<PAGE> 1
As filed with the Securities and Exchange Commission on October 29,1998
Registration No. 333-64967
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NCT GROUP, INC.
(FORMERLY NOISE CANCELLATION TECHNOLOGIES, INC.)
(Exact name of Registrant as specified in its charter)
DELAWARE 59-2501025
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1025 WEST NURSERY ROAD, LINTHICUM, MARYLAND 21090
(410) 636-8700
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
JOHN B. HORTON, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
NCT GROUP, INC.
ONE DOCK STREET
STAMFORD, CONNECTICUT 06902
(203) 961-0500, EXTENSION 3503
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
Copies of all communications and notices to:
WILLIAM P. O'NEILL, ESQ.
CROWELL & MORING, LLP
1001 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2595
(202) 624-2500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ] __________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE AMOUNT TO BE AGGREGATE PRICE AGGREGATE OFFERING REGISTRATION FEE
REGISTERED REGISTERED(1) PER UNIT PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK 1,786,991 SHARES $0.5469(2) $977,305(2) $288.31(2)
- ----------------------------------------------------------------------------------------------------
COMMON STOCK 26,000,000 SHARES 0.4844(3) 12,594,400(3) $3715.36(3)
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with Rule 416 promulgated under the Securities Act of 1933,
this registration statement also covers such indeterminate number of
additional shares of Common Stock as may become issuable upon conversion
of the Company's Series D Convertible Preferred Stock (i) to prevent
dilution resulting from stock splits, stock dividends or similar
transactions and (ii) by reason of changes in the conversion price or
conversion rate of the Company's Series D Convertible Preferred Stock in
accordance with the terms thereof.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933,
based on the average of the high and low prices for the Common Stock on
the NASDAQ National Market System on September 23, 1998. $288.31 was paid
by the registrant in connection with the filing of this registration
statement on September 30, 1998.
<PAGE> 2
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933,
based on the average of the high and low prices for the Common Stock on
the NASDAQ National Market System on October 22 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 4
SUBJECT TO COMPLETION, DATED OCTOBER 30, 1998
PROSPECTUS
27,786,991 SHARES
NCT GROUP, INC.
(FORMERLY NOISE CANCELLATION TECHNOLOGIES, INC.)
COMMON STOCK
This offering consists of the resale of 1,786,991 shares of Common Stock
which were issued by the Company in a private placement exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Regulation D thereunder ("Regulation D") on September 4, 1998.
This offering also consists of the resale of 12,500,000 shares of Common
Stock which may be issued upon the conversion of issued and outstanding shares
of the Company's Series D Convertible Preferred Stock ("Series D Preferred
Stock") which were issued by the Company in private placements exempt from
registration under the Securities Act pursuant to Regulation D thereunder.
In addition, this offering consists of the resale of 12,500,000 shares of
Common Stock which may be issued upon the conversion of authorized but unissued
shares of the Company's Series D Preferred Stock which may be issued in exchange
for issued and outstanding shares of Series A Convertible Preferred Stock of the
Company's subsidiary, NCT Audio Products, Inc. ("NCT Audio") which were issued
by NCT Audio in private placements, exempt from registration under the
Securities Act pursuant to Regulation D thereunder.
In accordance with Rule 416 promulgated under the Securities Act, this
offering also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Company's Series D Preferred
Stock (i) to prevent dilution resulting from stock splits, stock dividends or
similar transactions and (ii) by reason of changes in the conversion price or
conversion rate of the Company's Series D Convertible Preferred Stock in
accordance with the terms thereof.
In addition, this offering consists of the resale of 1,000,000 shares of
Common Stock which were issued by the Company in an exchange for shares of
common stock of NCT Audio with the holder thereof on October 12, 1998, which
exchange was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
<PAGE> 5
All of the foregoing shares of Common Stock may be offered for sale by the
holders thereof (the "Selling Stockholders"). The Company will not receive any
of the proceeds from the sale of such shares of Common Stock.
The Company's Common Stock is quoted on the NASDAQ National Market System
under the symbol "NCTI". The last sale price reported for such Common Stock on
October 27,1998, as quoted by NASDAQ, was $0.469 per share.
SEE "RISK FACTORS" ON PAGES 16 THROUGH 34 FOR
CERTAIN INFORMATION RELATING TO THE COMPANY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 30, 1998
2
<PAGE> 6
TABLE OF CONTENTS
PAGE
Available Information (Item 2.)............................................. 4
Incorporation of Certain Documents by Reference (Item 12.).................. 5
The Company (Item 3.)....................................................... 6
Summary Consolidated Financial Data (Item 3.)............................... 9
Recent Developments (Item 11.).............................................. 11
The Offering (Item 1.)...................................................... 15
Risk Factors (Item 3.)...................................................... 16
Use of Proceeds (Item 4.)................................................... 35
Selling Stockholders (Item 7.).............................................. 36
Plan of Distribution (Item 8.).............................................. 38
Legal Matters (Item 10.).................................................... 39
Experts (Item 10.).......................................................... 39
3
<PAGE> 7
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy and information
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, NW, Washington, DC 20549 and at the following regional offices of
the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048
and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60611. Copies of such material can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, NW, Washington, DC 20549 at
prescribed rates. The Company is an electronic filer on EDGAR pursuant to Rules
100 and 101 of Registration S-T. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such site is (http://www.sec.gov).
----------------
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE COMMON STOCK TO
WHICH IT RELATES OR A SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
4
<PAGE> 8
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
pursuant to the Exchange Act (File No. 0-18267) and are incorporated herein by
reference and made a part hereof:
(1) the Company's Annual Report on Form 10-K for the year ended December 31,
1997 (including Amendment No. 1 thereto filed on April 30, 1998, and
Amendment No. 2 thereto filed on May 4, 1998);
(2) the Company's Quarterly Report on Form 10-Q for the period ended March 31,
1998 (including Amendment No. 1 thereto filed on July 1, 1998);
(3) the Company's Quarterly Report on Form 10-Q for the period ended June 30,
1998;
(4) the Company's Current Report on Form 8-K filed on June 3, 1998;
(5) the Company's Current Report on Form 8-K filed on June 10, 1998;
(6) the Company's Current Report on Form 8-K filed on July 16, 1998;
(7) the Company's Current Report on Form 8-K filed on July 29, 1998;
(8) the Company's Current Report on Form 8-K filed on August 21, 1998;
(9) the Company's Current Report on Form 8-K filed on October 22, 1998; and
(10) the description of capital stock found in Item 1 of the Company's
Registration Statement on Form 8-A filed with the Commission on January
30, 1990.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of filing of this Prospectus
and prior to the termination of the offering of the Common Stock covered by this
Prospectus are deemed to be incorporated by reference and shall be a part hereof
from their respective dates of filing.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained in this Prospectus or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, upon written or oral request, a copy of any and
all of the information that has been incorporated by reference in this
Prospectus, but not including exhibits to such information unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates. Requests for copies of such information should be
directed to Krystyna Marushak, Investor Relations, NCT Group, Inc., One Dock
Street, Stamford, Connecticut 06902, telephone number (203) 961-0500, extension
3507.
5
<PAGE> 9
THE COMPANY
NCT Group, Inc. (formerly "Noise Cancellation Technologies, Inc.") ("NCT"
or the "Company") designs, develops, licenses, produces and distributes
electronic systems for Active Wave Management including systems that
electronically reduce noise and vibration. The Company's systems are designed
for integration into a wide range of products serving major markets in the
transportation, manufacturing, commercial, consumer products and communications
industries. The Company has begun commercial application of its technology
through a number of product lines, with 70 products currently being sold,
including NoiseBuster(R) communications headsets and NoiseBuster Extreme!(TM)
consumer headsets, Gekko(TM) flat speakers, flat panel transducers ("FPT(TM)"),
ClearSpeech(TM), microphones, speakers and other products, adaptive speech
filters ("ASF"), the ProActive(TM) line of industrial/commercial active noise
reduction ("ANR") headsets, an aviation headset for pilots, an industrial
muffler or "silencer" for use with large vacuums and blowers, quieting headsets
for patient use in magnetic resonance imaging ("MRI") machines, and an aircraft
cabin quieting system.
In early 1998, the Company introduced the Gekko(TM) flat speakers and the
ClearSpeech(TM) corporate intranet telephone software (the "I-Phone") which the
Company believes will have wide application in the audio and communications
industries. As part of its product line expansion plans, the Company has
introduced over 25 new products and associated accessories during 1998.
In keeping with the direction established in late 1994, during 1998 the
Company continued the practice of marketing its technology through licensing to
third parties for fees and subsequent royalties. During 1998, the Company has
entered into four new technology license agreements. Also during 1998, the
Company will receive royalties in connection with the cross license agreement
entered into by the Company, Verity Group plc ("Verity") and New Transducers
Ltd. ("NXT"), which will include sublicensing of technology to various
sublicensees.
In late 1995, the Company redefined its corporate mission to be a
worldwide leader in the advancement and commercialization of Active Wave
Management technology. Active Wave Management is the electronic and/or
mechanical manipulation of sound or signal waves to reduce noise, improve
signal-to-noise ratio and/or enhance sound quality. The Company also revised its
strategy, expanding its technology development into areas outside of traditional
active noise and vibration control in order to address markets having greater
opportunities such as communications and audio. The acquisition of certain
assets and all of the intellectual property of Active Noise and Vibration
Technologies, Inc. ("ANVT") broadened the Company's portfolio of intellectual
property and removed restrictions on the Company regarding licensing of certain
jointly held patents (the "Chaplin Patents") to unaffiliated third parties. The
Company can now license the Chaplin Patents directly to unaffiliated third
parties, which provides the Company with a greater ability to earn technology
licensing fees and royalties from such patents. Thus, while the Company
continues to focus on products, which the Company believes will generate near
term revenue, it is increasing its emphasis on technology
6
<PAGE> 10
licensing fees and royalties. Further, the Company is working continuously to
lower the cost of its products and improve their technological performance.
As distribution channels are established and as product sales and market
acceptance and awareness of the commercial applications of the Company's
technologies build, revenues from technology licensing fees, royalties and
product sales are anticipated to fund an increasing share of the Company's
requirements. The revenues from these sources, if realized, will reduce the
Company's dependence on engineering and development revenues.
From the Company's inception through June 30, 1998, approximately 25% of
its operating revenues have come from the sale of products and 31% of its
operating revenues have come from licensing of the Company's technology, while
approximately 44% of its operating revenues have come from engineering and
development services.
Active noise control offers many advantages over traditional passive
methods of noise control such as conventional mufflers, ear protectors and
acoustical padding. Active noise control systems: (i) generally reduce only
unwanted noise and permit desired sounds such as the human voice, music or
warning tones to pass freely, (ii) are more successful in attenuating low
frequency noise, (iii) contribute to energy savings and provide other economic
benefits in various applications, and (iv) generally are smaller and lighter.
Active Wave Management is the utilization of active noise control
technology and certain other technologies which results in the electronic and
mechanical manipulation of sound or signal waves to reduce noise, improve
signal-to-noise ratio and/or enhance sound quality.
NCT believes that it has a significant position in Active Wave Management
technology, currently holding 345 patents worldwide and an extensive library of
know-how and other unpatented technology.
The Company has entered into a number of strategic supply, manufacturing
and marketing alliances with leading global companies to commercialize its
technology. These strategic alliances historically have funded a substantial
portion of the Company's research and development, and provided the Company with
reliable sources of components, manufacturing expertise and capacity, as well as
extensive marketing and distribution capabilities. NCT has continuing
relationships with Walker Manufacturing Company ("Walker") (a division of
Tennessee Gas Pipeline Company, a wholly owned subsidiary of Tenneco, Inc.), AB
Electrolux ("Electrolux"), Analog Devices, Inc. ("ADI"), Ultra Electronics Ltd.
("Ultra"), The Charles Stark Draper Laboratory, Inc. ("Draper"), Applied
Acoustic Research, L.L.C. ("AAR"), Hoover Universal, Inc. ("Hoover") and New
Transducers, Ltd. ("NXT"), among others, in order to penetrate major markets
more rapidly and efficiently, while minimizing the Company's own capital
expenditures.
7
<PAGE> 11
In March 1995, the Company and Ultra amended their teaming agreement and
executed a licensing and royalty agreement for $2.6 million and a future royalty
of 1 1/2% of sales commencing in 1998.
On November 15, 1995, the Company and Walker executed a series of related
agreements (the "Restructuring Agreements") regarding the Company's commitment
to help fund $4.0 million of product and technology development work and the
transfer of the Company's 50% interest in Walker Noise Cancellation Technologies
("WNCT") to Walker. The Restructuring Agreements provided for the transfer of
the Company's interest in WNCT (an equally owned partnership between Walker and
the Company) to Walker, the elimination of the Company's previously expensed
obligation to fund the remaining $2.4 million of product and technology
development work, the transfer to Walker of certain Company owned tangible
assets related to the business of WNCT, the expansion of certain existing
technology licenses and the Company's performance of certain research and
development activities for Walker at Walker's expense.
An important factor for the Company's continuing development is its
ability to recruit and retain key personnel. As of August 31, 1998 the Company
had 90 employees, including 51 engineers and technical staff. Among its
engineering staff and consultants are several scientists and inventors that the
Company believes are preeminent in the active noise and vibration control field
worldwide.
The Company was incorporated in Nevada on May 24, 1983. In April 1985, the
Company moved its corporate domicile to Florida, and in January 1987, following
the assumption of control of the Company by the present management, it changed
its state of incorporation to Delaware. The Company's executive offices,
research and product development facility are located at 1025 West Nursery
Road, Suite 120, Linthicum, Maryland 21090; telephone number (410) 636-8700.
The Company maintains sales and marketing offices at One Dock Street, Suite
300, Stamford, Connecticut 06902; telephone number (203) 961-0500. The
Company's European operations are conducted through its product development and
marketing facility in Cambridge, England. The Company also maintains a
marketing facility in Tokyo, Japan.
8
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL DATA
The following should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
incorporated by reference into this Prospectus. See "Incorporation of Certain
Documents by Reference" - Items (1), (2) and (3). Operating results for the
period ended June 30, 1998, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS AND SHARES)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES
Product Sales $ 1,728 $ 2,337 $ 1,589 $ 1,379 $ 1,720
Engineering and development services 3,598 4,335 2,297 547 368
Technology licensing fees and other 60 452 6,580 1,238 3,630
--------- --------- --------- --------- ---------
Total revenues $ 5,386 $ 7,124 $ 10,466 $ 3,164 $ 5,718
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales $ 1,309 $ 4,073 $ 1,579 $ 1,586 $ 2,271
Cost of engineering and development services 2,803 4,193 2,340 250 316
Selling, general and administrative 7,231 9,281 5,416 4,890 5,217
Research and development 7,963 9,522 4,776 6,974 6,235
Interest (income) expense, net (311) (580) (49) 17 1,397(4)
Equity in net (income) loss of unconsolidated
affiliates 3,582(1) 1,824 (80) 80 --
Other expense, net -- 718 552 192 130
--------- --------- --------- --------- ---------
Total costs and expenses $ 22,577 $ 29,031 $ 14,534 $ 13,989 $ 15,566
--------- --------- --------- --------- ---------
Net loss $ (17,191)(1) $ (21,907) $ (4,068) $ (10,825) $ (9,848)
Less:
Preferred stock dividend requirement -- -- -- -- 1,623
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock -- -- -- -- 285
--------- --------- --------- --------- ---------
Net (loss) attributable to common stockholders $ (17,191)(1) $ (21,907) $ (4,068) $ (10,825) $ (11,756)
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding(2) - basic and diluted 70,416 82,906 87,921 101,191 124,101
========= ========= ========= ========= =========
Basic and diluted net loss per share $ (0.24)(1) $ (0.26) $ (0.05) $ (0.11) $ (.09)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS AND SHARES)
SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
--------- ---------
1997(4) 1998
--------- ---------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES
Product Sales $ 581 $ 1,065
Engineering and development services 213 149
Technology licensing fees and other 3,210 346
--------- ---------
Total revenues $ 4,004 $ 1,560
--------- ---------
COSTS AND EXPENSES:
Cost of sales $ 505 $ 869
Cost of engineering and development services 200 128
Selling, general and administrative 2,251 4,454
Research and development 3,012 3,297
Interest (income) expense, net 1,467(4) (212)
Other (income) / expense, net -- (3,382)
--------- ---------
Total costs and expenses $ 7,435 $ 5,154
--------- ---------
Net (loss) $ (3,431) $ (3,594)
Less:
Preferred stock dividend requirement -- 1,690
Accretion of difference between carrying
amount and redemption amount of
Redeemable preferred stock -- 483
--------- ---------
Net (loss) attributable to common stockholders $ (3,431) $ (5,767)
========= =========
Weighted average number of common
shares outstanding - basic and diluted 117,332 135,968
========= =========
Basic and diluted net (loss) per share $ (0.03) $ (0.04)
========= =========
</TABLE>
9
<PAGE> 13
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 29,541 $ 12,371 $ 9,583 $ 5,881 $ 17,361
Total liabilities 6,301 6,903 2,699 3,271 2,984
Long-term debt -- -- 105 -- --
Accumulated deficit (46,873) (68,780) (72,848) (83,673) (93,521)
Stockholders' equity(3) 23,239 5,468 6,884 2,610 14,377
Working capital (deficiency) 19,990 923 1,734 (1,312) 11,696
<CAPTION>
JUNE 30, 1998
(UNAUDITED)
--------
<S> <C>
BALANCE SHEET DATA:
Total assets $ 14,776
Total liabilities 2,382
Long-term debt 280
Accumulated deficit (97,115)
Stockholders' equity(3) 12,114
Working capital 6,712
</TABLE>
(1) In connection with the sale of Common Stock to Tenneco Automotive in
December 1993, the Company recognized its share of cumulative losses not
previously recorded with respect to its joint venture with Walker
amounting to approximately $3.6 million.
(2) Does not include shares issuable upon the exercise of outstanding stock
options, warrants and convertible Preferred Stock, since their effect
would be antidilutive.
(3) The Company has never declared nor paid cash dividends on its Common
Stock.
(4) Includes interest expenses of approximately $1.4 million relating to the
beneficial conversion feature on convertible debt issued in 1997. If the
$1.4 million non-cash charge had been allocated and recorded during each
quarter of 1997 instead of allocated and recorded entirely in the fourth
quarter, the 1997 quarterly results would have been reported as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Nine Months Ended
March 31, 1997 June 30, 1997 September 30, 1997
----------------------- ----------------------- -----------------------
(in thousands, except per share amounts) As Reported Adjusted As Reported Adjusted As Reported Adjusted
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest (income) expense $ -- $ 179 $ 47 $ 1,467 $ 75 $ 1,495
Net profit (loss) $ 599 $ 420 $ (2,011) $ (3,431) $ (5,178) $ (6,598)
Weighted average number of common shares
outstanding-basic income per share 111,978 111,978 117,332 117,332 121,490 121,490
Net profit (loss) per common share $ 0.01 $ 0.00 $ (0.02) $ (0.03) $ (0.04) $ (0.05)
</TABLE>
10
<PAGE> 14
RECENT DEVELOPMENTS
On June 16, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") notified the
Company that the Company's Common Stock had failed to maintain a closing bid
price of $1.00 or more for the previous thirty (30) consecutive trade dates in
accordance with Nasdaq's Marketplace Rule 4450(a)(5). Nasdaq also notified the
Company that no delisting action would be initiated at that time and that the
Company would be provided ninety (90) calendar days in which to regain
compliance with Marketplace Rule 4450(a)(5) which would be achieved if the
closing bid price of the shares of the Company's Common Stock equaled or
exceeded $1.00 for ten (10) consecutive days before the end of trading on
September 14, 1998. In this regard, Nasdaq advised the Company that in the event
the Company was unable to achieve compliance, it may seek further procedural
remedies. The Company was unable to achieve compliance by September 14, 1998,
and on that date delivered its request for a hearing on the matter together with
the requested fee to Nasdaq's Hearings Department. Such a hearing is presently
scheduled for November 5, 1998. Under Nasdaq's procedures delisting is stayed
pending the outcome of the hearing.
Between July 27, 1998 and August 4, 1998, the Company issued and sold
6,000 shares of its Series D Preferred Stock to six (6) "accredited" investors
(the "Investors") in a private placement pursuant to Regulation D of the
Securities Act (the "July 1998 Series D Preferred Stock Private Placement"). The
Company received net proceeds of $5.2 million from the July 1998 Series D
Preferred Stock Private Placement. Provided the Company's stockholders have
approved an increase in the authorized Common Stock of the Company from
185,000,000 shares to 255,000,000 shares, which approval was obtained by the
Company at its Annual Meeting of Stockholders held on October 20, 1998, the
Series D Preferred Stock is convertible into shares of the Company's Common
Stock in accordance with the conversion formula (the "Series D Conversion
Formula") and other terms and conditions set forth in the subscription
agreements relating to the July 1998 Series D Preferred Stock Private Placement
(the "July 1998 Series D Subscription Agreements") and the Certificate of
Designations, Preferences and Rights of the Series D Preferred Stock (the
"Series D Certificate of Designations") establishing the Series D Preferred
Stock in accordance with the provisions of the General Corporation Law of the
State of Delaware. The conversion terms of the Series D Preferred Stock also
provide that in no event shall the conversion price as defined and used in the
Series D Conversion Formula (the "Series D Conversion Price") be less than $0.50
per share and in no event shall the Company be obligated to issue more than
12,000,000 shares of its Common Stock in the aggregate in connection with the
conversion of the 6,000 shares of Series D Preferred Stock issued in the July
1998 Series D Preferred Stock Private Placement. Accordingly, such 12,000,000
shares of the Company's Common Stock are to be registered under the registration
statement containing this prospectus together with 500,000 shares of Common
Stock which may be issued to pay the 4% per annum accretion payable on the
stated value of such 6,000 shares of Series D Preferred Stock under the Series D
Conversion Formula which may be paid in cash or Common Stock of the Company, at
the Company's election. See "The Offering" below. The Series D Preferred Stock
is also redeemable by the Company in cash or in the Company's
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Common Stock in accordance with other terms and conditions set forth in the July
1998 Series D Subscription Agreements and the Series D Certificate of
Designations.
Between July 27, 1998 and August 4, 1998, NCT Audio issued and sold 60
shares of NCT Audio's Series A Convertible Preferred Stock (the "NCT Audio
Series A Preferred Stock") to the Investors in a private placement pursuant to
Regulation D of the Securities Act (the "1998 NCT Audio Series A Preferred Stock
Private Placement"). NCT Audio received net proceeds of $5.2 million from the
NCT Audio Series A Preferred Stock Private Placement. Under the terms of the
subscription agreements (the "NCT Audio Subscription Agreements"), NCT Audio is
required to file a registration statement (the "NCT Audio Registration
Statement") covering the resale of all shares of common stock of NCT Audio
issuable, upon conversion of the NCT Audio Series A Preferred Stock then
outstanding by a date (the "Filing Deadline") which is not later than thirty
(30) days after NCT Audio becomes a "reporting company" under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The shares of NCT Audio
Series A Preferred Stock become convertible into shares of NCT Audio common
stock at any time after the date NCT Audio becomes a "reporting company" under
the Exchange Act. The conversion terms of the NCT Audio Series A Preferred Stock
also provide that in the event that NCT Audio has not become a "reporting
company" under the Exchange Act by December 31, 1998, or the NCT Audio
Registration Statement has not been declared effective by the Commission by
December 31, 1998, the holders shall be entitled to exchange each share of NCT
Audio Series A Preferred Stock for 100 shares of the Company's Series D
Preferred Stock and thereafter shall be entitled to all rights and privileges of
a holder of the Company's Series D Preferred Stock. Accordingly, if all 60
shares of the NCT Audio Series A Preferred Stock were exchanged for 6,000 shares
of the Company's Series D Preferred Stock up to an additional 12,000,000 shares
of the Company's Common Stock would become issuable upon the conversion or
redemption of such shares of Series D Preferred Stock as described above.
Therefore, such additional 12,000,000 shares of the Company's Common Stock are
to be registered under the registration statement containing this prospectus
together with 500,000 shares of Common Stock which may be issued to pay the 4%
per annum accretion payable on the stated value of such 6,000 shares of Series D
Preferred Stock under the Series D Conversion Formula which may be paid in cash
or Common Stock of the Company, at the Company's election.
See "The Offering" below.
On July 29, 1998, the Company initiated a plan to repurchase from time to
time up to 10 million shares of the Company's Common Stock in the open market
pursuant to Rule 10b-18 under the Exchange Act or through block trades. As of
October 28, 1998, the Company had repurchased 5,407,100 shares of the Company's
Common Stock at per share prices ranging from $0.5156 to $0.6563.
On August 14, 1998, NCT Audio agreed to acquire substantially all of the
business assets of Top Source Automotive, Inc. ("TSA"), a tier one automotive
original equipment audio system supplier. On June 11, 1998, NCT Audio paid a
non-refundable deposit of $1,450,000 towards the purchase price, which is
recorded as an investment in unconsolidated subsidiaries. The total cash
purchase price is $10,000,000,
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and up to $6,000,000 in possible future contingent payments to be paid in either
NCT Audio common stock or cash, at the seller's election. The transaction is
subject to approval of the shareholders of Top Source Technologies, Inc.
("TST"), TSA's parent company. On July 31,1998, NCT Audio paid TST $2,050,000,
to be held in escrow with securities and documentation necessary to represent
beneficial ownership of 35% of the total equity rights and interests in TSA,
until such time as TST's stockholders approve the sale of the business assets of
TSA. Upon such TST stockholder approval, such $2,050,000 will be delivered to
TSA and such securities and documentation will be delivered to NCT Audio. If
such approval is not obtained, the $2,050,000 will be returned to NCT Audio and
the securities and documentation will be returned to TSA. TST's next stockholder
meeting is scheduled for December 15, 1998.
On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC dba Precision Power, Inc. ("PPI"), a supplier of
custom automotive audio systems. In consideration, the members of PPI shall
receive registered shares of NCT Audio's common stock having an aggregate value
of $2,000,000 as calculated using the offering price of such stock in an initial
public offering being considered by NCT Audio as a means of raising acquisition
funding. NCT Audio also agreed to retire $8.5 million of PPI debt. This
acquisition is subject to NCT Audio's receipt of the necessary financing to
close the transaction. In addition to the above, on June 17, 1998, NCT Audio
provided a working capital loan in the amount of $500,000 to PPI, which is
evidenced by a demand promissory note. On August 18,1998, NCT Audio provided an
additional working capital loan in the amount of $1,000,000 to PPI, which is
also evidenced by a demand promissory note. The unpaid principal balance of
these notes bear interest at a rate equal to the prime lending rate plus one
percent (1.00%).
On September 4, 1998, the Company acquired the issued and outstanding
common stock of Advancel Logic Corporation ("Advancel") pursuant to a stock
purchase agreement dated as of August 21, 1998 (the "Stock Purchase Agreement")
among the Company, Advancel and certain shareholders of Advancel (the "Advancel
Shareholders"). The consideration for the acquisition of the Advancel common
stock consisted of an initial payment of $1.0 million payable by the delivery of
1,786,991 shares of the Company's authorized and unissued Common Stock which
shares are to be registered under the registration statement containing this
Prospectus (see "The Offering" below) together with future payments, payable in
cash or in Common Stock of the Company at the election of the Advancel
Shareholders (individually, an "earnout payment" and collectively, the "earnout
payments") based on Advancel's earnings before interest, taxes, depreciation and
amortization (as defined in the Stock Purchase Agreement) for each of the
calendar years 1999, 2000, 2001 and 2002 (individually, an "earnout year" and
collectively, the "earnout years"). While each earnout payment may not be less
than $250,000 in any earnout year, there is no maximum earnout payment for any
earnout year or for all earnout years in the aggregate. To determine the number
of shares of the Company's Common Stock issuable in connection with an earnout
payment, each earnout payment is to be calculated using the
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<PAGE> 17
average of the closing prices of the Company's Common Stock for each of the
twenty (20) business days following the 21st day after the release of Advancel's
audited year-end financials for an earnout year. At that time, Advancel
Shareholders will elect to receive payment in cash or Common Stock of the
Company. In the event that the Company is unable to cause a registration
statement covering the resale of such 1,786,991 shares of the Company's Common
Stock to be declared effective by March 15, 1999, and to maintain such
registration statement effective for at least thirty (30) days, each Advancel
Shareholder shall have the right, until April 15, 1999, to have the Company
redeem up to one-third of the initial payment shares acquired by such Advancel
Shareholder by paying in cash therefor a sum calculated by using the formula
used to determine the number of shares of the Company's Common Stock to be
delivered in payment of the initial payment of $1.0 million.
On October 12, 1998, the Company exchanged 1,000,000 shares of its Common
Stock for 266 shares of the common stock of NCT Audio with the holder thereof in
an exchange exempt from registration under the Securities Act pursuant to
Section 4(2) thereof (the "October 1998 NCT Audio Common Stock Exchange"). The
October 1998 NCT Audio Common Stock Exchange was made in response to the
exercise of certain exchange rights granted to purchasers of NCT Audio Common
Stock in the NCT Audio Financing as described under "Risk Factors - Possible
Future Dilution from Exercise of Outstanding Warrants and Options and Conversion
of Convertible Securities" below. Such 1,000,000 shares of the Company's Common
Stock are to be registered under the registration statement containing this
prospectus. (See "The Offering" below.)
At the Annual Meeting of Stockholders of the Company held on October 20,
1998, the stockholders approved an amendment to the Company's Restated
Certificate of Incorporation changing the name of the Company to "NCT Group,
Inc.". Such amendment became effective on October 21, 1998, when the Company
filed a Certificate of Amendment to its Restated Certificate of Incorporation in
the Office of the Secretary of the State of Delaware pursuant to the
requirements of the General Corporation Law of the State of Delaware.
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<PAGE> 18
THE OFFERING
This offering consists of the resale of 1,786,991 shares of Common Stock
which were issued by the Company in a private placement exempt from registration
under the Securities Act pursuant to Regulation D thereunder on September 4,
1998.
This offering also consists of the resale of 12,500,000 shares of Common
Stock which may be issued upon the conversion of issued and outstanding shares
of the Company's Series D Preferred Stock which were issued by the Company in
private placements exempt from registration under the Securities Act pursuant to
Regulation D thereunder.
In addition, this offering consists of the resale of 12,500,000 shares of
Common Stock which may be issued upon the conversion of authorized but unissued
shares of the Company's Series D Preferred Stock which may be issued in exchange
for issued and outstanding shares of Series A Convertible Preferred Stock of the
Company's subsidiary, NCT Audio, which were issued by NCT Audio in private
placements, exempt from registration under the Securities Act pursuant to
Regulation D thereunder.
In accordance with Rule 416 promulgated under the Securities Act, this
offering also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Company's Series D Preferred
Stock (i) to prevent dilution resulting from stock splits, stock dividends or
similar transactions and (ii) by reason of changes in the conversion price or
conversion rate of the Company's Series D Convertible Preferred Stock in
accordance with the terms thereof.
In addition, this offering consists of the resale of 1,000,000 shares of
Common Stock which were issued by the Company in an exchange for shares of
common stock of NCT Audio with the holder thereof on October 12, 1998, which
exchange was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
All of the foregoing shares of Common Stock may be offered for sale by the
Selling Stockholders. The Company will not receive any of the proceeds from the
sale of such shares of Common Stock.
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RISK FACTORS
The shares of Common Stock offered hereby represent a speculative
investment and entail elements of risk. The following factors, in addition to
the other information included or incorporated by reference herein, should be
carefully considered before any decision is made to purchase any of the shares
of Common Stock offered hereby.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS. Statements in this Prospectus and the documents incorporated herein
by reference which are not historical facts are forward-looking statements under
provisions of the Private Securities Litigation Reform Act of 1995. All
forward-looking statements involve risks and uncertainties. The Company wishes
to caution readers that the following important factors, among others, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause its actual results in fiscal 1998 and beyond to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
maintain the listing of the Company's Common Stock on the NASDAQ National Market
System; achieve a competitive position in design, development, licensing,
production and distribution of electronic systems for Active Wave Management;
produce a cost effective product that will gain acceptance in relevant consumer
and other product markets; increase revenues from products; realize funding from
technology licensing fees, royalties, product sales, and engineering and
development revenues to sustain the Company's current level of operation; timely
introduce new products; continue its current level of operations to support the
fees associated with the Company's patent portfolio; maintain satisfactory
relations with its five customers that accounted for 71% of the Company's
revenues in 1997; attract and retain key personnel; prevent invalidation,
abandonment or expiration of patents owned or licensed by the Company and expand
its patent holdings to diminish reliance on core patents; have its products
utilized beyond noise attenuation and control; maintain and expand its strategic
alliances; and protect Company know-how, inventions and other secret or
unprotected intellectual property.
Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus and the documents incorporated herein by
reference will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein and in the documents
incorporated herein by reference, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
CURRENT FINANCIAL CONDITION; CASH POSITION; CONDITIONAL ADEQUACY OF
CURRENTLY AVAILABLE FUNDS TO SUSTAIN COMPANY; POSSIBLE NEED FOR ADDITIONAL
FINANCING. Cash and cash equivalents
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amounted to $5.2 million at June 30, 1998. Management believes that currently
available funds may not be sufficient to sustain the Company for the next 12
months. Such funds consist of available cash and cash from the exercise of
warrants and options, the funding derived from technology licensing fees,
royalties and product sales, and engineering development revenue. As noted in
"Subsequent Events" in the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998, and under "Recent Developments" above, the Company
received $5.2 million net proceeds from the July 1998 Series D Preferred Stock
Private Placement. The Company's subsidiary, NCT Audio, also received $5.2
million net proceeds from the 1998 NCT Audio Series A Preferred Stock Private
Placement. Continuation as a going concern is dependent upon the level of
realization of funding from technology licensing fees and royalties and product
sales and engineering and development revenue, all of which are presently
uncertain. In the event that technology licensing fees and royalties, product
sales, and engineering and development revenue are not realized as planned, then
management believes additional working capital financing must be obtained. There
is no assurance any such financing is or would become available.
There can be no assurance that funding will be provided by technology
license fees, royalties and product sales and engineering and development
revenue. In that event, the Company would have to substantially cut back its
level of operations. These reductions could have an adverse effect on the
Company's relations with its strategic partners and customers. Uncertainty
exists with respect to the adequacy of current funds to support the Company's
activities until positive cash flow from operations can be achieved, and with
respect to the availability of financing from other sources to fund any cash
deficiencies.
NO DIVIDENDS. The Company has never declared nor paid dividends on its
common stock and has no present intention to do so.
GOING CONCERN UNCERTAINTY PARAGRAPH IN REPORT OF INDEPENDENT AUDITORS. The
Company expects to continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business and its financial statements have been prepared on
that basis. However, this going concern basis is dependent upon, among other
things, the achievement of future profitable operations and the ability to
generate sufficient cash from operations, public and private financings and
other funding sources to meet its obligations as described in "Current Financial
Condition; Cash Position; Conditional Adequacy of Currently Available Funds to
Sustain Company; Possible Need for Additional Financing" above.
The Company's independent auditors issued their report on the Company's
consolidated financial statements as of and for the year ended December 31,
1997. Their report contains an explanatory paragraph, which discloses certain
factors, which are described in Note 1 to the financial statements covered by
the report. This paragraph notes that such factors raise substantial doubt as to
the Company's ability to continue as a going concern. See "Experts" below.
Prospective investors are urged to read carefully
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<PAGE> 21
the independent auditors' report as well as the consolidated financial
statements of the Company and the notes thereto, which are incorporated herein
by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, (including Amendment No. 1 thereto filed on April 30, 1998,
and Amendment No. 2 thereto filed on May 4, 1998).
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company incurred
a net loss of $9.8 million for the year ended December 31, 1997, and a loss of
$3.6 million for the six months ended June 30, 1998. The Company's accumulated
deficit at June 30, 1998 was $97.1 million, attributable in substantial part to
the costs of developing its proprietary technology. To achieve profitability,
NCT must, independently and with strategic allies, successfully develop,
manufacture, introduce and market its products in commercial quantities and
receive fees and royalties from licensing its proprietary technology.
LIMITED REVENUES. Although the Company has engaged in marketing activities
with regard to the sale or licensing of electronic systems for Active Wave
Management including systems that electronically reduce noise and vibration
based upon prototypes of such systems, its operating revenues from inception in
April 1986 through June 30, 1998, have been limited, aggregating $11.9 million
from the sale of such systems, $14.9 million from the licensing of technology
relating to such systems and $21.5 million from the performance of engineering
and development services, respectively. Although the Company has begun
commercial sales of active noise attenuation and other products in a limited
number of applications, significant further development will be necessary before
many of the Company's potential products will achieve expected commercial
end-use applications.
POSSIBLE FUTURE DILUTION FROM EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS
AND CONVERSION OF CONVERTIBLE SECURITIES. On October 6, 1992, the Company
adopted a stock option plan (the "1992 Plan") covering 6.0 million shares of the
Company's Common Stock and providing for the grant of options to purchase Common
Stock of the Company and awards of restricted common stock to employees,
officers and directors of the Company. The 1992 Plan was approved by the
stockholders at the 1993 Annual Meeting of Stockholders following which said 6.0
million shares were registered under the Securities Act. An amendment to the
1992 Plan adopted by the Option Committee on November 8, 1995, and approved by
the stockholders at the 1996 Annual Meeting of Stockholders (the "1996 Annual
Meeting"), increased the number of shares of Common Stock covered by the 1992
Plan to 10.0 million shares and added active consultants to the Company as
persons who are eligible to participate under the 1992 Plan. As of June 30,
1998, the Company has granted options to purchase 19,987,375 shares of Common
Stock under the 1992 Plan of which, 12,398,375 are currently exercisable and
7,409,000 will become exercisable in increments through
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February 14, 2002. As of June 30, 1998, the Company has also granted 95,000
shares of restricted stock under the 1992 Plan. On January 15, 1998, the Board
of Directors further amended the 1992 Plan (the "1998 Amendment"), subject to
stockholder approval which was obtained on October 20, 1998, increasing the
number of shares of Common Stock covered by the 1992 Plan to 30.0 million
shares, adding outside directors of the Company's Board of Directors as persons
who are eligible to participate under the 1992 Plan, deleting the formula for
grants of awards of restricted Common Stock and options to purchase Common Stock
to outside directors and providing for the administration of the 1992 Plan by
the Board of Directors of the Company or a committee appointed by the Board of
Directors consisting of at least two outside directors. The Company has reserved
30.0 million shares of Common Stock for issuance upon the exercise of options
granted under the 1992 Plan and for issuance upon the grant of restricted stock
awards under the 1992 Plan. Of such shares, 10.0 million are registered under
the Securities Act. The Company plans to register all of such additional 20.0
million shares under the Securities Act. As of June 30, 1998, the Company has
granted options to purchase 5,226,000 shares of Common Stock, which became
exercisable upon stockholder approval of the 1998 Amendment, and options to
purchase an additional 6,904,000 shares of Common Stock which will become
exercisable in increments on the later of the date of stockholder approval of
the 1998 Amendment and other dates between such date and February 14, 2002,
provided the optionee is then employed by or rendering services to the Company.
On November 15, 1994, the Company adopted and on May 8, 1995 and November
8, 1995 amended the Noise Cancellation Technologies, Inc. Option Plan for
Certain Directors (the "Directors Plan"), pursuant to which options to purchase
in the aggregate 821,000 shares of Common Stock were granted to two directors of
the Company. The Directors Plan was approved by the stockholders at the
Company's 1995 Annual Meeting of Stockholders as to options to purchase in the
aggregate 725,000 shares of Common Stock. An amendment to the Directors Plan
adopted by the Board of Directors on November 8, 1995, and approved by the
stockholders at the 1996 Annual Meeting, increased the number of shares of
Common Stock covered by the Plan to 821,000 shares and made certain minor
changes concerning the Plan's administration. The Company has reserved 821,000
shares of Common Stock for issuance upon the exercise of the options granted
under the Directors Plan and has registered such 821,000 shares under the
Securities Act. As of June 30, 1998, the Company has granted options to purchase
746,000 shares of Common Stock which are currently exercisable under the
Directors Plan.
As of June 30, 1998, the Company has reserved 378,894 shares of Common
Stock for issuance upon the exercise of warrants and options granted outside the
1992 Plan and the Directors Plan which the Company has registered under the
Securities Act. The Company has also reserved 1,305,500 shares for issuance upon
the exercise of warrants granted (i) to an investor in an early 1997 private
placement pursuant to Regulation S under the Securities Act (the "Investor
Warrant"); and (ii) in partial consideration for services rendered by three
placement agents in connection with the 1997 Preferred Stock
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Private Placement, described below, by one financial consultant in connection
with another financing completed by the Company and by one consultant in
connection with the Company's efforts to complete development and licensing
agreements with a large European company; and has reserved an additional 100,000
shares for issuance upon the exercise of options granted to two non-employee
directors of the Company, subject to the approval of the Company's stockholders.
On October 22, 1998, the weighted average exercise price for all currently
exercisable and outstanding warrants and options was $0.71.
Between October 10, 1997 and December 4, 1997, NCT Audio raised $4.0
million of equity capital by means of a private placement of 2,145 shares of its
common stock pursuant to Regulation D under the Securities Act (the "NCT Audio
Financing"). Under the terms of the subscription agreements for the sale and
purchase of NCT Audio common stock entered into in connection with this private
placement, the purchasers are granted the right commencing 90 days after their
purchase of NCT Audio common stock to exchange such common stock for the
Company's Common Stock at an exchange ratio which will provide the purchasers a
value in the Company's Common Stock equal to the amount paid by the purchasers
for NCT Audio common stock in accordance with an agreement between such
purchasers and the Company. However, the purchasers may not exercise this
exchange right if a registration statement of NCT Audio for an initial public
offering of NCT Audio common stock is filed with the SEC within 90 days of the
delivery of the purchase price for the NCT Audio common stock by the purchasers
thereof, but such exchange right is renewed if such registration statement does
not become effective within 180 days after such purchase price delivery.
Purchasers of $1.7 million in the aggregate of NCT Audio common stock have
agreed to extend such periods from 90 days to 150 days and from 180 days to 240
days, respectively. No such registration statement was filed by the Company
within said 150 day period. The Company is under no obligation to register any
of the shares of the Company's Common Stock which may be issued in connection
with the exercise of the foregoing exchange right although such Common Stock of
the Company may be sold pursuant to an applicable exemption from registration.
As noted under "Recent Developments" above the Company has issued 1,000,000
shares of its Common Stock in exchange for 266 shares of NCT Audio common stock
in the October 1998 NCT Audio Common Stock Exchange, and such 1,000,000 shares
of the Company's Common Stock are to be registered under the registration
statement containing this prospectus notwithstanding such registration was not
required under the terms of the NCT Audio Financing. Because the exchange ratio
is determined by using 80% of the average closing bid price of the Company's
Common Stock over the five day trading period immediately preceding such date
the exchange right is exercised, it is not possible to accurately determine the
maximum number of shares of the Company's Common Stock that would be issued if
all of the remaining purchasers of NCT Audio common stock elected to fully
exercise their exchange rights. If all of the remaining purchasers of the $3.5
million in the aggregate of NCT Audio common stock purchased pursuant to the
foregoing private placements, become entitled to exercise such exchange right
and do so at a time when the average closing bid price of the Company's Common
Stock for the five trading days immediately
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preceding the date on which the exchange right was exercised was the same as it
was on October 22, 1998 ($0.4688 per share) the Company would be required to
issue 9.3 million shares of its Common Stock. No assurance can be made that the
price of the Company's Common Stock will not be significantly lower than $0.4688
per share in which event a significant number of additional shares of the
Company's Common Stock would be issued in connection with such exchange.
Between November 3, 1997 and December 11, 1997 the Company issued and sold
13,250 shares of its Series C Convertible Preferred Stock (the "Series C
Preferred Stock") in a private placement pursuant to Regulation D of the
Securities Act (the "1997 Series C Preferred Stock Private Placement"). The
Series C Preferred Stock is convertible into shares of the Company's Common
Stock in accordance with the conversion formula (the "Series C Conversion
Formula") and other terms and conditions set forth in the subscription
agreements relating to the 1997 Series C Preferred Stock Private Placement. The
conversion terms of the Series C Preferred Stock also provide that in no event
shall the average closing bid price referred to in the Series C Conversion
Formula be less than $0.625 per share and in no event shall the Company be
obligated to issue more than 26.0 million shares of its Common Stock in the
aggregate in connection with the conversion of the Series C Preferred Stock. The
Series C Preferred Stock is also redeemable by the Company in cash or in the
Company's Common Stock in accordance with other terms and conditions set forth
in such subscription agreements. Because the calculations required to determine
the number of shares of the Company's Common Stock to be issued upon conversion
or redemption of the Series C Preferred Stock will be based upon the length of
time the Series C Preferred Stock is held as well as the lesser of (x) 120% of
the five (5) day average closing bid price of Common Stock immediately prior to
the closing date of the purchase of the Series C Preferred Stock being converted
or (y) 20% below the five (5) day average closing bid price of Common Stock
immediately prior to the conversion date thereof, it is not possible to
accurately determine the maximum number of shares of the Company's Common Stock
that would be issued upon any such conversion or redemption. All 13,250 shares
of the Series C Preferred Stock were issued when the average closing bid price
of the Company's Common Stock for the five trading days immediately preceding
issuance was higher than the minimum conversion price ($0.625). Therefore under
the Series C Conversion Formula if all 13,250 shares of the Series C Preferred
Stock were converted or redeemed one year following the issuance thereof and the
average closing bid price of the Company's Common Stock for the five trading
days immediately preceding the conversion or redemption date was equal to or
below $0.625, the Company would be required to issue 27.6 million shares of its
Common Stock except that under the terms of conversion as set forth in the
subscription agreements and in the Certificate of Designations Preferences and
Rights of the Series C Preferred Stock establishing the Series C Preferred Stock
in accordance with the provisions of the General Corporation Law of the State of
Delaware, the Company is not obligated to issue more than 26.0 million shares of
its Common Stock in the aggregate in connection with the conversion of the
Series C Preferred Stock. As of October 27, 1998, 10,850 shares of the Series C
Preferred Stock have been converted to 20,665,000 shares of Common Stock and
2,400 shares of Series C Preferred Stock remain outstanding.
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On June 10, 1998, the Board of Directors of the Company approved and
declared advisable an amendment to the Company's Restated Certificate of
Incorporation to increase the number of shares of Common Stock, which the
Company shall be authorized to issue by 70,000,000 shares from 185,000,000 to
255,000,000 shares subject to the approval of the Company's stockholders. Such
approval was obtained at the Company's Annual Meeting of Stockholders on October
20, 1998. Of such additional shares of Common Stock, 20,000,000 shares have been
reserved for issuance under the 1998 Amendment to the 1992 Plan described above,
stockholder approval for which was also obtained at the October 20, 1998 Annual
Meeting. The remaining 50,000,000 of such shares will be available for
acquisitions, public or private financings involving Common Stock or preferred
stock or other securities convertible into Common Stock, stock splits and
dividends, other present and future employee benefit programs and other
corporate purposes.
Between July 27,1998 and August 4, 1998, the Company issued and sold 6,000
shares of its Series D Preferred Stock in the July 1998 Series D Preferred Stock
Private Placement. Upon the Company's stockholders approval of an increase in
the authorized Common Stock of the Company from 185,000,000 to 255,000,000
shares at the Annual Meeting of Stockholders held on October 20, 1998, the
Series D Preferred Stock became convertible into shares of the Company's Common
Stock in accordance with the Series D Conversion Formula and other terms and
conditions set forth in the July 1998 Series D Subscription Agreements and the
Series D Certificate of Designations. The conversion terms of the Series D
Preferred Stock also provide that in no event shall the Series D Conversion
Price as defined and used in the Series D Conversion Formula be less than $0.50
per share and in no event shall the Company be obligated to issue: (i) more than
12,000,000 shares of its Common Stock in the aggregate in connection with the
conversion of the 6,000 shares of Series D Preferred Stock issued in the July
1998 Series D Preferred Stock Private Placement; or (ii) more than 12,000,000
additional shares of Common Stock in the aggregate in connection with the
conversion of the 6,000 shares of Series D Preferred Stock issuable in exchange
for NCT Audio Series A Preferred Stock under the circumstances described in the
paragraph below. The conversion terms also provide for the payment of 4% per
annum accretion on the stated value of the Series D Preferred Stock upon
conversion which may be paid, at the Company's election, in Common Stock or
cash in accordance with the Series D Conversion Formula. The Series D Preferred
Stock is also redeemable by the Company in cash or in the Company's Common
Stock in accordance with other terms and conditions set forth in the Series D
Subscription Agreements and the Series D Certificate of Designations. Because
the calculations required to determine the number of shares of the Company's
Common Stock to be issued upon conversion or redemption of the Series D
Preferred Stock will be based upon the length of time the Series D Preferred
Stock is held as well as the greater of the Series D Conversion Price (which is
determined by the five consecutive trading day average closing bid price of
Common Stock immediately prior to the conversion date of the Series D Preferred
Stock
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being converted subject to adjustment) or $0.50, it is not possible to
accurately determine the maximum number of shares of the Company's Common Stock
that would be issued upon any such conversion or redemption. However, under the
terms of conversion as set forth in the Series D Certificate of Designations,
the Company is not obligated to issue more than 24,000,000 shares of its Common
Stock in the aggregate in connection with the conversion of the Series D
Preferred Stock as contemplated under this and the paragraph below. Although,
the Company may elect to issue more than that amount in payment of all or part
of the applicable 4% per annum accretion on the stated value of the Series D
Preferred Stock payable upon the conversion thereof.
Between July 27, 1998 and August 4, 1998, NCT Audio issued and sold 60
shares of NCT Audio Series A Preferred Stock in the 1998 NCT Audio Series A
Preferred Stock Private Placement. Under the terms of the NCT Audio Subscription
Agreements, NCT Audio is required to file the NCT Audio Registration Statement
covering the resale of all shares of common stock of NCT Audio issuable, upon
conversion of the NCT Audio Series A Preferred Stock then outstanding by the
Filing Deadline which is not later than thirty (30) days after NCT Audio becomes
a "reporting company" under the Exchange Act. The shares of NCT Audio Series A
Preferred Stock become convertible into shares of NCT Audio common stock at any
time after the date NCT Audio becomes a "reporting company" under the Exchange
Act. The conversion terms of the NCT Audio Series A Preferred Stock also provide
that in the event that NCT Audio has not become a "reporting company" under the
Exchange Act by December 31, 1998, or the NCT Audio Registration Statement has
not been declared effective by the Commission by December 31, 1998, the holders
shall be entitled to exchange each share of NCT Audio Series A Preferred Stock
for 100 shares of the Company's Series D Convertible Preferred Stock and
thereafter shall be entitled to all rights and privileges of a holder of the
Company's Series D Preferred Stock. Accordingly, if all 60 shares of the NCT
Audio Series A Preferred Stock were exchanged for 6,000 shares of the Company's
Series D Convertible Preferred Stock up to an additional 12,000,000 shares of
the Company's Common Stock would become issuable upon the conversion or
redemption of such shares of Series D Convertible Preferred Stock as described
above.
On September 4, 1998, the Company acquired the issued and outstanding
common stock of Advancel pursuant to the Stock Purchase Agreement among the
Company, Advancel and the Advancel Shareholders.
The consideration for the acquisition of the Advancel common stock
consisted of an initial payment of $1.0 million payable by the delivery of
1,786,991 shares of the Company's authorized and unissued Common Stock which
shares are to be registered under the registration statement containing this
Prospectus, together with future payments, payable in cash or in Common Stock of
the Company at the election of the Advancel Shareholders (individually, an
"earnout payment" and collectively, the "earnout payments") based on Advancel's
earnings before interest, taxes, depreciation and amortization (as defined in
the Stock Purchase Agreement) for each of the calendar years 1999, 2000, 2001
and 2002 (individually, an "earnout year" and collectively, the "earnout
years"). While each earnout payment may not be less than $250,000 in any
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earnout year, there is no maximum earnout payment for any earnout year or for
all earnout years in the aggregate. To determine the number of shares of the
Company's Common Stock issuable in connection with an earnout payment, each
earnout payment is to be calculated using the average of the closing prices of
the Company's Common Stock for each of the twenty (20) business days following
the 21st day after the release of Advancel's audited year-end financials for an
earnout year. At that time, Advancel Shareholders will elect to receive payment
in cash or Common Stock of the Company.
On October 12, 1998, the Company exchanged 1,000,000 shares of its Common
Stock for 266 shares of the common stock of NCT Audio with the holder thereof in
the October 1998 NCT Audio Common Stock Exchange. The October 1998 NCT Audio
Common Stock Exchange was made in response to the exercise of certain exchange
rights granted to purchasers of NCT Audio Common Stock in the NCT Audio
Financing as described above in the fifth (5th) paragraph of this risk factor.
The possibility of the sale of the shares of Common Stock described in the
preceding paragraphs of this "risk factor", all of which (except the shares
issuable upon the exercise of the Investor Warrant, the shares described in the
paragraph relating to the NCT Audio Financing and shares in excess of 1,000,000
shares of Common Stock which the Company may elect to issue in payment of the 4%
per annum accretion payable upon the conversion of the Series D Preferred Stock
as described in the paragraph relating to the issuance of the Series D Preferred
Stock) the Company plans to register for resale under the Securities Act to the
extent they are not now so registered or exempt from the registration
requirements of the Securities Act, may adversely affect the market price of the
Company's Common Stock.
MATERIAL DEPENDENCE UPON CERTAIN PATENT AND TRADEMARK RIGHTS; UNCERTAIN
PROPRIETARY PROTECTION. No assurance can be given as to the range or degree of
protection any patent or trademark issued to, or licensed by, the Company will
afford or that such patents, trademarks or licenses will provide protection that
has commercial significance or will provide competitive advantages for the
Company's products. No assurance can be given that the Company's owned or
licensed patents or trademarks will afford protection against competitors with
similar technology or trademarks, or that others will not obtain patents
claiming aspects similar to those covered by the Company's owned or licensed
patents or patent applications. No assurance exists that the Company's owned or
licensed patents or trademarks will not be challenged by third parties,
invalidated, rendered unenforceable or designed around. Furthermore, there can
be no assurance that any pending patent or trademark applications or
applications filed in the future will result in the issuance of a patent or
trademark. The invalidation or expiration of patents or trademarks owned or
licensed by the Company and believed by the Company to be commercially
significant could permit increased competition, with potential adverse effects
on the Company and its business prospects. Although the Company intends to file
for extensions to certain patents, the Company can make no assurances that the
U.S. or foreign government patent authorities will grant such extensions.
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The Company has conducted only limited patent and trademark searches and
no assurances can be given that patents or trademarks do not exist or will not
be issued in the future that would have an adverse effect on the Company's
ability to market its products or maintain its competitive position with respect
to its products. Substantial resources may be required to obtain and defend
patent and trademark rights to protect present and future technology and
trademarks of the Company.
There has also been an inquiry regarding the product design configuration
of one of the Company's products as it relates to a patent held by another
company. Another competitor has implied that a possible conflict exists between
the Company's application of certain of its technology and a patent recently
allowed to the competitor and that the Company's use of what the Company
believes is a generic phrase conflicts with a trademark which the competitor has
applied for. The Company believes that such claims and inquiry are without merit
and intends to oppose them vigorously. Moreover, if such inquiry proves to have
any merit, the Company believes it could, without significant cost, modify its
product design configuration so as to avoid infringement. The Company does not
believe that any damages or costs it may incur as a result of such claims or
inquiry would have a material adverse effect on the financial condition of the
Company. Notices of opposition have been filed with respect to two of NCT
Audio's applications for trademarks for use with audio speakers and audio
speaker grilles. The Company and NCT Audio believe that said oppositions are
without merit and NCT Audio intends to prosecute its trademark applications
vigorously. However, if NCT Audio's applications are denied on the basis of said
oppositions, NCT Audio could be required to obtain a license to use the subject
trademarks or refrain from using said trademarks and adopt other marks either of
which could involve significant expense for NCT Audio but neither of which would
have a long-term material effect on NCT Audio's or the Company's operating
results.
The Company's policy is to enter into confidentiality agreements with all
of its executive officers, key technical personnel and advisors, but no
assurances can be made that Company know-how, inventions and other secret or
unprotected intellectual property will not be disclosed to third parties by such
persons.
RAPID TECHNOLOGICAL CHANGE. Active Wave Management is an evolving
industry, characterized by rapid technological change. The Company intends to
engage continually in research and development activities, including the
improvement of current products and development of new products. There can be no
assurance, however, that active noise and vibration attenuation or other
applications of Active Wave Management will be accepted by the commercial
marketplace, that the introduction of new products or the development of new
technologies by others will not render the Company's products obsolete or
unmarketable, or that the Company will be able to hire and retain adequate
research personnel or be able to finance research activities in this regard.
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RELIANCE UPON STRATEGIC ALLIANCES; COMMERCIAL ACCEPTANCE OF END-PRODUCTS.
The Company and certain of its wholly owned subsidiaries have entered into
agreements to establish strategic alliances related to the design, development,
manufacture, marketing and distribution of its electronic systems and products
containing such systems. These agreements generally provide that the Company
license its technology and contribute a nominal amount of initial capital and
that the other party provide substantially all of the funding to support the
alliance. In exchange for this funding, the other party generally receives a
preference in the distribution of cash and/or profits or royalties from these
alliances until such time as the support funding, plus an "interest" factor in
some instances, is recovered. At June 30, 1998, there were no preferred
distributions due to joint venture partners from future profits of the joint
ventures.
The Company conducts its marketing efforts primarily by identifying
specific market segments for active noise and vibration attenuation and other
Active Wave Management products and, thereafter, seeking to establish strategic
alliances with major domestic and international business concerns to support
product development, and to manufacture and distribute products for such market
segments. The Company's ability to enter into new markets is materially
dependent upon determinations by such concerns that the Company's products are
suitable for use in their respective end-products, and on the ability and
willingness of those concerns to market such products successfully. During 1995,
1996 and 1997 active headset product sales did not increase at the rate
previously anticipated and orders for active vehicular mufflers, kitchen exhaust
and HVAC fan quieting systems and industrial headsets were not received at
volumes or within time frames that had been anticipated by the Company.
The Company arranges for the supply of actuators, integrated circuits and
other electronic components for its active control systems through alliances
with manufacturers the Company believes will serve as dependable sources of
supply. The Company makes no assurances that these concerns will meet the
Company's and its customers' needs for quality components in sufficient
quantities at commercially reasonable prices.
CUMULATIVE LOSSES IN JOINT VENTURES. When the Company's share of
cumulative losses in a strategic alliance exceeds its investment and the Company
has no obligation to fund such additional losses, the Company suspends applying
the equity method of accounting for its investment in such alliance. The
estimated aggregate amount of losses in the Company's strategic alliances in
excess of the Company's investments which has not been recorded was not
considered material at June 30, 1998. The Company will not be able to record any
equity in income with respect to an entity until its share of future profits is
sufficient to recover any cumulative losses that have not previously been
recorded.
DEPENDENCE UPON EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL. The Company's
operations are, and for the proximate future will be, materially dependent upon
the efforts of its executive officers and key technical employees, all of whom
serve the Company on a full-time basis but none of whom are
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contractually obligated to remain in the Company's employ for any material term.
Moreover, the Company's growth and expansion into new product applications could
require additional expertise in areas such as manufacturing, marketing and
distribution, which would place increased demands on the Company's resources and
would require the addition of new personnel and the development of additional
expertise by existing personnel. Certain academic consultants serve the Company
on a part-time basis, and could terminate their relationship with the Company at
any time.
Certain employees and consultants of the Company have been approached by
the Company's competitors, and no assurances can be given that the competition
will not successfully recruit such personnel. The loss of key personnel or the
failure to recruit necessary additional personnel could impede the achievement
of the Company's development, commercialization and marketing objectives.
POSSIBLE RISKS ASSOCIATED WITH AGREEMENTS WITH RELATED PARTIES;
COMMISSIONS AND EXCLUSIVE DISTRIBUTORSHIPS. In 1993 the Company entered into
four agreements with QuietPower Systems, Inc. ("QSI") (formerly Active
Acoustical Solutions, Inc.) and in 1994 entered into a fifth agreement with QSI.
QSI is 33% owned by Environmental Research Information, Inc. ("ERI") and 2%
owned by Jay M. Haft, Chairman of the Board of Directors of the Company. Michael
J. Parrella, President of the Company owns approximately 12% of the outstanding
capital of ERI and Mr. Haft shares investment control over an additional 24% of
the outstanding capital of ERI. Under these agreements, QSI is given rights to
market certain of the Company's products and technologies to electric and/or
natural gas utilities and for use in or with feeder bowls. In one of these
agreements, QSI's rights are on an exclusive basis so long as QSI meets certain
performance criteria relating to marketing efforts and sales performance. Under
one of these agreements, QSI is entitled to receive a sales commission equal to
129% of QSI's marketing expenses attributable to the marketing of the products
in question, which expenses are to be deemed to be the lesser of QSI's actual
expenses or 35% of the revenues received by the Company from the sale of such
products. Commissions and fees payable under all of the other agreements are in
accordance with the Company's standard terms and conditions and do not exceed
6%. As of the date of this Prospectus, the Company has not been required to pay
any commissions to QSI under these agreements.
In March 1995, the Company entered into a Master Agreement with QSI under
which QSI was granted an exclusive worldwide license under certain NCT patents
and technical information to market, sell and distribute transformer quieting
products, turbine quieting products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products. However, QSI may
obtain the right to manufacture the products under certain circumstances
including NCT's failure to develop the products or the failure of the parties to
agree on certain development matters. In consideration of the rights granted
under the Master Agreement, QSI is to pay the Company a royalty of 6% of the
gross revenues received from the sale of the products and 50% of the gross
revenues received from sublicensing the rights granted to QSI under the Master
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Agreement after QSI has recouped 150% of the costs incurred by QSI in the
development of the products in question. The Company is obligated to pay similar
royalties to QSI on its sale of the products and the licensing of rights covered
under the Master Agreement outside the utility industry and from sales and
licensing within the utility industry in the Far East. In addition to the
foregoing royalties, QSI is to pay an exclusivity fee to the Company of
$750,000; $250,000 of which QSI paid to the Company in June 1994. The balance is
payable in equal monthly installments of $16,667 beginning in April 1995. QSI's
exclusive rights become non-exclusive with respect to all products if it fails
to pay any installment of the exclusivity fee when due and QSI loses such rights
with respect to any given product in the event it fails to make any development
funding payment applicable to that product. The Master Agreement supersedes all
other agreements relating to the products covered under the Master Agreement,
including those agreements between the Company and QSI described above.
Immediately following the execution to the Master Agreement, the Company
and QSI entered into a letter agreement providing for the termination of the
Master Agreement at the Company's election if QSI did not pay approximately
$500,000 in payables then owed to the Company by May 15, 1995.
In April 1995, the Company and QSI entered into another letter agreement
under which QSI agreed to forfeit and surrender the five year warrant to
purchase 750,000 shares of the Company's Common Stock issued to QSI under the
first Marketing Agreement described above. In addition, the $500,000 balance of
the exclusivity fee provided for under the Master Agreement was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the indebtedness to be paid under the letter agreement described in the
proceeding paragraph was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million, whichever
first occurs. Such indebtedness was to be evidenced by a promissory note,
non-payment of which would constitute an event of termination under the Master
Agreement.
In May, 1996, the Company and QSI entered into another letter agreement
extending the time by which the payments from QSI to the Company under the April
1995 letter agreement described above were to be made. Under the letter the
payment of certain arrearages in the payment of the exclusivity fee was to be
made not later than June 15, 1996, with the balance continuing to be payable by
monthly payments of $8,333 and as provided in the May 1995 letter agreement. In
addition the payment of the other indebtedness owed by QSI to the Company was to
be paid by a payment of $25,000 at the time QSI obtained certain anticipated
financing with the balance paid by monthly payments of $15,000 each. Default in
QSI's timely payment of any of the amounts specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.
On April 9, 1997, the Company and QSI entered into another letter
agreement revising the payment schedule set forth in the May 21, 1996 letter
agreement applicable to the payment of the indebtedness owed to the Company by
QSI other than the unpaid
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portion of the exclusivity fee. Under the revised schedule, the full amount of
such indebtedness is to be paid by an initial payment of $125,000 on or before
April 21, 1997, and a second payment of $200,000 upon the closing of a proposed
financing in June 1997 or on January 1, 1998, whichever first occurs. The
Company is also entitled to receive 15% of any other financing obtained by QSI
in the interim as well as interest at the rate of 10% per annum on the unpaid
amount of such indebtedness from July 1, 1997. The letter agreement also
provides for the continuation of QSI's payment of $11,108 by April 21, 1997, for
headset products sold by the Company to QSI in 1996. In the event of a default
in QSI's timely payment of any of the amounts specified in the April 9, 1997
letter agreement, the Company has the right to cause the termination of the
Master Agreement and all rights granted by QSI thereunder upon 10 days notice of
termination to QSI.
As of June 30, 1998, QSI has paid all installments due and payable for the
exclusivity fee, and still owes the Company $239,000 which was due on January 1,
1998, and is fully reserved by the Company, and, other than as described above,
as of the date of this Prospectus, owes no other amounts to the Company. The
Company has been informed by QSI that QSI's failure to pay such $239,000 is
attributable to a shortage of cash and other liquid assets.
The Company believes that the terms of its agreements with QSI are
comparable to those that it could have negotiated with other persons or
entities.
COMPETITION. The Company is aware of a number of direct competitors in the
field of Active Wave Management. Indirect competition also exists in the field
of passive sound and vibration attenuation. The Company's principal competitors
in active control systems include Andrea Electronics Corporation, Bose
Corporation, Digisonix (a division of Nelson Industries, Inc.), Group Lotus PLC
and Lotus Cars Limited, Lord Corporation, Matsushita Electric Industrial Co.,
Ltd., Sennheiser Electronic Corp. and Sony Corporation, among others. The
Company's principal competitors in other fields of Active Wave Management
include IBM Corporation, Lucent Technologies, Inc. and Texas Instruments,
Incorporated. To the Company's knowledge, each of such entities is pursuing its
own technology in active control systems, either on its own or in collaboration
with others, and has recently commenced attempts to commercially exploit such
technology. NCT also believes that a number of other large companies, such as
the major domestic and foreign communications, computer, automobile and
appliance manufacturers, and aircraft parts suppliers and manufacturers, have
research and development efforts underway in Active Wave Management and active
noise and vibration control. Many of these companies, as well as the Company's
potential competitors in the passive sound and vibration attenuation field and
other entities which could enter the active noise and vibration attenuation
field and other fields of Active Wave Management as the industry develops, are
well established and have substantially greater management, technical,
financial, marketing and product development resources than the Company.
NASDAQ/NMS LISTING REQUIREMENTS; DISCLOSURE RELATING TO LOW-PRICED STOCKS.
The Company's Common Stock currently is quoted on the
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National Association of Securities Dealers, Inc. Automated Quotation National
Market System ("NASDAQ/NMS"). The NASDAQ/NMS has adopted quantitative
maintenance criteria for continued listing by the NASDAQ/NMS under which the
Company is required, among other things, to maintain: (i) net tangible assets of
$4.0 million; and (ii) a market value of publicly held shares of $5.0 million.
In addition, for continued listing the Company's Common Stock must have a
minimum bid price of $1.00. A failure to meet the continued inclusion
requirements for minimum bid price is determined to exist if the deficiency
continues for a period of 30 consecutive business days. From April 30, 1998,
through June 15, 1998, the minimum bid price for the Company's Common Stock as
quoted on the NASDAQ/NMS was below $1.00. On June 16, 1998, the Company was
notified by Nasdaq of such a thirty (30) day deficiency and that the Company
would have a period of ninety (90) calendar days from such notification to
achieve compliance with the continued inclusion standard. Compliance can be
achieved by meeting the standard for a minimum of ten (10) consecutive business
days during the ninety (90) day compliance period. On June 30, 1998, the amount
of the Company's net tangible assets was approximately $12.2 million and the
market value of its publicly held shares was $98.2 million. Management believes
the Company will be able to maintain net tangible assets of at least $4.0
million at least through the year 1998 although no assurance can be given that
circumstances will not occur which will cause the Company's net tangible assets
to fall below $4.0 million before that time. See "Current Financial Condition;
Cash Position; Conditional Adequacy of Currently Available Funds to Sustain
Company; Possible Need for Additional Financing", "Going Concern Emphasis
Paragraph in Accountants' Opinion", and "Limited Revenues" above. Because the
price of the Company's Common Stock is dependent on numerous market factors not
within the Company's control, management is unable to express an opinion of the
likelihood that the market value of publicly held shares of the Company's Common
Stock will fall below $5.0 million which would occur if the number of publicly
held shares of the Company's Common Stock was the same number as existed on
October 22, 1998 (142,508,018 shares) and the price per share fell below
$0.0351. On October 22, 1998, the price per share of the Company's Common Stock
was $0.4688. On June 16, 1998, Nasdaq notified the Company that the Company's
common stock had failed to maintain a closing bid price of $1.00 or more for the
previous thirty (30) consecutive trade dates in accordance with Nasdaq's
Marketplace Rule 4450(a)(5). Nasdaq also notified the Company that no delisting
action would be initiated at that time and that the Company would be provided
ninety (90) calendar days in which to regain compliance with Marketplace Rule
4450(a)(5) which would be achieved if the closing bid price of the shares of the
Company's common stock equaled or exceeded $1.00 for ten (10) consecutive days
before the end of trading on September 14, 1998. In this regard Nasdaq advised
the Company that in the event the Company was unable to achieve compliance, it
may seek further procedural remedies. The Company was unable to achieve
compliance by September 14, 1998, and on that date delivered its request for a
hearing on the matter together with the requested fee to Nasdaq's Hearings
Department. Such a hearing is presently scheduled for November 5, 1998. Under
Nasdaq's procedures delisting is stayed pending the outcome of the hearing.
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Failure of the Company to continue to meet the maintenance requirements
could result in the Common Stock losing its NASDAQ/NMS designation. The
NASDAQ/NMS provides brokers and others with immediate access to the best bid and
asked prices and other information about the Common Stock during each trading
day. If the Company were to lose its NASDAQ/NMS designation, real-time price
information for the Common Stock might cease to be available. As a result, a
stockholder might find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Common Stock. In addition, if the Company
were to lose the NASDAQ/NMS designation, the Common Stock might no longer
qualify as a "margin security" as defined by the Federal Reserve Board.
If the Company were to lose its NASDAQ/NMS designation and, at any time
following the loss of such designation, did not have either (i) net tangible
assets in excess of $2.0 million or (ii) average revenue of at least $6.0
million for the last three years, the Common Stock could become subject to the
Commission's "penny stock" rules. The penny stock rules impose additional sales
practice requirements on broker-dealers who sell securities designated as penny
stocks to persons other than established customers and certain types of
accredited investors. For transactions covered by the penny stock rules, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to the sale. The rules require the delivery, prior to the transaction, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. The rules also require disclosure by the broker-dealer of commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. If the broker-dealer is the sole market-maker for
the penny stock, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
customer's account and information on the limited market in penny stocks. The
additional burdens imposed upon broker-dealers by the penny stock rules may
discourage broker-dealers from effecting transactions in penny stocks. Thus, if
the Common Stock were to fall within the definition of a penny stock, the
liquidity of the Common Stock could be reduced and there could be a material
effect on the trading market for the Common Stock.
POSSIBLE VOLATILITY OF COMMON STOCK. The market prices for securities of
emerging and high-technology companies have historically been highly volatile.
Future announcements concerning the Company or its competitors could have a
significant impact on the market price of the Common Stock.
BLANK CHECK PREFERRED STOCK. The Board of Directors has total discretion
in the issuance and the determination of the rights and privileges of any shares
of Preferred Stock which might be issued in the future, which rights and
privileges may be detrimental to the holders of the Common Stock. The Company is
authorized to issue 10.0 million shares of Preferred Stock, 25,250 shares of
which have been designated to date. At October 22, 1998 there were 8,400 shares
issued and outstanding. The issuance of Preferred Stock in the future could
discourage or impede a tender offer,
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proxy contest or other similar transaction involving a potential change in
control of the Company, which transaction might be viewed favorably by other
shareholders. Management is not aware of any efforts to acquire control of or
take over the Company.
RISKS ASSOCIATED WITH YEAR 2000. The Company believes the cost of
administrating its Year 2000 Compliance program will not have a material adverse
impact on future earnings. However, the potential costs and uncertainties
associated with any Year 2000 Compliance program will depend on a number of
factors, including software, hardware and the nature of the industry in which
the Company, its subsidiaries, suppliers and customers operate. In addition,
companies must coordinate with other entities with which they electronically
interact, such as customers, suppliers, financial institutions, etc. The Company
estimates that potential costs will not exceed $0.1 million.
Although the Company's evaluation of its systems is still in process,
there has been no indication that the Year 2000 Compliance issue, as it relates
to internal systems, will have a material impact on future earnings. While the
Company is not aware of any material Year 2000 Compliance issues at its
customers and suppliers, such potential problems remain a possibility and could
have a material adverse impact on the Company's future results. The Company
estimates completion of the evaluation process by June 30, 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. The Financial Accounting
Standards Board has recently issued Statements of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has not determined whether the above pronouncements will have a
significant effect on the information presented in its financial statements.
LITIGATION. On or about June 15, 1995, Guido Valerio filed suit against the
Company in the Tribunal of Milan, Milan, Italy. The suit requests the Court to
award judgment in favor of Mr. Valerio as follows: (i) establish and declare
that a proposed independent sales representation agreement submitted to Mr.
Valerio by the Company and signed by Mr. Valerio but not executed by the Company
was made and entered into between Mr. Valerio and the Company on June 30, 1992;
(ii) declare that the Company is guilty of breach of contract and that the
purported agreement was terminated by unilateral and illegitimate withdrawal by
the company; (iii) order the Company to pay Mr. Valerio $30,000 for certain
amounts alleged to be owing to Mr. Valerio by the Company; (iv) order the
Company to pay commissions to which Mr. Valerio would have been entitled if the
Company had followed up on certain alleged contacts made by Mr. Valerio for an
amount to be assessed by technicians and accountants from the Court Advisory
Service; (v) order the Company to pay damages for the harm and losses sustained
by Mr. Valerio in terms of loss of earnings and failure to receive due payment
in an amount such as shall be determined following preliminary investigations
and the assessment to be made by experts and accountants from the Court Advisory
Service and in any event no less than 3 billion Lira ($18.9 million); and (vi)
order the Company to pay damages for the harm done to Mr. Valerio's image for an
amount such as the judge shall deem equitable and in
32
<PAGE> 36
case for no less than 500 million Lira ($3.1 million). The Company retained an
Italian law firm as special litigation counsel to the Company in its defense of
this suit. On March 6, 1996, the Company, through its Italian counsel, filed a
brief of reply with the Tribunal of Milan setting forth the Company's position
that: (i) the Civil Tribunal of Milan is not the proper venue for the suit, (ii)
Mr. Valerio's claim is groundless since the parties never entered into an
agreement, and (iii) because Mr. Valerio is not enrolled in the official
Register of Agents, under applicable Italian law Mr. Valerio is not entitled to
any compensation for his alleged activities. A preliminary hearing before the
Tribunal was held on May 30, 1996, certain pretrial discovery has been completed
and a hearing before a Discovery Judge was held on October 17, 1996. Submissions
of the parties final pleadings were to be made in connection with the next
hearing which was scheduled for April 3, 1997. On April 3, 1997, the Discovery
Judge postponed this hearing to May 19, 1998, due to a reorganization of all
proceedings before the Tribunal of Milan. At the hearing on May 19, 1998, the
Discovery Judge established dates for the parties to submit final pleadings and
set September 22, 1998 as the date to send the case before the Tribunal of Milan
sitting in full bench. As of October 27, 1998, the Company had not been informed
of any decision by the Tribunal. Management is of the opinion that the lawsuit
is without merit and will contest it vigorously. In the opinion of management,
after consultation with outside counsel, resolution of this suit should not have
a material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment could have a severe material effect
on quarterly or annual operating results.
On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit
against the Company and Michael J. Parrella, President, Chief Executive Officer
and a Director of the Company, in the Circuit Court for Anne Arundel County,
Maryland. The summons and complaint in the suit were served on the Company and
Mr. Parrella on June 24, 1998. The complaint alleges the Company breached, and
Mr. Parrella interfered with, a purported contract entered into "in 1996"
between the Company and SCI under which SCI was to be paid commissions by the
Company when the Company received capital from investors who purchased
debentures or convertible preferred stock of the Company during a period
presumably commencing on the date of the alleged contract and allegedly
extending at least to May 1, 1998. In this regard, the complaint alleges that
SCI by virtue of a purported right of first refusal that the Company did not
honor, is entitled to commissions totaling $1,500,000 in connection with the
Company's sale of $13,300,000 of preferred stock and a subsidiary of the
Company's sale of $4,000,000 of stock convertible into stock of the Company. In
the complaint SCI demands judgment against the Company for compensatory damages
of $1,673,000, punitive damages of $50,000 and attorneys' fees of $50,000 and
demands judgment against Mr. Parrella for compensatory damages of $150,000,
punitive damages of $500,000 and attorneys' fees of $50,000 as well as
unspecified other appropriate relief. The Company has filed two motions seeking
to strike or dismiss certain claims contained in plaintiff's complaint and
amended complaint and is awaiting the Court's decision. For this reason and
because no discovery has taken place, the Company is unable to assess the
likelihood of an adverse result. Management, however, believes it has
meritorious defenses and intends a
33
<PAGE> 37
vigorous defense of this suit. However, in the event this suit does result in a
substantial final judgment against the Company, said judgment could have a
severe material effect on quarterly or annual operating results.
34
<PAGE> 38
USE OF PROCEEDS
All of the shares of Common Stock offered hereby are being offered by the
Selling Stockholders and the Company will not receive any of the proceeds from
their sale. The expenses payable by the Company in connection with this
registration statement are estimated to be $34,504. There are no other material
incremental expenses attributable solely to the issuance and distribution of the
above described shares.
35
<PAGE> 39
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
Selling Stockholders. The shares of Common Stock set forth therein have been
included in the Registration Statement of which this Prospectus forms a part
pursuant to registration commitments afforded to the Selling Stockholders by
contractual obligations. The Company will not receive any proceeds from the sale
of the shares by the Selling Stockholders.
<TABLE>
<CAPTION>
Beneficial
Ownership
Beneficial of Shares
Ownership Number of of Common
of Shares Shares of Stock After
of Common Common Giving
Relationship Stock at Stock Effect to
With October 22, Offered Proposed
Name of Selling Stockholder The Company 1998 For Sale Sale
--------------------------- ----------- ---- -------- ----
<S> <C> <C> <C> <C>
Advantage Bermuda Fund, Ltd. 312,500 312,500(4) -
Alliance Advisory Partners, LLC 389,348 89,348 300,000
Atlantis Capital Fund, Ltd. 5,213,269 3,854,167(1)(4) 1,359,102
Augustine Capital Management 1,000,000 1,000,000 -
Prakash Bhalerao 40,939 40,939 -
Canadian Advantage Limited Partnership 2,169,049 1,041,667(4) 1,127,382
Chuck Cheng 5,117 5,117 -
Vijay Chougule 40,939 40,939 -
Amy Dasso 171 171 -
Sanjay Dave 13,860 13,860 -
Dominion Capital Fund, Ltd. 11,515,386 6,875,000(2)(4) 4,640,386
The Endeavor Capital Fund, S.A. 1,250,000 1,250,000(4) -
Cynthia Hughes 3,412 3,412 -
Srini Krishnaswami 255,870 255,870 -
Derek Lentz 10,235 10,235 -
Nina Luu 171 171 -
Robert Maffit 5,117 5,117 -
Haresh Makhijani 5,117 5,117 -
Rajesh Parekh 34,116 34,116 -
Soma Pullela 3,412 3,412 -
Vaidyanathan Raghunathan 74,629 74,629 -
Vishnu Reddy 68,232 68,232 -
Balaji A. Sampath 3,483 3,483 -
Lee Scantlin 170,580 170,580 -
Anand Sheel 562,914 562,914 -
Shiraj Shivji 85,290 85,290 -
Mark Snesrud 255,870 255,870 -
Sovereign Partners, LP 14,721,205 11,666,666(3)(4) 3,054,539
Patricia Steele 171 171 -
Karen Vahtra 3,412 3,412 -
Stephen Voorhees 54,586 54,586 -
---------- ---------- ----------
38,268,400 27,786,991 10,481,409
========== ========== ==========
</TABLE>
36
<PAGE> 40
(1) Upon completion of the offering the Selling Stockholder will own 2.5% of
the Company's issued and outstanding Common Stock.
(2) Upon completion of the offering the Selling Stockholder will own 4.3% of
the Company's issued and outstanding Common Stock.
(3) Upon completion of the offering the Selling Stockholder will own 7.1% of
the Company's issued and outstanding Common Stock.
(4) Based on each Selling Stockholder's pro rata share of the maximum number
of shares of Common Stock which the Company is obligated to issue upon
conversion of the Company's Series D Preferred Stock under the Series D
Certificate of Designations including the shares of Series D Preferred
Stock issuable in exchange for 60 shares of NCT Audio Series A Preferred
Stock under the NCT Audio Subscription Agreements and each Selling
Stockholder's pro rata share of 1.0 million shares which may be issued to
pay the 4% accretion payable on the stated value of 12,000 shares of
Series D Preferred Stock. Such pro rata share has been determined for
each Selling Stockholder by dividing the sum of (i) the number of shares
of Series D Preferred Stock acquired by such Selling Stockholder in the
July 1998 Series D Preferred Stock Private Placement and (ii) the shares
of Series D Preferred Stock issuable to each Selling Stockholder in
exchange for NCT Audio Series A Preferred Stock under the terms of the
NCT Audio Subscription Agreements by (iii) 12,000, the total number of
shares of Series D Preferred Stock issued in the July 1998 Series D
Preferred Stock Private Placement and issuable in exchange for NCT Audio
Series A Preferred Stock. The number of shares of Common Stock issued
upon conversion to any particular Selling Stockholder may be more or less
than the amount shown depending on (i) the length of time the Series D
Preferred Stock is held, (ii) the conversion price as determined under
the Series D Conversion Formula, and (iii) the application of the
24,000,000 share limit on the Company's obligation to issue shares of
Common Stock upon conversion of the Series D Preferred Stock including
shares of Series D Preferred Stock issued in exchange for NCT Audio
Series A Preferred Stock.
37
<PAGE> 41
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Stockholders that there are no
underwriting arrangements with respect to the sale of the shares, that such
shares will be sold from time to time in public sales in the over-the-counter
market at then prevailing prices or at prices related to the then current market
price or in private transactions at negotiated prices. The shares offered hereby
may be sold by one or more of the following methods, without limitation: (a) a
block trade in which a broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and (d) face-to-face transactions between sellers and
purchasers without a broker-dealer. In effecting sales, brokers or dealers
engaged by the Selling Stockholders may arrange for other brokers or dealers to
participate. Such broker or dealers may receive commissions or discounts from
Selling Stockholders in amounts to be negotiated. Such brokers and dealers and
any other participating brokers or dealers may be deemed to be "underwriters"
within the meaning of the Act, in connection with such sales. Shares of Common
Stock offered hereby may be used to cover short sales or other hedging
transactions. From time to time, one or more of the Selling Stockholders named
herein may pledge, hypothecate or grant a security interest in some or all of
the Shares owned by them, and the pledgees, secured parties or persons to whom
such securities have been hypothecated shall, upon foreclosure in the event of
default, be deemed to be Selling Stockholders for purposes hereof.
38
<PAGE> 42
LEGAL MATTERS
Matters relating to the legality of 27,786,991 shares of Common Stock
being offered by this Prospectus have been passed upon for the Company by John
B. Horton, Esquire, Senior Vice President and General Counsel of the Company. As
of October 28, 1998, Mr. Horton owned 20,000 shares of Common Stock. In
addition, Mr. Horton owns 20,000 shares subject to acquisition upon the exercise
of currently exercisable warrants and 634,417 shares subject to acquisition upon
the exercise of currently exercisable options granted to him under the 1992
Plan, none of which are being offered by this Prospectus.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1997 and for the years ended December 31, 1995, 1996 and 1997 the related
financial statement schedule incorporated into this prospectus by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (including Amendment No. 1 thereto filed on April 30, 1998, and Amendment
No. 2 thereto filed on May 4, 1998), have been audited by Richard A. Eisner &
Company, LLP, Independent Auditors, as set forth in their report included
therein (which contains an explanatory paragraph relating to the Company's
ability to continue as a going concern) and have been so incorporated in
reliance upon such reports given upon the authority of such firm as experts in
auditing and accounting.
The financial statements of the Company's subsidiary, Noise Cancellation
Technologies (UK) Limited, at December 31, 1996 and 1997 and for the years ended
December 31, 1995, 1996 and 1997 incorporated into this prospectus by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 (including Amendment No. 1 thereto filed on April 30, 1998, and
Amendment No. 2 thereto filed on May 4, 1998), have been audited by Peters
Elworthy & Moore, Chartered Accountants, as set forth in their report included
therein (which contains an explanatory paragraph relating to the Company's
ability to continue as a going concern) and have been so incorporated in
reliance upon such reports given upon the authority of such firm as experts in
auditing and accounting.
39
<PAGE> 43
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by the
registrant with respect to the offering described in Amendment No. 1 to this
Registration Statement:
<TABLE>
<CAPTION>
<S> <C> <C>
Securities and Exchange Commission registration fee $ 4,004
Legal Fees and expenses 15,000 *
Accounting fees and expenses 15,000 *
Miscellaneous expenses 500 *
------------- --------------
Total $34,504 *
============= ==============
- -------------
</TABLE>
* Estimated
40
<PAGE> 44
ITEM 16. EXHIBITS (LISTED ACCORDING TO THE NUMBER ASSIGNED IN THE TABLE IN ITEM
601 OF REGULATION S-K)
Exhibit No. Description
2 Stock Purchase Agreement dated August 21,1998, among
Noise Cancellation Technologies, Inc., Advancel Logic
Corporation and the Holders of the Outstanding Capital
Stock of Advancel Logic Corporation.
4 Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock of Noise
Cancellation Technologies, Inc. filed on July 24, 1998
in the Office of the Secretary of State of the State
of Delaware.
5 Opinion of John B. Horton, Esquire, Senior Vice
President and General Counsel of the registrant, as
to the legality of the Common Stock to which
Amendment No. 1 to this Registration Statement
relates
23(a) Consent of Richard A. Eisner & Company, LLP
23(b) Consent of Peters Elworthy & Moore
23(c) Consent of John B. Horton, Esquire (contained in
Exhibit 5)
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused Amendment No. 1 to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Linthicum, Maryland, on this 30th day of October, 1998.
NCT GROUP, INC.
By: /s/ MICHAEL J. PARRELLA
----------------------------------
Michael J. Parrella, President
45
<PAGE> 46
Pursuant to the requirements of the Securities Act of 1933, Amendment
No. 1 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURES CAPACITY DATE
/s/ MICHAEL J. PARRELLA President (Principal Executive October 30, 1998
- -----------------------
Michael J. Parrella Officer) and Director
/s/ CY E. HAMMOND Senior Vice President and October 30, 1998
- -----------------------
Cy E. Hammond Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ JAY M. HAFT Chairman of the Board of Directors October 30, 1998
- ---------------------------
Jay M. Haft and Director
/s/ JOHN J. McCLOY Director October 30, 1998
- ---------------------------
John J. McCloy
/s/ SAM OOLIE Director October 30, 1998
- ---------------------------
Sam Oolie
/s/ STEPHAN CARLQUIST Director October 30, 1998
- ---------------------------
Stephan Carlquist
/s/ MORTON SALKIND Director October 30, 1998
- ---------------------------
Morton Salkind
46
<PAGE> 47
EXHIBIT INDEX
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
2 Stock Purchase Agreement dated August
21,1998, among Noise Cancellation
Technologies, Inc., Advancel Logic
Corporation and the Holders of the
Outstanding Capital Stock of Advancel Logic
Corporation.
4 Certificate of Designations, Preferences and
Rights of Series D Convertible Preferred
Stock of Noise Cancellation Technologies,
Inc. filed on July 24, 1998 in the Office of
the Secretary of State of the State of
Delaware.
5 Opinion of John B. Horton, Esquire, Senior
Vice President and General Counsel of the
registrant, as to the legality of the Common
Stock to which Amendment No. 1 to this
Registration Statement relates
23(a) Consent of Richard A. Eisner & Company, LLP
23(b) Consent of Peters Elworthy & Moore
23(c) Consent of John B. Horton, Esquire (contained in Exhibit 5)
47
<PAGE> 1
Exhibit 2
STOCK PURCHASE AGREEMENT
AMONG
NOISE CANCELLATION TECHNOLOGIES, INC.,
ADVANCEL LOGIC CORPORATION
AND
THE HOLDERS OF THE OUTSTANDING CAPITAL STOCK
OF ADVANCEL LOGIC CORPORATION
August 21, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 DEFINITIONS................................................................................................1
1.1 Definitions........................................................................................1
1.1.1 "Closing" ..................................................................................1
1.1.2 "Closing Date" .............................................................................1
1.1.3 "Closing Place" ............................................................................1
1.1.4 "Consideration" ............................................................................2
1.1.5 "EBITDA" ...................................................................................2
1.1.6 "Representative" ...........................................................................2
1.1.7 "Non-Employee Shareholders" ................................................................2
1.1.8 "Employee Shareholders" ....................................................................2
1.1.9 "Option Exercise Shareholders" .............................................................2
1.1.10 "Earnout Shareholders" .....................................................................2
1.2 Other Terms........................................................................................2
SECTION 2 SALE OF THE SHARES.........................................................................................2
2.1 Sale of the Shares.................................................................................2
2.2 Delivery...........................................................................................3
2.3 Related Agreements.................................................................................3
SECTION 3 CONSIDERATION..............................................................................................3
3.1 Consideration......................................................................................3
3.2 Payment of Purchase Price..........................................................................3
SECTION 4 REGISTRATION RIGHTS........................................................................................8
4.1 Obligation of NCT..................................................................................8
4.2 Underwriting.......................................................................................8
4.3 Termination of Registration Rights.................................................................9
4.4 Expenses of Registration...........................................................................9
SECTION 5 ADVANCEL EMPLOYEE AGREEMENTS...............................................................................9
5.1 Employment Agreements..............................................................................9
SECTION 6 REPRESENTATIONS AND WARRANTIES OF ADVANCELAND THE
SELLING SHAREHOLDERS........................................................................................9
6.1 Authority, Approval and Enforceability.............................................................9
6.2 Company Capital Structure..........................................................................10
6.3 Compliance with Applicable Laws....................................................................10
6.4 Deferred Compensation..............................................................................11
6.5 Equity Investments.................................................................................11
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
6.6 Insurance..........................................................................................11
6.7 Litigation.........................................................................................11
6.8 Taxes..............................................................................................11
6.9 Licenses and Other Rights..........................................................................11
6.10 Required Consents and Approvals....................................................................12
6.11 Title to Advancel's Assets.........................................................................12
6.12 Inventory..........................................................................................12
6.13 Accounts Receivable................................................................................12
6.14 Agreements.........................................................................................12
6.15 Tangible Assets....................................................................................13
6.16 Trade Names and Trademarks.........................................................................13
6.17 Intellectual Property Rights.......................................................................13
6.18 Absence of Environmental Liabilities...............................................................14
6.19 Employee Benefit Plans.............................................................................15
6.20 Financial Statements...............................................................................15
6.21 Absence of Undisclosed Liabilities.................................................................15
6.22 Absence of Material Changes........................................................................15
6.23 Brokers............................................................................................15
6.24 Disclosure.........................................................................................16
SECTION 7 REPRESENTATIONS AND WARRANTIES OF NCT .....................................................................16
7.1 Approval, Authorization and Enforceability.........................................................16
7.2 Validity of NCT Shares.............................................................................16
7.3 Litigation.........................................................................................17
7.4 Required Consents and Approvals....................................................................17
7.5 Disclosure.........................................................................................17
7.6 SEC Filings........................................................................................17
7.7 Absence of Certain Changes.........................................................................17
7.8 Full Disclosure....................................................................................17
7.9 Prior Issues.......................................................................................18
7.10 No Default.........................................................................................18
SECTION 8 COVENANTS..................................................................................................18
8.1 Notice to NCT......................................................................................18
8.2 Cooperation by Advancel and Selling Shareholders...................................................18
8.3 Confidentiality....................................................................................18
8.4 Covenants Not to Compete and Not to Solicit........................................................19
8.5 Cooperation by NCT.................................................................................19
8.6 Future Financing...................................................................................19
8.7 Right of First Refusal.............................................................................20
8.8 Bonus Option Pool..................................................................................20
8.9 Issuance of NCT Shares.............................................................................21
8.10 Filings............................................................................................21
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
8.11 Reporting Status...................................................................................21
8.12 Listing............................................................................................21
8.13 Transfer Agent Instructions........................................................................21
8.14 Promotion of the Business..........................................................................21
8.15 Assurance of Further Action........................................................................22
8.16 Board of Directors.................................................................................22
SECTION 9 NCT'S CONDITIONS TO CLOSING................................................................................22
9.1 Advancel and the Selling Shareholders' Performance.................................................22
9.2 Advancel and the Selling Shareholders' Representation..............................................22
9.3 Government Approvals...............................................................................22
9.4 Consents...........................................................................................22
9.5 Tax Good Standing Certificates.....................................................................22
9.6 Good-Standing Certificate..........................................................................23
9.7 Employment Agreements..............................................................................23
9.8 Investor Suitability Letter........................................................................23
9.9 Legal Opinion......................................................................................23
9.10 Form...............................................................................................23
SECTION 10 ADVANCEL'S AND SELLING SHAREHOLDERS' CONDITIONS TO
CLOSING.....................................................................................................23
10.1 Consideration......................................................................................23
10.2 NCT's Representations..............................................................................23
10.3 Employment Agreements..............................................................................23
10.4 Government Approvals...............................................................................23
10.5 Third Party Consent................................................................................23
10.6 Legal Opinion......................................................................................24
10.7 Form...............................................................................................24
SECTION 11 INDEMNIFICATIONS..........................................................................................24
11.1 Advancel's and the Selling Shareholders' Indemnities...............................................24
11.2 NCT's Indemnities..................................................................................24
11.3 Notice of Claim....................................................................................24
11.4 Assumption and Defense of Third-Party Action.......................................................25
11.5 Advancel and Selling Shareholders Representative...................................................25
11.6 Limitation.........................................................................................25
11.7 Exclusivity........................................................................................26
SECTION 12 FEES AND EXPENSES.........................................................................................26
12.1 Expenses...........................................................................................26
SECTION 13 NOTICES...................................................................................................26
SECTION 14 MISCELLANEOUS.............................................................................................27
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
14.1 Headings...........................................................................................27
14.2 Entire Agreement...................................................................................27
14.3 No Waiver..........................................................................................27
14.4 Other and Further Documents........................................................................27
14.5 Good Faith.........................................................................................28
14.6 Specific Performance...............................................................................28
14.7 Governing Law......................................................................................28
14.8 Dispute Resolution.................................................................................28
14.9 Severability of Provisions.........................................................................29
14.10 Assignment, Successors and Assigns ................................................................29
14.11 Third Parties .....................................................................................30
14.12 Facsimile Signatures ..............................................................................30
</TABLE>
-iv-
<PAGE> 6
TABLE OF CONTENTS
(CONTINUED)
PAGE
-v-
<PAGE> 7
TABLE OF CONTENTS
(CONTINUED)
PAGE
-vi-
<PAGE> 8
TABLE OF CONTENTS
(CONTINUED)
PAGE
Exhibits
A - Schedule of Advancel Shareholders
B - Disclosure Schedule
C - Form of Employment Agreement
D - Form of Investor Suitability Letter
E - Form of Legal Opinion of Counsel to Advancel
F - Form of Legal Opinion of Counsel to NCT
-vii-
<PAGE> 9
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, is made and entered into as of August
21, 1998, by and among Advancel Logic Corporation, a California corporation
(hereinafter referred to as "Advancel"), each of the shareholders of Advancel
that have executed and delivered a copy of this Agreement (collectively, the
"Selling Shareholders") and Noise Cancellation Technologies, Inc., a Delaware
corporation (hereinafter referred to as "NCT").
WITNESSETH:
WHEREAS, the Selling Shareholders own the shares of outstanding Common
Stock of Advancel set forth on Exhibit A hereto (the "Shares"), and the shares
set forth on such Exhibit A collectively represent all of the outstanding shares
of all classes of capital stock of Advancel;
WHEREAS, the Selling Shareholders desire to sell and NCT desires to
purchase the Shares for the consideration set forth in Section 3 herein;
WHEREAS, Advancel, the Selling Shareholders and NCT desire to make
certain representations and warranties and other agreements in connection with
the transactions contemplated hereby;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties and covenants herein contained, the parties,
intending to be legally bound, mutually agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions. As used herein, the following terms have the following
meanings:
1.1.1 "Closing" means the performance of all acts, fulfillment
of all conditions, and execution of all documents and instruments, including,
but not limited to, the documents referred to in this Agreement, as may be
necessary to effectively transfer the Shares from Advancel to NCT and to
consummate all other transactions hereby contemplated and herein agreed to, on
the Closing Date.
1.1.2 "Closing Date" means September 4, 1998, 9:00 a.m., or at
such other time agreed to by the parties.
1.1.3 "Closing Place" means the location where the Closing is
consummated, which shall be at the offices of Wilson Sonsini Goodrich & Rosati,
650 Page Mill Road, Palo Alto, California 94304-1050, or at a place to be agreed
to by the parties.
<PAGE> 10
1.1.4 "Consideration" shall have the meaning set forth in
Section 3 hereof.
1.1.5 "EBITDA" means earnings before interest, taxes,
depreciation and amortization, determined in accordance with GAAP as
consistently and historically applied by NCT in its financial statements as such
procedures have been described to Advancel by NCT, and excluding (i) indirect
overhead allocations assessed by NCT on Advancel other than allocations mutually
agreed upon by NCT and the Representative; (ii) the impact of any of the Earnout
Payments made pursuant to this Agreement; or (iii) the effect of profits and
losses on sales of fixed assets exceeding $50,000 in any one year.
1.1.6 "Representative" shall be the person appointed by the
holders of a majority of NCT Common Stock held by the Selling Shareholders,
which person shall initially be Anand Sheel.
1.1.7 "Non-Employee Shareholders" shall be the persons set
forth on Exhibit A hereto under the section entitled "Non-Employee
Shareholders."
1.1.8 "Employee Shareholders" shall be the persons set forth
on Exhibit A hereto under the section entitled "Employee Shareholders."
1.1.9 "Option Exercise Shareholders" shall be the persons set
forth on Exhibit A hereto under the section entitled "Option Exercise
Shareholders."
1.1.10 "Earnout Shareholders" shall collectively refer to
Employee Shareholders and the Option Exercise Shareholders.
1.2 Other Terms. All terms defined in the other Sections of this
Agreement shall have the meaning ascribed to them in those Sections.
SECTION 2
SALE OF THE SHARES
2.1 Sale of the Shares. At the Closing (as defined in Section 1.1) and
subject to and upon the terms and conditions of this Agreement, each of the
Selling Shareholders agrees to sell to NCT, and NCT agrees to purchase from each
of the Selling Shareholders, that number of shares of Common Stock of Advancel
specified opposite the Selling Shareholder's name in Exhibit A for an aggregate
purchase price of One Million Dollars ($1,000,000) plus, in the case of the
Earnout Shareholders, the Earnout Payments (as herein defined) (collectively,
the "Purchase Price"). The Purchase Price payments shall be allocated among the
Selling Shareholders as set forth on Exhibit A. NCT's agreements with each of
the Selling Shareholders are separate agreements, and the sales of the Shares
owned by each of the Selling Shareholders to NCT are separate sales.
2.2 Delivery.
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(a) Selling Shareholders. At the Closing, each of the Selling
Shareholders will deliver to NCT a certificate or certificates, registered in
such Selling Shareholder's name as set forth on Exhibit A, representing the
number of Shares to be sold by such Selling Shareholder to NCT.
(b) NCT. NCT shall pay to each Selling Shareholder that
portion of the Initial Payment therefore indicated in column 3 of Exhibit A in
shares of its Common Stock rounded to the nearest whole share. At the Closing,
Advancel shall deliver to the Representative a copy of NCT's transfer agent
instructions identifying the number of shares of NCT Common Stock issuable to
each Selling Shareholder for the Initial Payment.
2.3 Related Agreements. At the Closing, the Selling Shareholders hereto
shall execute the Investor Suitability Letter in the substantially the form
attached hereto as Exhibit D and each of Messrs. Mark Snesrud, Lee Scantlin,
Srini Krishnaswami and Anand Sheel will execute employment agreements
substantially in the form attached hereto as Exhibit C (collectively, the
"Related Agreements").
SECTION 3
CONSIDERATION
3.1 Consideration. For Advancel and the Selling Shareholders'
performance of this Agreement, including delivery of the Shares held by the
Selling Shareholders to NCT, the Purchase Price to be paid by NCT for the Shares
shall be: (i) an initial payment of One Million Dollars ($1,000,000) and (ii)
the Earnout Payments (as herein defined) for each of the calendar years 1999,
2000, 2001, and 2002 (each, an "Earnout Year").
3.2 Payment of Purchase Price. The Purchase Price will be distributed
as follows:
(a) Initial Payment. An initial payment of One Million Dollars
($1,000,000) in NCT's Common Stock shall be distributed in the following manner:
(i) Five percent (5%) of such amount ($50,000), shall
be paid in NCT's Common Stock to Advancel's consultant, Alliance Advisory
Partners, L.L.C. ("Alliance");
(ii) Ninety-five percent (95%) of such amount
($950,000), shall be paid in NCT's Common Stock to the Selling Shareholders on a
pro rata basis based on the total Shares as set forth in Exhibit A attached
hereto; provided, however, that such payment is subject to the restrictions set
forth in Section 3.2(c), below.
(iii) For purposes of this Section 3.2(a), the number
of shares of NCT's Common Stock to be delivered shall be valued at the average
of the closing prices of NCT's Common Stock on the Nasdaq National Market System
for each of the twenty (20) business days immediately prior to, but not
including, the Closing Date (the "Initial Payment Stock Price").
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(b) Additional Payments. In addition, twenty one (21) business
days following the release of Advancel's audited year-end financials in each
Earnout Year (each, the "Financials Release Date"), NCT will make the following
additional distribution:
(i) An amount equal to five percent (5%) of ninety
percent (90%) of Advancel's EBITDA, payable to Alliance; and
(ii) An amount equal to forty-seven and one-half
percent (47.5%) of ninety percent (90%) of Advancel's EBITDA (the "Earnout
Payment"), payable to the Earnout Shareholders on a pro rata basis based on the
total Shares held by the Earnout Shareholders as set forth in Exhibit A;
provided, however, that such payment is subject to the restrictions set forth in
Section 3.2(c), below. In no event shall the Earnout Payment be less than Two
Hundred Fifty Thousand Dollars ($250,000) in any given Earnout Year. The Earnout
Payment shall be made in either NCT's Common Stock or cash or a combination
thereof at the election of each Earnout Shareholder.
(iii) For purposes of this Section 3.2(b), the number
of shares of NCT's Common Stock to be delivered in each Earnout Payment shall be
valued at the average of the closing prices of NCT's Common Stock for each of
the twenty (20) business days following the Financials Release Date (the
"Valuation Date") as furnished by the National Association of Securities
Dealers, Inc. Automated Quotation System (or equivalent recognized source of
quotation); provided, however, that if the Common Stock is not traded in such
manner that the quotations referred to in this Section 3.2(b) are available for
the period required hereunder, then the value of the Common Stock shall be
determined in good faith by the board of directors of NCT, but if challenged by
at least a majority of the voting power of the outstanding shares of Advancel
held by the Earnout Shareholders immediately prior to Closing with another
proposed market price for each share of Common Stock, an independent appraiser
selected jointly by and mutually acceptable to both the board of directors of
NCT and such Earnout Shareholders shall determine the value of the Common Stock.
NCT shall bear the cost of such appraisal only if the difference between its
challenged valuation and the one determined by the independent appraiser is
greater than that between the market price proposed by the challenging Earnout
Shareholders and the one determined by the independent appraiser; otherwise, the
challenging Earnout Shareholders shall bear the cost of such appraisal.
(c) Restrictions on Initial Payment and Earnout Payments.
Participation in the Initial Payment and Earnout Payments by the Employee
Shareholders and Option Exercise Shareholders set forth on Exhibit A are subject
to the following restrictions:
(i) Option Exercise Shareholders shall vest in their
right to receive their pro rata share of the Initial Payment as set forth on
Exhibit A provided they remain employed with Advancel or NCT for one year
following the Closing Date. Option Exercise Shareholders that are not employed
by Advancel or NCT on such date shall not have a right to receive their pro rata
share of the Initial Payment and such pro rata share shall be redistributed
among the remaining Earnout Shareholders on a pro rata basis. The Secretary of
NCT shall serve as escrow holder of the stock
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certificates representing the Initial Payment paid to the Option Exercise
Shareholders until the first anniversary of the Closing Date.
(ii) Earnout Shareholders that are employed by
Advancel or NCT on the respective Earnout Payment date shall have a right to
receive their pro rata share of the applicable Earnout Payment. Earnout
Shareholders that are employed by Advancel or NCT on the last business day of
the first, second or third fiscal quarter of an Earnout Year shall have a right
to receive 25%, 50% or 75%, respectively, of their pro rata share of the
applicable Earnout Payment for such Earnout Year.
(iii) Subject to Subsection (c)(ii), above, Employee
Shareholders and Option Exercise Shareholders that are no longer employed by
Advancel or NCT on the respective Earnout Payment date shall not have the right
to receive their pro rata share of the respective Earnout Payment and the
remaining unpaid portion of their pro rata share shall be redistributed among
the remaining Employee Shareholders and Option Exercise Shareholders on a pro
rata basis; provided, however, that Earnout Shareholders that are terminated by
Advancel or NCT, as the case may be, without cause shall have the right to
receive their full pro rata share (measured as of the date of termination) of
each of the remaining Earnout Payments; provided further, however, that Employee
Shareholders and Option Exercise Shareholders that are terminated by Advancel or
NCT, as the case may be, (a) without cause and (b) upon a failure to cure for
six months following a written notice of a failure to adequately perform duties,
shall have the right to receive one-half (1/2) of their pro rata share (measured
as of the date of termination) of each of the remaining Earnout Payments and
such remaining unpaid one-half (1/2) of their pro rata share shall be
redistributed among the remaining Earnout Shareholders on a pro rata basis. For
purposes of this Section 3.2(c) "termination without cause" shall mean any
termination except for cause; "cause" shall mean:
A. Employee's engagement in willful and
material misconduct, including willful and material failure to perform his or
her duties as an officer or employee of Advancel or NCT, as the case may be, and
failure to "cure" such default within thirty (30) days after receipt of written
notice of default from Advancel or NCT, as the case may be;
B. Any dishonest, illegal or other conduct
which leads to a felony conviction.
C. Employee's use of narcotics, liquor or
illicit drugs that has a material detrimental effect on the performance of
employee's responsibilities, as reasonably determined by the Board of Directors
of NCT; and
D. The material breach of fiduciary duty or
material breach of the terms of the Employment Agreement attached hereto as
Exhibit C (the "Employment Agreement"), if applicable (including Executive's
violation of Sections 5 or 6 of the Employment Agreement) or the Confidentiality
Agreement (as defined in the Employment Agreement) that injures or damages
Advancel or NCT, as the case may be;
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(iv) SUBJECT TO THE APPLICABILITY TO A SELLING
SHAREHOLDER OF THE TERMS OF THE EMPLOYMENT AGREEMENT, EACH SELLING SHAREHOLDER
HEREBY UNDERSTANDS AND ACKNOWLEDGES THAT SUCH SELLING SHAREHOLDER'S EMPLOYMENT
WITH ADVANCEL OR NCT, AS THE CASE MAY BE, IS FOR AN UNSPECIFIED DURATION AND
CONSTITUTES "AT-WILL" EMPLOYMENT. EACH SELLING SHAREHOLDER ALSO ACKNOWLEDGES
THAT THIS EMPLOYMENT MAY BE TERMINATED AT ANY TIME, WITH OR WITHOUT NOTICE AND
THAT UPON ANY TERMINATION FOR ANY REASON, EXCEPT AS SET FORTH IN THIS AGREEMENT
AND THE EMPLOYMENT AGREEMENT, THERE WILL BE NO RIGHT OR ENTITLEMENT TO A
CONTINUATION OF SALARY, BENEFITS, STOCK VESTING, OPTION VESTING, THE PRO RATA
SHARE OF THE INITIAL PAYMENT OR EARNOUT PAYMENTS. THE TERMS OF THIS PARAGRAPH
EXPRESSLY SUPERSEDE ANY CONTRARY AGREEMENTS (INCLUDING ANY EMPLOYMENT AGREEMENTS
AND EMPLOYMENT OFFER LETTERS), EXPRESS OR IMPLIED, WRITTEN OR ORAL, EXISTING
PRIOR TO THE DATE HEREOF BETWEEN ADVANCEL AND ANY SELLING SHAREHOLDER.
(d) Redemption Rights. In the event that NCT is unable to
effect a valid registration statement as provided in Section 4 by March 15,
1999, and to maintain such registration statement effective for at least thirty
(30) days, each Selling Shareholder shall have the right, until April 15, 1999,
to request NCT to redeem an amount equal to up to one-third of the Initial
Payment shares acquired by such Selling Shareholder pursuant to this Agreement
(or, if less, the maximum amount NCT may lawfully redeem) by paying in cash or
cancellation of indebtedness to NCT therefor a sum per share of NCT Common Stock
(as adjusted for any stock split or combination of or dividend payable in stock)
equal to the Initial Payment Stock Price; together with all declared or accrued,
but unpaid, dividends with respect to such share to the date of the redemption
request. In the event of any redemption of only a part of the requested shares
to be redeemed, NCT shall effect such redemption pro rata according to the
number of shares held by each holder making a request for redemption.
(e) For the purpose of calculating the Earnout Payments,
separate books and records shall be maintained with respect to the business and
operations of Advancel following the Closing Date. Such books and records shall
be maintained in accordance with generally accepted accounting principles and
consistent with Advancel's past accounting practices.
The Selling Shareholders will be entitled to
reasonable rights to audit the Earnout Payments. Upon receipt of the proposed
Earnout Payment calculation from NCT (the "Calculation"), the Representative
shall have five (5) business days in which to request in writing an inspection
of the books and records, and back-up invoices and schedules, to confirm the
calculation. If within five (5) business days the Representative does not
request such inspection or if within ten (10) business days after inspection of
such books and records the Representative does not object to such Calculation,
NCT shall deliver instructions to its transfer agent to issue and deliver to the
Selling Shareholders the NCT Common Stock representing the Earnout Payment as
soon as reasonably practicable. If the Representative inspects such books and
records and, within ten
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(10) business days after inspection thereof, the Representative objects in
writing to NCT to the Calculation, NCT and the Representative shall work
together in good faith to see if they can reach an agreement on the appropriate
Earnout Payment. If within fourteen (14) days the parties have not reached an
agreement, the parties shall choose a nationally recognized accounting firm
mutually agreed upon by NCT and the Representative who shall calculate the
amount, or if no such agreement can be reached, then each of NCT and the
Representative shall appoint one nationally recognized accounting firm, which
accounting firms shall pick a third nationally recognized accounting firm to
which such disputes shall be referred. In the event that either NCT or the
Representative shall fail to select a nationally recognized firm in accordance
with the provisions of this subsection within fifteen (15) days after notice by
the other party that such selection should be made, and such other party has
selected a nationally recognized accounting firm pursuant to the provisions
hereof, such dispute shall be referred to the nationally recognized accounting
firm selected by such party. The decision of such nationally recognized
accounting firm shall be conclusive and binding on both parties. Each of NCT and
the Representative shall pay the costs and expenses of its own accountant and
one-half of the costs of the nationally recognized accounting firm selected by
both parties or their representatives (the "Independent Accountant"); provided,
however, that if a dispute arises that is resolved by the Independent Accountant
and the amount of the Earnout Payment as calculated by the Independent
Accountant exceeds by more than 25% the Calculation, NCT shall pay the costs and
expenses of the Representative's and the Independent Accountant's costs and
expenses.
(f) During the period subsequent to Closing and until the
completion of the fourth Earnout Year, (i) if NCT (A) sells 50% or more of its
assets to any acquiror or group of related acquirors not owned or controlled by
NCT or more than 50% of NCT's shareholders immediately prior to such sale, (B)
sells more than 50% of its common stock to a single acquiror or group of related
acquirors or (C) merges into another company and the surviving company is not
owned or controlled by more than 50% of NCT's shareholders immediately prior to
such merger, NCT will cause such sale or merger to be subject to the assumption
by the buyer or surviving company of all of NCT's obligations under this
Agreement, and (ii) NCT shall not take any voluntary actions for the purpose of
preventing the Selling Shareholders from being able to earn the Earnout Payments
or avoiding or seeking to avoid the observance or performance of any of the
terms under this Section 3.2. Notwithstanding this paragraph (e), nothing
contained herein shall require the officers and directors of NCT to maintain
NCT's business in a manner or take actions that would violate their fiduciary
duties to NCT and its shareholders.
(g) If between the date hereof and the completion of the final
Earnout Payment hereunder, NCT commences a voluntary case under the federal
bankruptcy laws or a petition is filed against NCT under the federal bankruptcy
laws and is not dismissed within ninety (90) days, the Earnout Shareholders
shall be entitled to seek recovery of any Earnout Payments due as unsecured
creditors of NCT in the related bankruptcy proceedings.
SECTION 4
REGISTRATION RIGHTS
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4.1 Obligation of NCT. The shares of NCT Common Stock issued to the
Selling Shareholders and Alliance pursuant to Sections 3.2(a) and 3.2(b) shall
collectively be referred to hereinafter as the "NCT Shares."
(a) If at any time NCT decides to register any of its Common
Stock, either for its own account or the account of a security holder or
holders, on a form that would be suitable for a registration involving the NCT
Shares, other than (i) a registration relating solely to employee benefit plans,
(ii) a registration relating solely to a Commission Rule 145 transaction, or
(iii) a registration pursuant to which the Company is contractually prohibited
from including for registration additional shares of Common Stock, NCT will (i)
promptly give the Selling Shareholders and Alliance written notice thereof
(which shall include a list of the jurisdictions in which NCT intends to attempt
to qualify such securities under the applicable Blue Sky or other state
securities laws) and (ii) will include in such registration (and any related
qualification under Blue Sky laws or other compliance), and in any underwriting
involved therein, all the NCT Shares specified in a written request delivered to
NCT by the Selling Shareholders and Alliance within twenty (20) days after
delivery of such written notice to NCT. Notwithstanding the foregoing, NCT's
registration obligations shall not pertain to any NCT Shares that can be
immediately sold without compliance with the registration requirements of the
Securities Act pursuant to Rule 144 during any 90-day period.
(b) In the event that NCT is unable to include the NCT Shares
of the Initial Payment in any registration of any of its Common Stock either for
its own account or the account of a security holder or holders as provided in
Section 4.1(a), above, within 60 days after the Closing Date, NCT shall file a
registration statement under The Securities Act of 1933, as amended, covering
the NCT Shares of the Initial Payment as soon as practicable, and in no event
later than 30 days, after receipt of the request or requests of the holder(s) of
a majority of the NCT Shares of the Initial Payment and use its best efforts to
effect such registration.
4.2 Underwriting. If the registration of which NCT gives notice is for
a registered public offering involving an underwriting, NCT shall so advise the
Selling Shareholders and Alliance as a part of the written notice given pursuant
to Section 4.1. In such event the right of the Selling Shareholder and Alliance
to registration shall be conditioned upon each Selling Shareholder's agreement
(together with NCT and the other holders distributing their securities through
such underwriting) to enter into an underwriting agreement in customary form
with the managing underwriter selected for such underwriting by NCT. If the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
number of NCT Shares to be included in such registration to not less than twenty
percent (20%) of the aggregate number of shares to be underwritten. NCT shall so
advise the Selling Shareholders and Alliance and other holders distributing
their securities through such underwriting and the number of NCT Shares that may
be included in the registration and underwriting shall be allocated among all
such holders of registrable securities. If the Selling Shareholder or Alliance
disapproves of the terms or any such underwriting, it may withdraw therefrom by
written notice to NCT and the managing underwriting. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
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4.3 Termination of Registration Rights. The registration rights granted
to the Selling Shareholders and Alliance pursuant to this Section 4 shall
terminate upon the two (2) year anniversary of the Financials Release Date of
the final Earnout Payment.
4.4 Expenses of Registration. All registration expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Section 4 shall be borne by NCT. All selling expenses relating to securities so
registered shall be borne by the holders of such securities pro rata on the
basis of the number of shares of securities so registered on their behalf.
SECTION 5
ADVANCEL EMPLOYEE AGREEMENTS
5.1 Employment Agreements. At Closing, Messrs. Mark Snesrud, Lee
Scantlin, Srini Krishnaswami and Anand Sheel will execute Employment Agreements
substantially in the form attached hereto as Exhibit C.
SECTION 6
REPRESENTATIONS AND WARRANTIES OF ADVANCEL
AND THE SELLING SHAREHOLDERS
Except as disclosed or excepted in the Disclosure Schedule attached
hereto as Exhibit B, which shall state the specific subsection or subsections of
this Section 6 to which each disclosure or exception applies, Advancel and the
Selling Shareholders hereby represent and warrant to NCT as follows:
6.1 Authority, Approval and Enforceability.
(a) Corporation. Advancel is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and in all other jurisdictions in which a failure to do so would adversely
affect Advancel's business. Advancel has all requisite power and authority to
own, lease and operate its properties and to carry on its business as conducted
before the Closing.
(b) Power to Execute Agreement. Advancel and the Selling
Shareholders have full power and authority to execute, deliver and perform its
obligations under this Agreement and the Related Agreements. All actions of
Advancel and the Selling Shareholders necessary for such execution, delivery and
performance have been duly taken, including all necessary corporate action on
the part of Advancel.
(c) Absence of Conflicts. The execution and delivery by
Advancel and the Selling Shareholders of this Agreement do not, and the
completion of the transactions contemplated by this Agreement will not, result
in any conflict with, breach of, or termination or forfeiture under
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(or upon the failure to give notice or the lapse of time, or both, result in any
conflict with, breach of, or termination or forfeiture under) any terms or
provisions of the charter documents, as amended, of Advancel or any statute,
rule, regulation, judicial or governmental decree, order, judgment, agreement,
lease, loan agreement, debenture, indenture, mortgage or other instrument to
which Advancel is a party or to which any of its assets are subject and in the
case of each of the foregoing which individually or in the aggregate is material
to Advancel.
(d) Enforceability. Upon the due execution and delivery by the
parties, this Agreement will be a binding obligation of Advancel and the Selling
Shareholders enforceable against Advancel and the Selling Shareholders in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally.
6.2 Company Capital Structure.
(a) The authorized capital stock of Advancel consists of
10,000,000 shares of Common Stock, of which 4,976,084 shares are outstanding and
10,000,000 shares of Preferred Stock, of which no shares are outstanding.
Advancel's capital stock is held by the persons and in the amounts set forth on
Exhibit A hereto. All outstanding shares of Advancel's Common Stock are duly
authorized, validly issued, fully paid and non-assessable, were issued in
compliance with all applicable federal and state securities laws, and are not
subject to preemptive rights created by statute, the Articles of Incorporation
or Bylaws of Advancel or any agreement to which Advancel is a party or by which
it is bound.
(b) There are no options, warrants, securities, calls, rights,
commitments or agreements of any character, written or oral, to which Advancel
is a party or by which it is bound obligating Advancel to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of Advancel or obligating Advancel to
grant, extend, accelerate the vesting of, change the price of, otherwise amend
or enter into any such option, warrant, call, right, commitment or agreement.
(c) Advancel does not have and has never had any subsidiaries
or affiliated companies and does not otherwise own and has never otherwise owned
any shares of capital stock or any interest in, or control, directly or
indirectly, any other corporation, partnership, association, joint venture or
other business entity.
6.3 Compliance with Applicable Laws. Advancel has duly complied in all
material respects with all applicable laws, rules, regulations, ordinances, and
all judgments, orders, rulings, and decrees of all federal, state and local
governmental authorities (collectively, "Laws"), subject to such exceptions as
shall have no material adverse affect on Advancel's assets, business or
operation. Advancel has not received notification of any asserted present or
past failure to so comply with any Laws. Advancel is not aware of any proposed
laws, ordinances or regulations, or any pending or threatened legal or
administrative proceedings or investigations, which, if determined adversely to
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Advancel, would result in any material adverse change to Advancel's business or
to any of the Shares or would materially affect the ability of Advancel to
perform its obligations hereunder.
6.4 Deferred Compensation. The attached Disclosure Schedule lists the
names of Advancel's employees, directors and consultants and the amount of money
each is entitled to receive from Advancel as a result of deferred compensation,
bonuses or expenses of Advancel payable to the employee, director or consultant,
other than stock options. Other than the names and amounts listed on the
attached Disclosure Schedule, no other compensation is owed by Advancel to the
employees, directors or consultants of Advance other than ordinary payroll
payable by Advancel at the end of each pay period.
6.5 Equity Investments. Advancel hereby certifies that it has no direct
or indirect equity interest in any other corporation, partnership, joint venture
or other entity, except as disclosed on Advancel's Financial Statements.
6.6 Insurance. Advancel maintains policies of fire, liability,
warranty, use, occupancy and other forms of insurance covering the properties
and assets of Advancel's business. A complete and accurate list of such
insurance policies has been provided to NCT.
6.7 Litigation. There is no suit, action (equitable, legal,
administrative or otherwise), proceeding or investigation of any kind pending
or, to the best of Advancel's and the Selling Shareholders' knowledge,
threatened against Advancel that would materially affect the value of Advancel's
assets, the operation of the business or the transactions contemplated by this
Agreement.
6.8 Taxes. Advancel has timely filed within the time period for filing
or any extension granted with respect thereto any and all federal, foreign,
state, local and other returns, reports and estimates ("Returns") which Advancel
is required to file with respect to any and all takes or other governmental
charges, obligations or fees, including but not limited to any income, business,
occupation, franchise, sales or use, withholding and secondary or transferee
liability for taxes and any related interest or penalties thereon ("Tax" or
"Taxes") attributable to or connected with the business. All such Tax Returns
are true and correct and have been completed in accordance with applicable law.
Advancel has paid all Taxes shown to be due and payable on such Returns and has
withheld all amounts it is required to withhold with respect to its employees.
There are no pending or, to the best of Advancel's knowledge, threatened audits,
examinations, assessments, asserted deficiencies or claims for additional Taxes.
There are no liens or similar encumbrances on Advancel's assets, except for
liens for current real or personal property taxes not yet due and payable.
6.9 Licenses and Other Rights. Advancel has all material permits,
business licenses and similar authority from governmental authorities necessary
for the conduct of the Business as presently conducted. All such permits and
licenses are listed on the Disclosure Schedule. Advancel is not in default under
any of such permits, licenses or other similar authority other than which would
not have a material adverse effect upon Advancel's business or operations.
6.10 Required Consents and Approvals. Advancel has obtained all
governmental and other third party consents or approvals required to consummate
the transactions contemplated herein, or, if
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reasonably satisfactory to NCT, Advancel and the Selling Shareholders have given
NCT adequate indemnification against the consequences to NCT or the Selling
Shareholders of failing to obtain any consent which may be requested.
6.11 Title to Advancel's Assets. Except as set forth in the Disclosure
Schedule, Advancel's Assets, as herein defined, are free and clear of
restrictions on or conditions to transfer or assignment. Advancel's Assets are
free and clear of mortgages, liens, encumbrances, claims and restrictions,
except for liens for current real or personal property taxes not yet due and
payable. Advancel's Assets are not held under any leases, security agreements,
conditional sales contracts, or other title retention arrangements. To the best
knowledge of Advancel and the Selling Shareholders, no other person, including
without limitation shareholder, officer, director, or employee of Advancel, will
have a direct or indirect interest in the Assets. Advancel's "Assets" shall mean
all equipment, intellectual property and other tangible and intangible assets
now used or currently proposed to be used in the business and necessary for the
conduct of Advancel's business in the manner and to the extent presently or
currently proposed to be conducted and operated.
6.12 Inventory. To the best of Advancel's knowledge, the Disclosure
Schedule sets forth a complete and accurate list of Advancel's inventory as of
the Closing Date, and the inventory consists of items of a quality and quantity
usable and saleable in the ordinary course of Advancel's business. All items
included in inventory are the property of Advancel. No items included in
inventory have been pledged as collateral or are held by Advancel on consignment
from others.
6.13 Accounts Receivable. To the best of Advancel's knowledge, Schedule
B is a complete and accurate schedule of the accounts receivable of Advancel as
of the Closing Date, together with an accurate aging of these accounts. The
accounts receivable arose from valid sales in the ordinary course of business.
The accounts receivable will be collected in accordance with their terms at
their recorded amounts, subject only to the reserve for doubtful accounts on the
Financial Statements.
6.14 Agreements. The Disclosure Schedule sets forth a complete and
accurate list of all material agreements of Advancel, written and oral (the
"Agreements") including without limitation any:
(i) distributor, dealer sales, advertising agency,
manufacturer's representative, franchise or similar contract or any other
contract relating to the payment of a commission;
(ii) contract with or commitment to any labor union;
(iii) contract for the future purchase of products, materials,
supplies, equipment or services which (A) exceeds Ten Thousand Dollars ($10,000)
or (B) is not terminable on sixty (60) days' or less notice without cost or
other liability;
(iv) contract for the future sale of products;
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(v) promissory note, loan agreement, guarantee or other
agreement or commitment for the borrowing of money;
(vi) contract or commitment for capital expenditures
individually in excess of Ten Thousand Dollars ($10,000); and
(vii) noncompetition or similar agreement which restricts
Advancel's business from engaging in any aspect of its business in which it may
engage.
Advancel has provided NCT complete and accurate copies of all written Agreements
and summaries of all oral Agreements. Advancel has in all material respects
performed all the obligations required to be performed by it to date under the
Agreements. Advancel is not in, or to its knowledge alleged to be in, material
default under any of the Agreements, commitments, instruments or obligations,
and there exists no event, condition or occurrence which, after notice or lapse
of time, would constitute to its knowledge such a material default by it or any
Agreement.
6.15 Tangible Assets. All material items of tangible property included
in Advancel's assets are in good operating condition and repair, subject to
normal wear and maintenance, and are usable in the ordinary course of business.
6.16 Trade Names and Trademarks. To the best of Advancel's and the
Selling Shareholders' knowledge, Advancel has not infringed, and is not now
infringing, on any trade name, trademark or service mark belonging to any other
person, firm or corporation. Advancel is not a party to any license, agreement,
or arrangement, whether as licensor, licensee, or otherwise, with respect to any
trademarks, service marks, or trade names associated with Advancel's business.
6.17 Intellectual Property Rights.
(a) Advancel owns and has good and marketable title to, or is
licensed or otherwise possesses legally enforceable rights to use, all patents,
patent applications, disclosures, copyright (whether registered or
unregistered), and any applications therefor, software or applications (in both
source code and object code), trademarks, trade names, service marks, trade
secret, know-how or mask work right (the "Intellectual Property") that are used
or currently proposed to be used in the business of Advancel as currently
conducted or proposed to be conducted.
(b) Except in each case as set forth in the Disclosure
Schedule:
(viii) Advancel owns all right, title and interest in
and to all of Advancel's Intellectual Property;
(ix) Advancel has the exclusive right to use, sell,
license and dispose of, the exclusive right to bring actions for the
infringement of, and otherwise exercise, all of the Intellectual Property;
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(x) The execution, delivery and performance of this
Agreement, and documentation related to this Agreement delivered by Advancel
contemporaneously herewith, and the consummation of the transactions hereby and
thereby, will not breach, violate or conflict in any material respect with any
instrument or agreement governing any of Advancel's Intellectual Property, or
impair the right of Advancel to use, sell, license or dispose of the
Intellectual Property, or to bring any action for the infringement of the
Intellectual Property;
(xi) To the actual knowledge of Advancel and the
Selling Shareholders, no third party is infringing any of Advancel's
Intellectual Property;
(xii) Advancel has taken all reasonable steps
necessary or appropriate (including, without limitation, entering into
appropriate confidentiality, nondisclosure and noncompetition agreements with
all officers, directors, subcontractors, employees, licensees and entities that
serve Advancel) to safeguard and maintain the secrecy and confidentiality of,
and establish Advancel's proprietary rights in, all of the Intellectual
Property; and
(xiii) All embodiments of those trade secrets which
are related to the business are presently and as of the Closing Date will be
located at Advancel's headquarters.
(c) Except as set forth in the Disclosure Schedule, Advancel
has in all material respects performed, or is now performing, the obligations of
Advancel in all material respects pursuant to each and every license or
agreement concerning the Intellectual Property. All such licenses and agreements
are in full force and effect and are a valid and enforceable obligation against
the other party or parties thereto in accordance with their terms (subject to
the enforcement of remedies).
6.18 Absence of Environmental Liabilities.
To the best of Advancel's and the Selling Shareholders' knowledge,
Advancel's business and the use of Advancel's assets are now, and at all times
in the past have been, conducted in all material respects in full compliance
with all applicable federal, state or local statutes, laws, regulations, rules,
ordinances, or codes (collectively, the "Environmental Laws") which prohibit,
regulate or otherwise relate to the use, treatment, storage, handling,
transport, disposal or discharge of chemicals, chemical solvents, gases,
pollutants or "hazardous substances" (as that term is hereinafter defined) or
otherwise relate to industrial hygiene or to the protection of the environment.
The term "Hazardous Substances" shall mean any substance or material which has
been determined by any state, federal or local governmental authority to be
capable of posing a risk of injury to health, safety or property.
To the best of Advancel's and the Selling Shareholders' knowledge, the
properties that Advancel has at any time owned, leased or used (the
"Properties") are not in violation of any Environmental Laws and no current use
of the Properties constitutes a public or private nuisance. Advancel has not
used, stored, transported, discharged or disposed of any Hazardous Substances.
Advancel and the Selling Shareholders are aware of no evidence that any
chemicals, chemical solvents or Hazardous Substances have been emitted by
Advancel's business in violation of
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Environmental Laws, or have been released or discharged into any source
whatsoever. Advancel has received no notification of release of a hazardous
substance on any of the Properties. No wastes generated by Advancel in operating
Advancel's business have ever been sent directly or indirectly to any site
listed or formally proposed for listing on the National Priority List
promulgated pursuant to CERCLA or to any site listed on any state list of
hazardous substance sites requiring investigation or clean-up. Advancel has not
received from any governmental authority or third party any requests for
information, notices of claim, demand letters or other notification that they
are or may be potentially responsible with respect to any investigation or
clean-up of hazardous substances.
6.19 Employee Benefit Plans. Except as listed in the Disclosure
Schedule, Advancel does not sponsor or maintain any employee benefit plan,
whether formal or informal, whether or not set forth in writing, and whether
covering one person or more than one person. As used here, the term "employee
benefit plan" includes all plans, funds, programs, policies, arrangements,
practices, customs and understandings providing benefits of economic value to
any employee, former employee, or present or former beneficiary, dependent or
assignee of any such employee or former employee other than regular salary,
wages or commissions paid substantially concurrently with the performance of the
services for which paid. "Employee benefit plan" includes all employee welfare
benefit plans within the meaning of Section 3(l) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and all employee pension
benefit plans within the meaning of Section 3(2) of ERISA.
6.20 Financial Statements. Advancel has provided to NCT copies of its
unaudited financial statements for the year ended December 31, 1997 and its
unaudited financials for the seven months ended July 31, 1998 (collectively, the
"Financial Statements"). All Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently applied,
except as stated therein. The Financial Statements fairly and accurately present
the condition of the business and Advancel's assets and the results of
operations at the time and for the periods stated.
6.21 Absence of Undisclosed Liabilities. Advancel does not have any
liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement of any type, whether accrued, absolute, contingent, matured,
unmatured or other (whether or not required to be reflected in Financial
Statements in accordance with generally accepted accounting principles), which
individually or in the aggregate would have a material adverse effect upon
Advancel or its business that has not been specifically described in this
Agreement or in the Disclosure Schedule.
6.22 Absence of Material Changes. There has been no material adverse
change in Advancel's business since July 31, 1998. Additionally, since July 31,
1998, Advancel has operated its business in the normal course, making no
payments and entering into no commitments to shareholders, creditors, employees,
suppliers, distributors, or others which were out of the ordinary or which would
have a material, adverse effect on the business or Advancel's assets.
6.23 Brokers. Advancel and the Selling Shareholders have not dealt with
any investment bankers, finders or brokers in connection with this transaction.
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6.24 Disclosure. No representation or warranty by Advancel or the
Selling Shareholders contained in this Agreement and no statement contained in
any certificate, schedule or exhibit or list furnished to NCT in connection with
this Agreement or the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary to
make, the statements or information therein not misleading.
SECTION 7
REPRESENTATIONS AND WARRANTIES OF NCT
NCT, subject to an increase in the number of authorized shares of
Common Stock of NCT, if necessary with respect to the Earnout Payments,
represents and warrants to Advancel and the Selling Shareholders as follows:
7.1 Approval, Authorization and Enforceability.
(a) Corporate Existence. NCT is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and is duly qualified as a foreign corporation in all jurisdictions
in which the failure to so qualify would have a material adverse effect on NCT
and its subsidiaries taken as a whole.
(b) Power to Execute Agreement. NCT has full power and
authority to execute, deliver and perform its obligations under this Agreement
and the Employment Agreements. All actions of NCT necessary for such execution,
delivery and performance have been duly taken.
(c) Absence of Conflicts. The execution and delivery by NCT of
this Agreement and the Employment Agreements does not, and the performance and
consummation of the transactions contemplated by this Agreement and the
Employment Agreements will not, result in any conflict with, breach or violation
of or default, termination or forfeiture under (or upon the failure to give
notice or the lapse of time, or both, result in any conflict with, breach or
violation of, or default, termination or forfeiture under) any terms or
provisions of the Certificate of Incorporation or Bylaws, as amended, of NCT, or
any statute, rule, regulation, judicial or governmental decree, order, judgment,
agreement, lease, loan agreement, debenture, indenture, mortgage or other
instrument binding upon NCT or to which NCT is a party.
(d) Enforceability. Upon the due execution and delivery by the
parties, each of this Agreement and the Employment Agreements will be a binding
obligation of NCT enforceable against NCT in accordance with its terms, except
as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally.
7.2 Validity of NCT Shares. The NCT Shares, when issued and delivered
in accordance with the terms and for the consideration expressed in this
Agreement, shall be duly and validly authorized, issued (including, without
limitation, issued in compliance with applicable federal and state securities
laws), fully paid and non-assessable, and free from any liens or encumbrances
other
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than those accepted or imposed by the holders thereof, and the applicable state
and federal securities laws restrictions on transfer to which such NCT Shares
are subject.
(e) Reporting Company Status. NCT has registered its Common
Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as amended
(the"Exchange Act"), and the Common Stock is listed and traded on the NASDAQ
National Market. NCT has timely filed all material required to be filed pursuant
to all reporting obligations under either Section 13(a) or 15(d) of the Exchange
Act for a period of at least twelve (12) months immediately preceding the offer
or sale of the Common Stock, and has received no notice, either oral or written,
with respect to the continued eligibility of the Common Stock for such listing.
(f) Authorized Shares. NCT legally has available sufficient
authorized and unissued shares to effect the issuance of NCT's Common Stock for
the Initial Payment.
7.3 Litigation. Except as set forth in NCT's public filings with
Securities and Exchange Commission, there is no suit, action (equitable, legal,
administrative or otherwise), proceeding or investigation of any kind pending or
threatened against NCT, and there is no factual basis for any such suit, action,
proceeding or investigation of which NCT is aware, which could materially affect
the ability of NCT to carry out the transactions contemplated hereunder in
accordance with the terms hereof.
7.4 Required Consents and Approvals. All governmental and other third
party consents or approvals required to be obtained by NCT to consummate the
transactions contemplated hereby have been obtained.
7.5 Disclosure. No representation or warranty by NCT contained in this
Agreement or the transactions contemplated hereby contains any untrue statement
of fact or omits to state a material fact necessary to make, the statements or
information therein not misleading.
7.6 SEC Filings. None of NCT's filings with the Securities and Exchange
Commission since January 1, 1998 contained, at the time they were filed, any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements made therein in light
of the circumstances under which they were made, not misleading. NCT has since
January 1, 1998 timely filed all requisite forms, reports and exhibits thereto
with the Securities and Exchange Commission.
7.7 Absence of Certain Changes. Since June 30, 1998, there has been no
material adverse change and no material adverse development in the business,
properties, operations, financial condition, outstanding securities, or results
of operations of NCT, except as disclosed in the documents referred to in
Section 7.6 hereof.
7.8 Full Disclosure. There is no fact known to NCT that NCT is legally
required to disclose and that has not been publicly disclosed and disseminated
in writing to Advancel by NCT
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(including through the publicly filed documents of NCT) that (i) could
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise) or in the earnings, business affairs, properties or
assets of NCT or (ii) could reasonably be expected to materially and adversely
affect the ability of NCT to perform its obligations pursuant to this Agreement.
7.9 Prior Issues. During the twelve (12) months preceding the date
hereof, NCT has not issued any securities pursuant to Regulation S or Regulation
D under the Act except as set forth on the Disclosure Schedule.
7.10 No Default. NCT is not in material default in the performance or
observance of any obligation or agreement to which it is a party or by which it
or its property maybe bound, and neither the execution, nor the delivery by NCT,
nor the performance by NCT of its obligations under this Agreement, materially
conflicts with or results in the material breach or violation of any of the
terms or provisions of, or constitutes a default or results in the creation or
imposition of any lien or charge on any assets or properties of NCT under, any
material agreement to which NCT is a party or by which it is bound or the
Certificate of Incorporation or Bylaws of NCT.
SECTION 8
COVENANTS
NCT, subject to an increase in the number of authorized shares of
Common Stock of NCT, if necessary with respect to the Earnout Payments, Advancel
and the Selling Shareholders covenant as follows:
8.1 Notice to NCT. Advancel will promptly advise NCT of any event that
may reasonably be anticipated to have a material adverse effect on Advancel's
business or Advancel's assets or would impair Advancel's ability to perform its
obligations under this Agreement.
8.2 Cooperation by Advancel and Selling Shareholders. Advancel and the
Selling Shareholders will take all reasonable actions necessary to obtain (and
will cooperate with NCT in obtaining) any consent, approval, order or
authorization of, or any registration, declaration or filing with, any
governmental entity or other person required to be obtained or made by Advancel
or the Selling Shareholders or by NCT in connection with the taking of any
action contemplated by this Agreement.
8.3 Confidentiality. Advancel and the Selling Shareholders will hold in
confidence and use reasonable efforts to have all its employees, consultants,
agents and representatives hold in confidence all confidential information
related to Advancel's business or Advancel's assets, and not disclose, or use
such information or permit others to do so.
8.4 Covenants Not to Compete and Not to Solicit.
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a Non-Competition and Non-Solicitation. For a period ending on
the later of (i) three (3) years after the Closing Date, or (ii) one year
following the termination of employment with Advancel, each of Mark Snesrud, Lee
Scantlin, Srini Krishnaswami and Anand Sheel (collectively, the "Key
Shareholders") agree that he will not, either for himself or on behalf of any
other person, partnership, firm, association or corporation in any territory in
which Advancel is actively engaged in business (i) open or operate a Restricted
Business which is in competition with any business of Advancel on the date of
his termination from NCT, (ii) act as an employee, agent, advisor or consultant
of any then existing competitor of Advancel on the date of each Key
Shareholder's termination from NCT, or (iii) take any action to, or do anything
reasonably intended to, divert business from Advancel or influence or attempt to
influence any existing customer of Advancel to cease doing business with
Advancel on the date of his termination. Each Key Shareholder also covenants
that he will not recruit, attempt to hire, solicit, or assist others in
recruiting or hiring any person who is an employee of Advancel. As used in this
Section 8.4, "Advancel" includes Advancel, its parent and their direct and
indirect subsidiaries. As used in this Section 8.4, "Restricted Business" shall
mean the development and manufacture of microprocessor cores that execute "Java"
instructions.
b Geographic Area. The geographical areas in which the
restrictions provided for in this Agreement apply include all cities, counties
and states of the United States, and all other countries, in which Advancel has
engaged in licensing or sales or otherwise conducted business at any time during
the period from Advancel's date of incorporation until the Closing Date hereof
or during the term of the respective Employment Agreements of each of the Key
Shareholders.
c Severability. The scope of the geographic, time and subject
matter restrictions set forth in this Section 8.4 are intended to conform to
applicable law. If, however, a court deter mines that the scope of any such
restriction exceeds what is permitted by law, then such restriction shall be
limited or otherwise reformed as necessary to comply with and be enforceable
under applicable law. If a court determines that any provision of this Section
8.4 is unenforceable and cannot be reformed, then such provision shall be deemed
eliminated from this Section 8.4 to the extent necessary to permit the remaining
provisions of this Section to be enforced.
8.5 Cooperation by NCT. NCT will take all reasonable actions necessary
to obtain (and will cooperate with Advancel in obtaining) any consent, approval,
order or authorization of, or any registration, declaration of filing with, any
governmental entity, domestic or foreign, or other person, required to be
obtained or made by NCT (or by Advancel) in connection with the taking of any
action contemplated by this Agreement.
8.6 Future Financing.
(a) Private Placement. In the event that Advancel undertakes a
sale or private placement of its equity securities (a "Financing"), NCT agrees
that it will grant each shareholder of Advancel holding at least ten percent
(10%) of the outstanding capital stock of Advancel prior to the transaction
contemplated herein the opportunity to participate in such Financing on the same
terms and conditions as other investors in the Financing; provided, however that
a Financing shall not
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include a sale of equity securities issued in connection with (i) an employee
incentive stock or benefit plan; (ii) the acquisition or merger of Advancel into
another corporation whereby the shareholders of Advancel shall hold more than
50% of the voting power of the surviving corporation; or (iii) an equipment
lease financing. The rights granted under this subsection (a) shall terminate
upon the initial public offering of the Common Stock of Advancel.
(b) Initial Public Offering. In the event of a firm
underwritten public offering of the Common Stock of Advancel (an "IPO") and such
IPO occurs at least two (2) years following the Closing Date, NCT and the
Selling Shareholders will negotiate in good faith the conversion of the Selling
Shareholders' right to receive any future Earnout Payments into shares of Common
Stock of Advancel such that each participating Selling Shareholder will receive
that number of the shares of Common Stock of Advancel equal to (i) such Selling
Shareholder's pro rata share of the Net Present Value (as herein defined) of the
projected Earnout Payments of Advancel over (ii) the initial public offering
price per share of the Common Stock of Advancel multiplied by .25. For purposes
of this Section 8.6(b), the Net Present Value shall be calculated as follows:
the sum of the present values of each remaining Earnout Payment, and the present
value of any given projected Earnout Payment shall be the projected Earnout
Payment for that year divided by the annually compounded sum of one (1) plus the
U.S. prime rate plus 3% as reported in the Wall Street Journal on the effective
date of the IPO. The projected Earnout Payment shall be determined in good faith
by the board of directors of NCT with the assistance of its independent auditors
and/or its financial advisors.
8.7 Right of First Refusal. Upon the Closing Date and until the three
(3) year anniversary of the Closing Date, the Key Shareholders shall have the
right of first refusal with respect to (i) any proposed capital reorganization,
merger or consolidation of Advancel with or into another corporation where the
stockholders of Advancel prior to such reorganization, merger or consolidation
hold less than fifty percent (50%) of the outstanding voting securities of the
surviving entity after such reorganization, merger or consolidation, or (ii) the
proposed sale of all or substantially all of Advancel to any person other than
the Key Shareholders (each a "Proposed Acquisition Event"). Upon such Proposed
Acquisition Event, NCT shall provide to the Key Shareholders a summary of
principal terms of such Proposed Acquisition Event, including the proposed
purchase price or consideration (an "Acquisition Notice"). Within sixty (60)
days of the Acquisition Notice, the Key Shareholders shall provide NCT with
written notice of its interest in acquiring Advancel, and thereafter the parties
shall negotiate in good faith for a period of up to thirty (30) days toward a
binding agreement with respect to the Key Shareholders' acquisition of Advancel
on terms substantially similar to those in the Acquisition Notice. If after such
thirty (30) day period the parties do not enter into a definitive acquisition
agreement, NCT may proceed with the Proposed Acquisition Event on substantially
similar terms to those stated in the Acquisition Notice.
8.8 Bonus Option Pool. Within one hundred twenty (120) days of the
Closing Date, NCT, subject to NCT's Board of Directors approval, and the
Representative will negotiate in good faith the terms of the creation of an
Employee Bonus Plan (the "Plan") to be created for the benefit of certain
employees of Advancel and/or employees of NCT assigned to Advance1's business,
subject in each case to the employee's continued employment with Advancel. In
each of the Earnout Years, NCT shall contribute to the Plan forty-seven and
one-half percent (47.5%) of ninety percent (90%) of
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Advancel's EBITDA (the "Bonus Pool Shares") in the form of Common Stock of NCT,
which shall be valued as of the Valuation Date. Until the four (4) year
anniversary of the Closing Date, the Representative subject to his continued
employment with Advancel, shall have the right to propose the allocation of all
of the Bonus Pool Shares to the administrator of the Plan who shall submit such
proposal to the Board of Directors of NCT for approval.
8.9 Issuance of NCT Shares. NCT will use commercially reasonable
efforts to increase, if necessary, the authorized number of shares of its Common
Stock such that NCT will have a sufficient number of shares of Common Stock for
issuance of the Earnout Payments.
8.10 Filings. NCT undertakes and agrees to make all necessary filings
in connection with the issuance of the NCT Shares to the Selling Shareholders as
required by United States laws and regulations, or by any domestic securities
exchange or trading market, and to provide a copy thereof to the Selling
Shareholders promptly after such filing.
8.11 Reporting Status. So long as the Selling Shareholders beneficially
own any of the Common Stock, NCT shall file all reports required to be, filed
with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), and NCT shall use commercially reasonable
efforts not to terminate its status as an issuer required to file reports under
the 1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination.
8.12 Listing. NCT shall use commercially reasonable efforts to maintain
the inclusion for quotation on The Nasdaq National Market of its Common Stock,
and without limiting the generality of the foregoing, NCT shall use commercially
reasonable efforts to arrange at least two market makers to register with the
NASD or any other comparable exchange as such with respect to the Common Stock.
NCT shall promptly report to Advancel's Board of Directors information or
notices it receives regarding the continued eligibility of its Common Stock for
quotation on any automated quotation system or securities exchange.
8.13 Transfer Agent Instructions. Upon delivery by the Selling
Shareholders of the Shares to NCT in accordance with Section 2.2(b) hereof, NCT
will irrevocably instruct its transfer agent to promptly issue the Initial
Payment NCT Common Stock bearing the restrictive legend specified in Section (f)
of Exhibit D to this Agreement in the name of each of the Selling Shareholders
as set forth on Exhibit A. Nothing in this Section shall affect in any way the
Selling Shareholders' obligations and agreement to comply with all applicable
securities laws upon resale of the NCT Common Stock.
8.14 Promotion of the Business. Following the Closing Date, NCT will
use commercially reasonable efforts to (i) promote Advancel's business and
operations; (ii) maintain the level and quality of staffing reasonably necessary
for Advancel; and (iii) not take any action which could reasonably be expected
to interfere unreasonably with the business or operations of Advancel.
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8.15 Assurance of Further Action. From time to time after the Closing
Date and without further consideration from NCT, but at NCT's expense, the
Selling Shareholders shall execute and deliver, or cause to be executed and
delivered, to NCT such further instruments of sale, assignment, transfer and
delivery and take such other action as NCT may reasonably request in order to
more effectively sell, assign, transfer and deliver and reduce to the possession
of NCT any and all of the outstanding shares of Advancel and consummate the
transactions contemplated hereby.
8.16 Board of Directors. From the Closing Date until the final Earnout
Payment date, NCT will vote all shares of Advancel registered in NCT's name such
that the Board of Directors of Advancel shall consist of five members, and shall
include the Representative, one director nominated by the Representative, and
the remaining members nominated by NCT.
SECTION 9
NCT'S CONDITIONS TO CLOSING
The obligations of NCT under this Agreement are subject to the
satisfaction of the following conditions, unless expressly waived by NCT:
9.1 Advancel and the Selling Shareholders' Performance. Advancel and
the Selling Shareholders shall have performed all obligations required by this
Agreement to be performed by it at or before Closing.
9.2 Advancel and the Selling Shareholders' Representation. The
representations, warranties and covenants of Advancel and the Selling
Shareholders set forth in this Agreement shall be true and correct in all
material respects as of the Closing Date as though made at that time.
9.3 Government Approvals. All consents, approvals, orders,
authorizations, registrations, declarations and filings with any domestic or
foreign governmental entity necessary for the consummation of the transactions
contemplated by this Agreement shall have been obtained or filed.
9.4 Consents.
(a) Advancel Shareholders. Selling Shareholders holding at
least 90% of the total outstanding shares of Advancel shall have executed this
Agreement.
(b) Third Parties. NCT shall have been furnished with
satisfactory evidence of the consent, approval or notification of other persons
whose consent, approval or notification shall be required in order to permit the
sale, conveyance and assignment of the Shares.
9.5 Tax Good Standing Certificates. NCT shall have received a tax good
standing certificate from Advancel from the California Franchise Tax Board and
such other tax clearance certificates as NCT may reasonably request.
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9.6 Good-Standing Certificate. NCT shall have received a Certificate of
Status for Advancel from the California Secretary of State.
9.7 Employment Agreements. Each of Advancel and Messrs. Mark Snesrud,
Lee Scantlin, Srini Krishnaswami, and Anand Sheel shall have executed an
Employment Agreement substantially in the form attached hereto as Exhibit C.
9.8 Investor Suitability Letter. Each Selling Shareholder and Alliance
shall have executed the Investor Suitability Letter in the form attached hereto
as Exhibit D.
9.9 Legal Opinion. NCT shall have received a legal opinion from
Advancel's counsel, Pillsbury, Madison & Sutro LLP in the form attached as
Exhibit E hereto.
9.10 Form. The form and substance of all certificates, instruments,
opinions and other documents delivered to NCT under this Agreement shall be
satisfactory in all reasonable respects to NCT and its counsel.
SECTION 10
ADVANCEL'S AND SELLING SHAREHOLDERS' CONDITIONS TO CLOSING
The obligations of Advancel and the Selling Shareholders under this
Agreement are subject to the satisfaction of the following conditions, unless
expressly waived by Advancel and the Selling Shareholders:
10.1 Consideration. The Consideration set forth in Section 3(a) above
shall have been paid to Alliance and the Selling Shareholders.
10.2 NCT's Representations. The representations, warranties, and
covenants of NCT set forth in this Agreement shall be true and correct in all
material respects as of the Closing Date as though made at that time.
10.3 Employment Agreements. Each of Advancel and Messrs. Snesrud,
Scantlin, Krishnaswami and Sheel shall have executed an Employment Agreement
substantially in the form attached hereto as Exhibit C.
10.4 Government Approvals. All consents, approvals, orders,
authorizations, registrations, declarations and filings with any domestic or
foreign governmental entity necessary for the consummation of the transactions
contemplated by this agreement shall have been obtained or filed.
10.5 Third Party Consent. Advancel shall have been furnished with
satisfactory evidence of the consent, approval or notification of other persons
whose consent, approval or notification shall be required in order to permit the
sale, conveyance and assignment of the Purchase Price.
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10.6 Legal Opinion. Advancel shall have received a legal opinion from
NCT's counsel, Wilson Sonsini Goodrich & Rosati, in the form attached as Exhibit
F hereto.
10.7 Form. The form and substance of all certificates, instruments,
opinions and other documents delivered to Advancel under this Agreement shall be
satisfactory in all reasonable respects to Advancel and its counsel.
SECTION 11
INDEMNIFICATIONS
11.1 Advancel's and the Selling Shareholders' Indemnities. The Selling
Shareholders shall jointly and not severally indemnify, defend and hold harmless
NCT from and against any and all loss, cost, liability, damage and expense
(including reasonable legal and other expenses incident thereto) of every kind,
nature or description (collectively, "Loss"), arising out of (a) the breach of
any representation or warranty of Advancel or the Selling Shareholders set forth
in this Agreement (including the Exhibits and Schedules hereto) or in any
certificate delivered to NCT pursuant hereto; or (b) the breach of any of its
covenants or other agreements contained in or arising out of this Agreement
(including the Exhibits and Schedules hereto) or the transactions contemplated
hereby to the extent such Loss exceeds $50,000 in the aggregate and then only to
the extent such Loss, in the aggregate, exceeds such amount.
11.2 NCT's Indemnities. NCT shall indemnify, defend and hold harmless
Advancel and the Selling Shareholders from and against any and all losses, cost,
liability, damage and expense (including reasonable legal and other expenses
incident thereto) of every kind, nature or description, arising out of (a) the
breach of any representation or warranty of NCT set forth in this Agreement
(including the Exhibits and Schedules hereto); or (b) the breach of any of its
covenants or other agreements contained in or arising out of the Agreement
(including the Exhibits and Schedules hereto) or the transactions contemplated
hereby; provided, however, that NCT shall be entitled to credit or offset
against any such liability the amount to be paid under the Earnout Payments. In
addition, in no event shall the amount of liability owed to Advancel or the
Selling Shareholders exceed the amounts to be paid under any remaining Earnout
Payments.
11.3 Notice of Claim. Each of the parties, upon discovery of the breach
of any of the representations, warranties or covenants of any of the others
under this Agreement, shall each give to the others prompt written notice of the
discovery of such breach. If any action, suit or proceeding shall be commenced
against, or any claim or demand be asserted against NCT or Advance and the
Selling Shareholders, as the case may be, in respect of which such party
proposes to seek indemnification from the other under this Section 11, then
such party (hereinafter the "Claimant") shall notify the party from whom
indemnification is sought (hereinafter the "Indemnifying Party") to that effect
in writing with reasonable promptness and in any event, if such claim arises out
of a claim by a person or entity other than the Claimant, then within fifteen
(15) days after written notice of such claim was given to the Claimant. However,
failure of the Indemnified Party to so timely notify the
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<PAGE> 33
Indemnifying Party shall not affect the Indemnified Party's right to
indemnification if the Indemnifying Party was not adversely prejudiced by the
late notification.
11.4 Assumption and Defense of Third-Party Action. If any claim
hereunder arises out of a claim against the Claimant by a third party, the
Indemnifying Party shall have the right, at its own expense, to participate in
or assume control of the defense or Settlement of such claim, and the Claimant
shall fully cooperate with the Indemnifying Party subject to reimbursement for
actual out-of-pocket expenses incurred as the result of a request by the
Indemnifying Party. If the Indemnifying Party elects to assume control of the
defense of any third-party claim, the Claimant shall have the right to
participate in the defense of such claim at its own expense. If a claim requires
immediate action, the parties will make every reasonable effort to reach a
decision with respect thereto as quickly as possible. If the Indemnifying Party
does not elect to assume control or otherwise participate in the defense of any
third-party claim, it shall be bound by the results obtained by the Claimant
with respect to such claim.
11.5 Advancel and Selling Shareholders Representative. For purposes of
this Section 11, the "Indemnifying Party" or "Indemnified Party" in the case of
Advancel or the Selling Shareholders shall mean the Representative, who shall
act as the representative for Advancel and the Selling Shareholders, subject to
the paragraph below. If the Representative dies or resigns or otherwise
terminates or declines to accept his authority hereunder, his successor shall be
any Selling Shareholder and shall be elected by the vote or written consent of a
majority in interest of the former Selling Shareholders. The Representative
shall keep the former Selling Shareholders reasonably informed of his decisions
of a material nature. The Representative (i) is authorized to take any action
deemed by him appropriate or necessary to carry out the provisions of, and
authorized to act on behalf of, the Selling Shareholders for all purposes
related to this Section 11, including without limitation, to accept service of
process upon the Selling Shareholders, and (ii) all decisions of the
Representative shall be binding upon the Selling Shareholders.
The Representative shall not be liable to any of the Selling
Shareholders for any error of judgment, act done or omitted by him in good
faith, or mistake of fact or law unless caused by his own gross negligence or
willful misconduct. In taking any action or refraining from taking any action
whatsoever the Representative shall be protected in relying upon any notice,
paper or other document reasonably believed by him to be genuine, or upon any
evidence reasonably deemed by him to be sufficient. The Representative may
consult with counsel in connection with his duties and shall be fully protected
in any act taken, suffered or permitted by him in good faith in accordance with
the advise of counsel. The Representative shall not be responsible for
determining or verifying the authority of any person acting or purporting to act
on behalf of any party of this Agreement.
11.6 Limitation. No party shall be entitled to indemnification
hereunder with respect to the breach of any representation, warranty or covenant
contained herein unless such claim for indemnification is asserted in writing to
the party from whom indemnification is sought within one (1) year after the
Closing Date.
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<PAGE> 34
11.7 Exclusivity. The right to each party hereto to assert
indemnification payments pursuant to this Section 11 shall be the sole and
exclusive right and remedy exercisable by such party with respect to any breach
by the other party hereto of any representation, warranty or covenant.
SECTION 12
FEES AND EXPENSES
12.1 Expenses. Except as otherwise expressly provided herein, each
party will pay its own costs and expenses, including legal and accounting
expenses, related to the transactions provided for herein, irrespective of when
incurred.
SECTION 13
NOTICES
All notices, requests, demands, waivers, consents or other
communications required or permitted hereunder shall be in writing and be deemed
to have been duly given two (2) days after being deposited in the United States
Mail via registered, certified or express mail, return receipt requested, or one
(1) day after being deposited with Federal Express or United Parcel Service for
overnight delivery, addressed to the party to be notified with postage and fees
prepaid as follows:
If to Advancel: Advancel Logic Corporation
1735 Technology Drive #200
San Jose, CA 95110
Attn: Anand Sheel
Phone: 408-367-0611
Fax: 408-453-0685
With copies to: Pillsbury, Madison & Sutro, LLP
2550 Hanover Street
Palo Alto, CA 94304
Attn: L. William Caraccio, Esq.
Phone: 650-233-4531
Fax: 650-233-4545
Alliance Advisory Partners, LLC
770 Menlo Avenue, Suite 101
Menlo Park, CA 94025
Attn: Michael Francisco
Phone: 650-344-9912
Fax: 650-344-3591
If to a Selling
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<PAGE> 35
Shareholder: At the address given on Exhibit A
If to NCT: Noise Cancellation Technologies, Inc.
1025 West Nursery Street
Linthicum, MD 21090
Attn: Michael Parella
Phone: 410-636-8700
Fax: 410-636-8708
With a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Michael J. Danaher, Esq.
Phone: 650-493-9300
Fax: 650-493-6811
Any party may change its address for notice purposes by providing a
notice in accordance with this Section.
SECTION 14
MISCELLANEOUS
14.1 Headings. The headings of the Sections of this Agreement are for
convenience of reference only, and do not form a part thereof, and do not in any
way modify, interpret or construe the meaning of the sections themselves or the
intentions of the parties.
14.2 Entire Agreement. This Agreement and any other agreements entered
into contemporaneously herewith set forth the entire agreement of the parties
and are intended to supersede all prior negotiations, understandings, and
agreements and cannot be altered, amended, changed or modified in any respect or
particular unless each such alteration, amendment, change or modification shall
have been agreed to by NCT, Advancel and the Selling Shareholders and reduced to
writing in its entirety and signed and delivered by each party.
14.3 No Waiver. No provision, condition or covenant of this Agreement
shall be waived by any party hereto except by a written instrument delivered to
the other parties and signed by the party(s) consenting to and to be charged
with such waiver.
14.4 Other and Further Documents. The parties hereto agree to execute,
acknowledge and deliver, at or after the Closing Date, such other and further
instruments and documents as may be reasonably necessary to implement,
consummate and effectuate the terms of this Agreement.
14.5 Good Faith. All parties hereto shall act in good faith in
performing and discharging their respective duties and obligations hereunder.
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<PAGE> 36
14.6 Specific Performance. The parties acknowledge that damages would
be an inadequate remedy for any breach of the provisions of this Agreement and
agree that the obligations of the parties hereunder shall be specifically
enforceable.
14.7 Governing Law. The parties agree that this Agreement will be
interpreted, construed, and enforced under and according to the laws of the
State of California.
14.8 Dispute Resolution.
(a) NCT, Advancel and the Selling Shareholders hereby
voluntarily agree to arbitrate any dispute or claim covered by this Agreement
and agree that the arbitrator's award shall be final and binding. The parties
hereto further agree that arbitration pursuant to this Agreement shall be the
sole and exclusive remedy for resolving any such dispute and/or claim except as
otherwise provided below. The parties acknowledge that part of the consideration
in entering into this Agreement is their recognition that arbitration provides a
more affordable, expeditious and less hostile manner of resolving a dispute or
claim than litigation, and that both parties benefit by agreeing to resolve
disputes through arbitration. By entering into this Agreement, the parties are
giving up their constitutional right to have any such dispute decided in a court
of law before a jury, and instead are accepting the use of arbitration.
(b) Arbitration Procedure
(i) A written demand for arbitration must be served
by one party on the other party (on a duly authorized representative). The time
for demanding arbitration of a claim for fraud shall be governed by California
law. For all other claims, the demand must be served within one year of the day
in which the act or omission complained of occurred; any acts or omissions which
occurred more than one year before service of such a demand shall be waived for
all purposes; and in the case of continuing actionable conduct, recovery shall
be limited to that portion of the dispute or claim occurring within one year of
the other party's receipt of the written demand for arbitration.
(ii) The arbitration shall be administered by and
conducted in accordance with the National Rules for the Resolution of Employment
Disputes supplemented by the Supplemental Procedures for Large Complex Disputes
of the American Arbitration Association (AAA), except as otherwise modified by
this Agreement. The parties may utilize another arbitration/mediation service in
lieu of AAA if they so agree in writing after the timely initiation of
arbitration.
(iii) A single arbitrator shall be mutually selected
by the parties hereto or, in the absence of mutual agreement as to the selection
of an arbitrator, the arbitrator shall be selected in accordance with the rules
and procedures of AAA (or an alternative service, if one is selected by the
parties). The arbitrator shall be selected from a list of qualified, neutral
arbitrators who are familiar with the general type of dispute or claim involved.
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<PAGE> 37
(iv) The arbitration shall be held at the AAA office
located nearest to the place this Agreement is executed as stated on the last
page of this Agreement. The applicable state law shall be that of California,
and venue for any legal proceeding shall be Santa Clara County, California.
(v) All fees and expenses charged by AAA and/or the
arbitrator shall be paid equally by the two sides, including the cost of an
original transcript if one is prepared. Each party shall pay for the fees and
expenses of its own attorneys, experts, witnesses, and preparation and
presentation of proof and briefing (except to the extent a party prevails on a
claim for which attorneys' fees and costs are recoverable by statute).
(vi) Prior to the commencement of the arbitration
hearing, the arbitrator shall allow the parties to conduct discovery to the
extent the discovery process does not undermine the considerations stated in
paragraph (a) above.
(vii) The burdens of proof and presenting evidence,
the legal standards to be applied, and the remedy awarded shall be the same as
that which a court of competent jurisdiction would apply, except as limited by
this Agreement. To the extent punitive damages may be awarded, (1) the amount
shall bear a reasonable relationship to any economic damages awarded; (2) the
amount shall bear a reasonable relationship to the amount of profit, if any,
derived from the underlying conduct; and (3) a party's economic condition shall
be admissible only for purposes of demonstrating hardship in paying such
damages.
(viii) The arbitrator shall issue a written opinion
with the arbitrator's award. The arbitrator's powers shall be limited in that
any award rendered by an arbitrator must be supported by law and substantial
evidence; the remedy shall not exceed that which a court would otherwise have
the power to award for the same claim(s); and, in a contract dispute, the award
shall bear a rational relationship to the contract. The parties hereto agree
that a violation of the above limitations on the arbitrator's powers shall be
deemed to exceed the arbitrator's powers as encompassed by Sections 1286.2(d)
and 1286.6(b) of the California Code of Civil Procedure, which code sections
require a reviewing court respectively to vacate or correct an award if the
award exceeds the arbitrator's powers. The court shall vacate the award if it
determines that a correction of the award would not be equitable. If an award is
vacated, the provisions of this Agreement shall continue in effect and either
party hereto shall have thirty days to re-initiate arbitration or said claims
shall be barred.
14.9 Severability of Provisions. If any provision of this Agreement
shall be held invalid or unenforceable, the remaining provisions of this
Agreement shall not be affected thereby.
14.10 Assignment, Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
successors and assigns. This Agreement may not be assigned by the Selling
Shareholders whether by operation of law or otherwise without the prior written
consent of NCT.
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<PAGE> 38
14.11 Third Parties. This Agreement is not intended, and shall not be
construed, to confer upon any person other than the parties any rights or
remedies.
14.12 Facsimile Signatures. Any signature page delivered by fax machine
or telecopy machine shall be binding to the same extent as an original signature
page, with regard to any agreement subject to the terms hereof or any amendment
thereto. Any party who delivers such a signature page agrees to later deliver an
original counterpart to any party which requests it.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be signed and executed by their proper officers thereunto duly
authorized as of the day and year first above written.
NCT Advancel
NOISE CANCELLATION ADVANCEL LOGIC CORPORATION
TECHNOLOGIES, INC.
/s/ MICHAEL PARELLA /s/ ANAND SHEEL
- ----------------------------------- ----------------------------------------
Michael Parella, President Anand Sheel, President
"Selling Shareholders"
/s/ SRINI KRISHNASWAMI
- -----------------------------------
Srini Krishnaswami
/s/ MARK SNESRUD
- -----------------------------------
Mark Snesrud
/s/ ANAND SHEEL
- -----------------------------------
Anand Sheel
/s/ H. LEE SCANTLIN
- -----------------------------------
H. Lee Scantlin
/s/ VIJAY CHOUGULE
- -----------------------------------
Vijay Chougule
/s/ CYNTHIA HUGHES
- -----------------------------------
Cynthia Hughes
/s/ STEPHEN VOORHEES
- -----------------------------------
Stephen Voorhees
/s/ DEREK LENTZ
- -----------------------------------
Derek Lentz
/s/ BALAJI A. SAMPATH
- -----------------------------------
Balaji A. Sampath
<PAGE> 40
/s/ SANJAY DAVE
- -----------------------------------
Sanjay Dave
/s/ HARESH MAKHIJANI
- -----------------------------------
Haresh Makhijani
/s/ RAJESH PAREKH
- -----------------------------------
Rajesh Parekh
/s/ VISHNU REDDY
- -----------------------------------
Vishnu Reddy
/s/ SHIRAJ SHIVJI
- -----------------------------------
Shiraj Shivji
/s/ KAREN VAHTRA
- -----------------------------------
Karen Vahtra
<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be signed and executed by their proper officers thereunto duly
authorized as of the day and year first above written.
ALLIANCE ADVISORY PARTNERS, LLC
/s/ MICHAEL FRANCISCO
- ---------------------------------------
Michael Francisco
[STOCK PURCHASE AGREEMENT SIGNATURE PAGE]
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT A
ADVANCEL LOGIC CORPORATION SHAREHOLDERS
PRO-RATA PERCENTAGE
NAME CLASS NO. OF SHARES INITIAL EARNOUT
PAYMENT(1) PAYMENT(2)
Non-Employee Shareholders
<S> <C> <C> <C> <C>
Derek Lentz Common 30,000 .603% N/A
Balaji A. Sampath Common 10,208 .205 N/A
Prakash Bhalerao Common 120,000 2.412 N/A
Cheuck Cheng Common 15,000 .301 N/A
Amy Dasso Common 500 .010 N/A
Sanjay Dave Common 40,626 .816 N/A
Nina Luu Common 500 .010 N/A
Haresh Makhijani Common 15,000 .301 N/A
Robert Maffit Common 15,000 .301 N/A
Rajesh Parekh Common 100,000 2.010 N/A
Soma Pullela Common 10,000 .201 N/A
Vaidyanathan Raghunathan Common 218,750 4.896 N/A
Vishnu Reddy Common 200,000 4.019 N/A
Shiraz Shivji Common 250,000 5.024 N/A
Patricia Steele Common 500 .010 N/A
Karen Vahtra Common 10,000 .201 N/A
--------- -------
Subtotal 1,036,084 20.821%
Employee Shareholders
Srini Krishnaswami Common 750,000 15.072% 19.04%
Anand Sheel Common 1,650,000 33.159 41.88
Mark Snesrud Common 750,000 15.072 19.04
Lee Scantlin Common 50,000 1.005 1.27
--------- -------
Subtotal 3,200,000 64.308 81.22
Option Exercise Shareholders
Vijay Chougule Options 120,000 2.412 3.05
Cynthia Hughes Options 10,000 .201 .25
Lee Scantlin Options 450,000 9.043 11.42
Stephan Voorhees Options 160,000 3.215 4.06
--------- ------- -----
Subtotal 740,000 14.871 18.78
Total 4,976,084 100.00% 100.00%
========= ======= ======
</TABLE>
(1) Pursuant to Section 3.2(c) of the Stock Purchase Agreement, Option
Exercise Shareholder participation in the Initial Payment is conditional and
payable upon a shareholder's continued employment with Advancel or NCT for a
period of one year from the Initial Payment date.
(2) Pursuant to the terms of Section 3.2(c) of the Stock Purchase
Agreement, Employee Shareholder participation in the Earnout Payments is
conditional upon a shareholder being employed by Advancel or NCT on the
respective Earnout Payment date.
<PAGE> 43
EXHIBIT B
DISCLOSURE SCHEDULE
The following are exceptions to the representations and warranties of
Advancel Logic Corporation, a California corporation ("Advancel"), and the
shareholders of Advancel (the "Selling Shareholders"), contained in the Stock
Purchase Agreement dated as of August 21, 1998 (the "Agreement"), by and among
Advancel, the Selling Shareholders and Noise Cancellation Technologies, Inc., a
Delaware corporation ("NCT") and should be considered an integral part of the
Agreement. The section numbers in this Disclosure Schedule correspond to the
section numbers in the Agreement; provided, however, that any information
disclosed in this Disclosure Schedule or the Agreement shall be deemed disclosed
and incorporated into any other sections under the Agreement or this Disclosure
Schedule where such disclosure would be appropriate, whether or not repeated
under any section number where such disclosure might be deemed appropriate. Any
terms defined in the Agreement shall have the same meaning when used in this
Disclosure Schedule as when used in the Agreement, unless the context otherwise
requires. Notwithstanding any materiality qualifications in any of Advancel's
representations or warranties in the Agreement, for administrative ease, certain
items have been included herein which are not considered by Advancel to be
material to the business, assets, results of operations or affairs of Advancel.
The inclusion of any item hereunder shall not be deemed to be an admission by
Advancel that such item is material to the business, assets, results of
operations, prospects or affairs of Advancel, nor shall it be deemed an
admission of an obligation or liability to any third party.
6.1 Authority, Approval and Enforceability.
Advancel's minute book contains copies of certain actions by written
consent of the Board of Directors which are not signed by Director Prakash
Bhalerao and/or former Director Shiraz Shivji. The Company will obtain all
necessary signatures of Mr. Bhalerao prior to the Closing and all necessary
signatures of Mr. Shivji as soon as practicable following the Closing.
6.2 Company Capital Structure.
Advancel has currently outstanding options to purchase 740,000 shares
of its Common Stock pursuant to Advancel's 1997 Stock Plan, issued to the
individuals, and in the amounts, set forth on Exhibit A to the Agreement under
the heading "Option Exercise Shareholders." As set forth in the Agreement, such
options will be exercised effective as of immediately prior to the Closing and
the shares issued upon such exercise shall be shares sold to NCT pursuant to
this Agreement.
Advancel issued 1,000,000 shares of its Common Stock to Shiraz Shivji,
former president of the Company, on July 25, 1997. Due to the termination of Mr.
Shivji's services to Advancel, Advancel subsequently repurchased 750,000 of
those shares.
<PAGE> 44
Advancel issued 150,000 shares of its Common Stock to Sanjay Dave, a
former employee of the Company, on July 25, 1997. Due to the termination of Mr.
Dave's services to Advancel, Advancel subsequently repurchased 109,375 of those
shares.
Advancel issued to Balaji Sampath, a former employee of Advancel,
options to purchase 35,000 shares of Advancel's Common Stock on April 7, 1997,
which option Mr. Sampath exercised. Due to the termination of Mr. Sampath's
services to Advancel, Advancel has subsequently repurchased 24,792 of those
shares.
Advancel was formed in March 1997 as a spin off from RVS Holding
Company, a California Corporation ("RVS"). In connection with the spin-off, RVS
was issued 800,000 shares of Advancel's Series A Preferred Stock pursuant to a
Series A Preferred Stock Purchase Agreement dated March 27, 1997. In connection
with a Stock Repurchase and Final Separation Agreement dated November 7, 1997,
the Series A Preferred shares were repurchased by Advancel for $800.00 and RVS
and Advancel resolved other open issues relating to the spin-off and actions
subsequent thereto.
In January 1996, Rajesh Parekh loaned $100,000 to the Company's
predecessor. In December 1997 the loan was intended to be converted into 100,000
shares of Series A Preferred Stock of Advancel. Such shares were never delivered
to Mr. Parekh. In July 1998, the parties agreed to rescind the proposed note
conversion in consideration for the Company's reaffirmation of the original loan
transaction and the issuance to Mr. Parekh of 100,000 shares of Common Stock of
the Company. The loan is evidenced by a short form promissory note dated January
10, 1996.
Advancel has formally approved by Board of Director action each option
grant identified on Exhibit A to the Agreement. Advancel is in the process of
obtaining executed copies of its standard form Stock Option Agreement from each
optionee and intends to complete the documentation process as soon as possible
following the Closing.
On the date of his resignation as an employee of the Company on August
28, 1998, Adam Goldstein held options to acquire 160,000 shares of common stock
of the Company, none of which were vested and all of which options terminated
effective as of such resignation. Accordingly, Mr. Goldstein and his terminated
option shares were removed from the list of Optionee Shareholders set forth on
Exhibit A to the Agreement.
6.3 Compliance with Applicable Laws.
On August 31, 1998, Advancel filed with the California Commissioner of
Corporations certain Notices of Transaction Pursuant to Corporations Code
section 25102(f) relating to certain prior stock and stock options issuances.
6.4 Deferred Compensation.
Schedule B-1 hereto lists the names of Advancel's employees, directors
and/or consultants who are entitled to receive from Advancel, as a result of
deferred compensation, bonuses or expenses of
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<PAGE> 45
Advancel payable to the employee, director or consultant, other than stock
options, and the amounts of money to which each employee, director or consultant
is thereby entitled as of August 17, 1998.
Advancel has tentatively agreed with each of the employees below that
it will cause NCT, on or before the Closing, to enter into employment agreements
with each such employee conferring the job title and annual salary amounts set
forth below:
Srini Krishnaswami Director, Integrated Circuits $110,000.00
Mark Snesrud Director of Software $92,000.00
Lee Scantlin Chief Architect $120,000.00
Anand Sheel President and CEO $149,500.00
6.5 Equity Investments.
No exceptions.
6.6 Insurance.
No exceptions.
6.7 Litigation.
No exceptions.
6.8 Taxes.
Advancel was late in filing U.S. federal income tax returns for fiscal
year 1995 and fiscal year 1996.
6.9 Licenses and Other Rights.
No exceptions.
6.10 Required Consents and Approvals.
No exceptions.
6.11 Title to Advancel's Assets.
Advancel executed a financing statement in favor of Financial Pacific
Company ("FPC") covering various of Advancel's office equipment, as security for
Advancel's obligations under an equipment lease dated September 27, 1997 between
Advancel and FPC.
6.12 Inventory.
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<PAGE> 46
Schedule B-2 hereto sets forth, to the best of Advancel's knowledge, a
complete and accurate list of Advancel's inventory as of the Closing Date.
6.13 Accounts Receivable.
No exceptions.
6.14 Agreements.
The following is a list of the material agreements of Advancel:
Office Building Lease, dated July 18, 1996, by and between The
Concourse Joint Venture and Advancel;
Tenant Estoppel Certificate, dated December 12, 1997, by and between
The Concourse Joint Venture and Advancel;
Equipment Lease, dated October 6, 1997, by and between Sun
Microsystems, Inc. and Advancel;
Equipment Lease, dated October 17, 1996, by and between American
Leasing and Advancel;
Lease Agreement, dated November 27, 1996, by and between Financial
Pacific Co. and Advancel;
Equipment Lease Agreement, dated February 13, 1996, by and between
American Leasing and Advancel;
Request to Purchase, dated February 13, 1996, by and between American
Leasing and Advancel;
Equipment Lease Agreement, dated August 30, 1996, by and between
Norwest Financial Leasing, Inc. and Advancel;
Employment Agreement, dated April 2, 1998, by and between Lee Scantlin
and Advancel.
Engineering Services Agreement, dated as of December 15, 1997, by and
between Ficus Computer Engineering, Inc. and Advancel.
Promissory Note, dated January 10, 1996, issued by Advancel to Rajesh
Parekh in the original principal amount of $100,000.
Technical License Agreement, dated July 19, 1996, as amended to date,
between Advancel and LG Semicon Company Ltd. regarding Java processors.
-4-
<PAGE> 47
Purchase Order no. 335981 dated February 27, 1998, from Zilog.
In June 1997, Adisys Corporation orally assumed certain lease payment
obligations of Advancel with respect to cubicle equipment transferred
by Advancel to Adisys. Pursuant to such assignment and assumption,
Adisys is responsible for the payment of approximately $650 per month.
Advancel is currently in the process of negotiating with ST
Microelectronics with respect to a License Agreement for the T2J Core.
Each current employee of Advancel has entered into an Employment Letter
Agreement substantially in the form previously provided to NCT.
6.15 Tangible Assets.
No exceptions.
6.16 Trade Names and Trademarks.
No exceptions.
6.17 Intellectual Property Rights.
No exceptions.
6.18 Absence of Environmental Liabilities.
No exceptions.
6.19 Employee Benefit Plans.
Advancel has adopted the 1997 Stock Plan and related forms of stock
option and stock purchase agreements. In addition, Advancel maintains health
insurance coverage and a SAR/SEP plan administered by MetLife for the benefit of
its employees.
6.20 Financial Statements.
No exceptions.
6.21 Absence of Undisclosed Liabilities.
In addition to the past due accounts payable reflected on Schedule B-1,
Advancel anticipates it will owe Pillsbury Madison & Sutro LLP approximately
$45,000 in connection with legal fees and disbursements relating to the NCT
transaction. Advancel has agreed to pay all past due and transaction-
-5-
<PAGE> 48
related fees and expenses to PM&S as soon as practicable following the Closing,
subject to its receipt of appropriate invoices and documentation for the
currently unbilled amounts.
The Company timely advised each of its shareholders who purchased
shares subject to reverse vesting provisions of their need to file Section 83(b)
election forms, and provided copies of forms suitable for filing. The Company
believes all such 83(b) elections were timely filed and, accordingly, has not
withheld any compensation amounts relating to increases in share value during
the relevant vesting periods of such shares. In the event one or more
shareholders of the Company failed to timely file their 83(b) election forms,
the Company may be subject to liability for failure to withhold compensation
amounts relating to any increase in share value during the vesting periods
occurring up to the Closing Date and with respect to the accelerated vesting of
the Shares on the Closing Date of the Agreement.
Each Selling Shareholder shall be solely responsible for determining
whether to file a Section 83(b) election form with respect to (a) as to each
Option Exercise Shareholder, the Initial Payment and the Earnout Payments, and
(b) as to each Employee Shareholder, the Earnout Payments.
6.22 Absence of Material Changes.
No exceptions.
6.23 Brokers.
Advancel will pay Alliance Advisory Partners, L.L.C., for its services
in connection with the transactions contemplated in the Agreement, five percent
(5%) of the Purchase Price thereunder.
6.24 Disclosure.
No exceptions.
-6-
<PAGE> 49
EXHIBIT C
FORM OF EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of September 4,
1998 (the "Effective Date"), by and between Advancel Logic Corporation, a
California corporation (the "Company"), Noise Cancellation Technologies, Inc., a
Delaware corporation ("NCT") and , the undersigned executive (the
"Executive").
Recitals
A. WHEREAS, Executive is currently the of the Company; and
B. WHEREAS, the Company, NCT and the shareholders of Advancel have
entered into a Stock Purchase Agreement dated as of even date herewith (the
"Stock Purchase Agreement"), which requires, among other things, that Executive
enter into this Agreement in connection with the sale of the outstanding capital
stock of the Company to NCT, as described in the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
respective undertakings of the Company and Executive set forth below, the
Company and Executive agree as follows:
1. Employment.
a. Duties. The Company agrees to employ, and to the extent the
Company is unable or refuses to, NCT agrees to employ, Executive as ___________
and Executive agrees to perform such reasonable responsibilities and duties as
may be required of him by the Company; provided, however, that the Company shall
have the right, subject to Section 7(b) below, to revise such responsibilities
from time to time as the Company reasonably may deem appropriate. The Executive
shall carry out his duties and responsibilities hereunder in a diligent and
competent manner and shall devote his full business time, attention and energy
thereto.
b. Term. Executive shall be employed for a term beginning on
the Effective Date and ending with the final Earnout Payment date (as that term
is defined in the Stock Purchase Agreement of even date herewith) from the
Effective Date (the "Fixed-Year Term"). At the end of the Fixed-Year Term, the
employment relationship between the Executive and the Company shall become
at-will (collectively, the "Employment Term"). This Agreement shall remain in
effect during the at-will period except that this Agreement shall be terminable
by either party with thirty (30) days notice and Section 3 shall no longer
apply. Executive's obligations, covenants and duties under Sections 5, 6 and 17
shall survive the termination of this Agreement.
<PAGE> 50
2. Compensation and Benefits.
a. Base Compensation. The Company shall pay Executive as
compensation for his services a base salary of $ per month (which is an
annualized salary of $ ). Such salary shall be subject to applicable tax
withholding and shall be paid in accordance with normal Company payroll
practices. The annual compensation specified in this Section 2, together with
any increases in such compensation that the Company may, in its sole discretion,
grant from time to time is referred to in this Agreement as "Base Compensation."
b. Executive Benefits. Executive shall be eligible to
participate in the Company's employee benefit plans which are available or which
become available, in the discretion of the Company, to the same extent as other
executive or managerial employees of the Company, subject in each case to the
generally applicable terms and conditions of the plan or program in question and
to the determination of any committee administering such plan or program.
c. Vacation. Executive shall be entitled to accrue three weeks
of vacation per year at a rate of 1.25 days per month in accordance with the
normal vacation policies of the Company. Executive will have until December 31
of the year following the calendar year in which such vacation accrues to use
her vacation balance (the "Expiration Date"). To the extent Executive has not
used his or her vacation balance by the Expiration Date, Executive shall lose
any and all rights to such vacation. If Executive's employment is terminated for
any reason on or prior to December 31 of any calendar year, (i) Executive shall
forfeit any and all unused vacation balance earned during the year in which the
termination occurred, and (ii) Executive shall be paid for any unused vacation
accrued during the calendar year preceding the year of termination.
3. Involuntary Termination Without Cause. If the Executive's employment
is terminated as a result of Involuntary Termination other than for Cause during
the Fixed-Year Term, then this Agreement shall terminate immediately.
Notwithstanding the foregoing, subject to Executive entering into a Release of
Claims, the Company (or, if the Company is unable or refuses, then NCT) shall
pay Executive a severance payment equal to Executive's Base Compensation for the
remainder of the Fixed-Year term at the time of Executive's severance. Any
severance payments to which the Executive is entitled pursuant to this Section 3
shall be paid to the Executive in accordance with the Company's normal payroll
policies.
Executive shall not be entitled to receive any partial bonus
payments for an incomplete bonus plan year; provided, however, the Company may,
at its sole discretion, award the Executive a bonus for a partial bonus plan
year.
4. Voluntary Resignation; Death; Disability; Termination for Cause. If
the Executive's employment is terminated by reason of Executive's voluntary
resignation, death, disability, or if the Executive is terminated for Cause, and
Executive shall not be entitled to any additional benefits or compensation
hereunder and Executive shall only be eligible for benefits in accordance with
the Company's established policies as is then in effect.
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<PAGE> 51
5. Covenants Not to Compete and Not to Solicit.
a. Non-Competition and Non-Solicitation. During the Employment
Term and for a period ending on the later of (i) three (3) years after the
Closing Date (as that term is defined in the Stock Purchase Agreement), or (ii)
one year following the termination of employment with the Company, Executive
agrees that each Executive will not, either for himself or on behalf of any
other person, partnership, firm, association or corporation in any territory in
which Advancel is actively engaged in business (i) open or operate a Restricted
Business which is in competition with any business of the Company on the date of
Executive's termination, (ii) act as an employee, agent, advisor or consultant
of any then existing competitor of the Company on the date of Executive's
termination, or (iii) take any action to, or do anything reasonably intended to,
divert business from the Company or influence or attempt to influence any
existing customer of the Company to cease doing business with the Company on the
date of Executive's termination. Executive also covenants that he will not
recruit, attempt to hire, solicit, or assist others in recruiting or hiring any
person who is an employee of the Company. As used in this Section 5, "Company"
includes the Company, its parent and their direct and indirect subsidiaries. As
used in this Section 5, "Restricted Business" shall mean the development and
manufacture of microprocessor cores that execute "Java" instructions.
b. Geographic Area. The geographical areas in which the
restrictions provided for in this Agreement apply include all cities, counties
and states of the United States, and all other countries, in which the Company
has engaged in licensing or sales or otherwise conducted business or at any time
during the period from the Company's date of incorporation until the Effective
Date hereof or during the term of this Agreement.
c. Severability. The scope of the geographic, time and subject
matter restrictions set forth in this Section 5 are intended to conform to
applicable law. If, however, a court determines that the scope of any such
restriction exceeds what is permitted by law, then such restriction shall be
limited or otherwise reformed as necessary to comply with and be enforceable
under applicable law. If a court determines that any provision of this Section 5
is unenforceable and cannot be reformed, then such provision shall be deemed
eliminated from this Section to the extent necessary to permit the remaining
provisions of this Section to be enforced.
6. Confidential Information.
a. Company Information. Executive agrees at all times during
the Employment Term and for three (3) years thereafter abide by the terms and
conditions of the Proprietary Information and Inventions Agreement (the
"Confidentiality Agreement"), which the parties hereto have separately executed
and a copy of which is attached hereto as Exhibit A.
7. Definitions. As used herein, the following terms shall have
the following meanings:
a. Cause. "Cause" means the Executive's termination only upon:
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<PAGE> 52
i. Executive's engagement in willful and material
misconduct, including willful and material failure to perform his duties as an
officer or employee of the Company and failure to "cure" such default within
thirty (30) days after receipt of written notice of default from the Company;
ii. Any dishonest, illegal or other conduct which
leads to a felony conviction.
iii. Executive's use of narcotics, liquor or illicit
drugs that has a material detrimental effect on the performance of Executive's
employment responsibilities, as reasonably determined by the Board of Directors
of NCT and;
iv. The material breach of fiduciary duty or material
breach of the terms of this Agreement (including Executive's violation of
Sections 5 or 6 of this Agreement) or the Confidentiality Agreement that injures
or damages the Company;
b. Involuntary Termination. "Involuntary Termination" shall
mean:
i. Termination by the Company of Executive's
employment with the Company for any reason other than for Cause;
ii. Termination by the Executive of Executive's
employment with Company as a result of
(a) A material reduction in Executive's
duties and responsibilities with the Company;
(b) A fifteen percent (15%) or greater
reduction in Executive's Base Compensation (not including bonus), other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(c) A material reduction by the Company in
the kind or level of employee benefits (other than salary and bonus) to which
Executive is entitled immediately prior to such reduction with the result that
Executive's overall benefits package (other than salary and bonus) is
substantially reduced (other than any such reduction applicable to officers of
the Company generally);
(d) Any material breach by the Company of
this Agreement that continues uncured for 30 days following notice thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Executive has agreed in writing thereto; provided further that
Executive has objected in writing to the change, and the Company has not cured
such change within thirty (30) days.
c. Release of Claims. "Release of Claims" shall mean the
Release and waiver of claims by Executive, in substantially the form attached
hereto as Exhibit B, of all employment related obligations of and claims and
causes of action against the Company.
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<PAGE> 53
8. Prior Agreements. Executive represents that Executive has not
entered into any agreements, understandings, or arrangements with any person or
entity which would be materially breached by Executive as a result of, or that
would in any way preclude or prohibit Executive from entering into this
Agreement with the Company or performing any of the duties and responsibilities
provided for in this Agreement.
9. Conflicting Employment. Executive agrees that, during the Employment
Term, Executive will not engage in any other employment, occupation, consulting
or other business activity directly related to the business in which the Company
is now involved or becomes involved during the Employment Term, nor will
Executive engage in any other activities that conflict with Executive's
employment obligations to the Company without the Company's prior written
consent.
10. Returning Company Documents. Executive agrees that, at the time of
leaving the employ of the Company, Executive will promptly deliver to the
Company (and will not keep in Executive's possession, recreate or deliver to
anyone else) any and all devices, records, data, notes, reports, proposals,
lists, correspondence, specifications, materials, equipment, other documents or
property, or reproductions of any aforementioned items developed by Executive
pursuant to Executive's employment with the Company or otherwise belonging to
the Company, its successors or assigns.
11. Notices. Any notice, report or other communication required or
permitted to be given hereunder shall be in writing to both parties and shall be
deemed given on the date of delivery, if delivered, or three days after mailing,
if mailed first-class mail, postage prepaid, to the following addresses:
If to the Executive, at the address set forth below the
Executive's signature at the end hereof.
If to the Company:
Advancel Logic Corporation
1735 Technology Drive, #200
San Jose, CA 95110
Attn: President
Phone: 408-367-0611
Fax: 408-453-0685
or to such other address as any party hereto may designate by notice given as
herein provided.
12. Governing Law. This Agreement shall be construed, interpreted, and
governed in accordance with the laws of the State of California without
reference to rules relating to conflict of law.
13. Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
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<PAGE> 54
14. Successors.
a. Company's Successors. Any successor to the Company or NCT
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's or NCT's business and/or assets shall assume the obligations under
this Agreement and agree expressly to perform the obligations under this
Agreement in the same manner and to the same extent as the Company would be
required to perform such obligations in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include any successor to
the Company's business and/or assets which executes and delivers the assumption
agreement described in this subsection (a) or which becomes bound by the terms
of this Agreement by operation of law.
b. Executive's Successors. The terms of this Agreement and all
rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successor, heirs, distributees, devisees or legatees.
15. Effectiveness of Agreement. This Agreement shall remain in effect
from the Effective Date throughout the Employment Term unless the transactions
contemplated by the Stock Purchase Agreement are not consummated and the Stock
Purchase Agreement is terminated. In the event of such a termination, the
Executive's obligations hereunder shall terminate effective as of the effective
date of the termination of the Stock Purchase Agreement.
16. Arbitration of Disputes. The Mutual Agreement to Arbitrate (the
"Arbitration Agreement"), which the parties hereto have separately executed and
a copy of which is attached hereto as Exhibit D, shall apply to any dispute or
claim arising out of or related to this Agreement or Executive's employment with
the Company as defined and except as limited by said Arbitration Agreement. As
provided by the Arbitration Agreement, all such disputes or claims must be
initiated within one year of the day in which the act or omission complained of
occurred, except as otherwise provided by said Arbitration Agreement.
17. Integration; Amendment.
a. Integration. This Agreement and the agreements referenced
herein represent the entire agreement and understanding between Executive and
the Company as to the subject matter hereof and supersedes all prior or
contemporaneous agreements whether written of oral. This Agreement supersedes
all prior agreements relating to the subject matter contained herein and the
employment of Executive by the Company, which agreements shall terminate as of
the date of this Agreement.
b. Amendments. This Agreement shall not be changed or modified
in whole or in part except by an instrument in writing signed by each party
hereto.
18. Counterparts. This Employment Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
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<PAGE> 55
19. Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
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<PAGE> 56
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
"ADVANCEL" ADVANCEL LOGIC CORPORATION
By:
Title:
"NCT" NOISE CANCELLATION TECHNOLOGIES, INC.
By:
Title:
"EXECUTIVE"
Signature
Printed Name
Address:
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
<PAGE> 57
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
This Agreement is entered into on September 4, 1998, by and between
___________________ (hereinafter "Executive") and Advancel Logic Corporation, a
California corporation (hereinafter "Employer") at San Jose, California. The
parties agree for good and valuable consideration as follows:
1. General. Executive has been offered employment by Employer, which
employment will be evidenced by a separate, written Employment Agreement which
incorporates into it the terms of the this Agreement by reference. Executive
acknowledges that, as an employee of Employer, Executive will be expected to
engage in creative activities and the development of products and ideas of value
to Employer, and that Executive will be given access to Employer's proprietary
information.
2. Confidential Information of Others. Executive represents that
Executive does not have in Executive's possession any confidential or
proprietary documents belonging to others, and represents and agrees that
Executive will not use, disclose to Employer, or cause Employer to use, such
documents or other confidential or proprietary information belonging to others
without the express, written consent of such third-parties. Executive represents
that employment with Employer will not require Executive to violate any
obligation to or confidence with another.
3. Definition of Proprietary Information. The term "Proprietary
Information" as used in this Agreement means any and all information of a
confidential, proprietary, or secret nature which is or may be applicable to or
related in any way to (i) the business, present or future, of Employer, (ii) the
research and development or investigations of Employer, or (iii) the business of
any customer or supplier of Employer. Proprietary information includes, for
example and without limitation, trade secrets (as defined by Section 3426.1 of
the California Civil Code), processes, formulas, data, patterns, devices,
computer software programs (including their source codes), compilations of
information, records, specifications, inventions, technical and financial
know-how, improvements, techniques, marketing plans and strategies, customer
preferences, and other information concerning employees, customers, or vendors.
Executive acknowledges that all of the above designated proprietary information
are trade secrets that are wholly owned and/or controlled by Employer.
4. Confidential Proprietary Information. Executive acknowledges that
the Proprietary Information is a special, valuable and unique asset of Employer,
and Executive agrees at all times during the period of employment and thereafter
to keep in confidence all Proprietary Information. Executive agrees that during
the period of employment and thereafter Executive will not directly or
indirectly use the Proprietary Information other than in the course of
performing duties as an employee of Employer, nor will Executive directly or
indirectly disclose any Proprietary Information to any person or entity, except
in the course of performing duties as an employee of Employer and with the
consent of Employer. Executive will abide by Employer's policies and
regulations, as established from time to time, for the protection of its
Proprietary Information.
<PAGE> 58
5. Disclosure to Employer. Executive agrees promptly to disclose to
Employer any and all inventions, discoveries, improvements, trade secrets,
formulas, techniques, processes, and know-how, whether or not patentable and
whether or not reduced to practice, and all works of authorship, whether or not
copyrightable, conceived, developed, or learned by Executive during the period
of employment by Employer, either alone or jointly with others, which relate to
or result from the actual or anticipated business, work, research or
investigations of Employer, or which result, to any extent, from use of
Employer's property or facilities, or of the Proprietary Information (the
foregoing hereinafter collectively referred to as the "Inventions").
6. Inventions as Sole Property of Employer. Executive acknowledges and
agrees that all the works of authorship and Inventions shall be the sole
property of Employer or any other entity designated by it, and Executive hereby
assigns to Employer all right and interest in and to all such works of
authorship and Inventions. Such assignment does not apply to any Invention which
qualifies fully under the provisions of Section 2870 of the California Labor
Code; provided, however, Executive shall maintain contemporaneous written
records of the process of creating such an Invention; and provided further that
such Invention (including the records relating thereto) remains subject to the
disclosure obligation of the preceding paragraph. Employer or any other entity
designated by it shall be the sole owner of all domestic and foreign rights
pertaining to the Inventions. In case any Invention is described in a patent
application or disclosed to third parties by Executive within three years after
leaving the employ of Employer, it is to be presumed that the invention was
conceived during the period of Executive's employment by Employer and the
invention will belong to Employer unless proved to have been conceived following
termination of such employment.
7. Prior Inventions. Any and all prior inventions made by Executive
prior to employment with Employer shall not be affected by this Agreement. A
complete list of such inventions, discoveries and improvements made by Executive
prior to Executive's employment with Employer, to the extent such exist, are
attached hereto as Exhibit A-1. If Executive has no such inventions, discoveries
or improvements to attach as an exhibit hereto, Executive shall enter "none" on
the face of Exhibit A-1.
8. Other Employment. Executive agrees that during the period of
employment by Employer, Executive will not, without Employer's prior written
consent, directly or indirectly, whether as an employee, employer, agent,
consultant, principal, partner, shareholder or any other capacity, engage or
participate in any employment, consulting, or other activity that is in
competition with or relates to any line of business in which Employer is now or
at such time is engaged, or which would otherwise conflict with employment
obligations to Employer.
9. Not Employment Contract. This Agreement is not an employment
contract and shall not alter the employment relationship between Executive and
Employer unless expressly incorporated into a separately executed Employment
Agreement.
10. Return of Materials at Termination. In the event of the termination
of Executive's employment, regardless of the reason, Executive will promptly
deliver to Employer all documents, data, records, disks, software, materials,
equipment and other information pertaining to or provided by Employer, and
Executive shall not take with Executive or otherwise retain any such documents
or data
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<PAGE> 59
or other information, or any reproduction or excerpt of any such documents or
data or other information without the express, written consent by a duly
authorized representative of Employer.
12. Miscellaneous Provisions.
a. Violations of and disputes arising out of this Agreement
shall be subject to the applicable provisions of the parties' separately
executed Employment Agreement and the separately executed Mutual Agreement to
Arbitrate.
b. To the extent any phrase, clause, sentence, paragraph or
other provision of this Agreement is, for whatever reason, deemed void, unlawful
or otherwise unenforceable, then such shall be severed herefrom and the balance
of this Agreement construed as if such were not a part hereof.
c. This Agreement is the complete agreement between Executive
and Employer with respect to the subject matter hereof except to the extent the
parties agree to additional provisions in a separately executed Employment
Agreement, and takes the place of all prior oral and/or written agreements
except as to a separately executed Employment Agreement and a Mutual Agreement
to Arbitrate. Any future changes to this Agreement must be in writing and signed
by both the undersigned parties. There are no implied promises, obligations,
covenants or guarantees in connection with this Agreement. Executive has been
given a copy of this Agreement. Executive and Employer have read this Agreement,
understand it and agree to its terms as stated above.
EXECUTIVE EMPLOYER
Address: Address:
Advancel Logic Corporation
1735 Technology Drive, #200
San Jose, CA 95110
Social Security Number
[SIGNATURE PAGE TO PROPRIETARY INFORMATION, INVENTIONS
AND NON-SOLICITATION AGREEMENT]
<PAGE> 60
EXHIBIT A-1
The following is a complete list of all inventions, discoveries and
improvements I have made prior to my employment with Advancel Logic Corporation:
Date Identification and Description
If additional sheets necessary, enter number of pages:
Date: Signature
Receipt of this Exhibit A-1 is acknowledged by Employer.
Date:
OWN TIME-EXEMPTION FROM AGREEMENT
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice
of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer, or
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
(1979 ch. 1001, 1986 ch. 346, 1991 ch. 647)
[SIGNATURE PAGE TO PROPRIETARY INFORMATION, INVENTIONS
AND NON-SOLICITATION AGREEMENT]
<PAGE> 61
EXHIBIT B
RELEASE AND WAIVER OF CLAIMS
This Release and Waiver of Claims (the "Release") is made by and
between Advancel Logic Corporation (the "Company"), and (the "Executive").
WHEREAS, Executive was employed by the Company;
WHEREAS, the Company and Executive have mutually agreed to terminate
the employment relationship and to release each other from any claims arising
from or related to the employment relationship;
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Executive (collectively referred to as "the Parties") hereby agree
as follows:
1. Termination. Executive's employment with the Company shall terminate
as of ______________, 199__ (the "Termination Date").
2. Consideration. The Company agrees to pay Executive at the rate of
________________________________ Dollars ($______________) per month for the
[_____] month period from the Termination Date in accordance with the Company's
payroll practices. During the payment period, Executive will receive benefits as
provided in Section 3 of the Employment Agreement (the "Employment Agreement").
3. Confidential Information. Executive shall continue to maintain the
confidentiality of all confidential and proprietary information of the Company
and shall continue to comply with the confidentiality provisions of the
Proprietary Information, Inventions and Non-Solicitation Agreement between
Executive and the Company. Executive shall return all the Company property and
confidential and proprietary information in her possession to the Company within
five business days from the effective date of this Release.
4. Payment of Salary. Executive acknowledges and represents that the
Company has paid all salary, wages, accrued vacation, commissions and any and
all other benefits due to Executive, prior to the Termination Date except for
monthly payments, if any, set forth in the Employment Agreement.
5. Release of Claims. Except as set forth below, Executive agrees that
the foregoing consideration represents settlement in full of all outstanding
obligations owed to Executive by the Company. Executive and the Company, on
behalf of themselves, and their respective heirs, executors, officers,
directors, Executives, investors, shareholders, administrators, predecessor and
successor corporations, and assigns, hereby fully and forever release each other
and their respective heirs, executors, officers, directors, Executives,
investors, shareholders, administrators, predecessor and successor corporations,
and assigns, of and from any claim, duty, obligation or cause of action relating
<PAGE> 62
to any matters of any kind, whether presently known or unknown, suspected or
unsuspected, that any of them may possess arising from any omissions, acts or
facts that have occurred up until and including the effective date of this
Release including, without limitation,
(a) any and all claims relating to or arising from Executive's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from,
Executive's right to purchase, or actual purchase of shares of stock of the
Company;
(c) any and all claims for wrongful discharge of employment;
breach of contract, both express and implied; breach of a covenant of good faith
and fair dealing, both express and implied; negligent or intentional infliction
of emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; and
defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, and the California
Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and costs.
The Company and Executive agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to (i) any obligations incurred
under this Release (ii) rights to the Earnout Payment (as that term is defined
in the Stock Purchase Agreement between NCT, Inc., and the stockholders of the
Company, dated August 21, 1998 (the "Purchase Agreement"); (iii) indemnification
rights provided for in Section 11 of the Purchase Agreement; and (iv)
indemnification rights that Advancel is authorized by its Articles of
Incorporation or Bylaws to provide corporate agents (as that term is used in
Section 317 of the California Corporations Code).
6. Acknowledgment of Waiver of Claims under ADEA. Executive
acknowledges that he is waiving and releasing any rights he may have under the
Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Executive and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
ADEA after the effective date of this Release. Executive acknowledges that the
consideration given for this Release is in addition to anything of value to
which Executive was already entitled. Executive further acknowledges that she
has been advised by this writing that (a) she should consult with an attorney
prior to executing this Release; (b) she has at least twenty-one (21) days
within which to consider this Release; (c) she has at least seven (7) days
following the execution of this Release by the Parties to revoke the Release;
and (d) this Release shall not be effective until the revocation period has
expired.
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<PAGE> 63
7. Confidentiality. The Parties hereto each agree to use their best
efforts to maintain in confidence the existence of this Release, the contents
and terms of this Release, and the consideration for this Release (hereinafter
collectively referred to as "Settlement Information"). Each Party hereto agrees
to take every reasonable precaution to prevent disclosure of any Settlement
Information to third parties, and each agrees that there will be no publicity,
directly or indirectly, concerning any Settlement Information. The Parties
hereto agree to take every precaution to disclose Settlement Information only to
those executives, officers, directors, attorneys, accountants, governmental
entities, and family members who have a reasonable need to know of such
Settlement Information.
8. Disparagement. Each Party agrees to refrain from any disparagement,
defamation, slander of the other, or tortious interference with the contracts
and relationships of the other.
9. Tax Consequences. Executive is aware that all salary payments made
under this Release constitute wages for tax purposes and are subject to
withholding.
10. No Admission of Liability. The Parties understand and acknowledge
that this Release constitutes a compromise and settlement of disputed claims. No
action taken by the Parties hereto, or either of them, either previously or in
connection with this Release shall be deemed or construed to be (a) an admission
of the truth or falsity of any claims heretofore made or (b) an acknowledgment
or admission by either Party of any fault or liability whatsoever to the other
Party or to any third party.
11. Authority. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Release.
Executive represents and warrants that she has the capacity to act on her own
behalf and on behalf of all who might claim through her to bind them to the
terms and conditions of this Release. Each Party warrants and represents that
there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.
12. No Representations. Each Party represents that it has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Release. Neither Party has relied
upon any representations or statements made by the other Party hereto which are
not specifically set forth in this Release.
13. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Release shall continue in full force and effect without said
provision.
14. Entire Agreement. This Release represents the entire agreement and
understanding between the Company and Executive concerning Executive's
separation from the Company, and supersedes and replaces any and all prior
agreements and understandings concerning Executive's relationship with the
Company and her compensation by the Company.
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<PAGE> 64
15. No Oral Modification. This Release may only be amended in writing
signed by Executive and the Company.
16. Governing Law. This Release shall be governed by the laws of the
State of California.
17. Effective Date. This Release is effective seven days after it has
been signed by both Parties.
18. Arbitration of Disputes. The Mutual Agreement to Arbitrate, which
the Parties hereto have separately executed at the initiation of this employment
relationship and a copy of which is attached hereto, shall apply to any dispute
or claim arising out of or related to this Release or Executive's employment
with the Company as defined and except as limited by said Mutual Agreement to
Arbitrate. As provided by the Mutual Agreement to Arbitrate, all such disputes
or claims must be initiated within one year of the day in which the act or
omission complained of occurred, except as otherwise provided by said Mutual
Agreement to Arbitrate.
19. Counterparts. This Release may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
20. Voluntary Execution of Release. This Release is executed
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Release;
(b) They have been represented in the preparation,
negotiation, and execution of this Release by legal counsel of their own choice
or that they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Release
and of the releases it contains;
(d) They are fully aware of the legal and binding effect of
this Release.
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<PAGE> 65
IN WITNESS WHEREOF, the Parties have executed this Release on the
respective dates set forth below.
Advancel Logic Corporation
Dated: _____________, 199__
By
Title
, an individual
Dated: _____________, 199__
(Signature)
(Print Name)
[SIGNATURE PAGE TO RELEASE AND WAIVER OF CLAIMS]
<PAGE> 66
EXHIBIT C
MUTUAL AGREEMENT TO ARBITRATE
This Mutual Agreement to Arbitrate (the "Arbitration Agreement")
disputes and claims is entered into between ____________________ (hereinafter
"Executive") and Advancel Logic Corporation, a California corporation
(hereinafter "Employer") as follows (collectively referred to as "the Parties"):
1. BINDING ARBITRATION OF DISPUTES AND CLAIMS.
Executive and Employer hereby voluntarily agree to arbitrate any
dispute or claim covered by this Arbitration Agreement and agree that the
arbitrator's award shall be final and binding. The Parties hereto further agree
that arbitration pursuant to this Arbitration Agreement shall be the sole and
exclusive remedy for resolving any such dispute and/or claim except as otherwise
provided below. The Parties acknowledge that part of the consideration in
entering into this Arbitration Agreement is their recognition that arbitration
provides a more affordable, expeditious and less hostile manner of resolving a
dispute or claim than litigation, and that both Parties benefit by agreeing to
resolve disputes through arbitration. By entering into this Arbitration
Agreement, both Parties are giving up their constitutional right to have any
such dispute decided in a court of law before a jury, and instead are accepting
the use of arbitration.
2. DISPUTES AND CLAIMS COVERED BY THIS ARBITRATION AGREEMENT.
(a) Dispute and claims covered by this Arbitration Agreement
include all claims by Employer against Executive, all claims by Executive
against Employer (as defined below) as well as any third party claims derived or
arising from the employment relationship of Executive and Employer, including,
without limitation, claims by either Party hereto against the other arising
under:
(i) Any federal, state or local law, regulation or
statute prohibiting employment discrimination (such as, without limitation,
race, color, ancestry, national origin, religion, age, sex, sexual orientation,
physical or mental disability, marital status, or veteran status) or prohibiting
harassment, including sexual harassment.
(ii) Any alleged or actual agreement or promise
(whether oral, written or implied) between Executive and Employer.
(iii) Any Employer policy or compensation or benefit
plan.
(iv) Any public policy recognized by any court that
would otherwise have jurisdiction over the claim.
(v) Any law for personal, emotional, physical or
economic injury, including tort claims, unless the claim is covered by the
California Workers' Compensation Act.
<PAGE> 67
(b) The only disputes between Executive and Employer which are
not encompassed by this Arbitration Agreement are:
(i) Any claim by Executive for workers' compensation
benefits.
(ii) Any claim by Executive for benefits under an
Employer plan which plan provides its own arbitration procedure.
(iii) Any claim by Employer for damages
and/or injunctive relief for Executive's violation of Employer's trade secrets
or confidence as provided by contract, common law or statute or Executive's
violation of the Proprietary Information, Inventions and Non-Solicitation
Agreement executed by the Parties.
(iv) Any claim to enforce an arbitration award under
this Arbitration Agreement, including injunctive relief.
3. ARBITRATION PROCEDURE
(a) A written demand for arbitration must be served by one
Party on the other Party (on a duly authorized representative in the case of the
Employer). The time for demanding arbitration of a claim for fraud shall be
governed by California law. For all other claims, the demand must be served
within one year of the day in which the act or omission complained of occurred;
any acts or omissions which occurred more than one year before service of such a
demand shall be waived for all purposes; and in the case of continuing
actionable conduct, recovery shall be limited to that portion of the dispute or
claim occurring within one year of the other Party's receipt of the written
demand for arbitration.
(b) The arbitration shall be administered by and conducted in
accordance with the National Rules for the Resolution of Employment Disputes
supplemented by the Supplemental Procedures for Large Complex Disputes of the
American Arbitration Association (AAA), except as otherwise modified by this
Arbitration Agreement. The Parties may utilize another arbitration/mediation
service in lieu of AAA if they so agree in writing after the timely initiation
of arbitration.
(c) A single arbitrator shall be mutually selected by the
Parties hereto or, in the absence of mutual agreement as to the selection of an
arbitrator, the arbitrator shall be selected in accordance with the rules and
procedures of AAA (or an alternative service, if one is selected by the
Parties). The arbitrator shall be selected from a list of qualified, neutral
arbitrators who are familiar with the general type of dispute or claim involved.
(d) The arbitration shall be held at the AAA office located
nearest to the place this Arbitration Agreement is executed as stated on the
last page of this Arbitration Agreement. The applicable state law shall be that
of California, and venue for any legal proceeding shall be San Jose, California.
<PAGE> 68
(e) All fees and expenses charged by AAA and/or the arbitrator
shall be paid equally by the two sides, including the cost of an original
transcript if one is prepared. Each Party shall pay for the fees and expenses of
its own attorneys, experts, witnesses, and preparation and presentation of proof
and briefing (except to the extent a Party prevails on a claim for which
attorneys' fees and costs are recoverable by statute).
(f) Prior to the commencement of the arbitration hearing, the
arbitrator shall allow the Parties to conduct discovery to the extent the
discovery process does not undermine the considerations stated in paragraph I
above.
(g) The burdens of proof and presenting evidence, the legal
standards to be applied, and the remedy awarded shall be the same as that which
a court of competent jurisdiction would apply, except as limited by this
Arbitration Agreement. To the extent punitive damages may be awarded, (i) the
amount shall bear a reasonable relationship to any economic damages awarded;
(ii) the amount shall bear a reasonable relationship to the amount of profit, if
any, derived from the underlying conduct; and (iii) a Party's economic condition
shall be admissible only for purposes of demonstrating hardship in paying such
damages.
(h) The arbitrator shall issue a written opinion with the
arbitrator's award. The arbitrator's powers shall be limited in that any award
rendered by an arbitrator must be supported by law and substantial evidence; the
remedy shall not exceed that which a court would otherwise have the power to
award for the same claim(s); and, in a contract dispute, the award shall bear a
rational relationship to the contract. The Parties hereto agree that a violation
of the above limitations on the arbitrator's powers shall be deemed to exceed
the arbitrator's powers as encompassed by Sections 1286.2(d) and 1286.6(b) of
the California Code of Civil Procedure, which code sections require a reviewing
court respectively to vacate or correct an award if the award exceeds the
arbitrator's powers. The court shall vacate the award if it determines that a
correction of the award would not be equitable. If an award is vacated, the
provisions of this Arbitration Agreement shall continue in effect and either
Party hereto shall have thirty days to re-initiate arbitration or said claims
shall be barred.
4. MISCELLANEOUS PROVISIONS.
(a) The term "Employer" is defined as the entity identified at
the outset of this Arbitration Agreement as well as any parent, affiliate or
subsidiary, officer, director, agent, shareholder, partner, benefit plan,
benefit plan sponsor, fiduciary, administrator, successor or assignee thereof.
(b) If either Party hereto pursues a dispute or claim against
the other by any action, method or legal proceeding where pursuit of the same is
inconsistent with or the claim is otherwise encompassed by this Arbitration
Agreement, the responding Party shall be entitled to dismissal or injunctive
relief regarding such action along with recovery of the respondent's costs, loss
and attorneys' fees related to such other action or proceeding.
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<PAGE> 69
(c) This Arbitration Agreement is the complete agreement of
the Parties on the subject of arbitration of disputes and claims. This
Arbitration Agreement supersedes any prior or contemporaneous oral, written or
implied understanding on the subject, shall survive the termination of
Executive's employment and can only be revoked or modified by a writing signed
by the Parties which specifically states an intent to revoke or modify this
Arbitration Agreement. If any provision of this Arbitration Agreement is
adjudged to be void or otherwise unenforceable in whole or in part, such
adjudication shall not affect the validity of the remainder of this Arbitration
Agreement. This Arbitration Agreement is not, and shall not be construed to
create a contract of employment, whether express or implied, nor does this
Arbitration Agreement in any respect alter the status of Executive's employment
as described in Executive's Employment Agreement.
<PAGE> 70
IN WITNESS WHEREOF, Executive and Employer have caused this Arbitration
Agreement to be executed below at San Jose, California, on September 4, 1998.
EXECUTIVE UNDERSTANDS THAT EXCEPT AS EXPRESSLY EXCLUDED IN PARAGRAPH 2(b) ABOVE,
BY SIGNING THIS ARBITRATION AGREEMENT YOU ARE AGREEING TO HAVE ANY ISSUE OR
DISPUTE DESCRIBED IN PARAGRAPH 2(a) ABOVE, INCLUDING A DISPUTE REGARDING YOUR
EMPLOYMENT, DECIDED BY NEUTRAL ARBITRATION AND YOU ARE GIVING UP YOUR RIGHT TO A
JURY OR COURT TRIAL. SEE PARAGRAPH 1 OF THIS ARBITRATION AGREEMENT.
EXECUTIVE EMPLOYER
Address: Address:
Advancel Logic Corporation
1735 Technology Drive, #200
San Jose, CA 95110
Social Security Number
[SIGNATURE PAGE TO MUTUAL AGREEMENT TO ARBITRATE]
<PAGE> 71
EXHIBIT D
FORM OF INVESTOR SUITABILITY LETTER
Date: __________________
Noise Cancellation Technologies, Inc.
1025 West Nursery Street
Linthicum, MD 21090
Attn: Michael Parella
Gentlemen:
Reference is made to that certain Stock Purchase Agreement (the
"Agreement") dated August ___, 1998 among Noise Cancellation Technologies, Inc.
("NCT"), Advancel Logic Corporation, a California corporation ("Advancel"), and
the holders of all of the outstanding capital stock of Advancel. This Investor
Suitability Letter, receipt of which is a condition to NCT's obligation to issue
securities under the Agreement, is rendered to you pursuant to Section 8.13 of
the Agreement. All terms used herein have the meaning defined for them in the
Agreement unless otherwise defined herein. The undersigned hereby represents to
NCT as follows:
(a) Shareholder's Own Account. The Shares issued under the terms of the
Agreement are being acquired for The undersigned's own account for investment
purposes only and not with a view to, or for resale in connection with any
distribution or public offering thereof within the meaning of the Securities
Act.
(b) No Registration; Economic Risk. The undersigned understands that
the Shares have not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), or any other securities law or regulation, that the
Shares must be held by The undersigned indefinitely, and that The undersigned
must therefore bear the economic risk of such investment indefinitely, unless a
subsequent disposition thereof is registered under the Securities Act or is
exempt from such registration thereunder. The undersigned further understands
that the Shares have not qualifies under the General Corporation Law of the
State of California (the "California Law") by reason of their issuance in a
transaction exempt from the qualification requirements of the California Law.
(c) Access to NCT Records. During the negotiation of the transactions
contemplated herein, The undersigned has been afforded full access to records,
documents, and other information concerning NCT and have been afforded an
opportunity to ask such questions of NCT's officers and representatives
concerning NCT's business, operations, financial condition, assets, liabilities
and other relevant matters as they have deemed necessary or desirable, and have
been given all such information as has been requested, in order to evaluate the
merits and risks of the prospective investment contemplated herein.
<PAGE> 72
(d) Knowledge and Experience. The undersigned has such knowledge and
experience in financial and business matters that The undersigned is capable of
evaluating the merits and risks of the Shares pursuant to the terms of the
Agreement.
(e) Rule 144. The undersigned is aware of the provisions of Rule 144,
promulgated under the Securities Act, which in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly from the
issuer thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, including, among other
things: The availability of certain public information about the Company; the
resale occurring not less than one year after the party has purchased and paid
for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934) and
the amount of securities being sold during any three month period not exceeding
the specified limitations stated therein.
The undersigned further understands that at the time it wishes
to sell the Shares there may be no public market upon which to make such a sale,
and that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, it would be precluded from selling the Shares under Rule 144 even if
the one-year minimum holding period had been satisfied.
The undersigned further understands that in the event all of
the requirements of Rule 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the staff of the SEC has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rule 144 will have a substantial burden
of proof in establishing that an exemption from registration is available for
such offers or sales, and that such persons and their respective brokers who
participate in such transaction do so at their own risk.
(f) Legend. Each certificate representing the Shares to be issued in
accordance with the terms of the Agreement shall be endorsed with the following
legend.
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE
ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
IN WITNESS WHEREOF, I have set my hand to this Investor Suitability
Letter on the date first above written.
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<PAGE> 73
By: _____________________________________
Name of Shareholder
By:
Title:
[SIGNATURE PAGE TO INVESTOR SUITABILITY LETTER]
<PAGE> 1
Exhibit 4
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS
OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
NOISE CANCELLATION TECHNOLOGIES, INC.
Noise Cancellation Technologies, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"CORPORATION"),
DOES HEREBY CERTIFY
That, pursuant to authority conferred upon the Board of Directors of
the Corporation by the Restated Certificate of Incorporation of the Corporation,
and pursuant to the provisions of Section 151 of Title 8 of the Delaware Code of
1953, as amended, said Board of Directors, at a meeting duly held on July 15,
1998, adopted a resolution providing for the issuance of a series of twelve
thousand (12,000) shares of Series D Convertible Preferred Stock, and providing
for the powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
which resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted to
and vested in the Board of Directors of the Corporation by the
provisions of Article IV of the Restated Certificate of Incorporation
of the Corporation, this Board of Directors hereby creates a series of
the Preferred Stock of the Corporation with par value of $0.10 per
share (the "Preferred Stock") to consist of twelve thousand (12,000)
shares of the 10,000,000 authorized shares of Preferred Stock, which
the Corporation now has authority to issue, and this Board of Directors
hereby fixes the powers, designations, preferences and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions thereof of the shares of such series (in
addition to the powers, designations, preferences and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions thereof, set forth in Article IV of the
Certificate of Incorporation not inconsistent with the terms of this
resolution and which are applicable to the Preferred Stock) as follows:
(1) Designation. The designation of said series of Preferred
Stock created by this Resolution shall be Series D Convertible
Preferred Stock. Shares of said Series D Convertible Preferred Stock
are herein referred to as "Series D Preferred Shares."
<PAGE> 2
(2) Par Value, Stated Value and Accretion Rate. Each Share of
Series D Convertible Preferred Stock shall have a par value of $0.10,
and a stated value (face amount) of One Thousand Dollars ($1,000.00)
(the "Stated Value"), with an accretion rate of four percent (4%) per
annum on the Stated Value for the purposes and on the terms set forth
herein.
<PAGE> 3
(3) Dividends. The Series D Preferred Shares shall not bear
any dividends.
(4) Holder's Conversion of Series D Preferred Shares. A holder
of Series D Preferred Shares shall have the right, at such holder's option, to
convert the Series D Preferred Shares into shares of the Corporation's common
stock, $.01 par value per share (the "COMMON STOCK"), on the following terms and
conditions:
(a) Conversion Right. Subject to the provisions of
Sections 4(g), 4(j), 4(k), and 5(a) below, at any time or
times on or after the earlier of (i) 90 days after the
Issuance Date (as defined herein), (ii) 5 days after receiving
a "no-review" status from the U.S. Securities and Exchange
Commission in connection with a registration statement
("REGISTRATION STATEMENT") covering the resale of Common Stock
issued upon conversion of the Series D Preferred Shares and
required to be filed by the Corporation pursuant to the
Registration Rights Agreement between the Corporation and its
initial holders of Series D Preferred Shares (the
"REGISTRATION RIGHTS AGREEMENT"), (iii) the date that the
Registration Statement is declared effective (the
"REGISTRATION STATEMENT EFFECTIVE DATE") by the U.S.
Securities and Exchange Commission (the "SEC") any holder of
Series D Preferred Shares shall be entitled to convert any
Series D Preferred Shares into fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with
Section 4(h) below) of Common Stock, at the Conversion Rate
(as defined below); provided, however, that in no event other
than upon a Mandatory Conversion pursuant to Section 4(g)
hereof, shall any holder be entitled to convert Series D
Preferred Shares in excess of that number of Series D
Preferred Shares which, upon giving effect to such conversion,
would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed
9.9% of the outstanding shares of the Common Stock following
such conversion. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned
by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of the Series
D Preferred Shares with respect to which the determination of
such proviso is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (i)
conversion of the remaining, nonconverted Series D Preferred
Shares beneficially owned by the holder and its affiliates
beneficially owned by the holder and its affiliates. Except as
set forth in the preceding sentence, for purposes of this
paragraph, beneficial
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<PAGE> 4
ownership shall be calculated in accordance with Section 13(d)
of the Securities Exchange Act of 1934, as amended.
(b) Conversion Rate. The number of shares of Common
Stock issuable upon conversion of each of the Series D
Preferred Shares pursuant to Section 4(a) shall be determined
according to the following formula (the "CONVERSION RATE")
(.04)(N/365)(1,000) +1,000
___________________________
CONVERSION PRICE
;provided that the Corporation shall have the option to pay
the 4% accretion accruing on each Series D Preferred Share in
either cash or Common Stock of the Corporation.
Notwithstanding anything contained herein to the contrary, the
Corporation shall not issue in excess of 24,000,000 Shares of
Common Stock upon conversion of 12,000 Series D Preferred
Shares or such lesser amount as determined on a pro-rata basis
based upon the number of Series D Preferred Shares issued. For
example, if 6,000 Shares of Series D Preferred Shares are
issued, the Corporation shall not issue in excess of
12,000,000 Shares of Common Stock.
For purposes of this Certificate of Designations, the
following terms shall have the following meanings:
(i) "CONVERSION PRICE" means, as of any date
of determination, the amount obtained by multiplying
the Conversion Percentage in effect as of such date
by the Average Market Price for the Common Stock for
the five (5) consecutive trading days immediately
preceding such date, provided however that in the
even that such calculation results in a number which
is equal to or less than $0.50 per Share, then the
Conversion Price shall be $0.50 per Share (the "Floor
Price");
(ii) "CONVERSION PERCENTAGE" means 80% and
shall be reduced by an additional 2% for every 30
days (pro-rated for partial months) beyond 60 days
from the Issuance Date (the "SCHEDULED FILING DATE")
that the Registration Statement is
not filed by the Corporation;
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<PAGE> 5
(iii) "AVERAGE MARKET PRICE" means, with
respect to any security for any period, that price
which shall be computed as the arithmetic average of
the Closing Bid Prices (as defined below) for such
security for each trading day in such period;
(iv) "CLOSING BID PRICE" means, for any
security as of any date, the last closing bid price
on the Nasdaq National Market System (the
"NASDAQ-NM") as reported by Bloomberg Financial
Markets ("BLOOMBERG"), or, if the Nasdaq-NM is not
the principal trading market for such security, the
last closing bid price of such security on the
principal securities exchange or trading market where
such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last
closing bid price of such security in the
over-the-counter market on the pink sheets or
bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported
for such security by Bloomberg, the last closing
trade price of such security as reported by
Bloomberg. If the Closing Bid Price cannot be
calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such
security on such date shall be the fair market value
as reasonably determined in good faith by the Board
of Directors of the Company (all as appropriately
adjusted for any stock dividend, stock split or other
similar transaction during such period); and
(v) "N" means the number of days from, but
excluding, the Issuance Date through and including
the Conversion Date for the Series D Preferred Shares
for which conversion is being elected.
(vi) "ISSUANCE DATE" means the date of
issuance of Series D Preferred Shares having an
aggregate stated value of $6,000,000.
(c) [LEFT INTENTIONALLY BLANK]
(d) Adjustment to Conversion Price - Dilution and
Other Events. In order to prevent dilution of the rights
granted under this Certificate of Designations, the Conversion
Price will be subject to adjustment from time to time as
provided in this Section 4(d).
-5-
<PAGE> 6
(i) Adjustment of Floor Price upon
Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock
split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the
Floor Price in effect immediately prior to such
subdivision will be proportionately reduced. If the
Corporation at any time combines (by combination,
reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a
smaller number of shares, the Floor Price in effect
immediately prior to such combination will be
proportionately increased.
(ii) Reorganization, Reclassification,
Consolidation, Merger, or Sale. Any recapitalization,
reorganization reclassification, consolidation.
merger, sale of all or substantially all of the
Corporation's assets to another Person (as defined
below) or other similar transaction which is effected
in such a way that holders of Common Stock are
entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock is
referred to herein as an "Organic Change." Prior to
the consummation of any Organic Change, the
Corporation will make appropriate provision (in form
and substance reasonably satisfactory to the holders
of a majority of the Series D Preferred Shares then
outstanding) to insure that each of the holders of
the Series D Preferred Shares will thereafter have
the right to acquire and receive in lieu of or in
addition to (as the case may be) the shares of Common
Stock immediately theretofore acquirable and
receivable upon the conversion of such holder's
Series D Preferred Shares, such shares of stock,
securities or assets as may be issued or payable with
respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and
receivable upon the conversion of such holder's
Series D Preferred Shares had such Organic Change not
taken place. In any such case, the Corporation will
make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority
of the Series D Preferred Shares then outstanding)
with respect to such holders' rights and interests to
insure that the provisions of this Section 4(d) and
Section 4(e) below will thereafter be applicable to
the Series D Preferred Shares. The
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<PAGE> 7
Corporation will not effect any such consolidation,
merger or sale, unless prior to the consummation
thereof the successor entity (if other than the
Corporation) resulting from consolidation or merger
or the entity purchasing such assets assumes, by
written instrument (in form and substance reasonably
satisfactory to the holders of a majority of the
Series D Preferred Shares then outstanding), the
obligation to deliver to each holder of Series D
Preferred Shares such shares of stock, securities or
assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.
For purposes of this Agreement, "PERSON" shall mean
an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust,
an unincorporated organization and a government or
any department or agency thereof.
(iii) Notices.
(A) Immediately upon any adjustment
of the Conversion Price, the Corporation
will give written notice thereof to each
holder of Series D Preferred Shares, setting
forth in reasonable detail and certifying
the calculation of such adjustment.
(B) The Corporation will give
written notice to each holder of Series D
Preferred Shares at least twenty (20) days
prior to the date on which the Corporation
closes its books or takes a record (I) with
respect to any dividend or distribution upon
the Common Stock, (II) with respect to any
pro rata subscription offer to holders of
Common Stock or (III) for determining rights
to vote with respect to any Organic Change,
dissolution or liquidation.
(C) The Corporation will also give
written notice to each holder of Series D
Preferred Shares at least twenty (20) days
prior to the date on which any Organic
Change, Major Transaction (as defined
below), dissolution or liquidation will take
place.
(e) Purchase Rights. If at any time the Corporation
grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other
property pro rata to all
-7-
<PAGE> 8
the record holders of any class of Common Stock (the "PURCHASE
RIGHTS"), then the holders of Series D Preferred Shares will
be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such
holder could have acquired if such holder had held the number
of shares of Common Stock acquirable upon complete conversion
of the Series D Preferred Shares immediately before the date
on which a record is taken for the grant issuance or sale of
such Purchase Rights, or, if no such record is taken, the date
as of which the record holders of Common Stock are to be
determined for the grant, issue or sale of such Purchase
Rights.
(f) Mechanics of Conversion. Subject to the
Corporation's inability to fully satisfy its obligations under
a Conversion Notice (as defined below) as provided for in
Section 7 below:
(i) Holder's Delivery Requirements. To
convert Series D Preferred Shares into full shares of
Common Stock on any date (the "CONVERSION DATE"), the
holder thereof shall (A) deliver or transmit by
facsimile, for receipt on or prior to 11:59 p.m.,
Eastern Standard Time, on such date, a copy of a
fully executed notice of conversion in the form
attached hereto as Exhibit I (the "CONVERSION
NOTICE") to the Corporation or its designated
transfer agent (the "TRANSFER AGENT"), and (B)
surrender to a common carrier for delivery to the
Corporation or the Transfer Agent as soon as
practicable following such certificates, the original
certificates representing the Series D Preferred
Shares being converted (or an indemnification
undertaking with respect to such certificates in the
case of their loss, theft or destruction) (the
"PREFERRED STOCK CERTIFICATES") and the originally
executed Conversion Notice.
(ii) Corporation's Response. Upon receipt by
the Corporation of a facsimile copy of a Conversion
Notice, the Corporation shall immediately send, via
facsimile, a confirmation of receipt of such
Conversion Notice to such holder. Upon receipt by the
Corporation or the Transfer Agent of the Preferred
Stock Certificates to be converted pursuant to a
Conversion Notice, together with the originally
executed Conversion Notice, the Corporation or the
Transfer Agent (as applicable) shall, within five (5)
business days following the date of receipt, issue
and surrender to a common carrier for
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<PAGE> 9
overnight delivery to the address as specified in the
Conversion Notice, a certificate, registered in the
name of the holder or its designee, for the number of
shares of Common Stock to which the holder shall be
entitled.
(iii) Dispute Resolution. In the case of a
dispute as to the determination of the Average Market
Price or the arithmetic calculation of the Conversion
Rate, the Corporation shall promptly issue to the
holder the number of shares of Common Stock that is
not disputed and shall submit the disputed
determinations or arithmetic calculations to the
holder via facsimile within three (3) business days
of receipt of such holder's Conversion Notice. If
such holder and the Corporation are unable to agree
upon the determination of the Average Market Price or
arithmetic calculation of the Conversion Rate within
two (2) business days of such disputed determination
or arithmetic calculation being submitted to the
holder, then the Corporation shall within one (1)
business day submit via facsimile (A) the disputed
determination of the Average Market Price to an
independent, reputable investment bank or (B) the
disputed arithmetic calculation of the Conversion
Rate to its independent, outside accountant. The
Corporation shall cause the investment bank or the
accountant, as the case may be, to perform the
determinations or calculations and notify the
Corporation and the holder of the results no later
than forty-eight (48) hours from the time it receives
the disputed determinations or calculations. Such
investment bank's or accountant's determination or
calculation, as the case may be, shall be binding
upon all parties absent manifest error.
(iv) Record Holder. The person or persons
entitled to receive the shares of Common Stock
issuable upon a conversion of Series D Preferred
Shares shall be treated for all purposes as the
record holder or holders of such shares of Common
Stock on the Conversion Date.
(v) Corporation's Failure to Timely Convert.
If the Corporation shall fail to issue to a holder
within seven (7) business days following the date of
receipt by the Corporation or the Transfer Agent of
the Preferred Stock Certificates to be converted
pursuant to a Conversion Notice, a certificate for
the number of shares of Common Stock to which such
holder is
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<PAGE> 10
entitled upon such holder's conversion of Series D
Preferred Shares, in addition to all other available
remedies which such holder may pursue hereunder and
under the Securities Purchase Agreement between the
Corporation and the initial holders of the Series D
Preferred Shares (the "SECURITIES PURCHASE
AGREEMENT") (including indemnification pursuant to
Section 8 thereof), the Corporation shall pay
additional damages to such holder on each day after
the seventh (7th) business day following the date of
receipt by the Corporation or the Transfer Agent of
the Preferred Stock Certificates to be converted
pursuant to the Conversion Notice, for which such
conversion is not timely effected, an amount equal to
1.0% of the product of (A) the number of shares of
Common Stock not issued to the holder and to which
such holder is entitled and (B) the Closing Bid Price
of the Common Stock on the business day following the
date of receipt by the Corporation or the Transfer
Agent of the Preferred Stock Certificates to be
converted pursuant to the Conversion Notice.
(g) Mandatory Conversion. If any Series D Preferred
Shares remain outstanding on July 31, 2000, then all such
Series D Preferred Shares shall be converted as of such date
in accordance with this Section 4 as if the holders of such
Series D Preferred Shares had given the Conversion Notice on
July 31, 2000, and the Conversion Date had been fixed as of
July 31, 2000, for all purposes of this Section 4, and all
holders of Series D Preferred Shares shall thereupon and with
two (2) business days thereafter surrender all Preferred Stock
Certificates, duly endorsed for cancellation, to the
Corporation or the Transfer Agent. No person shall thereafter
have any rights in respect of Series D Preferred Shares,
except the right to receive shares of Common Stock on
conversion thereof as provided in this Section 4.
(h) Fractional Shares. The Corporation shall not
issue any fraction of a share of Common Stock upon any
conversion. All shares of Common Stock (including fractions
thereof) issuable upon conversion of more than one share of
the Series D Preferred Shares by a holder thereof shall be
aggregated for purposes of determining whether the conversion
would result in the issuance of a fraction of a share of
Common Stock. If, after the aforementioned aggregation, the
issuance would result in the issuance of a fraction of a share
of
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<PAGE> 11
Common Stock, the Corporation shall round such fraction of a
share of Common Stock up or down to the nearest whole share.
(i) Taxes. The Corporation shall pay any and all
taxes which may be imposed upon it with respect to the
issuance and delivery of Common Stock upon the conversion of
the Series D Preferred Shares.
(j) Conversion Restriction. The right of a holder of
Series D Preferred Shares to convert Series D Preferred Shares
pursuant to this Section 4 shall be subject to the following
limitations (which shall be applied independently):
(i) Prior to the earlier of (i) the 90th day
following the Issuance Date or (ii) the Registration
Statement Effective Date (such earlier period shall
be hereinafter referred to as the "Initial Conversion
Date"), holders of Series D Preferred Shares shall
not be entitled to convert any Series D Preferred
Shares;
(ii) During the period beginning on the
Initial Conversion Date and ending on the 30th day
following the Initial Conversion Date, each Buyer and
all of their respective successors shall be entitled
to convert no more than 25% of the number of Series D
Preferred Shares purchased by such Buyer;
(iii) During the period beginning on the
Initial Conversion Date and ending on the 60th day
following the Initial Conversion Date, each Buyer and
all of their respective successors shall be entitled
to convert no more than 50% of the number of Series D
Preferred Shares purchased by such Buyer;
(iv) During the period beginning on the
Initial Conversion Date and ending on the 90th day
following the Initial Conversion Date, each Buyer and
all of their respective successors shall be entitled
to convert no more than 75% of the number of Series D
Preferred Shares purchased by such Buyer;
(v) After the 90th day following the Initial
Conversion Date, each holder of the Series D
Preferred Shares shall be entitled to convert any and
all of the Series D Preferred Shares then held by
such person.
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<PAGE> 12
Provided however, notwithstanding the foregoing, any holder of
Series D Preferred Shares shall be immediately entitled to
convert all of such holder's Series D Preferred Shares into
shares of Common Stock pursuant to this Section 4 upon (i) the
occurrence of any Triggering Event, (ii) any public
announcement by the Corporation stating that the Corporation
intends to consummate, or is the subject of, a Major
Transaction, (iii) execution of a definitive agreement by the
Corporation with respect to a Major Transaction, (iv) the
consummation of a Major Transaction, or (v) if the Closing
Price of the Common Stock as reported by NASDAQ or on another
securities exchange or market on which the Common Stock is
listed for the previous five (5) trading days is greater than
$1.25. A "Major Transaction" shall be deemed to have occurred
upon the occurrence of any of the following events:
(i) the consummation of any merger,
reorganization, restructuring, consolidation, or
similar transaction by or involving the Corporation
except (A) a merger or consolidation where the
Corporation is a survivor or (B) pursuant to a
migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the
Corporation;
(ii) the sale of all or substantially all of
the assets of the Corporation or all of its material
subsidiaries or any similar transaction or related
transactions which effectively results in a sale of
all or substantially all of the assets of the
Corporation and/or its subsidiaries; or
(iii) the occurrence, after the date hereof,
of the acquisition, by any person (including any
entity or association) or persons (other than any
existing stockholder of the Corporation or two or
more existing stockholders of the Corporation acting
in concert), of securities of the Corporation (or the
power to vote such securities) representing 50% or
more of the total voting power of all outstanding
Common Stock or other voting securities of the
Corporation.
(k) Condition Precedent to Conversion Rights. None of
the rights of holders of the Series D Preferred Shares to
convert Series D Preferred Shares into Common Stock of the
Corporation pursuant to this Section 4 or otherwise and none
of the obligations of the Corporation to reserve shares of
Common Stock for issuance or to
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<PAGE> 13
issue and deliver shares of Common Stock upon a holder's
exercise of such conversion rights shall be enforceable unless
and until the stockholders of the Corporation entitled to vote
therefor approve an increase in the authorized Common Stock of
the Corporation from 185,000,000 shares to 255,000,000 shares
and the Corporation completes the requisite filing of an
amendment to the Restated Certificate of Incorporation of the
Corporation effecting such an increase in the Office of
Secretary of State of the State of Delaware which the
Corporation undertakes immediately to make upon approval of
such amendment to the Restated Certificate of Incorporation.
(5) Corporation's Right to Redeem at its Election.
(a) At any time, as long as the Corporation has not
received a notice of Conversion from the holder and has not
breached any of the representations, warranties, and covenants
contained herein or in any related agreements, the Corporation
shall have the right, in its sole discretion, to redeem
("REDEMPTION AT CORPORATION'S ELECTION"), from time to time,
any or all of the Series D Preferred Shares; provided (i) the
Corporation shall first provide no more than five (5) days and
no less than (1) day advance written notice as provided in
subparagraph 5(a)(ii) below (which can be given any time on or
after 80 days after the Issuance Date, and (ii) that the
Corporation shall only be entitled to redeem Series D
Preferred Shares having an aggregate Stated Value (as defined
above) of at least Five Hundred Thousand Dollars ($500,000).
If the Corporation elects to redeem some, but not all, of the
Series D Preferred Shares, the Corporation shall redeem a
pro-rata amount from each Holder of the Series D Preferred
Shares.
(i) Redemption Price At Corporation's
Election. The "REDEMPTION PRICE AT CORPORATION'S
ELECTION" shall be calculated as 125% of Stated
Value, plus the unpaid 4% per annum accretion of the
Series D Preferred Shares being redeemed pursuant to
this Section 5(a).
(ii) Mechanics of Redemption at
Corporation's Election. The Corporation shall effect
each such redemption by giving no more than five (5)
days and no less than one (1) day prior written
notice ("NOTICE OF REDEMPTION AT CORPORATION'S
ELECTION") to (A) the Holders of the Series D
Preferred Shares
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<PAGE> 14
selected for redemption at the address and facsimile
number of such Holder appearing in the Corporation's
Series D Preferred Stock register and (B) the
Transfer Agent, which Notice of Redemption At
Corporation's Election shall be deemed to have been
delivered three (3) business days after the
Corporation's mailing (by overnight or two (2) day
courier, with a copy by facsimile) of such Notice of
Redemption at Corporation's Election. Such Notice of
Redemption At Corporation's Election shall indicate
(i) the number of shares of Series D Preferred Stock
that have been selected for redemption, (ii) the date
which such redemption is to become effective (the
"DATE OF REDEMPTION AT CORPORATION'S ELECTION") and
(iii) the applicable Redemption Price At
Corporation's Election, as defined in subsection
(a)(i) above. Notwithstanding the above, Holder may
convert into Common Stock, prior to the close of
business on the Date of Redemption at Corporation's
Election, any Series D Preferred Shares which it is
otherwise entitled to convert, including Series D
Preferred Shares that have been selected for
redemption at Corporation's election pursuant to this
subsection 5(a).
(b) Corporation Must Have Immediately Available Funds
or Credit Facilities. The Corporation shall not be entitled to
send any Redemption Notice and begin the redemption procedure
under Sections 5(a) unless it has:
(i) the full amount of the redemption price
in cash, available in a demand or other immediately
available account in a bank or similar financial
institution; or
(ii) immediately available credit
facilities, in the full amount of the redemption
price with a bank or similar financial institution,
or
(iii) an agreement with a standby
underwriter willing to purchase from the Corporation
a sufficient number of shares of stock to provide
proceeds necessary to redeem any stock that is not
converted prior to redemptions; or
(iv) a combination of the items set forth in
(i), (ii), and (iii) above, aggregating the full
amount of the redemption price.
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<PAGE> 15
(c) Payment of Redemption Price. Each Holder
submitting Series D Preferred Shares being redeemed under this
Section 5 shall send their Series D Preferred Share
Certificates to be redeemed to the Corporation or its Transfer
Agent, and the Corporation shall pay the applicable redemption
price to that Holder within five (5) business days of the Date
of Redemption at Corporation's Election.
(6) Redemption at Option of Holders.
(a) [LEFT INTENTIONALLY BLANK]
(b) Redemption Option Upon Triggering Event. In
addition to all other rights of the holders of Series D
Preferred Shares contained herein, after a Triggering Event
(as defined below), the holders of Series D Preferred Shares
shall have the right in accordance with Section 6(g), at the
option of the holders of at least two-thirds (2/3) of the
Series D Preferred Shares then outstanding, to require the
Corporation to redeem all of the Series D Preferred Shares
then outstanding at a price per Series D Preferred Share equal
to the greater of (i) 125% of the Liquidation Value of such
Share and (ii) the price calculated in accordance with the
Redemption Rate as of the date immediately preceding such
Triggering Event on which the exchange or market on which the
Common Stock is traded is open.
(c) "Redemption Rate." The "REDEMPTION RATE" shall,
as of any date of determination, be equal to (i) the
Conversion Rate in effect as of such date as calculated
pursuant to Section 4(b) multiplied by (ii) the Closing Bid
Price of the Common Stock on such date.
(d) [LEFT INTENTIONALLY BLANK]
(e) "Triggering Event." A "TRIGGERING EVENT" shall be
deemed to have occurred at such time as any of the following
events:
(i) [LEFT INTENTIONALLY BLANK]
(ii) [LEFT INTENTIONALLY BLANK]
(iii) the Corporation's notice to any holder
of Series D Preferred Shares, including by way of
public announcement, at any time, of its intention
for any reason not to comply with
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<PAGE> 16
requests for conversion of any Series D Preferred
Shares for shares of Common Stock;
(iv) if for any reason the Corporation
breaches any material representation or fails to
perform or observe any covenant, agreement, or other
provision contained herein or in the Securities
Purchase Agreement or the Registration Rights
Agreement, and such failure is not cured within 30
days after the Corporation receives notice thereof
from holders of at least 10% of the Series D
Preferred Shares then outstanding ("Notice of
Triggering Event"), of the occurrence thereof, and
such failure has had, or could reasonably be expected
to have, a material adverse effect on (A) the
financial condition, operating results, business,
properties, or operations of the Corporation and its
subsidiaries taken as a whole taking into account any
proceeds reasonably expected to be received by the
Corporation or its subsidiaries in the foreseeable
future from insurance policies or rights of
indemnification or (B) the Series D Preferred Shares;
(f) [LEFT INTENTIONALLY BLANK]
(g) Mechanics of Redemption at Option of Holder Upon
Triggering Event. Within one (1) day after receipt of a Notice
of Triggering Event, the Corporation shall deliver written
notice thereof via facsimile and overnight courier to each
holder of Series D Preferred Shares. At any time after receipt
of a Notice of Triggering Event, the holders of at least
two-thirds (2/3) of the Series D Preferred Shares then
outstanding may require the Corporation to redeem all of the
Series D Preferred Shares then outstanding in accordance with
Section 6(b) by delivering written notice thereof via
facsimile and overnight courier ("NOTICE OF REDEMPTION AT
OPTION OF BUYER UPON TRIGGERING EVENT") to the Corporation,
which Notice of Redemption at Option of Buyer Upon Triggering
Event shall indicate (i) the number of Series D Preferred
Shares that such holders are voting in favor of redemption and
(ii) the applicable redemption price, as calculated pursuant
to Section 6(b) above.
(h) Payment of Redemption Price. Upon the
Corporation's receipt of a Notice(s) of Redemption at Option
of Holder Upon Triggering Event from the holders of at least
two-thirds (2/3) of the Series D Preferred Share then
outstanding, the Corporation shall
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<PAGE> 17
immediately notify each holder by facsimile of the
Corporation's receipt of such requisite notices necessary to
affect a redemption and each holder of Series D Preferred
Shares shall thereafter promptly send such holder's Series D
Preferred Share certificates to be redeemed to the Corporation
or its Transfer Agent. The Corporation shall pay the
applicable redemption price, as calculated pursuant to Section
6(b) above, in cash to such holder within thirty (30) days
after the Corporation' receipt of the requisite notices
required to affect a redemption; provided that a holder's
Series D Preferred Shares certificates shall have been so
delivered to the Corporation or its Transfer Agent; provided
further that if the Corporation is unable to redeem all of the
Series D Preferred Shares, the Corporation shall redeem an
amount from each holder of Series D Preferred Shares equal to
such holder's pro-rata amount (based on the number of Series D
Preferred Shares held by such holder relative to the number of
Series D Preferred Shares outstanding) of all Series D
Preferred Shares being redeemed. If the Corporation shall fail
to redeem all of the Series D Preferred Shares submitted for
redemption (other than pursuant to a dispute as to the
determination of the Closing Bid Price or the arithmetic
calculation of the Redemption Rate), the applicable redemption
price payable in respect of such unredeemed Series D Preferred
Shares shall bear interest at the rate of 1% for the first
month and a rate of 2.5% per month thereafter (prorated for
partial months) until paid in full. Until the Corporation pays
such unpaid applicable redemption price in full to each
holder, holders of at least two-thirds (2/3) of the Series D
Preferred Shares then outstanding, including shares of Series
D Preferred Shares submitted for redemption pursuant to this
Section 6 and for which the applicable redemption price has
not been paid, shall have the option (the "VOID OPTIONAL
REDEMPTION OPTION") to, in lieu of redemption, require the
Corporation to promptly return to each holder all of the
Series D Preferred Shares that were submitted for redemption
by such holder under this Section 6 and for which the
applicable redemption price has not been paid, by sending
written notice thereof to the Corporation via facsimile (the
"VOID OPTIONAL REDEMPTION NOTICE"). Upon the Corporation's
receipt of such Void Optional Redemption Notice(s) and prior
to payment of the full applicable redemption price to each
holder, (i) the Notice(s) of Redemption at Option of Holder
Upon Triggering Event shall be null and void with respect to
those Series D Preferred Shares submitted for redemption and
for which the applicable redemption price has not been paid,
(ii) the Corporation shall immediately return any Series D
Preferred Share certificates
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<PAGE> 18
submitted to the Corporation by each holder for redemption
under this Section 6(h) and for which the applicable
redemption price had not been paid, (iii) the Conversion
Percentage in effect at such time and thereafter shall be
reduced by a number of percentage points equal to the product
of (A) two and one-half (2.5) and (B) the number of months
(prorated for partial months) in the period beginning on the
date on which the Notice(s) of Redemption at Option of Buyer
Upon Triggering Event is delivered to the Corporation and
ending on the date on which the Void Optional Redemption
Notice(s) is delivered to the Corporation. Notwithstanding the
foregoing, in the event of a dispute as to the determination
of the Closing Bid Price or the arithmetic calculation of the
Redemption Rate, such dispute shall be resolved pursuant to
Section 4(f)(iii) above with the term "CLOSING BID PRICE"
being substituted for the term "AVERAGE MARKET PRICE" and the
term "REDEMPTION RATE" being substituted for the term
"CONVERSION RATE."
(7) Inability to Fully Convert.
(a) Holder's Option if Corporation Cannot Fully
Convert. If at any time after the Registration Statement
Effective Date, upon the Corporation's receipt of a Conversion
Notice, the Corporation does not issue shares of Common Stock
which are registered for resale under the Registration
Statement within five (5) business days of the time required
in accordance with Section 4(f) hereof, for any reason or for
no reason, including, without limitation, because the
Corporation (x) does not have a sufficient number of shares of
Common Stock authorized and available, (y) is otherwise
prohibited by applicable law or by the rules or regulations of
any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the
Corporation or its Securities, including without limitation
The Nasdaq Stock Market, Inc. from issuing all of the Common
Stock which is to be issued to a holder of Series D Preferred
Shares pursuant to a Conversion Notice or (z) fails to have a
sufficient number of shares of Common Stock registered and
eligible for resale under the Registration Statement, then the
Corporation shall issue as many shares of Common Stock as it
is able to issue in accordance with such holder's Conversion
Notice and pursuant to Section 4(f) above and, with respect to
the unconverted Series D Preferred Shares, the holder, solely
at such holder's option, can, in addition to any other
remedies such holder may have hereunder, under the Securities
Purchase Agreement (including indemnification under
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<PAGE> 19
Section 8 thereof), under the Registration Rights Agreement,
at law or in equity, elect to:
(i) require the Corporation to redeem from
such holder those Series D Preferred Shares for which
the Corporation is unable to issue Common Stock in
accordance with such holder's Conversion Notice
("MANDATORY REDEMPTION") at a price per Series D
Preferred Share (the "MANDATORY REDEMPTION PRICE")
equal to the greater of (x) 125% of the Liquidation
Value of such share and (y) the Redemption Rate as of
such Conversion Date;
(ii) if the Corporation's inability to fully
convert Series D Preferred Shares is pursuant to
Section 7(a)(z) above, require the Corporation to
issue restricted shares of Common Stock in accordance
with such holder's Conversion Notice and pursuant to
Section 4(f) above; or
(iii) void its Conversion Notice and retain
or have returned, as the case may be, the
nonconverted Series D Preferred Shares that were to
be converted pursuant to such holder's Conversion
Notice.
(b) Mechanics of Fulfilling Holder's Election. The
Corporation shall immediately send via facsimile to a holder
of Series D Preferred Shares, upon receipt of a facsimile copy
of a Conversion Notice from such holder which cannot be fully
satisfied as described in Section 7(a) above, a notice of the
Corporation's inability to fully satisfy such holder's
Conversion Notice (the "INABILITY TO FULLY CONVERT NOTICE").
Such Inability to Fully Convert Notice shall indicate (i) the
reason why the Corporation is unable to fully satisfy such
holder's Conversion Notice, (ii) the number of Series D
Preferred Shares which cannot be converted and (iii) the
applicable Mandatory Redemption Price. Such holder must within
five (5) business days of receipt of such Inability to Fully
Convert Notice deliver written notice via facsimile to the
Corporation ("NOTICE IN RESPONSE TO INABILITY TO CONVERT") of
its election pursuant to Section 7(a) above.
(c) Payment of Redemption Price. If such holder shall
elect to have its shares redeemed pursuant to Section 7(a)
above, the Corporation shall pay the Mandatory Redemption
Price in cash to such holder within thirty (30) days of the
Corporation's receipt of the
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<PAGE> 20
holder's Notice in Response to Inability to Convert. If the
Corporation shall fail to pay the applicable Mandatory
Redemption Price to such holder on a timely basis as described
in this Section 7(c) (other than pursuant to a dispute as to
the determination of the Closing Bid Price or the arithmetic
calculation of the Redemption Rate), such unpaid amount shall
bear interest at the rate of 1% for the first month and a rate
of 2.5% per month thereafter (prorated for partial months)
until paid in full. Until the full Mandatory Redemption Price
is paid in full to such holder, such holder may void the
Mandatory Redemption with respect to those Series D Preferred
Shares for which the full Mandatory Redemption Price has not
been paid and receive back such Series D Preferred Shares.
Notwithstanding the foregoing, if the Corporation fails to pay
the applicable Mandatory Redemption Price within such thirty
(30) days time period due to a dispute as to the determination
of the Closing Bid Price or the arithmetic calculation of the
Redemption Rate, such dispute shall be resolved pursuant to
Section 4(f)(iii) above with the term "CLOSING BID PRICE"
being substituted for the term "AVERAGE MARKET PRICE" and the
term, "REDEMPTION RATE" being substituted for the term
"CONVERSION RATE."
(d) Pro-rata Conversion and Redemption. In the event
the Corporation receives a Conversion Notice from more than
one holder of Series D Preferred Shares on the same day and
the Corporation can convert and redeem some, but not all, of
the Series D Preferred Shares pursuant to this Section 7, the
Corporation shall convert and redeem from each holder of
Series D Preferred Shares electing to have Series D Preferred
Shares converted and redeemed at such time an amount equal to
such holder's pro-rata amount (based on the number of Series D
Preferred Shares held by such holder relative to the number of
Series D Preferred Shares outstanding) of all Series D
Preferred Shares being converted and redeemed at such time.
(8) Reissuance of Certificates. In the event of a conversion
or redemption pursuant to this Certificate of Designations of less than
all of the Series D Preferred Shares represented by a particular Series
D Preferred Share certificate, the Corporation shall promptly cause to
be issued and delivered to the holder of such Series D Preferred Shares
a Series D Preferred Share certificate representing the remaining
Series D Preferred Shares which have not been so converted or redeemed.
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<PAGE> 21
(9) Reservation of Shares. Subject to Section 4(k), the
Corporation shall, so long as any of the Series D Preferred Shares are
outstanding, reserve and keep available out of its authorized and
unissued Common Stock, solely for the purpose of effecting the
conversion of the Series D Preferred Shares, such number of shares of
Common Stock as shall from time to time be sufficient to affect the
conversion of all of the Series D Preferred Shares then outstanding;
provided that the number of shares of Common Stock so reserved shall at
no time be less than 100% of the number of shares of Common Stock for
which the Series D Preferred Shares are at any time convertible, based
upon the Floor Price.
(10) Voting Rights. Holders of Series D Preferred Shares shall
have no voting rights, except as required by law, including but not
limited to the General Corporation Law of the State of Delaware and as
expressly provided in this Certificate of Designations.
(11) Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation, the holders of the Series D Preferred Shares shall be
entitled to receive in cash out of the assets of the Corporation,
whether from capital or from earnings available for distribution to its
stockholders (the "PREFERRED FUNDS"), after all amounts payable to the
holders of the Corporation's Series C Convertible Preferred Stock and
before any amount shall be paid to the holders of any of the capital
stock of the Corporation of any class junior in rank to the Series D
Preferred Shares in respect of the preferences as to the distributions
and payments on the liquidation, dissolution and winding up of the
Corporation, an amount per Series D Preferred Share equal to the sum of
(i) $1,000 and (ii) an amount equal to the product of (.04) (N/365)
($1,000) (such sum being referred to as the "LIQUIDATION VALUE");
provided that, if the Preferred Funds are insufficient to pay the full
amount due to the holders of Series D Preferred Shares and holders of
shares of other classes or series of preferred stock of the Corporation
that are of equal rank with the Series D Preferred Shares as to
payments of Preferred Funds (the "PARI PASSU SHARES"), then each holder
of Series D Preferred Shares and Pari Passu Shares shall receive a
percentage of the Preferred Funds equal to the full amount of Preferred
Funds payable to such holder as a liquidation preference, in accordance
with their respective Certificate of Designations, Preferences and
Rights as a percentage or the full amount of Preferred Funds payable to
all holders of Series D Preferred Shares and Pari Passu Shares. The
purchase or redemption by the Corporation of stock of any class in any
manner permitted by law, shall not for the purposes hereof, be regarded
as a
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<PAGE> 22
liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other
Person, nor the sale or transfer by the Corporation of less than
substantially all of its assets, shall, for the purposes hereof, be
deemed to be a liquidation, dissolution or winding up of the
Corporation. No holder of Series D Preferred Shares shall be entitled
to receive any amounts with respect thereto upon any liquidation,
dissolution or winding up of the Corporation other than the amounts
provided for herein.
(12) Preferred Rank. All shares of Series C Convertible
Preferred Stock shall be of senior rank and all shares of Common Stock
shall be of junior rank to all Series D Preferred Shares in respect to
the preferences as to distributions and payments upon the liquidation,
dissolution, and winding up of the Corporation. The rights of the
shares of Common Stock shall be subject to the Preferences and relative
rights of the Series D Preferred Shares. The Series D Preferred Shares
shall be of greater rank than any Series of Common or Preferred Stock
hereinafter issued by the Corporation. Without the prior express
written consent of the holders of not less than two-thirds (2/3) of the
then outstanding Series D Preferred Shares, the Corporation shall not
hereafter authorize or issue additional or other capital stock that is
of senior or equal rank to the Series D Preferred Shares in respect of
the preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Corporation. Without the prior
express written consent of the holders of not less than two-thirds
(2/3) of the then outstanding Series D Preferred Shares, the
Corporation shall not hereafter authorize or make any amendment to the
Corporation's Certificate of Incorporation or bylaws, or file any
resolution of the board of directors with the Delaware Secretary of
State containing any provisions, which would adversely affect or
otherwise impair the rights or relative priority of the holders of the
Series D Preferred Shares relative to the holders of the Common Stock
or the holders of any other class of capital stock in respect of the
preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Corporation. In the event of the
merger or consolidation of the Corporation with or into another
corporation, the Series D Preferred Shares shall maintain their
relative powers, designations, and preferences provided for herein and
no merger shall result inconsistent therewith.
(13) Restriction on Dividends. If any Series D Preferred
Shares are outstanding, without the prior express written consent of
the holders of not less than two-thirds (2/3) of the then outstanding
Series D Preferred Shares, the Corporation shall not directly or
indirectly declare, pay or make
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<PAGE> 23
any dividends or other distributions upon any of the Common Stock
unless written notice thereof has been given to holders of the Series D
Preferred Shares at least thirty (30) days prior to the earlier of (a)
the record date taken for or (b) the payment of any such dividend or
other distribution. Notwithstanding the foregoing, this Section 13
shall not prohibit the Corporation from declaring and paying a dividend
in cash with respect to the Common Stock so long as the Corporation:
(i) pays simultaneously to each holder of Series D Preferred Shares an
amount in cash equal to the amount such holder would have received had
all of such holder's Series D Preferred Shares been converted to Common
Stock pursuant to Section 4 hereof one business day prior to the record
date for any such dividend, and (ii) after giving effect to the payment
of any dividend and any other payments required in connection therewith
including to the holders of the Series D Preferred Shares under clause
13(a)(i) hereof, the Corporation has in cash or cash equivalents an
amount equal to the aggregate of: (A) all of its liabilities reflected
on its most recently available balance sheet, (B) the amount of any
indebtedness incurred by the Corporation or any of its subsidiaries
since its most recent balance sheet and (C) 125% of the amount payable
to all holders of any shares of any class of preferred stock of the
Corporation assuming a liquidation of the Corporation as of the date of
its most recently available balance sheet.
(14) Vote to Change the Terms of Series D Preferred Shares.
The affirmative vote at a meeting duly called for such purpose or the
written consent without a meeting, of the holders of not less than
two-thirds (2/3) of the then outstanding Series D Preferred Shares,
shall be required for any change to this Certificate of Designations or
the Corporation's Certificate of Incorporation which would amend,
alter, change or repeal any of the powers, designations, preferences
and rights of the Series D Preferred Shares.
(15) Lost or Stolen Certificates. Upon receipt by the
Corporation of evidence satisfactory to the Corporation of the loss,
theft, destruction or mutilation of any certificates representing the
Series D Preferred Shares, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the holder to the
Corporation and, in the case of mutilation, upon surrender and
cancellation of the Series D Preferred Share certificate(s), the
Corporation shall execute and deliver new Series D Preferred Share
certificate(s) of like tenor and date; provided, however, the
Corporation shall not be obligated to re-issue Series D Preferred Share
certificates if the holder contemporaneously requests the Corporation
to convert such Series D Preferred Shares into Common Stock.
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<PAGE> 24
(16) Withholding Tax Obligations. Notwithstanding anything
herein to the contrary, to the extent that the Corporation receives
advice in writing from its counsel that there is a reasonable basis to
believe that the Corporation is required by applicable federal laws or
regulations and delivers a copy of such written advice to the holders
of the Series D Preferred Shares so effected, the Corporation may
reasonably condition the making of any distribution (as such term is
defined under applicable federal tax law and regulations) in respect of
any Series D Preferred Shares on the holder of such Series D Preferred
Shares depositing with the Corporation an amount of cash sufficient to
enable the Corporation to satisfy its withholding tax obligations (the
"WITHHOLDING TAX") with respect to such distribution. Notwithstanding
the foregoing or anything to the contrary, if any holder of the Series
D Preferred Shares so effected receives advice in writing from its
counsel that there is a reasonable basis to believe that the
Corporation is not so required by applicable federal laws or
regulations and delivers a copy of such written advice to the
Corporation, the Corporation shall not be permitted to condition the
making of any such distribution in respect of any Series D Preferred
Shares on the holder of such Series D Preferred Shares depositing with
the Corporation any Withholding Tax with respect to such distribution,
provided, however, the Corporation may reasonably condition the making
of any such distribution in respect of any Series D Preferred Shares on
the holder of such Series D Preferred Shares executing and delivering
to the Corporation, at the election of the holder, either: (i) if
applicable, a property completed Internal Revenue Service Form 4224, or
(a) an indemnification agreement in reasonably acceptable form, with
respect to any federal tax liability, penalties and interest that may
be imposed upon the Corporation by the Internal Revenue Service as a
result of the Corporation's failure to withhold in connection with such
distribution to such holder. If the conditions in the preceding two
sentences are fully satisfied, the Corporation shall not be required to
pay any additional damages set forth in Section 2(f)(v) of this
Certificate of Designations if its failure to timely deliver any
Conversion Shares results solely from the holder's failure to deposit
any withholding tax hereunder or provide to the Corporation an executed
indemnification agreement in the form reasonably satisfactory to the
Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be signed by John Horton, its Senior Vice President and General
Counsel, as of the 23rd day of July, 1998.
NOISE CANCELLATION TECHNOLOGIES, INC.
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<PAGE> 25
By: /s/ JOHN HORTON
-----------------------------------------
John Horton
Senior Vice President and General Counsel
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<PAGE> 26
EXHIBIT I
NOISE CANCELLATION TECHNOLOGIES, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and
Rights of Noise Cancellation Technologies, Inc. (the "CERTIFICATE OF
DESIGNATIONS"). In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series D Convertible Preferred Stock, $.10 par value per share (the "SERIES D
PREFERRED SHARES"), of Noise Cancellation Technologies, Inc., a Delaware
corporation (the "CORPORATION"), indicated below into shares of Common Stock,
$.01 par value per share (the "COMMON STOCK"), of the Corporation, by tendering
the stock certificate(s) representing the share(s) of Series D Preferred Shares
specified below as of the date specified below.
The undersigned acknowledges that any sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Series D Preferred
Shares shall be made only pursuant to (i) a registration statement effective
under the Securities Act of 1933, as amended (the "ACT"), or (ii) an opinion of
counsel in form and content reasonably satisfactory to the Corporation that such
sale is exempt from registration required by Section 5 of the Act.
Date of Conversion:
----------------------------------------
- ---
Number of Series D
Preferred Shares to be converted
----------------------------------------
- ---
Stock certificate no(s). of Series D
Preferred Shares to be converted:
----------------------------------------
- ---
Please confirm the following information:
Conversion Price:
----------------------------------------
- ---
Number of shares of Common
Stock to be issued:
-----------------------------------------
- ---
<PAGE> 27
please issue the Common Stock into which the Series D Preferred Shares are being
converted in the following name and to the following address:
Issue to:(1)
----------------------------------------
- ---
----------------------------------------
- ---
Facsimile Number:
----------------------------------------
- ---
Authorization:
----------------------------------------
- ---
By:
-------------------------------------
- ---
Title:
----------------------------------
- --
Dated:
----------------------------------------
- ---
ACKNOWLEDGED AND AGREED:
NOISE CANCELLATION TECHNOLOGIES, INC.
By:
--------------------------
Name:
------------------------
Title:
-----------------------
Date:
------------------------
- --------
1 If other than to the record holder of the Series D Preferred Shares, any
applicable transfer tax must be paid by the undersigned.
<PAGE> 1
Exhibit 5
October 30, 1998
NCT Group, Inc.
1025 West Nursery Road, Suite 120
Linthicum, Maryland 21090
Re: Amendment No. 1 to Registration Statement on form S-3
Gentlemen:
Referring to Amendment No. 1 to the Registration Statement on Form S-3
that NCT Group, Inc. (the "Company") is filing today with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
the sale by certain Selling Stockholders of 27,786,991 shares of Common Stock of
the Company (the "Resale Shares"), I am of the opinion that the Resale Shares
have been duly authorized by the Company, have been validly issued and are fully
paid and nonassessable.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission as Exhibit No. 5 to Amendment No. 1 to the Registration
Statement referred to above and to the reference to me under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
/s/ JOHN B. HORTON
-------------------
John B. Horton
Senior Vice President and
General Counsel
<PAGE> 1
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-3 Amendment No. 1 of our report dated February 27, 1998, on our audit of
the consolidated financial statements and schedule of NCT Group, Inc. (formerly
Noise Cancellation Technologies, Inc.) (the "Company") as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, included in the Company's Annual Report on Form 10-K (as amended) for the
year ended December 31, 1997, and to the reference to the firm under the caption
"Experts" included in the Prospectus.
/s/ RICHARD A. EISNER & COMPANY, LLP
Richard A. Eisner & Company, LLP
New York, New York
October 28, 1998
<PAGE> 1
Exhibit 23(b)
October 28, 1998
Noise Cancellation Technologies, Inc.
1025 West Nursery Road, Suite 120
Linthicum, MD 21090 USA
Dear Sirs:
Noise Cancellation Technologies (UK) Limited
We consent to the incorporation by reference to the Registration Statement on
Form S-3 Amendment No. 1 of our report dated May 13, 1998, on the financial
statements and schedule of Noise Cancellation Technologies (UK) Limited (the
"Company") as at December 31, 1997 and December 31, 1996 and for each of the
years in the three year period ended December 31, 1997, included in the
Company's Annual Report on Form 10-K (as amended) for the year ended December
31, 1997, and to the reference to the firm under the caption "Experts" included
in the Prospectus.
Yours faithfully,
/s/ PETERS ELWORTHY & MOORE
Peters Elworthy & Moore
