UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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
The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of August 12, 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 June 30,
2004 (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited) and Condensed
Consolidated Statements of Comprehensive Loss (Unaudited) for the Three
and Six Months Ended June 30, 2003 and 2004 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 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 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 32
Part II Other Information
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 40
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, June 30,
2003 2004
------------------ ------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 988 $ 789
Investment in available-for-sale marketable securities 49 50
Accounts receivable, net 255 514
Inventories, net 509 484
Other current assets (includes $138 and $24, respectively, due from officers) 310 128
------------------ ------------------
Total current assets 2,111 1,965
Property and equipment, net 641 581
Goodwill, net 7,184 7,184
Patent rights and other intangibles, net 1,223 1,146
Other assets 1,616 137
------------------ ------------------
$ 12,775 $ 11,013
================== ==================
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 2,905 $ 3,299
Accrued expenses (includes $1,128 and $3,491, respectively, related parties) 13,799 17,640
Notes payable 3,403 3,368
Related party convertible notes (due to a stockholder) 28,650 32,338
Current maturities of convertible notes 3,438 3,685
Deferred revenue 2,763 2,251
Shares of subsidiary subject to exchange into a variable number of shares 742 699
Other current liabilities 7,227 6,997
------------------ ------------------
Total current liabilities 62,927 70,277
------------------ ------------------
Long-term liabilities:
Deferred revenue 535 -
Convertible notes 675 440
Other liabilities 1,536 82
------------------ ------------------
Total long-term liabilities 2,746 522
------------------ ------------------
Commitments and contingencies
Minority interest in consolidated subsidiaries 8,313 8,478
------------------ ------------------
Capital deficit:
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Convertible series H preferred stock, issued and outstanding, 1,725 and
1,752 shares, respectively; (redemption amount $20,700,000 and
$20,929,500, respectively; liquidation amount $18,300,822 and $18,916,386, 18,301 18,851
respectively)
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 205,102 223,326
Accumulated other comprehensive loss (1,170) (1,209)
Accumulated deficit (289,864) (315,652)
Common shares payable, 3,029,608 shares - -
------------------ ------------------
Total capital deficit (61,211) (68,264)
------------------ ------------------
$ 12,775 $ 11,013
================== ==================
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 June 30, Six months ended June 30,
-------------------------------- -----------------------------
2003 2004 2003 2004
------------- ------------- ------------- ------------
REVENUE:
Technology licensing fees and royalties $ 605 $ 962 $ 1,311 $ 1,683
Product sales, net 409 442 876 883
Advertising 11 36 20 68
Engineering and development services 25 - 25 -
------------- ------------- ------------- ------------
Total revenue 1,050 1,440 2,232 2,634
------------- ------------- ------------- ------------
COSTS AND EXPENSES:
Cost of product sales 180 200 388 439
Cost of advertising 1 4 4 8
Selling, general and administrative (includes $1,564, $45, $2,814,
and $90, respectively, related party consulting expenses) 3,470 2,158 7,042 4,246
Research and development 903 1,100 1,832 2,170
Other operating income - - (22) -
------------- ------------- ------------- ------------
Total operating costs and expenses 4,554 3,462 9,244 6,863
Non-operating items:
Other expense, net (includes related party expenses
of $354, $2,266, $472 and $3,382, respectively) 1,019 2,632 1,431 3,879
Interest expense, net (includes related party expenses
of $2,436, $5,148, $4,776 and $17,225, respectively) 3,382 5,394 6,249 17,680
------------- ------------- ------------- ------------
Total costs and expenses 8,955 11,488 16,924 28,422
------------- ------------- ------------- ------------
NET LOSS $ (7,905) $ (10,048) $ (14,692) $ (25,788)
Less: Preferred stock dividends 269 256 533 511
Beneficial conversion feature - 104 - 104
Non-registration charges 556 146 1,255 292
Non-conversion/exchange charges - 1,702 - 1,702
------------- ------------- ------------- ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (8,730) $ (12,256) $ (16,480) $ (28,397)
============= ============= ============= ============
Basic and diluted loss per share attributable to
common stockholders $ (0.02) $ (0.02) $ (0.03) $ (0.04)
============= ============= ============= ============
Weighted average common shares outstanding -
basic and diluted 523,993 645,000 518,841 645,000
============= ============= ============= ============
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2004 2003 2004
------------ ------------ ----------- ----------
NET LOSS $ (7,905) $(10,048) $ (14,692) $ (25,778)
Other comprehensive income (loss):
Currency translation adjustment (10) 63 (4) (104)
Unrealized loss on marketable securities/Adjustment of unrealized loss (10) 39 (9) 65
------------ ------------ ----------- ----------
COMPREHENSIVE LOSS $ (7,925) $ (9,946) $ (14,705) $ (25,827)
============ ============ =========== ==========
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 (Notes 1 and 3)
(Unaudited)
(in thousands)
Six months ended June 30,
-------------------------------------------
2003 2004
-------------------- --------------------
Cash flows from operating activities:
Net loss $ (14,692) $ (25,788)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 451 200
Common stock, warrants and options issued as consideration for:
Operating expenses (includes $2,770 and zero of related party consulting, 2,851 64
respectively)
Common stock of subsidiary conveyed as consideration for operating expenses - 46
Provision for inventory (89) (38)
Provision for doubtful accounts and uncollectible amounts - 88
Loss on disposition of fixed assets 33 1
Finance costs associated with non-registration of common shares 1,418 349
Finance costs associated with non-conversion or exchange for common shares - 103
Preferred stock dividends as interest - 11
Default penalty on notes (related party) 472 3,382
Amortization of discounts on notes (includes $2,099 and $7,381,
respectively, with related parties) 2,731 7,381
Amortization of beneficial conversion feature on convertible notes (includes
$1,807 and $8,213, respectively, with related parties) 1,887 8,224
Realized loss on available-for-sale securities - 77
Settlement of debt (231) -
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (26) (248)
Decrease in inventories 194 63
Decrease in other assets 85 174
Increase in accounts payable and accrued expenses 192 2,631
Decrease in other liabilities and deferred revenue (599) (1,065)
-------------------- --------------------
Net cash used in operating activities $ (5,323) $ (4,345)
-------------------- --------------------
Cash flows from investing activities:
Capital expenditures $ (120) $ (63)
-------------------- --------------------
Net cash used in investing activities $ (120) $ (63)
-------------------- --------------------
Cash flows from financing activities:
Proceeds from:
Convertible notes and notes payable, net $ 5,410 $ 4,260
Repayment of notes (273) (53)
-------------------- --------------------
Net cash provided by financing activities $ 5,137 $ 4,207
-------------------- --------------------
Effect of exchange rate changes on cash $ (4) $ 2
-------------------- --------------------
Net decrease in cash and cash equivalents (310) (199)
Cash and cash equivalents - beginning of period 806 988
-------------------- --------------------
Cash and cash equivalents - end of period $ 496 $ 789
==================== ====================
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" (which may be referred to as the "company,"
"we," "our" or "us") means NCT Group, Inc. or NCT Group, Inc. and its
subsidiaries, as the context requires. 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 condensed consolidated financial
position and the results of operations and cash flows for the periods presented
in conformity with accounting principles generally accepted in the United States
of America applicable to interim periods. The results of operations for the
three and six months ended June 30, 2004 and cash flows for the six months ended
June 30, 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 $315.7 million through June 30, 2004. Cash and
cash equivalents amounted to $0.8 million at June 30, 2004, decreasing from $1.0
million at December 31, 2003. A working capital deficit of $68.3 million existed
at June 30, 2004. NCT was in default of $3.2 million of its notes payable and
$4.5 million of its convertible notes at June 30, 2004 and was subject to a
judgment of approximately $2.1 million (excluding accrued interest at 10%). Our
management believes that internally generated funds are currently insufficient
to meet our short-term and long-term operating and capital requirements. These
funds include available cash and cash equivalents and revenue derived from
technology licensing fees and royalties and product sales. NCT's ability to
continue as a going concern is substantially dependent upon future levels of
funding from its revenue sources, which are currently uncertain. If NCT is
unable to generate sufficient revenue to sustain its current level of operations
and to execute its business plan, NCT will need to obtain additional financing
to maintain its current level of operations. We are attempting to obtain
additional working capital through debt and equity financings. However, we can
give no assurance that additional financing will be available to us on
acceptable terms or at all. The failure to obtain any necessary additional
financing would have a material adverse effect on NCT, including causing a
substantial reduction in the level of its operations. These reductions, in turn,
could have a material adverse effect on NCT's relationships with its licensees,
customers and suppliers.
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. NCT's ability to continue as a going concern
is dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, equity
and/or debt financing and other funding sources to meet our obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
June 30, 2004 about NCT'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 NCT be unable to continue as a going concern.
2. Stock-Based Compensation:
We have 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, we account for
stock-based compensation transactions with employees using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB No. 25, no compensation costs are recognized if the option exercise price is
equal to or greater than the fair market price of the
6
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 June 30, 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
stockholder 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 we had applied the fair value recognition provisions of
SFAS No. 123, as amended by SFAS 148, to stock-based employee compensation.
(in thousands, except per share amounts)
Three months ended June 30, Six months ended June 30,
------------------------------- ------------------------------
2003 2004 2003 2004
-------------- -------------- -------------- -------------
Net loss attributable to common stockholders $ (8,730) $ (12,256) $ (16,480) $ (28,397)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (67) (450) (135) (902)
-------------- -------------- -------------- -------------
Pro forma net loss attributable to common stockholders $ (8,797) $ (12,706) $ (16,615) $ (29,299)
============== ============== ============== =============
Net loss per common share (basic and diluted):
As reported $ (0.02) $ (0.02) $ (0.03) $ (0.04)
============== ============== ============== =============
Pro forma $ (0.02) $ (0.02) $ (0.03) $ (0.05)
============== ============== ============== =============
Since the options granted vest over several years and additional option
grants are expected to be made in future years, the pro forma impact on the
results of operations for the three and six months ended June 30, 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 NCT's available-for-sale securities (in
thousands):
Adjusted Market Adjustment Market
Cost Basis Unrealized Value Unrealized of Unrealized Realized Value
01/01/03 Gain (Loss) 12/31/03 Additions Gain Loss Loss 06/30/04
------------ ------------ ---------- ----------- ----------- -------------- ----------- --------------
Available-for-sale:
ITC $ 94 $ (56) $ 38 $ 13 (a) $ - $ 56 $ (77) $ 30
Teltran 8 3 11 - 9 - - 20
------------ ------------ ---------- ----------- ----------- -------------- ----------- --------------
Totals $ 102 $ (53) $ 49 $ 13 $ 9 $ 56 $ (77) $ 50
============ ============ ========== =========== =========== ============== =========== ==============
Footnote:
- --------
(a) Represents shares previously classified as "Other assets" valued at
$5.00 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 these shares were reclassified as
marketable securities at their market value at that date.
7
We review declines in the value of our investment portfolio when general
market conditions change or specific information pertaining to an industry or to
an individual company becomes available. We consider all available evidence to
evaluate the realizable value of our investments and to determine whether the
decline in realizable value may be other-than-temporary. During the three and
six months ended June 30, 2004, we recognized an other-than-temporary decline of
approximately $0.1 million.
Accounts receivable comprise the following (in thousands):
December 31, June 30,
2003 2004
------------ -----------
Technology license fees and royalties $ 278 $ 485
Joint ventures and affiliates 34 34
Other receivables 284 324
------------ -----------
$ 596 $ 843
Allowance for doubtful accounts (341) (329)
------------ -----------
Accounts receivable, net $ 255 $ 514
============ ===========
Inventories comprise the following (in thousands):
December 31, June 30,
2003 2004
------------ -----------
Finished goods $ 588 $ 516
Components 203 212
------------ -----------
$ 791 $ 728
Reserve for obsolete and slow moving inventory (282) (244)
------------ -----------
Inventories, net $ 509 $ 484
============ ===========
Other current assets comprise the following (in thousands):
December 31, June 30,
2003 2004
------------ -----------
Notes receivable $ 1,000 $ 1,000
Due from officers (Note 10) 138 -
Due from former officer (Note 10) - 124
Other 172 104
------------ -----------
$ 1,310 $ 1,228
Reserve for uncollectible amounts (Note 10) (1,000) (1,100)
------------ -----------
Other current assets $ 310 $ 128
============ ===========
Other assets (long-term) comprise the following (in thousands):
December 31, June 30,
2003 2004
------------ -----------
Marketable ITC securities (a) $ 1,320 $ -
Advances and deposits 73 73
Deferred charges 223 64
------------ -----------
Other assets (classified as long term) $ 1,616 $ 137
============ ===========
Footnote:
- --------
(a) Valued at agreed amount of $5.00 per share returnable to ITC in
settlement of an obligation at December 31, 2003. The market value of
these shares at December 31, 2003, if they had not been returnable in
settlement of the obligation, would have been 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 acknowledged our 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 were 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, June 30,
2003 2004
------------ -----------
Machinery and equipment $ 1,210 $ 1,271
Furniture and fixtures 622 576
Leasehold improvements 392 391
Tooling 632 495
Other 429 429
------------ -----------
$ 3,285 $ 3,162
Accumulated depreciation (2,644) (2,581)
------------ -----------
Property and equipment, net $ 641 $ 581
============ ===========
Depreciation expense for each of the six months ended June 30, 2003 and
2004 was approximately $0.1 million.
Accrued expenses comprise the following (in thousands):
December 31, June 30,
2003 2004
------------ -----------
Non-registration fees $ 3,147 $ 3,788
Interest 1,484 1,913
Interest due to a related party 818 694
Judgments 2,072 2,066
Non-conversion fees due to a related party - 1,531
Non-exchange fees - 274
Default penalties due to a related party - 866
Consulting fees due to a related party 310 400
Other 5,968 6,108
------------ -----------
Accrued Expenses $ 13,799 $ 17,640
============ ===========
Deferred revenue comprise the following (in thousands):
December 31, June 30,
2003 2004
------------ -----------
New Transducers Ltd. $ 2,675 $ 1,605
Other 623 646
------------ -----------
$ 3,298 $ 2,251
Less: amount classified as current (2,763) (2,251)
------------ -----------
Deferred revenue (classified as long term) $ 535 $ -
============ ===========
As of June 30, 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, June 30,
2003 2004
------------ -----------
License reacquisition payable $ 4,000 $ 4,000
Development fee payable 650 650
Royalty payable 1,679 1,679
Due to selling shareholders of Theater Radio Network 557 557
Due to Lernout & Hauspie 100 100
Advance by investor 230 -
Other 11 11
------------ -----------
Other current liabilities $ 7,227 $ 6,997
============ ===========
Other liabilities (long-term) comprise the following (in thousands):
December 31, June 30,
2003 2004
------------ -----------
Due to ITC (a) $ 1,422 $ -
Other 114 82
------------ -----------
Other liabilities (classified as long term) $ 1,536 $ 82
============ ===========
Footnote:
- ---------
(a) Refer to the discussion of ITC cross-release agreement under other
assets (long-term) above.
Statements of Operations Information
Other operating income consisted of the following:
(in thousands)
Three months ended June 30, Six months ended June 30,
-------------------------------- ---------------------------------
2003 2004 2003 2004
-------------- --------------- -------------- ---------------
Settlement of accounts payable $ - $ - $ (18) $ -
Other - - (4) -
-------------- --------------- -------------- ---------------
Other operating income $ - $ - $ (22) $ -
============== =============== ============== ===============
Non-operating Other expense, net consisted of the following:
(in thousands)
Three months ended June 30, Six months ended June 30,
-------------------------------- ---------------------------------
2003 2004 2003 2004
-------------- --------------- -------------- ---------------
Finance costs associated with non-registration
of common shares $ 690 $ 174 $ 1,418 $ 349
Finance costs associated with non-exchange
for common shares - 103 - 103
Default penalties on debt 354 2,266 472 3,382
Realized loss on available-for-sale securities - 77 - 77
Settlement of notes payable (7) - (27) -
Litigation settlement - - (429) -
Other (18) 12 (3) (32)
-------------- --------------- -------------- ---------------
Other expense, net $ 1,019 $ 2,632 $ 1,431 $ 3,879
============== =============== ============== ===============
We include losses from our majority-owned subsidiaries in our condensed
consolidated statements of operations exclusive of amounts attributable to
minority shareholders' common equity interests only up to the basis of such
minority shareholders' interests. Losses in excess of that amount are borne by
NCT. Such amounts from our Pro Tech Communications, Inc. subsidiary borne by NCT
for the three and six months ended June 30, 2003 were approximately $44,000 and
$91,000, respectively. Such amounts from our Pro Tech Communications, Inc.
subsidiary borne by NCT for the three and six months ended June 30, 2004 were
approximately $43,000 and $89,000, respectively. Future earnings of our
majority-owned subsidiaries otherwise attributable to minority shareholders'
interests will be allocated again to minority shareholders only after future
earnings are sufficient to recover the cumulative losses previously absorbed by
NCT ($2.3 million at June 30, 2004).
10
Supplemental Cash Flow Information
(in thousands)
Six months ended June 30,
----------------------------------------------
2003 2004
--------------------- ---------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 15 $ 16
===================== =====================
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding loss on available-for-sale securities $ (9) $ (12)
===================== =====================
Finance costs associated with non-registration of common shares
on preferred stock of subsidiary $ 1,255 $ 292
===================== =====================
Finance costs associated with non-conversion or exchange for common
shares on preferred stock of subsidiary and parent $ - $ 1,702
===================== =====================
Receipt of common stock of subsidiary as consideration for license amendment $ - $ 275
===================== =====================
Receipt of common stock of subsidiary for payment of note receivable $ - $ 640
===================== =====================
Issuance of preferred stock for advance by investor in prior years $ - $ 230
===================== =====================
Principal on convertible notes and notes payable rolled into new notes $ 7,756 $ 25,222
===================== =====================
Interest on convertible notes and notes payable rolled into new notes $ 732 $ 1,757
===================== =====================
Default penalty on convertible notes rolled into new notes $ 760 $ 2,516
===================== =====================
Issuance of common stock upon exchange of convertible notes of subsidiary $ 460 $ -
===================== =====================
Issuance of common stock to fulfill common stock payable obligation $ 2,296 $ -
===================== =====================
Issuance of common stock to settle litigation $ 125 $ -
===================== =====================
11
4. Capital Deficit:
The changes in capital deficit during the six months ended June 30, 2004
were as follows (in thousands):
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Series H
Convertible
Preferred Stock Common Stock Additional Accumu-
--------------------- ------------------ Paid-in lated
Shares Amount Shares Amount Capital Deficit
--------------------- ------------------ -------------- ------------
Balance at December 31, 2003 2 $ 18,301 641,970 $6,420 $ 205,102 $ (289,864)
Sale of preferred stock, net - 205 - - 25 -
Beneficial conversion feature on preferred stock - (104) - - 104 -
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - 449 - - (449) -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - - - (166) -
Charges for the non-registration of the
underlying shares of NCT common stock
to subsidiary preferred shareholders - - - - (292) -
Charges for the non-conversion/exchange
for common stock of NCT to NCT and
subsidiary preferred shareholders - - - - (1,702) -
Warrants issued in conjunction with
convertible debt - - - - 10,184 -
Beneficial conversion feature on
convertible debt - - - - 10,254 -
Net loss - - - - - (25,778)
Accumulated other comprehensive loss - - - - - -
Compensatory stock options and warrants - - - - 64 -
Other - - - - 202 -
--------------------- ---------------------- -------------- ------------
Balance at June 30, 2004 2 $ 18,851 641,970 $6,420 $ 223,326 $ (315,652)
===================== ====================== ============== ============
Accumulated
Other Common
Comprehensive Shares
Loss Payable Total
------------------ ----------- ------------
Balance at December 31, 2003 $ (1,170) $ - $ (61,211)
Sale of preferred stock, net - - 230
Beneficial conversion feature on preferred stock - - -
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - - -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - (166)
Charges for the non-registration of the
underlying shares of NCT common stock
to subsidiary preferred shareholders - - (292)
Charges for the non-conversion/exchange
for common stock of NCT to NCT and
subsidiary preferred shareholders - - (1,702)
Warrants issued in conjunction with
convertible debt - - 10,184
Beneficial conversion feature on
convertible debt - - 10,254
Net loss - - (25,788)
Accumulated other comprehensive loss (39) - (39)
Compensatory stock options and warrants - - 64
Other - - 202
------------------ ----------- ------------
Balance at June 30, 2004 $ (1,209) $ - $ (68,233)
================== =========== ============
12
5. Notes Payable:
(in thousands)
December 31, June 30,
2003 2004
------------------ ------------------
Logical eBusiness Solutions Limited (f/k/a DataTec) (a) $ 2,679 $ 2,729
Obligation of subsidiary to a prior owner of Web Factory;
past due; payable in 1,500 British Pounds Sterling;
interest accrues at 4% per annum above the base rate
of National Westminister Bank plc.
Note due investor (a) 385 385
Interest at 8% per annum payable at maturity; effective interest rate
of 80.3% per annum resulting from the issuance of warrants and finders
fees; matured April 7, 2003; default interest accrues at 18% per annum.
Note due stockholder of subsidiary 142 59
Interest at 8.5% per annum; monthly payments (including interest)
of $3.5 through May 2004, remainder matured June 27, 2004.
Remainder rolled into note bearing interest at 8.5% per annum;
monthly payments(including interest) of $3.5 through May 2005,
remainder matures June 27, 2005.
Note due former employee (a) 100 100
Interest at 8.25% per annum, compounded annually.
Other financings 97 95
Interest ranging from 7% to 9% per annum;
$35 due July 15, 2003 (a); $60 all other.
------------------ ------------------
$ 3,403 $ 3,368
================== ==================
Footnote:
- ---------
(a) Notes payable are in default due to nonpayment.
6. Convertible Notes Payable:
December 31, June 30,
Related Party Convertible Notes (in thousands): 2003 2004
------------------ ------------------
Issued to Carole Salkind - related party (a) $ 33,824 $ 42,357
Weighted average effective interest rate of 91.6% per annum; accrues
interest at 8% per annum; collateralized by substantially all of the
assets of NCT; convertible into NCT common stock at prices ranging
from $0.027 - $0.053 or exchangeable for common stock of NCT
subsidiaries except Pro Tech; maturing by quarter as follows:
2003 2004
--------------- ---------------
Past due $ - $ 400
On demand 3,050 13,638
March 31, 11,163 -
June 30, 19,611 8,264
December 31, - 20,055
Less: unamortized debt discounts (5,174) (10,019)
------------------ ------------------
$ 28,650 $ 32,338
================== ==================
13
December 31, June 30,
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;
exchangeable 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) (440)
------------------ ------------------
$ 3,438 $ 3,685
================== ==================
Footnotes:
- ----------
(a) During the six months ended June 30, 2004, NCT issued an aggregate of
$33.7 million of convertible notes to Carole Salkind, a stockholder of
NCT, an accredited investor and spouse of a former director of NCT.
These notes are secured by substantially all the assets of NCT. During
the six months ended June 30, 2004, we defaulted on payment of all
notes upon their maturity and upon receipt of demand for payment for
an aggregate principal amount of $25.6 million. For the six months
ended June 30, 2004, an aggregate of $25.2 million principal was
rolled into new notes along with default penalties ($2.5 million) and
accrued interest ($1.7 million) aggregating $29.4 million. We are
currently in negotiation to cure the remaining $0.4 million principal
in default. In addition, we issued notes aggregating $4.3 million in
consideration of new funding from Carole Salkind. During the six
months ended June 30, 2004, we recorded original issue discounts of
$10.2 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 $10.2 million have been
recorded as a discount to the notes. These discounts are amortized
over the terms 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. The majority of the notes
entered into during the second quarter of 2004 had a six-month
maturity. For the three and six months ended June 30, 2004, $4.3
million and $15.6 million, respectively, of amortization related to
these and prior discounts is classified as interest expense in our
condensed consolidated statements of operations. Unamortized discounts
of $10.0 million have been reflected as a reduction to the convertible
notes in our condensed consolidated balance sheet as of June 30, 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 at the stated interest rate of the note plus 5%. As of June
30, 2004, $0.9 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 of NCT common stock for the five days
preceding conversion; a note totaling $0.6 million is convertible at
the lower of $0.07 per share or 80% of the lowest closing bid price
for the five days preceding conversion; a note totaling $0.4 million
is convertible at $0.0647 per share; a note totaling $0.2 million is
convertible at $0.04 per share and notes totaling approximately $0.4
million are convertible at 80% of the average of the
14
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, Inc. Beneficial
conversion features were recorded as a discount to the notes and are
being amortized over the term of the notes. For the three and six
months ended June 30, 2004, zero and approximately $11,000,
respectively, of amortization related to these discounts is classified
as interest expense in our condensed consolidated statements of
operations. We did not fulfill registration obligations and settled
finance costs associated with non-registration of common shares
underlying convertible notes during 2003. We are in default on
convertible notes aggregating $1.0 million due to a cross default
provision and nonpayment. In addition, we are in default on
convertible notes aggregating $0.6 million due to a cross default
provision.
(c) We were obligated but unable to register for resale shares of our
common stock issuable upon exchange of these notes at various dates
during 2001. For the three and six months ended June 30, 2004, we have
recorded charges of approximately $0.2 million and $0.3 million,
respectively, 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 nonpayment. These notes are
senior debt of Artera Group. We had received requests for exchange of
subsidiary convertible notes into our common stock and have been
unable to fulfill such requests. The note holders granted a waiver of
charges related to these requests. The waivers expired on April 10,
2004 and have not been renegotiated. For the three and six months
ended June 30, 2004, we have recorded charges of $0.1 million as a
component of finance costs associated with non-exchange for common
shares on subsidiary convertible notes included in other expense, net
(see Note 3).
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 condensed consolidated balance sheet at June 30, 2004, which is
comprised of $0.6 million of shares plus the accrued dividends of approximately
$61,000. NCT would have to issue approximately 20.2 million shares of its common
stock if settlement of the stated value had occurred as of June 30, 2004. NCT
has the option to settle the accrued dividends in cash or common stock. As of
June 30, 2004, settlement in common stock for the accrued dividends would
require issuance of approximately 2.4 million shares of our common stock. There
is no limit on the number of shares of common stock that NCT could be required
to issue upon exchange of the Pro Tech series A and B preferred stock.
For the three and six months ended June 30, 2004, 40 shares of Pro Tech
series B preferred stock plus accrued dividends were converted into 2,522,042
shares of Pro Tech common stock. At June 30, 2004, there were 50 shares of Pro
Tech series A preferred stock and 460 shares of Pro Tech series B preferred
stock outstanding. For the three and six months ended June 30, 2004, we
calculated the 4% dividends earned by holders of the Pro Tech series A and B
preferred stock at approximately $5,000 and $11,000, respectively. Following
adoption of SFAS No. 150 effective July 1, 2003, this amount is included in
interest expense.
8. Commitments and Contingencies:
Under the July 25, 2002 private equity credit agreement with Crammer Road
LLC, 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 us to Crammer Road. We are 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).
We reached an oral agreement during the fourth quarter of 2003 with Crammer Road
to cancel the July 2002 private equity credit agreement and are currently
engaged in negotiations to replace it with a new private equity credit
agreement. We expect that the new private equity agreement will have similar
business terms to the existing agreement.
15
9. Capital Stock:
Common shares available for future issuance
At June 30, 2004, we were required to reserve for issuance 4,567,599,447
shares of common stock calculated at the $0.0315 price per share on that date
(or the discount therefrom as provided under applicable exchange or conversion
agreements). At June 30, 2004, the number of shares required to be reserved for
issuance exceeded the number authorized but unissued shares of common stock. As
a result, at our next stockholder meeting, we intend to seek stockholder
approval of an amendment to our Restated Certificate of Incorporation to
increase the number of authorized shares of common stock. At June 30, 2004, we
have been unable to satisfy valid conversion, exchange and share issuance
requests to issue approximately 155.5 million shares of our common stock because
of an insufficient number of authorized but unissued shares.
NCT Group, Inc. Preferred Stock
At June 30, 2004, we had one class of issued and outstanding preferred
stock, our series H preferred stock, consisting of 2,100 designated shares. We
are obligated to register for resale shares of common stock issuable upon the
conversion of the 1,752 issued and outstanding shares of series H preferred
stock at June 30, 2004. The series H preferred stock is senior in rank to our
common stock and has a liquidation value equal to the dividends plus the stated
value in the case of liquidation, dissolution or winding up of NCT. The holder
of our series H preferred stock has no voting rights (except as may be required
by law). Each share of series H preferred stock is convertible into shares of
our common stock at 75% of the average closing bid price of our common stock for
the five-day trading period immediately preceding conversion. The holder of the
series H preferred stock is subject to a limitation on its percentage ownership
of our outstanding common stock. The series H preferred stock is redeemable by
us in cash at any time at a redemption price that is a function of the time
between the date the series H was originally issued and the redemption date. The
redemption price ranges from 85% of stated value (within three months of
issuance) to 120% of stated value (after nine months from issuance). On May 11,
2004, we issued 27 shares ($270,000 stated value) of our series H preferred
stock to Crammer Road for cash advanced in prior years of $230,000 less related
fees of $24,500. In connection with the issuance, a beneficial conversion
feature of $0.1 million was recorded as a reduction to the outstanding balance
of the preferred stock and an increase to additional paid-in capital. The
beneficial conversion feature was immediately amortized because the series H
preferred is eligible to be converted on the date of issuance. For the three and
six months ended June 30, 2004, amortization of the beneficial conversion
feature on the series H preferred stock was $0.1 million. For the three and six
months ended June 30, 2004, we calculated the 4% dividends earned by the holder
of the outstanding series H preferred stock at approximately $0.2 million and
$0.3 million, respectively. The amortization of beneficial conversion feature
and the dividend amount is included in the calculation of loss attributable to
common stockholders.
We received a request to convert 189 shares ($1,890,000 stated value) of
series H preferred stock plus accrued dividends into 52.5 million shares of our
common stock that we could not fulfill because of an insufficient number of
authorized but unissued shares of common stock. Under the Certificate of
Designations, Preferences and Rights governing the series H preferred stock and
incorporated into the June 21, 2002 exchange agreement pursuant to which these
shares were sold by NCT to Crammer Road, Crammer Road is therefore entitled to
(i) compensation for late delivery of conversion shares of 1% of the stated
value of series H not converted ($18,900) per business day beginning March 4,
2004, the 12th business day after the conversion date; or (ii) ordinary contract
breach damages. In addition, if Crammer Road elects to purchase on the open
market the number of NCT common shares it should have been issued upon exchange
of the series H shares, Crammer Road is entitled to a payment equal to the
excess, if any, of the open market price over the conversion price. Neither of
these remedies has yet been demanded by Crammer Road. For the three and six
months ended June 30, 2004, we recorded charges of $1.5 million for
non-conversion of series H preferred stock into our common stock. The
non-conversion charges and dividends are included in the calculation of loss
attributable to common stockholders.
16
Artera Group, Inc. Preferred Stock
NCT is obligated to register for resale shares of its common stock issuable
upon the exchange of 4,276 shares of Artera series A preferred stock. For the
three and six months ended June 30, 2004, we incurred charges of approximately
$0.1 million and $0.3 million, respectively, 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 their shares into NCT
preferred stock (a series to be designated) thirty days after receipt of written
notice. In 2003, we received requests to exchange Artera series A preferred
stock into our common stock and have been unable to fulfill these requests. The
stockholders granted a waiver of charges related to these requests. The waivers
expired on April 10, 2004 and have not been renegotiated. For the three and six
months ended June 30, 2004, we have recorded charges of $0.2 million for
non-exchange for common shares on subsidiary preferred stock. For the three and
six months ended June 30, 2004, we calculated the 4% dividends earned by holders
of the Artera series A preferred stock at $0.1 million and $0.2 million,
respectively. The non-registration charge, non-exchange charges and dividends
are included in the calculation of loss attributable to common stockholders.
Transactions Affecting the Common Stock of Pro Tech Communications, Inc.
At March 31, 2004, NCT Hearing Products, Inc., a wholly-owned subsidiary of
NCT, owned approximately 82% of the outstanding Pro Tech Communications, Inc.
common stock. On April 5, 2004, NCT Hearing converted $0.6 million of its notes
receivable due from Pro Tech into 27,846,351 shares of Pro Tech common stock. In
addition, on April 6, 2004, NCT Hearing transferred 2,000,000 shares of its Pro
Tech common stock to outside consultants as consideration for consulting
services valued at approximately $46,000. On April 21, 2004, NCT Hearing
expanded its existing exclusive worldwide technology license with Pro Tech. This
license, which covers over 50 patents, patents pending and innovations relating
to active noise reduction ("ANR") and noise and echo cancellation, now
encompasses all styles of headsets (an expansion from lightweight, portable
styles) including headphones, earmuffs, earbuds and earplugs, as well as all
markets (an expansion from cellular, multimedia and telephony) including
consumer audio, industrial safety, spectator racing, two-way radio
communications and aviation. In addition to having the expanded technology
license, Pro Tech now has the right, in marketing the licensed products, to use
NCT Hearing's existing brands including: NoiseBuster(R) ANR lightweight consumer
audio and communications headsets; Pro Active(R) ANR industrial safety earmuffs
and two-way radio headsets including aviation; and ClearSpeech(R) noise and echo
cancellation algorithm-based products. As consideration, NCT Hearing was issued
9,821,429 shares of Pro Tech common stock valued at $0.3 million. On April 27,
2004, 40 shares of Pro Tech series B preferred stock, plus accrued dividends,
were converted into 2,522,042 shares of Pro Tech common stock. At June 30, 2004,
NCT Hearing held approximately 86% of the outstanding Pro Tech common stock.
Options
On March 17, 2004, we granted options under our 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 stockholder approval of sufficient increases in the
number of shares of common stock (i) authorized and (ii) available for issuance
under the 2001 Plan. At the time of any such stockholder approval, if the market
value of our common stock exceeds the exercise price of the subject options, we
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 consulting 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 and six
months ended June 30, 2004, we recorded charges for consulting services of zero
and approximately $0.1 million, respectively, 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.
17
Warrants
During the six months ended June 30, 2004, in conjunction with the issuance
of convertible notes, NCT granted Carole Salkind warrants to acquire an
aggregate of 550,500,000 shares of its common stock at exercise prices ranging
from $0.027 to $0.053 per share. The fair value of these warrants for the six
months ended June 30, 2004 was approximately $14.8 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 $10.2 million for the six months ended June 30,
2004.
10. Related Parties:
Carole Salkind
During the six months ended June 30, 2004, NCT issued $33.7 million of 8%
convertible notes due upon demand to Carole Salkind (see Note 6) along with
five-year warrants to acquire an aggregate of 550,500,000 shares of NCT common
stock (see Note 9). Consideration paid for these notes included approximately
$4.3 million cash and cancellation and surrender of notes aggregating
approximately $25.2 million, along with default penalty and accrued interest.
Carole Salkind has demanded, and we have agreed, that to the extent required in
connection with her security interests under NCT's secured notes to her, NCT
will pay the legal fees she incurs as a result of legal matters (see Note 11).
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 NCT 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
2004.
Indebtedness of Former Management
Effective April 30, 2004, Jonathan M. Charry, Ph.D. resigned from his
employment with NCT Group, Inc. as its Senior Vice President, Corporate
Development. On various dates in 2000 and 2001, Dr. Charry had entered into
short-term promissory notes to borrow funds from NCT in anticipation of cash
overrides due him under his incentive compensation arrangement. As of May 1,
2002, the borrowed funds had not been repaid but were consolidated with interest
into an outstanding promissory note due January 15, 2003 for a principal amount
owed to NCT of $107,960. The note bore interest at an annual rate of 6.0%
through its due date of January 15, 2003, and bears interest at prime plus 5%
thereafter. This note was not paid when due on January 15, 2003 and became past
due. NCT continues to seek collection on the May 1, 2002 note. During the three
months ended June 30, 2004, we recorded an allowance of approximately $0.1
million for the portion of a May 1, 2002 note receivable from Dr. Charry (plus
accrued interest) exceeding the amount NCT owed to Dr. Charry.
Kambrium, AB
On May 20, 2004, NCT entered into a one-year consulting agreement with
Kambrium, AB, a Swedish consulting organization. Kambrium will assist NCT, in
particular Artera, in establishing distribution relationships, large end user
sales, resellers, capital funding, joint venture partners and private network
opportunities. We have been advised that Jonathan M. Charry, Ph.D., NCT's former
Senior Vice President, Corporate Development, was affiliated with Kambrium
through June 30, 2004. Our agreement with Kambrium provides that NCT pay an
up-front engagement fee of $32,800 (all of which has been paid) and other future
pay-for-performance consideration that is generally based on a percentage of the
value of the revenue or funding received by NCT as a direct result of Kambrium's
efforts.
18
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 suits brought by PRG (see Note 11).
In May 2004, NCT agreed to indemnify NCT's Chairman and Chief Executive
Officer for any liabilities that may arise against him in a lawsuit brought in
Connecticut against him, NCT and NCT's subsidiaries Midcore Software, Inc. and
Artera Group, Inc. by Jerrold Metcoff and David Wilson and to provide him with
legal representation in the suit (see Note 11).
11. Litigation:
Production Resource Group Litigation
On June 6, 2001, PRG brought suit in Connecticut state court against NCT
and our subsidiary, Distributed Media Corporation, for breach of agreements and
instruments relating to the lease of some Sight & Sound(R) equipment. On
December 20, 2001, NCT and DMC accepted an Offer of Judgment in the suit
requiring NCT and DMC to pay PRG $2.0 million. On January 2, 2002, outside the
scope of that judgment, PRG amended its complaint to allege that Michael
Parrella (Chairman and Chief Executive Officer of NCT), in dealing with PRG on
behalf of NCT, committed breaches of good faith and fair dealing, unfair trade
practices and fraud. On or about December 15, 2003, PRG brought suit in Delaware
state court against NCT, DMC, Michael Parrella, Irene Lebovics (President and a
Director of NCT), John McCloy II (a Director of NCT) and Sam Oolie (a Director
of NCT).
In the first Connecticut case, in the portion 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 Health Radio Network, Inc. (f/k/a DMC
HealthMedia Inc.) representing 100% of the issued and outstanding shares of
Health Radio Network, 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) Health Radio Network,
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. On June 4, 2004, PRG filed a motion for an Order in Aid
of Execution (i) authorizing PRG to institute collections proceedings and
property executions directly against those owing money to NCT and DMC (e.g.,
licensees paying royalties), (ii) authorizing such proceedings and executions
against subsidiaries of NCT and DMC for amounts owing to NCT and DMC under
intercompany notes and licenses, (iii) prohibiting intercompany transfers of
cash or other assets among NCT, DMC and their subsidiaries and (iv) compelling
additional post-judgment discovery disclosures by NCT and DMC. A hearing on the
motion was held on August 2, 2004 but was adjourned pending submission of
additional briefs. Carole Salkind has demanded, and we have agreed, that to the
extent required in connection with her security interests under NCT's secured
convertible notes to her, NCT will pay the legal fees she incurs as a result of
PRG's efforts to collect on its judgment against NCT in this Connecticut action.
At June 30, 2004, no amounts have been incurred by NCT. At December 31, 2003,
the net liabilities included in our condensed consolidated balance sheet related
to NCT Audio, DMC Cinema and Health Radio Network were $16.1 million, $4.9
million and $1.7 million, respectively. At June 30, 2004, the net liabilities
included in our condensed consolidated balance sheet related to NCT Audio, DMC
Cinema and Health Radio Network were $15.4 million, $5.0 million and $1.9
million, respectively. For the six months ended June 30, 2003, the net earnings
(loss) before income taxes included in our condensed consolidated statement of
operation related to NCT Audio, DMC Cinema and Health Radio Network were $1.4
million, less than $(0.1) million and $(0.3) million, respectively. For the six
months ended June 30, 2004, the net earnings (loss) before income taxes included
in our condensed consolidated statement of operation related to NCT Audio, DMC
Cinema and Health Radio Network were $0.7 million, $(0.1) million and $(0.3)
million, respectively.
19
In the first Connecticut case, in the portion against 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 is expected to take place in the fall of 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 to add Cy 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
intends to challenge the initial indemnification insurance denials if the motion
to dismiss is denied. 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. A hearing on the defendants' amended
motion to dismiss is scheduled for September 20, 2004. 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.
On or about May 14, 2004, PRG brought a second suit in Connecticut state
court, this one against NCT and Carole Salkind (a secured lender to NCT),
alleging fraudulent transfers in connection with certain collateral Ms. Salkind
has for her loans to NCT. In this second Connecticut suit, PRG seeks to have the
court void NCT's transfer of possession of stock certificates and promissory
notes it held to Carole Salkind (who has security interests in all of such
assets), so that the certificates and notes, once returned, may be subject to
judicial process in PRG's first Connecticut suit, described above. In addition,
PRG seeks to have the court re-characterize Salkind's secured loans to NCT as
equity rather than debt, which would give PRG greater rights against the secured
assets in the first Connecticut suit. PRG seeks, in the alternative, to have the
court subordinate the Salkind debt to NCT's debts to other creditors (including
PRG), again increasing PRG's rights against these assets in the first
Connecticut suit. PRG also seeks compensatory damages, punitive damages and
attorneys' fees, all in unspecified amounts. NCT intends to deny all of the
material allegations against it in the suit and defend itself in the suit
vigorously. Ms. Salkind has told NCT that she intends to deny all of the
material allegations against her in the suit and defend herself in the suit
vigorously. Ms. Salkind has demanded, and we have agreed, that to the extent
required in connection with her security interests under NCT's secured
convertible notes to her, NCT will pay the legal fees she incurs as a result of
the PRG claims in this second Connecticut action. At June 30, 2004, no amounts
have been incurred by NCT.
Founding Midcore Shareholder Litigation
On or about April 16, 2004, Jerrold Metcoff and David Wilson filed a
complaint 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. On or
about June 17, 2004, Messrs. Metcoff and Wilson amended their complaint to add
claims against the existing defendants relating primarily to their dealings with
Carole Salkind and, in a related filing on July 12, 2004, requested that the
court permit them to add Carole Salkind as a defendant. The request to add
Carole Salkind is currently pending. This 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 requires NCT to issue additional shares of its 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, NCT is required to issue 26,193,025 shares 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, NCT is required to issue 34,166,551 shares for the royalty payment.
NCT did not issue
20
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, as amended, alleges 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's and Wilson's
contractual relations with NCT and Midcore; (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 and (vii) fraudulent
transfers and civil conspiracy of NCT and Ms. Salkind in a number of financing
transactions of NCT and in the treatment of NCT assets constituting collateral
in such financings. The complaint, as amended, seeks damages, punitive damages,
interest and attorneys' fees, all in unspecified amounts. (In a subsequent court
filing, the plaintiffs claimed they are owed "in excess of $3,000,000.00.") On
July 2, 2004, NCT, Midcore, Artera and Mr. Parrella filed a motion to strike a
number of the claims against them in the amended complaint. That motion is
currently pending. On July 6, 2004, the case was transferred to Connecticut's
Complex Litigation Docket in Waterbury. 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 has submitted
the claims against Mr. Parrella to its director and officer indemnification
insurance carrier, but the carrier has not yet responded to confirm or initially
deny coverage. Carole Salkind has demanded, and we have agreed, that to the
extent required in connection with her security interests under NCT's secured
notes to her, NCT will pay the legal fees she incurs as a result of the claims
in this action. NCT intends to defend against all claims against it in the
action and 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. Ms. Salkind has told
NCT that, if she is added as a defendant under the amended complaint, she
intends to deny and defend against all claims against her.
Reference is made to our Annual Report on Form 10-K for the year ended
December 31, 2003, for further information regarding the foregoing matters. We
believe 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 our financial position and results of operations.
12. Segment Information:
NCT is organized into three operating segments: communications, media and
technology. The other segment is used to reconcile the reportable segment data
to the condensed consolidated financial statements and is segregated into two
categories, other-corporate and other-consolidating. Other-corporate consists of
items maintained at our corporate headquarters and not allocated to the
segments. This includes most of our 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 and six months ended June 30, 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.
21
Reportable segment data for the three and six months ended June 30, 2004
and June 30, 2003 is as follows (in thousands):
For the three months ended Reportable ---------- Other ---------- Grand
June 30, 2004: Communications Media Technology Segments Corporate Consolidating Total
- --------------------------------------- ------------------------------------------------------------------------------------------
License fees and royalties - external $ 398 $ 535 $ 29 $ 962 $ - $ - $ 962
Other revenue - external 434 44 - 478 - - 478
Other revenue - other operating
segments 278 1 - 279 325 (604) -
Net (loss) income (2,790) (1,042) (13) (3,845) (6,807) 604 (10,048)
For the three months ended Reportable ---------- Other ---------- Grand
June 30, 2003: Communications Media Technology Segments Corporate Consolidating Total
- --------------------------------------- ------------------------------------------------------------------------------------------
License fees and royalties - external $ 66 $ 535 $ - $ 601 $ 4 $ - $ 605
Other revenue - external 422 23 - 445 - - 445
Other revenue - other operating
segments 261 2 - 263 42 (305) -
Net (loss) income (2,975) (743) 27 (3,691) (4,811) 597 (7,905)
For the six months ended Reportable ---------- Other ---------- Grand
June 30, 2004: Communications Media Technology Segments Corporate Consolidating Total
- --------------------------------------- ------------------------------------------------------------------------------------------
License fees and royalties - external $ 482 $1,070 $ 131 $ 1,683 $ - $ - $ 1,683
Other revenue - external 870 81 - 951 - - 951
Other revenue - other operating
segments 583 2 - 585 328 (913) -
Net (loss) income (5,510) (1,968) 57 (7,421) (19,560) 1,193 (25,788)
For the six months ended Reportable ---------- Other ---------- Grand
June 30, 2003: Communications Media Technology Segments Corporate Consolidating Total
- --------------------------------------- ------------------------------------------------------------------------------------------
License fees and royalties - external $ 236 $ 1,070 $ - $ 1,306 $ 5 $ - $ 1,311
Other revenue - external 877 44 - 921 - - 921
Other revenue - other operating
segments 536 3 - 539 169 (708) -
Net (loss) income (5,969) (1,543) 58 (7,454) (8,431) 1,193 (14,692)
13. Subsequent Events:
Financing Transactions with Carole Salkind
On July 16, 2004, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $0.4 million as consideration for cash. The note is due
January 16, 2005 and may be converted into NCT common stock (at $0.029 per
share) and exchanged for shares of common stock of any subsidiary of NCT (except
Pro Tech) that makes a public offering of its common stock (at the public
offering price). In conjunction with this note issuance, we issued Ms. Salkind a
five-year warrant to acquire approximately 6.8 million shares of NCT common
stock at an exercise price per share of $0.029. The relative estimated fair
value of the warrant will be reflected as original issue discount to the note
and amortized as interest expense over the term of the note.
22
Also on July 16, 2004, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of approximately $9.5 million to cure our default under two
notes dated December 31, 2003 that matured on June 30, 2004. The principal
amount of this note represents the principal amounts rolled over (approximately
$7.5 million and $0.8 million), default penalty (10% of the principal in
default) and accrued interest. The note matures on January 16, 2005 and may be
converted into NCT common stock (at $0.0296 per share) and exchanged for shares
of common stock of any subsidiary of NCT (except Pro Tech) that makes a public
offering of its common stock (at the public offering price). In conjunction with
this note issuance, we issued Ms. Salkind a five-year warrant to acquire 156.0
million shares of NCT common stock at an exercise price per share of $0.0296.
The relative estimated fair value of the warrant will be reflected as original
issue discount to the note and amortized as interest expense over the term of
the note.
On August 2, 2004, NCT issued Ms. Salkind an 8% convertible note in the
principal amount of $13.6 million to cure our default under eight demand notes
for which Ms. Salkind made a demand for payment on July 29, 2004. The principal
amount of this note represents the principal rolled over aggregating $12.0
million, default penalty (10% of the principal in default) and accrued interest.
The note matures on February 2, 2005 and may be converted into NCT common stock
(at $0.027 per share) and exchanged for shares of common stock of any subsidiary
of NCT (except Pro Tech) that makes a public offering of its common stock (at
the public offering price). In conjunction with this note issuance, we issued
Ms. Salkind a five-year warrant to acquire approximately 223.8 million shares of
NCT common stock at an exercise price per share of $0.027. The relative
estimated fair value of the warrant will be reflected as original issue discount
to the note and amortized as interest expense over the term of the note.
Also on August 2, 2004, NCT issued Ms. Salkind an 8% convertible note in
the principal amount of $0.4 million, for which Ms. Salkind paid NCT $0.4
million in cash. The note is due February 2, 2005 and may be converted into NCT
common stock (at $0.027 per share) and exchanged for shares of common stock of
any subsidiary of NCT (except Pro Tech) that makes a public offering of its
common stock (at the public offering price). In conjunction with this note
issuance, we issued Ms. Salkind a five-year warrant to acquire 7.5 million
shares of NCT common stock at an exercise price per share of $0.027. The
relative estimated fair value of the warrant will be reflected as original issue
discount to the note and amortized as interest expense over the term of the
note.
Other Financing Transactions
On July 23, 2004, NCT issued subordinate secured convertible notes to Alpha
Capital Aktiengesellschaft and Longview Fund LP for an aggregate principal
amount of $0.9 million. These notes are secured by substantially all of the
assets of NCT. In addition, NCT issued unsecured convertible notes to Libra
Finance S.A. and Bi-Coastal Consulting Corp., as finders, in the aggregate
principal amount of approximately $0.1 million. The notes mature on July 23,
2006 and bear interest at 8% per annum, payable at maturity. Until the notes are
paid in full, the holders have the right to convert any outstanding principal of
the notes and, at their election, the interest accrued on the notes into shares
of NCT common stock at a conversion price per share of the lesser of $0.0232 or
80% of the average of the closing bid price for the five days immediately
preceding conversion. In conjunction with the issuance of these notes to Alpha
and Longview, we issued five-year warrants to acquire an aggregate of
approximately 12.5 million shares of our common stock at an exercise price equal
to the conversion price of the notes. The relative estimated fair value of the
warrants will be reflected as original issue discount to the notes and amortized
as interest expense over the term of the notes.
Other Consulting
On July 1, 2004, NCT entered into a sixteen-month consulting agreement with
Manatt Jones Global Strategies, LLC, a consulting organization. Manatt will
assist NCT, in particular Artera, in establishing distribution relationships,
large end user sales, resellers, capital funding, joint venture partners and
private network opportunities. We have been advised that Jonathan M. Charry,
Ph.D., NCT's former Senior Vice President, Corporate Development, is now
affiliated with Manett. Our agreement with Manett provides that NCT pay a
monthly fee of $16,250.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
Caution Concerning Forward-Looking Statements
This report contains forward-looking statements, in accordance with Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that reflect our current estimates,
expectations and projections about our future results, performance, prospects
and opportunities. Forward-looking statements include all statements that are
not historical facts. These statements are often identified by words such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "may,"
"should," "will," "would" and similar expressions. These forward-looking
statements are based on information currently available to us and are subject to
numerous risks and uncertainties that could cause our actual results,
performance, prospects or opportunities to differ materially from those
expressed in, or implied by, the forward-looking statements we make in this
report. Important factors that could cause our actual results to differ
materially from the results referred to in the forward-looking statements we
make in this report include:
o our ability to generate sufficient revenues to sustain our current level of
operations and to execute our business plan;
o our ability to obtain additional financing if and when necessary;
o the level of demand for our products and services;
o the level and intensity of competition in our industries;
o our ability to develop new products and the market's acceptance of these
products;
o our ability to maintain and expand our strategic relationships;
o our ability to protect our intellectual property;
o difficulties or delays in manufacturing;
o our ability to effectively manage our operating costs;
o our ability to attract and retain key personnel; and
o additional factors discussed in our Annual Report on Form 10-K for the year
ended December 31, 2003 and our other filings with the Securities and
Exchange Commission.
You should not place undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason after the date of this report.
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.
Overview
NCT designs products and develops and licenses technologies based upon our
portfolio of patents and related proprietary rights and extensive technological
know-how. Our business operations are organized into three operating segments:
communications, media and technology. Our operating revenue is comprised of
technology licensing fees and royalties, product sales, advertising and
engineering and development services. Operating revenue for the six months ended
June 30, 2004 consisted of approximately 63.9% in technology licensing fees and
royalties, 33.5% in product sales and 2.6% in advertising. The mix of our
revenue sources during any reporting period may have a material impact on our
results of operations. In particular, our execution of technology licensing
agreements and the timing of the revenue recognized from these agreements has
not been predictable.
We have continued our practice of marketing our technologies through
licensing to third parties for fees, generally by obtaining technology license
fees when initiating strategic relationships with new partners, and subsequent
royalties. We have entered into a number of licensing agreements with
established firms for the integration of our technologies into products. The
speed with which we can achieve the commercialization of our technologies and
subsequently receive royalties depends, in part, upon the time taken by these
firms for product testing and their assessment of how best to integrate our
technology into their products and manufacturing operations. While we work with
these firms on product testing and integration, we are not always able to
influence
24
how quickly this process can be completed and a resulting revenue stream can be
generated. Currently, we are selling products through several of our licensees,
including Oki, which is integrating our ClearSpeech(R) algorithms into large
scale integrated circuits for communications applications, Sharp, which is
incorporating our ClearSpeech(R) adaptive speech filter algorithm into
third-generation cellular telephones and STMicroelectonics, which is integrating
our T2J microprocessor core into smart card applications.
Going Concern Risks
Since inception, we have experienced substantial recurring losses from
operations, which amounted to $315.7 million on a cumulative basis through June
30, 2004. Internally generated funds from our revenue sources have not been
sufficient to cover our operating costs. The ability of our revenue sources,
especially technology license fees, royalties, product sales and advertising, to
generate significant cash for our operations is critical to our long-term
success. We cannot predict whether we will be successful in obtaining market
acceptance of our new products or technologies or in completing our current
licensing agreement negotiations. To the extent our internally generated funds
are not adequate, our management believes we will need to obtain additional
working capital through equity and/or debt financings. However, we can give no
assurance that any additional financing will be available to us on acceptable
terms or at all. In addition, in order to obtain additional financing through
the sale of shares of our common stock, we will need to obtain the approval of
our stockholders of an amendment to our certificate of incorporation to
sufficiently increase the number of authorized shares of our common stock.
However, we can give no assurance that our stockholders would approve a
sufficient increase in our authorized shares of common stock.
Our management believes that currently available funds will not be
sufficient to sustain our operations at current levels through the next six
months. These funds consist of available cash and the funding derived from our
revenue sources. Cash and cash equivalents amounted to $0.8 million at June 30,
2004 and the working capital deficit was $68.3 million. We have been able to
continue our operations by raising additional capital. We have been primarily
dependent upon funding from Carole Salkind in 2003 and to date in 2004. In the
event that external financing is not available or timely, we will be required to
substantially reduce our level of operations in order to conserve cash. These
reductions could have an adverse effect on our relationships with our customers
and suppliers. Reducing operating expenses and capital expenditures alone may
not be adequate, and continuation as a going concern is dependent upon the level
of funding realized from our internal and external funding sources, all of which
are currently uncertain.
Our condensed consolidated financial statements have been prepared assuming
that we will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. Our ability to continue as a going concern is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, equity
and/or debt financings and other funding sources to meet our obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
June 30, 2004 about our ability to continue as a going concern. Our accompanying
condensed consolidated financial statements do not include any adjustments
relating to the recoverability of the carrying amount of recorded assets or the
amount of liabilities that might result from the outcome of these uncertainties.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires our 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
25
accounting policies is contained in our filings with the Securities and Exchange
Commission, including, 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 and later 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 and title has passed. Revenue from subscription
services (included in product sales) is deferred and recognized ratably over the
period when the service is provided (subscription period). 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 of operations. In
particular, our execution of technology licensing agreements and the timing of
the revenue recognized from these agreements 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 June 30, 2004, our deferred revenue aggregated $2.3 million. We do not
expect to realize any additional cash in connection with recognizing revenue
from our deferred revenue.
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. We also record
goodwill 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, we test our goodwill for impairment. We also recognize 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, we
evaluated the goodwill allocated to our 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 June
30, 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 amortized using the straight-line method over the
remaining useful lives, ranging from one to seventeen years. Amortization
expense for each of the six months ended June 30, 2003 and 2004 was $0.1
million.
We evaluate 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. We evaluate our 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 June 30, 2004, our patent rights and other
intangibles, net were $1.1 million.
26
Results of Operations
Three months ended June 30, 2004 compared to three months ended June 30, 2003.
Revenue. Total revenue for the three months ended June 30, 2004 was $1.4
million compared to $1.1 million for the same period in 2003, an increase of
$0.3 million, or 27.3%, reflecting increases in our technology licensing fees
and royalties, product sales and advertising sources. Total revenue for the
three months ended June 30, 2004 consisted of approximately 66.8% in technology
licensing fees and royalties, 30.7% in product sales and 2.5% in advertising
revenue as compared to the three months ended June 30, 2003 of approximately
57.6% in technology licensing fees and royalties, 39.0% in product sales, 1.0%
in advertising and 2.4% in engineering and development services.
Technology licensing fees and royalties were $1.0 million for the three
months ended June 30, 2004 as compared to $0.6 million for the same period in
2003, an increase of $0.4 million, or 66.7%. This increase was due primarily to
royalties resulting from the license of our ClearSpeech(R) adaptive speech
filter algorithm to Sharp for use in third generation cellular phones and the
license of our ClearSpeech(R) algorithms to Oki for use in large scale
integrated circuits for communications applications. Our recognition of license
fee revenue for both periods was due primarily to recognition of deferred
revenue from the New Transducers Ltd. (NXT) license. At June 30, 2004, our
deferred revenue related to NXT was $1.6 million. No additional cash will be
realized from our deferred revenue.
For each of the three months ended June 30, 2004 and 2003, product sales
were $0.4 million. Gross profit on product sales, as a percentage of product
sales, for the three months ended June 30, 2004 and 2003 was 54.8% and 56.0%,
respectively. For the three months ended June 30, 2004 and 2003, 98% and 95%,
respectively, of our product sales were attributable to the communications
segment. The mix of our product sales within the communications segment for the
three months ended June 30, 2004 includes 62% of Pro Tech products and 20% of
Artera Turbo subscriptions whereas the same period in the prior year includes
61% of Pro Tech products and 1% of Artera Turbo subscriptions. Our subscriber
base that generated the Artera Turbo product sales for the three months ended
June 30, 2004 consisted of residential and small business users.
Advertising revenue was $36,000 for the three months ended June 30, 2004
compared to $11,000 for the same period in 2003. Health Radio Network (shares of
which were surrendered in the PRG litigation - see Note 11 - notes to the
condensed consolidated financial statements) is the business responsible for the
sale of audio and visual advertising in healthcare venues employing our Sight &
Sound(R) systems and contributed 100% of total advertising revenue for both
periods.
Costs and expenses. Total costs and expenses for the three months ended
June 30, 2004 were $11.5 million compared to $9.0 million for the same period in
2003, an increase of $2.5 million, or 27.8%, due primarily to a $2.0 million
increase in interest expense, net and a $1.6 million increase in other expense,
net partially offset by a decrease in selling, general and administrative
expenses.
For the three months ended June 30, 2004, selling, general and
administrative expenses totaled $2.2 million as compared to $3.5 million for the
three months ended June 30, 2003, a decrease of $1.3 million, or 37.1%. This
decrease was due primarily to a $1.5 million decrease in consulting expense
resulting from decreased non-cash charges from the issuance of options during
the three months ended June 30, 2004.
For the three months ended June 30, 2004, research and development
expenditures totaled $1.1 million as compared to $0.9 million for the three
months ended June 30, 2003, an increase of $0.2 million, or 22.2%. This increase
was due primarily to an increase in the amortization of deferred charges related
to the installation costs of our Sight & Sound(R) systems in commercial venues
and an increase in Artera Turbo research and development efforts during the
three months ended June 30, 2004, including the development of other components
of our Artera Turbo subscription service.
For the three months ended June 30, 2004, other expense, net totaled $2.6
million as compared to $1.0 million for the three months ended June 30, 2003, an
increase of $1.6 million, or 160%. The increase was due primarily to a $1.9
million increase in default penalties on convertible notes partially offset by a
decrease in finance costs associated with non-registration of common shares
underlying convertible notes.
27
For the three months ended June 30, 2004, interest expense, net totaled
$5.4 million as compared to $3.4 million for the three months ended June 30,
2003, an increase of $2.0 million, or 58.8%. The increase in interest expense is
attributable to the immediate expensing of the relative fair value of warrants
(original issue discounts and beneficial conversion features) allocated to the
related debt that is due upon demand. Interest expense for the three months
ended June 30, 2004 includes amortization of original issue discounts of $1.9
million, amortization of beneficial conversion features in convertible debt of
$2.3 million, and interest on convertible debt issued by NCT of $1.1 million.
Six months ended June 30, 2004 compared to six months ended June 30, 2003.
Revenue. For the six months ended June 30, 2004, total revenue amounted to
$2.6 million, compared to $2.2 million for six months ended June 30, 2003, an
increase of $0.4 million, or 18.2%, due primarily to increases in our technology
licensing fees and royalties. Total revenue for the six months ended June 30,
2004 consisted of approximately 63.9% in technology licensing fees and
royalties, 33.5% in product sales and 2.6% in advertising as compared to the six
months ended June 30, 2003 of approximately 58.7% in technology licensing fees
and royalties, 39.3% in product sales, 0.9% in advertising and 1.1% in
engineering and development services.
Technology licensing fees and royalties were $1.7 million for the six
months ended June 30, 2004 as compared to $1.3 million for the same period in
2003, an increase of $0.4 million, or 30.8%. The increase was due primarily to
an increase in royalties resulting from the license of our ClearSpeech(R)
adaptive speech filter algorithm to Sharp for use in third generation cellular
phones. In addition, our technology license fees increased by $0.1 million
resulting from the cross-release agreement with Infinite Technology Corporation
(see Note 3 - notes to the condensed consolidated financial statements). The
technology licensing fees for the six months ended June 2004 and 2003 were due
primarily to the recognition of deferred revenue from the NXT license. As of
June 30, 2004, our deferred revenue for NXT was $1.6 million. No additional cash
will be realized from our deferred revenue balance.
For each of the six months ended June 30, 2004 and 2003, product sales were
$0.9 million. Gross profit on product sales, as a percentage of product sales,
for the six months ended June 30, 2004 and 2003 was 50.3% and 55.7%,
respectively. For the six months ended June 30, 2004 and 2003, 99% and 95%,
respectively, of our product sales were attributable to the communications
segment. The mix of our product sales within the communication segment for the
six months ended June 30, 2004 includes 62% of Pro Tech products and 16% of
Artera Turbo subscriptions whereas the same period in the prior year includes
70% of Pro Tech products and 1% of Artera Turbo subscriptions. Our subscriber
base that generated the Artera Turbo product sales for the six months ended June
30, 2004 consisted of residential and small business users. On March 22, 2004,
Avaya Inc. announced it is offering our product within its Network Bandwidth
Optimization software solution to enterprise subscribers (businesses with 250 or
more users). At June 30, 2004, we had no enterprise subscribers.
Advertising revenue was $68,000 for the six months ended June 30, 2004
compared to $20,000 for the same period in 2003. Health Radio Network (shares of
which were surrendered in the PRG litigation - see Note 11 - notes to the
condensed consolidated financial statements) is the business responsible for the
sale of audio and visual advertising in healthcare venues employing our Sight &
Sound(R) systems and contributed 100% of total advertising revenue for both
periods.
Costs and expenses. Total costs and expenses for the six months ended June
30, 2004 were $28.4 million compared to $16.9 million for the same period in
2003, an increase of 68%, or $11.5 million, due primarily to an $11.5 million
increase in interest expense, net and a $2.5 million increase in other expenses,
net, partially offset by a $2.8 million decrease in selling, general and
administrative expenses.
Cost of product sales was $439,000 for the six months ended June 30, 2004
and $388,000 for the six months ended June 30, 2003. The increase resulted from
an expansion of our Artera Turbo data centers. Cost of advertising revenue was
$8,000 for the six months ended June 30, 2004 compared to $4,000 for the same
period in 2003. These costs include the commissions paid to advertising
representative companies and agencies and communication expenses related to the
Sight & Sound(R) locations in commercial and healthcare venues.
For the six months ended June 30, 2004, selling, general and administrative
expenses totaled $4.2 million as compared to $7.0 million for the six months
ended June 30, 2003, a decrease of $2.8 million, or 40.0%. This decrease was due
primarily to a $2.8 million decrease in consulting expense resulting from
decreased non-cash charges from the issuance of options during the six months
ended June 30, 2004.
28
For the six months ended June 30, 2004, research and development
expenditures totaled $2.2 million as compared to $1.8 million for the six months
ended June 30, 2003, an increase of $0.4 million, or 22.2%. This increase was
due primarily to: (i) a $0.3 million increase in compensation and benefit costs
related to Artera Group, Inc. (ii) a $0.1 million increase related to the
cross-release entered into with Infinite Technology Corporation (see Note 3 -
notes to the condensed consolidated financial statements) and (iii) a $0.1
million increase in the amortization of deferred charges related to the
installation costs of our Sight & Sound(R) systems in commercial venues. These
increases were partially offset by a decrease in our depreciation and
amortization expense related to our research equipment. Our research and
development efforts during the six months ended June 30, 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.
For the six months ended June 30, 2004, other expense, net totaled $3.9
million as compared to $1.4 million for the six months ended June 30, 2003, an
increase of $2.5 million, or 178.6%. The increase was due primarily to a $2.9
million increase in default penalties on convertible notes and a $0.1 million
increase in finance costs associated with non-exchange for common shares
partially offset by a decrease in finance costs associated with non-registration
of common shares underlying convertible notes and income related to a litigation
settlement.
For the six months ended June 30, 2004, interest expense, net totaled $17.7
million as compared to $6.2 million for the six months ended June 30, 2003, an
increase of $11.5 million, or 185.5%. The increase in interest expense is
primarily attributable to the immediate expensing of the relative fair value of
warrants (original issue discounts and beneficial conversion features) allocated
to the related debt that is due upon demand. Interest expense for the six months
ended June 30, 2004 includes amortization of original issue discounts of $7.4
million, amortization of beneficial conversion features of $8.2 million, and
interest on debt issued by the company of $2.1 million.
Liquidity and Capital Resources
We have experienced substantial losses from operations since inception,
which have been recurring and amounted to $315.7 million on a cumulative basis
through June 30, 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 the 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 that internally generated funds are currently insufficient to
meet our short-term and long-term operating and capital requirements. These
funds include available cash and cash equivalents and revenues derived from
technology licensing fees and royalties and product sales. Our ability to
continue as a going concern is substantially dependent upon future levels of
funding from our revenue sources, which are currently uncertain. If we are
unable to generate sufficient revenue to sustain our current level of operations
and to execute our business plan, we will need to obtain additional financing to
maintain our current level of operations. We are attempting to obtain additional
working capital through debt and/or equity financings. However, we can give no
assurance that additional financing will be available to us on acceptable terms
or at all. The failure to obtain any necessary additional financing would have a
material adverse effect on us, including causing a substantial reduction in the
level of our operations. These reductions, in turn, could have a material
adverse effect on our relationships with our licensees, customers and suppliers.
The uncertainty surrounding future levels of funding from our revenue sources
and the availability of any necessary additional financing raises substantial
doubt at June 30, 2004 about our ability to continue as a going concern.
29
We have entered into financing transactions because internally generated
funding sources have been insufficient to maintain our operations. Our financing
transactions to fund our business pursuits during the six months ended June 30,
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 our failure to repay her notes
as the notes matured. However, we have no legally binding assurance that Ms.
Salkind will continue to fund 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 June 30, 2004, our cash and cash equivalents aggregated $0.8 million.
Our working capital deficit was $68.3 million at June 30, 2004, compared to a
deficit of $60.8 million at December 31, 2003, a $7.5 million increase. Our
current assets were approximately $2.0 million at June 30, 2004 compared to
approximately $2.1 million at December 31, 2003. The decline in current assets
was due primarily to the decrease in our cash and cash equivalents balance of
approximately $0.2 million. Our current liabilities were approximately $70.3
million at June 30, 2004 compared to approximately $62.9 million at December 31,
2003. The $7.4 million increase in current liabilities was due primarily to the
issuance and rollover of convertible notes to Carole Salkind of $3.7 million
(net of discounts) and an increase in accrued expenses of $3.8 million. We are
in default of $3.2 million of our notes payable and $4.5 million of our
convertible notes at June 30, 2004 and are subject to a judgment of
approximately $2.1 million (excluding accrued interest at 10%). The following
table summarizes our indebtedness in default at June 30, 2004.
(in millions)
New Defaults
Indebtedness Defaults Cured Indebtedness
In Default during during In Default
Notes Payable: 12/31/03 the Period the Period 06/30/04
-------------------- ------------------ ------------------ -----------------
Obligation to prior owner
of Web Factory $ 2.7 (a) $ - $ - $ 2.7 (a)
Former Employee / Other 0.5 (a) - - 0.5 (a)
-------------------- ------------------ ------------------ -----------------
Subtotal $ 3.2 $ - $ - $ 3.2
-------------------- ------------------ ------------------ -----------------
Convertible Notes Payable:
Carole Salkind Notes $ - $ 25.6 $ (25.2) $ 0.4 (a)
8% Notes 1.0 (b) 0.6 - 1.6 (a,b)
6% Notes 2.5 (a) - - 2.5 (a)
-------------------- ------------------ ------------------ -----------------
Subtotal $ 3.5 $ 26.2 $ (25.2) $ 4.5
-------------------- ------------------ ------------------ -----------------
Grand Total $ 6.7 $ 26.2 $ (25.2) $ 7.7
==================== ================== ================== =================
Footnotes:
- ----------
(a) Default due to nonpayment.
(b) Default due to cross default provision (default on other debt).
Net cash used in operating activities for the six months ended June 30,
2004 was $4.3 million due primarily to funding the 2004 net loss of $25.8
million, as adjusted to reconcile to net cash.
Our deferred revenue balance at June 30, 2004 was $2.3 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 $0.1 million for the six-month
period ended June 30, 2004 due to purchase of capital equipment. The capital
expenditures were primarily for Artera Group, Inc. as we added an Artera Turbo
data center in anticipation of future growth.
30
At each of June 30, 2004 and December 31, 2003, our 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 and realizable values of these securities are subject to
substantial price volatility and other market conditions.
Net cash provided by financing activities was $4.2 million for the
six-month period ended June 30, 2004 and was due primarily to the issuance and
sale of convertible notes to Ms. Salkind.
At June 30, 2004, our short-term debt was $39.4 million (principally
comprised of $36.0 million face value of outstanding convertible notes payable,
net and $3.4 million of outstanding notes payable), shown net of discounts of
approximately $10.0 million on our condensed consolidated balance sheet,
compared to $35.5 million of short-term debt, net at December 31, 2003, an
increase of $3.9 million. The cash proceeds from debt issued in 2004 were
primarily used for working capital purposes.
During the six months ended June 30, 2004, we issued an aggregate of $33.7
million of convertible notes to Carole Salkind, as consideration for $4.3
million of cash and the rollover of $25.2 million in principal of matured
convertible notes along with $1.7 million of interest, and $2.5 million of
default penalties (10% of the principal in default).
As of June 30, 2004, we are in default (primarily from nonpayment) on $7.7
million of our indebtedness, including $3.2 million of notes payable and $4.5
million of convertible notes (refer to Notes 5 and 6 - notes to the condensed
consolidated financial statements for disclosure of material defaults). We
expect 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, our
flexibility with regard to long-term financing activity could be limited by: (i)
the liquidity of our common stock on the open market; (ii) our current level of
short-term debt; and (iii) our credit ratings. In addition, many of the factors
that affect our 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
our control. We can give no assurances that we will continue to have access to
the capital markets on favorable terms.
We have no lines of credit with banks or other lending institutions and
therefore have no unused borrowing capacity. We will not have access to the
private equity credit agreement dated July 25, 2002 until our stockholders
approve an increase in authorized shares of our common stock and we register for
resale the underlying shares of NCT common stock.
Capital Expenditures
We intend to continue our business strategy of working with supply,
manufacturing, distribution and marketing partners to commercialize our
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 June 30, 2004, we have 33 of the approximately 400 Barnes & Noble
College Bookstores operating our Sight & Sound(R) system. Our average cost for
outfitting a store is approximately $18,000. The initial five-year term of our
agreement with Barnes & Noble College Bookstores expired in May 2004. Presently,
we do not expect to continue installing Sight & Sound(R) systems in additional
retail stores.
At June 30, 2004, in connection with the proposed release of a new
industrial hearing protection product, we anticipate incurring approximately
$0.1 million in tooling costs payable as follows: one-quarter at inception,
one-quarter with first shipment and the remainder based upon unit production,
not to exceed twelve months.
Other than the above-mentioned expenditures, there were no material
commitments for capital expenditures as of June 30, 2004, and no material
commitments are anticipated in the near future.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures include fluctuations in interest rates
and foreign exchange rates. We are exposed to short-term interest rate risk on
some of our obligations. We do not use derivative financial instruments to hedge
cash flows for these obligations. In the normal course of business, we employ
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
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Act of 1934,
as amended) as of June 30, 2004. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of June 30, 2004 were effective in ensuring that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. We believe that a control system, no matter how
well designed and operated, cannot provide absolute assurance that the
objectives of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, could be detected within a company.
Changes in internal controls
There were no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2004 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
32
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of our legal proceedings, see Note 11 - Litigation
included in the notes to the condensed consolidated financial statements herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The table below identifies all unregistered sales of our securities from
April 1, 2004 through June 30, 2004, as well as the amount and nature of the
consideration paid by each purchaser. The issuances of these securities were not
registered under the Securities Act of 1933, as amended, pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act
and/or Regulation D under the Act.
- ---------------------------------------------------------- --------------------------------- ---------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
04/01/04 NCT Convertible Note ($410,000.00 Carole Salkind $410,000 in cash
principal amount)
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
04/01/04 Warrant to purchase 6,750,000 shares Carole Salkind Agreement to purchase NCT Convertible
of NCT commonstock at $0.053 per Note
share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
04/14/04 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
04/14/04 Warrant to purchase 6,750,000 shares Carole Salkind Agreement to purchase NCT Convertible
of NCT common stock at $0.0501 Note
per share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
05/07/04 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
05/07/04 Warrant to purchase 6,750,000 shares Carole Salkind Agreement to purchase NCT Convertible
of NCT common stock at $0.041 Note
per share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
05/11/04 27 shares of Series H Convertible Crammer Road LLC $230,000 in cash
Preferred Stock
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
05/21/04 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
05/21/04 Warrant to purchase 6,750,000 shares Carole Salkind Agreement to purchase NCT Convertible
of NCT common stock at $0.034 per Note
share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/04/04 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/04/04 Warrant to purchase 6,750,000 shares Carole Salkind Agreement to purchase NCT Convertible
of NCT commonstock at $0.031 per Note
share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/15/04 NCT Convertible Note Carole Salkind Cancellation and surrender of
($2,793,668.42 principal amount) $450,000.00, $980,802.25 and
$864,615.56 convertible notes dated
03/04/03, 03/13/03 and03/13/03 along
with accrued interest and
default penalty
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/15/04 Warrant to purchase 46,000,000 Carole Salkind Agreement to cancel and surrender
shares of NCT common stock at convertible notes listed above
$0.027 per share
33
- ---------------------------------------------------------- --------------------------------- ---------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/15/04 NCT Convertible Note Carole Salkind Cancellation and surrender of
($1,626,883.31 principal amount) $450,000.00, $450,000.00 and
$450,000.00 convertiblenotes dated
04/02/03, 04/11/03 and 04/21/03 along
with accrued interest and default
penalty
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/15/04 Warrant to purchase 27,000,000 Carole Salkind Agreement to cancel and surrender
shares of NCT commonstock at convertible notes listed above
$0.027 per share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/15/04 NCT Convertible Note Carole Salkind Cancellation and surrender of
($6,913,600.96 principalamount) $580,650,27, $4,469,018.84, $474,154.08
and $425,000.00 convertible notes dated
09/11/03, 10/14/03, 11/21/03 and
11/21/03 along with accrued interest
and default penalty
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/15/04 Warrant to purchase 114,000,000 Carole Salkind Agreement to cancel and surrender
shares of NCT common stock at convertible notes listed above
$0.027 per share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/16/04 NCT Convertible Note ($425,000.00 Carole Salkind $425,000 in cash
principal amount)
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/16/04 Warrant to purchase 7,500,000 shares Carole Salkind Agreement to purchase NCT Convertible
of NCT common stock at $0.027 per Note
share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/16/04 NCT Convertible Note ($400,000.00 Carole Salkind $400,000 in cash
principal amount)
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/16/04 Warrant to purchase 6,750,000 shares Carole Salkind Agreement to purchase NCT Convertible
of NCT common stock at $0.027 per Note
share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/16/04 NCT Convertible Note Carole Salkind Cancellation and surrender of $400,000
($459,659.88 principal amount) convertible note dated 11/22/03 along
with accrued interest and default
penalty
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/16/04 Warrant to purchase 7,750,000 shares Carole Salkind Agreement to cancel and surrender
of NCT common stock at $0.027 per convertible note listed above
share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/28/04 NCT Convertible Note Carole Salkind Cancellation and surrender of
($4,383,902.01 principal amount) $3,828,985 convertible note dated
12/15/03 along with accrued interest
and default penalty
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/28/04 Warrant to purchase 72,250,000 Carole Salkind Agreement to cancel and surrender
shares of NCT common stock at convertible note listed above
$0.031 per share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/30/04 NCT Convertible Note Carole Salkind Cancellation and surrender of
($3,477,126.66 principal amount) $3,050,000 convertible note dated
12/31/03 along with accrued interest
and default penalty
- ---------------------------------------------------------- --------------------------------- ---------------------------------------
34
- ---------------------------------------------------------- --------------------------------- ---------------------------------------
SECURITY SOLD PURCHASER(S) CONSIDERATION
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
Date of Sale Amount and Type Name of Person/Entity to whom Aggregate Amount and Type
securities were sold
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
06/30/04 Warrant to purchase 57,250,000 Carole Salkind Agreement to cancel and surrender
shares of NCT common stock at convertible note listed above
$0.031 per share
- ------------------- -------------------------------------- --------------------------------- ---------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4(a) 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, incorporated by reference to Exhibit
4(g) of NCT's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 (File No. 0-18267), filed on May 17, 2004.
4(b) 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, incorporated by reference to Exhibit
4(h) of NCT's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 (File No. 0-18267), filed on May 17, 2004.
4(c) Warrant dated May 7, 2004 issued to Carole Salkind for the
purchase of 6,750,000 shares of NCT common stock at a purchase
price of $0.0410 per share, incorporated by reference to Exhibit
4(ds) of NCT's Pre-Effective Amendment No. 11 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on June
10, 2004.
4(d) Warrant dated May 21, 2004 issued to Carole Salkind for the
purchase of 6,750,000 shares of NCT common stock at a purchase
price of $0.0340 per share, incorporated by reference to Exhibit
4(dt) of NCT's Pre-Effective Amendment No. 11 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on June
10, 2004.
4(e) Warrant dated June 4, 2004 issued to Carole Salkind for the
purchase of 6,750,000 shares of NCT common stock at a purchase
price of $0.0310 per share, incorporated by reference to Exhibit
4(du) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(f) Warrant dated June 15, 2004 issued to Carole Salkind for the
purchase of 46,000,000 shares of NCT common stock at a purchase
price of $0.0270 per share, incorporated by reference to Exhibit
4(dv) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(g) Warrant dated June 15, 2004 issued to Carole Salkind for the
purchase of 27,000,000 shares of NCT common stock at a purchase
price of $0.0270 per share, incorporated by reference to Exhibit
4(dw) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(h) Warrant dated June 15, 2004 issued to Carole Salkind for the
purchase of 114,000,000 shares of NCT common stock at a purchase
price of $0.0270 per share, incorporated by reference to Exhibit
4(dx) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(i) Warrant dated June 16, 2004 issued to Carole Salkind for the
purchase of 7,500,000 shares of NCT common stock at a purchase
price of $0.0270 per share, incorporated by reference to Exhibit
4(dy) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
35
4(j) Warrant dated June 16, 2004 issued to Carole Salkind for the
purchase of 6,750,000 shares of NCT common stock at a purchase
price of $0.0270 per share, incorporated by reference to Exhibit
4(dz) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(k) Warrant dated June 16, 2004 issued to Carole Salkind for the
purchase of 7,750,000 shares of NCT common stock at a purchase
price of $0.0270 per share, incorporated by reference to Exhibit
4(ea) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(l) Warrant dated June 28, 2004 issued to Carole Salkind for the
purchase of 72,250,000 shares of NCT common stock at a purchase
price of $0.0310 per share, incorporated by reference to Exhibit
4(eb) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(m) Warrant dated June 30, 2004 issued to Carole Salkind for the
purchase of 57,250,00 shares of NCT common stock at a purchase
price of $0.0310 per share, incorporated by reference to Exhibit
4(ec) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(n) Warrant dated July 16, 2004 issued to Carole Salkind for the
purchase of 6,750,000 shares of NCT common stock at a purchase
price of $0.0290 per share, incorporated by reference to Exhibit
4(ed) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(o) Warrant dated July 16, 2004 issued to Carole Salkind for the
purchase of 156,000,000 shares of NCT common stock at a purchase
price of $0.0296 per share, incorporated by reference to Exhibit
4(ee) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
4(p) Warrant dated July 23, 2004 issued to Alpha Capital
Aktiengesellschaft for the purchase of 5,555,556 shares of NCT
common stock at an exercise price of the lesser of $0.0232 or 80%
of the average of the closing bid price for the five days
immediately preceding exercise, incorporated by reference to
Exhibit 4(ef) of NCT's Pre-Effective Amendment No. 12 to
Registration Statement on Form S-1 (Registration No. 333-60574),
filed on July 28, 2004.
4(q) Warrant dated July 23, 2004 issued to Longview Fund LP for the
purchase of 6,944,445 shares of NCT common stock at an exercise
price of the lesser of $0.0232 or 80% of the average of the
closing bid price for the five days immediately preceding
exercise, incorporated by reference to Exhibit 4(eg) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(a) Secured Convertible Demand Note in principal amount of
$410,000.00 dated April 1, 2004 issued by the company to Carole
Salkind, incorporated by reference to Exhibit 10(h) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (File No. 0-18267), filed on May 17, 2004.
10(b) Secured Convertible Demand Note in principal amount of
$400,000.00 dated April 14, 2004 issued by the company to Carole
Salkind, incorporated by reference to Exhibit 10(i) of NCT's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (File No. 0-18267), filed on May 17, 2004.
10(c) Secured Convertible Demand Note in principal amount of
$400,000.00 dated May 7, 2004 issued by the company to Carole
Salkind, incorporated by reference to Exhibit 10(ei) of NCT's
Pre-Effective Amendment No. 11 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on June 10, 2004.
36
10(d) Securities Purchase Agreement for the purchase of twenty seven
(27) shares of Series H Convertible Preferred Stock dated May 11,
2004, between NCT and Crammer Road LLC, incorporated by reference
to Exhibit 10(ej) of NCT's Pre-Effective Amendment No. 11 to
Registration Statement on Form S-1 (Registration No. 333-60574),
filed on June 10, 2004.
10(e) Secured Convertible Demand Note in principal amount of
$400,000.00 dated May 21, 2004 issued by the company to Carole
Salkind, incorporated by reference to Exhibit 10(ek) of NCT's
Pre-Effective Amendment No. 11 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on June 10, 2004.
10(f) Distribution and Marketing Agreement dated April 21, 2003
between Artera Group, Inc. and Avaya Inc, incorporated by
reference to Exhibit 10(el) of NCT's Pre-Effective Amendment No.
11 to Registration Statement on Form S-1 (Registration No.
333-60574), filed on June 10, 2004.
10(g) Amendment No. 1 dated October 8, 2003 to the Distribution and
Marketing Agreement dated April 21, 2003 between Artera Group,
Inc. and Avaya Inc, incorporated by reference to Exhibit
10(el)(1) of NCT's Pre-Effective Amendment No. 11 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on June
10, 2004.
10(h) Amendment No. 2 dated April 21, 2004 to the Distribution and
Marketing Agreement dated April 21, 2003 between Artera Group,
Inc. and Avaya Inc, incorporated by reference to Exhibit
10(el)(2) of NCT's Pre-Effective Amendment No. 11 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on June
10, 2004.
10(i) Amendment No. 3 dated May 19, 2004 to the Distribution and
Marketing Agreement dated April 21, 2003 between Artera Group,
Inc. and Avaya Inc, incorporated by reference to Exhibit
10(el)(3) of NCT's Pre-Effective Amendment No. 11 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on June
10, 2004.
10(j) Amendment No. 4 dated June 4, 2004 to the Distribution and
Marketing Agreement dated April 21, 2003 between Artera Group,
Inc. and Avaya Inc, incorporated by reference to Exhibit
10(el)(4) of NCT's Pre-Effective Amendment No. 11 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on June
10, 2004.
10(k) Consulting Agreement dated May 20, 2004 between the company and
Kambrium AB, incorporated by reference to Exhibit 10(em) of NCT's
Pre-Effective Amendment No. 11 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on June 10, 2004.
10(l) Secured Convertible Demand Note in principal amount of
$400,000.00 dated June 4, 2004 issued by the company to Carole
Salkind, incorporated by reference to Exhibit 10(em) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(m) Secured Convertible Note in principal amount of $2,793,668.42
dated June 15, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(en) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(n) Secured Convertible Note in principal amount of $1,626,883.31
dated June 15, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(eo) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(o) Secured Convertible Note in principal amount of $6,913,600.96
dated June 15, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ep) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
37
10(p) Secured Convertible Demand Note in principal amount of
$425,000.00 dated June 16, 2004 issued by the company to Carole
Salkind, incorporated by reference to Exhibit 10(eq) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(q) Secured Convertible Note in principal amount of $400,000.00
dated June 16, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(er) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(r) Secured Convertible Note in principal amount of $459,659.88
dated June 16, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(es) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(s) Amendment No. 5 dated June 18, 2004 to the Distribution and
Marketing Agreement dated April 21, 2003 between Artera Group,
Inc. and Avaya Inc., incorporated by reference to Exhibit 10(et)
of NCT's Pre-Effective Amendment No. 12 to Registration Statement
on Form S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(t) Amendment No. 6 dated June 25, 2004 to the Distribution and
Marketing Agreement dated April 21, 2003 between Artera Group,
Inc. and Avaya Inc., incorporated by reference to Exhibit
10(et)(1) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
10(u) Amendment No. 7 dated June 30, 2004 to the Distribution and
Marketing Agreement dated April 21, 2003 between Artera Group,
Inc. and Avaya Inc., incorporated by reference to Exhibit
10(et)(2) of NCT's Pre-Effective Amendment No. 12 to Registration
Statement on Form S-1 (Registration No. 333-60574), filed on July
28, 2004.
10(v) Secured Convertible Note in principal amount of $4,383,902.01
dated June 28, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(eu) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(w) Secured Convertible Note in principal amount of $3,477,126.66
dated June 30, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ev) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(x) Consulting Agreement dated July 1, 2004 between the company and
Manatt Jones Global Strategies, LLC.
10(y) Secured Convertible Note in principal amount of $400,000 dated
July 16, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ew) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(z) Secured Convertible Note in principal amount of $9,469,467.03
dated July 16, 2004 issued by the company to Carole Salkind,
incorporated by reference to Exhibit 10(ex) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(aa) Subscription Agreement dated July 23, 2004 between NCT Group,
Inc. and Alpha Capital Aktiengesellschaft and Longview Fund LP,
incorporated by reference to Exhibit 10(ey) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
38
10(ab) Security Agreement dated July 23, 2004 between NCT Group, Inc.
and Alpha Capital Aktiengesellschaft and Longview Fund LP,
incorporated by reference to Exhibit 10(ez) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(ac) Secured Convertible Note in principal amount of $400,000 dated
July 23, 2004 issued by the company to Alpha Capital
Aktiengesellschaft, incorporated by reference to Exhibit 10(fa)
of NCT's Pre-Effective Amendment No. 12 to Registration Statement
on Form S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(ad) Secured Convertible Note in principal amount of $500,000 dated
July 23, 2004 issued by the company to Longview Fund LP,
incorporated by reference to Exhibit 10(fb) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
10(ae) Convertible Note in principal amount of $40,000 dated July 23,
2004 issued by the company to Libra Finance S.A, incorporated by
reference to Exhibit 10(fc) of NCT's Pre-Effective Amendment No.
12 to Registration Statement on Form S-1 (Registration No.
333-60574), filed on July 28, 2004.
10(af) Convertible Note in principal amount of $50,000 dated July 23,
2004 issued by the company to Bi-Coastal Consulting Corp.,
incorporated by reference to Exhibit 10(fd) of NCT's
Pre-Effective Amendment No. 12 to Registration Statement on Form
S-1 (Registration No. 333-60574), filed on July 28, 2004.
31(a) Certification of Chief Executive Officer pursuant to Rule 13a -
14(a) under the Securities Exchange Act of 1934.
31(b) Certification of Chief Financial Officer pursuant to Rule 13a -
14(a) under the Securities Exchange Act of 1934.
32(a) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a - 14(b) under the Securities
Exchange Act of 1934 and 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:
None.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCT GROUP, INC.
By: /s/ Michael J. Parrella
----------------------------------
Michael J. Parrella
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ Cy E. Hammond
-----------------------------------
Cy E. Hammond
Senior Vice President,
Chief Financial Officer
Dated: August 17, 2004
40