UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2005
------------------
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 Exchange Act).
/ / Yes /X/ No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
/ / Yes /X/ No
The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of November 14, 2005 was 788,360,496.
EXPLANATORY NOTE
NCT Group, Inc. (also referred to as "we" or "our") is filing this
Amendment to its Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2005, originally filed with the Securities and Exchange Commission
on November 14, 2005, for the following purposes: (a) to correct the following
line items in the Condensed Consolidated Statements of Cash Flows: (i) the
caption "Gain on dissolution of Artera International" had been omitted along
with the amounts for the nine months ended September 30, 2004 ($4,567) and 2005
($0); (ii) the amount for the nine months ended September 30, 2005 for "Increase
in accounts payable and accrued expenses" was corrected from $383 to $316; and
(iii) the amount for the nine months ended September 30, 2005 for "(Decrease)
increase in other liabilities and deferred revenue" was corrected from $4,039 to
$383; (b) to correct the table in Note 2 of the Notes to the Condensed
Consolidated Financial Statements - Stock-Based Compensation to reflect the
prior year total stock-based employee compensation expense and correct the
total; (c) to clarify certain disclosure in Note 8 of the Notes to the Condensed
Consolidated Financial Statements - Commitments and Contingencies; (d) to
clarify certain disclosure in Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources; and (e)
to make miscellaneous wording changes and correct typographical errors
throughout the Form 10-Q.
The complete text of our Form 10-Q, as amended, is set forth below. This
Amendment speaks as of the original filing date of the Form 10-Q and reflects
only the changes discussed above. Updated certifications of our Chief Executive
Officer and Chief Financial Officer are attached to this Amendment as exhibits.
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at December 31, 2004 and September 30, 2005
(Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited) and Condensed Consolidated
Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months
Ended September 30, 2004 and 2005 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2004 and 2005 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
Part II Other Information
Item 1. Legal Proceedings 32
Item 6. Exhibits 32
Signatures 33
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Notes 1 and 6)
(in thousands, except share data)
December 31, September 30,
2004 2005
------------ --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,359 $ 445
Investment in available-for-sale marketable securities 24 26
Accounts receivable, net 528 772
Inventories, net 364 375
Other current assets (includes $127 and $98, respectively, due from former
officer) 248 157
------------ ------------
Total current assets 2,523 1,775
Property and equipment, net 470 1,121
Goodwill, net 1,252 1,252
Patent rights and other intangibles, net 1,089 1,038
Other assets 120 70
------------ ------------
$ 5,454 $ 5,256
LIABILITIES AND CAPITAL DEFICIT ============ ============
Current liabilities:
Accounts payable $ 1,909 $ 2,832
Accrued expenses-related parties 8,745 7,235
Accrued expenses-other 9,862 11,046
Notes payable 603 577
Related party convertible notes (due to a stockholder) 40,565 60,606
Current maturities of convertible notes 4,513 4,803
Deferred revenue 885 350
Shares of subsidiary subject to exchange into a variable number of shares 709 652
Other current liabilities 6,990 7,015
------------ ------------
Total current liabilities 74,781 95,116
------------ ------------
Long-term liabilities:
Related party convertible notes (due to a stockholder) 5,000 5,000
Other liabilities 63 37
------------ ------------
Total long-term liabilities 5,063 5,037
------------ ------------
Commitments and contingencies
Minority interest in consolidated subsidiaries 8,645 8,574
------------ ------------
Capital deficit:
Preferred stock, $.10 par value, 10,000,000 shares authorized:
Convertible series H preferred stock, 1,752 and 1,716 shares issued and outstanding,
respectively (redemption amount $20,992,210 and $20,772,000, respectively;
liquidation amount $19,267,746 and $19,385,089, respectively) 19,203 19,321
Convertible series I preferred stock, zero and 510 shares issued and outstanding,
respectively (liquidation amount zero and $510,000, respectively) - 510
Common stock, $.01 par value, authorized 645,000,000 and 5,622,000,000 shares, respectively;
issued and outstanding, 641,970,392 and 717,355,365 shares, respectively 6,420 7,174
Additional paid-in capital 245,746 283,641
Accumulated deficit (354,490) (414,363)
Accumulated other comprehensive income 86 246
Common shares payable, 3,029,608 and zero shares, respectively - -
------------ ------------
Total capital deficit (83,035) (103,471)
------------ ------------
$ 5,454 $ 5,256
============ ============
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 Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2004 2005 2004 2005
-------------- -------------- -------------- --------------
REVENUE:
Technology licensing fees and royalties $ 982 $ 513 $ 2,665 $ 2,006
Product sales, net 418 479 1,301 1,465
Advertising 35 12 103 61
Engineering and development services 4 25 4 25
-------------- -------------- -------------- --------------
Total revenue 1,439 1,029 4,073 3,557
-------------- -------------- -------------- --------------
COSTS AND EXPENSES:
Cost of product sales 193 272 632 697
Cost of advertising 4 4 12 9
Selling, general and administrative 2,552 1,927 6,798 5,196
Research and development 943 1,077 3,113 3,276
-------------- -------------- -------------- --------------
Total operating costs and expenses 3,692 3,280 10,555 9,178
Non-operating items:
Other (income) expense, net (3,194) 5,905 685 9,295
Interest expense, net 11,355 18,034 29,035 44,957
-------------- -------------- -------------- --------------
Total costs and expenses 11,853 27,219 40,275 63,430
-------------- -------------- -------------- --------------
NET LOSS $ (10,414) $ (26,190) $ (36,202) $ (59,873)
Less: Preferred stock dividends 1,831 (4,789) 4,336 472
Beneficial conversion feature - - 104 -
-------------- -------------- -------------- --------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (12,245) $ (21,401) $ (40,642) $ (60,345)
============== ============== ============== ==============
Basic and diluted loss per share attributable to
common stockholders $ (0.02) $ (0.03) $ (0.06) $ (0.09)
============== ============== ============== ==============
Weighted average common shares outstanding -
basic and diluted 645,000 690,330 645,000 658,287
============== ============== ============== ==============
NCT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
(in thousands) 2004 2005 2004 2005
- -------------- -------------- -------------- -------------- --------------
NET LOSS $ (10,414) $ (26,190) $ (36,202) $ (59,873)
Other comprehensive income (loss):
Currency translation adjustment 1,213 35 1,110 158
Unrealized loss on marketable securities/Adjustment of
unrealized loss (18) - 46 2
-------------- -------------- -------------- --------------
COMPREHENSIVE LOSS $ (9,219) $ (26,155) $ (35,046) $ (59,713)
============== ============== ============== ==============
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)
Nine months ended September 30,
----------------------------------
2004 2005
---------------- ---------------
Cash flows from operating activities:
Net loss $ (36,202) $ (59,873)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 290 247
Common stock, warrants and options issued as consideration for:
Compensation and Operating expenses 216 22
Provision for inventory reserve (47) (201)
Provision for doubtful accounts and uncollectible amounts 91 (6)
Loss (gain) on disposition of fixed assets 1 (7)
Gain on dissolution of Artera International (4,567) -
Finance costs associated with non-registration of common shares 526 613
Finance costs associated with non-conversion or exchange of common shares - (41)
Subsidiary preferred stock dividends as interest 16 14
Default penalty on notes (related party) 4,704 8,529
Interest converted to principal (related party) 2,540 3,656
Amortization of discounts on notes (includes $12,349 and $19,535,
respectively, with related parties) 12,371 19,620
Amortization of beneficial conversion feature on convertible notes (includes
$13,243 and $20,299, respectively, with related parties) 13,306 20,504
Realized loss on available-for-sale securities 77 -
Minority interest loss - (59)
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (476) (237)
Decrease in inventories 38 190
Decrease in other assets 170 142
Increase in accounts payable and accrued expenses 1,370 316
(Decrease) increase in other liabilities and deferred revenue (1,623) 383
------------- ---------------
Net cash used in operating activities $ (7,199) $ (6,188)
------------- ---------------
Cash flows from investing activities:
Capital expenditures (72) (890)
------------- ---------------
Net cash used in investing activities $ (72) $ (890)
------------- ---------------
Cash flows from financing activities:
Proceeds from:
Issuance of convertible notes and notes payable, net 7,133 6,036
Sale of common stock - 50
Repayment of notes (80) (81)
------------- ---------------
Net cash provided by financing activities $ 7,053 $ 6,005
Effect of exchange rate changes on cash $ 25 $ 159
------------- ---------------
Net decrease in cash and cash equivalents $ (193) $ (914)
Cash and cash equivalents - beginning of period 988 1,359
------------- ---------------
Cash and cash equivalents - end of period $ 795 $ 445
============= ===============
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 "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 nine
months ended September 30, 2005 and cash flows for the nine months ended
September 30, 2005 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, 2004
contained in our Annual Report on Form 10-K/A.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates.
We have experienced substantial losses since our inception, which
cumulatively amounted to $414.4 million through September 30, 2005. Cash and
cash equivalents amounted to $0.4 million at September 30, 2005, decreasing from
$1.4 million at December 31, 2004. A working capital deficit of $93.3 million
existed at September 30, 2005. We were in default of $0.5 million of our notes
payable and $5.1 million of our convertible notes at September 30, 2005. 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, product sales and advertising. 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 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. Uncertainty exists about the adequacy of current funds
to support our activities until positive cash flow from operations can be
achieved, and uncertainty exists about the availability of external financing
sources to fund any cash deficiencies.
The accompanying condensed consolidated financial statements have been
prepared assuming that 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 financing and other funding sources to meet our obligations. The
uncertainties described in the preceding paragraph raise substantial doubt at
September 30, 2005 about our 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 we be unable to continue as a going concern.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 151, "Inventory Costs--an
amendment of ARB No. 43," which is the result of its efforts to converge U.S.
accounting standards for inventories with International Accounting Standards.
SFAS No. 151 requires idle facility expenses, freight, handling cost and wasted
material (spoilage) costs to be recognized as current-period charges. It also
requires that allocation of fixed production overhead to the costs of conversion
be based on the normal capacity of the production facilities. SFAS No. 151 will
be effective for us beginning January 1, 2006. We do not believe that the
adoption of SFAS 151 will have a significant impact on our consolidated
financial statements.
6
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" that prescribes the accounting for share-based payment transactions in
which a company receives employee services in exchange for (a) equity
instruments of the company or (b) liabilities that are based on the fair value
of the company's equity instruments or that may be settled by the issuance of
such equity instruments. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees," that was
previously allowed under SFAS No. 123 as originally issued. Under SFAS No. 123R,
companies are required to record compensation expense for all share-based
payment award transactions measured at fair value. In April 2005, the Securities
and Exchange Commission ("SEC") delayed the effective date of SFAS No. 123R.
Accordingly, this statement is effective for us beginning January 1, 2006. We
have not yet determined the impact of applying the various provisions of SFAS
No. 123R (see Note 2).
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. We are required to adopt the provisions of SFAS No. 154, as
applicable, beginning in fiscal 2006.
In June 2005, the FASB's Emerging Issues Task Force reached a consensus on
Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements"
("EITF 05-6"). The guidance requires that leasehold improvements acquired in a
business combination or purchased subsequent to the inception of a lease be
amortized over the lesser of the useful life of the assets or a term that
includes renewals that are reasonably assured at the date of the business
combination or purchase. The guidance is effective for periods beginning after
June 29, 2005. We have adopted EITF 05-06 and the adoption of EITF 05-6 did not
have a significant effect on our financial statements.
2. Stock-Based Compensation:
We have adopted the disclosure only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and continue to apply
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for our stock-based
compensation plans. Under APB No. 25, no compensation costs are recognized if
the option exercise price is equal to or greater than the fair market price of
the common stock on the date of the grant. Under SFAS No. 123, stock options are
valued at the date of grant 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 all 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.
Options that were granted in prior periods were subject to approval of an
increase in the number of shares available under our option plan, as well as an
increase in the number of authorized shares. These increases were approved by
our stockholders on June 28, 2005. Our share price on the approval date was less
than the exercise price for all such options waiting approval and accordingly,
no additional charge was incurred.
Had compensation costs been determined as prescribed by SFAS No. 123, our
net loss attributable to common stockholders and net loss per share would have
been the pro forma amounts indicated below:
7
(in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2004 2005 2004 2005
------------ ------------- ------------ -------------
Net loss attributable to common stockholders $ (12,245) $ (21,401) $ (40,642) $ (60,345)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (41) - (943) -
------------ ------------- ------------ -------------
Pro forma net loss attributable to common stockholders $ (12,286) $ (21,401) $ (41,585) $ (60,345)
============ ============= ============ =============
Net loss per common share (basic and diluted):
As reported $ (0.02) $ (0.03) $ (0.06) $ (0.09)
============ ============= ============ =============
Pro forma $ (0.02) $ (0.03) $ (0.06) $ (0.09)
============ ============= ============ =============
Since the options granted normally vest over several years and additional
option grants are expected to be made in future years, the pro forma impact on
the results of operations for the three and nine months ended September 30, 2004
and 2005, 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
Investment in marketable securities comprises available-for-sale securities
at fair market value. The following table sets forth the market value, carrying
value and realized and unrealized gain/(loss) of our available-for-sale
securities:
Adjusted
Cost Unrealized Market Unrealized Market
Basis Gain/ Value Gain/ Realized Value
(In thousands) 01/01/04 (Loss) 12/31/04 Additions (Loss) Loss 09/30/05
- -------------- ---------- ----------- ----------- ----------- ---------- ---------- ------------
Available-for-sale:
ITC $ 38 $ (28) $ 10 $ - $ 2 $ - $ 12
Teltran 11 3 14 - - - 14
---------- ----------- ----------- ----------- ---------- ---------- ------------
Totals $ 49 $ (25) $ 24 $ - $ 2 $ - $ 26
========== =========== =========== =========== ========== ========== ============
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 nine months
ended September 30, 2005, we did not recognize any other-than-temporary-decline
in the realizable value of our investments.
Accounts receivable comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
Technology license fees and royalties $ 472 $ 538
Joint ventures and affiliates 34 34
Other receivables 375 535
-------------- --------------
$ 881 $ 1,107
Allowance for doubtful accounts (353) (335)
-------------- --------------
Accounts receivable, net $ 528 $ 772
============== ==============
8
Inventories comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
Finished goods $ 491 $ 296
Components 215 220
-------------- --------------
$ 706 $ 516
Reserve for obsolete and slow moving inventory (342) (141)
-------------- --------------
Inventories, net $ 364 $ 375
============== ==============
Other current assets comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
Notes receivable $ 1,000 $ 1,000
Due from former officer 127 98
Other 223 157
--------------- --------------
$ 1,350 $ 1,255
Reserve for uncollectible amounts (1,102) (1,098)
--------------- --------------
Other current assets $ 248 $ 157
=============== ==============
Other assets (long-term) comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
Advances and deposits $ 70 $ 70
Deferred charges 50 -
--------------- --------------
Other long term assets $ 120 $ 70
=============== ==============
Property and equipment comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
Machinery and equipment $ 1,284 $ 1,169 (a)
Furniture and fixtures 585 572
Tooling 493 491
Leasehold improvements 394 389
Other 434 402
--------------- --------------
$ 3,190 $ 3,023
Accumulated depreciation (2,720) (1,902)(a)
--------------- --------------
Property and equipment, net $ 470 $ 1,121
=============== ==============
Footnote:
- --------
(a) Includes the write-off of fully depreciated DMC assets of
approximately $0.8 million and the addition of approximately $0.8
million for the purchase of data center equipment for Artera Group.
Depreciation expense for each of the nine months ended September 30, 2004
and 2005 was approximately $0.2 million.
9
Accrued expenses comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
Non-conversion fees due to a related party $ 3,972 $ -
Non-registration fees due to a related party 1,446 4,735
Interest due to a related party 1,012 1,632
Consulting fees due to a related party 483 -
Incentive compensation due to officers 1,832 868
--------------- --------------
Accrued expenses-related parties $ 8,745 $ 7,235
=============== ==============
Non-registration fees $ 4,436 $ 5,397
Interest 1,458 1,993
Commissions payable 372 113
Other 3,596 3,543
--------------- --------------
Accrued expenses-other $ 9,862 $ 11,046
=============== ==============
Deferred revenue comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
New Transducers Ltd. $ 535 $ -
Other 350 350
--------------- --------------
$ 885 $ 350
=============== ==============
As of September 30, 2005, we will not realize any additional cash from
revenue that has been deferred.
Other current liabilities comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
License reacquisition payable $ 4,000 $ 4,000
Royalty payable-former Midcore stockholders 1,679 1,679
Development fee payable 650 650
Due to selling shareholders of Theater Radio
Network 557 557
Due to Lernout & Hauspie 100 100
Other 4 29
--------------- --------------
Other current liabilities $ 6,990 $ 7,015
=============== ==============
Other liabilities (long-term) comprise the following:
December 31, September 30,
(In thousands) 2004 2005
- -------------- --------------- --------------
Note Payable-BMI $ 53 $ 35
Other long term and capital leases 10 2
--------------- --------------
Other long term liabilities $ 63 $ 37
=============== ==============
10
Statements of Operations Information
Other (income) expense, net consisted of the following:
Three months ended Nine months ended
September 30, September 30,
---------------------------- ---------------------------
(In thousands) 2004 2005 2004 2005
- -------------- -------------- ------------ ------------ -------------
Finance costs associated with non-registration
of common shares $ 74 $ 206 $ 526 $ 613
Default penalties on debt 1,321 5,588 4,704 8,529
Dissolution of Artera International (4,567) - (4,567) -
Minority interest loss - - - (59)
Other (22) 111 22 212
-------------- ------------ ------------ -------------
Other (income) expense $ (3,194) $ 5,905 $ 685 $ 9,295
============== ============ ============ =============
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 the
minority shareholders' interests. Losses in excess of that amount are borne by
us. Such amounts from our Pro Tech Communications, Inc. subsidiary borne by us
for the nine months ended September 30, 2005 were approximately $0.2 million.
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 us (approximately $2.6 million at September 30,
2005).
Supplemental Cash Flow Information
Nine months ended September 30,
---------------------------------
(In thousands) 2004 2005
- -------------- --------------- ---------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 20 $ 13
=============== ===============
Supplemental disclosures of non-cash investing and financing activities:
Unrealized holding (loss)/gain on available-for-sale securities $ (30) $ 2
=============== ===============
Finance costs associated with non-registration of common shares $ 439 $ 3,638
=============== ===============
Finance costs associated with non-conversion of preferred stock $ 2,741 $ (3,931)
=============== ===============
Issuance of series I preferred stock $ - $ 976
=============== ===============
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 $ -
=============== ===============
Property and equipment financed through notes payable $ - $ 18
=============== ===============
Principal on convertible notes and notes payable rolled into new notes $ 46,637 $ 85,294
=============== ===============
Interest on convertible notes and notes payable rolled into new notes $ 2,540 $ 3,656
=============== ===============
Default penalty on convertible notes rolled into new notes $ 4,664 $ 8,529
=============== ===============
11
4. Capital Deficit:
The changes in capital deficit during the nine months ended September 30,
2005 were as follows:
Convertible Preferred Stock
Series H Series I Common Stock Additional Accumu-
----------------- ----------------- -------------------- Paid-in lated
(In thousands) Shares Amount Shares Amount Shares Amount Capital Deficit
- -------------- ----------------- ----------------- -------------------- ----------- ----------
Balance at December 31, 2004 2 $19,203 - $ - 641,970 $6,420 $245,746 ($354,490)
Conversion of preferred stock - (404) - (466) 68,628 686 184 (a) -
Issuance of NCT common stock under
private equity credit agreement - - - - 6,757 68 (18)(b) -
Issuance of series I preferred stock - - 1 976 - - 155 -
Dividend and amortization of discounts
on beneficial conversion price
to preferred shareholders - 522 - - - - (522) -
Dividend and amortization of discounts
on beneficial conversion price to
subsidiary preferred shareholders - - - - - - (244) -
Charges for the non-registration of the
underlying shares of NCT common stock
to subsidiary preferred shareholders - - - - - - (3,638) -
Charges for the non-conversion/exchange
for common stock of NCT to NCT and
subsidiary preferred shareholders - - - - - - 3,931 -
Warrants issued in conjunction with
convertible debt - - - - - - 22,547 -
Beneficial conversion feature on
convertible debt - - - - - - 15,466 -
Net loss - - - - - - - (59,873)
Accumulated other comprehensive loss - - - - - - - -
Compensatory stock options and warrants - - - - - - 22 -
Other - - - - - - 12 -
----------------- ----------------- -------------------- ----------- ----------
Balance at September 30, 2005 2 $19,321 1 $ 510 717,355 $7,174 $283,641 ($414,363)
================= ================= ==================== =========== ==========
Other
Compre-
hensive
(In thousands) Loss Total
- -------------- ------- -----------
Balance at December 31, 2004 $86 ($83,035)
Conversion of preferred stock - -
Issuance of NCT common stock under
private equity credit agreement - 50
Issuance of series I preferred stock - 1,131
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 - (244)
Charges for the non-registration of the
underlying shares of NCT common stock
to subsidiary preferred shareholders - (3,638)
Charges for the non-conversion/exchange
for common stock of NCT to NCT and
subsidiary preferred shareholders - 3,931
Warrants issued in conjunction with
convertible debt - 22,547
Beneficial conversion feature on
convertible debt - 15,466
Net loss - (59,873)
Accumulated other comprehensive loss 160 160
Compensatory stock options and warrants - 22
Other - 12
------- -----------
Balance at September 30, 2005 $246 ($103,471)
======= ===========
Footnotes:
- ---------
(a) Includes $(75,000) representing the difference between the aggregate
conversion price of the preferred shares, which was based on a formula
in the certificate of designation of the preferred stock, and the
aggregate par value of the shares of common stock issued upon
conversion.
(b) Represents the difference between the aggregate sales price of the
shares sold, which was based on the fair market value of the shares,
and the aggregate par value of the shares sold.
12
5. Notes Payable:
December 31, September 30,
(In thousands) 2004 2005
- -------------- ---------------- ----------------
Note due investor $ 385 $ 385
Interest at 8% per annum payable at maturity; effective interest
rate of 80.3% per annum resulting from the issuance of warrants
and finders fees; matured April 7, 2003 (a); default interest accrues
at 18% per annum.
Note due stockholder of subsidiary 40 17
Interest at 12% per annum; monthly payments (including interest)
of $1.5 through September 2005, remainder matures October 15, 2006 (b).
Note due former employee 100 100
$100 bears interest at 8.25% per annum, compounded annually;
past due (a).
Other financings 78 75
Interest ranging from 7% to 9% per annum;
$35 due July 15, 2003 (a); $41 all other.
---------------- ----------------
$ 603 $ 577
================ ================
Footnotes:
- ---------
(a) Notes payable are in default due to nonpayment.
(b) On August 1, 2005, we refinanced the remaining principal of $16,704
from a prior note issued on June 1, 2005, with a modification of
terms. The debt instruments were deemed not to be substantially
different in accordance with Emerging Issues Task Force Issue No.
96-19 "Debtor's Accounting for a Modification or Exchange of Debt
Instruments."
6. Convertible Notes Payable:
December 31, September 30,
(In thousands) 2004 2005
- -------------- ---------------- ----------------
Related Party Convertible Notes:
Issued to Carole Salkind - (a) $ 58,120 $ 80,341
Weighted average effective interest rate of 82.5% per annum; accrues
interest at 8% per annum except $5,000 at 12%; collateralized by substantially
all of the assets of NCT; convertible into NCT common stock at prices ranging
from $0.0050 to $0.0166 or exchangeable for common stock of NCT
subsidiaries except Pro Tech; maturing by quarter as follows:
2004 2005
---------------------
March 31, 2005 $ 26,408 $ -
June 30, 2005 26,712 -
December 31, 2005 - 5,500
March 31, 2006 - 69,841
December 31, 2009 5,000 5,000
Less: unamortized debt discounts (12,555) (14,735)
---------------- ----------------
$ 45,565 $ 65,606
Less: amounts classified as long-term (5,000) (5,000)
---------------- ----------------
$ 40,565 $ 60,606
=============== ================
13
December 31, September 30,
(In thousands) 2004 2005
- -------------- ---------------- ----------------
Convertible Notes:
8% Convertible Notes - (b) $ 2,641 $ 2,641
Weighted average effective interest rate of 30.8% per annum;
generally convertible into NCT common stock at 80% of the five-day
average closing bid price preceding conversion; matures
2004 2005
--------- ---------
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
July 23, 2006 990 990
6% Convertible Notes 2,474 2,474
Weighted average effective interest rate of 85.8% per annum;
convertible into NCT common stock at 100% of the five-day average
closing bid price preceding conversion; past due:
2004 2005
--------- ----------
January 9, 2002 $ 818 $ 818
April 4, 2002 325 325
May 25, 2002 81 81
June 29, 2002 1,250 1,250
---------------- ----------------
$ 5,115 $ 5,115
Less: unamortized debt discounts (602) (312)
---------------- ----------------
$ 4,513 $ 4,803
=============== ================
Footnotes:
- ---------
(a) During the nine months ended September 30, 2005, we issued an
aggregate of $107.5 million of convertible notes to Carole Salkind, a
stockholder and spouse of a former director of ours. These notes are
secured by substantially all of our assets. During the nine months
ended September 30, 2005, we defaulted on payment of all notes that
matured during the period for an aggregate principal amount of $85.3
million. For the nine months ended September 30, 2005, we refinanced
an aggregate of $85.3 million principal amount into new notes along
with default penalties ($8.5 million) and accrued interest ($3.7
million) aggregating $97.5 million. In addition, we issued notes
aggregating approximately $10.0 million in consideration of new
funding from Carole Salkind. Included in the new funding amount is an
8% convertible note in the principal amount of $5.0 million, for which
Ms. Salkind paid us $1.0 million in cash. During the nine months ended
September 30, 2005, we recorded original issue discounts of $19.5
million to the notes based upon the relative fair values of the debt
and warrants granted to Ms. Salkind (see Note 10). In addition,
beneficial conversion features totaling $22.5 million have been
recorded as a discount to the notes. These discounts are amortized
over the terms of the related notes. For the three and nine months
ended September 30, 2005, $16.1 million and $39.8 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 $14.7 million and
$12.6 million have been reflected as a reduction to the convertible
notes in our condensed consolidated balance sheet as of September 30,
2005 and December 31, 2004, respectively. 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%.
(b) We are in default on convertible notes aggregating $1.6 million due to
a cross-default provision and non-payment. We are also in default on
convertible notes aggregating $1.0 million dated July 23, 2004 due to
our failure to register for resale the shares of our common stock
issuable upon conversion of these notes.
14
7. Shares of Subsidiary Subject to Exchange into a Variable Number of Shares:
The monetary value of Pro Tech series B convertible preferred stock was
approximately $652,000 in our condensed consolidated balance sheet at September
30, 2005, which is comprised of $575,000 aggregate fair value of shares plus the
accrued dividends of approximately $77,000. We have the option to settle the
accrued dividends in cash or common stock. We would have to issue approximately
115.7 million shares of our common stock if settlement of the stated value along
with accrued dividends had occurred as of September 30, 2005. There is no limit
on the number of shares of common stock that we could be required to issue upon
exchange of the Pro Tech series B preferred stock.
At September 30, 2005, there were no shares of Pro Tech series A preferred
stock and 460 shares of Pro Tech series B preferred stock were outstanding. On
March 31, 2005, 50 shares of the Pro Tech series A preferred stock were
converted into 1,844,007 shares of Pro Tech common stock pursuant to a mandatory
conversion requirement. For the three and nine months ended September 30, 2005,
we calculated the 4% dividends earned by holders of the Pro Tech preferred stock
at approximately $5,000 and $14,000, respectively. Following adoption of SFAS
No. 150 effective July 1, 2003, this amount is included on our condensed
consolidated financial statements in interest expense.
8. Commitments and Contingencies:
In July 2005, we entered into a second amended and restated private equity
credit agreement with Crammer Road LLC ("Crammer Road"), a Cayman Islands
limited liability company, that supersedes and replaces our amended and restated
private equity credit agreement dated as of September 30, 2004, which in turn
replaced a similar agreement dated as of July 25, 2002. The new credit agreement
provides that we must put to Crammer Road shares of our common stock having an
aggregate value of at least $5.0 million (the minimum commitment amount) and may
put to Crammer Road shares of our common stock having an aggregate value of up
to $50.0 million (the maximum commitment amount). The purchase price of the
shares will equal 93% of the average of the three lowest closing bid prices of
our common stock during the ten-day trading period immediately following the
date of our notice to Crammer Road of our election to put shares. The maximum
amount that we can put to Crammer Road in any single transaction is equal to, at
the time of our election, the lesser of (a) $2.0 million or (b) 500% of the
daily weighted average volume of shares of our common stock for the 15 trading
days immediately preceding the date of the put, provided that the maximum amount
is no less than $500,000. Through September 30, 2005, we sold a total of
6,756,756 shares of our common stock to Crammer Road pursuant to our private
equity credit agreement for gross proceeds of $50,000. (see Note 13 for
transactions subsequent to September 30, 2005).
Delaware law restricts sales of unissued shares of common stock at a price
less than the par value of the common stock. We have put shares under our
private equity credit agreement which were sold below par value. We are
currently engaged in discussions with Crammer Road regarding this shortfall. In
the future, we do not intend to sell shares pursuant to the private equity
credit agreement when the purchase price of such shares would be less than par
value. We also do not intend to fulfill conversion requests for preferred stock
or convertible notes or exercise requests for warrants or options if to do so
would require us to issue shares of our common stock at a conversion or exercise
price less than the par value of our common stock.
9. Capital Stock:
Common Shares Available for Future Issuance
At September 30, 2005, we were required to reserve for issuance
approximately 23.0 billion shares of common stock based on the market price of
$0.0058 per share on that date (or the discount therefrom as provided under
applicable exchange or conversion agreements). The number of shares issuable
upon conversion or exchange of many of our outstanding convertible and
exchangeable securities varies as a function of the market price of our common
stock. At September 30, 2005, the number of shares required to be reserved for
issuance exceeded the number of authorized but unissued shares of our common
stock. At September 30, 2005, we had valid conversion, exchange and share
issuance requests to issue approximately 105.1 million shares of our common
stock.
Increase in Authorized Shares
At our 2005 annual meeting of stockholders, held on June 28, 2005, our
stockholders approved an amendment to our certificate of incorporation to
increase the number of our authorized shares of common stock to
15
5.622 billion shares. This increase, however, is not sufficient for us to
satisfy all of our commitments to reserve, issue and register for resale shares
of our common stock.
NCT Group, Inc. Preferred Stock
At September 30, 2005, we had two designations of issued and outstanding
preferred stock, our series H convertible preferred stock, consisting of 2,100
designated shares, and our series I convertible preferred stock, consisting of
1,000 designated shares. We are obligated to register for resale shares of our
common stock issuable upon the conversion of our series H preferred stock. At
September 30, 2005, 1,716 shares of series H preferred stock were issued and
outstanding. 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
($10,000 per share) in the case of our liquidation, dissolution or winding up.
The holder of our series H preferred stock (Crammer Road) 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. Crammer Road 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 nine
months ended September 30, 2005, we calculated the 4% dividends earned by the
holder of the outstanding series H preferred stock at approximately $0.5
million. The amortization of beneficial conversion feature and the dividend
amount are included in the calculation of loss attributable to common
stockholders. On June 30, 2005, Crammer Road converted six shares of series H
preferred stock into 5,275,230 shares of our common stock. On July 12, 2005 and
August 1, 2005, Crammer Road converted fifteen shares each of series H preferred
stock along with accrued dividends totaling approximately $0.1 million into
19,023,915 and 22,159,660 shares of our common stock, respectively (see Note
13 for transactions subsequent to September 30, 2005).
We had 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 us to Crammer Road, Crammer Road was 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 elected to purchase on the open market the
number of our common shares it should have been issued upon conversion of the
series H shares, Crammer Road was entitled to a payment equal to the excess, if
any, of the open market price over the conversion price. On July 19, 2005,
Crammer Road irrevocably waived, rescinded and voided any and all outstanding
demands with respect to the conversion of the 189 shares of series H preferred
stock into shares of our common stock. As result of this waiver, we reversed
charges accrued through July 11, 2005 of $6.3 million for non-conversion of
series H preferred stock into our common stock. The non-conversion charges are
included in preferred stock dividends in the calculation of loss attributable to
common stockholders.
Pursuant to the terms of a registration rights agreement with Crammer Road,
we were obligated to file a registration statement covering these shares no
later than August 28, 2004. Because we did not have a sufficient number of
authorized shares of NCT common stock to issue these shares, we were not able to
file a registration statement. As a result, Crammer Road is entitled to
liquidated damages at the rate of 2% per month of the stated value of our
outstanding series H preferred stock. The non-registration charges are included
in the calculation of loss attributable to common stockholders. For the nine
months ended September 30, 2005, this resulted in a charge to additional paid-in
capital of $3.2 million.
During the nine months ended September 30, 2005, we issued 975.55767 shares
of our series I preferred stock to four of our executive officers, one of our
non executive offices, a holder of shares of preferred stock of our subsidary,
Artera Group, Inc., and Steven Salkind, the son of Carole Salkind (see Artera
Group, Inc. Preferred Stock (below) and Note 10). During the three months ended
September 30, 2005, all but one holder of our series I preferred stock converted
an aggregate of 465.55767 shares (including executive officers' conversion of
212.33253 shares) of our series I preferred stock into a total of 22,169,412
shares of our common stock. At September 30, 2005, 510 shares of our series I
preferred stock
16
were issued and outstanding and held by Steven Salkind. Our series I preferred
stock has a par value of $0.10 per share and a stated value of $1,000 per share.
No dividends are payable on the series I preferred stock. The series I preferred
stock is junior in rank to our series H convertible preferred stock, but senior
in rank to our common stock and has preferences over the common stock with
respect to distributions and payments upon our liquidation, dissolution or
winding up. The holders of our series I preferred stock have no voting rights
(except as may be required by law). Each share of series I preferred stock is
convertible into approximately 47,619 shares of our common stock, determined by
dividing the $1,000 stated value by the fixed conversion price of $0.021 per
share. As a result, the 510 issued and outstanding shares of our series I
preferred stock are convertible into approximately 24,285,714 shares of our
common stock.
Artera Group, Inc. Preferred Stock
At September 30, 2005, there were 8,299 shares of Artera series A preferred
stock outstanding. Each share of series A convertible preferred stock is
convertible into shares of Artera common stock at a conversion price equal to
the average closing price for the five trading days prior to the conversion
date. We entered into an exchange rights agreement in 2001 with ten accredited
investors who hold $4.3 million in aggregate stated value of Artera series A
preferred stock. Each of the ten holders of Artera series A preferred stock is
entitled to exchange the Artera series A preferred stock for shares of our
common stock at an exchange price per share of 100% of the average closing bid
price of our common stock for the five trading days prior to the exchange date
and may not convert into Artera common stock. We are obligated to register for
resale shares of our common stock issuable upon the exchange of 4,276 shares of
Artera series A preferred stock. For the nine months ended September 30, 2005,
we incurred charges of approximately $0.4 million for non-registration of the
underlying shares of our common stock. Pursuant to the exchange rights
agreement, we have the option at any time to redeem the shares of Artera series
A preferred stock subject to the agreement 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 our 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. For the nine months ended September 30, 2005,
we calculated the 4% dividends earned by holders of the Artera series A
preferred stock at approximately $0.2 million. The non-registration charges and
dividends are included in the calculation of loss attributable to common
stockholders. During the nine months ended September 30, 2005, 271 shares with a
stated value of $271,000, along with accrued dividends of $44,000, were
exchanged for 160 shares of our series I preferred stock.
Transactions Affecting the Common Stock of Pro Tech Communications, Inc.
On March 31, 2005, the remaining Pro Tech series A shares were converted
into 1,844,007 shares of Pro Tech common stock. At September 30, 2005, our
subsidiary, NCT Hearing, held approximately 83% of the outstanding Pro Tech
common stock.
Warrants
During the nine months ended September 30, 2005, in conjunction with the
issuance of convertible notes, we issued to Carole Salkind warrants to acquire
an aggregate of 1,832,500,000 shares of our common stock at exercise prices
ranging from $0.005 to $0.0195 per share. The fair value of these warrants was
approximately $19.1 million (determined using the Black-Scholes option pricing
model). Based upon the allocation of the relative fair values of the
instruments, we recorded a discount to the convertible notes issued to Carole
Salkind of $15.8 million during the nine months ended September 30, 2005.
10. Related Parties:
Carole Salkind and Affiliates
During the nine months ended September 30, 2005, we issued $107.5 million
of 8% convertible notes due six months from respective dates of issuance to
Carole Salkind (see Note 6) along with five-year warrants to acquire an
aggregate of 1,832,500,000 shares of our common stock (see Note 9).
Consideration paid for these notes included approximately $6.0 million cash and
cancellation and surrender of notes aggregating approximately $85.3 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 our secured notes to her, we will pay the legal fees she incurs
as a result of certain legal matters (see Note 11).
17
On January 7, 2005, we entered into a three-year consulting agreement with
Morton Salkind, the spouse of Carole Salkind, to provide us ongoing financial
and consulting advisory services as we may reasonably request from time to time.
As compensation for these consulting services, we have agreed to pay to Mr.
Salkind a monthly $5,000 cash fee payable at the end of the term of the
agreement, to reimburse Mr. Salkind and his spouse for the cost of health
insurance premiums and to provide Mr. Salkind with the use of an automobile
owned or leased by us, together with auto insurance coverage, through the term
of the agreement. Our expected costs to provide this automobile are $10,800 per
year. The consulting engagement and compensation of Mr. Salkind is not dependent
upon the ongoing funding provided by Ms. Salkind.
In March 2005, we issued 510 shares of our series I convertible preferred
stock to Steven Salkind in exchange for an aggregate of accrued consulting fees
of $510,000 including amounts accrued through June 12, 2005, representing all
consulting fees payable in cash to consulting entities affiliated with Carole
Salkind (but not to Morton Salkind personally pursuant to his January 2005
agreement) (see Note 9). These consulting fees had previously been assigned to
Steven Salkind by these entities.
Executive Officer Preferred Stock Issuance
In March 2005, we issued an aggregate of 212.33253 shares of our series I
convertible preferred stock to four executive officers in exchange for accrued
but unpaid incentive cash bonuses of $343,000 (before income tax withholding)
(see Note 9). The specific terms of these issuances are as follows:
Net Bonus Amount
Gross After Tax Shares
Name Bonus Amount Withholding Issued
---- ------------ ----------- ------
Michael J. Parrella, Chief Executive Officer and Chairman of
the Board $125,000 $ 81,000 81
Irene Lebovics, President 46,000 27,000 27
Cy E. Hammond, Senior Vice President and Chief Financial
Officer 72,000 41,000 41
R. Wayne Darville, Chief Operating Officer, Artera Group,
Inc. 100,000 63,332.53 63.33253
During the three months ended September 30, 2005, these executive officers
converted 212.33253 shares of our series I preferred stock into 10,111,072
shares of our common stock.
Incentive Compensation of Management
On March 31, 2005, three executives agreed to waive a portion of their
incentive bonus earned in 2004. The amounts waived were approximately $326,000,
$107,000 and $158,000 for our Chief Executive Officer, President and Chief
Financial Officer, respectively. In addition, these executives agreed to subject
the payment of a portion of their accrued but unpaid 2004 bonus amounts to
certain conditions. Furthermore, effective January 1, 2005, the incentive cash
compensation arrangements applicable to these executives have been amended. For
the first nine months of 2005, these executives received incentive cash
compensation consisting of a percentage of the value only of new cash and cash
equivalents received by us, subject to certain payment limitations.
Manatt Jones Global Strategies, LLC
On July 1, 2004, we entered into a sixteen-month consulting agreement with
Manatt Jones Global Strategies, LLC, a consulting firm. Under this agreement,
Manatt Jones is assisting us in establishing distribution relationships, large
end user sales, resellers, capital funding, joint venture partners and private
network opportunities for our Artera Group business and our Artera Turbo product
lines, primarily in Mexico, Latin America and Asia through the firm's extensive
contacts in those regions, but also in the United States and elsewhere through
the firm's extensive contacts in the Washington, D.C. area. Manatt Jones also
provides us with use of their Washington, D.C. and New York City offices. Under
this agreement, we pay a monthly fee of $16,250 to Manatt Jones for these
services. Manatt Jones recruited our former Senior Vice President, Corporate
Development to serve as a Managing Director in which capacity he is able to
support Manatt Jones's efforts on our behalf as a result of his availability and
his experience with our Artera Group business. The total expensed in the nine
months ended September 30, 2005 under this agreement was approximately $146,250.
18
Spyder Technologies Group, LLC
On May 1, 2005, we and Spyder Technologies Group, LLC, a company in which
our Chairman and Chief Executive Officer, Michael Parrella, and members of his
family have interests, amended the arrangement under which Spyder provides
technical consulting services to our subsidiary Artera Group, Inc. The amendment
was to change the cash compensation payable by Artera to Spyder from $20 per
hour to $365 per day (or $45.63 per hour for a pro rata portion thereof based on
an eight-hour day). No additional compensation is paid for hours in excess of
eight per day. In addition, Spyder received a one-time payment of approximately
$11,900, which effectively made the rate increase retroactive to January 1,
2005. Spyder earned technical consulting fees of $65,607 for the nine months
ended September 30, 2005.
11. Litigation:
Founding Midcore Shareholder Litigation
In April 2004, Jerrold Metcoff and David Wilson filed a complaint against
us and Michael Parrella, our Chairman and Chief Executive Officer, in
Connecticut state court, which complaint was subsequently amended to add Carole
Salkind as a defendant. The plaintiffs allege that we and Mr. Parrella breached
a number of representations, warranties and obligations under or relating to the
August 29, 2000 Agreement and Plan of Merger by which Metcoff, Wilson and others
sold to us 100% of the outstanding shares of a corporation that became our
subsidiary, Midcore Software, Inc. Among those obligations was the obligation
for us to issue to Metcoff and Wilson an aggregate of 60,359,576 shares of our
common stock, which we have not done. The plaintiffs also allege that we and Mr.
Parrella engaged in intentional and/or negligent misrepresentations, fraudulent
transfers of intellectual property and other company assets, unfair trade
practices and breaches of an implied covenant of good faith and fair dealing.
The complaint, as amended, seeks damages, punitive damages, interest and
attorneys' fees, and seeks a declaration that the intellectual property acquired
from the plaintiffs by the corporation that became Midcore Software, Inc. (which
intellectual property is currently used in our Artera Turbo product) is held in
trust for the benefit of the plaintiffs. The damages, punitive damages, interest
and attorneys' fees sought in the substitute complaint are all for unspecified
amounts, but in other court filings in the case, the plaintiffs have alleged
that the total cash amount they are owed exceeds $4.2 million.
On January 7, 2005, the court granted our motion to strike one of the
claims against Midcore Software in the complaint (as amended), pertaining to
Midcore's responsibility for our failure to issue shares of its common stock to
Metcoff and Wilson. On or about January 24, 2005, Metcoff and Wilson filed a
substitute complaint to reformulate the claim against Midcore Software that had
been struck. On April 25, 2005, at our request, the court required the
plaintiffs to revise their substitute complaint with respect to certain
distinctions in the August 29, 2000 Agreement and Plan of Merger between
potential liabilities of NCT and potential liabilities of Midcore Software.
On June 21, 2005, Metcoff and Wilson filed a second amended complaint. This
new complaint: (i) added claims against Mr. Parrella for breach of fiduciary
duty owed to the plaintiffs as alleged creditors of NCT; (ii) added Morton
Salkind (husband of Carole Salkind) as a defendant in the case, asserted claims
against him for unfair trade practices and fraudulent transfers and asserted
that he should be held personally responsible for some of the allegedly wrongful
acts of NCT; and (iii) reformulated some of the existing claims with respect to
the issue of potential liability as between Midcore and NCT. The new complaint
also sought to add as defendants in the case Irene Lebovics, Cy Hammond, John
McCloy and Sam Oolie (members of our board of directors) and assert claims
against them for unfair trade practices and breach of fiduciary duty. We
objected to the addition of those parties and, on July 29, 2005, the court held
in our favor on that issue. Mr. Parrella has told us that, he intends to deny
the material new allegations against him in the second amended complaint.
On October 3, 2005, at our request, the court required the plaintiffs to
revise their second amended complaint with respect to, among other things, the
removal of certain references to members of our board of directors other than
Mr. Parrella. On October 19, 2005, Metcoff and Wilson filed a revised complaint.
On November 2, 2005, we filed a request to further revise the revised complaint,
which request is currently pending before the court.
We have agreed to indemnify Mr. Parrella, to the extent permitted by our
certificate of incorporation and applicable law, for any liabilities (including
legal fees) he may incur as a result of the claims against him in this action.
We have submitted the claims against Mr. Parrella in the prior complaint, and
the additional claims against him in the second amended complaint, to our
director and officer indemnification insurance carrier. The carrier has not yet
responded to confirm or initially deny coverage of any of the claims against Mr.
Parrella.
19
Carole Salkind has demanded that we indemnify her, in connection with her
security interests under our promissory notes to her, for legal fees she incurs
in this action. During the nine months ended September 30, 2005, Ms. Salkind
incurred approximately $10,000 in such legal fees of which we paid approximately
$2,000.
In November 2005, Metcoff and Wilson filed a separate complaint against
John McCloy, Sam Oolie, Irene Lebovics and Cy Hammond in Connecticut state court
asserting claims against them for breaches of fiduciary duty and unfair trade
practices in connection with the transactions relating to the August 29, 2000
Agreement and Plan of Merger. The damages, punitive damages, interest and
attorneys' fees sought in the complaint are for unspecified amounts. Messrs.
McCloy, Oolie and Hammond and Ms. Lebovics have indicated to us that they intend
to deny the allegations against them.
We have agreed to indemnify Messrs. McCloy, Oolie and Hammond and Ms.
Lebovics, to the extent permitted by our certificate of incorporation and
applicable law, for any liabilities (including legal fees) they may incur as a
result of the claims against them in this action. We intend to submit the claims
against Messrs. McCloy, Oolie and Hammond and Ms. Lebovics in the case to the
Company's director and officer indemnification insurance carrier.
Reference is made to our Annual Report on Form 10-K for the year ended
December 31, 2004, for further information regarding the foregoing as well as
other litigation related matters. We believe there are no other patent
infringement claims, litigation, matters or unasserted claims other than the
matters discussed above or in our most recent Form 10-K that could have a
material adverse effect on our financial position and results of operations.
20
12. Segment Information:
We are organized into three operating segments: communications, media and
technology. To reconcile the reportable segment data to the condensed
consolidated financial statements, we capture other information in 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
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 consolidating column. Consolidating consists of items
eliminated in consolidation, such as intercompany revenue and expense.
During the nine months ended September 30, 2005, no geographic information
for revenue from external customers or for long-lived assets is disclosed, as
our primary markets and capital investments were concentrated in the United
States.
Reportable segment data for the three and nine months ended September 30,
2005 and September 30, 2004 is as follows:
(In thousands)
For the three months ended Communi- Reportable Other Consoli- Grand
September 30, 2005 cations Media Technology Segments Corporate dating Total
- --------------------------------------- ---------- ---------- ------------ ------------ ------------ ------------ -----------
License Fees and Royalties - External $ 489 $ - $ 24 $ 513 $ 691 $ (691) $ 513
Other Revenue - External 503 16 - 519 - (3) 516
Revenue - Other Operating Segments 747 1 - 748 4 (752) -
Net Income (loss) (3,827) (2,089) 129 (5,787) (25) (20,378) (26,190)
Segment Assets 14,255 21,432 737 36,424 2,489 (33,657) 5,256
For the three months ended Communi- Reportable Other Consoli- Grand
September 30, 2004 cations Media Technology Segments Corporate dating Total
- --------------------------------------- ---------- ---------- ------------ ------------ ------------ ------------ -----------
License Fees and Royalties - External $ 432 $ 535 $ 15 $ 982 $ - $ - $ 982
Other Revenue - External 418 39 - 457 - - 457
Revenue - Other Operating Segments 303 3 - 306 14 (320) -
Net Income (loss) 1,796 (1,014) 83 865 (11,881) 602 (10,414)
Segment Assets 20,575 23,145 936 44,656 2,288 (35,759) 11,185
For the nine months ended Communi- Reportable Other Consoli- Grand
September 30, 2005 cations Media Technology Segments Corporate dating Total
- --------------------------------------- ---------- ---------- ------------ ------------ ------------ ------------ -----------
License Fees and Royalties - External $ 1,378 $ 535 $ 93 $ 2,006 $ 700 $ (700) $ 2,006
Other Revenue - External 1,485 69 - 1,554 - (3) 1,551
Revenue - Other Operating Segments 775 1 - 776 13 (789) -
Net Income (loss) (9,637) (4,793) 349 (14,081) (47,445) 1,653 (59,873)
Segment Assets 14,255 21,432 737 36,424 2,489 (33,657) 5,256
For the nine months ended Communi- Reportable Other Consoli- Grand
September 30, 2004 cations Media Technology Segments Corporate dating Total
- --------------------------------------- ---------- ---------- ------------ ------------ ------------ ------------ -----------
License Fees and Royalties - External $ 914 $ 1,605 $ 146 $ 2,665 $ - $ - $ 2,665
Other Revenue - External 1,288 120 - 1,408 - 1,408
Revenue - Other Operating Segments 886 5 - 891 342 (1,233) -
Net Income (loss) (3,714) (2,982) 140 (6,556) (31,441) 1,795 (36,202)
Segment Assets 20,575 23,145 936 44,656 2,288 (35,759) 11,185
13. Subsequent Events:
During October 2005, Crammer Road converted an aggregate of 16 shares of
our series H preferred stock along with accrued dividends, into 45,515,131
shares of our common stock.
On October 10, 2005, Longview Fund LP converted $15,227 in principal and
$48,548 in accrued interest due under our $500,000 convertible note issued in
July 2004 into an aggregate of 13,370,000 shares of our common stock.
On October 11, 2005, we sold 12,000,000 shares of our common stock to
Crammer Road, pursuant to a put of $80,000 under our private equity credit
agreement with Crammer Road.
21
On October 14, 2005, we issued Carole Salkind an 8% convertible note in the
principal amount of $300,000, for which Ms. Salkind paid us $300,000 in cash.
Also on October 14, 2005, we issued Carole Salkind a 12% convertible note in the
principal amount of $1,001,329.96 to cure our default on payment of the initial
interest installment due under the $5,000,000 note dated December 22, 2004. The
principal amount of this note represents the interest installment due October 1,
2005 ($498,082.19), default interest thereon and interest default penalty (10%
of the then outstanding principal). The notes are secured by substantially all
of our assets. The notes are due on April 14, 2006 and may be converted into
shares of our common stock at a conversion price per share of $0.0049 or
exchanged for shares of common stock of any of our subsidiaries (except Pro
Tech) that makes a public offering of its common stock (at the public offering
price). In conjunction with the issuance of these notes, we issued Ms. Salkind
five-year warrants to acquire 26,500,000 shares of our common stock at an
exercise price per share of $0.0049.
On October 18, 2005, we issued Carole Salkind an 8% convertible note in the
principal amount of $968,035.46 to cure our default on repayment of two notes
dated April 14, 2005. The principal amount of this note represents the aggregate
principal rolled over ($847,970.18), default penalty (10% of the principal in
default) and accrued interest. The notes are secured by substantially all of our
assets. The notes are due on April 18, 2006 and may be converted into shares of
our common stock at a conversion price per share of $0.0049 or exchanged for
shares of common stock of any of our subsidiaries (except Pro Tech) that makes a
public offering of its common stock (at the public offering price). In
conjunction with the issuance of this note, we issued Ms. Salkind a five-year
warrant to acquire 16,000,000 shares of our common stock at an exercise price
per share of $0.0049.
On October 19, 2005, our board of directors increased the number of
directorships on the board from five to seven and elected Stephan Carlquist and
Robert N. Rose, to fill the newly created vacancies on the board effective
October 19, 2005 for a term expiring at our 2006 annual meeting of stockholders
or until their successors are elected and duly qualified. Our board of directors
also appointed Mr. Carlquist to serve on its compensation committee. Messrs.
Carlquist and Rose were each granted options to purchase 6 million shares of our
common stock at an exercise price of $0.006 per share, the fair market value of
our common stock on the date of grant.
On October 19, 2005, we issued 120,000 shares to Wayne Darville, Chief
Operating Officer, Artera Group, Inc. pursuant to a stock award granted by our
board of directors on September 30, 2004.
On October 19, 2005, we granted an aggregate of 363,694,000 options to our
employees and non-employee directors. Of these options, 262,103,000 options were
granted to officers and other employees by the compensation committee of our
board of directors pursuant to our 2001 Stock and Incentive Plan, as amended
(the "2001 Plan"), 46,002,000 options were granted to our non-employee directors
(including Messrs. Carlquist and Rose) by the full board of directors pursuant
to the 2001 Plan and 55,589,000 options were granted to an executive officer by
the full board outside of the 2001 Plan. All of the options granted have a
seven-year term and an exercise price of $0.006 per share, the fair market value
of our common stock on the date of grant.
On October 31, 2005, we issued Carole Salkind an 8% convertible note in the
principal amount of $325,000, for which Ms. Salkind paid us $325,000 in cash.
Also on October 31, 2005, we issued Carole Salkind an 8% convertible note in the
principal amount of $1,625,612.05 to cure our default on repayment of notes
dated April 26, 2005 and April 29, 2005. The principal amount of this note
represents the aggregate principal rolled over ($1,424,532.52), default penalty
(10% of the principal in default) and accrued interest. The notes are secured by
substantially all of our assets. The notes mature six months from the date of
issuance may be converted into shares of our common stock (369,457,284 shares
for the $1,625,612.05 note at a conversion price per share of $0.0044 and
79,268,293 shares for the $325,000 note at a conversion price per share of
$0.0041) or exchanged for shares of common stock of any of our subsidiaries
(except Pro Tech) that makes a public offering of its
common stock (at the public offering price). In conjunction with the issuance of
these notes, we issued Ms. Salkind five-year warrants to acquire 27,000,000
shares of our common stock at an exercise price per share of $0.0044 and
15,000,000 shares of our common stock at an exercise price per share of $0.0041.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 our substantial level of indebtedness;
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, 2004 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
We design products and develop and license 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 consists of
technology licensing fees and royalties, product sales, advertising and
engineering and development services. Operating revenue for the nine months
ended September 30, 2005 consisted of approximately 56.4% in technology
licensing fees and royalties, 41.2% in product sales, 1.7% in advertising and
0.7% in engineering and development. The mix of our revenue sources during any
reporting period may have a material impact on our operating results. In
particular, our execution of technology licensing agreements and the timing of
the revenue recognized from these agreements has not been predictable.
Going Concern Risks
Since inception, we have experienced substantial recurring losses from
operations, which amounted to $414.4 million on a cumulative basis through
September 30, 2005. 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
23
our internally generated funds are not adequate, we believe that 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 may need
to obtain the approval of our stockholders of additional amendments to our
certificate of incorporation to sufficiently increase the number of authorized
shares of our common stock and to reduce or eliminate the par value of our
common stock. However, we can give no assurance that our stockholders would
approve either or both of these amendments.
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 $0.4 million at September
30, 2005 and our working capital deficit was $93.3 million. We have been able to
continue our operations by raising additional working capital through the sale
of convertible notes. We have been primarily dependent upon funding from Carole
Salkind during 2003, 2004 and to date in 2005. 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
September 30, 2005 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 following discussion of our financial condition and results of
operations is based on the consolidated financial statements included in this
Form 10-Q, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and the related
disclosures of contingencies. We base these 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 for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. On an on going basis, we evaluate our estimates, including those
related to amortization and potential impairment of intangible assets and
goodwill. 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. During the nine months ended September 30, 2005, there were no
significant changes to the critical accounting policies that we disclosed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2004.
The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results we report in our financial
statements, which we discuss under the heading "Results of Operations" below.
Some of our accounting policies require us to make difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Our most critical accounting estimate is the assessment of
recoverability of long-lived assets, which primarily impacts operating results
when we impair assets or accelerate their depreciation. Below, we discuss this
policy further, as well as the estimates and judgments involved. We also have
other policies that we consider key accounting policies, such as policies for
revenue recognition, including the deferral of revenue.
24
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, 2004, we evaluated the goodwill allocated to our Advancel
reporting unit, NCT Hearing reporting unit and Midcore/Artera reporting unit and
determined no impairment existed for Advancel or NCT Hearing. Based on our
assessment, as of December 31, 2004, we concluded that the goodwill of the
Midcore/Artera reporting unit was impaired and we recorded an impairment of $5.9
million. At September 30, 2005, our goodwill, net, all of which is allocated to
the Advancel and NCT Hearing reporting units, totalled $1.3 million. Our next
annual evaluation is planned for December 31, 2005.
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 nine months ended September 30, 2004 and 2005 was less
than $0.1 million. At September 30, 2005, our patent rights and other
intangibles, net were $1.0 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. Our evaluations to date have not
indicated that any revisions are necessary. Our next evaluation is planned for
December 31, 2005. 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, which
results in a charge in our results of operations equal to the determined
impairment amount. In addition, if we determine that a reduction in the
remaining amortization period was warranted, our amortization expense would
increase, which would reduce our operating results. In light of our continuing
losses, a potential indicator of impairment, we test our patent rights and other
intangible assets with finite useful lives for impairment at each reporting
period. Our next evaluation is planned for December 31, 2005.
Results of Operations
Three months ended September 30, 2005 compared to three months ended September
30, 2004
Revenue. Total revenue for the three months ended September 30, 2005 was
$1.0 million as compared to $1.4 million for same period in 2004, a decrease of
$0.4 million or, 28.6%, primarily the result of having fully recognized the
license fee revenue from the New Transducers Ltd. ("NXT") license as of March
31, 2005. Total revenue for the three months ended September 30, 2005 consisted
of approximately 49.9% in technology licensing fees and royalties, 46.6% in
product sales, 1.2% in advertising and 2.3% in engineering and development
services as compared to the three months ended September 30, 2004 of
approximately 68.2% in technology licensing fees and royalties, 29.0% in product
sales, 2.4% in advertising and 0.4% in engineering and development services.
Technology licensing fees and royalties were $0.5 million for the three
months ended September 30, 2005 as compared to $1.0 million for the same period
in 2004, a decrease of $0.5 million, or 50.0%. This decrease was due primarily
to having fully recognized the license fee revenue from the NXT license. In May
2005, we learned that our ClearSpeech algorithm will not be incorporated by
Sharp Corporation in its next generation product. As a result,
25
we expect to experience a significant decline in our royalties from Sharp
beginning sometime in 2006. Our revenue from Sharp for the three months ended
September 30, 2005 and September 30, 2004 was approximately $0.3 million and
$0.2 million, respectively.
For the three months ended September 30, 2005, product sales were $0.5
million compared to $0.4 million for the same period in 2004. Gross profit on
product sales, as a percentage of product sales, for the three months ended
September 30, 2005 and 2004 was 43.2% and 53.8%, respectively, primarily due to
the change in product mix within the communications segment. For the three
months ended September 30, 2005 and 2004, 97% and 92%, respectively, of our
product sales were attributable to our communications segment. The mix of our
product sales within the communications segment for the three months ended
September 30, 2005 included 68% of Pro Tech products and 15% of Artera Turbo
subscriptions whereas the same period in the prior year included 72% of Pro Tech
products and 23% of Artera Turbo subscriptions. Our subscriber base that
generated the Artera Turbo product sales for the three months ended September
30, 2005 consisted of residential and small business users.
Advertising revenue was $12,000 for the three months ended September 30,
2005 compared to $35,000 for the same period in 2004. The decrease was primarily
due to termination of an advertising contract with a prior user of our Sight &
Sound system. Hospital Radio Network is the business responsible for the sale of
audio and visual advertising in healthcare venues employing our Sight & Sound
systems and contributed 100% of total advertising revenue for both periods.
In September 2005, we decided to modify the business model for operating
our Hospital Radio Network business. Instead of continuing to directly operate
this business, we have initiated our modified plan to license our proprietary
technology used in this business to third parties in exchange for a percentage
of the advertising revenues generated by these third parties through the
installation of our Sight & Sound systems in healthcare facilities.
Costs and expenses. Total costs and expenses for the three months ended
September 30, 2005 were $27.2 million compared to $11.9 million for the same
period in 2004, an increase of $15.3 million, or 128.6%, due primarily to an
increase of $6.6 million in interest expense and an increase of $4.3 million in
default penalties on convertible notes, partially offset by decreases in
selling, general and administrative expenses of $0.7 million. The three months
ended September 30, 2004 included a $4.6 million gain resulting from the
dissolution of Artera International, included in other (income)/expense, net.
For the three months ended September 30, 2005, selling, general and
administrative expenses totaled $1.9 million as compared to $2.6 million for the
three months ended September 30, 2004, a decrease of $0.7 million, or 26.9%.
This decrease was due primarily to decreases in other compensation resulting
from amending the incentive cash compensation arrangements applicable to certain
executives.
For the three months ended September 30, 2005, other (income)/expense, net
totaled $5.9 million as compared to income of $3.2 million for the three months
ended September 30, 2004, an increase of $9.1 million, or 284.4%. The increase
was due to a $4.3 million increase in default penalties on convertible notes.
The three months ended September 30, 2004 included a $4.6 million gain resulting
from the dissolution of Artera International.
For the three months ended September 30, 2005, interest expense, net
totaled $18.0 million as compared to $11.4 million for the three months ended
September 30, 2004, an increase of $6.6 million, or 57.9%. The increase in
interest expense was primarily attributable to the increase in debt and the
amortization of the relative fair value of warrants (original issue discounts
and beneficial conversion features) allocated to the related debt. Interest
expense for the three months ended September 30, 2005 included amortization of
original issue discounts of $8.9 million, amortization of beneficial conversion
features in convertible debt of $7.3 million, and interest on convertible debt
issued by us of $1.8 million.
26
Nine months ended September 30, 2005 compared to nine months ended September 30,
2004
Revenue. For the nine months ended September 30, 2005, total revenue
amounted to $3.6 million, compared to $4.1 million for nine months ended
September 30, 2004, a decrease of $0.5 million, or 12.2%. This decrease was due
primarily to having fully recognized the license fee revenue from the NXT
license as of March 31, 2005, partially offset by increases in the reporting of
royalties from OKI Electric. Total revenue for the nine months ended September
30, 2005 consisted of approximately 56.4% in technology licensing fees and
royalties, 41.2% in product sales, 1.7% in advertising and 0.7% in engineering
and development services as compared to the nine months ended September 30, 2004
of approximately 65.4% in technology licensing fees and royalties, 31.9% in
product sales, 2.5% in advertising, and 0.1% in engineering and development
services.
Technology licensing fees and royalties were $2.0 million for the nine
months ended September 30, 2005 as compared to $2.7 million for the same period
in 2004, a decrease of $0.7 million, or 25.9%. The decrease was due primarily to
a decrease in royalties resulting from the license fee revenue from NXT. In May
2005, we learned that our ClearSpeech algorithm will not be incorporated by
Sharp Corporation in its next generation product. As a result, we expect a
significant decline in our royalties recognized from Sharp beginning sometime in
2006. Our revenue from Sharp for the nine months ended September 30, 2005 and
September 30, 2004 was approximately $0.6 million and $0.5 million,
respectively.
For the nine months ended September 30, 2005, product sales were $1.5
million as compared with $1.3 million for the same period in 2004. Gross profit
on product sales, as a percentage of product sales, for the nine months ended
September 30, 2005 and 2004 was 52.4% and 51.4%, respectively. For the nine
months ended September 30, 2005 and 2004, 96% and 92%, respectively, of our
product sales were attributable to our communications segment. The mix of our
product sales within the communication segment for the nine months ended
September 30, 2005 included 66% of Pro Tech products and 17% of Artera Turbo
subscriptions whereas the same period in the prior year included 65% of Pro Tech
products and 19% of Artera Turbo subscriptions.
Advertising revenue was $61,000 for the nine months ended September 30,
2005 compared to $103,000 for the same period in 2004. Hospital Radio Network
was the business responsible for the sale of audio and visual advertising in
healthcare venues employing our Sight & Sound systems and contributed 100% of
total advertising revenue for both periods.
In September 2005, we decided to modify the business model for operating
our Hospital Radio Network business. Instead of continuing to directly operate
this business, we have initiated our modified plan to license our proprietary
technology used in this business to third parties in exchange for a percentage
of the advertising revenues generated by these third parties through the
installation of our Sight & Sound systems in healthcare facilities.
Costs and expenses. Total costs and expenses for the nine months ended
September 30, 2005 were $63.4 million compared to $40.3 million for the same
period in 2004, an increase of $23.1 million, or 57.3%, due primarily to a $16.0
million increase in interest expense and $3.8 million in default penalties on
convertible notes, partially offset by decreases in selling, general and
administrative expenses of $1.6 million. The nine months ended September 30,
2004 included a $4.6 million gain resulting from the dissolution of Artera
International.
Cost of product sales for the nine months ended September 30, 2005 was $0.7
million as compared to $0.6 million for the nine months ended September 30,
2004. Cost of advertising revenue was $9,000 for the nine months ended September
30, 2005 compared to $12,000 for the same period in 2004. These costs included
the commissions paid to advertising representative companies and agencies and
communication expenses related to the Sight & Sound locations in commercial and
healthcare venues.
For the nine months ended September 30, 2005, selling, general and
administrative expenses totaled $5.2 million as compared to $6.8 million for the
nine months ended September 30, 2004, a decrease of $1.6 million, or 23.5%. This
decrease was due primarily to the waiver by three executives of a portion of
their incentive bonus earned in 2004 and amendment of the incentive cash
compensation arrangements applicable to the three executives. The amounts waived
were approximately $326,000, $107,000 and $158,000 for our Chief Executive
Officer, President and Chief Financial Officer, respectively.
For the nine months ended September 30, 2005, other (income)/expense, net
totaled $9.3 million as compared to $0.7 million for the nine months ended
September 30, 2004, a increase of $8.6 million. The increase was primarily due
to a $3.8 million increase in default penalties on convertible notes and a $0.3
million increase in finance
27
costs associated with non-registration of common shares underlying convertible
notes. The nine months ended September 30, 2004 included a $4.6 million gain
resulting from the dissolution of Artera International.
For the nine months ended September 30, 2005, interest expense, net totaled
$45.0 million as compared to $29.0 million for the nine months ended September
30, 2004, an increase of $16.0 million, or 55.2%. The increase in interest
expense was primarily attributable to the increase in debt and the amortization
of the relative fair value of warrants (original issue discounts and beneficial
conversion features) allocated to the related debt. Interest expense for the
nine months ended September 30, 2005 included amortization of original issue
discounts of $19.6 million, amortization of beneficial conversion features of
$20.5 million, and interest on convertible debt issued by us of $4.8 million.
Liquidity and Capital Resources
We have experienced substantial losses from operations since inception,
which have been recurring and amounted to $414.4 million on a cumulative basis
through September 30, 2005. These losses, which include the costs for
development of technologies and products for commercial use, have been funded
primarily from:
o the issuance of our and our subsidiaries' convertible debt;
o the sale of our and our subsidiaries' common stock;
o the sale of our and our subsidiaries' convertible preferred stock;
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, product sales and advertising. 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. At our 2005 annual meeting of stockholders,
held on June 28, 2005, our stockholders approved an amendment to our certificate
of incorporation to increase the number of authorized shares of our common stock
to 5.622 billion shares. This increase in the number of our authorized shares of
common stock, however, is not sufficient for us to satisfy all potential
requests for conversions and exchanges of our and our subsidiaries' derivative
securities. 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 September 30, 2005 about our ability to continue as a going concern.
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 three and nine months
ended September 30, 2005 are described in the notes to the condensed
consolidated financial statements. In 2005, 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 Ms. Salkind will continue to
provide funds to us. Our belief that funding from her will continue is based
primarily upon her continued funding of us during 2003, 2004 and to date in 2005
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 us in the
short-term or that the amount, timing and duration of the funding from her will
be adequate to sustain our business operations.
Our monthly use of operating cash for each of the nine months ended
September 30, 2005 was approximately $0.7 million, down from approximately $0.8
million in the same period in the prior year. In the absence of a significant
infusion of new capital, we anticipate that our monthly use of cash over the
next 12 months will not exceed this approximate level, assuming continued
funding from Carole Salkind or other sources to satisfy the amounts not funded
by royalty collections and product sales. Of our monthly cash expenditures,
approximately $0.6 million is used currently to fund payroll and payroll-related
costs (such as taxes and health insurance) and the balance is used for other
operating expense (including rents, utilities and arrearage arrangements).
28
At September 30, 2005, our cash and cash equivalents aggregated $0.4
million. Our working capital deficit was $93.3 million at September 30, 2005,
compared to a deficit of $72.3 million at December 31, 2004, a $21.0 million
increase. Our current assets were approximately $1.8 million at September 30,
2005 compared to approximately $2.5 million at December 31, 2004. Our current
liabilities were approximately $95.1 million at September 30, 2005 compared to
approximately $74.8 million at December 31, 2004. The $20.3 million increase in
current liabilities was due primarily to the issuance and refinancing of
convertible notes to Carole Salkind of $20.0 million (net of discounts) and an
increase in accrued expenses due to non-registration costs and liquidated
damages of $0.2 million, partially offset by reductions in consulting fees of
$0.5 million and incentive compensation of $0.9 million. At September 30, 2005,
our current liabilities consisted of indebtedness ($66.0 million), accrued
liabilities ($18.3 million), other current liabilities ($7.0 million), accounts
payable ($2.8 million), deferred revenue ($0.4 million) and shares of subsidiary
subject to exchange rights ($0.7 million). We anticipate that we may not be
required to settle all of our current liabilities in cash. Most of our
indebtedness (and accrued interest thereon) is convertible into shares of our
common stock and may be converted to the extent we have sufficient shares of
authorized but unissued common stock.
At September 30, 2005, we were in default of $0.5 million of our notes
payable and $5.1 million of our convertible notes. The following table
summarizes our indebtedness in default at September 30, 2005:
(In millions)
New Defaults
Indebtedness Defaults Cured Indebtedness
In Default during during In Default
Notes Payable: 12/31/04 the Period the Period 09/30/05
----------------- ---------------- ---------------- ----------------
Former Employee / Other $ 0.5 (a) $ - $ - $ 0.5 (a)
----------------- ---------------- ---------------- ----------------
Subtotal $ 0.5 $ - $ - $ 0.5
----------------- ---------------- ---------------- ----------------
Convertible Notes Payable:
Carole Salkind Notes $ - $ 97.5 $ (97.5) $ - (a)
8% Notes 2.6 (a,b) - - 2.6 (a,b)
6% Notes 2.5 (a) - - 2.5 (a)
----------------- ---------------- ---------------- ----------------
Subtotal $ 5.1 $ 97.5 $ (97.5) $ 5.1
----------------- ---------------- ---------------- ----------------
Grand Total $ 5.6 $ 97.5 $ (97.5) $ 5.6
================= ================ ================ ================
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 nine months ended September
30, 2005 was $6.2 million due primarily to funding the 2005 net loss of $59.9
million, as adjusted to reconcile to net cash.
Our deferred revenue balance at September 30, 2005 was $0.4 million. No
additional cash will be realized from our deferred revenue balance.
Net cash used in investing activities was approximately $0.9 million for
the nine months ended September 30, 2005, reflecting the purchase of data center
equipment for Artera Group.
At each of September 30, 2005 and December 31, 2004, 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
price volatility and other market conditions.
Net cash provided by financing activities was $6.0 million for the
nine-month period ended September 30, 2005 and was due to the issuance and sale
of convertible notes to Ms. Salkind for cash consideration of $6.0 million.
At September 30, 2005, our short-term debt was $66.0 million (principally
comprised of $65.4 million face value of outstanding convertible notes payable,
net and $0.6 million of outstanding notes payable), shown net of discounts of
approximately $14.7 million on our condensed consolidated balance sheet,
compared to $45.7 million of short-term debt, net at December 31, 2004, an
increase of $20.3 million due to debt issued to Carole Salkind. The
29
cash proceeds from debt issued in the nine months ended September 30, 2005 was
primarily used for working capital purposes.
During the nine months ended September 30, 2005, we issued an aggregate of
$107.5 million of convertible notes to Carole Salkind as consideration for $6.0
million cash and refinancing of $85.3 million in principal of matured notes,
along with default penalties and accrued interest.
We believe that the level of financial resources available to us is
critical to our ability to continue as a going concern. From time to time, we
may need to raise additional capital through equity or debt financing in order
to sustain our operations or capitalize upon business opportunities and market
conditions. We expect that from time to time our outstanding short-term debt may
be replaced with new short-term or long-term borrowings. Although we believe
that we can continue to access the capital markets in 2005 on acceptable terms
and conditions, our flexibility with regard to long-term financing activity
could be limited by the liquidity of our common stock on the open market, our
current level of short-term debt and 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
assurance that we will continue to have access to the capital markets on
favorable terms. In addition, our subsidiaries are at a stage where they may not
separately be able to obtain financing or other funding based upon their lack of
or limited performance history.
In July 2005, we entered into a second amended and restated private equity
credit agreement with Crammer Road that superseded and replaced our amended and
restated private equity credit agreement dated as of September 30, 2004, which
in turn, replaced a similar agreement dated as of July 25, 2002. The new credit
agreement gives us the right to sell to Crammer Road shares of our common stock
having an aggregate value of up to $50.0 million pursuant to puts made by us.
The agreement requires us to sell to Crammer Road at least an aggregate of $5.0
million of our common stock at a 7% discount from the market value of our common
stock determined at the time of a put. Through September 30, 2005, we sold a
total of 6,756,756 shares of our common stock to Crammer Road pursuant to our
private equity credit agreement for gross proceeds of $50,000. Through October
11, 2005, we sold an aggregate of 18,756,756 shares of our common stock under
the private equity credit agreement at prices determined pursuant to the
provisions of the agreement, which prices were less than $0.01 per share, the
current par value of our common stock. Delaware law restricts sales of unissued
shares of common stock at a price less than the par value of the common stock.
We have put shares under the private equity credit agreement which were sold
below par value. We are currently engaged in discussions with Crammer Road
regarding this shortfall. In the future, we do not intend to sell shares
pursuant to the private equity credit agreement when the purchase price of such
shares would be less than par value.
We intend to use the 2005 private equity credit agreement to raise
additional cash. However, the equity credit line may not be a reliable source of
new cash capital for us. We must maintain an active trading market able to
absorb large quantities of traded shares of our common stock. If the market for
our common stock has an insufficient volume of shares traded, large quantities
of shares of our common stock sold by Crammer Road to satisfy our puts may drive
down the price of our common stock due to lack of demand for those shares. In
addition, any shares issued to Crammer Road under the private equity credit
agreement will be issued at a 7% discount to the average of the three lowest
closing bid prices for the ten trading days immediately following the notice
date of a put. Based on this discount, Crammer Road has an incentive to sell
immediately to realize the gain on the 7% discount. These discounted sales could
cause our stock price to decline. A significant downward pressure on the price
of our common stock caused by the sale of material amounts of common stock under
the private equity credit agreement could encourage short sales by third
parties. These sales could place additional downward pressure on the price of
our common stock by increasing the number of shares being sold. Furthermore, as
discussed above, we do not intend to sell shares pursuant to the private equity
credit agreement at any time the purchase price of such shares would be less
than the par value of our common stock.
We have no lines of credit with banks or other lending institutions and,
therefore, have no unused borrowing capacity.
Capital Expenditures
As of September 30, 2005, we anticipate incurring approximately $0.1
million in tooling costs in connection with the release of a new industrial
safety earmuff. Other than this expenditure, we had no material commitments for
capital expenditures and no material commitments are anticipated in the near
future.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures include fluctuations in interest 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 September 30, 2005. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of September 30, 2005 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 September 30, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
31
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 6. EXHIBITS
10.1(a) Form of Secured Convertible Note (new financings) issued by NCT Group,
Inc. to Carole Salkind (incorporated herein by reference to Exhibit
10.8(a) of the registrant's Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 0-18267)).
10.1(b) Schedule of Secured Convertible Notes (new financings) issued by NCT
Group, Inc. to Carole Salkind and outstanding as of September 30,
2005. (1)
10.2(a) Form of Secured Convertible Note (refinancings) issued by NCT Group,
Inc. to Carole Salkind (incorporated herein by reference to Exhibit
10.9(a) of the registrant's Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 0-18267)).
10.2(b) Schedule of Secured Convertible Notes (refinancings) issued by NCT
Group, Inc. to Carole Salkind and outstanding as of September 30,
2005. (1)
10.3(a) Form of Warrant (new financings) issued by NCT Group, Inc. to Carole
Salkind (incorporated herein by reference to Exhibit 10.10(a) of the
registrant's Annual Report on Form 10-K for the year ended December
31, 2004 (File No. 0-18267)).
10.3(b) Schedule of Warrants (new financings) issued by NCT Group, Inc. to
Carole Salkind for the three months ended September 30, 2005. (1)
10.4(a) Form of Warrant (refinancings) issued by NCT Group, Inc. to Carole
Salkind (incorporated herein by reference to Exhibit 10.11(a) of the
registrant's Annual Report on Form 10-K for the year ended December
31, 2004 (File No. 0-18267)).
10.4(b) Schedule of Warrants (refinancings) issued by NCT Group, Inc. to
Carole Salkind for the three months ended September 30, 2005. (1)
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934. (2)
31.2 Certification of Chief Financial Officer pursuant Rule 13a-14(a) under
the Securities Exchange Act of 1934. (2)
32.1 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. (2)
- ----------------
(1) Previously filed.
(2) Filed herwith.
32
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 and Treasurer
Dated: November 23, 2005
33