EX-10.FB 33 exh-10fb.txt CONVERTIBLE NOTE Exhibit 10(fb) THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NCT GROUP, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. SECURED CONVERTIBLE NOTE FOR VALUE RECEIVED, NCT GROUP, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to LONGVIEW FUND LP, 600 Montgomery Street, 44th Floor, San Francisco, CA 94111, Fax: (415) 981-5300 (the "Holder") or order, without demand, the sum of Five Hundred Thousand Dollars ($500,000.00), with simple interest accruing at the annual rate of 8%, on July 23, 2006 (the "Maturity Date"). The following terms shall apply to this Note: ARTICLE 1 PAYMENT RELATED PROVISIONS 1.1. Payment Grace Period. The Borrower shall have a ten (10) day grace period to pay any monetary amounts due under this Note, after which grace period a default interest rate of eighteen percent (18%) per annum shall apply to the amounts owed hereunder. 1.2. Conversion Rights. The Conversion Rights set forth in Article 2 shall remain in full force and effect commencing from the date hereof and until the Note is paid in full. 1.3. Interest Rate. Subject to the Holder's right to convert, interest payable on this Note shall accrue at the annual rate of eight percent (8%) and be payable on the Maturity Date, accelerated or otherwise, when the principal and accrued but unpaid interest shall be due and payable, or sooner as described below. ARTICLE 2 CONVERSION RIGHTS The Holder shall have the right to convert the principal amount and interest due under this Note into Shares of the Borrower's Common Stock as set forth below. 2.1. Conversion into the Borrower's Common Stock. (a) The Holder shall have the right from and after the Availability Date (as defined in the Subscription Agreement) and then at any time until this Note is fully paid, to convert any outstanding and unpaid principal portion of this Note, and/or at the Holder's election, the interest accrued on the Note (the date of giving of such notice of conversion being a "Conversion Date") into fully paid and nonassessable shares of common stock of Borrower as such stock exists on the date of issuance of this Note, or any shares of capital stock of Borrower into which such stock shall hereafter be changed or reclassified (the "Common Stock") at the conversion price, as described in Section 2.1(b) hereof (the 1 "Conversion Price"), determined as provided herein. Upon delivery to the Borrower of a Notice of Conversion, attached hereto as Exhibit A, as described in the subscription agreement entered into between the Borrower and Holder relating to this Note (the "Subscription Agreement"), all the terms of which are incorporated herein by this reference, of the Holder's written request for conversion, Borrower shall issue and deliver to the Holder within five (5) business days from the Conversion Date that number of shares of Common Stock for the portion of the Note converted in accordance with the foregoing. At the election of the Holder, the Borrower will deliver accrued but unpaid interest on the Note through the Conversion Date directly to the Holder on or before the Delivery Date (as defined in the Subscription Agreement). The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal (and interest, at the election of the Holder) of the Note to be converted, by the Conversion Price. (b) Subject to adjustment as provided in Section 2.1(c) hereof, the Conversion Price shall be the lesser of (i) $0.0232 ("Maximum Base Price"), and (ii) 80% of the average of the closing bid prices of the Common Stock as reported by Bloomberg L.P. for the OTC Bulletin Board for the five trading days preceding the Conversion Date. (c) The Maximum Base Price and number and kind of shares or other securities to be issued upon conversion shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows: (i) Merger, Sale of Assets, etc. If the Borrower at any time shall consolidate with or merge into or sell or convey all or substantially all its assets to any other corporation, this Note, as to the unpaid principal portion thereof and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase such number and kind of shares or other securities and property as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance, upon or with respect to the securities subject to the conversion or purchase right immediately prior to such consolidation, merger, sale or conveyance. The foregoing provision shall similarly apply to successive transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the anti-dilution provisions of this Section shall apply to such securities of such successor or purchaser after any such consolidation, merger, sale or conveyance. (ii) Reclassification, etc. If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the unpaid principal portion thereof and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase such number and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change. (iii)Stock Splits, Combinations and Dividends. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Base Price shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of 2 shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. (iv) The Conversion Price and the amount of shares of Common Stock issuable upon conversion of this Note are subject to adjustment as described in the Subscription Agreement. 2.2 Whenever the Conversion Price is adjusted pursuant to Section 2.1(c) above, the Borrower shall promptly provide notice to the Holder setting forth the Conversion Price after such adjustment and the amount of shares of Common Stock issuable and setting forth a brief statement of the facts requiring such adjustment. 2.3 Beginning from and after the Availability Date, and for the remaining period during which the conversion right under this Note exists, Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the full conversion of this Note. Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. Borrower agrees that its issuance of this Note shall constitute full authority to its officers, agents and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the conversion of this Note. 2.4 Method of Conversion. This Note may be converted by the Holder in whole or in part as described in Section 2.1(a) hereof and the Subscription Agreement. Upon partial conversion of this Note, if requested by the Holder, a new Note containing the same date and provisions of this Note shall be issued by the Borrower to the Holder for the remaining principal balance of this Note and interest which shall not have been converted or paid. 2.5 Maximum Conversion. The Holder shall not be entitled to convert on a Conversion Date that amount of the Note in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on a Conversion Date, and (ii) the number of shares of Common Stock issuable upon the conversion of the Note with respect to which the determination of this provision is being made on a Conversion Date, which would result in beneficial ownership by the Holder and its affiliates of more than 9.99% of the outstanding shares of Common Stock of the Borrower on such Conversion Date. For the purposes of the provision to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregate conversions of only 9.99% and aggregate conversion by the Holder may exceed 9.99%. The Holder shall have the authority and obligation to determine whether the restriction contained in this Section 2.3 will limit any conversion hereunder and to the extent that the Holder determines that the limitation contained in this Section applies, the determination of which portion of the Notes are convertible shall be the responsibility and obligation of the Holder. The Holder may void the conversion limitation described in this Section 2.3 upon 61 days prior written notice to the Borrower. The Holder may allocate which of the equity of the Borrower deemed beneficially owned by the Holder shall be included in the 9.99% amount described above and which shall be allocated to the excess above 9.99%. 3 ARTICLE 3 EVENT OF DEFAULT The occurrence of any of the following events of default ("Event of Default") shall, at the option of the Holder hereof, make all sums of principal and interest then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable, all without demand, presentment or notice, or grace period, all of which hereby are expressly waived, except as set forth below: 3.1. Failure to Pay Principal or Interest. The Borrower fails to pay any installment of principal or interest hereon when due and such failure continues for a period of ten (10) days after the due date. The ten (10) day period described in this Section 3.1 is the same ten (10) day period described in Section 1.1 hereof. 3.2. Breach of Covenant. The Borrower breaches any material covenant or other term or condition of this Note in any material respect and such breach, if subject to cure, continues for a period of seven (7) days after written notice to the Borrower from the Holder. 3.3. Breach of Representations and Warranties. Any material representation or warranty of the Borrower made herein, in the Subscription Agreement entered into by the Holder and Borrower in connection with this Note, or in any agreement, statement or certificate given in writing pursuant hereto or in connection therewith shall be false or misleading in any material respect. 3.4. Receiver or Trustee. The Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. 3.5. Judgments. Any money judgment, writ or similar final process shall be entered or filed against Borrower or any of its property or other assets for more than $50,000, and shall remain unpaid, unvacated, unbonded or unstayed for a period of sixty (60) days. 3.6. Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower and if instituted against Borrower are not dismissed within seventy-five (75) days of initiation. 3.7. Default. A default by the Borrower, after applicable notice and cure periods, under any one or more obligations in an aggregate monetary amount in excess of $100,000. 3.8. Stop Trade. A Securities and Exchange Commission stop trade order or Principal Market (as defined in the Subscription Agreement) trading suspension with respect to the Common Stock that lasts for five (5) or more consecutive trading days. 3.9. Failure to Deliver Common Stock or Replacement Note. Borrower's failure to timely deliver Common Stock to the Holder pursuant to and in the form required by this Note and Section 9 of the Subscription Agreement, or if required, a replacement Note. 3.10.Non-Registration Event. The occurrence of a Non-Registration Event as described in Section 10.4 of the Subscription Agreement. 4 3.11.Cross Default. A default by Borrower of a material term, covenant, warranty or undertaking of any other agreement to which Borrower and Holder are parties as of the date hereof, or the occurrence of a material event of default under any such other agreement. 3.12.Delisting. Delisting of the Common Stock from the OTC Bulletin Board or other Principal Market; failure to comply with the requirements for continued listing on the OTC Bulletin Board for a period of three (3) consecutive trading days; or notification from the OTC Bulletin Board or any Principal Market that the Borrower is not in compliance with the conditions for such continued listing on the OTC Bulletin Board or other Principal Market and the Common Stock does not at the time of such notification comply with the continued listing requirements of the OTC Bulletin Board. 3.13.Security Agreement. An "Event of Default" as defined in the Security Agreement dated at or about the date of this Note delivered by Borrower to Holder (the "Security Agreement"). ARTICLE 4 SECURITY INTEREST 4. Security Interest/Waiver of Automatic Stay. This Note is secured by a security interest granted to the Collateral Agent for the benefit of the Holder pursuant to the Security Agreement, as delivered by Borrower to Holder. ARTICLE 5 MISCELLANEOUS 5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 5.2 Notices. Any notice herein required or permitted to be given shall be in writing and may be personally served or sent by fax transmission (with copy sent by regular, certified or registered mail or by overnight courier). For the purposes hereof, the address and fax number of the Holder is as set forth on the first page hereof. A Conversion Notice shall be deemed delivered on (i) the business day it is received by facsimile or otherwise by the Borrower if such notice is received prior to 5:00 P.M. New York time, or (ii) the immediately succeeding business day if it is received by facsimile or otherwise after 5:00 P.M. New York time on a business day or at any time on a day which is not a business day. The address and fax number of the Borrower shall be NCT Group, Inc., 20 Ketchum Street, Westport, CT 06880, attn: Chief Financial Officer, telecopier number: (203) 226-4338, with a copy by telecopier only to: General Counsel. Both Holder and Borrower may change the address and fax number for service by service of notice to the other as herein provided. Notice of Conversion shall be deemed given when made to the Borrower pursuant to the Subscription Agreement. 5.3 Amendment Provision. The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. 5 5.4 Assignability. This Note shall be binding upon the Borrower and its successors and permitted assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder. 5.5 Cost of Collection. If default is made in the payment of this Note, Borrower shall pay the Holder hereof reasonable costs of collection, including reasonable attorneys' fees. 5.6 Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in New York County in the State of New York. Both parties and the individual signing this Agreement on behalf of the Borrower agree to submit to the jurisdiction of such courts. The prevailing party shall be entitled to recover from the other party its reasonable attorneys' fees and costs. 5.7 Maximum Payments. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 5.8 Prepayment. This Note may not be paid prior to the Maturity Date or after the occurrence of an Event of Default without the consent of the Holder. IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer as of the 23rd day of July, 2004. NCT GROUP, INC. By: /s/ Michael J. Parrella ---------------------------------- Name: Michael J. Parrella Title: Chairman & Chief Executive Officer 6 EXHIBIT A NOTICE OF CONVERSION (To be executed by the Registered Holder in order to convert the Note) The undersigned hereby elects to convert $_________ of the principal and $_________ of the interest due on the Note issued by NCT GROUP, INC. on July 23, 2004 into Shares of Common Stock of NCT GROUP, INC. according to the conditions set forth in such Note, as of the date written below. Date of Conversion: ------------------------------------------------------------- Conversion Price: --------------------------------------------------------------- Shares To Be Delivered: --------------------------------------------------------- Signature: ---------------------------------------------------------------------- Print Name: --------------------------------------------------------------------- Address: ------------------------------------------------------------------------ 7