 6,750,000 shares of NCT common stock at a purchase price of $0.047
per share, incorporated by reference to Exhibit 4(do) of NCT's
Pre-Effective Amendment No. 10 to Registration Statement on Form S-1
(Registration No. 333-60574), filed on May 7, 2004.
4(f) Warrant dated March 15, 2004 issued to Carole Salkind for the purchase
of 5,000,000 shares of NCT common stock at a purchase price of $0.047
per share, incorporated by reference to Exhibit 4(dp) of NCT's
Pre-Effective Amendment No. 10 to Registration Statement on Form S-1
(Registration No. 333-60574), filed on May 7, 2004.
4(g) Warrant dated April 1, 2004 issued to Carole Salkind for the purchase
of 6,750,000 shares of NCT common stock at a purchase price of $0.053
per share.
4(h) Warrant dated April 14, 2004 issued to Carole Salkind for the purchase
of 6,750,000 shares of NCT common stock at a purchase price of $0.0501
per share.
10(a) Secured Convertible Demand Note in principal amount of $425,000.00
dated February 13, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(dy) of the company's Annual
Report on Form 10-K for the year ended December 31, 2003, filed April
8, 2004.
28
10(b) Secured Convertible Demand Note in principal amount of $410,000.00
dated March 5, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(dz) of NCT's Pre-Effective
Amendment No. 10 to Registration Statement on Form S-1 (Registration
No. 333-60574), filed on May 7, 2004.
10(c) Secured Convertible Demand Note in principal amount of $6,171,275.69
dated March 15, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ea) of NCT's Pre-Effective
Amendment No. 10 to Registration Statement on Form S-1 (Registration
No. 333-60574), filed on May 7, 2004.
10(d) Secured Convertible Demand Note in principal amount of $3,606,526.83
dated March 15, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(eb) of NCT's Pre-Effective
Amendment No. 10 to Registration Statement on Form S-1 (Registration
No. 333-60574), filed on May 7, 2004.
10(e) Secured Convertible Demand Note in principal amount of $410,000.00
dated March 15, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ec) of NCT's Pre-Effective
Amendment No. 10 to Registration Statement on Form S-1 (Registration
No. 333-60574), filed on May 7, 2004.
10(f) Secured Convertible Demand Note in principal amount of $180,000.00
dated March 15, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ed) of NCT's Pre-Effective
Amendment No. 10 to Registration Statement on Form S-1 (Registration
No. 333-60574), filed on May 7, 2004.
10(g) Cross-release Agreement dated March 31, 2004 among the company,
Advancel Logic Corporation and Infinite Technology Corporation,
incorporated by reference to Exhibit 10(ef) of NCT's Pre-Effective
Amendment No. 10 to Registration Statement on Form S-1 (Registration
No. 333-60574), filed on May 7, 2004.
10(h) Secured Convertible Demand Note in principal amount of $410,000.00
dated April 1, 2004 issued by the company to Carole Salkind.
10(i) Secured Convertible Demand Note in principal amount of $400,000.00
dated April 14, 2004 issued by the company to Carole Salkind.
31(a) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended March
31, 2004.
31(b) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended March
31, 2004.
32(a) Certification of Form 10-Q for the quarterly period ended March 31,
2004 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 March 22, 2004, the company filed a report on Form 8-K disclosing
the press release relating to the introduction by Avaya Global
Services, a subsidiary of Avaya Inc., of their software-based managed
service incorporating technology of our subsidiary, Artera Group, Inc.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /s/ Michael J. Parrella
----------------------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ Cy E. Hammond
----------------------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: May 17, 2004
30