Exhibit 10.2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE
AND THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION
STATEMENT
FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR AN
OPINION
OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE BORROWER
THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SAID ACT. ANY SUCH SALE,
ASSIGNMENT OR TRANSFER
MUST ALSO COMPLY WITH
APPLICABLE STATE SECURITIES LAWS.
SECURED CONVERTIBLE NOTE
(No. CTS-05-30)
October 14, 2005
$1,001,329.96
FOR VALUE RECEIVED, NCT GROUP, INC., a
Delaware corporation
(hereinafter called
the "Borrower") hereby promises to pay to the order of Carole Salkind or
registered assigns (the "Holder") the sum of One Million One
Thousand Three
Hundred Twenty-Nine Dollars and Ninety-Nine Cents
($1,001,329.96) on
April 14,
2006, and to pay interest on the unpaid principal balance hereof at eight
percent (8%) per annum (the "Ordinary
Interest Rate") from
the date hereof (the
"Issue Date") until the same becomes due and payable, whether at maturity or
upon acceleration or otherwise.
Any amount of
principal of or interest on this
Note which is not paid when due shall bear
interest at the rate
of five percent
(5%) above the Ordinary Interest Rate (the
"Default Interest Rate") from the due
date thereof until the same is paid.
Interest shall commence accruing on the
Issue Date and, to the extent not converted
in accordance with the provisions of
Article II below, shall be payable in arrears on the
date the principal
amount
in respect of which it has accrued is paid, whether at maturity or upon
acceleration or by prepayment or otherwise. All payments of principal and
interest (to the extent not converted in
accordance with the terms hereof) shall
be made in lawful money of the United
States of America. All
payments shall be
made at such address as the Holder shall hereafter give to the Borrower by
written notice made in accordance with the
provisions of this Note.
The following terms shall apply to this
Note:
ARTICLE I
NO PREPAYMENT
1.1 PREPAYMENT. This Note is not subject to prepayment. This Note is
subject to optional conversion in
accordance with Section 2.7 below.
ARTICLE II
CONVERSION AND PURCHASE RIGHTS; PAYMENT OF EXERCISE PRICE
2.1 CONVERSION RIGHT. The Holder shall have the right (the
"Conversion
Right") at any time on or prior to the day
this Note is paid in full, to convert
at any time all or from time to time any part of the outstanding and unpaid
principal amount of this Note of at least
$50,000, or such lesser amount as
shall remain unpaid at the time of the
conversion, into, at
Holder's election,
(i) fully paid and non-assessable shares of common stock, par value $.01 per
share, of the Borrower ("Common
Stock"), at the
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conversion price determined by Section 2.2(a) hereof; (ii) if Artera (UK)
Limited ("Artera") has made an initial
public offering of its common stock, par
value (pound)1.00 per share, fully paid and
non-assessable shares
of such stock
owned by the Borrower, at a conversion price equal to the initial public
offering price of such stock; (iii) if Distributed Media Corporation
International Limited ("DMCI") has made a public
offering of its common stock,
par value (pound)1.00 per share,
fully paid and
non-assessable
shares of such
stock owned by the Borrower, at a conversion price equal to the initial
public
offering price of such stock; and (iv) if any other subsidiary of the Borrower
(other than Pro Tech Communications, Inc.) has made a public
offering of its
common stock, fully paid and non-assessable shares of such stock owned by
the
Borrower, at a conversion price equal to the initial public
offering price of
such stock. Upon the surrender of this Note, accompanied by a Notice of
Conversion of Secured Convertible Note in
the form attached hereto as Exhibit 1,
properly completed and duly executed by the
Holder (a "Conversion Notice"), the
Borrower shall issue and, within five (5) business days
after such surrender of
this Note with the Conversion Notice,
deliver to or upon the order of the Holder
(x) that number of shares of common stock
for the portion of the Note converted
as shall be determined in accordance herewith and (y) a new Note in the
form
hereof for the balance of the principal
amount hereof, if any.
The number of
shares of common stock to be issued upon each conversion of
this Note shall be determined by dividing
(i) the sum of (A) that portion of the
principal amount of the Note to be converted plus (B) the "Conversion Date
Interest" (as defined below), by (ii) the
Conversion Price (as defined below) in
effect on the date the Conversion Notice is delivered to the Borrower by the
Holder. Conversion Date Interest means the
product of (i) the principal amount
of the Note to be converted, multiplied by (ii) a fraction (A)
the numerator of
which is the number of days elapsed
since the date of
issuance of this Note and
(B) the denominator of which is 365,
multiplied by the
Ordinary Interest
Rate
(iii) or, a fraction (A) the numerator of which is the number of days in
the
period of time after the occurrence of an Event of Default and (B) the
denominator of which is 365, multiplied by
the Default Interest Rate.
2.2 CONVERSION PRICE.
(a) The per share "Conversion Price" for conversion of this Note
into
the Borrower's Common Stock shall be equal to the
closing sale price of the
Common Stock on the Trading Day (as defined
below) immediately preceding the
date of this Note; provided, however, that if, on the date of
this Note and the
three Trading Days thereafter (the
"Window"), neither the Holder nor any Related
Party (as defined below) sells or, whether in writing or otherwise,
agrees to
sell any shares of Common Stock or any
option, warrant,
instrument or right
to
convert into, exchange for or acquire
Common Stock, then such price shall be
reduced to a price equal to the lowest
closing sale price, if lower than the
price specified above in this sentence, of
the Common Stock during the Window on
the principal securities exchange or market on which the
Common Stock is then
traded as reported on Bloomberg
Financial Markets. If
any closing sale price of
the Common Stock during the Window is lower than the price
specified at the
beginning of this Section 2.2(a), the Holder shall give the Borrower
prompt
written notice of any sale of or
agreement to sell any
Common Stock or option,
warrant, instrument or right to convert into,
exchange for or
acquire Common
Stock made by the Holder or a Related
Party during the Window. "Trading Day"
shall mean any day on which the
Common Stock is traded for any period on the
NASDAQ National Market, or on the principal securities exchange or other
securities market on which the Common Stock is then being traded. "Related
Party" shall mean a member of the Holder's
immediate family, including spouse
(even if separated or not residing with the
Holder) and adult
children (even if
not residing with the Holder), or an entity (other than the
Borrower) of which
the Holder or any such immediate family member is an officer, director or
beneficial shareholder (determined under Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "1934
Act")). The Conversion
Price shall
also be subject to equitable adjustments for stock splits, stock dividends,
combinations, recapitalization,
2
<PAGE>
reclassifications and similar events. The Artera and DMCI "Conversion Price"
shall be equal to the initial public offering price of such stock and
shall be
subject to adjustment as provided in
Section 2.2(b) hereof.
(b) The Conversion
Price for NCT, Artera and DMCI shall also be
subject to equitable adjustments for stock splits, stock dividends,
combinations, reclassifications and similar
events.
(c) Borrower shall promptly notify each Holder of any
adjustment (and
event that requires adjustment) to the Conversion
Price of NCT, Artera and DMCI
pursuant to this Section 2.2.
2.3 AUTHORIZED
SHARES. The Borrower covenants that during the period
the
Conversion Right exists, the Borrower will use its best
efforts to 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.
The Borrower represents that upon issuance,
such shares will be duly and validly
issued, fully paid and non-assessable. The Borrower (i) acknowledges
that it
will irrevocably instruct its transfer agent as soon as practicable to issue
certificates for the Common Stock issuable
upon conversion of this Note and (ii)
agrees that its issuance of this Note shall
constitute
full authority to its
officers and agents, who are charged with the duty of executing stock
certificates, to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note. In the event that a sufficient
number of shares cannot be reserved,
Borrower agrees to use
its best efforts to
call an annual meeting of the Borrower's
shareholders
and seek approval for
an
increase in the authorized shares of the Borrower's Common
Stock to a number of
shares sufficient to provide for the full
conversion of this Note.
2.4 METHOD OF
CONVERSION.
Except as otherwise provided in this Note or
agreed to by the Holder, this Note may be converted by the Holder in whole at
any time or in part (provided such partial
conversion is at least
$50,000) from
time to time by (i) submitting to the
Borrower a Conversion Notice (by facsimile
dispatched on the Conversion Date and confirmed by U.S. mail or
overnight mail
service sent within two Trading Days
thereafter) and (ii) surrendering this Note
with the mailed confirmation of the
Conversion Notice at the principal office of
the Borrower. Upon partial exercise of the
conversion rights provided hereby, a
new Note containing the same date and
provisions as this Note shall be issued by
the Borrower to the Holder for the
principal balance of this Note which
shall
not have been converted. This Note has been issued by the
Borrower pursuant
to
the exemption from registration provided either by Section 4.2 or
Regulation D
under the Securities Act of 1933, as
amended (the "Act").
2.5 RESTRICTIONS ON SHARES. The shares of common stock issuable upon
conversion of this Note may not be sold or
transferred
unless (i) they first
shall have been registered under the Act and applicable
state securities
laws,
(ii) the Borrower shall have been furnished
with an opinion of legal counsel (in
form, substance and scope reasonably
acceptable to
Borrower) to the effect that
such sale or transfer is exempt from the
registration requirements of the Act or
(iii) they are sold pursuant to Rule 144 under the
Act. Each certificate for
shares of common stock issuable upon
conversion of this
Note that have not been
so registered and that have not been sold
pursuant to an exemption that permits
removal of the legend, shall bear a legend substantially
in the following form,
as appropriate:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION
STATEMENT FOR
THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL
IN FORM, SUBSTANCE AND
SCOPE REASONABLY
ACCEPTABLE TO THE
BORROWER THAT REGISTRATION IS NOT REQUIRED UNDER SAID
3
<PAGE>
ACT OR UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT. ANY
SUCH SALE, ASSIGNMENT
OR TRANSFER MUST ALSO COMPLY WITH
APPLICABLE STATE SECURITIES LAWS.
Upon the request
of a holder of a
certificate
representing any
shares of
common stock issuable upon conversion of this Note,
the Borrower shall
remove
the foregoing legend from the certificate or issue to such holder a new
certificate therefor free of any transfer
legend, if (i) with such request, the
Borrower shall have received either an opinion of counsel, reas
