EXCHANGE RIGHTS AGREEMENT
(Preferred)
This Agreement is dated as of the 29th day of June, 2001 among NCT Group,
Inc., a Delaware corporation (the "Company"), and the Holders identified on
Schedule A hereto (individually a "Holder", collectively the "Holders").
WHEREAS, Artera Group, Inc. (formerly NCT Networks, Inc.), a Delaware
corporation, is a wholly owned subsidiary of the Company ("Subsidiary"); and
WHEREAS, the Holders are owners of Series A Preferred Stock of the
Subsidiary, $.01 par value per share ("Preferred Shares") identified on Schedule
A hereto, which Preferred Shares were issued in connection with transactions by,
between and among the Company, the Subsidiary, the Holders, and Teltran
International Group, Inc., a Delaware corporation; and
WHEREAS, some of the Holders are intending to loan up to $1,000,000 to the
Subsidiary, with such loans to be evidenced by Convertible Promissory Notes of
the Subsidiary ("Notes"); and
WHEREAS it is in the best interests of the Company for the Holders to
purchase the Notes and as an inducement therefore and for other good and
valuable consideration, the receipt of which is hereby acknowledged by the
Company, the Company hereby grants the exchange rights described herein to the
Holders.
NOW THEREFORE, the parties agree as follows:
1. Exchange into the Company's Common Stock.
(a) The Holder shall have the right (such a right an "Exchange Right") from
November 30, 2001, and at any time thereafter that Preferred Shares are
outstanding, to exchange any outstanding Stated Value of the Preferred Shares
and accrued dividends for fully paid and nonassessable shares of the Company's
common stock, par value $0.01 per share, as such stock exists on the date of
issuance of the Preferred Shares, or any shares of capital stock of Company into
which such stock shall hereafter be changed or reclassified (the "Common Stock")
at the exchange price as defined in Section 1(b) hereof (the "Exchange Price"),
determined as provided herein. The number of shares of Common Stock to be issued
upon each exchange of the Preferred Shares shall be determined by dividing the
principal of that portion of the Preferred Shares to be exchanged, by the
Exchange Price.
(b) Subject to adjustment as provided in Section 4 hereof, the exchange
price per share (the "Exchange Price") shall be one hundred percent (100%) of
the average of the closing bid prices for the Common Stock on the OTC Pink
Sheets, NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market
System, American Stock Exchange, or New York Stock Exchange, as applicable, or
if not then trading on any of the foregoing, such other principal market or
exchange where the Common Stock is listed or traded (whichever of the foregoing
is at the time the principal trading exchange or market for the Common Stock,
the "Principal Market"), for the five (5) trading days prior to but not
including the Exchange Date.
2. (a) Exchange Procedure/Optional Redemption. The Holder of Preferred
Shares desiring to exchange any Stated Value or accrued dividend portion of such
Preferred Shares may give written notice of its decision to exchange the
Preferred Shares for Common Stock by delivering or telecopying an executed and
completed notice of exchange in the form annexed hereto (such notice a "Notice
of Exchange") to the Company (any date of giving such a Notice of Exchange, an
"Exchange Date") and delivering within three business days thereafter, the
original Preferred Share certificate to the Company. The Company will transmit
the certificates representing the shares of Common Stock issuable upon exchange
of Preferred Shares (together with a Preferred Share certificate representing
the Stated Value and dividends not exchanged) to the Holder via express courier,
by electronic transfer or otherwise for receipt by the Holder, within five (5)
business days after receipt by the Company of the original or telecopied Notice
of Exchange and thereafter, the Preferred Shares to be exchanged (the "Delivery
Date"). The Holder of the Preferred Shares so surrendered for exchange shall be
entitled to receive on or before the Delivery Date a certificate or certificates
which shall be fully paid and non-assessable for the number of shares of Common
Stock to which such Holder shall be entitled upon such exchange, registered in
the name of such Holder. In the case of any Preferred Share certificate which is
exchanged only in part, the Holder of Preferred Shares shall upon delivery of
the certificate or certificates representing Common Stock also receive a new
Preferred Share certificate representing the unexchanged portion of the
Preferred Shares.
(b) The Company shall not be required, in connection with any exchange of
Preferred Shares, to issue a fraction of a share of its Common Stock and shall
instead deliver a stock certificate representing the next whole number.
(c) The Company will, at any time and from time to time, have the option of
redeeming any outstanding Preferred Shares ("Optional Redemption") by paying to
the Holder a sum of money equal to the Stated Value of the Preferred Shares
together with accrued but unpaid dividends thereon ("Redemption Amount")
outstanding on the day notice of redemption ("Notice of Redemption") is given to
a Holder ("Redemption Date"). A Notice of Redemption may be given in connection
with any portion of the Stated Value and dividends including the Stated Value
and dividends for which Notice of Exchange has been given by the Holder provided
the Company elects within one (1) business day after receipt of a Notice of
Exchange to give the Holder a Notice of Redemption in connection with some or
all of the Redemption Amount. A Notice of Redemption must be accompanied by a
certificate signed by the chief executive officer or chief financial officer of
the Company stating that the Company has on deposit and segregated ready funds
equal to the Redemption Amount. The Redemption Amount must be paid in good funds
to the Holder no later than the tenth (10th) business day after the Redemption
Date ("Optional Redemption Payment Date"). In the event the Company fails to pay
the Redemption Amount by the Optional Redemption Payment Date, then the
Redemption Notice will be null and void and the Company will thereafter have no
further right to effect an Optional Redemption.
3. Exchange Limitations. The Holder may not exchange that amount of the
Preferred Shares on an Exchange Date into amounts 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 such Exchange Date, and (ii) the
number of shares of Common Stock issuable upon the exchange of the Preferred
Shares with respect to which the determination of this proviso is being made on
such Exchange 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 Company. For the purposes of the proviso 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 (the "Exchange Act"),
and Rule 13d-3 promulgated thereunder. The Holder may revoke the exchange
limitation described in this Paragraph 3 upon 75 days prior notice to the
Company. The Holder may allocate which of the equity of the Company 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%.
4. Merger/Sale of Assets/Dividends.
(a) In case of any merger of the Company with or into any other Company
(other than a merger in which the Company is the surviving or continuing Company
and which does not result in any reclassification, exchange, or change of the
outstanding shares of Common Stock) then unless the right to exchange Preferred
Shares shall have terminated, as part of such merger provision shall be made so
that Holders of Preferred Shares shall thereafter have the right to exchange
Preferred Shares held by such Holder into the kind and amount of shares of stock
and/or other securities or property receivable upon such merger by a holder of
the number of shares of Common Stock into which such Preferred Shares might have
been exchanged immediately prior to such consolidation or merger. The foregoing
provisions of this Paragraph 4 shall similarly apply to successive mergers.
(b) In case of any sale or conveyance to another person or entity of the
property of the Company as an entirety, or substantially as an entirety, in
connection with which shares or other securities or cash or other property shall
be issuable, distributable, payable, or deliverable for outstanding shares of
Common Stock, then, unless the right to exchange the Preferred Shares shall have
terminated, lawful provision shall be made so that the Holders of Preferred
Shares shall thereafter have the right to exchange the Preferred Shares into the
kind and amount of shares of stock or other securities or property that shall be
issuable, distributable, payable, or deliverable upon such sale or conveyance
with respect to each share of Common Stock immediately prior to such conveyance.
(c) 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 Exchange 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 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.
(d) In case at any time the Company shall propose:
(i) to pay any dividend or distribution payable in shares upon its Common
Stock or make any distribution (other than cash dividends) to the holders of its
Common Stock; or
(ii) to offer for subscription to the holders of its Common Stock any
additional shares of any class or any other rights; or
(iii) any capital reorganization or reclassification of its shares or the
merger of the Company with another Company (other than a merger in which the
Company is the surviving or continuing Company and which does not result in any
reclassification, exchange, or change of the outstanding shares of Common
Stock); or
(iv) the voluntary dissolution, liquidation or winding-up of the Company;
then, and in any one or more of said cases, the Company shall cause at least
fifteen (15) days prior notice of the date on which (A) the books of the Company
shall close or a record be taken for such stock dividend, distribution, or
subscription rights, or (B) such capital reorganization, reclassification,
merger, dissolution, liquidation or winding-up shall take place, as the case may
be, to be mailed to the Holders of Preferred Shares.
(e) The Company shall pay the amount of any and all issue taxes (but not
income taxes) which may be imposed in respect of any issue or delivery of stock
upon the exchange of Preferred Shares, but all transfer taxes and income taxes
that may be payable in respect of any change of ownership of Preferred Shares or
any rights represented thereby or of stock receivable upon exchange thereof
shall be paid by the person or persons surrendering such Preferred Shares for
exchange.
(f) Whenever the number of shares to be issued upon exchange of the
Preferred Shares is required to be adjusted as provided in this Paragraph 4, the
Company shall forthwith compute the adjusted number of shares to be so issued
and the adjusted Exchange Price and prepare a certificate setting forth such
adjusted exchange amount and the facts upon which such adjustment is based, and
such certificate shall forthwith be delivered to each Holder of Preferred
Shares.
5. Liquidated Damages.
(a) In the event a Holder shall elect to exchange Preferred Shares as
provided herein, the Company may not refuse exchange based on any claim that
such Holder or any one associated or affiliated with such Holder has been
engaged in any violation of law, or for breach of this Agreement or any of the
agreement between the Company and its affiliates and the Holders, unless, an
injunction from a court, on notice, restraining and or enjoining exchange of all
or part of said Preferred Shares shall have been issued and the Company posts a
surety bond for the benefit of such Holder in the amount of 125% of the Stated
Value of the Preferred Shares and accrued dividends sought to be exchanged,
which is subject to the injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Holder in the event it obtains judgment.
(b) Intentionally Omitted.
(c) Intentionally Omitted.
(d) In the event (i) the Company is prohibited from issuing Common Stock;
(ii) fails to timely deliver Common Stock within five business days after a
Delivery Date; (iii) if the Approval (as defined in Section 6 hereof) is not
obtained on or before July 10, 2001; or (iv) if the Required Reserve (as defined
in Section 6 hereof) is not set aside and reserved on behalf of the holder of
the Preferred Shares on or before July 10, 2001, then at the Holder's election,
the Company must pay to the Holder five (5) business days after request by the
Holder or on the Delivery Date (if requested by the Holder) a sum of money equal
to the Preferred Shares Stated Value designated by the Holder together with
accrued but unpaid interest thereon ("Mandatory Redemption Payment"). The
Mandatory Redemption Payment must be received by the Holder on the same date as
the Common Stock otherwise deliverable or within five (5) business days after
request, whichever is sooner ("Mandatory Redemption Payment Date"). Upon receipt
of the Mandatory Redemption Payment, the corresponding Stated Value and accrued
dividends will be deemed paid and no longer outstanding.
(e) In the event the Common Stock issuable upon exchange of Preferred
Shares is not included for resale in an effective registration statement at any
time when such Common Stock is required to be so included pursuant to the terms
of this Agreement, and the Registration Rights Agreement referred to in
Paragraph 7 below, then the Holder may elect, at the Holder's sole discretion,
to receive an amount of restricted Common Stock equal to the amount of Common
Stock otherwise receivable upon exchange in lieu of the Common Stock otherwise
receivable pursuant to the relevant Notice of Exchange.
(f) Nothing contained herein or in any document referred to herein or
delivered in connection herewith 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 or dividends
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 Company to the Holder and thus refunded to the Company.
6. Undertaking/Share Reservation. So long as any Preferred Shares shall
remain outstanding and the Holders thereof shall have the right to exchange
same, the Company shall at all times reserve from the authorized and unissued
shares of its Common Stock a sufficient number of shares to provide for such
exchanges subject to the following: The Company will reserve the number of
shares of Common Stock on behalf of each Holder of Preferred Shares equal at all
times to not less than 130% of the amount of Common Stock necessary to allow
exchange of the entire Preferred Shares Stated Value and accrued dividends. To
the extent that the Company does not have sufficient authorized and unissued
shares of Common Stock available for full exchange of the Preferred Shares and
accrued dividends, the Company shall seek shareholder approval to increase the
number of authorized shares of Common Stock to provide for the reservation of
the number of shares of Common Stock equal to not less than 130% of the number
of shares of Common Stock that would be issuable upon exchange of the Preferred
Shares and accrued dividends employing the lowest Exchange Price in effect at
any time from the date of this Agreement and until the date immediately
preceding the date of the meeting of the Company's shareholders at which such
approval is sought (such amount being the "Required Reserve" and the
shareholder's approval being the "Approval"). The Company undertakes to obtain
the Approval no later than July 10, 2001 and reserve the Required Reserve.
7. Registration Rights. The Holder has been granted certain registration
rights by the Company in connection with the Common Stock. These registration
rights are set forth in a Registration Rights Agreement entered into by the
Company and Holder at or about the date of this Agreement.
8. Waiver. The Company and Subsidiary hereby waive any right of recission,
set-off and each and every other tortious or contractual claim as the foregoing
relate to the Preferred Shares held by the Holders, arising out of any contract,
agreement, course of dealing or relationship between and among the Company,
Subsidiary, Teltran International Group, Ltd., Byron Lerner, or James Tubbs
(collectively a "Claim"). The Company and Subsidiary hereby agree that no Claim
will be raised against the Holders nor will any attempt be made by the Company
or Subsidiary to deprive the Holders of any rights as holders of Preferred
Shares based on a Claim. The foregoing shall not limit the rights of the Company
and Subsidiary to make a Claim provided there shall be no impairment of the
rights of the Holders in the Preferred Shares nor any impairment of the value of
the Preferred Shares.
9. Indemnification.
(a) The Company agrees to indemnify, hold harmless, reimburse and defend
Holder, Holder's officers, directors, agents, affiliates, control persons, and
principal shareholders, against any claim, cost, expense, liability, obligation,
loss or damage (including reasonable legal fees) of any nature, incurred by or
imposed upon Holder or any such person which results, arises out of or is based
upon (i) any misrepresentation by Company or breach of any warranty by Company
in this Agreement or in any Exhibits or Schedules attached hereto, or other
agreement delivered pursuant hereto; or (ii) after any applicable notice and/or
cure periods, any breach or default in performance by the Company of any
covenant or undertaking to be performed by the Company hereunder, or any other
agreement entered into by the Company and Holders relating hereto.
(b) Holder agrees to indemnify, hold harmless, reimburse and defend the
Company and the Company's officers and directors against any claim, cost,
expense, liability, obligation, loss or damage (including reasonable legal fees)
of any nature, incurred by or imposed upon the Company or any such person which
results, arises out of or is based upon (i) any misrepresentation by Holder or
breach by Holder of any warranty in this Agreement or in any Exhibits or
Schedules attached hereto or other agreement delivered pursuant hereto; or (ii)
after any applicable notice and/or cure periods, any breach or default in
performance by Holder of any covenant or undertaking to be performed by Holder
hereunder, or any other agreement entered into by the Company and Holders
relating hereto.
10. Miscellaneous.
(a) Notices. All notices or other communications given or made hereunder
shall be in writing and shall be personally delivered or deemed delivered the
first business day after being telecopied (provided that a copy is delivered by
first class mail) to the party to receive the same on Schedule A hereto: (i) if
to the Company, to NCT Group, Inc., 20 Ketchum Street, Westport, CT 06880,
telecopier number: (203) 226-4338, with a copy by telecopier only to: Latham &
Watkins, 555 Eleventh Avenue, N.W., Washington, D.C. 20004, Attn: William P.
O'Neill, Esq., telecopier number: (202) 637-2201 and (ii) if to the Holder, to
the name, address and telecopy number set forth on Schedule A hereto. Any notice
that may be given pursuant to this Agreement, or any document delivered in
connection with the foregoing may be given by the Holder on the first business
day after the observance dates in the United States of America by Orthodox Jewry
of Rosh Hashanah, Yom Kippur, the first two days of the Feast of Tabernacles,
Shemini Atzeret, Simchat Torah, the first two and final two days of Passover and
Pentecost, with such notice to be deemed given and effective, at the election of
the Holder on a holiday date that precedes such notice. Any notice received by
the Holder on any of the aforedescribed holidays may be deemed by the Holder to
be received and effective as if such notice had been received on the first
business day after the holiday. Notice of change of address for purposes of this
section shall be made pursuant to the provisions of this section.
(b) Entire Agreement; Assignment. This Agreement represents the entire
agreement between the parties hereto with respect to the subject matter hereof
and may be amended only by a writing executed by both parties. No right or
obligation of either party shall be assigned by that party without prior notice
to and the written reasonable consent of the other party.
(c) Execution. This Agreement may be executed by facsimile transmission,
and in counterparts, each of which will be deemed an original.
(d) Law Governing this Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
principles of conflicts of laws. 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
the state of New York. The parties and the individuals executing this Agreement
and other agreements on behalf of the Company agree to submit to the
jurisdiction of such courts and waive trial by jury. The prevailing party shall
be entitled to recover from the other party its reasonable attorney's fees and
costs. In the event that any provision of this Agreement or any other agreement
delivered in connection herewith is invalid or unenforceable under any
applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of any agreement.
(e) Specific Enforcement, Consent to Jurisdiction. The Company and Holder
acknowledge and agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof or thereof, this being in addition to any other
remedy to which any of them may be entitled by law or equity. Subject to Section
9(d) hereof, each of the Company and Holder hereby waives, and agrees not to
assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. Nothing in this Section shall affect or limit
any right to serve process in any other manner permitted by law.
IN WITNESS WHEREOF, the parties hereto have caused this Exchange Rights
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
NCT GROUP, INC.
By:_________________________________
- ------------------------------------- ------------------------------------
AUSTOST ANSTALT SCHAAN - Holder BALMORE S.A. - Holder
- ------------------------------------- ------------------------------------
AMRO INTERNATIONAL, S.A. - Holder THE GROSS FOUNDATION, INC. - Holder
- ------------------------------------- ------------------------------------
NESHER LTD. - Holder TALBIYA B. INVESTMENTS LTD. - Holder
- ------------------------------------- ------------------------------------
LEVAL TRADING, INC. - Holder UNITED SECURITIES SERVICES, INC.
- Holder
- ------------------------------------- ------------------------------------
ICT N.V. - Holder LIBRA FINANCE, S.A. - Holder
Artera Group, Inc. acknowledges the foregoing Exchange Rights Agreement
and agrees to cooperate with all parties thereto to effectuate the timely
compliance with the terms thereof by NCT Group, Inc. and the Holders.
ARTERA GROUP, INC.
By:___________________________________
SCHEDULE A TO EXCHANGE RIGHTS AGREEMENT
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HOLDER NUMBER OF STATED VALUE CERTIFICATE
SHARES OF NUMBER
PREFERRED STOCK
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AUSTOST ANSTALT SCHAAN 1,077 $1,077,000 P23 and P24
7440 Fuerstentum
Lichenstein, Landstrasse 163
Fax: 011-431-534532895
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BALMORE, S.A. 1,077 $1,077,000 P21 and P22
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
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AMRO INTERNATIONAL, S.A. 471 $471,000 P25 and P26
C/o Ultra Finanz
Grossmuenster Platz 6
Zurich, Switzerland CH8022
Fax: 011-411-262-5512
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THE GROSS FOUNDATION, INC. 70 $70,000 P31
1660 49th Street
Brooklyn, New York
Fax: 718-851-3511
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LEVAL TRADING, INC. 260 $260,000 P32 and P33
C/o Thierry Ulmann
14 rue du Conseil-General
CH-1205, Geneva, Switzerland
Fax: 011-4122-321-0807
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NESHER LTD. 107 $107,000 P27 and P28
Ragnall House, 18 Peel Road Douglas, Isle of Man 1M1 4L2, United Kingdom Fax:
011-44-1624-661594
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TALBIYA B. INVESTMENTS LTD. 116 $116,000 P29 and P30
Ragnall House, 18 Peel Road Douglas, Isle of Man 1M1 4L2, United Kingdom Fax:
011-44-1624-661594
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UNITED SECURITIES SERVICES, 21 $21,000 P35
INC.
135 West 50th Street, Suite
1700
New York, New York 10020
Fax: 212-541-4410
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ICT N.V. 77 $77,000 P36
Antwerp Tower
De Keyserlei 5 Box 59
2018 Antwerp, Belgium
Fax: 011-32-3-233-2680
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LIBRA FINANCE, S.A. 1,000 $1,000,000 P3 and P6
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
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NOTICE OF EXCHANGE
(To be executed by the Registered Holder in order to exchange the Preferred
Shares)
The undersigned hereby elects to exchange $_________ of the Stated Value
and $_________ of the accrued dividends due on the Preferred Shares issued by
Artera Group, Inc. on ___________, 2001 into Shares of Common Stock of Artera
Group, Inc. (the "Company") according to the conditions set forth in such Note,
as of the date written below.
Date of Exchange:_______________________________________________________________
Exchange Price:_________________________________________________________________
Shares To Be Delivered:_________________________________________________________
Signature:______________________________________________________________________
Print Name:_____________________________________________________________________
Address:________________________________________________________________________
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